Moody’s Archives - The Automatic Earth

S&P 500 companies have returned a record $1 trillion to shareholders over the past year, helped by a recent surge in dividends and stock buybacks following sweeping corporate tax cuts introduced by Republicans, a report on Friday showed. In the 12 months through March, S&P 500 companies paid out $428 billion in dividends and bought up $573 billion of their own shares, according to S&P Dow Jones Indices analyst Howard Silverblatt. That compares to combined dividends and buybacks worth $939 billion during the year through March 2017, Silverblatt said in a research note. Earnings per share of S&P 500 companies surged 26 percent in the March quarter, boosted by the Tax Cuts and Jobs Act passed by Republican lawmakers in December.

Companies have been returning much of that profit windfall to shareholders via share buybacks and increased dividends at never before seen amounts, highlighted by Apple’s record $23.5 billion worth of shares repurchased in the first quarter. S&P 500 companies have also plowed some of the windfall from lower taxes into investments toward growth or becoming more efficient. First-quarter capital expenditures totaled at least $159 billion, up more than 21 percent from the year before, according to S&P Dow Jones Indices. The biggest overhaul of the U.S. tax code in over 30 years, the new law slashes the corporate income tax rate to 21 percent from 35 percent, and charges multinationals a one-time tax on profits held overseas.

Mauldin turns dark side.

• The 2020s Might Be The Worst Decade In US History (Mauldin)

I recently wrote about a looming credit crisis that’s stemming from high-yield junk bonds. The crisis itself will have massive consequences for investors. But that’s not the worst part. The crisis will create a domino effect and trigger global financial contagion, which I usually refer to as “The Great Reset.” The collapse of high-yield bonds will hit stocks and bonds. Rising defaults will force banks to reduce their lending exposure, drying up capital for previously creditworthy businesses. This will put pressure on earnings and reduce economic activity. A recession will follow. This will not be just a U.S. headache, either. It will surely spill over into Europe (and may even start there) and then into the rest of the world.

The U.S. and/or European recession will become a global recession, as happened in 2008. Europe has its own set of economic woes and multiple potential triggers. It is quite possible Europe will be in recession before the ECB finishes this tightening cycle. As always, a U.S. recession will spark higher federal spending and reduce tax revenue. So I expect the on-budget deficit to quickly reach $2 trillion or more. Within four years of the recession’s onset, total government debt will be at least $30 trillion. This will further constrain the private capital markets and likely raise tax burdens for everyone—not just the rich.

Meanwhile, job automation will intensify, with businesses desperate to cut costs. The effect we already see on labor markets will double or triple. Worse, it will start reaching deep into the service sector. The technology is improving fast. The working-class population will not like this and it has the power to vote. “Safety net” programs and unemployment benefit expenditures will skyrocket. Studies show that the ratio of workers covered by unemployment insurance is at its lowest level in 45 years. What happens when millions of freelancers lose their incomes?

We’re talking trillions. Poof!

• Moody’s Warns Of ‘Particularly Large’ Wave Of Junk Bond Defaults Ahead (CNBC)

With corporate debt hitting its highest levels since before the financial crisis, Moody’s is warning that substantial trouble is ahead for junk bonds when the next downturn hits. The ratings agency said low interest rates and investor appetite for yield has pushed companies into issuing mounds of debt that offer comparatively low levels of protection for investors. While the near-term outlook for credit is “benign,” that won’t be the case when economic conditions worsen. The “prolonged environment of low growth and low interest rates has been a catalyst for striking changes in nonfinancial corporate credit quality,” Mariarosa Verde, Moody’s senior credit officer, said in a report.

“The record number of highly leveraged companies has set the stage for a particularly large wave of defaults when the next period of broad economic stress eventually arrives.” Though the current default rate is just 3 percent for speculative-grade credit, that has been predicated on favorable conditions that may not last. Since 2009, the level of global nonfinancial companies rated as speculative, or junk, has surged by 58 percent, to the highest ever, with 40 percent rated B1 or lower, the point that Moody’s considers “highly speculative,” as opposed to “non-investment grade speculative.” In dollar terms, that translates to $3.7 trillion in total junk debt outstanding, $2 trillion of which is in the B1 or lower category.

“Strong investor demand for higher yields continues to allow all but the weakest issuers to avoid default by refinancing maturing debt,” Verde wrote. “A number of very weak issuers are living on borrowed time while benign conditions last.” The level of speculative-grade issuance peaked in the U.S. in 2013, at $334.5 billion, according to the Securities Industry and Financial Markets Association. American companies have $8.8 trillion in total outstanding debt, a 49 percent increase since the Great Recession ended in 2009.

President Mattarella has refused to accept the nominee for finance minister, Savona. He’s a euroskeptic.

Meanwhile, if Italian bonds are downgraded further, Europe has a massive problem.

• Moody’s Puts Italy On Downgrade Review, Junk Rating Possible (ZH)

In a quite direct ‘threat’ to the newly formed Italian coalition, Moody’s warned that Italy will face a downgrade from its current Baa2 rating (potentially more than one notch to junk status) due to the lack of fiscal restraint in the new “contract” and the potential for delays to Italy’s structural reforms. While Italy’s current rating is Baa2, and a downgrade would leave it at Baa3 (still investment grade), one look at Italian debt markets this week and one can be forgiven for thinking it is pricing in a multiple-notch downgrade to junk… and thus potentially making things awkward for its ECB bond-buying-benefactor and its banking system’s massive holdings of sovereign bonds.

Full Moody’s Report: Moody’s Investors Service has today placed the Government of Italy’s ratings on review for possible downgrade. Ratings placed under review are the Baa2 long-term issuer and senior unsecured bond ratings as well as the (P) Baa2 medium-term MTN programme, the (P)Baa2 senior unsecured shelf, the Commercial Paper and other short-term ratings of Prime-2/(P) Prime-2 respectively. The key drivers for today’s initiation of the review for downgrade are as follows: 1. The significant risk of a material weakening in Italy’s fiscal strength, given the fiscal plans of the new coalition government; and 2. The risk that the structural reform effort stalls, and that past reforms such as the pension reforms implemented in 2011 are reversed.

Moody’s will use the review period to assess the impact of the fiscal and economic policy platform of the new government on Italy’s credit profile, with a particular focus on the effect on the deficit and debt trajectories in the coming years. The review will also allow Moody’s to assess further whether the new government intends to continue to pursue growth-enhancing structural reforms, or conversely to reverse earlier reforms, such as the 2011 pension reform, as well as other economic policy initiatives in the coming months that may have an incidence on the country’s growth potential over the coming years.

What do you mean we can’t blame the weather?

• UK Economy Posts Worst Quarterly GDP Figures For Five Years (G.)

The weakest household spending for three years and falling levels of business investment dragged the economy to the worst quarter for five years, official statisticians have said. The Office for National Statistics confirmed its previous estimate that GDP growth slumped to 0.1% in the first quarter, while sticking to its view that the “beast from the east” had little impact. The latest figures will further stoke concerns over the strength of the UK economy, amid increasing signals for deteriorating growth as Britain prepares to leave the EU next year. Some economists, including officials at the Bank of England, thought the growth rate would be revised higher as more data became available.

Threadneedle Street delayed raising interest rates earlier this month after the weak first GDP estimate, despite arguing that the negative hit to the economy from heavy snowfall in late February and early March had probably been overblown. Instead the ONS said it had seen a longer-term pattern of slowing growth in the first three months of the year. Rob Kent-Smith of the ONS said: “Overall, the economy performed poorly in the first quarter, with manufacturing growth slowing and weak consumer-facing services.” While admitting bad weather will have had some impact, particularly for firms in the construction industry and some areas of the retail business, statisticians said the overall effect was limited, with increased online sales and heightened energy production during the cold snap.

The figures show the services industries contributed the most to GDP growth, with an increase of 0.3% in the first quarter, while household spending grew at a meagre 0.2%. The construction industry declined by 2.7% and business investment fell by 0.2%.

“..an advance team of 30 White House and State Department officials was preparing to leave for Singapore later this weekend..”

• Prospects of US-North Korea Summit Brighten (R.)

Prospects that the United States and North Korea would hold a summit brightened after U.S. President Donald Trump said late on Friday Washington was having “productive talks” with Pyongyang about reinstating the June 12 meeting in Singapore. Politico magazine reported that an advance team of 30 White House and State Department officials was preparing to leave for Singapore later this weekend. Reuters reported earlier this week the team was scheduled to discuss the agenda and logistics for the summit with North Korean officials. The delegation was to include White House Deputy Chief of Staff Joseph Hagin and deputy national security adviser Mira Ricardel, U.S. officials said, speaking on condition of anonymity.

Trump said in a Twitter post late on Friday: “We are having very productive talks about reinstating the Summit which, if it does happen, will likely remain in Singapore on the same date, June 12th., and, if necessary, will be extended beyond that date.” Trump had earlier indicated the summit could be salvaged after welcoming a conciliatory statement from North Korea saying it remained open to talks. “It was a very nice statement they put out,” Trump told reporters at the White House. “We’ll see what happens – it could even be the 12th.” “We’re talking to them now. They very much want to do it. We’d like to do it,” he said.

Through Kimberley Strassel, the Wall Street Journal distances itself ever more from the MSM.

• The Real ‘Constitutional Crisis’ (Strassel)

Democrats and their media allies are again shouting “constitutional crisis,” this time claiming President Trump has waded too far into the Russia investigation. The howls are a diversion from the actual crisis: the Justice Department’s unprecedented contempt for duly elected representatives, and the lasting harm it is doing to law enforcement and to the department’s relationship with Congress. The conceit of those claiming Mr. Trump has crossed some line in ordering the Justice Department to comply with oversight is that “investigators” are beyond question. We are meant to take them at their word that they did everything appropriately. Never mind that the revelations of warrants and spies and dirty dossiers and biased text messages already show otherwise.

We are told that Mr. Trump cannot be allowed to have any say over the Justice Department’s actions, since this might make him privy to sensitive details about an investigation into himself. We are also told that Congress – a separate branch of government, a primary duty of which is oversight – cannot be allowed to access Justice Department material. House Intelligence Committee Chairman Devin Nunes can’t be trusted to view classified information – something every intelligence chairman has done – since he might blow a source or method, or tip off the president. That’s a political judgment, but it holds no authority. The Constitution set up Congress to act as a check on the executive branch—and it’s got more than enough cause to do some checking here.

Yet the Justice Department and Federal Bureau of Investigation have spent a year disrespecting Congress—flouting subpoenas, ignoring requests, hiding witnesses, blacking out information, and leaking accusations. Senate Judiciary Chairman Chuck Grassley has not been allowed to question a single current or former Justice or FBI official involved in this affair. Not one. He’s also more than a year into his demand for the transcript of former national security adviser Mike Flynn’s infamous call with the Russian ambassador, as well as reports from the FBI agents who interviewed Mr. Flynn. And still nothing.

[..] Mr. Trump has an even quicker way to bring the hostility to an end. He can – and should – declassify everything possible, letting Congress and the public see the truth. That would put an end to the daily spin and conspiracy theories. It would puncture Democratic arguments that the administration is seeking to gain this information only for itself, to “undermine” an investigation. And it would end the Justice Department’s campaign of secrecy, which has done such harm to its reputation with the public and with Congress.

“..a malevolent secret police operation..”

• A Mendacious Exercise In Manufacturing Paranoia (Jim Kunstler)

After many months, the gaslight is losing its mojo and a clearer picture has emerged of just what happened during and after the 2016 election: the FBI, CIA, and the Obama White House colluded and meddled to tilt the outcome and, having failed spectacularly, then labored frantically to cover up their misdeeds with further misdeeds. The real election year crimes for which there is actual evidence point to American officials not Russian gremlins. Having attempted to incriminate Trump at all costs, these tragic figures now scramble to keep their asses out of jail.

I say “tragic” because they — McCabe, Comey, Rosenstein, Strzok, Page, Ohr, et al — probably think they were acting heroically and patriotically to save the country from a monster, and I predict that is exactly how they will throw themselves to the mercy of the jury when they are called to answer for these activities in a court of law. Of course, they have stained the institutional honor of the FBI and its parent Department of Justice, but it is probably a healthier thing for the US public to maintain an extremely skeptical attitude about what has evolved into a malevolent secret police operation.

The more pressing question is how all this huggermugger gets adjudicated in a timely manner. Congress has the right to impeach agency executives like Rod Rosenstein and remove them from office. That would take a lot of time and ceremony. They can also charge them with contempt-of-congress and jail them until they comply with committee requests for documents. Mr. Trump is entitled to fire the whole lot of the ones who remain. But, finally, all this has to be sorted out in federal court, with referrals made to the very Department of Justice that has been a main actor in this tale.

The most mysterious figure in the cast is the MIA Attorney General, Jeff Sessions, who has become the amazing invisible man. It’s hard to see how his recusal in the Russia matter prevents him from acting in any way whatsoever to clean the DOJ house and restore something like operational norms — e.g. complying with congressional oversight — especially as the Russia matter itself resolves as a completely fabricated dodge. The story is moving very fast now. The Pequod is whirling around in the maelstrom, awaiting the final blow from the white whale’s mighty flukes.

Gullible?

• Tesla Seeks To Dismiss Securities Fraud Lawsuit (R.)

Tesla Inc on Friday asked a court to dismiss a securities fraud lawsuit by shareholders who said the electric vehicle maker gave false public statements about the progress of producing its new Model 3 sedan. In a filing in federal court in San Francisco, Tesla said that its statements about the challenges the company faced with Model 3 were “frank and in plain language,” including repeated disclosures by Chief Executive Elon Musk of “production hell.” Tesla did not seek to hide the truth, its motion to dismiss said. The company says its Model 3 has experienced numerous “bottlenecks” from problems with Tesla’s battery module process at its Nevada Gigafactory to general assembly at its Fremont plant.

Tesla is under pressure to deliver the Model 3 to reap revenue and stem massive spending that has put Tesla’s finances in the red. The ramp of the Model 3, Tesla said in the court filing, was “the first of its kind,” with difficulties likely to crop up after it got underway. The lawsuit filed last October seeks class action status for shareholders who bought Tesla stock between May 4, 2016 through October 6, 2017, inclusive. It said shareholders bought “artificially inflated” shares because Musk and other executives misled them with their statements. Tesla made such statements during the lead-up to, and early production of, its Model 3 sedan and failed to disclose that the company was “woefully unprepared” for the vehicle’s production, the lawsuit said.

Good on ’em! Cars don’t belong in cities.

• Madrid Takes Its Car Ban to the Next Level (CityLab)

The days when cars could drive unhindered through central Madrid are coming to a close. Following an announcement this week, the Spanish capital confirmed that, starting in November, all non-resident vehicles will be barred from a zone that covers the entirety of Madrid’s center. The only vehicles that will be allowed in this zone are cars that belong to residents who live there, zero-emissions delivery vehicles, taxis, and public transit. Even on a continent where many cities are scaling back car access, the plan is drastic. While much of central Madrid consists of narrow streets that were never suitable to motor vehicles in the first place, this central zone also includes broad avenues such as Gran Via, and wide squares that have been islands in a sea of surging traffic for decades.

The plan is thus not just about making busy central streets more pleasant, but about creating a situation where people simply no longer think of bringing their cars downtown. This might come as a shock to some drivers, but the wind has been blowing this way for more than a decade. Madrid set up the first of what it calls Residential Priority Zones in 2005, in the historic, densely packed Las Letras neighborhood. Since then, a modest checkerboard of three other similar zones have been installed across central Madrid. The new area will be a sort of all-encompassing zone that abolishes once and for all the role of downtown streets as through-routes across the city.

To get people used to the idea, implementation of the non-local car ban will be staggered. In November, manual controls by police around the zone’s edge will begin. Cars that are breaching the new rules will be warned of the fine they face in the future—€90 per occurrence—without actually being charged then. In January, a fully automated system with cameras will be put in place, and from February, the €90 will be actively enforced against any cars found breaking the rules.

Debt Rattle May 26 2017

May 262017

May 26, 2017 Posted by Raúl Ilargi Meijer at 9:34 am Finance Tagged with: ban, Brexit, detention, G7, IMF, Moody’s, NATO, NSA, Romer, Toronto, Troika, Trump 1 Response »

Henri Matisse Le Bonheur de Vivre 1906

• Trump Directly Scolds NATO Allies, Says They Owe ‘Massive’ Sums (R.)

• Trump Joins New-Look G7 Amid Trade, Climate Discord (AFP)

• US Appeals Court Refuses To Reinstate Travel Ban (R.)

• NSA Under Obama Secretly Spied On Americans For Years (Circa)

• UK Labour Party Slashes Tory Lead To Just Five Points In Latest Poll (Ind.)

• UK Election Campaign Resumes After Manchester Attack (AFP)

• Not A Little List: EU Draws Up Brexit Bill (R.)

• China’s Reforms Not Enough To Arrest Mounting Debt – Moody’s (R.)

• Toronto Area Home Sales Sink After Cooling Measures (G&M)

• World Bank Star Economist Paul Romer Sidelined in War Over Words (BBG)

• Fed Faces A ‘Surprise’ Problem On US Inflation (R.)

• No-Nonsense Finns Ready to Rain on Franco-German Euro Parade (BBG)

• Greece Debt Talks Remain Fraught Despite IMF Optimism (AFP)

• Unease On Greek Island of Chios Over New Migrant Detention Center (K.)

It’s an anti-Trump love fest.

Spending $1 billion on a new building that you will never be able to visit tells you what these people think of you. But the, NATO is the ideal vehicle for the arms industry: no democracy anywhere in sight.

• Trump Directly Scolds NATO Allies, Says They Owe ‘Massive’ Sums (R.)

U.S. President Donald Trump on Thursday intensified his accusations that NATO allies were not spending enough on defense and warned of more attacks like this week’s Manchester bombing unless the alliance did more to stop militants. In unexpectedly abrupt remarks as NATO leaders stood alongside him, Trump said certain member countries owed “massive amounts of money” to the United States and NATO – even though allied contributions are voluntary, with multiple budgets. His scripted comments contrasted with NATO’s choreographed efforts to play up the West’s unity by inviting Trump to unveil a memorial to the Sept. 11, 2001, attacks on the United States at the new NATO headquarters building in Brussels.

“Terrorism must be stopped in its tracks, or the horror you saw in Manchester and so many other places will continue forever,” Trump said, referring to Monday’s suicide bombing in the English city that killed 22 people, including children. “These grave security concerns are the same reason that I have been very, very direct … in saying that NATO members must finally contribute their fair share,” Trump said. NATO Secretary-General Jens Stoltenberg defended Trump, saying that although he was “blunt” he had “a very plain and clear message on the expectations” of allies. But one senior diplomat said Trump, who left the leaders’ dinner before it ended to fly to Italy for Friday’s Group of Seven summit, said the remarks did not go down well at all. “This was not the right place or time,” the diplomat said of the very public harangue. “We are left with nothing else but trying to put a brave face on it.”

In another unexpected twist, Trump called on NATO, an organization founded on collective defense against the Soviet threat, to include limiting immigration in its tasks. And Trump did say that the United States “will never forsake the friends who stood by our side” but NATO leaders had hoped he would more explicitly support the mutual defense rules of a military alliance’s he called “obsolete” during his campaign. Instead, he returned to a grievance about Europe’s drop in defense spending since the end of the Cold War and failed to publicly commit to NATO’s founding Article V rule which stipulates that an attack on one ally is an attack against all. “23 of the 28 member nations are still not paying what they should be paying for their defense,” Trump said, standing by a piece of the wreckage of the Twin Towers. “This is not fair to the people and taxpayers of the United States, and many of these nations owe massive amounts of money from past years,” Trump said as the other leaders watched.

It’ll give the press some more material to talk about on handshakes; it’s all they do these days anyway.

• Trump Joins New-Look G7 Amid Trade, Climate Discord (AFP)

G7 leaders meet Friday determined to put on a display of united resolve in the fight against jihadist terrorism, despite deep divisions on trade and global warming. The two-day summit in Sicily’s ancient hilltop resort of Taormina kicks off four days after children were among 22 people killed in a concert bomb attack in Manchester. British Prime Minister Theresa May will lead a discussion on terrorism in one of Friday’s working sessions and is expected to issue a call for G7 countries to put more pressure on internet companies to remove extremist content. “The fight is moving from the battlefield to the internet,” a senior British official said ahead of the talks.

With May and Donald Trump among four new faces in the club of the world’s major democracies, the gathering in Italy is being billed as a key test of how serious the new US administration is about implementing its radical policy agenda, particularly on climate change. Senior officials are preparing to work through the night of Friday-Saturday in a bid to bridge what appear to be irreconcilable differences over Trump’s declared intention of ditching the US commitment to the landmark Paris according on curbing carbon emissions. Officials acknowledge the summit, one of the shortest in the body’s history, is effectively about damage limitation against a backdrop of fears among US partners that the Trump presidency, with its ‘America First’ rhetoric, could undermine the architecture of the post-World War II world. Summit host Paolo Gentiloni, a caretaker Italian prime minister also making his G7 debut, acknowledged as much on the eve of the meeting.

Long dead. It was supposed to be for 30 days only anyway, and those are long gone.

• US Appeals Court Refuses To Reinstate Travel Ban (R.)

In a stinging rebuke to President Donald Trump, a U.S. appeals court refused on Thursday to reinstate his travel ban on people from six Muslim-majority nations, calling it discriminatory and setting the stage for a showdown in the Supreme Court. The decision, written by Chief Judge Roger Gregory, described Trump’s executive order in forceful terms, saying it uses “vague words of national security, but in context drips with religious intolerance, animus, and discrimination.” Attorney General Jeff Sessions said in a statement that the government, which says the temporary travel ban is needed to guard against terrorist attacks, would seek a review of the case at the Supreme Court. “These clearly are very dangerous times and we need every available tool at our disposal to prevent terrorists from entering the United States and committing acts of bloodshed and violence,” said Michael Short, a White House spokesman.

He added that the White House was confident the order would ultimately be upheld by the judiciary. In its 10-3 ruling, the U.S. 4th Circuit Court of Appeals said those challenging the ban, including refugee groups and individuals, were likely to succeed on their claim that the order violates the U.S. Constitution’s bar against favoring one religion over another. Gregory cited statements by Trump during the 2016 presidential election calling for a Muslim ban. During the race, Trump called for “a total and complete shutdown of Muslim’s entering the United States” in a statement on his website. The judge wrote that a reasonable observer would likely conclude the order’s “primary purpose is to exclude persons from the United States on the basis of their religious beliefs.”

Where’s the anger?

• NSA Under Obama Secretly Spied On Americans For Years (Circa)

The National Security Agency under former President Barack Obama routinely violated American privacy protections while scouring through overseas intercepts and failed to disclose the extent of the problems until the final days before Donald Trump was elected president last fall, according to once top-secret documents that chronicle some of the most serious constitutional abuses to date by the U.S. intelligence community. More than 5%, or one out of every 20 searches seeking upstream Internet data on Americans inside the NSA’s so-called Section 702 database violated the safeguards Obama and his intelligence chiefs vowed to follow in 2011, according to one classified internal report reviewed by Circa. The Obama administration self-disclosed the problems at a closed-door hearing Oct. 26 before the Foreign Intelligence Surveillance Court that set off alarm.

Trump was elected less than two weeks later. The normally supportive court censured administration officials, saying the failure to disclose the extent of the violations earlier amounted to an “institutional lack of candor” and that the improper searches constituted a “very serious Fourth Amendment issue,” according to a recently unsealed court document dated April 26, 2017. The admitted violations undercut one of the primary defenses that the intelligence community and Obama officials have used in recent weeks to justify their snooping into incidental NSA intercepts about Americans. Circa has reported that there was a three-fold increase in NSA data searches about Americans and a rise in the unmasking of U.S. person’s identities in intelligence reports after Obama loosened the privacy rules in 2011. Officials like former National Security Adviser Susan Rice have argued their activities were legal under the so-called minimization rule changes Obama made, and that the intelligence agencies were strictly monitored to avoid abuses.

May was losing a lot of votes before AMnchester.

• UK Labour Party Slashes Tory Lead To Just Five Points In Latest Poll (Ind.)

Labour has slashed the Conservatives’ lead in the polls to just five points, the latest YouGov/Times results show. The party has made consistent gains in recent weeks as leader Jeremy Corbyn claimed his message was finally getting through to voters. The results show a four point change since last week when the Tories were leading by 9 percentage points – the first time Labour had narrowed the gap to single figures since Theresa May called the snap election on 18 April. The latest poll comes after the Prime Minister made an unprecedented U-turn over her “dementia tax” plans, just four days after making them the centrepiece of her election manifesto.

A separate poll, conducted after the Tory manifesto launch, found 28% of voters said they were less likely to vote Conservative because of the social care package. It comes as Mr Corbyn prepares to take the hugely controversial step of blaming Britain’s foreign wars for terror attacks such as the Manchester suicide bombing. The Labour leader will claim a link between “wars our government has supported or fought in other countries and terrorism here at home”, as he relaunches his party’s election campaign on Friday after the three-day pause. Mr Corbyn will stress his assessment is shared by the intelligence and security services and “in no way reduces the guilt of those who attack our children”. The Independent understands Mr Corbyn wishes to draw attention to his March 2011 vote against the Libya bombing – when he was one of just 13 MPs to oppose David Cameron.

May will use Manchester and fear for all she can suck out of it. Corbyn will be portrayed as incapable leader for the country, in the same way he has been called unfit to lead his party. He would have been way ahead in the polls if his own party had not turned on him. Re: Bernie.

• UK Election Campaign Resumes After Manchester Attack (AFP)

Britain’s politicians resume campaigning in earnest on Friday with national security in the spotlight, as police scramble to bust a Libya-linked jihadist network thought to be behind the Manchester terror attack. Prime Minister Theresa May and Labour leader Jeremy Corbyn had suspended campaigning after Monday’s bombing at a Manchester pop concert, which killed 22 people, including many teenagers, and wounded dozens more. Eight suspects are currently in detention on UK soil in connection with the blast, for which the Islamic State group has claimed responsibility, while police in Libya have detained the father and brother of 22-year-old suicide bomber Salman Abedi. Washington’s top diplomat Rex Tillerson is due to visit London on Friday in an expression of solidarity, after Britain reacted furiously to leaks of sensitive details about the investigation to US media.

Opposition leader Corbyn in a speech in London later on Friday is expected to say it is the “responsibility” of governments to minimise the risk of terror by giving police the funding they need. A YouGov poll published in Friday’s edition of The Times put Conservatives on 43% compared to Labour on 38%, far better for Labour than the double-digit margin that had previously separately it from the ruling party. YouGov polled 2,052 people on Wednesday and Thursday. But analysts said that the Conservative prime minister – who previously served as interior minister for six years – could benefit at the polls from the shift in focus ahead of the general election on June 8. “If security and terrorism become more prominent then I can only see one winner from this – Theresa May,” said Steven Fielding, a professor of politics at the University of Nottingham. The YouGov poll also found that 41% of respondents said that the Conservatives would handle defence and security best, compared to 18% who said the same of Labour.

Will May be part of these discussions?

• Not A Little List: EU Draws Up Brexit Bill (R.)

The EU will next month demand Britain agree to pay a fixed percentage of the EU’s outstanding obligations on the day it leaves the bloc, in defiance of a British rejection of that logic as “preposterous”. A draft EU negotiating paper, seen by Reuters, that will be put to London when Brexit talks begin following a national election in Britain on June 8 makes clear that suggestions from Prime Minister Theresa May’s government that the Union might end up owing rather than getting money cut no ice in Brussels. The paper on principles of the financial settlement that the EU wants from London on departure in March 2019 sets no figure, and chief negotiator Michel Barnier has made clear it cannot be calculated until the end as it depends on the EU’s spending.

However, he wants an agreement on how the “Brexit bill” will be calculated, perhaps by late this year, before the Europeans agree to launch talks that May wants on a free trade agreement. EU chief executive Jean-Claude Juncker has said Britain may have to pay its 27 allies some €60 billion on departure and some experts estimated the up-front cost, before later refunds, could be nearly double that – suggestions May’s foreign minister Boris Johnson called “absolutely preposterous”. The paper to be discussed among diplomats next week before Barnier presents the opening demands to London in the week of June 19, spells out that while Britain will get some credit – notably its €39 billion share of the capital of the European Investment Bank.

But the list of what it must pay, and go paying for some years after Brexit, is much longer. Four pages of appendix details list more than 70 EU bodies and funds to which Britain has committed payment in a budget set out to 2020. Yet the three-page main document made no mention of Britain getting credit for a share of, say, EU buildings, as British ministers have said it should have. EU officials argue Britain was not asked to pay extra for existing infrastructure in Brussels when it first joined the bloc in 1973. Among obligations Britain will be asked to cover are the funding until summer 2021 of British teachers seconded to schools catering to the EU’s staff and diplomats.

Other payments include promises to fund Syrian refugees in Turkey, aid for the Central African Republic, the EU aviation safety agency and the European Institute for Gender Equality. “The United Kingdom obligations should be fixed as a percentage of the EU obligations calculated at the date of withdrawal in accordance with a methodology to be agreed in the first phase of the negotiations,” the paper states. It adds that people, businesses and organizations in Britain would continue to benefit from some EU funds for some time after Brexit. Britain has about 13% of the EU’s 507 million population and accounts for some 16% of its economy. Its net contribution to the EU’s €140 billion annual budget has typically been roughly €10 billion in recent years.

CHina is not in good shape. Moody’s diagnosis came late.

• China’s Reforms Not Enough To Arrest Mounting Debt – Moody’s (R.)

China’s structural reforms will slow the pace of its debt build-up but will not be enough to arrest it, and another credit rating cut for the country is possible down the road unless it gets its ballooning credit in check, officials at Moody’s said. The comments came two days after Moody’s downgraded China’s sovereign ratings by one notch to A1, saying it expects the financial strength of the world’s second-largest economy to erode in coming years as growth slows and debt continues to mount. In announcing the downgrade, Moody’s Investors Service also changed its outlook on China from “negative” to “stable”, suggesting no further ratings changes for some time.

China has strongly criticized the downgrade, asserting it was based on “inappropriate methodology”, exaggerating difficulties facing the economy and underestimating the government’s reform efforts. In response, senior Moody’s official Marie Diron said on Friday that the ratings agency has been encouraged by the “vast reform agenda” undertaken by the Chinese authorities to contain risks from the rapid rise in debt. However, while Moody’s believes the reforms may slow the pace at which debt is rising, they will not be enough to arrest the trend and levels will not drop dramatically, Diron said. Diron said China’s economic recovery since late last year was mainly thanks to policy stimulus, and expects Beijing will continue to rely on pump-priming to meet its official economic growth targets, adding to the debt overhang.

Moody’s also is waiting to see how some of the announced measures, such as reining in local government finances, are actually implemented, Diron, associate managing director of Moody’s Sovereign Risk Group, told reporters in a webcast. China may no longer get an A1 rating if there are signs that debt is growing at a pace that exceeds Moody’s expectations, Li Xiujun, vice president of credit strategy and standards at the ratings agency, said in the same webcast. “If in the future China’s structural reforms can prevent its leverage from rising more effectively without increasing risks in the banking and shadow banking sector, then it will have a positive impact on China’s rating,” Li said. But Li added: “If there are signs that China’s debt will keep rising and the rate of growth is beyond our expectations, leading to serious capital misallocation, then it will continue to weigh on economic growth in the medium term and impact the sovereign rating negatively.”

Down 26% yoy.

• Toronto Area Home Sales Sink After Cooling Measures (G&M)

House sales fell 26% in the Toronto region in the month following the Ontario government’s introduction of a foreign-buyer’s tax as many potential purchasers stepped back and waited to assess the market impact. In the 30 days after the province announced the immediate introduction of a 15-per-cent foreign-buyer’s tax on April 20, the number of houses sold in the Greater Toronto Area fell 26% compared with the same period last year, according to data compiled by Toronto realtor John Pasalis, president of Realosophy Realty Inc. Communities north of Toronto saw the greatest declines between April 20 and May 20, with sales falling 61% in Richmond Hill, 46% in Markham and 44% in Newmarket. The City of Toronto recorded a 23% drop in the number of homes sold, while Brampton and Mississauga west of Toronto had sales declines of 16% and 27%, respectively.

The sales review looked only at freehold homes, including detached and semi-detached houses, but did not include condominiums. The drop in selling activity is part of a broad cooling in the Toronto region market that began in April as buyers moved to the sidelines while home owners rushed to list their houses to try to cash in before the market peaked. In the first two weeks of May alone, sales of all types of homes in the GTA fell 16% compared with the same period in May last year, while the number of new listings soared 47%, according to data compiled by the Toronto Real Estate Board. The average GTA home sold for $890,284 in the first two weeks of May, a 17-per-cent increase from a year earlier, primarily because of large gains earlier this year. But the price was down 3% compared with April, when the average sale price for all types of GTA homes was $920,791.

Mr. Pasalis said he does not believe the new foreign-buyer’s tax is directly responsible for much of the drop in sales since April 20 because foreign buyers were not a large enough part of the market to cause such a significant decline, and many foreign buyers will qualify for rebates of the tax. Instead, he believes the drop is a result, in part, to a decline in demand from domestic investors who were purchasing second properties to rent or flip. Most investors have stopped buying as they wait to see the impact of a suite of new measures announced by the province in April, including the foreign-buyer’s tax, he said. “They disappeared – no one is talking about buying money-losing rental properties any more,” Mr. Pasalis said. “The whole excitement and euphoria is kind of gone right now.”

The fight over conventional economic theories.

• World Bank Star Economist Paul Romer Sidelined in War Over Words (BBG)

The World Bank’s chief economist has been stripped of his management duties after researchers rebelled against his efforts to make them communicate more clearly, including curbs on the written use of “and.” Paul Romer is relinquishing oversight of the Development Economics Group, the research hub of the Washington-based development lender, according to an internal staff announcement seen by Bloomberg. Kristalina Georgieva, the chief executive for the bank’s biggest fund, will take over management of the unit July 1. Romer will remain chief economist, providing management with “timely thought leadership on trends directly affecting our client countries, including the ‘future of work,’” World Bank President Jim Yong Kim said in the note to staff dated May 9.

Romer said he met resistance from staff when he tried to refine the way they communicate. “I was in the position of being the bearer of bad news,” he said in an interview. “It’s possible that I was focusing too much on the precision of the communications and not enough on the feelings my messages would invoke.” [..] But in recent years, his attacks on the credibility of macroeconomic models irritated many of his peers. His combativeness didn’t endear him to some of the more than 600 economists who work in DEC, according to people familiar with the matter. Romer wanted DEC to set the intellectual agenda among those who think deeply about how to help the world’s poorest countries, said one of the people, who spoke on condition of anonymity.

The World Bank is already considered a major source of development research, ranking first among institutions in terms of the number of times its work is cited, ahead of Brown University, the London School of Economics and Harvard University. But Romer expressed to those around him that the department should communicate more clearly, dive right into public debates, and align its work with the institution’s goals of ending extreme poverty and reducing inequality. It didn’t take him long to shake things up. He declared several positions redundant and enforced term limits on senior managers. In the interview, Romer said he cut more than $1 million in annual expenses from the group’s budget.

A fight between fabricated numbers.

• Fed Faces A ‘Surprise’ Problem On US Inflation (R.)

Recent data on the performance of the U.S. economy has been generally on the soft side, a sore point discussed at length by Federal Reserve officials at their latest meeting, minutes of the gathering released on Wednesday showed. In fact, measures developed by Citigroup economists to track how incoming economic data stacks up against market expectations show the latest numbers from the United States have been falling persistently short of forecasts. Meanwhile, Citi’s comparable “economic surprise” indexes for other regions show just the opposite: upside surprises. Of particular concern for the Fed are recent undershoots on key gauges of inflation that have been lagging the central bank’s stated target of 2% annualized consumer price growth.

Market-based measures of long-term inflation expectations have also weakened substantially, enough so that Fed policymakers agreed at their last meeting that before raising rates again they would need stronger data to confirm recent weakness was not a new trend. With doubts rising over U.S. President Donald Trump’s ability to deliver policies to promote faster economic growth, many of these gauges have fallen back to near Election Day levels. Citi’s inflation surprise indexes underscore the Fed’s anxiety. [..] recent U.S. inflation readings have returned to their long-term trend of underperforming against forecasts after a brief run of upside surprises earlier this year.

Meanwhile, inflation reports from Europe have topped expectations by the widest margin on record. The rest of the so-called Group of 10 largest developed economies are meanwhile beating forecasts by the most since the financial crisis nearly a decade ago, even after taking into account the drag from U.S. numbers. Even Japan, notorious for its decades-long struggles against deflation, is posting inflation data notably above forecasts.

Will France and Germany push through a closer union despite the protests? They could….

• No-Nonsense Finns Ready to Rain on Franco-German Euro Parade (BBG)

The euro area should focus on implementing its banking union and consigning bailouts to the history books, rather than exploring ambitious ideas such as a common budget or shared liabilities, according to Finland’s finance minister. “We’re willing to engage in a discussion on different scenarios on the future of European Monetary Union,” Petteri Orpo said in an emailed response to questions Wednesday. “I would be cautious about proposals that aren’t consistent with the current stage of political union in Europe, such as eurobonds.” The debate over the future of the EU has received new impetus following the U.K.’s decision to leave, with the European Commission outlining five possible scenarios.

Those hoping for a re-start in the integration drive in response to populist criticisms have drawn new energy from the lovefest on display in Berlin when German Chancellor Angela Merkel hosted a first meeting with Emmanuel Macron, the new French president. Italy and Spain, meanwhile, are renewing their push for mutually-backed debt. The priorities of Finland’s finance minister are not as lofty. “The banking union is by far the most important element,” Orpo said. “Risk reduction must come before risk sharing.” Finland may have a special interest in boosting the banking union now that the largest Nordic lender, Nordea Bank, is considering relocating its headquarters to Helsinki from Stockholm.

My long-term point exactly: “Greece cannot grow while maintaining such a high surplus,” Rice said.”

• Greece Debt Talks Remain Fraught Despite IMF Optimism (AFP)

Critical talks on easing Greece’s massive debt burden remain fraught with conflict, despite assurances from the IMF on Thursday that the sides are closer to an agreement. A deal to secure debt relief for Athens from the eurozone is the missing piece to unlocking loans the country needs to make debt payments and begin to recover from the years-long crisis. But transcripts of part of the recent discussions between the IMF, the ECB and eurozone finance ministers published by Greek financial website Euro2day on Thursday show many disputes remain and few of the participants are satisfied, least of all Greece Finance Minister Euclid Tsakalotos. He slammed one of the proposals floated in the discussions the “worst of all worlds” for Greece. “I don’t think anyone here can say that is a good deal for us, who have negotiated in good faith.”

This seems to contradict comments from an IMF official Thursday, who said the differences are narrowing even though the fund needs more specifics on a debt relief plan before it can agree to release more financing. “Everyone is optimistic that agreement can be reached and hopefully can be reached at the next Eurogroup meeting” in mid-June, IMF spokesman Gerry Rice told reporters. In contrast, the IMF’s main negotiator, Poul Thomsen, said he was “very far away from being able to tell our board that we are close to a strategy we can agree to” on debt relief, according to the transcripts. [..] Eurogroup president Jeroen Dijsselbloem floated the possibility of the IMF approving a loan for Greece, but withholding disbursement of the funds until it had sufficient details on the debt relief — something virtually unheard of in IMF aid programs.

Thomsen said it was an “interesting proposal” that he could raise with the management, even while Tsakalotos slammed the idea. One advantage to the unusual arrangement, were the IMF to agree, is that it would take the discussion of Greek debt relief out of play in Germany’s election in September. The German public is hostile to more financial support for Athens. Rice vehemently denied doing any political favors for Germany. “We are exploring all options within our existing practices and rules,” he said. IMF lending depends on each country’s circumstances “but we try to be as flexible as we can,” he added. German Finance Minister Wolfgang Schaeuble called the lack of a deal at Monday’s talks “a major failure,” and said “I’m not very optimistic that things will improve.”

The IMF also disagrees with Europe’s forecasts for Greek growth and primary fiscal surplus which are key to the debt discussions, Rice said. Europe continues to forecast a surplus excluding debt payments of 3.5% of GDP even after 2022, which the IMF believes is not sustainable and would impose undue hardship on the country. Athens could better use its budget to fuel growth and “Greece cannot grow while maintaining such a high surplus,” Rice said. “It does not help anyone to have assumptions that are overly optimistic.”

Detention centers for people fleeing western-induced misery and chaos breaks so many international laws that these laws are invalidated in one fell swoop.

• Unease On Greek Island of Chios Over New Migrant Detention Center (K.)

People living near the location of a new migrant detention center on the island of Chios say they will fight its construction. The facility will be used as a holding center for those who have had their asylum requests rejected and are due to be deported. A high-ranking police official, Nikolaos Zisimopoulos, informed authorities on Chios that construction of the new center would begin immediately, and containers carrying building materials arrived on the island Thursday. The municipal council called an emergency meeting last night to discuss the matter, as residents say their patience is reaching breaking point and that they will take action to fight the center’s construction.

Chios Mayor Manolis Vournous has asked for more time to allow the island’s residents to discuss the location of the new center. The Hellenic Police (ELAS), however, says there is no more time for any further discussion as the situation on the island’s existing camps is dire. ELAS also notes that a shift in the main flow of migrants toward Chios and away from Lesvos is adding fuel to the fire. Authorities say this shift can be attributed to the migrants knowing Chios does not have a closed facility like Lesvos does. So far this month more than half of all refugee and migrant arrivals in Greece have come to Chios.

Debt Rattle May 24 2017

May 242017

May 24, 2017 Posted by Raúl Ilargi Meijer at 9:32 am Finance Tagged with: austerity, China, dieselgate, downgrade, eurozone, fossils, Greece, IMF, Moody’s, QE, refugees 6 Responses »

Henri Matisse Nu Blue IV 1952

• China Hit by First Moody’s Downgrade Since 1989 on Debt Risk (BBG)

• Chinese Banks Are In Big Trouble (ZH)

• American Exceptionalism – Population Growth vs Money Growth (Econimica)

• Shiller: Stay In The Market, It ‘Could Go Up 50% From Here’ (CNBC)

• German Police Search Daimler Facilities In Dieselgate Probe (DW)

• Canada Must Deflate Its Housing Bubble (BBG Ed.)

• The Violence of Austerity (OD)

• IMF Wants More Realism In Eurozone Assumptions On Greece (R.)

• QE Remains A Long Shot For Greece (K.)

• In Germany, Syrian Man Wins Case Against Deportation To Greece (AP)

• Elder Refugees Seeking Asylum in Europe Left Stranded in Greece – HRW (GR)

• Tasmania Bans Super Trawlers From Its Waters (AAP)

• Fossils Cast Doubt On Human Lineage Originating In Africa (R.)

Moody’s worries are the local government financing vehicles and state-owned enterprises, which are umbilically linked to the shadow banks.

You can’t run an entire economy from and in the shadows.

• China Hit by First Moody’s Downgrade Since 1989 on Debt Risk (BBG)

Moody’s Investors Service cut its rating on China’s debt for the first time since 1989, challenging the view that the nation’s leadership will be able to rein in leverage while maintaining the pace of economic growth. Stocks and the yuan slipped in early trading after Moody’s reduced the rating to A1 from Aa3 on Wednesday, with markets paring losses in the afternoon. Moody’s cited the likelihood of a “material rise” in economy-wide debt and the burden that will place on the state’s finances, while also changing the outlook to stable from negative. It’s “absolutely groundless” for Moody’s to argue that local government financing vehicles and state-owned enterprise debt will swell the government’s contingent liabilities, according to a response released by the Ministry of Finance. The ratings company has underestimated the capability of the government to deepen reform and boost demand, the ministry said.

It wouldn’t be the first time a rating company was behind the curve, nor is such pushback unique – U.S. Treasury officials questioned the credibility of a 2011 downgrade from Standard & Poor’s. Still, the move underscores broader doubts over whether President Xi Jinping’s government can simultaneously cut excessive leverage and steady growth, all with a twice a decade reshuffle of top party posts looming later this year. “It is a psychological blow that China will not take kindly to and absolutely speaks to the rising financial pressures,” said Christopher Balding, an associate professor at the HSBC School of Business at Peking University in Shenzhen. That said, “it doesn’t matter much in the grand scheme of things because so much of Chinese debt is held by state or quasi-state actors and minimal amounts are international investors.”

Total outstanding credit climbed to about 260% of GDP by the end of 2016, up from 160% in 2008. At the same time, China’s external debt is low by international standards, at around 12% of gross domestic product, according to the IMF, meaning that a downgrade isn’t likely to be as disruptive as it would be for nations more reliant on international funding. Overseas institutions’ holdings of onshore bonds dropped to 830 billion yuan ($121 billion) as of the end of March, from 853 billion yuan three months earlier, People’s Bank of China data show. That’s less than 1.5% of 63.7 trillion yuan of outstanding notes. Moody’s last cut China’s sovereign rating in 1989, when it downgraded the sovereign to Baa2 from Baa1, according to spokesperson, Manvela Yeung. Moody’s lowered China’s credit-rating outlook to negative from stable in March 2016, citing rising debt, falling currency reserves and uncertainty over authorities’ ability to carry out reforms.

Starting to be painful. At some point, Beijing total control will come up empty.

• Chinese Banks Are In Big Trouble (ZH)

That’s not supposed to happen… With the crackdown on financial system leverage underway, Chinese banks (and securities firms) are in big trouble. As we noted previously, China’s bond curve is inverted, yields are surging, and Chinese regulatory decisions shutting down various shadow-banking pipelines has crushed securities firms’ stocks. However, as Bloomberg points out, as China’s deleveraging efforts cut into banks’ profit margins, rising base funding costs and interbank credit risk concerns have pushed banks’ cost of borrowing beyond the rate they charge customers for loans for the first time in history. As the chart shows, the one-year Shanghai Interbank Offered Rate has exceeded the Loan Prime Rate, the first time this has happened since the latter was introduced in 2013. “This is probably just the beginning” and interbank funding costs will rise further amid the drive to reduce leverage, said Xu Hanfei at China Merchants Securities in Shanghai.

Wonderful from Chris Hamilton.

• American Exceptionalism – Population Growth vs Money Growth (Econimica)

Since 1971, and the disconnection of the dollar from a finite gold backing, the value of money (the dollar) has been determined by it’s purchasing power versus the inflation of the assets to be purchased. Thus printing more money has not necessarily created “wealth” if the assets to be purchased are rising as fast or faster than the purchasing power of the “money”. The Fed touts it’s dual mandate of full employment and stable prices…but the result in prices; not so stable. The primary global asset purchasable only in US dollars, crude oil, has told a story of wildly gyrating prices. Since the end of Bretton Woods and the subsequent Congressionally dual mandated roles bestowed on the Fed…crude oil prices have gone bezerk, twice climbing nearly 10x’s within a decade. This is the opposite of stable (particularly compared to the price stability from WWII’s end until the Fed took over).

Soooo, theoretically the growth of “money” should be linked to the growth of the population, to ensure an adequate and stable money supply exists for the growing population. In a moment I’ll show you anything but a stable money supply. But first, the chart below shows the total 25-54yr/old US population, those employed among them, and the value in dollars of all publicly traded US stocks (represented by the Wilshire 5000). Something far beyond population growth or employment growth is pushing up the value of dollar based assets, gauging by US stock markets accelerating appreciation.

With that in mind, the chart below shows the growth of M3 money (the broadest measure of US “money”) and the broader 15-64yr/old US population since 1971. The money supply has grown in excess of 20x’s (2,000%) vs. the working age population (15-64yr/olds) which has grown less than 1x (nearly 70% increase).

This results in a rising ratio of “money” on a per capita of the core population basis, as the chart below details. The total amount of “money” rose from approximately $5 thousand dollars per working age adult to todays $65 thousand dollars per adult…an increase of 13x’s (1.300%).

The annual growth of the 15-64yr/old core US population peaked in 2003 and annual core population growth has decelerated by 90% since…while annual M3 growth has doubled over the same time period. [..] The chart below from 2000 into 2017 shows the change in both core population and M3 money supply, showing the year over year change on a monthly basis…and the current fall in core population growth will continue downward, likely turning negative at times over the next year (yet another first for America).

The final chart is the growth in M3 money supply per the growth in the adult, working age population. I’m not an economist or expert on much of anything…but that doesn’t look particularly good to me (something to do with “hyper-monetization” or some such thing). All I can say is the appearance of hockey sticks typically aren’t a good or stable sign but their appearance, just like those of black swans, has become the “new normal”.

It could also fall by 50%.

• Shiller: Stay In The Market, It ‘Could Go Up 50% From Here’ (CNBC)

Nobel Prize-winning economist Robert Shiller believes investors should continue to own stocks because the bull market may continue for years. CNBC’s Mike Santoli spoke with Shiller in an exclusive interview for CNBC PRO. Santoli asked Shiller about his market outlook. “I would say have some stocks in your portfolio. It could go up 50% from here. That’s what it did around 2000, after it reached this level, it went up another 50%. So I’m not against investing in the stock market when you consider the alternatives. But I think if one wants to diversify, US is high in its CAPE ratio. You can go practically anywhere else in the world and it’s lower,” Shiller said. “We could even set a new another record high in CAPE, that’s not a forecast.”

Shiller developed the “cyclically adjusted price-to-earnings ratio” (CAPE) market valuation measure, which is calculated using price divided by the index’s average historical 10-year earnings, adjusted for inflation. The economist’s research found future 10-year stock market returns were negatively correlated to high CAPE ratio readings on a relative basis. However, even though the current CAPE ratio is at 29, which is above the 17 historical average, the economist is not calling for a market decline. “I can see it as a real possibility that stocks prices and house prices would both keep going up for years, but I’m not forecasting that by any means,” he added.

Dragging on.

• German Police Search Daimler Facilities In Dieselgate Probe (DW)

German authorities have raided several locations associated with German premium carmaker Daimler. They acted on an initial suspicion of fraud involving misleading information about emission levels. Prosecutors in the southern German city of Stuttgart confirmed Tuesday they had searched about a dozen locations associated with the maker of Mercedes-Benz cars. The raids came as a result of the company being suspected of fraud and misleading advertising in relation to the selling of diesel-powered vehicles. Prosecutors have yet to provide further details on the raids. They only said the raids were carried out by well over 200 investigators across the country, with the focus of the search in progress on locations in the states of Baden-Württemberg, Lower Saxony, Saxony and the the city state of Berlin.

The carmaker said the investigations targeted “known and unknown employees of Daimler over suspicion of fraud related to the possible manipulation of exhaust gas emissions in passenger cars with diesel engines.” Daimler executives said they were not aware of any emissions scandal, adding that they were fully co-operating with investigators. The automaker had earlier agreed with Germany’s Federal Motor Transport Authority to “voluntarily” recall 247,000 vehicles to remove “potentially problematic technology,” which Daimler said had been installed to prevent engines from being damaged. Daimler has also been in the crosshairs of prosecutors in the US where it faces a number of class-action suits by car owners who have accused the company of not being accurate in stating emissions levels for a number of its diesel-powered models.

You don’t say.

• Canada Must Deflate Its Housing Bubble (BBG Ed.)

Canada’s housing market offers a case study in a contentious economic issue: If a central bank sees a bubble forming, should it act to deflate it? In this instance, the answer should be a resounding yes. A combination of foreign money, local speculation and abundant credit has driven Canadian house prices to levels that even government officials recognize cannot be sustained. In the Toronto area, for example, they were up 32% from a year earlier in April. David Rosenberg, an economist at Canadian investment firm Gluskin Sheff, notes that it would take a decline of more than 40% to restore the historical relationship between prices and household income. Granted, the bubble bears little resemblance to the U.S. subprime boom that triggered the global financial crisis.

Although one specialized lender, Home Capital, has had issues with fraudulent mortgage applications, regulation has largely kept out high-risk products. Homeowners haven’t been withdrawing a lot of equity, and can’t legally walk away from their debts like many Americans can. Banks aren’t sitting on the kinds of structured products that destroyed balance sheets in the U.S. Nearly all mortgage securities and a large portion of loans are guaranteed by the government. That said, the situation presents clear risks. As buyers stretch to afford homes, household debt has risen to 167% of disposable income – the highest among the Group of Seven industrialized nations. This is a serious vulnerability, and a big part of the rationale behind Canadian banks’ recent ratings downgrade. The more indebted people are, the more sensitive their spending becomes to changes in prices and interest rates, potentially allowing an otherwise small shock to result in a deep recession.

What to do? Administrative efforts to curb lending and tax foreign buyers have helped but haven’t solved the problem. That’s largely because extremely low interest rates are still giving people a big incentive to borrow. The Bank of Canada has held its target rate at 1% or lower since 2009, and at 0.5% since 2015, when it eased to counteract the effect of falling oil prices. That’s a very stimulative stance in a country where the neutral rate is estimated to be about 3% or higher. One can’t help but see a parallel with the low U.S. rates and the housing bubble of the early 2000s.

The Violence of Austerity, edited by Vickie Cooper and David Whyte, is published by Pluto Press.

• The Violence of Austerity (OD)

As we move towards the general election, we are paralyzed by what is probably the biggest single issue affecting ordinary people in the country: austerity. We are unable to fully understand both the economic madness of austerity and the true scale of the human cost and death toll that ‘fiscal discipline’ has unleashed. Since coming into power as Prime Minister, Theresa May has made a strategic decision not to use the word ‘austerity’. Instead she has adopted a more palatable language in a vain attempt to distance herself from the Cameron governments before her: “you call it austerity; I call it living within our means.” The experience of countless thousands of people is precisely the opposite: people are actively prevented from living within their means and are cut off from their most basic entitlement to: housing, food, health care, social care and general protection from hardship.

And people are dying as a result of these austerity effects. In February, Jeremy Corbyn made precisely this point when he observed the conclusions of one report that 30,000 people were dying unnecessarily every year because of the cuts to NHS and to local authority social care budgets. But this is really only the tip of the iceberg. The scale of disruption felt by people at the sharp end of these benefit reforms is enormous. Countless thousands of others have died prematurely following work capability assessments: approximately 10,000 according the government’s own figures. People are dying as a result of benefit sanction which has fatal impacts on existing health conditions, such as diabetes and heart disease. Austerity is about dismantling social protection. The crisis we face in social care is precipitated by cuts to local authority funding.

In the first 5 years of austerity, local authority budgets were cut by 40%, amounting to an estimated £18bn in care provision. A decade of cuts, when added up, also means that some key agencies that protect us, such as the Health and Safety Executive and the Environment Agency will have been decimated by up to 60% of funding cuts. Scaling back on an already paltry funding in these critical areas of regulation will lead to a rise in pollution related illness and disease and will fail to ensure people are safe at work. The economic folly is that austerity will cost society more in the long term. Local authorities are, for example, housing people in very expensive temporary accommodation because the government has disinvested in social housing.

The crisis in homelessness has paradoxically led to a £400 million rise in benefit payments. The future costs of disinvesting in young people will be seismic. Ending austerity would mean restoring our system of social protection and restoring the spending power of local authorities. It would mean, as all the political parties except the Conservatives recognise, taxing the rich, not punishing the poor in order to pay for a problem that has its roots in a global financial system that enriched the elite. It would also mean recognizing that the best way to prevent the worsening violence of austerity and to rebuild the economy is to re-invest in public sector jobs.

The Greek government is being played for fools. Given how long this has been going on, one might suggest they are.

• IMF Wants More Realism In Eurozone Assumptions On Greece (R.)

The IMF needs to see more realistic euro zone assumptions about Greece’s economy and more detail on planned debt relief measures to join a bailout, IMF’s European Department head Poul Thomsen said. Thomsen said the IMF and Greece’s euro zone lenders made progress in talks on Monday, but were not yet quite there. “We still think there is a need for more realism in assumptions and more specificity,” Thomsen said on Tuesday. The euro zone and the IMF agreed on Monday that Greece would have to keep a primary surplus – the budget balance before debt servicing – at 3.5% of GDP for five years after the bailout ends in 2018. But officials said the size of the surplus afterwards was still under discussion and there were also differences on economic growth assumptions, especially that forecasts used for debt relief plans spanned dozens of years. A group of euro zone countries led by Germany wants the IMF to join the Greek bailout, now handled by euro zone governments alone, to increase credibility. The IMF says that it will only join if Greece is granted debt relief.

Greece will be declared eligible for inclusion in the ECB’s QE only AFTER the central bank says it will taper QE.

• QE Remains A Long Shot For Greece (K.)

Greece is nowhere near a swift inclusion in the ECB’s QE program, according to senior officials at domestic banks. They argue that the issue of the national debt, and securing its sustainability in a way that would satisfy the IMF too, constitutes a particularly complex problem that may well be too hard to resolve by next month’s Eurogroup. They therefore consider Greece’s entry into the ECB’s bond-buying program this summer unlikely – instead expecting it to happen after the German election in the fall, either by the end of 2017 or in early 2018. Some go as far as expressing concern as to whether Greece will make it in at all before the program ends.

While there are more and more voices within the ECB speaking in favor of concluding the program earlier, Greece would like enjoy its benefits for more than two years. Greek banks are hoping a formula will be found at the next Eurogroup, on June 15, that will allow the disbursement of the next bailout tranche while putting off any decisions on the debt. The most optimistic observers note there is a chance of Greece entering QE between July and September and next month’s Eurogroup will be crucial to this end. The ECB argues that Greece’s inclusion in the bond-buying program requires the safeguarding of the debt’s sustainability.

In this context political statements or a mere reference to a series of measures will not suffice, as they will have to constitute legally binding pledges, which is highly unlikely before the German election. Goldman Sachs stated in an analysis that this country is not likely to fulfill the terms the ECB has set to join QE before the reduction of the monthly rate of bond purchases is activated. It also highlighted the high rate of bad loans as a point of concern that might also delay the decision for Greece to enjoy the benefits of QE. Similarly, Citi estimates that without an agreement on the easing of the debt, both inclusion in QE and a return to the bond markets would be quite difficult for Greece.

In one and the same Union, laws and rights are widely divergent. That is not a union.

• In Germany, Syrian Man Wins Case Against Deportation To Greece (AP)

Germany’s highest court has upheld a complaint by a Syrian whose asylum claim was rejected because he’d already been granted asylum in Greece. The man, whose name wasn’t released, arrived in Germany in 2015. He told officials he had already been granted protection in Greece but had been living on the street there and received no support from the Greek government. The man’s claim in Germany was rejected, meaning that he risked deportation to Greece. Germany’s Federal Constitutional Court said Tuesday that a lower court had wrongly failed to take account of a lack of welfare payments for refugees in Greece and to check whether there were assurances that the man would be given at least temporary housing. Judges sent the case back to the lower court to reconsider.

Who cares about human rights declarations when elections are coming up?

• Elder Refugees Seeking Asylum in Europe Left Stranded in Greece – HRW (GR)

There are many unnecessary delays and arbitrary barriers which keep older refugees and asylum seekers stranded in Greece, unable to reunite with family members who have legal status in the EU, Human Rights Watch said on Monday. According to their publication on Monday, EU: Older Refugees Stranded in Greece, one of the main issues that older refugees face is that family reunification does not focus on reuniting an entire family, but spouses and parents with minor children who are under the age of 18. Hundreds of older refugees and asylum seekers currently in Greece who have fled war zones and persecution are waiting to learn if they will be allowed to reunite with adult family members who have been granted residency in another EU country. Although EU law provides for family reunification for older people, lack of clarity or explicit provisions governing the process means that they can remain in limbo, far from their family for prolonged periods of time.

“These older people, already victims of conflict and persecution, hoped to find protection in the EU after treacherous journeys to Greece, and to be reunited with their family,” said Bethany Brown, researcher on older people’s rights at Human Rights Watch. “Now they don’t know if they will ever see their relatives again.” While several barriers are common to all asylum seekers, they can have a more significant impact on older people. Older people have been shown, in some contexts, to have significantly higher rates of psychological distress than the general refugee population, and often suffer from health issues, injuries and violence during displacement, and frailty that can be exacerbated by time and uncertainty.

A little piece of news. But a good one.

• Tasmania Bans Super Trawlers From Its Waters (AAP)

Tasmania’s parliament has passed laws banning super trawler fishing vessels from operating in the state’s waters. Legislation was given a green light on Wednesday, with Liberal government MP Mark Shelton confirming that any future attempts to allow freezer trawler vessels would require an act of parliament. “Our bill should give recreational fishers additional comfort that any future attempt to let super trawlers into the small pelagic fishery will be met with parliamentary hurdles,” he said.

Graecopithecus freybergi.

• Fossils Cast Doubt On Human Lineage Originating In Africa (R.)

Fossils from Greece and Bulgaria of an ape-like creature that lived 7.2 million years ago may fundamentally alter the understanding of human origins, casting doubt on the view that the evolutionary lineage that led to people arose in Africa. Scientists said on Monday the creature, known as Graecopithecus freybergi and known only from a lower jawbone and an isolated tooth, may be the oldest-known member of the human lineage that began after an evolutionary split from the line that led to chimpanzees, our closest cousins. The jawbone, which included teeth, was unearthed in 1944 in Athens. The premolar was found in south-central Bulgaria in 2009.

The researchers examined them using sophisticated new techniques including CT scans and established their age by dating the sedimentary rock in which they were found. They found dental root development that possessed telltale human characteristics not seen in chimps and their ancestors, placing Graecopithecus within the human lineage, known as hominins. Until now, the oldest-known hominin was Sahelanthropus, which lived 6-7 million years ago in Chad. The scientific consensus long has been that hominins originated in Africa. Considering the Graecopithecus fossils hail from the Balkans, the eastern Mediterranean may have given rise to the human lineage, the researchers said.

The findings in no way call into question that our species, Homo sapiens, first appeared in Africa about 200,000 years ago and later migrated to other parts of the world, the researchers said. “Our species evolved in Africa. Our lineage may not have,” said paleoanthropologist Madelaine Böhme of Germany’s University of Tübingen, adding that the findings “may change radically our understanding of early human/hominin origin.” Homo sapiens is only the latest in a long evolutionary hominin line that began with overwhelmingly ape-like species, followed by a succession of species acquiring more and more human traits over time.