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The Mother of All Deflations

Apr 092018
 
 April 9, 2018  Posted by at 12:22 pm Finance Tagged with: , , , , , , , , ,  8 Responses »


Keith Haring Retrospect 1989

 

Longtime and dear friend of the Automatic Earth, professor Steve Keen, wrote an article recently that everyone should read (that goes for everything Steve writes). It’s hard to select highlights, but I’ll give it a try. Steve explains where our housing markets went off the rails, what (short-sighted) interests politicians have in subverting them, and, something rarely addressed, why housing markets are unlike any other markets (the turnover of existing properties is financed with newly created money)

He then suggests some measures that might counter this subversion, with a twang of It’s a Wonderful Life nostalgia thrown in. That nostalgia, which will be seen by many as outdated and a grave mistake in these ‘modern times’, instead makes a lot of sense. We might even say it’s the only way to get back on our feet. It resides in the idea that money-circulating building societies, rather than money-creating banks should be in charge of the housing market.

Because it’s not supply and demand that rule the market today, it’s available debt (credit). And banks can, and will, always create more debt at the stroke of a keyboard. That is, until they can’t, and then house prices must and will of necessity fall off a cliff. In Steve’s words: “..mortgage credit causes house prices to rise, leading to yet more credit being taken on until, as in 2008, the process breaks down. And it has to break down, because the only way to sustain it is for debt to continue rising faster than income.

Still, it left me with a big question. But I’ll ask that at the end; here’s Steve first.

 

The Housing Crisis – There’s Nothing We Can Do… Or Is There?

[..] the UK data is remarkable, even in the context of a worldwide trend to higher levels of leverage. Between 1880 and 1980, private debt in the UK fluctuated as a percentage of GDP, but it never once reached 75% of GDP. But in 1982, both household and corporate debt took off. In 1982, total private debt was equivalent to 61% of GDP, split equally between households and corporations. 25 years later, as the global financial crisis unfolded, private debt was three times larger at 197% of GDP, again split 50:50 between households and corporations.

The key changes to legislation that occurred in 1982 is the UK let banks muscle into the mortgage market that was previously dominated by building societies. This was sold in terms of improving competition in the mortgage market, to the benefit of house buyers: allegedly, mortgage costs would fall. But its most profound impact was something much more insidious: it enabled the creation of credit money to fuel rising house prices, setting off a feedback loop that only ended in 2008.

Building societies don’t create money when they lend, because they lend from a bank account that stores the accumulated savings of their members. There’s no change in bank deposits, which are by far the largest component of the money supply.

However, banks do create money when they lend, because a bank records a loan as their asset when they make an identical entry in the borrower’s account, which enables the property to be bought. This dramatically inflates the price of housing, since, as the politicians themselves acknowledge – housing supply is inflexible, so prices increase far more than supply.

The supply side of the housing market has two main factors: the turnover of the existing stock of housing, and the net change in the number of houses (thanks to demolition of old properties and construction of new ones). The turnover of existing properties is far larger than the construction rate of new ones, and this alone makes housing different to your ordinary market. The demand side of the housing market has one main factor: new mortgages created by the banks.

Monetary demand for housing is therefore predominantly mortgage credit: the annual increase in mortgage debt. This also makes housing very different to ordinary markets, where most demand comes from the turnover of existing money, rather than from newly created money.

We can convert the credit-financed monetary demand for housing into a physical demand for new houses per year by dividing by the price level. This gives us a relationship between the level of mortgage credit and the level of house prices. There is therefore a relationship between the change in mortgage credit and the change in house prices. This relationship is ignored in mainstream politics and mainstream economics. But it is the major determinant of house prices: house prices rise when mortgage credit rises, and they fall when mortgage credit falls. This relationship is obvious even for the UK, where mortgage debt data isn’t systematically collected, and I am therefore forced to use data on total household debt (including credit cards, car loans etc.).

Even then, the correlation is obvious (for the technically minded, the correlation coefficient is 0.6). The US does publish data on mortgage debt, and there the correlation is an even stronger 0.78—and standard econometric tests establish that the causal process runs from mortgage debt to house prices, and not vice versa (the downturn in house prices began earlier in the USA, and was an obvious pre-cursor to the crisis there).

None of this would have happened – at least not in the UK – had mortgage lending remained the province of money-circulating building societies, rather than letting money-creating banks into the market. It’s too late to unscramble that omelette, but there are still things that politicians could do make it less toxic for the public.

The toxicity arises from the fact that the mortgage credit causes house prices to rise, leading to yet more credit being taken on until, as in 2008, the process breaks down.

And it has to break down, because the only way to sustain it is for debt to continue rising faster than income. Once that stops happening, demand evaporates, house prices collapse, and they take the economy down with them. That is no way to run an economy.

Yet far from learning this lesson, politicians continue to allow lending practices that facilitate this toxic feedback between leverage and house prices. A decade after the UK (and the USA, and Spain, and Ireland) suffered property crashes – and economic crises because of them – it takes just a millisecond of Internet searching to find lenders who will provide 100% mortgage finance based on the price of the property.

This should not be allowed. Instead, the maximum that lenders can provide should be limited to some multiple of a property’s actual or imputed rental income, so that the income-earning potential of a property is the basis of the lending allowed against it.

 

Two smaller points first: Steve doesn’t mention the role of ultra-low rates. Which is a huge factor leading the process. Second, he says his proposals will “..transition us from a world in which we treat housing as a speculative asset rather than what it really is, a long-lived consumption good”. I wonder if perhaps we should take this a step further.

We don’t see land as a consumption good either, or water sources. They are assets that belong to a given community. Or should. So shouldn’t buildings be too? A building society (or some local equivalent, It’s a Wonderful Life style) in a community can’t, won’t lend out money to build homes that serve the interests of the owner, but hamper those of the community. But now I sound even more commie than Steve for many, I know.

 

On to my main point: if you return mortgage lending to money-circulating building societies, rather than money-creating banks, who’s going to create the money? Don’t let’s forget that a huge part of our present money supply comes from those banks, and much of that from the mortgage loans they issue. Steve may well have thought about this (was he afraid to ask?), and I’d be curious to see his views.

Inflation/deflation is a function of money supply x money velocity (MxV). There are multiple ways to define this, and discuss it, but in the end this remains valid.

This is what the US money supply (stock) has done over the past 30-odd years

 

 

And here is the Case/Shiller home price index for the US over roughly that period. The correlation is painfully clear. Except maybe for that drop in 2008, but the Fed caught that one. Can’t let the money supply fall off a cliff.

 

 

And why can’t we afford to let the money supply fall off a cliff? Because money velocity already has:

 

 

How dramatic that fall has been is perhaps even clearer on a shorter time-frame.

 

 

We can say that MV = GDP, or we can make it a bit more complex with MV=PT, where P is prices and T is transactions (or national output), and people can say that this is just one of many ways to define inflation, but when you have a drop in velocity as steep as that one, and you combine it with the rise in money supply we saw, the danger should be obvious.

We have made our economies fully dependent on banks creating loans out of thin air. Which is a ridiculous model, and as Steve says: “That is no way to run an economy”, but we still have. And if and when home prices start to fall, and fewer people buy homes, the money supply will first stop rising, and then start falling, and we will have the mother of all deflations.

If you take the MV = GDP formulation, GDP will go down right with the money supply, unless velocity (V) soars. Which it can’t, because people are maxed out on those mortgages. They can’t spend. If you go with MV=PT, then if money supply falls, so will prices. Unless transactions (output) is demolished, but that will just kill off velocity even more. Why many people see inflation in our future is hard to gauge.

 

We could, presumably, get our central banks to pump ginormous amounts of money into our societies, but where are they going to put it? Not into our banks(!), which wouldn’t create all those loans anymore, as It’s a Wonderful Life takes over that role, taking the banks and their present role down with it.

Because it’s starting to get obvious that the present ‘system’ is set to go down big time, since as Steve put it:the only way to sustain it is for debt to continue rising faster than income, and we all know where that goes, we can advocate a version of controlled demolition, but who would lead that?

The banks are the most powerful party at the table right now, and controlled demolition of what we have today, as sensible as it may be for society at large, is not for them. Which makes this not only a financial problem, but a political one too: where does power reside. Down the line, it doesn’t even seem to matter much who gives out the loans, there will be very few takers.

Let’s just say we’re open to suggestions. But they better be good.

 

 

Our Economies Run On Housing Bubbles

Mar 302017
 
 March 30, 2017  Posted by at 2:40 pm Finance Tagged with: , , , , , , , ,  9 Responses »


Rene Magritte Memory 1948

 

We are witnessing the demise of the world’s two largest economic power blocks, the US and EU. Given deteriorating economic conditions on both sides of the Atlantic, which have been playing out for many years but were so far largely kept hidden from view by unprecedented issuance of debt, the demise should come as no surprise.

The debt levels are not just unprecedented, they would until recently have been unimaginable. When the conditions for today’s debt orgasm were first created in the second half of the 20th century, people had yet to wrap their minds around the opportunities and possibilities that were coming on offer. Once they did, they ran with it like so many lemmings.

The reason why economies are now faltering invites an interesting discussion. Energy availability certainly plays a role, or rather the energy cost of energy, but we might want to reserve a relatively larger role for the idea, and the subsequent practice, of trying to run entire societies on debt (instead of labor and resources).

 

 

It almost looks as if the cost of energy, or of anything at all really, doesn’t play a role anymore, if and when you can borrow basically any sum of money at ultra low rates. Sometimes you wonder why people didn’t think of that before; how rich could former generations have been, or at least felt?

The reason why is that there was no need for it; things were already getting better all the time, albeit for a briefer period of time than most assume, and there was less ‘want’. Not that people wouldn’t have wanted as much as we do today, they just didn’t know yet what it was they should want. The things to want were as unimaginable as the debt that could have bought them.

It’s when things ceased getting better that ideas started being floated to create the illusion that they still were, and until recently very few people were not fooled by this. While this will seem incredible in hindsight, it still is not that hard to explain. Because when things happen over a period of decades, step by step, you walk headfirst into the boiling frog analogy: slowly but surely.

 

At first, women needed to start working to pay the bills, health care and education costs started rising, taxes began to rise. But everyone was too busy enjoying the nice slowly warming water to notice. A shiny car -or two, three-, a home in the burbs with a white picket fence, the American -and German and British etc.- Dream seemed to continue.

Nobody bothered to think about the price to pay, because it was far enough away: the frog could pay in installments. In the beginning only for housing, later also for cars, credit card debt and then just about anything.

Nobody bothered to look at external costs either. Damage to one’s own living environment through a huge increase in the number of roads and cars and the demise of town- and city cores, of mom and pop stores, of forest land and meadows, basically anything green, it was all perceived as inevitable and somehow ‘natural’ (yes, that is ironic).

 

 

Damage to the world beyond one’s own town, for instance through the exploitation of domestic natural resources and the wars fought abroad for access to other nations’ resources, only a very precious few ever cared to ponder these things, certainly after the Vietnam war was no longer broadcast and government control of -or cooperation with- the media grew exponentially.

Looking at today’s world in a sufficiently superficial fashion -the way most people look at it-, one might be forgiven for thinking that debt, made cheap enough, tapers over all other factors, economic and otherwise, including thermodynamics and physics in general. Except it doesn’t, it only looks that way, and for a limited time at that. In the end, thermodynamics always beats ‘financial innovation’. In the end, thermodynamics sets the limits, even those of economics.

 

That leads us into another discussion. If not for the constraints, whether they emanate from energy and/or finance, would growth have been able to continue at prior levels? Both the energy and the finance/political camps mostly seem to think so.

The energy crowd -peak oilers- appear to assume that if energy would have been more readily available, economic growth could have continued pretty much unabated. Or they at least seem to assume that it’s the limits of energy that are responsible for the limits to economic growth.

The finance crowd mostly seems to think that if we would have followed different economic models, growth would have been for the taking. They tend to blame the Fed, or politics, loose regulation, the banking system.

Are either of them right? If they are, that would mean growth can continue de facto indefinitely if only we were smart enough to either make the right economic and political decisions, or to find or invent new sources of energy.

But what kind of growth do both ‘fields’ envision? Growth to what end, and growth into what? 4 years ago, I wrote What Do We Want To Grow Into? I have still never seen anyone else ask that question, before or since, let alone answer it.

We want growth by default, we want growth for growth’s sake, without caring much where it will lead us. Maybe we think unconsciously that as long as we can secure growth, we can figure out what to do with it later.

But it doesn’t work that way: growth changes the entire playing field on a constant basis, and we can’t keep up with the changes it brings, we’re always behind because we don’t care to answer that question: what do we want to grow into. Growth leads us, we don’t lead it. Next question then: if growth stops, what will lead us?

Because we don’t know where we want growth to lead us, we can’t define it. The growth we chase is therefore per definition blind. Which of necessity means that growth is about quantity, not quality. And that in turn means that the -presupposed- link between growth and progress falls apart: we can’t know if -the next batch of- growth will make us better off, or make our lives easier, more fulfilling. It could do the exact opposite.

 

And that’s not the only consequence of our blind growth chase. We have become so obsessed with growth that we have turned to creative accounting, in myriad ways, to produce the illusion of growth where there is none. We have trained ourselves and each other to such an extent to desire growth that we’re all, individually and collectively, scared to death of the moment when there might not be any. Blind fear brought on by a blind desire.

As we’ve also seen, we’ve been plunging ourselves into ever higher debt levels to create the illusion of growth. Now, money (debt) is created not by governments, as many people still think, but by -private- banks. Banks therefore need people to borrow. What people borrow most money for is housing. When they sign up for a mortgage, the bank creates a large amount of money out of nothing.

So if the bank gets itself into trouble, for instance because they lose money speculating, or because people can’t pay their mortgages anymore that they never could afford in the first place, the only way out for that bank, other than bailouts, is to sign more people up for mortgages -or car loans-, preferably bigger ones all the time.

 

 

What we have invented to keep big banks afloat for a while longer is ultra low interest rates, NIRP, ZIRP etc. They create the illusion of not only growth, but also of wealth. They make people think a home they couldn’t have dreamt of buying not long ago now fits in their ‘budget’. That is how we get them to sign up for ever bigger mortgages. And those in turn keep our banks from falling over.

Record low interest rates have become the only way that private banks can create new money, and stay alive (because at higher rates hardly anybody can afford a mortgage). It’s of course not just the banks that are kept alive, it’s the entire economy. Without the ZIRP rates, the mortgages they lure people into, and the housing bubbles this creates, the amount of money circulating in our economies would shrink so much and so fast the whole shebang would fall to bits.

That’s right: the survival of our economies today depends one on one on the existence of housing bubbles. No bubble means no money creation means no functioning economy.

 

What we should do in the short term is lower private debt levels (drastically, jubilee style), and temporarily raise public debt to encourage economic activity, aim for more and better jobs. But we’re doing the exact opposite: austerity measures are geared towards lowering public debt, while they cut the consumer spending power that makes up 60-70% of our economies. Meanwhile, housing bubbles raise private debt through the -grossly overpriced- roof.

This is today’s general economic dynamic. It’s exclusively controlled by the price of debt. However, as low interest rates make the price of debt look very low, the real price (there always is one, it’s just like thermodynamics) is paid beyond interest rates, beyond the financial markets even, it’s paid on Main Street, in the real economy. Where the quality of jobs, if not the quantity, has fallen dramatically, and people can only survive by descending ever deeper into ever more debt.

 

 

Do we need growth? Is that even a question we can answer if we don’t know what we would need or use it for? Is there perhaps a point, both from an energy and from a financial point of view, where growth simply levels off no matter what we do, in the same way that our physical bodies stop growing at 6 feet or so? And that after that the demand for economic growth must necessarily lead to The Only Thing That Grows Is Debt?

It’s perhaps ironic that the US doesn’t appear to be either first or most at risk this time around. There are plenty other housing markets today with what at least look to be much bigger bubbles, from London to China and from Sydney to Stockholm. Auckland’s bubble already looks to be popping. The potential consequences of such -inevitable- developments are difficult to overestimate. Because, as I said, the various banking systems and indeed entire economies depend on these bubbles.

The aftermath will be chaotic and it’s little use to try and predict it too finely, but it’ll be ‘interesting’ to see what happens to the banks in all these countries where bubbles have been engineered, once prices start dropping. It’s not a healthy thing for an economy to depend on blowing bubbles. It’s also not healthy to depend on private banks for the creation of a society’s money. It’s unhealthy, unnecessary and unethical. We’re about to see why.

 

Debt Rattle Christmas Day 2015

Dec 252015
 
 December 25, 2015  Posted by at 9:44 am Finance Tagged with: , , , , , ,  Comments Off on Debt Rattle Christmas Day 2015


Jack Delano Brockton, Mass., Enterprise newspaper office on Christmas Eve 1940

• Switzerland To Vote On Banning Banks From Creating Money (Telegraph)
• US Retailers At Risk Of Missing Even Modest Holiday Sales Goals (Reuters)
• High Street Christmas Shopping Figures Grim Reading For Retailers (Guardian)
• Lower Jobless Claims Don’t Point to Robust US Labor Market (WSJ)
• African Firms Hit by Dollar Shortages (WSJ)
• Why The Fed Will Never Succeed (Macleod)
• The Perils of Fed Gradualism (Stephen Roach)
• The Political Consequences of Financial Crises (Davies)
• Yanis Varoufakis Talks Again, Insults Everybody (Politico)
• 2015 Year In Review – Scenic vistas from Mount Stupid (Collum)
• Black Lives Matter Protests Roil Cities Across The US (LA Times)
• US Plans Mass Deportation of Illegal Central American Migrants (WSJ)
• In The Bleakness Of The Calais Migrant Camp, A Light Shines Out (Guardian)
• Refugee NGOs On Greek Islands To Be Coordinated (Kath.)

Well, we can hope…

• Switzerland To Vote On Banning Banks From Creating Money (Telegraph)

Switzerland will hold a referendum to decide whether to ban commercial banks from creating money. The Swiss federal government confirmed on Thursday that it would hold the plebiscite, after more than 110,000 people signed a petition calling for the central bank to be given sole power to create money in the financial system. The campaign – led by the Swiss Sovereign Money movement and known as the Vollgeld initiative – is designed to limit financial speculation by requiring private banks to hold 100pc reserves against their deposits. “Banks won’t be able to create money for themselves any more, they’ll only be able to lend money that they have from savers or other banks,” said the campaign group. Under Switzerland’s direct democracy, a referendum can be held if a motion gains 100,000 signatures within 18 months of launching.

If successful, the sovereign money bill would give the Swiss National Bank a monopoly on physical and electronic money creation, “while the decision concerning how new money is introduced into the economy would reside with the government,” says Vollgeld. The idea of limiting all money creation to central banks was first touted in the 1930s and supported by renowned US economist Irving Fischer as a way of preventing asset bubbles and curbing reckless lending. In modern market economies, central banks control the creation of banknotes and coins but not the creation of all money, which occurs when a commercial bank offers a line of credit. Central banks aim to influence the money supply with monetary policy and regulatory tools. The SNB was established in 1891, with exclusive power to mint coins and issue Swiss banknotes.

But over 90pc of money in circulation in Switzerland now exists in the form “electronic” cash created by private banks, rather than the central bank. Members of the initiative committee for Monetary Reform (Vollgeld-Initiative) hand over boxes with more than 120.000 signatures at the Federal Chancellery in Bern, Switzerland “Due to the emergence of electronic payment transactions, banks have regained the opportunity to create their own money,” said the Swiss Sovereign Money campaign. “The decision taken by the people in 1891 has fallen into oblivion.”

Referenda on monetary matters are not new in Switzerland. Last year, the country voted by more than 78pc to reject a law calling for the central bank to increase its gold reserves from 7pc to 20pc. Unlike the gold vote – which was seen as a precursor to re-introducing the Gold Standard in Switzerland – economists have been more supportive of the idea of “sovereign money” as a way to stabilise the economy and prevent excess credit growth. Iceland – which saw its bloated banking system collapse in spectacular fashion in 2008 – has also touted an abolition of private money creation and an end to fractional reserve banking. A date for the Swiss referendum has not been set.

Read more …

Translation: it’s a lousy shopping season.

• US Retailers At Risk Of Missing Even Modest Holiday Sales Goals (Reuters)

Retailers are struggling to meet even modest forecasts for the holiday shopping season this year after the “Super Saturday” before Christmas failed to live up to its nickname, industry research groups said. The last Saturday before Christmas often sets the annual record for retail sales, vying with Thanksgiving weekend’s Black Friday. In recent years, last-minute shopping has determined the success of the season, and a relatively weak final weekend bodes poorly for retailers. This year Super Saturday weekend sales in stores and online rose 4% to $55 billion, after a 2.5% gain last year, according to retail consultancy and private-equity fund Customer Growth Partners. That puts overall store and online sales from the start of November through Dec. 22 on track to rise 3.1%, below the 3.2% pace the firm forecast and down from 4.1% growth in the same period last year.

“Sales have been sluggish so far this year as most consumers are still buying close to need,” said Craig Johnson, president of Customer Growth Partners. “What’s worse is the marked deceleration from a year ago,” he said. Last year, last-minute sales gained in the final 10 days of the holiday season, driven by savings from lower gasoline prices. If sales, spurred by gift card redemptions, hold up in the week after Christmas this year, retailers could move closer to meeting performance forecasts, consultants and retail experts said. The National Retail Federation, the leading industry body, has forecast a 3.7% rise in store and online sales this year. Discounts across categories have been deeper than last year, in the range of 20% to 50%, said Traci Gregorski at analytics firm Market Track.

But consultants said the discounting still had not been enough to boost store traffic materially. Promotions earlier in November took a toll on in-store sales during the Thanksgiving weekend, when total spending was the same as last year, according to the NRF.

Read more …

Lousy shopping in Britain too.

• High Street Christmas Shopping Figures Grim Reading For Retailers (Guardian)

High streets are continuing to suffer as shoppers saved on gifts and splashed their spare cash in restaurants and pubs in the days before Christmas. The number of shoppers visiting UK stores slid 9% year on year on Monday and Tuesday, dashing hopes of a late rush to stores, according to analysts at Springboard. Diane Wehrle, insights director at Springboard, said about 2% of the decline in shopper numbers was likely to be linked to the timing of Christmas Day, which is one day later in the week than last year. The changing of shopping habits towards buying online and unseasonably balmy temperatures have also meant there is little demand for new coats, boots and knitwear. The Black Friday discount day in late November may also have eaten up sales.

“There is a downward movement in footfall anyway but we are seeing greater drops in the run-up to Christmas this year,” Wehrle said. “It’s partly because we have now got Black Friday and that has fed the habit to shop online. Retailers have gone hell for leather with with bargains but a lot of those will have been bought online for click & collect later.” The poor shopper numbers will make grim reading for retailers who have been banking on a late rush this year. Bonmarché and Game Digital have already issued profit warnings as demand has failed to materialise this year and analysts expect more will follow. Shares in Marks & Spencer slid earlier this week after analysts at Nomura predicted sales of clothing and homewares at established stores would slump 5.5% over the three months to the end of the year.

The retailer has been offering 30% off knitwear, one of its key seasonal ranges, since 10 December, as chains including Debenhams, Bhs, Dorothy Perkins, H&M and Gap have all got out their sale banners. Veteran analyst Richard Hyman has predicted a shake-out in the new year, as shops count the cost of a lacklustre Christmas. “There’s a lot of zombie-looking, ailing retailers that are not long for this world,” he said. High street stores are particularly suffering as shoppers switch to the internet. In-store spending slid 2.3% in the first 10 days of December according to Barclaycard, while online spending rose 9.4%, leaving overall spending virtually flat year on year.

Read more …

“The greatest concern in the labor market now aren’t those who recently lost their jobs, but the persistently large number out of work for months or years, and those stuck in low-paying and part-time jobs.“

• Lower Jobless Claims Don’t Point to Robust US Labor Market (WSJ)

The fewest Americans since 1973 will seek new unemployment benefits this year, but that doesn’t mean the labor market is back to full health. In total, less than 15 million American will make first-time requests for government assistance this year–about half as many claims as were made in 2009–and far fewer than the number filed during the 1980s and 90s when the economy was expanding at a stronger clip. The greatest concern in the labor market now aren’t those who recently lost their jobs, but the persistently large number out of work for months or years, and those stuck in low-paying and part-time jobs. At the same time, a larger portion of those newly laid off isn’t seeking benefits.

Initial claims are seen as a proxy for layoffs, but other separation measures show that layoffs have plateaued, or even increased this year. The Labor Department recorded 17.4 million layoffs and discharges during the first 10 months of the year, nearly unchanged from the same period in 2014. Outplacement consultants Challenger, Gray & Christmas report the number of layoffs announced by typically large companies through November was 28% higher than through the first 11 months of last year, partly reflecting cutbacks in the energy industry. Economists usually expect hiring to strengthen when new claims decline. But that hasn’t happened this year. Through November, employers added a monthly average of 210,000 jobs to payrolls.

For all of last year, the average was 260,000. The average level of weekly claims was about 10% higher in 2014. Claims readings could be distorted because a smaller share of those laid off are applying for benefits. The share of laid off workers seeking benefits has fallen this year to just above 50%, according to the National Employment Law Project, a group that advocates for the unemployed. The rate is down from record high of almost 80% just after the recession ended.

Read more …

Seen from miles away.

• African Firms Hit by Dollar Shortages (WSJ)

Valentine Ozigbo is struggling to obtain a key construction ingredient as he refurbishes and builds hotels in Nigeria: the U.S. dollar. Some of Africa’s largest economies, including Nigeria, Angola, Ethiopia and Mozambique, are restricting access to the greenback to protect dwindling reserves. That is causing problems for businesses from Mr. Ozigbo’s Transcorp Hotels to international giants like General Electric and Coca-Cola, all of which are struggling to get the dollars they need for imports or to send profits back home. The shortage comes as the inflow of dollars from resource exports, from oil to cotton, has plummeted with the prices of these commodities. The commodity rout also is putting pressure on local currencies, which some central banks are trying to support with their dwindling supply of dollars.

This dollar squeeze is frustrating investors, increasing costs and delaying projects. It may hamper future investment in countries reeling from the fall in commodity prices. “It’s been a rough ride for a lot of companies in Nigeria, if not all the companies,” said Mr. Ozigbo, chief executive of Transcorp Hotels. Nigeria gets more than 90% of its foreign-currency reserves from oil exports. Since June 20, 2014, when the U.S. oil price was at $107.26, the U.S. oil price has declined 66% through Tuesday’s close of $36.14, amid oversupply and weak growth in demand. Oil’s decline sent the value of the naira, Nigeria’s currency, sharply lower at the start of the year. In March, the Central Bank of Nigeria fixed its exchange rate at around 199 naira to the dollar. By this month, its currency reserves were down 18% to $29.5 billion from the same month last year.

In the summer, the central bank introduced a list of 41 items, from meat to concrete, that it won’t release dollars for. But no matter what a buyer wants their dollars for, their request has to be vetted against this list, slowing down any attempt to buy the currency. Angola now lists industries—including the oil and food sectors—that have priority for the country’s dollar reserves, In Mozambique, the government requires companies to convert half of any dollar revenues into the local currency, as it looks to shore up its reserves. “It’s obviously not like it used to be, where you would go to the bank and get your dollars,” said Jay Ireland, the Africa chief executive officer for GE. “Now it’s a process that they require and it takes longer,” he said, talking about Nigeria and Angola.

Mr. Ireland said GE remains committed to long-term projects in Africa, but the dollar shortage means that it now takes local clients longer to buy GE products priced in dollars. Coca-Cola has been in Africa for almost a century and can obtain dollars from across its businesses. Still, the beverage giant is concerned that its suppliers will start to feel the pinch as they struggle to fund imports that they need. “If there are no changes in monetary policy it might become a bigger challenge and that is a space we are watching very closely,” said Adeola Adetunji, Coca-Cola’s managing director in Nigeria. “Business is not as usual.”

Read more …

“The fundamental question is actually far broader than whether or not the Fed should be raising rates: rather, should the Fed be managing interest rates at all?” No, of course not.

• Why The Fed Will Never Succeed (Macleod)

The Fed will never succeed in its attempt to manage inflation and unemployment by varying interest rates. This is because it and its economists do not accept the relationship between, on one side, the money it creates and the bank credit its commercial banks issue out of thin air, and on the other the disruption unsound money causes in the economy. This has been going on since the Fed was created, which makes the question as to whether the Fed was right to raise interest rates recently irrelevant. Furthermore, it’s not just the American people who are affected by the Fed’s monetary management, because the Fed’s actions affect nearly everyone on the planet. The Fed does not even admit to having this wider responsibility, except to the extent that it might have an impact on the US economy.

That the Fed thinks it is only responsible to the American people for its actions when they affect all nations is an abrogation of its duty as issuer of the reserve currency to the rest of the world, and it is therefore not surprising that the new kids on the block, such as China, Russia and their Asian friends, are laying plans to gain independence from the dollar-dominated system. The absence of comment from other central banks in the advanced nations on this important subject should also worry us, because they appear to be acting as mute supporters for the Fed’s group-think. This is the context in which we need to clarify the effects of the Fed’s monetary policy. The fundamental question is actually far broader than whether or not the Fed should be raising rates: rather, should the Fed be managing interest rates at all? Before we can answer this question, we have to understand the relationship between credit and the business cycle.

There are two types of economic activity, one that correctly anticipates consumer demand and is successful, and one that fails to do so. In free markets the failures are closed down quickly, and the scarce economic resources tied up in them are redeployed towards more successful activities. A sound-money economy quickly eliminates business errors, so this self-cleansing action ensures there is no build-up of malinvestments and the associated debt that goes with it. When there is stimulus from monetary inflation, it is inevitable that the strict discipline of genuine profitability that should guide all commercial enterprises takes a back seat. Easy money and interest rates lowered to stimulate demand distort perceptions of risk, over-values financial assets, and encourages businesses to take on projects that are not genuinely profitable. Furthermore, the owners of failing businesses find it possible to run up more debts, rather than face commercial reality. The result is a growing accumulation of malinvestments whose liquidation is deferred into the future.

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“..the excess liquidity spawned by gradual normalization leaves financial markets predisposed to excesses and accidents.”

• The Perils of Fed Gradualism (Stephen Roach)

The Fed had, in effect, become beholden to the monster it had created. The corollary was that it had also become steadfast in protecting the financial-market-based underpinnings of the US economy. Largely for that reason, and fearful of “Japan Syndrome” in the aftermath of the collapse of the US equity bubble, the Fed remained overly accommodative during the 2003-2006 period. The federal funds rate was held at a 46-year low of 1% through June 2004, before being raised 17 times in small increments of 25 basis points per move over the two-year period from mid-2004 to mid-2006. Yet it was precisely during this period of gradual normalization and prolonged accommodation that unbridled risk-taking sowed the seeds of the Great Crisis that was soon to come.

Over time, the Fed’s dilemma has become increasingly intractable. The crisis and recession of 2008-2009 was far worse than its predecessors, and the aftershocks were far more wrenching. Yet, because the US central bank had repeatedly upped the ante in providing support to the Asset Economy, taking its policy rate to zero, it had run out of traditional ammunition. And so the Fed, under Ben Bernanke’s leadership, turned to the liquidity injections of quantitative easing, making it even more of a creature of financial markets. With the interest-rate transmission mechanism of monetary policy no longer operative at the zero bound, asset markets became more essential than ever in supporting the economy.

Exceptionally low inflation was the icing on the cake – providing the inflation-targeting Fed with plenty of leeway to experiment with unconventional policies while avoiding adverse interest-rate consequences in the inflation-sensitive bond market. Today’s Fed inherits the deeply entrenched moral hazard of the Asset Economy. In carefully crafted, highly conditional language, it is signaling much greater gradualism relative to its normalization strategy of a decade ago. The debate in the markets is whether there will be two or three rate hikes of 25 basis points per year – suggesting that it could take as long as four years to return the federal funds rate to a 3% norm.

But, as the experience of 2004-2007 revealed, the excess liquidity spawned by gradual normalization leaves financial markets predisposed to excesses and accidents. With prospects for a much longer normalization, those risks are all the more worrisome. Early warning signs of troubles in high-yield markets, emerging-market debt, and eurozone interest-rate derivatives markets are particularly worrisome in this regard.

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Swing to the right.

• The Political Consequences of Financial Crises (Davies)

Three German economists, Manuel Funke, Moritz Schularik, and Christoph Trebesch, have just produced a fascinating assessment based on more than 800 elections in Western countries over the last 150 years, the results of which they mapped against 100 financial crises. Their headline conclusion is stark: “politics takes a hard right turn following financial crises. On average, far-right votes increase by about a third in the five years following systemic banking distress.” The Great Depression of the 1930s, which followed the Wall Street crash of 1929, is the most obvious and worrying example that comes to mind, but the trend can be observed even in the Scandinavian countries, following banking crises there in the early 1990s.

So seeking to explain, say, the rise of the National Front in France in terms of President François Hollande’s personal and political unpopularity is not sensible. There are greater forces at work than his exotic private life and inability to connect with voters. The second major conclusion that Funke, Schularik, and Trebesch draw is that governing becomes harder after financial crises, for two reasons. The rise of the far right lies alongside a political landscape that is typically fragmented, with more parties, and a lower share of the vote going to the governing party, whether of the left or the right. So decisive legislative action becomes more challenging. At the same time, a surge of extra-parliamentary mobilization occurs: more and longer strikes and more and larger demonstrations.

Control of the streets by government is not as secure. The average number of anti-government demonstrations triples, the frequency of violent riots doubles, and general strikes increase by at least a third. Greece has boosted those numbers recently. The only comforting conclusion that the three economists reach is that these effects gradually peter out. The data tell us that after five years, the worst is over. That does not seem to be the way things are moving now in Europe, if we look at France’s recent election scare, not to mention Finland and Poland, where right-wing populists have now come to power. Maybe the answer is that the clock starts ticking on the five years when the crisis is fully over, which is not yet true in Europe.

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Politico.eu doesn’t seem to like Yanis much.

• Yanis Varoufakis Talks Again, Insults Everybody (Politico)

In an interview published in Thursday’s edition of the Dutch newspaper De Volkskrant, Varoufakis took dozens of hard swings at those who have vilified him and his negotiation tactics. Among the greatest hits were Varoufakis claiming the Eurogroup is a place fit only for psychopaths, calling German Finance Minister Wolfgang Schäuble a puppet master and bashing Eurogroup President Jeroen Dijsselbloem as an ineffectual tool of the Germans. Here are the highlights:

1. It was one big coup d’état – European partners came to an agreement with Tsipras’s left-wing government on a third bailout after a hot summer of tense negotiations and slow progress. Many still blame the Varoufakis for the disastrous turn of events. Does Varoufakis agree? “No! I won’t do that. It was nothing but a coup, one big coup d’état. And it succeeded,” he said. “I’m not taking any responsibility for that,” he said. “My speeches were moderate, my plans measured, my advisors were not left-wing lunatics. There was another reason that the other side poured poison and lies over me, and portrayed me as a dangerous radical while I was the most right wing minister in the cabinet. If I was a crazy left-wing lunatic, they wouldn’t have been afraid of me.” “No, they wanted to get rid of me because I knew what I was talking about.”

Jeroen Dijsselbloem, the president of the Eurogroup of finance ministers, confirmed to the Dutch broadcaster NOS that he pushed Tsipras to pull out his finance minister. The Dutchman said he didn’t think Varoufakis had a mandate to negotiate, and thus “I went to do this with the prime minister instead,” he said in an interview to be broadcasted next Monday.

2. Dijsselbloem is a puppet, Schaüble his master – Varoufakis clashed repeatedly with his fellow finance ministers in the Eurogroup. Soothing the egos of politicians and power brokers was not his strong suit. When asked who dominated the meetings, he said: “(German Finance Minister) Wolfgang Schäuble. He’s the puppet master who pulls all the strings. All the other ministers are marionettes. Schäuble is the grandmaster of the Eurogroup. He decides who becomes the president, he determines the agenda, he controls everything.” The Greek ex-minister is especially hard for Dijsselbloem. “[He] has no real power. Dijsselbloem has no authority; he is a soldier, a puppet … He can’t make any decisions without calling Schäuble.”

“Dijsselbloem is a cog in a machine that he doesn’t understand himself,” he said later in the interview. “There was absolutely no reason for me to speak with Jeroen because he was neither willing nor able to have a real discussion, let alone interested.” But one leader gets praise from the Greek economist: the European Central Bank’s President Mario Draghi: “A formidable economist,” Varoufakis called him, adding that “Draghi is very frustrated by the suffocating limitations of his ECB mandate.”

3. Eurogroup is the place to be — if you’re a psychopath – “Anyone who speaks about blissful moments in the Eurogroup should be locked up immediately for being a dangerous lunatic,” the ex-minister said laughingly. “The Eurogroup is a very unpleasant place, including for Schäuble, Dijsselbloem and the ECB president Draghi. Centers of power are stressful by definition, with big egos and continuous conflict.” “If you’re a psychopath and you thrive on conflict, then the Eurogroup is the place to be.” Asked whether it was a place for power-hungry politicians, he said: “Ultimately, almost no one has any power … [Individuals] power is undermined by opposing power, everyone cancels each other out. I’ve seen a lot of frustration in the Eurogroup.”

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Dave’s annual endless litany.

• 2015 Year In Review – Scenic vistas from Mount Stupid (Collum)

I am penning my seventh “Year in Review.” These summaries began exclusively for myself, evolved into a sort of holiday cheer for a couple hundred e-quaintances with whom I had been affiliating since my earliest days as a market bear in the late ’90s, and metastasized into the Tower of Babble—longer than a Ken Burns miniseries—summarizing the human follies that capture my attention each year. Jim Rickards kindly called it “a perfect combination of Mel Brooks, Erwin Schrodinger & Howard Beale.” I wade through the year’s most extreme lunacies as well as a few special topics while trying to find the overarching themes. I love conspiracy theories and detest detractors who belittle those trying to sort out fact from fiction in a propaganda-rich world.

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“..the most wonderful time of the year and a winter of discontent..”

• Black Lives Matter Protests Roil Cities Across The US (LA Times)

It’s the most wonderful time of the year and a winter of discontent, a season of police bullhorns and Christmas lights. Demonstrators protesting police shootings of black men confronted last-minute holiday shoppers and travelers in California and the Midwest this week, seeing the crowds as an opportunity to draw attention to their cause. In Chicago on Thursday, more than 100 demonstrators marched down North Michigan Avenue, the city’s premier shopping corridor, and laid down on the street for a “die-in.” They also blocked access to some stores where Christmas Eve shoppers were hoping to wrap up their tardy gift-buying. The demonstrators were again protesting the October 2014 police shooting of Laquan McDonald, a black 17-year-old carrying a knife who was killed when a Chicago police officer shot him 16 times.

The officer, Jason Van Dyke, has been charged with first-degree murder. Footage released last month appeared to show McDonald walking away from Van Dyke, sparking protests that have yet to fully die down, much as the Black Lives Matter movement has remained in national headlines since last year’s protests in Ferguson, Mo. “When one part of Chicago is affected, all of Chicago is affected,” one of the demonstrators, Alex Thiedmann, said of the “Black Christmas” demonstration on North Michigan Avenue. “If I remain silent, I become an oppressor.” Onlookers affected by the protest had a mixed response. Emily Grossman, 36, was kept from getting an iPhone at the Apple Store. “I hate to put myself first, but this is BS,” she said.

Rabiah Muhammad came downtown for a doctor’s appointment but stopped to watch the protests. “I was walking down the street and I saw all these beautiful people of all ages and colors,” she said. “I think it’s a bigger problem than the city of Chicago. It’s an American problem. This kind of brutality? That’s not what our country is supposed to be.” [..] “On one of the busiest travel days of the year, Black Lives Matter is calling for a halt on Christmas as usual in memorial of all of the loved ones we have lost and continue to lose this year to law enforcement violence without justice or recourse,” a statement from Black Lives Matter organizers said.

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“It is time that the administration acknowledged once and for all that these mothers and children are refugees just like Syrians.”

• US Plans Mass Deportation of Illegal Central American Migrants (WSJ)

To staunch the flow of illegal migrants to the U.S., the Department of Homeland Security has been preparing a national operation to deport Central American families who have evaded removal orders, according to a government official. Starting early next month, U.S. Immigration and Customs Enforcement, a DHS unit, plans to start rounding up hundreds of families that entered the U.S. illegally and who have ignored a final order to leave the country, said the official. Such an order is issued by a judge in immigration court. The number of families showing up at the southwest border has spiked in recent months as gang-related violence grips El Salvador and Honduras. The region also has been plagued by drought.

Typically, the migrants, many of them women and children, turn themselves in at the border and make asylum claims. U.S. authorities then release them, often to live with relatives here, while their cases are adjudicated. DHS Secretary Jeh Johnson in recent months has warned that those whose claims are denied in immigration court could be removed from the country. A spokeswoman for Immigration and Customs Enforcement didn’t dispute an operation has been planned to pursue Central Americans with removal orders. In a statement, the spokeswoman said the agency “focuses on individuals who pose a threat to national security, public safety and border security.” “As Secretary Johnson has consistently said, our border is not open to illegal immigration, and if individuals come here illegally, do not qualify for asylum or other relief, they will be sent back consistent with our laws and our values,” the statement said.

The operation, which was first reported by the Washington Post, has caused controversy in Mr. Johnson’s agency, the official said, with some within DHS opposed to targeting people who have fled violence in their countries of origin. The official said that the operation’s goal is twofold: It aims to send the message to would-be crossers that they won’t be allowed to remain in the U.S. It also seeks to address safety concerns involved as adults entrust their lives and those of their children to human smugglers. “Jeh Johnson wants to send a message to Central Americans: Don’t come north. But Washington hasn’t solved the underlying problem of massive violence in their home countries that is causing them to come north in the first place,” said Margaret Stock, an immigration attorney in Anchorage, Alaska.

[..] The possible roundup for deportation of families caught immigrant advocates by surprise. “This is the last thing we expected from the administration at this point, given the court decision,” said Marielena Hincapie, executive director of the National Immigration Law Center, an advocacy organization in Los Angeles. “It is time that the administration acknowledged once and for all that these mothers and children are refugees just like Syrians.”

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Bit too focused on the Noble Brit, but cool.

• In The Bleakness Of The Calais Migrant Camp, A Light Shines Out (Guardian)

If this had been a conventional disaster, the United Nations would have come in and then the big aid agencies would have got busy. But this is Europe, which is meant to be beyond the need of such help. So the UN and UNHCR are not in Calais, while there’s little sign of Oxfam, Save the Children or the Red Cross. That’s not because they don’t care: aid workers tell visiting politicians they feel they have no mandate to operate in Europe (though Médecins Sans Frontières is there, its first such operation on French soil). As for the French and British governments, their only presence comes in the form of uniformed security personnel policing the barbed wire perimeter, watching – but not helping – the people within, tasked with preventing them breaking out and heading for the tunnel or sea that might take them to England.

The camp has been left instead to the volunteers. That big warehouse – with its kitchen, its clothes-sorting operation and its workshop where carpenters, some professional, some amateur, churn out timber frames for shelters as fast as they can construct them – has been set up by a small, Calais charity, L’Auberge des Migrants. It has grown tenfold in three months, helped by the ad hoc efforts of assorted British groups. The result is that, for the outsider, the atmosphere can seem to be part refugee camp, part Glastonbury. Threading their way around the muddy paths and dirt tracks are countless young Brits, dreadlocked and nose-studded, friendly and eager. Some are there to teach English in the pop-up classroom. Some are helping out at the library (announced by the sign that says “Jungle Books”).

Some are on hand in the large, domed tent set up by two young British playwrights that serves as a kind of arts centre. Musicians from Syria, Iraq or Afghanistan sit in a circle and play songs from the old country. On the walls are drawings or photographs made by refugees. One shows a tree-fringed lake, covered in morning mist. The caption says, “Sometimes I come here and stand for a few minutes, imagining that this is what England looks like.” Judged by the usual standards of policy, this is awful. Both the French and UK governments are guilty of an appalling abdication of responsibility, insisting that the Calais camp is not their problem and so turning their backs on it. They won’t supply it with the basics necessary for human existence, lest they be seen to legitimise or entrench it. This is a shameful response, putting politics before fundamental human decency.

And yet fury cannot be the only response to the camp. Admiration is the right reaction too. First for the migrants and refugees themselves, for their resilience and dignity – for the ingenuity that has seen them build a high street full of chipboard restaurants and plywood cafes, as well as mosques and at least one church. But it’s impossible not to admire the volunteers too. For no pay, they have given up comfortable lives to build or cook or teach, to provide for people they have never met because they know that, if they don’t, no one else will. Some are young or retired, with time on their hands. Others have put busy jobs or careers on hold. But none of them had to trade comfortable lives for working in the mud and squalor of the Jungle. No one forced them to rent a van, fill it with tarpaulins or bulk packs of rice and take it across the Channel.

They did it simply because they were moved by the sight of their fellow human beings in distress. And this is what sets them apart from the governments that claim to represent them. The volunteers saw in the faces of those refugees not a problem to be addressed – or, more accurately, avoided – but people just like them. The same is true of all those who have given, and are still giving, to the Guardian’s unprecedentedly successful Christmas appeal. Within a few hours of the Paris attacks, someone tweeted the advice they’d learned from Fred Rogers, the long-serving face of American children’s television. Don’t look at the killers. Look for the helpers. In what has often been a harsh, dark year, this ragtag, impromptu army of volunteers has been a point of light. They are the very best of us.

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This will not go well. It will lead to the biggest NGOs ordering around the rest of them. And to EU border forces to step in.

• Refugee NGOs On Greek Islands To Be Coordinated (Kath.)

A special committee will be formed under the General Secretariat for the Aegean to coordinate dozens of nongovernmental organizations on the Greek islands receiving the biggest inflows of refugees and migrants, Kathimerini has learned. Alternate Minister for Immigration Yiannis Mouzalas visited Lesvos on Wednesday, where he met with authorities and inspected progress on the construction of a registration center. Mouzalas also met with Susan Sarandon, who is on the island helping with rescue efforts. The US actress reportedly said that she plans to make a documentary on her experiences. Arrivals from the Turkish coast on Greece’s islands remain steady at around 3,500-4,000 people a day, coast guard officials said, adding that they have rescued roughly 100,000 people this year. Hundreds of migrants have not been so lucky on the crossing. On Wednesday, seven children, four men and two women drowned as they tried to reach Farmakonisi.

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Debt Rattle September 21 2015

Sep 212015
 
 September 21, 2015  Posted by at 9:43 am Finance Tagged with: , , , , , , , , , ,  2 Responses »


Arthur Rothstein Interior of migratory fruit worker’s tent, Yakima, Washington Jul 1936

• The Least-Believed Recovery And The Least-Believed Bull Market (Bloomberg)
• Yellen Is Trapped in the Worst Nightmare Ever (Martin Armstrong)
• Yellen Pause Ups Pressure on Draghi as Global Pessimism Mounts (Bloomberg)
• Fed’s Lacker Says Economy Strong Enough For Higher Rates (Reuters)
• Fed’s Williams Still Sees 2015 Rate Hike After ‘Close Call’ (Reuters)
• Volkswagen Plunges 25% After US Emissions Cheat Scandal (Bloomberg)
• Greece’s Year Of Tumult Enters New Chapter As Tsipras Dominates (Bloomberg)
• Debt Relief Tops Tsipras Agenda, Party Official Says (Reuters)
• EU’s Schulz Says Cannot Understand Tsipras’ Greek Coalition Choice (Reuters)
• A Frontline Solution to Europe’s Refugee Crisis: Remember Ellis Island (WSJ)
• Central Europe Gives Up On Holding Refugees Back From Austria (Guardian)
• We Must Act Together, Says Merkel Ahead Of Refugee Summit (Guardian)
• Merkel Coalition at Odds Over Proposal to Cap EU Asylum Places (Bloomberg)
• 15,000 More Refugees To Be Resettled In US Next Year (WaPo)
• UN Meets To Fight Poverty, Europe Puts Up Razor Wire To Keep Poor Out (Guardian)
• Why China Is Turning Back to Confucius (WSJ)
• Was Standard Chartered Flouting US Iranian Sanctions? (FT)
• Nine On Lagarde List Being Probed For Money Laundering (Kath.)
• The Massacre Of The Kurds And The Silence Of Europe (M5S Lower House)
• Safe Assets In A World Gone Mad (Chatham)
• People Have No Idea How Money Is Created (PM.org)

“This is the least-believed economic recovery and the least-believed bull market of our careers..”

• The Least-Believed Recovery And The Least-Believed Bull Market (Bloomberg)

Investors hate stocks – again. Amid a six-year bull market that’s notable mainly for how little conviction there is in it, equity sentiment is plunging at a historic rate, falling by some measures at the fastest pace since Federal Reserve Chairman Paul Volcker had just finished pushing up interest rates in the 1980s. The cost to hedge against stock losses is soaring, valuations are contracting, and bearishness among professional stock handicappers is rising the most in three decades. Fret not. All of this is good news for bulls, if history is any guide. Since 1963, the S&P’s 500 Index has advanced an average 11% in the year after newsletter writers surveyed by Investors Intelligence were as pessimistic as they are now, data compiled by Bloomberg show. That compares with an annualized return of 8.3%.

Skepticism is one thing the rally since 2009 hasn’t lacked – and it may be the best thing stocks have going for them as corporate profits fall, concerns deepen over China’s travails, oil and commodities plunge and the Fed turns more pessimistic on global growth. Some traders even say they see bargains after S&P 500 posted its first 10% retreat in four years. “This is the least-believed economic recovery and the least-believed bull market of our careers,” said Bob Doll, chief equity strategist at Chicago-based Nuveen Asset Management, which oversees $130 billion and bought stocks during the August selloff. “The nervousness means people have stepped to the sidelines. The question is, who is left to sell? Everybody who has cash is a potential buyer.”

Investors have bailed out of stocks at every sign of trouble since 2009, from the euro crisis to ebola, with the latest catalyst coming from China’s devaluation of its currency. The distrust has been a barrier to euphoria, a quality that historically is the bigger threat to bull markets. Fear reigns, spreading faster than any time since 1984 as the S&P 500 tumbled 10% over four days in August. At the start of this month, the bull-to-bear ratio in Investors Intelligence’s survey of newsletter writers fell to a four-year low of 0.9. In April, when bulls dominated the market that was heading for an all-time high, the ratio reached 4.1.

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“..they MUST raise rates or they will bankrupt countless pension funds and international where emerging markets will go into default..”

• Yellen Is Trapped in the Worst Nightmare Ever (Martin Armstrong)

Yellen has inherited a complete nightmare. Thursday’s decision to delay yet again the long-awaited liftoff from zero interest rates is illustrating that the world economy is totally screwed. There is a lot of speculation about why the Fed seems so reluctant to “normalize monetary policy”. There are of course the typical domestic issues that there is low inflation, weak wage gains in the face of strong job growth, a hike will increase the Federal deficit and then there is the argument that corporations that now have $12.5 trillion in debt. All that is nice, but with corporate debt, our clients are locking in long-term at these levels, not funding anything short-term.

Those clients who have listened are preparing for what is to come unlike government which has been forced to shorten the average duration of their debts blind to what happens when rates rise, which will be set in motion by the markets – not Yellen. Fed is really caught between a rock and a very dark place. Yes, they have the IMF and the world pleading with them not to raise rates for it will hurt other debtors who borrowed excessively using dollars to save money. The Fed is also caught between domestic policy objectives that dictate they MUST raise rates or they will bankrupt countless pension funds and international where emerging markets will go into default because commodities have collapsed and they have no way of paying off this debt that has risen to about 50% of the US national debt.

By avoiding the normalization of interest rates (hikes), the Fed has encouraged government to spend far more than they realize because money is cheap. This will eventually light the fire under the economy helping to fuel the Sovereign Debt Crisis. There appears to be no hope for the Fed and they will be forced to raise rates only when they see asset inflation in equities. Then they will have no choice. This is the worst possible mess and the longer they have waited to normalize interest rates, the worst the total crisis is becoming for they will have zero control over the economy and once that is seen, holy Hell will break lose.

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“..a structural shift has beset the world economy.”

• Yellen Pause Ups Pressure on Draghi as Global Pessimism Mounts (Bloomberg)

The global economy caused Janet Yellen to pause for thought. It could spur Mario Draghi to act. After the Federal Reserve chair held off from a U.S. interest-rate increase amid concerns that world growth will weaken, her counterpart at the ECB may give clues on the need for further stimulus for the euro area. Draghi and other Governing Council members will make public appearances this week, while data releases will show whether the currency bloc is succumbing to, or shaking off, the gloom. Like the U.S., the euro area is stuck with stubbornly low inflation. Unlike Yellen, Draghi can’t yet rely on domestic demand to lift prices. Whether because the Fed’s delay leads to a stronger euro, or because of the drag of emerging markets, economists see it as increasingly likely that the ECB will be called on its pledge to boost its €1.1 trillion bond-buying program if needed.

“The worry is that, previously, central banks assumed that global growth would be materially stronger in 2016, but that doesn’t look likely now,” said Nick Kounis at ABN Amro in Amsterdam. “If the Fed had hiked rates, it would have given the ECB some breathing space. Now the pressure is on them again.” The ECB’s optimism that a home recovery coupled with stronger external demand would steer inflation back to the goal of just under 2% is now being replaced by concern that a structural shift has beset the world economy. Executive Board member Peter Praet, the institution’s chief economist, said in an interview published over the weekend that policy makers “won’t hesitate to act” if it they reach that conclusion. Draghi’s lieutenants have been reinforcing that message since the Fed’s rate decision last week.

Benoit Coeure, the ECB’s markets chief, said in a speech in Paris on Friday that prospects for growth in the euro area have “clearly weakened,” and aren’t helped by a euro that’s now strengthening against the currencies of its main trading partners. The single currency has gained 3.5% in trade-weighted terms since mid-July and more than 4% against the dollar. European bonds jumped after the Fed’s Sept. 17 decision to keep its benchmark rate at a record low. Both Praet and Coeure speak in public on Monday, followed by Draghi’s appearance at a European Parliament hearing in Brussels on Wednesday. Hours before Draghi addresses lawmakers, purchasing managers’ surveys for September may tell investors whether Europe’s manufacturing and services industries are indeed succumbing to lower external demand, or whether domestic consumers are helping to prop them up.

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“..public understanding of the Fed’s behavior “an essential foundation for the monetary stability we currently enjoy.”

• Fed’s Lacker Says Economy Strong Enough For Higher Rates (Reuters)

Richmond Federal Reserve President Jeffrey Lacker on Saturday said he dissented at a Fed policy meeting because he thought the economy was now strong enough to warrant higher interest rates. Fed policymakers on Thursday voted to keep the Fed’s target interest rate at between zero and a quarter point. “Such exceptionally low real interest rates are unlikely to be appropriate for an economy with persistently strong consumption growth and tightening labor markets,” Lacker said in a statement. He was the lone dissenter among the 10 Fed officials who voted at the meeting. Lacker said the Fed’s target should rise by a quarter point. Lacker has a history of dissent in Fed policy meetings. In 2012, he voted against eight straight policy decisions by the central bank.

At the time he was urging the Fed to wind down asset purchases that were aimed at stimulating the economy. Regarding Thursday’s decision at the Fed, Lacker said a rebound in consumer spending and “tightening labor markets” meant the economy no longer needed zero interest rates. He said keeping interest rates at their current level deviated from the way the Fed has responded to the economy in the past, which was dangerous because public understanding of the Fed’s behavior was “an essential foundation for the monetary stability we currently enjoy.” “Such departures are risky and raise the likelihood of adverse outcomes,” Lacker said.

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Extending the narrative.

• Fed’s Williams Still Sees 2015 Rate Hike After ‘Close Call’ (Reuters)

An interest rate hike will likely be appropriate this year given the U.S. Federal Reserve’s decision last week to stand pat was a “close call,” a top Fed policymaker said on Saturday. John Williams, a centrist and president of the San Francisco Fed, said the arguments for and against beginning to tighten U.S. monetary policy are about balanced now that the economy is on solid footing, giving him confidence in continued economic and labor market growth. Williams, the first U.S. policymaker to speak publicly since the Fed’s much-anticipated decision on Thursday, suggested he is almost ready to pull the trigger on a rate hike. He acknowledged the risks from a slowdown in China and global downward pressure on inflation, noting a rate rise in 2015 is not guaranteed.

But he said full U.S. employment should be achieved “in the near future” and inflation, while still too low for comfort, should gradually move back to a 2% goal. “Given the progress we’ve made and continue to make on our goals, I view the next appropriate step as gradually raising interest rates, most likely starting sometime later this year,” he said at a weekend conference on the China-U.S. financial system. The Fed’s decision to leave rates near zero “was a close call in my mind, in part reflecting the conflicting signals we’re getting,” he said. “The U.S. economy continues to strengthen while global developments pose downside risks to fully achieving our goals.”

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Falling further as the day goes on. “The violations, which affect nearly half a million vehicles, could result in as much as $18 billion in fines.”

• Volkswagen Plunges 25% After US Emissions Cheat Scandal (Bloomberg)

Volkswagen dropped the most in almost seven years after it admitted to cheating on U.S. air pollution tests for years, risking billions in potential fines and a backlash from consumers in the world’s second-biggest car market. The shares declined as much as 17%, or €27.9, to €134.5 in Frankfurt, the most since Nov. 3, 2008. The drop extends the slump for the year to 25%, valuing the Wolfsburg, Germany-based company at €65.3 billion. Volkswagen Chief Executive Officer Martin Winterkorn said on Sunday that the company is cooperating with the probe and ordered its own external investigation into the issue. The CEO said he was “deeply sorry” for breaking the public’s trust. VW has halted sales of the car models involved, which were a cornerstone of Winterkorn’s effort to catch up in the U.S.

The violations, which affect nearly half a million vehicles, could result in as much as $18 billion in fines. Criminal prosecution is also possible. “If this ends up having been structural fraud, the top management in Wolfsburg may have to bear the consequences,” said Sascha Gommel, a Frankfurt-based analyst for Commerzbank AG, whose share rating is under review. The German carmaker admitted to fitting its U.S. diesel vehicles with software that turns on full pollution controls only when the car is undergoing official emissions testing, the Environmental Protection Agency said Friday. The violations, which affect nearly half a million vehicles, could result in as much as $18 billion in fines. Criminal prosecution is also possible.

Analysts at Kepler Cheuvreux downgraded the shares to “hold” from “buy,” cutting their target price 27% to €185. Volkswagen faces not only a short-term drop in sales and hit to its reputation but also the longer-term risk of litigation in the U.S., the analysts wrote in a note on Monday. During normal driving, the cars with the software – known as a “defeat device” – would pollute 10 times to 40 times the legal limits, the EPA estimated. The discrepancy emerged after the International Council on Clean Transportation commissioned real-world emissions tests of diesel vehicles including a Jetta and Passat, then compared them to lab results. Volkswagen had counted on clean, powerful diesel cars to help it build its sales in the U.S., where it has struggled for years. Sales of VW-brand cars in the country dropped 10% last year to 366,970.

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Lame duck.

• Greece’s Year Of Tumult Enters New Chapter As Tsipras Dominates (Bloomberg)

Greek voters had the choice to reject the man who led their country closer than ever to being forced out of Europe’s single currency. Instead, they embraced him. Alexis Tsipras and his Coalition of the Radical Left, or SYRIZA, emerged from a second election in eight months with a level of support barely diminished from the emphatic victory that catapulted him both into power and a standoff with the euro region. SYRIZA, which took 35.5% of the vote compared with 28.1% for the center-right New Democracy, will enter a coalition with the same small party that helped it rule before. While the victory tightens Tsipras’s hold over Greek politics, it also exposes the paradoxes of a country whose economy is a shadow of its former self and where controls remain on bank withdrawals.

After coming to power pledging to end austerity and restore “dignity,” Tsipras now must implement the further sharp spending cuts and tax increases he ended up agreeing to in exchange for €86 billion of fresh European aid. The electorate has voted to return to power a party that “ditched its promises, switched its policies, and caused the collapse of Greek banks, bringing in an unneeded recession,” said Stathis Kalyvas, a professor of political science at Yale University. On the other hand, “this government will be called to implement a stringent set of fiscal and structural reforms that it vigorously rejected before,” he said.

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What EU says is non-negotiable.

• Debt Relief Tops Tsipras Agenda, Party Official Says (Reuters)

Negotiations over Greece’s debt will top the agenda for Prime Minister-elect Alexis Tsipras from Monday as he prepares for a return to office following a surprisingly easy national election win, a senior source from his party said. Tsipras and his leftist SYRIZA party clinched a clear victory in Sunday’s poll as voters put aside his dramatic U-turn over Greece’s international bailout to offer him a second chance to steer a battered economy to recovery. SYRIZA said on Sunday it plans to govern in a coalition with the small right wing Independent Greeks party, the same partner Tsipras chose after winning the country’s previous general election in January. But to strengthen his hand in talks with EU partners over how to ease Greece’s debt burden, he will seek a broader consensus among the parties he defeated on Sunday, the party source said.

“We will continue negotiations in the coming period, with the debt issue being the first and most important battle,” the source said. “We will ask all political forces to support our efforts.” Some European governments, particularly Germany, are opposed to cutting Greece’s debt – a so-called haircut – but not averse to stretching out its repayment schedule. Eurozone officials told Reuters last week that governments are ready to cap Greece’s debt-servicing costs at 15% of GDP annually over the long term. That would mean the nominal payment would be lower if the Greek economy struggled, higher if it was more robust, they said.

Tsipras is also planning to form a national council for European policy, including representatives of parties other than the Independent Greeks and which would advise the finance minister, the SYRIZA source said. Centre-left daily newspaper Ethnos tipped Euclid Tsakalotos, the former finance minister who brokered terms of the bailout accord in August, to be re-appointed. JP Morgan analyst Malcolm Barr said he expected some sort of debt restructuring to be in place by early next year. “We continue to think that… the (bailout) programme will make enough progress to allow a restructuring of loans from euro area countries by the end of the first quarter of 2016,” he wrote in a note.

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Brussels has lost all sense of the limits of interfering in sovereign nations. This is none of Schulz’s business.

• EU’s Schulz Says Cannot Understand Tsipras’ Greek Coalition Choice (Reuters)

The head of the European Parliament, Martin Schulz, lamented on Monday the decision by Greek leftist Alexis Tsipras to renew a coalition with the small right-wing Independent Greeks party. Tsipras stormed back into office with an unexpectedly decisive election victory on Sunday, claiming a clear mandate to steer Greece’s battered economy to recovery. The vote ensured Europe’s most outspoken leftist leader would remain Greece’s dominant political figure, despite having been abandoned by party radicals last month after he caved in to demands for austerity to win a bailout from the eurozone. Speaking to France Inter radio, Schulz said he could not understand Tsipras’ decision to bring the Independent Greeks, who polled less than 4% of the vote, back into government.

“I called him (Tsipras) a second time to ask him why he was continuing a coalition with this strange, far-right party,” Schulz said. “He pretty much didn’t answer. He is very clever, especially by telephone. He told me things that seemed convincing, but which ultimately in my eyes are a little bizarre.” Independent Greeks leader Panos Kammenos says the bailout by the European Union, European Central Bank and International Monetary Fund has reduced Greece to the status of a debt colony.

The party differs from Syriza on many traditionally conservative issues, pledging to crack down on illegal immigration and defend the close links between the Orthodox Church and the state. Schulz said he admired Tsipras for the way he had navigated through the last year to get himself re-elected, but said Kammenos was a loose canon who always needed to be controlled. “It’s politically and strategically something that you have to admire,” he said. “But after … this renewed mandate with this far-right, populist party, that I don’t understand.”

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The US must be part of the solution too.

• A Frontline Solution to Europe’s Refugee Crisis: Remember Ellis Island (WSJ)

Tabanovce, Macedonia: This quaint Macedonian village provides a useful vantage point for anyone hoping to grasp the scale of the current European refugee crisis. Up to 7,000 refugees have been passing through here daily before crossing the border with Serbia. A generation ago this region escaped communism, then fought bitter ethnic and sectarian wars that lasted until 2001. Now its nations find themselves in the eye of a humanitarian storm. And Europe is no closer to a durable solution. Short of military intervention to stabilize some of the Middle East hotspots the refugees are fleeing, the only long-term response is to develop legal, safe conduits that bring refugees to European Union-funded and operated frontline processing centers, say, on the Greek and Italian isles and Turkey’s western coast.

Asylum-seekers would be offered fair, humane and expedient processing. Those relying on trafficker routes would be routed back to these centers. Accepted refugees would be placed depending on host-country capacity, family and communal ties, and related factors. The U.S. experience on Ellis Island at the turn of the 20th century is instructive. The island processed an astonishing 1.25 million immigrants in 1907, a banner year for U.S. immigration. In the next decade U.S. immigration authorities also mastered immigrant processing—including ultra-efficient medical checks and questioning—aboard ships. The situations aren’t precisely analogous. At Ellis Island’s height as a processing center, America maintained a more or less open-door policy.

But the main lesson for Europe today lies in the American government’s ability at that time to impose order on human chaos on a scale similar to the current refugee crisis. Central to that success was the existence of a singular executive with broad discretion to examine, process, accept and in some cases reject migrants. Compare that achievement with Europe’s mess today. As the crisis mounted, the states on the Balkan corridor—Greece, Macedonia, Serbia and Turkey—provided refugees easy passage toward Hungary. Macedonia and Serbia especially became efficient at getting refugees in and out of their territory as quickly as possible, sometimes within a day. Balkan governments knew that most refugees were headed for Germany, Sweden and the like, and after minimal processing they granted papers allowing refugees to head north.

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Should have been done from the start.

• Central Europe Gives Up On Holding Refugees Back From Austria (Guardian)

The countries of central Europe suspended their resistance this weekend to Europe’s largest refugee exodus since the second world war, as Hungary, Slovenia and Croatia all shunted tens of thousands of people towards Austria, reversing most recent attempts to block their passage. At least 15,000 refugees mainly from Syria, Afghanistan and Iraq were funnelled from Croatia into Hungary and then onwards to Austria over the weekend, the Austrian news agency APA said, after Hungary temporarily gave up trying to stop refugees from crossing its border. Another 2,500 have crossed from Croatia into Slovenia, despite Slovenia initially trying to block their passage. The moves represent a volte-face from both countries – and in particular from Hungary.

The Budapest government had previously tried to stop the entry of undocumented travellers by building a fence along its southern border with Serbia, and by posting military vehicles on its western border with Croatia. But by Sunday, its resistance was mostly rhetorical. The country admitted thousands of refugees over the weekend from Croatia, whose shared border is not yet blocked by a fence, even as foreign minister Péter Szijjártó promised tougher measures in the future. Szijjártó said: “We are a state that is more than 1,000 years old that throughout its history has had to defend not only itself, but Europe as well many times. That’s the way it’s going to be now.”

Thousands more continued to enter Europe on Saturday and Sunday at the other end of the refugee route in the Greek islands, where coastguards said that 24 people were feared to have drowned on Sunday. An inflatable refugee boat, attempting to reach Lesbos from the Turkish shoreline, capsized before it reached its destination, and only 22 out of 46 passengers were rescued. The number of migrant shipwrecks in the Aegean has increased in recent days, with Sunday’s incident the sixth in a week of accidents that have left around 100 dead.

For many of the survivors, the trauma has not ended with their rescue: it emerged on Sunday that more than 200 Syrians and Iraqis saved by the Turkish coastguard following the sinking of their ship near Kos had allegedly been threatened with deportation back to the war zones they had just fled. One Syrian survivor, who asked not to be named as she is still in detention, said in a voice message: “They are threatening us that Syrians will be deported to Syria, Iraqis to Iraq. If they send us back to Syria we will die.” The Turkish government has denied any Syrians will be deported.

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No kidding, the headline still said ‘emergency summit’.

• We Must Act Together, Says Merkel Ahead Of Refugee Summit (Guardian)

A divided European leadership will try to seek a credible response to the continent’s worst migration crisis since second world war at an emergency summit on Wednesday. As central European countries abandoned attempts to stop thousands of refugees from crossing their borders towards Austria on Sunday, German chancellor Angela Merkel called on her peers to accept joint responsibility. “Germany is willing to help. But it is not just a German challenge, but one for all of Europe,” Merkel told a gathering of trade unionists. “Europe must act together and take on responsibility. Germany can’t shoulder this task alone.“ Striking a more sceptical tone on migration than in previous weeks, Merkel also warned that Germany could not shelter those who were moving for economic reasons rather than to flee war or persecution.

“We are a big country. We are a strong country. But to make out as if we alone can solve all the social problems of the world would not be realistic,” she told a gathering of the Verdi trade union. The foreign ministers of the Czech Republic, Hungary, Poland, Slovakia, Romania and Latvia will hold talks on Monday with their counterpart from Luxembourg, which currently holds the EU presidency, aimed at addressing divides between neighbouring states. Donald Tusk, president of the European Council, who chairs EU summits, said on Twitter on Sunday following a weekend visit to Jordan and Egypt that the EU needed to help Syrian refugees find a better life closer at home.

That will be one of the topics of discussion for Wednesday’s summit in Brussels as hundreds of thousands of refugees and migrants brave the seas and trek across the Balkan peninsula to reach the affluent countries of northern Europe. The 28-member bloc has struggled to find a unified response to the crisis, which has tested many of its newer members in the east that are unaccustomed to large-scale immigration. On Sunday Hungary erected a steel gate and fence posts at a border crossing with Croatia, the EU’s newest member state. Overwhelmed by an influx of some 25,000 migrants this week, Croatia has been sending them north by bus and train to Hungary, which has waved them on to Austria.

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Europe remains in bland denial of reality. And that’s dangerous.

• Merkel Coalition at Odds Over Proposal to Cap EU Asylum Places (Bloomberg)

German Vice Chancellor Sigmar Gabriel said he doesn’t “understand” Interior Minister Thomas de Maiziere’s proposal for the European Union to set an upper limit to the number of people it accepts as asylum seekers. “It’s the opposite of what the Chancellor has rightly said, namely that those who arrive in Germany and apply for asylum need a fair procedure,” Gabriel, who’s also chairman of the Social Democratic Party, said Sunday on ARD public television. “It is not a solution to establish quotas for asylum seekers. Incidentally, it is also contrary to the German constitution.” Support for two German opposition parties not represented in parliament rose as criticism of Merkel’s handling of Europe’s refugee crisis mounted.

Backing for the Free Democrats, Merkel’s former coalition partner, and the anti-euro Alternative for Germany party each increased 1%age point to 5% in a weekly poll, Bild am Sonntag reported. “We can’t host all the people from conflict areas and all poverty refugees who want to come to Europe and to Germany,” de Maiziere told Germany’s Spiegel magazine. “The right way would be that we in the EU commit ourselves to fixed, generous quotas for the admission of refugees.” A call by one of his party deputies that de Maiziere, a member of Chancellor Angela Merkel’s Christian Democratic Union, should resign unless he succeeds at accelerating asylum procedures was “nonsense,” Gabriel said.

Labor Minister Andrea Nahles said in an interview with Deutschlandfunk public radio she expects German unemployment figures to rise next year due to “a significant increase” in the number of refugees seeking work as “not every refugee who comes now is already automatically a qualified worker.” All parties represented in the lower house of parliament shed 1%age point in the Emnid poll, with Merkel’s Christian Union bloc dropping to 40%, her Social Democrat coalition partner to 24%, the Greens to 10% and the Left party to 9%.

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How about 1 million, just to begin with?

• 15,000 More Refugees To Be Resettled In US Next Year (WaPo)

The United States will increase its cap on the number of refugees it admits and resettles to 85,000 in the coming fiscal year and to 100,000 in 2017, Secretary of State John F. Kerry said Sunday. The additional refugees, up from 70,000 in the current fiscal year that ends Sept. 30, will come from countries around the world. But the increase largely reflects the 10,000 Syrian refugees that the White House earlier this month promised to admit. Kerry said the administration is exploring ways to admit even more, but Congress must approve enough money to cover the extra cost of resettlement. “This step is in keeping with America’s best tradition as a land of second chances and a beacon of hope,” Kerry said in announcing the increase during a visit to Berlin to discuss the Syrian refugee crisis with his German counterpart, Frank-Walter Steinmeier.

Even before Syrian refugees began streaming into Europe in recent weeks, the State Department had been considering a modest increase of about 5,000 refugees, including more from Congo, where human rights abuses are rampant. At the end of each fiscal year, the State Department announces the new target number for refugees. Although the administration can unilaterally set a numerical goal for the refugees it wants to accept, it is up to Congress to agree to fund the resettlement. In the current fiscal year, it cost $1.1 billion to bring 70,000 refugees to the United States, put them through an orientation program run by refugee charities and have them dispersed throughout the country. It was not immediately clear how much more it will cost to bring in more Syrians.

One of the reasons it is so expensive is that every refugee must undergo extensive background checks under security measures enacted after the terrorist attacks of Sept. 11, 2001. Those checks have been taking 18 to 24 months for Syrians, according to State Department figures. A senior State Department official said many, many more refugees could be admitted if officials can find ways to streamline the system without jeopardizing security. Refugees admitted for resettlement are selected from lists provided by the United Nations High Commissioner for Refugees. So far, about 1,600 of more than 18,000 Syrians referred by the U.N. refugee agency since the conflict began have arrived in the United States about 1,500 in this fiscal year alone. More than 10,000 are well along in being vetted, and they are expected to arrive in much greater numbers in the coming months.

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Let’s be honest, that UN meeting willl lead to nothing at all.

• UN Meets To Fight Poverty, Europe Puts Up Razor Wire To Keep Poor Out (Guardian)

The contrast could hardly be sharper. Razor wire fences are being constructed to keep the uprooted poor out of the European Union at the very moment the United Nations meets to agree anti-poverty goals for the next 15 years. No question, the gathering in New York will be a regular jamboree. There will be mutual backslapping about the progress that has been made over the past 15 years, a good deal of it justified. Countries will solemnly pledge to meet the 17 sustainable development goals, with 169 specific targets, by 2030. They will turn a blind eye to what is happening in Serbia, Hungary, Croatia and Austria. The truth, though, is that there is a link between the UN shindig and the most severe refugee crisis in generations: inequality.

It is the obvious disparity between life in a rich country and life in a poor country that makes the long and dangerous journey to the west attractive. It is the gap between rich and poor within developed countries that has helped foster a deep suspicion, not just of unlimited migration, but of free movement of capital and goods as well. And without addressing inequality head on, ensuring that growth benefits the poor by as much as it benefits the rich, there is not the remotest chance that the ambitious goals being embraced in New York this week will be met. Here’s the picture. The SDGs replace the millennium development goals that set the framework for poverty reduction between 2000 and 2015, but are much tougher.

The MDGs sought to make progress in areas such as poverty reduction or infant mortality: the SDGs will commit the international community to more ambitious goals, which include ending poverty and hunger, and ensuring healthy lives and access to quality education for all. There are reasons to be optimistic. Much progress has been made in the past two decades, in large part due to the rapid growth in China. One billion people have been lifted out of poverty and the MDG objective of halving the number living below the global agreed minimum was achieved five years early. This will be seen by world leaders as evidence that even more can be done in the next 15 years.

But achieving the new SDGs would be a gargantuan task in the best of times. And these are not the best of times. China is growing more slowly, with concerns that doctored official figures mask a hard landing. Emerging markets in the rest of the world are being hurt both by weaker Chinese demand for their commodities and by the continued sluggishness of the big western economies. The Great Recession of 2008-09 continues to cast a long shadow.

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Back to the future. “Mr. Xi is backfilling his vision and seeking a fresh source of legitimacy by reinventing the party as inheritor and savior of a 5,000-year-old civilization.”

• Why China Is Turning Back to Confucius (WSJ)

One Thursday morning in June, 200 senior officials crammed into an auditorium in the Communist Party’s top training academy to study a revolutionary idea at the heart of President Xi Jinping’s vision for China. They didn’t come to brush up on Marx, Lenin or Mao, staple fodder at the Central Party School since the 1950s. Nor were they honing their grasp of the state-guided capitalism that defined the nation for the last 35 years. They came to hear Wang Jie, a professor of ancient Chinese philosophy and a figure in the country’s next ideological wave: a renaissance of the traditional culture the Communist Party once sought to destroy.

For two hours, Prof. Wang says, he reeled off quotes from Confucius and other Chinese sages—whom the party long denounced as feudal relics—and urged his audience to incorporate traditional concepts of filial piety and moral rectitude into their personal and professional lives. “I’m getting hoarse,” Prof. Wang says over a cup of green tea after class. The previous day, he had lectured at the culture ministry and, the day before, at the commerce ministry. Monday would be the insurance regulator. “Xi Jinping’s words,” he says, “have lit a fuse.” Two years after outlining a “China Dream” to re-establish his nation as a great world power, Mr. Xi is backfilling his vision and seeking a fresh source of legitimacy by reinventing the party as inheritor and savior of a 5,000-year-old civilization.

The shift forms the backdrop for Mr. Xi’s visit to the U.S. this week and could shape China for years. Mr. Xi appears to be seeking to inoculate Chinese people against the spread of Western political ideals of individual freedom and democracy, part of what some political insiders say he views as a long-term contest of values and ideology with the U.S. The effort is gaining urgency now, as an economic slowdown and stock-market rout fray the social compact of the last three decades in which citizens traded political freedom for rapid wealth creation. With Communist dogma and Chinese-style capitalism losing appeal, the party needs fresh ideas. “It’s like the prodigal son returning,” says Guo Yingjie, a University of Sydney Chinese-studies professor who wrote a book on Chinese cultural nationalism. “China has had more than a century of anti-traditionalism. Now they’re heading in the opposite direction.”

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Well, obviously: “You f***ing Americans. Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians?”

• Was Standard Chartered Flouting US Iranian Sanctions? (FT)

The expletive-laden exclamation attributed to a senior Standard Chartered executive in 2006 may well come back to haunt the British bank. “You f***ing Americans. Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians?” For US authorities, who included the quote in a legal filing, the statement came to define StanChart’s “obvious contempt” for American banking regulations, including sanctions designed to cut Iran off from access to the US dollar. Nine years on, after paying nearly $1bn in fines to US regulators and law enforcement agencies for sanction breaches and compliance failures, StanChart seems no closer to ending its legal problems. An FT investigation has identified transactions involving Iran that could put the bank at risk of severe penalties ranging from further fines to suspension or loss of its crucial dollar clearing licence.

Documents seen by the FT suggest that StanChart continued to seek new business from Iranian and Iran-connected companies after it had committed in 2007 to stop working with such clients. These activities include foreign exchange transactions that, people familiar with StanChart operations say, would have involved the US dollar. The documents suggest the bank — a few months after a costly settlement with US authorities in 2012 — was still internally reviewing its client list and was unable to determine in certain cases whether customers were Iranian or not. For Bill Winters, the American former JPMorgan investment banker who took over as StanChart’s chief executive in June, the stakes could hardly be higher. The London-listed lender, that specialises in Asia, the Middle East and Africa, is already grappling with slowing growth in emerging markets and a slide in commodity prices.

While it has relatively small operations in the US, the loss of its dollar clearing licence would deal a crippling blow to StanChart’s ability to finance the trade, energy and cross-border activities that have become its main focus. Suspending the dollar clearing rights for banks accused of breaching sanctions is a rare punishment. But US regulators have cracked down hard on institutions for breaching sanctions on Iran, amid concerns about money flowing to the country’s nuclear programme or to militant Islamist organisations such as Hizbollah in Lebanon or the Palestinian group, Hamas. The US has mostly relied on levying heavy fines against non-US banks for using dollars to do business with Iran — frequently causing controversy in those banks’ home countries. BNP Paribas last year paid $8.9bn in fines and had some dollar clearing rights suspended temporarily for such breaches, prompting angry accusations from French politicians of US over-reach.

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I’ll believe it when I see it.

• Nine On Lagarde List Being Probed For Money Laundering (Kath.)

Greek judicial authorities are investigating the possibility that up to nine people on the Lagarde list of Greeks with deposits at the Geneva branch of HSBC were involved in a large money-laundering network, Kathimerini understands. Prosecutors from Greece recently questioned Herve Falciani, the former HSBC employee who extracted the data on the list, and he is believed to have given them information that points to the existence of a major money-laundering operation. Prior to speaking to Falciani, Greek authorities had identified three suspects. Kathimerini understands that Greek prosecutors, led by the head of the first instance prosecutor’s office, Ilias Zagoraios, have been in contact with counterparts in France, Spain and Italy regarding the matter. They are expected to make a second trip to Paris to interview Falciani in the coming weeks.

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More trouble on the way.

• The Massacre Of The Kurds And The Silence Of Europe (M5S Lower House)

“In the last few days, Turkish Military units have entered northern Iraq in an operation against the guerrillas of the Kurdistan Workers’ Party (PKK). The Ankara government has defined it as land-based incursion and a “short-term” measure to finally “eliminate” the “rebels”. We are given to believe that Erdogan took the decision to intervene following the PKK attack in Igdir last Tuesday which killed 13 local police officers. But the truth is that for some months now, the Turkish army has being besieging the only entity that has demonstrated it is really able to stop the advance of ISIS. And Europe stays silent, enclosed in a shell of hypocrisy and opportunism. The “popular resistance” cells have collapsed.

They were formed last March when different member states (including Italy) gave the green light to sending in arms to the Peshmerga. Even the government stays silent. There’s not a word from Minister Gentiloni even while the Turkish air force is continuing an indiscriminate attack on rebels and civilians. This is not simply shameful. It’s showing the double standards used by the West where people are ready to tear their hair out when looking at the dead body of little Aylan, but where they are careful to stay silent when their own interests, or the interests of their allies are at stake. In fact, Turkey is the only member that NATO has in the Middle East.

It is in a strategic position (to the East it has borders with Armenia, Azerbaijan and Iran, to the South East it borders Iraq and to the South, Syria). The USA cannot do without it and the EU feels it has a duty to protect it. It doesn’t matter whether the game play involves the sacrifice of the fundamental rights of a people who for decades have been legitimately claiming their independence and autonomy. This is why the EU remains silent even in relation to Erdogan’s intentions to change the constitution to give himself more powers and even thinking of the city of Cizre that is now on its last legs – after suffering a blackout for more than a week, without new supplies of food and water. And meanwhile ISIS is moving forward, conquering, and threatening our country, but above all threatening the survival of democracy.

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Reads the Automatic Earth?

• Safe Assets In A World Gone Mad (Chatham)

Gold and silver are good assets to hold to insure the preservation of EXCESS wealth but there are other assets that are even more valuable longterm. Those things that can be used to produce a product are the elements that can be used to leverage your time, resources and talents to produce wealth. The ability to produce excess is the basis of the need for wealth preservation. Physical goods in the form of equipment that can be used to create or produce goods needed by society are the basis of prosperity and wealth in the world. Gold and silver only become necessary when society begins to produce more products than the producer can use. This excess production is then traded for those things that can preserve the value of this excess production until it is needed by individuals.

Machines to build or repair such as saws and hammers, sewing machines, metal fabricating machines such as lathes and mills and machines to convert raw materials to value added products such as steel to I beams or pots and pans, wheat to flour or pasta, lumber to finished furniture and cotton to cloth are the assets that define how prosperous you are as a nation. A nation derives its wealth from having a product to sell. That will never change. It is true for nations as well as for individuals.

Individuals need to have the ability to produce something in excess of their needs to advance to the need to store that excess. This requires tools and equipment in most cases. You do not necessarily need to process your own resources to generate this excess. A miller can provide the equipment to grind grain for the community taking part of the production for his time and effort. This gives rise to the service economy where individual specialization is traded for other services and resources rendered. In most cases this service will require specialized equipment not possessed by the general population. This specialized equipment is an asset more valuable than gold and silver in many cases.

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Only 4% of Swiss know.

• People Have No Idea How Money Is Created (PM.org)

Interesting news from our sister organisation MoMo in Switzerland: The survey results from a master’s thesis from the Institute of Finance and Banking at Zurich University confirm that Swiss people have no idea about how Swiss Francs are created. Here are the results and the main reactions from the press: A survey has been carried out as part of a master’s thesis at the University of Zurich about the level of knowledge in the general population about the financial system. The results are astonishing:
• Only 13% know that private commercial banks provide the majority of the money in circulation.
• However, 78% of the Swiss population would like money to be produced and distributed solely by a public organisation working for the common good, such as the National Bank.
• Only 4% preferred the system we actually have today – that money is mostly created by private, for-profit companies such as commercial banks.

The survey results reinforce the Vollgeld Initiative, which currently has more than 90,000 signatures of the 100,000 required to force a binding national referendum in Switzerland. The study shows clearly that the Swiss people do not know who actually creates the Swiss Franc: Only 13% of the population are aware that, in the current system, private banks produce the majority of the money through the extension of loans. 73% mistakenly believe money is created by the state or by the Swiss National Bank.

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Debt Rattle June 1 2015

Jun 012015
 
 June 1, 2015  Posted by at 10:26 am Finance Tagged with: , , , , , , , , , , ,  1 Response »


Lewis Wickes Hine Whole family works, Browns Mills, New Jersey 1910

• QE For The People: Monetary Policy For The Next Recession (Bloomberg)
• The Liquidity Timebomb – Monetary Policies Create Dangerous Paradox (Roubini)
• Bond Dealers Enfeebled as Liquidity Breakdown Boosts Derivatives (Bloomberg)
• Top US Fund Managers Attack Regulators (FT)
• Banks Are Not Intermediaries Of Loanable Funds – And Why This Matters (BoE)
• Alexis Tsipras: The Bell Tolls for Europe (The Automatic Earth)
• Defiant Tsipras Threatens To Detonate Crisis Rather Than Yield To Creditors (AEP)
• Greece’s Creditors’ Crazy Commands (KTG)
• The Key Reason Why Euro’s Future Is Uncertain (Ivanovitch)
• Draghi Deflation Relief Means Little With Greek Threat Unsolved (Bloomberg)
• Shale Oil’s House of Cards (TheStreet)
• China Considers Doubling Its Local Bond-Swap Program (Bloomberg)
• China $550 Billion Stock Wipeout Reminds Traders of 2007 Catastrophe (Bloomberg)
• Hedge Fund Activists Are Japan’s Best Friend (Pesek)
• Sydney And Melbourne Are ‘Unequivocally’ In A House Price Bubble (Guardian)
• Czech Finance Minister Proposes Referendum on the Euro (WSJ)
• Prime Minister Renzi Bruised In Italy’s Regional Elections (Politico)
• Over 5,000 Mediterranean Migrants Rescued Since Friday (Reuters)

“Nobody, so far as I’m aware, is arguing that it wouldn’t be effective. What, then, is the objection?”

• QE For The People: Monetary Policy For The Next Recession (Bloomberg)

By pre-crash standards, the big central banks have made and continue to make amazing efforts to support demand and keep their economies running. Quantitative easing would once have been seen as reckless. The official term of art – unconventional monetary policy – tacitly acknowledged that. But QE isn’t unconventional any longer. It mostly worked, the evidence suggests. The world avoided another Great Depression. Yet even in the U.S., this is a seriously sub-par recovery; growth in Europe and Japan has been worse still. Now imagine a big new financial shock. It’s quite possible that all three economies would fall back into recession. What then?

According to your economics textbook, the obvious answer is fiscal policy. But bringing fiscal expansion to bear in a sustained and effective way proved difficult after 2008. Next time round, the politics might be harder still, because public debt has grown and concerns about government solvency (warranted or otherwise) will be greater. Sooner rather than later, attention therefore needs to turn to a new kind of unconventional monetary policy: helicopter money. One thing’s for sure: The idea needs a blander name. Milton Friedman, who argued that central banks could always defeat deflation by printing dollars and dropping them from helicopters, did nothing to make the idea acceptable. Put it that way and most people think the notion is crazy.

How about “QE for the people” instead? It has a nice populist ring to it – suggesting a convergence of financial excess and the Communist Manifesto. The problem is, it isn’t bland. It sounds even bolder than helicopter money. “Overt monetary financing” is closer to what’s required, but something even duller would be better. Whatever you call it, the idea is far from crazy. Lately, more economists have been advocating it, and they’re right. The logic is simple. If central banks need to expand demand – and interest rates can’t be cut any further – let them send a check to every citizen. Much of this money would be spent, boosting demand just as Friedman said. Nobody, so far as I’m aware, is arguing that it wouldn’t be effective. What, then, is the objection?

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“..the longer central banks create liquidity to suppress short-run volatility, the more they will feed price bubbles in equity, bond, and other asset markets.”

• The Liquidity Timebomb – Monetary Policies Create Dangerous Paradox (Roubini)

A paradox has emerged in the financial markets of the advanced economies since the 2008 global financial crisis. Unconventional monetary policies have created a massive overhang of liquidity. But a series of recent shocks suggests that macro liquidity has become linked with severe market illiquidity. Policy interest rates are near zero (and sometimes below it) in most advanced economies, and the monetary base (money created by central banks in the form of cash and liquid commercial-bank reserves) has soared – doubling, tripling, and, in the US, quadrupling relative to the pre-crisis period. This has kept short- and long-term interest rates low (and even negative in some cases, such as Europe and Japan), reduced the volatility of bond markets, and lifted many asset prices (including equities, real estate, and fixed-income private- and public-sector bonds).

And yet investors have reason to be concerned. [..] though central banks’ creation of macro liquidity may keep bond yields low and reduce volatility, it has also led to crowded trades (herding on market trends, exacerbated by HFTs) and more investment in illiquid bond funds, while tighter regulation means that market makers are missing in action. As a result, when surprises occur – for example, the Fed signals an earlier-than-expected exit from zero interest rates, oil prices spike, or eurozone growth starts to pick up – the re-rating of stocks and especially bonds can be abrupt and dramatic: everyone caught in the same crowded trades needs to get out fast.

Herding in the opposite direction occurs, but, because many investments are in illiquid funds and the traditional market makers who smoothed volatility are nowhere to be found, the sellers are forced into fire sales. This combination of macro liquidity and market illiquidity is a timebomb. So far, it has led only to volatile flash crashes and sudden changes in bond yields and stock prices. But, over time, the longer central banks create liquidity to suppress short-run volatility, the more they will feed price bubbles in equity, bond, and other asset markets. As more investors pile into overvalued, increasingly illiquid assets – such as bonds – the risk of a long-term crash increases. This is the paradoxical result of the policy response to the financial crisis. Macro liquidity is feeding booms and bubbles; but market illiquidity will eventually trigger a bust and collapse.

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Risk where it doesn’t belong.

• Bond Dealers Enfeebled as Liquidity Breakdown Boosts Derivatives (Bloomberg)

As Wall Street retreats from its traditional role as the bond market’s middle man, investors frustrated by sudden gyrations and a lack of liquidity are turning to derivatives – in a big way. In the world’s biggest debt markets, including the U.S., Europe and Japan, the number of futures contracts on government debt reached a post-crisis high in May after doubling since 2009. Trading of German bund options and Italian futures also hit records. While some are using derivatives to hedge against higher U.S. interest rates, Pioneer Investment Management and BlackRock Inc. are also shifting into more obscure corners of the fixed-income world as rules to limit bank risk-taking have made it harder to trade at a moment’s notice. Since October 2013, dealers that trade with the Fed have slashed U.S. debt inventories by 84%.

“Liquidity risk is a big challenge,” said Cosimo Marasciulo, the Dublin-based head of fixed income at Pioneer, which oversees $242 billion. “And it’s now affecting an asset that was once considered most liquid – government bonds.” Derivatives, contracts based on underlying assets that can provide the same exposure without tying up as much capital, have become a popular option after central banks started to purchase bonds as a way to boost growth following the financial crisis, which has sapped supply and increased volatility. Over that time, bond buying by major central banks has inundated economies with at least $10 trillion of cheap cash, according to Deutsche Bank. [..]

The shift into derivatives has accelerated as the world’s biggest banks scale back their bond-trading businesses to comply with higher capital requirements imposed by Basel III, which went into effect this year. For Treasuries, the share of transactions by primary dealers has dwindled by more than half to 4% since the end of 2008, according to the Institute of International Finance, a lobbying group for banks. And in the past year, JPMorgan, Morgan Stanley, Credit Suisse and RBS have have either cut back their fixed-income trading desks or are weighing reductions in those businesses. That’s made getting the bonds you want at the price you need more difficult, especially when markets are moving.

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Are the biggest funds TBTF?

• Top US Fund Managers Attack Regulators (FT)

US fund managers have launched a new attack on global regulators as they fight a rearguard action against possible rules that would treat groups such as Fidelity and BlackRock as threats to the financial system. The Financial Stability Board, a global watchdog chaired by Mark Carney, governor of the Bank of England, is exploring whether to designate the biggest asset managers as “systemically important” and hit them with tougher rules and heightened scrutiny. But Fidelity said the FSB’s approach was “irredeemably flawed” and told regulators in a letter that regulating a fund manager as systemically important “would be counterproductive and destructive”.

Fund managers argue that they do not pose systemic dangers to financial stability because they do not take deposits, guarantee returns or face the risk of sudden failure like a bank. But regulators have other concerns. Last month Mr Carney highlighted the risk on investor runs on “funds that offer on-demand redemptions but invest in less liquid assets”. The watchdogs are also looking at the stability impact of securities lending by asset managers, and the complexity of fund businesses structured as holding companies, which bear a growing resemblance to banks. Empowered by the leaders of the G20 top economies, the FSB has already designated 30 banks and 9 insurers as global institutions that require tighter regulation because of their potential to cause systemic contagion.

Next in its sights are asset managers, although the FSB, which is based in Basel, Switzerland, is debating whether it makes more sense to regulate entire institutions or particular products and activities. Fidelity and the Securities Industry and Financial Markets Association (Sifma), a US trade group, accused the FSB of ploughing ahead while ignoring an avalanche of empirical studies and previous industry comments.

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Not the first time BoE people address this, but still somewhat surprising from a central bank. Central to the Steve Keen vs Krugman debate.

• Banks Are Not Intermediaries Of Loanable Funds – And Why This Matters (BoE)

In the intermediation of loanable funds model of banking, banks accept deposits of pre-existing real resources from savers and then lend them to borrowers. In the real world, banks provide financing through money creation. That is they create deposits of new money through lending, and in doing so are mainly constrained by profitability and solvency considerations. This paper contrasts simple intermediation and financing models of banking. Compared to otherwise identical intermediation models, and following identical shocks, financing models predict changes in bank lending that are far larger, happen much faster, and have much greater effects on the real economy

Since the Great Recession, banks have increasingly been incorporated into macroeconomic models. However, this literature confronts many unresolved issues. This paper shows that many of them are attributable to the use of the intermediation of loanable funds (ILF) model of banking. In the ILF model, bank loans represent the intermediation of real savings, or loanable funds, between non-bank savers and non-bank borrowers. But in the real world, the key function of banks is the provision of financing, or the creation of new monetary purchasing power through loans, for a single agent that is both borrower and depositor. The bank therefore creates its own funding, deposits, in the act of lending, in a transaction that involves no intermediation whatsoever.

Third parties are only involved in that the borrower/depositor needs to be sure that others will accept his new deposit in payment for goods, services or assets. This is never in question, because bank deposits are any modern economy’s dominant medium of exchange. Furthermore, if the loan is for physical investment purposes, this new lending and money is what triggers investment and therefore, by the national accounts identity of saving and investment (for closed economies), saving. Saving is therefore a consequence, not a cause, of such lending. Saving does not finance investment, financing does. To argue otherwise confuses the respective macroeconomic roles of resources (saving) and debt-based money (financing).

The paper shows that this financing through money creation (FMC) description of the role of banks can be found in many publications of the world’s leading central banks. What has been much more challenging is the incorporation of the FMC view’s insights into dynamic stochastic general equilibrium (DSGE) models that can be used to study the role of banks in macroeconomic cycles. DSGE models are the workhorse of modern macroeconomics, and are a key tool in macro-prudential policy analysis. They study the interactions of multiple economic agents that optimise their utility or profit objectives over time, subject to budget constraints and random shocks. The key contribution of this paper is therefore the development

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My post yesterday of Tsipras’ integral text for Le Monde.

• Alexis Tsipras: The Bell Tolls for Europe (The Automatic Earth)

Judging from the present circumstances, it appears that this new European power is being constructed, with Greece being the first victim. To some, this represents a golden opportunity to make an example out of Greece for other countries that might be thinking of not following this new line of discipline. What is not being taken into account is the high amount of risk and the enormous dangers involved in this second strategy. This strategy not only risks the beginning of the end for the European unification project by shifting the Eurozone from a monetary union to an exchange rate zone, but it also triggers economic and political uncertainty, which is likely to entirely transform the economic and political balances throughout the West.

Europe, therefore, is at a crossroads. Following the serious concessions made by the Greek government, the decision is now not in the hands of the institutions, which in any case – with the exception of the European Commission- are not elected and are not accountable to the people, but rather in the hands of Europe’s leaders. Which strategy will prevail? The one that calls for a Europe of solidarity, equality and democracy, or the one that calls for rupture and division? If some, however, think or want to believe that this decision concerns only Greece, they are making a grave mistake. I would suggest that they re-read Hemingway’s masterpiece, “For Whom the Bell Tolls”.

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Ambrose acknowledges what I wrote quite some time ago: “The matter has moved to a higher level and is at this point entirely political.”

• Defiant Tsipras Threatens To Detonate Crisis Rather Than Yield To Creditors (AEP)

The Greek prime minister has accused Europe’s leaders of ‘issuing absurd demands’. Greek premier Alexis Tsipras has accused Europe’s creditor powers of issuing “absurd demands” and come close to warning that his far-Left government will detonate a pan-European political and strategic crisis if pushed any further. Writing for Le Monde in a tone of furious defiance after the latest set of talks reached an impasse, Mr Tsipras said the eurozone’s dominant players were by degrees bringing about the “complete abolition of democracy in Europe” and were ushering in a technocratic monstrosity with powers to subjugate states that refuse to accept the “doctrines of extreme neoliberalism”.

“For those countries that refuse to bow to the new authority, the solution will be simple: Harsh punishment. Judging from the present circumstances, it appears that this new European power is being constructed, with Greece being the first victim,” he said. The Greek leader, head of the radical-Left Syriza government, issued a stark warning that his country will not submit to these demands and will instead take action “to entirely transform the economic and political balances throughout the West.” Alexis Tsipras made his thoughts known in a piece for Le Monde, the French newspaper “If some, however, think or want to believe that this decision concerns only Greece, they are making a grave mistake. I would suggest that they re-read Hemingway’s masterpiece, “For Whom the Bell Tolls”,” he said.

The words originally come from John Donne’s Meditation XVII, with its poignant reminder that the arrogant can be blind to their own demise. “Perchance he for whom this bell tolls may be so ill, as that he knows not it tolls for him,” it reads. Mr Tsipras’s article is a thinly-disguised warning that Greece may choose to default on roughly €330bn of debt in the biggest sovereign default ever, and pull out of the euro, rather than breech its key red lines. The debts are mostly to European official creditors and the European Central Bank. The situation has become critical after depositors withdrew €800m from Greek banks in two days at the end of last week, heightening fears that capital controls may be imminent.

Mr Tsipras’s choice of words also implies that Greece may turn its back on the Western security system, presumably by shifting into the orbit of Russia and China. The article comes as Panagiotis Lafanzanis, the energy minister and head of Syriza’s powerful Left Platform, returns from Moscow after securing a provisional deal with Gazprom to build part of the “Turkish Stream” gas pipeline through Greece. The Russian energy minister, Alexander Novak, said over the weekend that the project has been agreed in principle. ” We are now discussing technical details,” he said. Greek officials have told The Telegraph that Russia is offering up to €2bn in up-front credit to sweeten the arrangement, though it will not be a state-to-state transaction.

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Greek banks’ holdings of Greek bonds got a 53.5% haircut in a Private Sector Involvement scheme in 2012.

• Greece’s Creditors’ Crazy Commands (KTG)

Creditors command and demand, Greece is willing but … some red lines cannot be set aside. Apart from that, creditors’ commands are anything but logical as their demands could be only described as crazy. Furthermore the creditors seem divided as to what they demand from Greece with the logical consequence that the negotiations talks have ended into a deadlock. According to Greek media reports, “While the European Commissions wants austerity measures worth €4-5 billion for the second half of 2015 and the 2016, the IMF raises the lot to €7 billion for 2016. The all-inclusive austerity package should include among others €2.7 billion cuts in pensions.

The Pensions Chapter is one of the thorns among the negotiation partners, and Greece would love to postpone it for after the provisional agreement with the creditors. While it is not clear whether it is the IMF or the EC or both, it comes down to the command that “Pensions should not be higher of 53% of the salary due to the financial situation of the social security funds.” Pension for a civil servant (director, 37 years of work) should come down to €900 from €1,386 today after the pension cuts during the austerity years. Pension for private sector – IKA insurer (37 years of work, 11,000 IKA stamps) and salary €2,300 should come down to €1,250 from €1,452 today after the austerity cuts. (examples* via here)

Of course, with the PSI in March 2012, Greece’s social security funds suffered a huge slap in their deposits in Greek bonds. According to the Bank of Greece report of 2012, social security funds were holding Greek bonds with nominal value €18.7 billion euro. The PSI gave them a new look with a nice hair cut of 53.5%. Guess, how many billions euros were left behind. If one adds the loss of contributions due to high unemployment, part-time jobs, uninsured jobs and the disappearance of full time jobs in the last 3-4 years, the estimations concerning the money available at the Greek social insurance funds are … priceless!

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Everyone hesitates when push comes to shove.

• The Key Reason Why Euro’s Future Is Uncertain (Ivanovitch)

The need to consider technical aspects of investment options in a currency of an allegedly very uncertain future is a permanent challenge for the euro area portfolio analysis. In spite of that, the region’s political leaders seem oblivious to the widely held view that the common currency is just a flimsy and provisional political structure. If they understood that reality, their loose talk about the “euro crisis” and the euro’s “doubtful long-term viability” would never be uttered, because without their currency the Europeans would not even have a customs union that was laboriously built and implemented ever since the Treaty of Rome came into effect on January 1, 1958. Indeed, like Caesar’s wife, the permanence of the euro should be above any suspicion.

Sadly, the unbearable lightness of the euro area politicians gives no confidence in their resolve to rally around their single currency – an epochal achievement and a unique symbol of European unity. The serious and continuing degradation of the political situation in France is the main reason for my euro pessimism. France has been the country that originated and carried most of the policies and institutions designed to bring a hostile and divided continent back together. France, unfortunately, seems in no position to play that noble role anymore. France is mired in a deep economic and fiscal crisis, and its leader is one of the country’s most unpopular acting presidents ever. An opinion poll, published May 30, shows that 77% of the French people don’t want President François Hollande to run for re-election in 2017.

His main rival, the former President Nicholas Sarkozy, fares no better: more than 70% of the French would not support his presidential candidacy two years from now. That leaves Germany’s Chancellor Angela Merkel (representing two close center-right parties) alone in a leadership position, despite credibility problems caused by destabilizing spying scandals and a fraying governing coalition with Social Democrats. It, therefore, should not be surprising that there is no political decision on Greece’s legitimate demand to renegotiate unreasonable austerity conditions imposed upon its deeply impoverished population. The French and German leaders seem paralyzed, even though they know that forcing Greece out of the monetary union would spell the end of the euro – with incalculable damages to the European and world economies.

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Deflation is here because people don’t spend. That’s a far wider issue than just Greece.

• Draghi Deflation Relief Means Little With Greek Threat Unsolved (Bloomberg)

With a solution to the Greek crisis still out of reach, Mario Draghi can count on at least one piece of good news this week: euro-area consumer prices are rising again. Economists in a Bloomberg survey forecast that the inflation rate rose to 0.2% in May from zero in April. The report, due on Tuesday, would follow improving data from Spain and Italy and mark the first price increase in six months. While the European Central Bank president can take comfort from the fading deflation risk, he and his fellow policy makers will be distracted by a looming Greek loan repayment that could make or break months of negotiations aimed at funding the country and preventing a splintering of the currency bloc.

As the economy stutters through its recovery, concerns about the debt crisis are putting the reins on consumer and business sentiment across the region. “There’s not a huge uncertainty about the economic outlook, there’s more uncertainty about Greece,” said Holger Sandte, chief European analyst at Nordea Markets in Copenhagen. The return of inflation is “good news for the ECB,” he said. “In the months ahead, while we might get a setback, the tendency is upward.” The improving inflation backdrop partly reflects a rebound in oil prices since falling to a six-year low in January. ECB policy makers may also see it as a sign their €1.1 trillion stimulus is working. Draghi said last month that the unconventional actions “have proven so far to be potent, more so than many observers anticipated.” Governing Council member Patrick Honohan said that price inflation is “getting back up.”

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“..it was undeniable proof that as a nation, we had completely bolloxed this once-in-a-lifetime opportunity.”

• Shale Oil’s House of Cards (TheStreet)

I knew that the conventional wisdom on the drop in oil prices after the OPEC meeting in November, 2014 was going to be ascribed solely to the Saudis, a conclusion that was far too simple to explain the massive collapse. No, something else, something even more important was going on. The Saudi reticence to cut production was just a catalyst. The bigger theme was an already overdue bust that was happening in U.S. shale oil. This oil bonanza had been built on a house of cards, ready at any moment to topple over. The list of fragile flaws in the system was long. Each state had its own set of regulations and oversights on leases and operations, with no consistent framework for oil shale fracking.

Despite (or because of) the complete freedom in oversight, fracking for oil from shale had grown at a frightening and undisciplined pace. As prices declined, it became clear that much of this breakneck activity had been financed by very risky and highly leveraged capital investments that mirrored some of the worst pyramiding schemes I had ever seen. But because prices had been high, many of the shortcomings had been conveniently overlooked: Oil was being taken out of the ground as quickly as it could be drilled. The months following the OPEC announcement showed me just how rickety the entire structure for retrieving shale oil had become. Oil companies that had been the darlings of Wall Street not one year earlier were now losing 70 to 80% of their share value, as their corporate bonds, which were already poorly rated, risked complete default.

Virtually every company involved in shale production was forced to slash development budgets, hoping to ride out what they prayed was a temporary dip in the price of oil. Yet projected production numbers from all of these players continued to rise, almost insuring that prices would stay cheap. What had been a universally optimistic industry not 6 months prior had changed overnight into a frightened group playing a collective game of chicken, as oil producers hunkered down with reduced budgets and hoped like mad that the “other guy” would go broke first. That shale oil had folded like a cheap suitcase so quickly and completely was incredible to witness and, I thought, incredibly important: it was undeniable proof that as a nation, we had completely bolloxed this once-in-a-lifetime opportunity.

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“An expansion would signal officials are confident in the template..” No, it means things are not going as planned, and that is due to debt to shadow banks.

• China Considers Doubling Its Local Bond-Swap Program (Bloomberg)

Chinese policy makers are considering plans to as much as double the size of a clean-up program for shaky local government finances, according to people familiar with the discussions. In what would be the second stage of the program, a further 500 billion yuan ($81 billion) to 1 trillion yuan of local-government loans would be authorized to be swapped into bonds issued by provinces and cities, the people said, asking not to be named because the talks are private. The first stage of the bond swap, currently under way, is 1 trillion yuan.

An expansion would signal officials are confident in the template they’ve crafted for reducing risks from a record surge in borrowing that local authorities took on to fund a glut of investment projects. The complex process – which includes inducements for banks to buy new, longer-maturity, lower yielding bonds — is alleviating a funding crunch among provinces that had threatened to deepen the economy’s slowdown. “It’s solving the cash-flow issue at the local governments and ensuring that infrastructure projects this year aren’t delayed,” said Nicholas Zhu at Moody’s, referring to the initial 1 trillion-yuan program. He said any additional quota probably would be for debt swaps in 2016.

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Much more of this to come.

• China $550 Billion Stock Wipeout Reminds Traders of 2007 Catastrophe (Bloomberg)

The rout wiped out about $350 billion of market value in a week on the Shanghai and Shenzhen exchanges. It so traumatized traders that eight years later they still refer to the decline by the date it began: the 5/30 catastrophe. The milestone for the modern Chinese stock market, which began in 1990, started on midnight, May 30, 2007, with Hu Jintao’s government unexpectedly announcing it would triple a tax on stock trading. The plunge sparked by the pronouncement had followed a breathless rally, making it eerily similar to last week’s events. On Thursday, stocks erased almost $550 billion in value after surging 143% on the Shanghai Composite Index over the past year. Traders could be forgiven for a wave of deja vu mixed with a dollop of dread: In 2007, stocks recovered from their May losses only to drop more than 70% over the next 12 months from an October peak. Here’s a look at the similarities and differences between China’s markets then and now. What’s similar:

* Timing of declines: Both selloffs followed rallies that sent the benchmark index up more than 100% in just months. Thursday’s tumble in Chinese stocks came after brokerages tightened lending restrictions and the central bank drained cash from the financial system. The Shanghai Composite shed 6.5% and fell another 0.2% in volatile trading on Friday. On May 30, 2007, the Shanghai gauge also tumbled 6.5% after the government raised the stamp tax to 0.3% from 0.1%. The measure aimed to cool the stock market after it doubled in about six months and almost quadrupled from the end of 2005. By June 4, the benchmark had lost 15%. The market then started to stabilize and rose another 66% to an all-time high in October 2007 before tanking again as the global financial crisis raged.

* Rookie traders: The two stock rallies were fueled by record amounts of new investors, increasing fluctuations. About 29 million new stock accounts have opened this year through May 22, almost as many as in the previous four years combined, according to the China Securities Depository & Clearing Corp. Margin debt on the Shanghai exchange has soared more than 10-fold in the past two years to a record 1.35 trillion yuan ($220 billion) on Thursday. In the first five months of 2007, more than 20 million stock accounts opened, four times the amount in all of 2006. Margin trading, or investing with funds borrowed from brokerages, wasn’t allowed then.

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” Japan remains 30 years behind its peers in how its companies are run..”

• Hedge Fund Activists Are Japan’s Best Friend (Pesek)

Japan has New York hedge fund manager Daniel Loeb to thank for its biggest stock market surge since 1988. Investors have been taking inspiration from Loeb’s surprising success with the Japanese robot maker Fanuc. When Loeb bought a stake in the notoriously opaque company earlier this year and started demanding changes, few in corporate Japan believed he would get anywhere. It’s not just that Fanuc was known for its insularity; foreign activist investors had a long history of failure when dealing with corporate Japan. So when Fanuc President Yoshiharu Inaba started heeding Loeb’s demands – inviting journalists to the company’s campus near Mt. Fuji, opening a shareholder relations department and doubling the %age of profit the company pays out to shareholders – other foreign investors took note.

They began flocking to the Nikkei stock exchange in hopes of getting at the trillions of dollars sitting on Japan’s corporate balance sheets. (It’s estimated that executives are hoarding cash that amounts to half the country’s annual $4.9 trillion of output.) But the stock surge doesn’t represent a broader vote of confidence in Prime Minister Shinzo Abe’s economic program – nor should it. Abe has failed to carry out the bold structural reforms – lowered trade barriers, less red tape for startups and loosened labor markets – that he promised would enliven growth and boost corporate profits. Investors are aware that Japan’s latest economic data isn’t very good: Household spending is weak (down 1.3% in April), 340,000 people have given up on the labor market and inflation is back at zero.

But if Abe is wise, he will leverage the uptick in foreign investment to reignite his reform program. After all, Japan’s new foreign investors are a demanding and vocal crowd, and their goals are broadly in alignment with Abe’s. “They tend to speak out in ways that locals won’t, adding to the pressure on management to change,” says Jesper Koll, former JPMorgan, and adviser to Japan’s government. “That’s something to be supported in the current environment, not silenced.” Abe has already started leading a charge for more stringent corporate governance standards. Last year, Tokyo implemented a stewardship code urging investors to shame underperforming CEOs and introduced an index of 400 Japanese companies doing a good job of providing returns on investment.

Last week, Abe unveiled a code of conduct for executives along with requests that companies increase the number of outside directors. But Chicago money manager David Herro says that for all Abe’s efforts, Japan remains 30 years behind its peers in how its companies are run. Corporate Japan still indulges in cross-shareholdings and permits itself male-dominated boards, and the country’s timid media does little to hold it to account. “Japan has gone from zero to two,” Herro told Bloomberg News last week. “It’s improving. But we need to get to eight, nine or 10.”

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A discussion like climate change: denied until it’s too late.

• Sydney And Melbourne Are ‘Unequivocally’ In A House Price Bubble (Guardian)

Sydney and parts of Melbourne are “unequivocally” experiencing a house price bubble, according to Treasury secretary John Fraser. Speaking at Senate estimates in Canberra on Monday, Fraser said he was concerned about the amount of money being poured into the housing market with interest rates at a record low of 2%. “It does worry me that the historically low level of interest rates are encouraging people to perhaps overinvest in housing,” Fraser said. As Sydney saw an auction clearance rate of 87.4% at the weekend, Fraser said: “When you look at the housing price bubble evidence, it’s unequivocally the case in Sydney.” It was also “certainly the case in higher priced areas in Melbourne”, he said, but elsewhere in Australia the evidence was “less compelling”.

Fraser’s comments give an insight into his role as a member of the Reserve Bank of Australia board, which has voted twice this year to cut interests rates, including at its May meeting. If his concerns reflect a wider view on the board, it suggests Tuesday’s monthly meeting of the board will not see another rate cut. However, his remarks will be tempered by figures released on Monday which showed that home prices dipped in May for the first time in six months, with Sydney’s booming property market losing a bit of steam. Home values in Australia’s capital cities fell by 0.9%, with drops recorded everywhere except Darwin and Canberra, the latest CoreLogic RP Data home value index showed.

Sydney’s home values fell 0.7%, with Melbourne down 1.7% and Hobart posting the biggest fall with a 2.7% slide. For the year to 31 May, home values were up by 9%, with the average property priced at $570,000. It came as approvals for the construction of new homes fell 4.4% in April, which was much worse than market expectations of a 1.5% fall. Over the 12 months to April, building approvals were up 16.6%, the Australian Bureau of Statistics said on Monday. Approvals for private sector houses rose 4.7% in the month, and the “other dwellings” category, which includes apartment blocks and townhouses, was down 15%.

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Europe and democracy remains an uneasy relationship.

• Czech Finance Minister Proposes Referendum on the Euro (WSJ)

The Czech finance minister on Sunday proposed letting the public have a say in whether the country should adopt the euro through a nonbinding referendum. The proposal caused disagreement in the Czech Republic cabinet. Roughly two-thirds of the population in the European Union country are against giving up the national currency, the koruna. After meeting the prime minister, the central bank governor and the country’s president at a special gathering to discuss the Czech position toward Europe’s common currency, Finance Minister Andrej Babis said he proposes holding a nonbinding public referendum in 2017—in conjunction with expected general elections—on whether to adopt the euro.

The purpose of holding a referendum would be “so that citizens can express themselves, like they’ve done in Sweden,” said Mr. Babis, who himself hasn’t yet taken a position on the currency issue and is widely considered a top candidate for the premier’s post after the next elections. In a 2003 referendum, Swedish voters rejected switching to the euro. Sweden continues to use the krona despite having a treaty obligation to switch to the euro at some point. Such a referendum in the Czech Republic wouldn’t break treaties but would serve as a gauge of public opinion before politicians embark on the potentially treacherous task of surrendering the national currency.

Prime Minister Bohuslav Sobotka dismissed the idea, saying while there is no deadline by which the country must adopt the euro, the Czech Republic—like the 12 other countries that have joined the bloc since 2004—is bound by accession treaties to the European Union to adopt the common currency, and so there is no need for any referendums. Despite the urging of President Milos Zeman, who seeks deeper ties with Russia but is nevertheless calling for politicians to work to integrate the country monetarily with the neighboring eurozone—officials agreed that the fate of the national currency will be left for a future government.

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Eroding power base.

• Prime Minister Renzi Bruised In Italy’s Regional Elections (Politico)

Prime Minister Matteo Renzi’s party suffered a blow in Sunday’s regional and local elections, casting his political strength into doubt as he takes on major electoral and economic reforms.The center-left Democratic party won in five of the seven regions up for grabs, but the opposition made noteworthy gains in key areas. The outcome was not the triumph that Renzi saw during last year’s European elections.Renzi’s candidates won in central Italy, Tuscany, Marche, and Umbria, as well as in the south, in Puglia and in Campania, a region so far governed by the center right. The euroskeptic Northern League prevailed, with a wide margin, in its stronghold in Veneto. In the key Liguria region, long governed by the left, a candidate of Silvio Berlusconi’s party has won.

The anti-establishment and anti-euro 5Star movement, bolstered by disappointment with mainstream parties and corruption scandals, also made gains. So far, the movement has performed well in general elections but not in local ballots. On Saturday, Renzi downplayed the vote, saying it would not be a a judgment on his tenure. “Regional elections have a local meaning, there will no consequence for the government,” Renzi said in a public meeting in Trento. After Renzi’s party dominated last year’s elections for the European Parliament, pundits dubbed him Italy’s strong man. The fragility of that reputation came into focus in the elections. His power in Brussels is also at stake. A poor showing could slow down the pace of the changes to Italy’s moribund economy that the European Commission is seeking.

“Renzi has enjoyed a honeymoon … that is now over,” said before the elections pollster Nando Pagnoncelli, who said that trust in him had dropped in polls to 40% from 60% in September. Only one Italian out of two has gone to vote. Turnout, at 52.2% is much lower than 58.6% at the European elections. “Those disillusioned voters, who once used to vote for the center right and then chose Renzi [at the European elections], are not returning to vote for the right, they will simply stay home,” he said. The vote followed a series of tough parliamentary battles over Renzi’s reform agenda. With a staggering debt at 132% of the GDP, the second highest ratio after Greece, Brussels and the European Central Bank have pushed for a major economic overhaul.

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Note the press playing up the suggestion it’s now a pan-European effort.

• Over 5,000 Mediterranean Migrants Rescued Since Friday (Reuters)

The corpses of 17 migrants were brought ashore in Sicily aboard an Italian naval vessel on Sunday along with 454 survivors as efforts intensified to rescue people fleeing war and poverty in Africa and the Middle East. More than 5,000 migrants trying to reach Europe have been saved from boats in distress in the Mediterranean since Friday and operations are in progress to rescue 500 more, European Union authorities said on Sunday. In some of the most intense Mediterranean traffic of the year, migrants who left Libya in 25 boats were picked up by ships from Italy, Britain, Malta and Belgium, assisted by planes from Iceland and Finland, the EU’s border control agency Frontex said.

Naval and merchant vessels involved in rescue operations also came from countries including Germany, Ireland and Denmark. The 17 corpses found on one of the boats arrived in the Sicilian port of Augusta aboard the Italian navy corvette Fenice. Italian prosecutors are investigating how they died. Frontex is coordinating an EU rescue mission in the Mediterranean known as Triton, which was stepped up after around 800 migrants drowned off Libya in April in the Mediterranean’s most deadly shipwreck in living memory. “This is the biggest wave of migrants we have seen in 2015,” Frontex Executive Director Fabrice Leggeri said in a written statement. “The new vessels that joined operation Triton this week have already saved hundreds of people.”

Italy has so far borne the brunt of Mediterranean rescue operations. Most of the migrants depart from the coast of Libya, which has descended into anarchy since Western powers backed a 2011 revolt that ousted Muammar Gaddafi. Calm seas are increasingly favoring departures as warm spring weather sets in. The migrants saved over the weekend are all being disembarked at nine ports on the Italian islands of Lampedusa, Sicily and Sardinia and on its southern mainland regions of Calabria and Puglia. The latest wave of more than 5,000 arrivals will take the total of those reaching Italy by boat across the Mediterranean this year to more than 40,000, according to estimates by the United Nations refugee agency.

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