Apr 042016
 
 April 4, 2016  Posted by at 9:26 am Finance Tagged with: , , , , , , , ,  


Harris&Ewing Kron Prinz Wilhelm, German ship, interned in US in tow 1916

Panama Papers “100 Times Bigger Than Wikileaks” (Fusion)
Corporate Media Gatekeepers Protect Western 1% From Panama Leak (Murray)
‘Panama Papers’ Leak Spells Danger For Tax Havens, World Leaders (CNBC)
Iceland PM Faces No Confidence Vote After Panama Papers Disclosure (BBG)
Panama Papers Reveal Ukraine President Poroshenko’s Voter Betrayal (OCCRP)
In Brexit Warm Up, Dutch To Vote on EU Treaty With Ukraine (Reuters)
Trump’s Prediction Of ‘Massive Recession’ Puzzles Economists (Reuters)
BOJ Negative Rates Destroy Interbank Loan Market as Freeze Deepens (BBG)
An Inconvenient Truth About Free Trade (BBG)
Britain’s Free Market Economy Isn’t Working (G.)
UK Housing Policy ‘Tantamount To Social Cleansing’ (Ind.)
There Has To Be A Better Way (Steve Keen)
Rescuing Europe’s Worst Government Bonds May Take More Than ECB (BBG)
Greece’s Euro Future May Be Back in Play as Rescue Talks Drag On (BBG)
Italy, Not UK is European Union’s Weakest Link (Reuters)
IMF Chief Says Greece Plan ‘Good Distance Away’ (AFP)
Sordid Wrangling Between IMF and EU Shows Greek Democracy Is Dead (E.)
EU Begins Refugee Push-Back, Defying Human Rights Outcry (WaPo)

The Panama Papers are a huge issue, with many names being named and more suggested. We’re more or less promised revelations about US angles soon, which are absent. But what does the Guardian open with today? A photo of Vladimir Putin, who’s NOT in the papers, but is linked to a violinist he knows, who is. Poroshenko is named, the Iceland PM is, the Saudi king, Cameron’s dad, Xi Jinping, and many others. But the Guardian opens with Putin. There goes the last bit of credibility. Western media propaganda has gone beyond shameless.

Panama Papers “100 Times Bigger Than Wikileaks” (Fusion)

One April morning in 2014, Jurgen Mossack, the tall, German-born co-founder of the prominent Panama City law firm Mossack Fonseca, shot off an agitated email with the subject line “Serious Matter URGENT” to three top members of his staff. There was trouble brewing in the British Virgin Islands, a “secrecy jurisdiction” whose white-sand beaches and blue Caribbean waters conceal a barely-regulated haven for people who wish to create shell corporations. Many of those people employ Mossack Fonseca to perform precisely this service. “Swindled investors call the office constantly. We need to resign from this company immediately,” Mossack wrote. “At any moment, the police arrive, and we end up in the newspapers.”

As a “registered agent,” Mossack Fonseca provides the paperwork, signatures, and mailing addresses that breathe life into shell companies established in tax havens around the world – holding companies that often create nothing and sell nothing, but shelter assets with maximum concealment and a minimum of fuss. Jurgen wanted to pull the plug on representing one such firm that was raising red flags. For weeks, investors in an entity called Swiss Group Corporation had been contacting Mossack Fonseca, wondering why their annuity payments had suddenly stopped, why they had received only vague emails, whether they had been a victim of a fraud. “Swiss Group Corp. has shown no transparency in their processes,” one woman wrote from Colombia on March 31, 2014, “and now, I am worried about the investment I made 5 years ago, which is my only means of living.”

Mossack instructed his underlings to “Please do what you have to do,” – and then, he added: “Use the telephone!” Weeks after Jurgen issued his stern orders, queries continued to pour in from investors – including one woman who identified herself as a U.S. citizen, and others from Colombia and Bolivia. They were still groping in the dark, searching for shreds of information in the same black hole of offshore finance that routinely stumps tax authorities, law enforcement officials, and asset-tracers across the globe. By one estimate – based on data from the World Bank, IMF, UN, and central banks of 139 countries – between $21 and $32 trillion is hiding in tax havens, more than the United States’ national debt. That study didn’t even attempt to count money from fraud, drug trafficking and other criminal transactions whose perpetrators gravitate toward the same secret hideouts.

Mossack and his business partner Ramon Fonseca, a powerful political leader and best-selling author in Panama, are captains in an offshore industry that has had a major impact on the world’s finances since the 1970s. As their business has grown to encompass more than 500 employees and collaborators, they’ve expanded into jurisdictions around the world – including parts of the United States. But a new trove of secret information is shining unprecedented light on this dark corner of the global economy. Fusion analyzed an archive containing 11.5 million internal documents from Mossack Fonseca’s files, including corporate records, financial filings, emails, and more, extending from the firm’s inception in 1977 to December 2015.

The documents were obtained by the German newspaper Süddeutsche Zeitung and shared with Fusion and over 100 other media outlets by the International Consortium of Investigative Journalists (ICIJ) as part of the Panama Papers investigation. The massive leak is estimated to be 100 times bigger than Wikileaks. It’s believed to be the largest global investigation in history.

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The world’s biggest ‘offshore industry’ is in the US these days. Delaware. Nevada. South Dakota.

Corporate Media Gatekeepers Protect Western 1% From Panama Leak (Murray)

Whoever leaked the Mossack Fonseca papers appears motivated by a genuine desire to expose the system that enables the ultra wealthy to hide their massive stashes, often corruptly obtained and all involved in tax avoidance. These Panamanian lawyers hide the wealth of a significant proportion of the 1%, and the massive leak of their documents ought to be a wonderful thing. Unfortunately the leaker has made the dreadful mistake of turning to the western corporate media to publicise the results. In consequence the first major story, published today by the Guardian, is all about Vladimir Putin and a cellist on the fiddle. As it happens I believe the story and have no doubt Putin is bent. But why focus on Russia? Russian wealth is only a tiny minority of the money hidden away with the aid of Mossack Fonseca.

In fact, it soon becomes obvious that the selective reporting is going to stink. The Suddeutsche Zeitung, which received the leak, gives a detailed explanation of the methodology the corporate media used to search the files. The main search they have done is for names associated with breaking UN sanctions regimes. The Guardian reports this too and helpfully lists those countries as Zimbabwe, North Korea, Russia and Syria. The filtering of this Mossack Fonseca information by the corporate media follows a direct western governmental agenda. There is no mention at all of use of Mossack Fonseca by massive western corporations or western billionaires – the main customers. And the Guardian is quick to reassure that “much of the leaked material will remain private.”

What do you expect? The leak is being managed by the grandly but laughably named “International Consortium of Investigative Journalists”, which is funded and organised entirely by the USA’s Center for Public Integrity. Their funders include Ford Foundation, Carnegie Endowment, Rockefeller Family Fund, W K Kellogg Foundation, Open Society Foundation (Soros) among many others. Do not expect a genuine expose of western capitalism. The dirty secrets of western corporations will remain unpublished. Expect hits at Russia, Iran and Syria and some tiny “balancing” western country like Iceland. A superannuated UK peer or two will be sacrificed – someone already with dementia. The corporate media – the Guardian and BBC in the UK – have exclusive access to the database which you and I cannot see.

They are protecting themselves from even seeing western corporations’ sensitive information by only looking at those documents which are brought up by specific searches such as UN sanctions busters. Never forget the Guardian smashed its copies of the Snowden files on the instruction of MI6. What if they did Mossack Fonseca database searches on the owners of all the corporate media and their companies, and all the editors and senior corporate media journalists? What if they did Mossack Fonseca searches on all the most senior people at the BBC?

What if they did Mossack Fonseca searches on every donor to the Center for Public Integrity and their companies? What if they did Mossack Fonseca searches on every listed company in the western stock exchanges, and on every western millionaire they could trace? That would be much more interesting. I know Russia and China are corrupt, you don’t have to tell me that. What if you look at things that we might, here in the west, be able to rise up and do something about? And what if you corporate lapdogs let the people see the actual data?

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Hmmm.. We wonder how deep the impact will be..

‘Panama Papers’ Leak Spells Danger For Tax Havens, World Leaders (CNBC)

A huge leak of documents that implicate government heads in the setting up of “shell” companies to harbor billions of dollars is set to cause upheaval on offshore hubs and shake up global political governance. A team of journalists from around the world published what they called the “Panama Papers” on Sunday—more than 11.5 million encrypted internal documents from Mossack Fonseca, a Panamanian law firm. An anonymous source began supplying the documents— dated from the 1970s to 2016—to German newspaper Süddeutsche Zeitung (SZ) a year ago. SZ assembled a group of media organizations, including the International Consortium of Investigative Journalists (ICIJ), The Guardian, the BBC and Le Monde, to analyze the data, before simultaneously releasing their findings.

Calling the leak “the biggest that journalists had ever worked with,” SZ said the documents revealed numerous shadowy financial transactions via offshore companies created by Mossack Fonseca. The law firm, who has more than 40 offices worldwide, specialized in the sale of anonymous offshore companies, known as shell firms. According to SZ’s findings, 12 current and former heads of state, 200 other politicians, as well as members of various Mafia organizations, plus football stars, 350 major banks, and hundreds of thousands of regular citizens were among Mossack Fonseca’s clients. It is important to note that owning an offshore company is not illegal in itself, but SZ alleged that concealing the identities of the true company owners was the law firm’s primary aim in the bulk of cases.

While people often legitimately move funds to countries outside their national boundaries to access more relaxed financial regulations, offshore companies are also commonly associated with tax evasion as well as serious illicit activities such as money laundering. Argentine President Mauricio Macri, Iceland’s Prime Minister Sigmundur David Gunnlaugsson, Saudi Arabia’s King Salman, U.A.E President Sheikh Khalifa and Ukrainian President Petro Poroshenko are among those named in the documents as having set up shell companies, according to SZ. Relatives and associates of other leaders, including Russia’s Vladimir Putin, China’s Xi Jinping, Syria’s Bashar Assad and Britain’s David Cameron, were also identified by the team of reporters that examined the documents. Other prominent Asian officials named in the reports included Anuraj Kerjiwal, the former head of Indian political party Lok Sattam, as well as Cambodia’s Minister of Justice.

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Okay, this doofus is gone. What a dork.

Iceland PM Faces No Confidence Vote After Panama Papers Disclosure (BBG)

Icelandic Prime Minister Sigmundur D. Gunnlaugsson faces a no confidence vote in parliament amid revelations he and his wife had an investment account in the British Virgin Islands created with the aid of the Panama-based law firm at the center of a global tax evasion leak. The opposition has called for a vote against the government as parliament begins its session at 3 p.m. local time. Protests are scheduled in Reykjavik starting two hours later. Gunnlaugsson, who took office in 2013, finds himself in the middle of a political storm after it was revealed in a leak uncovered by the International Consortium of Investigative Journalists, or ICIJ, that he and his wife had an offshore account to manage an inheritance. His wife, Anna Sigurlaug Palsdottir, previously revealed the account in a Facebook posting in March after the premier was questioned about the money.

According to the ICIJ report, Pálsdóttir says she has always paid all her taxes owed on the Wintris account, which was confirmed by her tax firm, KPMG. ICIJ cited a leak covering documents spanning leaders and businesses across the globe from 1977 to 2015 from Panama-based law firm Mossack Fonseca, a top creator of shell companies that has branches in Hong Kong, Miami, Zurich and more than 35 other places around the world. “As has been explained publicly, in establishing this company, the Prime Minister and his wife have adhered to Icelandic law, including declaring all assets, securities and income in Icelandic tax returns since 2008,” a Gunnlaugsson spokesman said in a statement to the ICIJ. The premier was one of 12 current and former world leaders to have offshore holdings revealed in the leak that has come to be called the Panama Papers. Offshore holdings can be legal, though documents show some banks, law firms failed to follow requirements to check their clients are not involved in crimes.

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“..the candy magnate was more concerned about his own welfare than his country’s – going so far as to arguably violate the law twice, misrepresent information and deprive his country of badly needed tax dollars during a time of war.”

Panama Papers Reveal Ukraine President Poroshenko’s Voter Betrayal (OCCRP)

When Ukrainian President Petro Poroshenko ran for the top office in 2014, he promised voters he would sell Roshen, Ukraine’s largest candy business, so he could devote his full attention to running the country. “If I get elected, I will wipe the slate clean and sell the Roshen concern. As President of Ukraine I plan and commit to focus exclusively on welfare of the nation,” Poroshenko told the German newspaper Bild less than two months before the election. Instead, actions by his financial advisers and Poroshenko himself, who is worth an estimated $858 million, make it appear that the candy magnate was more concerned about his own welfare than his country’s – going so far as to arguably violate the law twice, misrepresent information and deprive his country of badly needed tax dollars during a time of war.

Poroshenko did this by setting up an offshore holding company to move his business to the British Virgin Islands (BVI), a notorious offshore jurisdiction often used to hide ownership and evade taxes. His financial advisers say it was done through BVI to make Roshen more attractive to potential international buyers, but it also means Poroshenko may save millions of dollars in Ukrainian taxes. In one of several ironic twists in this story, the news about the president’s offshore comes as the Ukrainian government is actively fighting the use of offshores, which one organization says are costing Ukraine $11.6 billion a year in lost revenues.

Details about the Roshen deal can be found in the Panama Papers, documents obtained from a Panama-based offshore services provider called Mossack Fonseca. The documents were received by the German newspaper Süddeutsche Zeitung and shared by the International Consortium of Investigative Journalists (ICIJ) with the Organized Crime and Corruption Reporting Project (OCCRP). And in a more painful irony, the Panama Papers reveal that Poroshenko was apparently scrambling to protect his substantial financial assets in the BVI at a time when the conflict between Russia and Ukraine had reached its fiercest.

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Dutch anti-Putin propaganda is as strong as any, but people still don’t like supporting Ukraine’s corrupt system. As now represented by Poroshenko.

In Brexit Warm Up, Dutch To Vote on EU Treaty With Ukraine (Reuters)

Dutch voters will decide on Wednesday whether to support a European treaty deepening ties with Ukraine in a referendum that will test sentiment toward Brussels ahead of Britain’s June Brexit vote and could also bring a boost for Russia. The broad political, trade and defense treaty is already provisionally in place but has to be ratified by all 28 European Union member states for every part of it to have full legal force. The Netherlands is the only country that has not done so. While a “no” vote in the non-binding referendum would not force the Dutch government to veto the treaty on an EU level the fragile coalition, which holds the rotating EU presidency, might find it hard to ignore with less than a year to general elections.

[..] An EU decision to push on with the treaty despite a “no vote”, whether the government respects it or not, could be damaging for the EU and highlight EU problems ahead of the British vote. “If politicians ignore the Dutch no then it will be an even stronger signal than what the British have already received that there is no way to correct the European political class and that they should vote to leave,” said Thierry Baudet, a “no” campaigner and one of the architects of the referendum that was triggered when activists gathered thousands of signatures of support.

Many Dutch feel they are being asked to choose between two unattractive options: EU expansion plans dreamed up by unaccountable bureaucrats in Brussels or helping Russian Putin who they blame for the MH17 plane disaster which killed almost 200 Dutch citizens in July 2014. A poll by Maurice De Hond on Sunday forecast that 66% of people certain to vote, would back ‘No’ with only 25% in favor, with turnout likely to be decisive in shaping the final result. Pollsters TNS Nipo have forecast turnout of 32%, just above the 30% threshold that is needed for the referendum to be valid.

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The hastily gathered ‘expert’ comments are so lame Trump doesn’t even need to comment.

Trump’s Prediction Of ‘Massive Recession’ Puzzles Economists (Reuters)

Donald Trump’s prediction that the U.S. economy was on the verge of a “very massive recession” hit a wall of skepticism on Sunday from economists who questioned the Republican presidential front-runner’s calculations. In an interview with the Washington Post published on Saturday, the billionaire businessman said a combination of high unemployment and an overvalued stock market had set the stage for another economic slump. He put real unemployment above 20%. “We’re not heading for a recession, massive or minor, and the unemployment rate is not 20%,” said Harm Bandholz, chief U.S. economist at UniCredit Research in New York. The official unemployment rate has declined to 5% from a peak of 10% in October 2009, according to government statistics.

But a different, broader measure of unemployment that includes people who want to work but have given up searching and those working part-time because they cannot find full-time employment is at 9.8%. Coming off a difficult week of campaigning, in which he acknowledged he struggled to articulate his position on abortion among other missteps, Trump’s comments to the Post might be some of his most bearish on the economy and financial markets. “I think we’re sitting on an economic bubble. A financial bubble,” he said. Some economists agree the stock market is in a period of overvaluation but do not see that as foretelling a cataclysmic economic downturn originating in the United States.

“Nobody can predict what the stock market is going to do,” said Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University. “I cannot predict a stock market crash, so I cannot predict a recession. I don’t see any of the reasons for a recession going forward unless there is a huge problem with the market or there is some catastrophic world event which is beyond the scope of economics.” Sung Won Sohn, an economics professor at California State University Channel Islands in Camarillo, put the probability of an imminent recession at less than 10%. “If it happens, it would be because of what is happening overseas, especially in China and Europe,” he said.

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Negative rates are perverse.

BOJ Negative Rates Destroy Interbank Loan Market as Freeze Deepens (BBG)

The freeze in Tokyo’s market for overnight loans looks set to extend into a third month as the Bank of Japan’s negative rate policy makes it harder for brokers to price and process transactions. Two months after the BOJ said it would start charging interest on some lenders’ reserves, the outstanding balance in the interbank call market tumbled to a record low 2.97 trillion yen ($27 billion) on March 31, according to Tanshi Kyokai data going back to 1988. While the brokers association and the Japan Securities Depository Center said two weeks ago they had upgraded systems to settle transactions at sub-zero yields, traders say more than technical issues are preventing a revival.

“Among central banks, the BOJ is the one that destroys functioning markets the most,” said Izuru Kato, the president of Totan Research in Tokyo. “Companies will slash staff and scale back operations where activity is grinding to a halt, exposing markets to spikes in rates when the time comes for normalization.” The disruption to Japan’s ground zero for bank funding coincides with a collapse in bond-market trading over the past year, even as the BOJ’s hoarding of notes has left it nowhere near achieving its 2% inflation target three years after Haruhiko Kuroda became governor. When questioned by a lawmaker in parliament last month, Kuroda agreed that it would be theoretically possible to lower rates to minus 0.5%, from the current minus 0.1%.

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It’s high time to have this talk.

An Inconvenient Truth About Free Trade (BBG)

It’s easy to scoff at the anti-free-trade rhetoric emanating from the U.S. presidential campaign trail. Donald Trump keeps yelling about China, Mexico, and Japan. Bernie Sanders won’t stop shouting about greedy multinational corporations. Hillary Clinton, Ted Cruz, and John Kasich are awkwardly leaning in the same direction. If you’re a typical pro-trade business executive, you’re tempted to ask: Were these people throwing Frisbees on the quad during Econ 101? A recent article in the National Review expressed disdain by blaming a swath of America for its own problems, attributing Trump’s success to a “white American underclass” that’s “in thrall to a vicious, selfish culture whose main products are misery and used heroin needles.” Wait. Trump and Sanders may be clumsy and overly dramatic, and their solutions may be misbegotten, but they’re on to something real.

New research confirms what a lot of ordinary people have been saying all along, which is that free trade, while good overall, harms workers who are exposed to low-wage competition from abroad. Ignoring this damage—or pretending that it’s being cured through “redistribution” of gains—undermines the credibility of free traders and makes it harder to win trade liberalization deals. “Economists, for whatever odd reason, tend to close ranks when they talk about trade in public” for fear of giving ammunition to protectionists, says Dani Rodrik, an economist at Harvard’s Kennedy School of Government. “There’s a sense that it will feed the barbarians.” The theory of comparative advantage that’s taught to college freshmen is impossibly clean: It’s all about specialization. England trades its cloth for Portugal’s wine.

Even if Portugal is slightly better at producing cloth than England is, it should focus on what it’s best at, winemaking. Portuguese who lose their jobs making cloth will readily find new ones making wine. Efficiency improves. Everyone wins. Life is more complicated. For example: In times of slack global demand, countries grab more than their fair share of the available work by boosting exports and limiting imports. Perpetual trade deficits leave one country deep in hock to another, threatening its sovereignty. Financial bubbles form when deficit countries are overwhelmed by hot money inflows. Countries restrict trade for strategic reasons, such as to nurture an infant industry, to punish a rival, or to guarantee a domestic source for sensitive military hardware and software.

Nation-states may not appear in intro econ, but they call the shots in the real world. Even setting aside geopolitics, trade creates losers as well as winners. Back in 1941, economists Wolfgang Stolper and Paul Samuelson pointed out that unskilled workers in a high-wage country would suffer losses if that country opened up to imports from a low-wage nation. (The prestigious American Economic Review rejected the paper, calling it a complete sell-out to protectionists.) American support for free trade was strong for most of the 20th century. The Stolper-Samuelson theorem was of mainly theoretical interest because most U.S. trade was with other developed nations. Besides, economic textbooks assured students that losers from trade could be compensated with a portion of society’s gains.

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“At the end of the 1990s, imports accounted for 40% of UK demand for basic metals; import penetration is now at 90%.”

Britain’s Free Market Economy Isn’t Working (G.)

Last week should have been a good one for George Osborne. The first day of April marked the day when the ”national living wage” came into force. The idea was championed by the chancellor in his 2015 summer budget when he said it was time to “give Britain a pay rise”. Unfortunately for the chancellor, the 50p an hour increase in the pay floor for workers over 25 was completely overshadowed by the existential threat to the steel industry posed by Tata’s decision to sell its UK plants. Instead of being acclaimed by a grateful nation, Osborne found his handling of the economy under fire. The fact that official figures showed that Britain has the highest current account deficit since modern records began in 1948 did not help. At one level, all seems well with the economy. Growth was revised up for the fourth quarter of 2015 to 0.6% and is running at an annual rate of just over 2% – close to its long-term average and higher than in Germany, France or Italy.

Two of three key sectors of the economy are struggling, though. Industrial production and construction have yet to recover the ground lost in the recession of 2008-09, leaving the economy dependent on services, which accounts for three-quarters of national output. Digging beneath the surface glitter shows just how unbalanced and unsustainable the economy has become. Growth is far too biased towards consumer spending. Borrowing is going up and imports are being sucked in. An enormous current account deficit and a collapse in the household saving ratio are usually consistent with the economy in the last stages of a wild boom rather than one trundling along at 2%. A little extra digging provides the explanation, with some alarming structural flaws quickly emerging.

Here are two pieces of evidence. The first, relevant to the debate about the future of the steel industry, comes from an investigation by the left of centre thinktank, the IPPR, into the state of Britain’s foundation industries. Foundation industries supply the basic goods – such as metal and chemicals – used by other industries. They have been having a tough time of it across the developed world, but the decline has been especially pronounced in the UK. Since 2000, the share of GDP accounted for by foundation industries has fallen by 21% across the rich nations that belong to the OECD but by 43% in Britain. At the end of the 1990s, imports accounted for 40% of UK demand for basic metals; import penetration is now at 90%. Clearly, this trend will become even more marked if the Tata steel plants close.

The second piece of evidence comes from a joint piece of research from the innovation foundation Nesta and the National Institute for Economic and Social Research being published on Monday. This found that productivity weaknesses are common across the sectors of the UK economy, but particularly marked among newly formed companies. Fledgling firms tend to be less efficient on average, but the report said that in the years since the recession performance had been unusually poor among startups. Since the economy emerged from recession, the growth of highly productive companies has been curbed and there has also been a slowdown in the number of under-performing businesses contracting in size. This helps explain why Britain has an 18% productivity gap with the other members of the G7 group of industrial nations.

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Now we’re talking.

UK Housing Policy ‘Tantamount To Social Cleansing’ (Ind.)

Charities and politicians are demanding urgent changes to housing policy across Britain and warning that thousands of homeless children’s lives may be at risk because they are disappearing from support services after being rehoused. The calls come after an investigation by The Independent uncovered cases of homeless children dying from neglect and abuse after families were moved out of their local authority boundaries. Other evidence in the report suggested that the transfer of homeless families to other parts of the country could have resulted in suicides and miscarriages.

Councils are shunting homeless families out of their local areas on an unprecedented scale to save money on accommodation, as the legacy of the housing crisis and the the Government’s cuts to welfare are felt, but they are frequently neglecting to share records with each other, meaning thousands of vulnerable women and children are completely off the radar of support services. Figures obtained exclusively by The Independent show that at least 64,704 homeless families were moved out by London boroughs between July 2011 and June 2015, with more recent data yet to be collated. The Independent’s research suggests at least one third of families are moved without information being shared with the receiving council, though it is not known how high that figure could potentially be.

Councils are legally obliged to send notification under Section 208 of the Housing Act 1996. Housing and children’s charities are now calling for an urgent review of the practice. Barnardo’s chief executive Javed Khan told The Independent: “Children’s lives can be put at risk if homeless families fall off the radar of authorities.” “[Councils must] share information more effectively to stop that happening”. Shelter’s chief executive Campbell Robb said that out-of-area moves are “far too common and can have a disastrous effect on health and wellbeing” but that one problem is the Government not giving councils “realistic budgets to find accommodation locally”.

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“We should follow the other Marx — Groucho — and apply the rule that no-one who actually wants the top job should get it.” As I’ve said many times, our ‘democratic’ structures self-select for the very last people you should want to hold the jobs.

There Has To Be A Better Way (Steve Keen)

One of the disadvantages of growing up is finding in your old age that people you never took seriously in your youth are now running your country. In my personal case, I’m speaking about Tony Abbott and Malcolm Turnbull – but if I’d gone to University at the same time and place as Kevin Rudd, I’m sure I’d be speaking about him too. I knew Abbott and Turnbull in their Sydney University days: they were both active student politicians, while I was one of the leaders of the student revolt against the economics curriculum there. Abbott and Turnbull both tried to play a role in this “political economy” dispute – and their approach then mirrors their styles today. One believed he knew the word of God, while the other believed he was God. Abbott tried to defeat what he described, in his peculiar nasal drawl, as “the Maarxists” behind the protests.

He went beyond speaking against us at meetings and voting against us on the Students Representative Council to, shall we say, robust attempts to stop us putting up posters in the dead of night. He failed. He lost the votes in public forums and on the SRC. The posters went up, and most of them stayed up – my favourite stayed for years, because we cleaned it into the tarnished copper cladding of the library stack. Turnbull tried to reach a negotiated settlement between the warring sides: a majority of the students and (a substantial segment of the staff) on one side, and the professors Hogan and Simkin and Vice-Chancellor Williams on the other. He failed too. At a meeting where I was one of two invited student speakers, the economics faculty voted, against the professors’ wishes, for an inquiry into the Department of Economics.

The inquiry recommended, against the Vice Chancellor’s wishes, that the department should be split in two. This occurred in 1975 with the formation of the Department of Political Economy, which still exists today. So Turnbull and Abbott were bit players in that drama, but of course their eyes were set on a bigger role: that of becoming prime minister of Australia, as they both have now done. We knew those ambitions back in the 1970s too, and we laughed. It turned out to be no laughing matter so far as their ambitions went, but for the country itself, their success — and that of Rudd before them, and frankly many others — was a crying shame. Their one qualification for the top job was the unshakable belief that they deserved it. That self-belief, and the drive that went with it, carried them all — Rudd included — to the top.

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This time it’s Portugal. Worse than Greece. Political distortions engendered by Draghi.

Rescuing Europe’s Worst Government Bonds May Take More Than ECB (BBG)

It’s gone from bad to the worst for investors in Portuguese bonds. While government debt in the euro region posted the biggest quarterly returns since the ECB started its quantitative easing program a year ago, holders of Portuguese securities were left nursing a loss. Political wrangling to form a government and then a shift in budget policy have been dragging down the market more than in Spain, which is still without an elected government, or even Greece, a byword for crisis. Portuguese bonds lost 1.3% in the three months through March 31, compared with an average gain of 3.3% in the euro area, according to Bloomberg World Bond Indexes. Greece managed to eek out a 0.4% return.

“The situation in Portuguese bonds has been compromised by the election result and the instability that came after,” said Gianluca Ziglio at Sunrise Brokers in London. “That creates uncertainty with potential impact on the rating.” While Portugal’s bonds have also benefited from the ECB’s expansion of its asset-purchase program by €20 billion a month starting April, they have had a torrid year as investors avoided what they consider the riskiest assets. The issue is that Portugal’s prospects just look gloomier compared with neighboring Spain, even without their respective political battles. Portugal’s economy is forecast to grow 1.5% this year compared with 2.7% in Spain and 4.7% in Ireland.

Another country that had to resort to a bailout at the height of the sovereign debt crisis, Ireland last week sold a bond that matures in a century at 2.35%. Portugal has to pay about 3% just to borrow for a decade. Portugal is rated below investment grade, or junk, by Fitch Ratings, Moody’s Investors Service and Standard & Poor’s. It’s only the grading by DBRS Ltd., which is scheduled to next review its position on April 29, that gives the country enough creditworthiness to qualify for purchases under the ECB’s QE program.

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Yeah, why not?! Let’s do it all over again.

Greece’s Euro Future May Be Back in Play as Rescue Talks Drag On (BBG)

Greece could again face the threat of being pushed into default and out of the euro area if its current bailout review drags on into June and July, according to European officials monitoring the slow progress of Prime Minister Alexis Tsipras’s negotiations with creditors. Greece still hasn’t cut a deal on pensions, tax administration or its fiscal gap, and other issues like non-performing loans and a proposed privatization fund continue to slow the talks, said European officials. The IMF presents another obstacle, they said. The IMF, for its part, disagrees with the euro area on how Greece needs to cut its budget. With Germany insisting that the fund will eventually have to get on board for the bailout to proceed, officials from the IMF are trying to find ways to pressure Chancellor Angela Merkel to give Greece debt relief, according to a transcript of a purported conversation published by WikiLeaks April 2.

The euro area’s most-indebted member was almost forced out of the currency union last July before national leaders agreed to a third bailout package after all-night talks in Brussels. Merkel helped break the logjam then, warning it would be reckless and sow chaos to let Greece slip away from the currency union. While European officials have talked up the prospects for the review in public recently, all sides have harbored doubts from the get-go about whether Greece could meet the strict budget goals at the heart of last year’s rescue. Those concerns have increased as Tsipras’s Syriza party has lost allies and the European Commission and the ECB have faced stepped up demands from IMF negotiators.

“My odds for another Greek crisis this summer are relatively high,” said Carsten Brzeski, chief economist at ING Diba in Frankfurt. “Given the extremely slow pace of the implementations, the review, Syriza’s loss of popularity in opinion polls and still little appetite for debt relief, the next crisis is already in the making. It’s only a matter of time before it happens.”

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The entire south is the weakest link.

Italy, Not UK is European Union’s Weakest Link (Reuters)

The drama of the European Union can’t yet be called a tragedy, but it’s shaping up that way. What started out as the salvation of a continent from the horrors of the first half of its 20th century is now — after decades of optimistic growth lofty proclamations — toiling miserably merely to exist. Dramatic tragedy is the collapse of high status and ambition: The EU grasped after greatness, achieved much – and is now perilously close to losing all. The most obvious challenges from within come, first, from the always semi-detached British, who may well leave after a referendum in June. Informed opinion, which had been comfortably sure that fear or inertia would ensure continued membership, is now alarmed that threats of mass immigration, terrorism and increased economic turbulence mean out is winning over in.

But smaller nations are pesky too. Hungary is in what seems a frozen posture of enmity to the liberal ideals and practices of the Union it clamoured to join. To only a slightly lesser degree, so is Poland, seen since its 2004 accession to the Union as the most successful of the post-communist entrants. Greece still trembles on the brink of a new collapse: the governing leftist Syriza party must pass several dozen laws which will deepen austerity as a prelude to what is promised to be growth next year. It may balk. Yet a still larger, and hidden, challenge comes from the state that was one of the founding six nations and has consistently been most enthusiastic for ever-closer union. That state is Italy, a world soft power for its art and culture, both historic and present, its flair in design, its cuisine, its beauty. Italy is perhaps the weakest point in the European construction — for obvious reasons, and a deeper one.

One of the obvious reasons is its public debt: at over $2 trillion, it is second only to Greece in these dismal stakes. Another is the weakness of the Italian banks, which are burdened with bad debt of some $350 billion. It can be managed, say the financial authorities, as long as growth continues to increase: at present, however, it’s slowing. Prime Minister Matteo Renzi, a man of constant public optimism, seems to have passed on his upbeat view to the people of his nation, but not to the statistics. A Reuters analysis in January noted that Renzi’s sunniness “appears to have got through to most Italians, but this does not solve the chronically weak productivity and economic bottlenecks that have crimped its growth for two decades.” To set the seal on gloom, the analysis quotes the Deutsche Bank economist Marco Stringa as saying that “Every year (Italy) grows below the euro zone average, and if you are always below the average you have a problem.”

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Lagrade reacts to Tsipras’ inquiries about the Wikileaks reveal with venom.

IMF Chief Says Greece Plan ‘Good Distance Away’ (AFP)

IMF chief Christine Lagarde on Sunday told Greek Prime Minister Alexis Tsipras that “we are still a good distance away” in negotiations for a new deal for hard-up Athens. Her strongly worded letter to the prime minister, made public by the IMF, comes amid tense ties between Athens and the IMF after WikiLeaks said the lender sought a crisis “event” to push the indebted nation into concluding talks over its reforms. “My view of the ongoing negotiations is that we are still a good distance away from having a coherent program that I can present to our Executive Board,” Lagarde wrote, in unusually forceful terms, after Tsipras wrote to her in the wake of the WikiLeaks allegations.

“I have on many occasions stressed that we can only support a program that is credible and based on realistic assumptions, and that delivers on its objective of setting Greece on a path of robust growth while gradually restoring debt sustainability.” The Greek government on Saturday reacted strongly to the WikiLeaks report, saying it wanted the IMF to clarify its position. Lagarde rebuffed any suggestions the IMF was pushing for crisis in Greece. “The IMF conducts its negotiations in good faith, not by way of threats, and we do not communicate through leaks,” IMF managing director Lagarde said in her letter, adding that she was releasing the details of the text “to further enhance the transparency of our dialogue.” “I also look forward to any personal conversation with you on how to take the discussions forward,” she added.

In July, Greece accepted a three-year, €86 billion EU bailout that saved it from crashing out of the eurozone. But the bailout came with strict conditions such as fresh tax cuts and pay cuts. The IMF worked with the EU on two previous bailouts for Greece since 2010 but the Washington-based lender said it would not participate in the third rescue plan without credible reforms and an EU agreement to ease Greece’s debt burden. Athens is under pressure to address the large number of non-performing loans burdening Greek banks and to push forward with a pension and tax overhaul resisted by farmers and white-collar staff. Tsipras has accused the IMF of employing “stalling tactics” and “arbitrary” estimates to delay a reforms review crucial to unlock further bailout cash.

Mission chiefs from Greece’s international lenders — the EU, IMF, European Central Bank and European rescue fund — are due to resume an audit of the reforms on Monday. “I agree with you that successful negotiations are built on mutual trust, and this weekend’s incident has made me concerned as to whether we can indeed achieve progress in a climate of extreme sensitivity to statements of either side,” Lagarde wrote. “On reflection, however, I have decided to allow our team to return to Athens to continue the discussions,” she added, stressing that “it is critical that your authorities ensure an environment that respects the privacy of their internal discussions and take all necessary steps to guarantee their personal safety.”

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Just one of many things that show that.

Sordid Wrangling Between IMF and EU Shows Greek Democracy Is Dead (E.)

Financiers from the IMF are prepared to force millions of Greeks into abject poverty to secure a petty political victory over Brussels, according to a leaked conversation between top officials. The sordid wrangling shows just how dead Greece’s supposed democracy is, with Prime Minister Alexis Tsipras now powerless to defend his people from its puppet paymasters in Berlin and Washington, where the IMF is based. The international lender even wanted to use Britain’s EU referendum as an excuse to drive the struggling country to the wall so that it could get its own way. Greek politicians have reacted with fury to the revelations, and have demanded immediate answers from IMF boss Christine Lagarde. In a response today she astonishingly asked Greece’s former finance minister to “respect the privacy” of her staff, but also denied that the organisation would use his country’s insolvency as a bargaining chip.

But in truth they have no power to change the situation, with their country now entirely reliant on international bailouts to stay afloat. The shocking plot has been revealed in a leaked transcript of a meeting between two top IMF officials released by the whistle blowing website Wikileaks. The conversation, on 19 March, purportedly involves Poul Thomsen, head of the IMF’s Europe department, and Delia Velculescu, leader of the IMF team in Greece, who are the senior officials in charge of Greece’s debt crisis. They are apparently discussing how to get the EU – and Angela Merkel in particular – to come around to their way of thinking over a restructuring of Greek debt. The IMF says it will only sign up to a deal which involves debt relief for the stricken nation, a position Germany emphatically rejects.

The two parties are due to meet next week to discuss the next financial instalment for Greece, which will need fresh funding in the summer to avert a costly default. During the conversation it is apparently suggested that the international lender should be prepared to bring about an “event” – in other words a financial crisis bringing Greece to the point of collapse – to force the issue to a head. In the leaked transcript Mr Thomsen is quoted as complaining about the pace of talks on reforms Greece has agreed to carry out in exchange for the bailout. He asks: “What is going to bring it all to a decision point? “In the past there has been only one time when the decision has been made and then that was when they were about to run out of money seriously and to default.” Ms Velculescu later agrees, saying: “We need an event, but I don’t know what that will be”.

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European democracy is dead. So is its reputation, its decency, its humanity. It will take a hundred years or more to get it back.

EU Begins Refugee Push-Back, Defying Human Rights Outcry (WaPo)

The European Union on Monday began sending back across the sea hundreds of people who, only days ago, had braved the crossing to Greece aboard flimsy rubber rafts in search of a new life. Just after dawn on Lesbos, several bus-loads of men were led aboard two ferries under heavy police and military guard. The ferries, flying Turkish flags, steamed out of the port and turned east toward the Turkish coast. More than 100 migrants were believed to have been aboard. The deportations are the first of thousands expected under the E.U.’s plan to end the continent’s refugee crisis by shifting the burden onto neighboring Turkey. Human rights groups have condemned the strategy as a violation of basic rights.

But European officials forged ahead with a plan to send several boatloads of people on Monday across the Aegean Sea from the Greek islands of Lesbos and Chios — two popular landing spots for refugee rafts — to Turkey. More deportations are expected to follow later in the week. A spokeswoman for Frontex, the E.U. border control agency that will carry out the deportations, said on Sunday it had organized ferries to transport the migrants and that 200 personnel would be on Lesbos to oversee the operation, including to serve as escorts. “It needs to be done right with respect to human dignity,” said Ewa Moncure, the spokeswoman. But human rights advocates insisted that the plan was fundamentally flawed and represented an abandonment of European responsibility to help those seeking escape from the conflicts flaring on Europe’s doorstep. Amnesty International has called it “a historic blow to human rights.”

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Mar 142016
 
 March 14, 2016  Posted by at 9:45 am Finance Tagged with: , , , , , , , , ,  


John M. Fox WCBS studios, 49 East 52nd Street, NYC 1948

Marc Faber: Central Banks Will End Up Buying All Financial Assets (CNBC)
There’s Only One Buyer Keeping the S&P 500’s Bull Market Alive (BBG)
The Central Bankers Are Crazy & Public is Out Of Its Mind (Armstrong)
The Effects of a Month of Negative Rates in Japan (BBG)
Bank Of Japan Scrambles To Find Positives In Negative Rates (Reuters)
There Is A Limit To Draghi’s Negative Interest Rate Madness (Mish)
The European Central Bank Has Lost The Plot On Inflation (FT)
A Thought Experiment On Budget Surpluses (Steve Keen)
Central Banks Beat Bitcoin At Own Game With Rival Supercurrency (AEP)
China Debt Swap Could Leave Banks In Capital Hole (Reuters)
China’s Next Bubble? Iron Ore Surges As Speculators Weigh In (AFP)
China’s Growth Target Is the Next Test for Its Central Bank (BBG)
Goldman: 4 Reasons Why Yuan Will Weaken vs Dollar (CNBC)
Subprime Flashback: Early Defaults Are a Warning Sign for Auto Sales (WSJ)
Key Formula for Oil Executives’ Pay: Drill Baby Drill (WSJ)
Dairy Industry In Race To Ruin (NZH)
Why Monsanto’s GMO Business Isn’t Growing in India (WSJ)
February Breaks Global Temperature Records By ‘Shocking’ Amount (Guardian)
Anti-Refugee And Pro-Refugee Parties Both Win In German Elections (Guardian)
Bulgaria Pushes To Be Part Of EU-Turkey Refugee Deal (AFP)

Don’t know that you would call this socialism, but with the limits to negative rates, it sounds plausible.

Marc Faber: Central Banks Will End Up Buying All Financial Assets (CNBC)

Central banks around the globe are pursuing strategies that will put all financial assets into government hands, perma-bear Marc Faber, told CNBC’s Squawk Box. He also took the opportunity to endorse Donald Trump’s bid for the U.S. presidency. Faber said central bank policies are essentially monetizing debt, particularly in Japan, where he claims the Bank of Japan is buying all the government bonds the treasury is issuing. He expects that asset buying by global central banks will only increase, even though he believes those policies aren’t working to stimulate the economy. “The central banks aren’t interested in what works, they’re interested in their own prestige. And they are so deep into it already and it didn’t work. They will increase the medicine,” said Faber, the publisher of The Gloom, Boom & Doom Report.

“Eventually, they’ll buy all the government bonds; they’ll buy all the corporate bonds, all the shares outstanding. Afterwards the housing market goes down, they’ll buy all the homes and then the government will own everything.” That’s the road to socialism, he said. “I could see a situation where at the end the government owns all the corporations and all the government bonds and then we are back into socialism, into a planning economy,” said Faber. To be sure, the Bank of Japan does not buy Japan government bonds (JGBs) directly from the treasury; it only purchases them in the open market. Since some entities, such as banks and insurers, are required to hold JGBs in their reserves, the BOJ is unlikely to acquire all of the bonds outstanding. The BOJ does, however, use its quantitative easing program to purchase select exchange traded funds (ETFs) in the open market.

The U.S. Federal Reserve began tapering its quantitative easing program in 2013 and officially ended it in late 2014. But last week, the ECB announced further easing measures, including expanding the size of its bond-buying program to 80 billion euros ($89.23 billion) worth of assets a month, to include corporate bonds. Faber expects these programs will only expand. “The governments in my view, with their agents the Federal Reserve and other central banks and with the treasury department, they will do anything not to let asset prices go down,” said Faber. “If the stock markets go down, I’m convinced all the central banks will buy stocks. All of them,” he said, noting that this is not without precedent, citing Hong Kong’s purchase of stocks during the Asian Financial Crisis in the late 1990s.

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Beware.

There’s Only One Buyer Keeping the S&P 500’s Bull Market Alive (BBG)

Demand for U.S. shares among companies and individuals is diverging at a rate that may be without precedent, another sign of how crucial buybacks are in propping up the bull market as it enters its eighth year. Standard & Poor’s 500 Index constituents are poised to repurchase as much as $165 billion of stock this quarter, approaching a record reached in 2007. The buying contrasts with rampant selling by clients of mutual and exchange-traded funds, who after pulling $40 billion since January are on pace for one of the biggest quarterly withdrawals ever. While past deviations haven’t spelled doom for equities, the impact has rarely been as stark as in the last two months, when American shares lurched to the worst start to a year on record as companies stepped away from the market while reporting earnings.

Those results raise another question about the sustainability of repurchases, as profits declined for a third straight quarter, the longest streak in six years. “Anytime when you’re relying solely on one thing to happen to keep the market going is a dangerous situation,” said Andrew Hopkins at Wilmington Trust.. “Over time, you come to the realization, ‘Look, these companies can’t grow. Borrowing money to buy back stocks is going to come to an end.”’

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“I asked John if he slept with Karen and got his admittal!” “I told him, Oh that’s cool, I think it’s probably about time you stopped drinking.”

The Central Bankers Are Crazy & Public is Out Of Its Mind (Armstrong)

The central bankers are simply crazy, not evil. They are trying to steer the economy by utilizing this simpleton theory that if you make something cheaper, someone will buy it. Japanese and German cars managed to get a major foothold in the U.S. because the quality of U.S. manufacturers collapsed, thanks to unions. The socialist battle against corporations forgot something important – the ultimate decision maker is the consumer. The last American car I bought in the 1970s simply caught on fire while parked in my driveway. Another friend bought a brand-new American car and there was a terrible rattle. When they took the door panel off, there was an empty bottle of Coke inside. Cheaper does not always cut it. Gee, shall we cheer if the stock market goes down by 90%? It would be a lot cheaper. Why does the same theory not apply?

Then we have the trading public. If the central bankers have gone crazy with this whole negative interest rate theory, then the public is simply out of their minds. The euro rallied because Draghi cut rates further, extended the stimulus another year, increased the amount by another 33%, and then declared rates would stay there for years to come. And these insane traders cheer. Unbelievable! They are celebrating the public admission of Draghi that all his efforts to date have failed, so let’s do even more of the same. And they love this nonsense? Negative interest rates have become simply a tax on saving money and the stupid traders and media writers love it. The Fed tries to raise rates and they say – NO! This is a stunning combination of admission and stupidity that one would expect from a pretty but clueless girl and her drunk college boyfriend who can’t say no to any girl: “I asked John if he slept with Karen and got his admittal!” “I told him, Oh that’s cool, I think it’s probably about time you stopped drinking.”

All they see is that lower interest rates “should” stimulate but ignore the fact that they never do. They are too stupid to grasp the fact that raising taxes cannot be offset by lower interest rates. People judge everything by the bottom-line and not some crazy theory that’s just stupid. A simple correlation study by a high school student in math class would prove this theory does not correlate to the expected outcome. And we cheer this insanity confirming our own overall stupidity and one is left wondering who is crazier? I suppose it is just that central bankers are crazy and the public, as well as the media, are just out of their minds.

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Bank hits.

The Effects of a Month of Negative Rates in Japan (BBG)

The Bank of Japan shocked markets in January with negative rates. The policy had immediate effects on financial markets, even before it actually started on February 16. Although most analysts don’t expect a change on Tuesday, they are expecting the central bank eventually to cut the rate further. Here’s a look at some effects of negative rates:

About 70% of government bonds have a yield of zero or below, meaning investors are paying to hold the debt. Pushing the yield curve down to make borrowing less costly and to encourage lending is the aim of the new policy, according to Governor Haruhiko Kuroda. However, those actions are hurting the bond market, with 69% of traders in February saying market function has declined compared with three months ago, according to a BOJ survey.

A 10-year, fixed-rate home loan carried a 0.8% rate last week, down from 1.05% before the introduction of the negative rate, according to a speech by Kuroda. Japan’s three biggest banks cut their deposit rate to a record low of 0.001%, meaning you receive 10 yen (9 cents) in income on a deposit of 1 million yen. All 11 companies running money-market funds stopped accepting new investments, citing the BOJ stimulus. They plan to return money to investors, the Nikkei newspaper reported, and money from the funds is moving to deposits, according to analysts at Deutsche Bank. Deposit returns are still positive, if negligible.

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“Bank shares fell sharply.”

Bank Of Japan Scrambles To Find Positives In Negative Rates (Reuters)

Bank of Japan officials have been scurrying to commercial banks to explain and apologize for its surprise adoption of negative interest rates in January, while Prime Minister Shinzo Abe has distanced himself from a decision that is proving unpopular with the public. Some officials close to the premier say it could cause a rift in his once close relationship with BOJ Governor Haruhiko Kuroda, whose radical stimulus measures have so far failed to lift Japan clear of two decades of deflation and stagnation. A government press relations official said there was nothing to add beyond remarks made publicly by Chief Cabinet Secretary Yoshihide Suga that no such rift exists. With the economy shrinking again and prices flat, Abe has already announced he will set up a panel to consider fresh budget spending to provide the stimulus that monetary policy has struggled to achieve.

The controversy over the negative rates move, which unlike his previous eye-catching policy steps was not welcomed by Japan’s stock market, comes even as Kuroda is on the verge of gaining greater control of the bank’s nine-member board. Two skeptics of his stimulus program are stepping down in the coming months. The diminishing returns from his preferred modus operandi of market-shocking measures will leave him little option but to revert to the drip-feed easing he derided in his predecessor Masaaki Shirakawa if inflation fails to pick up, some analysts say. “Given the confusion caused by the January move, I don’t think the BOJ will be able to cut rates again for the time being,” said Hideo Kumano, a former BOJ official who is now chief economist at Dai-ichi Life Research Institute.

“The BOJ may instead expand asset purchases in small installments. That would be returning to the incremental approach of easing Kuroda dismissed in the past as ineffective.” Mandated by Abe to transform the risk-shy BOJ, Kuroda delighted markets and silenced skeptics within the bank by deploying a massive money-printing program, dubbed “quantitative and qualitative easing” (QQE), in April 2013. The Tokyo stock market soared and the yen tumbled, giving exporters a boost, and Japanese growth and inflation registered a pulse. He struck again in October 2014 with a big expansion of QQE, though the market boost was smaller, price rises were already moderating and the economy was taking a step back for every step forward. But the late-January rates decision failed to reverse a rise in risk-aversion that was hitting stocks and forcing up the yen, traditionally a safe haven in times of market stress. Bank shares fell sharply.

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Very clear and simple explanation of what the limits are.

There Is A Limit To Draghi’s Negative Interest Rate Madness (Mish)

On Thursday, ECB president Mario Draghi lowered the deposit rate on money parked at the ECB to -0.4% from -0.3%. Draghi also cut the main refinancing rate by 5 basis points to 0%. How low can he go? Is there a limit? There is indeed a practical limit to negative interest rate madness, and it’s likely we have already hit that limit. Let’s investigate why. All hell would break loose if rates fell lower than -1.0%, and perhaps well before that. This has to do with Euribor. Euribor is the rate offered to prime banks on euro-denominated interbank term loans. It is based on the average interest rates of about 50 European banks that lend and borrow from each other. [..]

How does Euribor place a Limit? Millions of mortgages in Europe are based on Euribor. The vast majority of mortgage rates in Spain and Portugal are based on Euribor. A huge number in Italy are based on Euribor. The typical mortgage loan in many Eurozone countries is Euribor plus 1%age point. For those on 1-month Euribor, the interest banks collect is no longer 1%. Instead, banks collect 0.70%. Servicing fees eat into that profit. If Euribor fell below -1.0% banks would have to pay customers interest on their mortgages rather than collect interest! This has already happened in some instances, primarily related to the Swiss Franc where rates are even lower.

Low rates eat into bank profits. Such concerns place a floor on negative rates. This is why Draghi announced he is finished cutting rates. The practical limit on negative interest rates in Europe may very well be -0.4%, right where we are now. Perhaps Draghi has a buffer of another -0.20% or so, but he is reluctant to use it. If 12-month Euribor rates go any lower, it will affect bank profits on every Euribor-based mortgage loan. Loans based on 1-month and 6-month Euribor are already impacted. Draghi is unable or unwilling to go further down the interest rabbit hole, but there are still lots of rabbit hole possibilities regarding various QE measures. Corporate bonds still offer Draghi wide possibilities for more economic madness.

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“The only reason you would want to make a long-term investment at these rates is that you do not believe in the target.”

The European Central Bank Has Lost The Plot On Inflation (FT)

Better than expected. How often have we heard these three words after a policy decision by the European Central Bank? My advice is to stop reading immediately whenever you see them. After all, what the markets expect to happen is entirely in the control of the ECB. The only thing that matters is the policy decision itself: the extent to which it can help achieve a target in this case an inflation rate of just under 2%. It may have been better than expected. But was it sufficient? The components of the decision an≠nounced on Thursday by Mario Draghi, ECB president, were: cuts in the three official interest rates; an increase in the volume of asset purchases; and more generous terms on targeted longer-term refinancing operations, a liquidity facility for banks pegged to the quantity of loans on their balance sheet.

The deposit rate, at which banks park their reserves at the central bank, is down from -0.3 to -0.4%. Mr Draghi hinted that we should not expect further cuts in that rate. And that line was the really big news of the day. He did not so much cut the rates as end the rate cuts. This is why the euro first fell then rose when investors realised this rate cut was not what it seemed. There is nothing fundamentally wrong with any of the decisions except that the ECB missed a trick. It could have widened the spread between short-term and long-term interest rates or, in financial parlance, it could have steepened the yield curve. One method would have been to make a bigger cut in the deposit rate and a smaller increase in the size of asset purchases. Since asset purchases reduce long-term rates, a small increase in purchases would have reduced them by less.

There are big problems with a flat yield curve. It is a nightmare for the banks because their business consists of turning short-term savings into long-term loans. When long rates are similar to short rates, banks find it hard to make money. They have to find other ways to generate income. Think also about the deeper meaning of a flat yield curve with all interest rates near 0%. Assume you trust Mr Draghi’s commitment to the inflation target. Would you, as a private investor, buy a 10-year corporate bond that yields 0.5%? If inflation really were to reach 2% within two or three years, you would surely make a loss. The only reason you would want to make a long-term investment at these rates is that you do not believe in the target. Long-term rates are low because people believe the ECB has lost the plot on inflation. I, too, believe this.

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Government surpluses kill economies.

A Thought Experiment On Budget Surpluses (Steve Keen)

While conservative parties—like the USA’s Republicans, the UK’s Tories, and Australia’s Liberals,—are more emphatic on this point than their political rivals, there’s little doubt that all major political parties share the belief that the government should aim to have low government debt, to at least balance its budget, and at best to run a surplus. As the UK’s Prime Minister put it in 2013:

“Would you want a government that is not targeting a surplus in the next Parliament, that just said no, we’re going to run overdrafts all the way through the next parliament,” he told BBC political editor Nick Robinson. “I don’t think that would be responsible. So the other parties are going to have to answer this question, ‘Do you think it’s right to have a surplus?’ I do.” (David Cameron: It’s responsible to target budget surplus”, BBC October 1 2013)

So is it “right to run a surplus”? Let’s consider this via a little thought experiment. The numbers are far-fetched, but they’re chosen just to highlight the issue: Imagine an economy with an GDP of $100 per year, where the money supply is just $1—so that $100 of output each year is generated by that $1 changing hands 100 times in a year. And imagine that this country’s government has accumulated debt of $100—giving it a debt to GDP ratio of 100%—and it decides to reduce it by running a surplus that year of 1% of GDP. And imagine that it succeeds in its target. What will this country’s GDP the following year, and what will happen to the government’s debt to GDP ratio? The GDP will be zero, and the government’s debt to GDP ratio will be infinite.

Huh? The outcomes of this policy are the opposite of its intentions: a policy aimed at reducing the government’s debt to GDP ratio increased it dramatically; and what is perceived as “good economic management” actually destroys the economy. What went wrong? The target of running a surplus of 1% of GDP means that the government collects $1 more in taxes than it spends. This $1 surplus of taxation over spending takes all of the money in the economy out of circulation, leaving the population with no money at all. The physical economy is still there, but without money, no-one can buy anything, and the economy collapses. The government can pay its debt down by $1 as planned, but the GDP of the economy is now zero, so the government debt to GDP ratio has gone from $100/$100 or 100%, to $99/$0 or infinity.

As I noted, the numbers are far-fetched, but the principle is correct: a government surplus effectively destroys money. A government surplus, though it might be undertaken with the noble aim of reducing government debt, and the noble intention of helping the economy to grow, will, without countervailing forces from elsewhere in the economy, increase the government’s debt to GDP ratio, and make the economy smaller (if the rate of turnover of money—it’s so-called “velocity of circulation”—is greater than one). This little thought experiment illustrates the logical flaw in the conventional belief that running a government surplus is “good economic management”: it ignores the relationship between government spending and the money supply. Unless the public finds some other way to compensate for the effect of a government surplus on the money supply, the surplus will reduce GDP by more than it reduces government debt.

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Provocative. Let’s see how this unfolds.

Central Banks Beat Bitcoin At Own Game With Rival Supercurrency (AEP)

Computer scientists have devised a digital crypto-currency in league with the Bank of England that could pose a devastating threat to large tranches of the financial industry, and profoundly change the management of monetary policy. The proto-currency known as RSCoin has vastly greater scope than Bitcoin, used for peer-to-peer transactions by libertarians across the world, and beyond the control of any political authority. The purpose would be turned upside down. RSCoin would be a tool of state control, allowing the central bank to keep a tight grip on the money supply and respond to crises. It would erode the exorbitant privilege of commercial banks of creating money out of thin air under a fractional reserve financial system.

“Whoever reacts too slowly to these developments is going to take it on the chin. They will lose their businesses,” said Dr George Danezis, who is working on the design at University College London. “My advice is that companies should play very close attention to what is happening, because this will not go away,” he said. Layers of middlemen in payments systems face a creeping threat across the nexus of commerce, stockbroking, currency trading or derivatives. Many risk extinction over time. “Deep in the markets there are dark pools buying and selling shares, and entities that facilitate that foreign exchange. There are Visa, Master, and PayPal. These are the sorts of guys that we are going to disrupt,” he said. University College drafted the plan after being encouraged by the Bank of England last year to come up with a radical design for a secure digital currency.

The Bank itself has an elite four-man unit grappling with the implications of crypto-currencies and blockchain technology. Central banks at first saw Bitcoin as a rogue currency and a threat to monetary order, but they are starting to glimpse ways of turning the new technology to their advantage. The findings of the University College team were delivered to the Network and Distributed System Security Symposium (NDSS) in San Diego, revealing for the first time what may be in store. Dr Danezis said a national pilot project could be up and running within eighteen months if a decision were made to launch such a scheme. The RSCoin is deemed more likely to gain to mass acceptance than Bitcoin since the ledger would remain exclusively in the hands of the central bank, with the ‘trust’ factor of state authority. It would have the incumbency benefits of an established currency behind it.

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“..any bank that swaps a corporate loan for equity of the equivalent value will need at least four times as much capital for that exposure.”

China Debt Swap Could Leave Banks In Capital Hole (Reuters)

China’s mooted debt-for-equity swap could leave the country’s banks in a capital hole. New rules are being proposed that would allow lenders to exchange bad loans for shares. That could ease pressure on ailing companies. But it would also put pressure on bank capital ratios. In developed economies, it’s not unusual for creditors of troubled companies to accept shares in exchange for loans. In China, however, banks are restricted from investing in non-financial companies, limiting their scope for restructuring ailing borrowers. The regulations being prepared would remove that constraint, Reuters reported on March 10, potentially clearing the way for a wave of debt conversions. Some exchanges are already happening: Huarong Energy, a troubled shipbuilder, announced on March 8 it would give creditors a 60% stake in the company in return for forgiving debt worth $2.2 billion.

Yet while such swaps help overindebted Chinese companies, they are less positive for banks. True, the industry’s reported ratio of non-performing loans – which rose to 1.7% of total lending at the end of 2015 – will fall. But capital requirements will also rise as banks recognize more losses. Under China’s interpretation of international Basel rules, corporate loans typically attract a risk weighting of 100% for capital purposes. But the risk weighting for equity investments is at least 400%, and can be as high as 1250%, according to a 2013 assessment of Chinese regulations by the Bank for International Settlements. In other words, any bank that swaps a corporate loan for equity of the equivalent value will need at least four times as much capital for that exposure.

This calculation also assumes that banks have already written down troubled loans to their correct value. In reality, that’s unlikely to be the case. So-called “special mention” loans, which are wobbly but not yet officially classed as bad, accounted for a further 3.8% of overall lending at the end of last year. The true level of non-performing debt is probably much higher. The result is that any large-scale swap of debt-for-equity in the country will leave lenders short of capital. As the largest shareholder of Chinese banks, the government would have to step in. Though that might be one way to start solving China’s debt problem, other investors in the banks would feel the pain.

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Casino.

China’s Next Bubble? Iron Ore Surges As Speculators Weigh In (AFP)

With a huge global steel glut and slowing demand in China, an enormous recent spike in the price of iron ore has left analysts scratching their heads, with some even claiming a flower show might be to blame. But observers say the extraordinary movements for one of the world’s basic bulk commodities have been fuelled by something far more prosaic than daisies and daffodils – simple speculation. The spot price for iron ore – the key material for steel – jumped 20% on the Dalian Commodity Exchange on Monday. It closed at $57.35 per tonne on Friday, up nearly 33% so far this year. But the vast majority of trades on the exchange do not reflect real-world transactions: the iron ore futures volume on Wednesday alone represented an underlying 978 million tonnes of the commodity – more than China’s entire imports last year.

“Steel prices are in a crazy phase now. Everyone’s emotions are high and pushing up prices is the norm,” Chen Bingkun at Minmetals and Jingyi Futures told AFP. “The price rise is also caused by speculation.” Only part of the real global iron ore trade passes through exchanges such as Dalian or Singapore, the other main hub for derivatives based on the commodity. Instead, the business is dominated by a small group of producers, including Anglo-Australian giants Rio Tinto and BHP Billiton, Brazil’s Vale and Fortescue Metals of Australia. They all compete to sell to steelmakers in China and elsewhere on longer-term contracts, often priced according to indices calculated by specialist trade publications, leaving limited liquidity for the spot market and heightening its volatility.

Chinese analysts and industry officials have cited a mix of factors driving the speculation that fuelled the price surge, including hopes for higher government spending on steel-hungry infrastructure after the economy grew at its slowest pace in a quarter of a century last year. The beginning of warmer weather and the end of the Lunar New Year holiday have restarted construction projects and steel production. Even an upcoming flower show in the Chinese steel hub of Tangshan has been named as a factor, with local steel companies expected to suspend output to ensure blue skies for the event – which could prompt them to step up production before the halt. China produces more steel than the rest of the world combined, and in the long term, cuts of up to 150 million tonnes in its capacity over five years could ultimately support steel prices, although their impact on iron ore costs is less clear.

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“If market participants have been worried about China since June-July 2015, they have not seen the real thing yet.”

China’s Growth Target Is the Next Test for Its Central Bank (BBG)

China’s central bank chief oozed calm in an annual press briefing in Beijing Saturday, supported by weeks of composure in markets as investor anxiety over the nation’s currency policy eased. How long the lull lasts will depend on how policy makers manage a balancing act made tougher by a weaker-than-anticipated start to the year for the world’s No. 2 economy. After People’s Bank of China Governor Zhou Xiaochuan spoke at the country’s annual gathering of the legislature, data showed an “alarming” failure of growth to respond to recent stimulus, Bloomberg Intelligence analysts Tom Orlik and Fielding Chen concluded. The weakening momentum seen in industrial output and retail sales highlight skepticism about the Communist Party’s goal of achieving average growth of at least 6.5% in its five-year plan to 2020.

Gavekal Dragonomics calls the target “incredible.” JPMorgan says a sustainable pace is “much lower” than what officials are targeting for this year. The danger is that to meet the leadership’s objective, which for 2016 is an expansion of 6.5% to 7%, Zhou will need to loosen monetary policy faster and further. That could intensify depreciation pressures on the yuan, which has benefited in recent weeks from a drop in the dollar. Looser monetary policy, along with the expanded fiscal deficit pledged by Premier Li Keqiang’s cabinet, would quicken a buildup of debt that already amounts to almost 2.5 times GDP. “This is a risky target for the next five years as it means the continuation of super-loose monetary and fiscal policy,” said Chen Zhiwu, a finance professor at Yale University, and a former adviser to China’s State Council.

“If market participants have been worried about China since June-July 2015, they have not seen the real thing yet.” The data released Saturday showed industrial production rose 5.4% in the first two months of the year from a year before, the weakest reading since the 2009 global recession. That’s even before policy makers have much to show for a campaign to shut down excess capacity in the unproductive state-owned sector. Retail sales also slowed, while the value of homes soared versus a year ago with property sales in some mid-sized cities doubling. Fixed-asset investment exceeded economists’ estimates. Speaking hours before the data releases, Zhou, 68, warned banks about increased credit risk and rising real estate prices in the biggest cities. He sought to ease concerns over volatility in the stock and currency markets while saying meeting the five-year growth target would not require a big stretch.

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China is going to get called on its illusions.

Goldman: 4 Reasons Why Yuan Will Weaken vs Dollar (CNBC)

The Chinese yuan, the source of much anguish in financial markets from Sao Paulo to Singapore since last summer, is enjoying some respite. The currency, also known as renminbi, is currently trading near its best levels against the dollar this year at 6.5241, having slumped to 6.5800 earlier in 2016. Efforts by Chinese policymakers to shore up confidence in the economy have helped somewhat. Capital outflows, a big factor behind the weakness in the currency and the subsequent depletion of China’s foreign exchange reserves as the People’s Bank of China intervened to prevent the yuan from falling more, also appear to have eased. But Goldman Sachs still expects the currency to weaken to 7 against the greenback by the end of the year and has listed four reasons behind its call. Here they are:

Debt overhang The sharp surge in credit in recent years has led to an accumulation of debt in the economy that will likely imply interest rates will stay lower for longer, Goldman Sachs estimates. The softer monetary policy should add to depreciation pressures on the currency.

Economic slowdown China’s once-runaway export growth has slowed (shipments fell at their fastest pace since 2009 in February) as the currency has appreciated on a trade-weighted basis over many years. Overall economic growth was 6.9% in 2015, sturdy by global standards but the slowest pace in China in 25 years. Policymakers may now have to tweak the currency to counter the slowdown in the economy, Goldman reckons.

Preference for weaker currency According to Goldman Sachs, the managed depreciation of the yuan in December and the early weeks of 2016 suggests “a degree of bias” on the part of the authorities for a weaker currency. Goldman cites a recent interview given by PBOC Governor Zhou Xiaochuan to Caixin magazine, in which Zhou suggested that the current yuan level against the dollar did not represent a “reasonable and balanced” level for the currency.

Policy divergence Goldman’s U.S. team expects the U.S. Federal Reserve to raise interest rates three times this year, while forecasting economic growth to be above the trend level. An increase in U.S. interest rates coupled with a downward trend in Chinese monetary policy will imply outflow pressures and lead to yuan weakness, Goldman says. The trend for further softness in the yuan has raised speculation on policy options for the PBOC, including a one-off devaluation in the yuan or a more steady weakness. Goldman believes the second option is more likely as a chunky one-off devaluation would raise doubts over the credibility of Chinese policymakers and draw political attention at a sensitive time.

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This is going to go so wrong.

Subprime Flashback: Early Defaults Are a Warning Sign for Auto Sales (WSJ)

To understand how far the U.S. auto business has been reaching for new customers, consider the early performance of a bond issue called Skopos Auto Receivables Trust 2015-2. The bonds were built out of subprime auto loans and sold in November. Through February, about 12% of the underlying loans were at least 30 days past due, a third of which were more than 60 days delinquent. In another 2.6% of loans, borrowers had filed for bankruptcy or the vehicles had been repossessed. Those borrowers are at the outer fringe of the auto market. Still, the high level of missed payments for loans made so recently is a warning sign for an industry that needs every customer it can get to keep sales increasing at a record pace.

The early delinquency rates seen in the debt issue from Skopos Financial, a Dallas-based lender that specializes in loans to people with weak or no credit histories, are in line with those for several similar bond deals from other lenders around the same time. About 12% of the loans backing bonds sold in November by Exeter Finance, another Dallas-based subprime lender, were more than 30 days delinquent through February, according to the company. A spokeswoman said delinquency rates came down from the previous month. Loan payments have been slipping as well for the broader group of subprime borrowers who make up a big slice of the auto market. The 60-plus day delinquency rate among subprime car loans that have been packaged into bonds over the past five years climbed to 5.16% in February, according to Fitch Ratings, the highest level in nearly two decades.

The rate of missed payments is higher for loans made in more recent years, a reflection of more liberal credit standards and the larger number of deals from lenders serving less creditworthy customers, according to Standard & Poor’s Ratings Services. Investors are becoming concerned. Flagship Credit Acceptance, another small lender, recently had to offer higher yields than expected to sell bonds backed by subprime auto loans. Flagship declined to comment. “What’s driving record auto sales is not the economy, but record auto lending,” said Ben Weinger, who runs hedge fund 3-Sigma Value LP in New York and who has bearish bets on some auto lenders. He said demand for auto debt has led lenders to systematically loosen underwriting standards, which he predicts will result in higher loan delinquencies.

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Paid to harm your own company. Perfect.

Key Formula for Oil Executives’ Pay: Drill Baby Drill (WSJ)

Markets have been waiting for U.S. energy producers to slash output during a period of depressed crude prices. But these companies have been paying their top executives to keep the oil flowing. Production and reserve growth are big components of the formulas that determine annual bonuses at many U.S. exploration and production companies. That meant energy executives took home tens of millions of dollars in bonuses for drilling in 2014, even though prices had begun to fall sharply in what would be the biggest oil bust in decades. The practice stems from Wall Street’s treatment of such companies’ shares as growth stocks, favoring future prospects over profitability. It has helped drive U.S. energy producers to spend more unearthing oil and gas than they make selling it, energy executives and analysts say.

It has also helped fuel the drilling boom that lifted U.S. oil and natural-gas production 76% and 31%, respectively, from 2009 through 2015, pushing down prices for both commodities. “You want to know why most of the industry outspent cash flow last year trying to grow production?” William Thomas, CEO of EOG Resources, said recently at a Houston conference. “That’s the way they’re paid.” Lately, though, some shareholders are asking companies to reduce connections between pay and production, saying such incentives don’t make sense since abundant supplies have caused commodity prices to crash. Signs that oil production may finally be easing helped push up crude prices Friday to their highest levels of the year. The International Energy Agency said in a monthly report that output in some regions was falling faster than expected and that prices may have “bottomed out.”

A separate report said the number of rigs drilling for oil and natural gas in the U.S. fell to a record low. Still, CEO pay and production are likely to remain a flash point for investors because few wells are profitable even at these higher crude prices. The persistence of U.S. production in the face of such economics has been one of the biggest puzzles in the energy market. Members of the Organization of the Petroleum Exporting Countries have increased production, betting that U.S. energy producers would curtail drilling or be forced out of business. But even as oil prices began their plunge in the second half of 2014, many companies kept drilling.

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New Zealand is so toast. Land prices are doomed, and home prices will follow a swell as corporate defaults.

Dairy Industry In Race To Ruin (NZH)

Imagine being approached with an investment proposal that went something like this: how about you borrow almost $30 billion to invest in something that produces a commodity that swings in price by more than 50% over a two-year cycle? How about you invest in producing that commodity on the idea that demand has moved structurally higher, but pretty much ignores what other suppliers of that commodity might do? You would probably be more than a little sceptical. Yet that was the proposition New Zealand Inc essentially agreed to invest in over the past decade. This is the story of the dairy boom that has now bust, leaving dairy farmers holding debts of more than $40b and producing a commodity that is losing them $1.6b a year. Those debts are worth more than three times the income produced by that land and up from just $11.3b as recently as 2003.

The Reserve Bank has forecast that if this week’s payout cut to $3.90/kg is extended into next season, and then recovers only slowly, then 44% of those loans would be non-performing. That doesn’t necessarily mean the banks would kick 44% of farmers off their land – but it does mean the banks face profit drops. No other business leader in any other industry would borrow three times the income to build a business that produced something they couldn’t control the price of. Robert Muldoon was ridiculed and condemned for borrowing and betting big on a continued high price for oil when he invested in petro-chemical plants at Motonui, Waitara and Kapuni, and indirectly on the Clyde Dam and Tiwai Point expansion. This sort of investment decision makes no sense. Unless, of course, you weren’t actually borrowing the money purely to produce cashflow from the sale of that commodity.

It makes perfect sense if you are borrowing money to push up the value of land, the gains from which are tax-free. Most farmers would vehemently deny they are farming for tax-free capital gains, and most hold their land for multiple decades and often for multiple generations. But it is simply not credible to say that land value is irrelevant in their decision-making. It’s certainly relevant in the decision-making of the banks. Finance Minister Bill English put it best this week when he said it was time for farmers to be more like proper business investors. “This is an industry where they’ve had a focus on growing equity and growing land values for quite a long time now. It’s going to be a significant adjustment to getting back to the core business of effective farming for cash flow. “They are going to see land values drop. That is pretty much certain.”

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“Despite dozens of biotech-food-crop trials in India, the country has approved none for commercial cultivation.”

Why Monsanto’s GMO Business Isn’t Growing in India (WSJ)

Genetically modified organisms, or GMOs, grow in an estimated 97% of India’s cotton fields and have helped India by some measures become the fiber’s top global producer. But after a decade of Monsanto’s efforts with Mahyco to win Indian-government approval for biotech food crops, seeds for plants like Mr. Char’s remain in limbo, stymied by environmentalist opposition, farmer skepticism and bureaucratic inertia. Despite dozens of biotech-food-crop trials in India, the country has approved none for commercial cultivation. “What greater case study in terms of food security than a country that will soon have more people than any other country in the world?” said Robert Fraley, Monsanto’s chief technology officer. “To see a country that has the potential and intellectual ability to be a leader in these biotech advances, to be stymied politically, I think it’s a tragedy.”

India’s Agriculture Minister, Radha Mohan Singh, said the government was waiting for India’s Supreme Court to rule in a case opposing genetically modified food crops before deciding on their commercial cultivation. Meanwhile, Monsanto’s established cotton business in India faces new threats, including new government price controls around seed genetics and an antitrust probe into pricing practices, prompting Monsanto on March 4 to warn that it could withdraw its biotech crop genes from the country. Monsanto’s experience is part of a broader backlash against genetically engineered crops from a mix of environmentalists, consumer groups and nationalism thwarting the technology’s expansion after years of growth. Biotech-crop opponents say they can damage the environment, burden poor farmers with high-price seeds and potentially harm health.

GMO proponents reject such assertions, and the U.S. Food and Drug Administration, World Health Organization and European Commission have concluded GMOs are safe to eat. Yet pushback has swept the world. More than half of European Union countries have moved to bar GMO cultivation. Russia hasn’t approved any biotech crops. China, which allows cultivation of some, isn’t expected to approve new ones soon. In the U.S., where GMO crops are widespread, some food brands are stripping GMOs from their products. The backlash has slowed global-sales growth of genetically modified seeds. Sales grew 4.7% to $21 billion in 2014, compared with 8.7% growth in 2013 and average annual growth of 21% from 2007 through 2012, according to research firm PhillipsMcDougall.

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Looks insane.

February Breaks Global Temperature Records By ‘Shocking’ Amount (Guardian)

Global temperatures in February smashed previous monthly records by an unprecedented amount, according to Nasa data, sparking warnings of a climate emergency. The result was “a true shocker, and yet another reminder of the incessant long-term rise in global temperature resulting from human-produced greenhouse gases”, wrote Jeff Masters and Bob Henson in a blog on the Weather Underground, which analysed the data released on Saturday. It confirms preliminary analysis from earlier in March, indicating the record-breaking temperatures. The global surface temperatures across land and ocean in February were 1.35C warmer than the average temperature for the month, from the baseline period of 1951-1980.

The global record was set just one month earlier, with January already beating the average for that month by 1.15C above the average for the baseline period. Although the temperatures have been spurred on by a very large El Niño in the Pacific Ocean, the temperature smashed records set during the last large El Niño from 1998, which was at least as strong as the current one. The month did not break the record for hottest month, since that is only likely to happen during a northern hemisphere summer, when most of the world’s land mass heats up. “We are in a kind of climate emergency now,” Stefan Rahmstorf, from Germany’s Potsdam Institute of Climate Impact Research and a visiting professorial fellow at the University of New South Wales, told Fairfax Media. “This is really quite stunning … it’s completely unprecedented,” he said.

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Polarization

Anti-Refugee And Pro-Refugee Parties Both Win In German Elections (Guardian)

The anti-refugee party, Alternative für Deutschland (AfD), has shaken up Germany’s political landscape with dramatic gains at regional elections, entering state parliament for the first time in three regions off the back of rising anger with Angela Merkel’s asylum policy. But, in a sign of the increasingly polarised nature of Germany’s political debate, pro-refugee candidates also achieved two resounding victories in the elections – the first to take place in Germany since the chancellor embarked on her flagship open-doors approach to the migration crisis. Merkel’s Christian Democrat party suffered painful defeats to more left-leaning parties in two out of three states, one of them Baden-Württemberg, a region dominated by the CDU since the end of the second world war. News weekly Der Spiegel described the result as a “black Sunday” for the conservatives.

The CDU also failed to oust the incumbent Social Democrats in Rhineland-Palatinate. But it was the breakthrough of the AfD – a party that did not exist a little more than three years ago and last year was on the verge of collapse – that was arguably most striking. In Saxony-Anhalt in the former east Germany, the party with links to the far-right Pegida movement had gained 24.4%, according to initial exit polls, thus becoming the second-biggest party behind the CDU. In both Rhineland-Palatinate and Baden-Württemberg, it appeared to have gained 12% and 15%. Germany’s rightwing upstarts appeared to have benefited from an increased voter turnout across the country. In all three states, the AfD gained most of its votes from people who had not voted before, rather than disillusioned CDU voters. In Saxony-Anhalt, as many as 40% of AfD voters were previously non-voters, while 56% of AfD voters in the state said they had opted for the party because of the refugee crisis, according to one poll.

[..]If the AfD’s strong showing reflected deep hostility to Merkel’s plan, however, other results last night told a different story. [..] The politician who won in Baden-Württemberg’s, Green state premier Winfried Kretschmann, had passionately defended the German chancellor’s open-borders stance, stating in one day that he was “praying every day” for her wellbeing. With a centrist, pro-business party programme that defied orthodox ideas of what an environmental party should stand for, the Green party in Germany’s southwest managed to come top with 30.5% in a state. Remarkably, 30% of voters who had switched from Christian Democrat to Green in the state said they had done so because of the refugee debate. “In Baden-Württemberg we have written history”, Kretschmann told reporters after the first exit polls.

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More closed borders.

Bulgaria Pushes To Be Part Of EU-Turkey Refugee Deal (AFP)

Bulgarian Prime Minister Boyko Borisov pressed on March 12 to have his country’s borders protected as part of a proposed EU-Turkey deal aimed to stop the flow of migrants to Europe. Bulgaria has so far remained on the sidelines of the EU’s worst migration crisis since WWII after it built a 30-kilometre razor wire fence in 2014 and sent 2,000 border police to guard its 260-kilometre (160-mile) border with Turkey. But the EU member fears that it could become a major transit hub after countries along the main western Balkan migrant trail shut their borders this week. All countries on the frontline should be able to rely on support from the EU for protection of the EU’s external borders,” Borisov told visiting Austrian Interior Minister Johanna Mikl-Leitner and Austrian Defense Minister Hans Peter Doskozil in Sofia.

Borisov said he had sent a letter to that effect to EU President Donald Tusk on March 11. “Bulgaria insists that the talks between the EU and Turkey for solving the migration problem should also include Bulgaria’s land borders with Turkey and Greece as well as the Black Sea border between the EU and Turkey,” the letter read. [..] Bulgarian media reported on Saturday that Borisov was ready to block the deal if Turkey only agreed to stop the flow of migrants to the Greek islands in the Aegean Sea. Mikl-Leitner and Doskozil, who were due to visit the Bulgarian-Turkish border later on Saturday, expressed their “full support” for Borisov’s demands. “What applies to Greece also has to apply to Bulgaria,” Doskozil said. Mikl-Leitner meanwhile pledged to host a police conference on border security and human traffickers with the countries along the western Balkan migrant trail, including Germany and Greece.

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Feb 192016
 
 February 19, 2016  Posted by at 8:36 am Finance Tagged with: , , , , , , , , ,  


Richardson Hope for a New Life: Man passes baby through fence, Serbia/Hungary border 2015

Negative Interest Rates Set The Stage For The Next Crisis (Stephen Roach)
Why Negative Interest Rates Spell Doom For Capitalism (Romano)
Central Banking Is In Crisis. Can The World Economy Be Far Behind? (Economist)
Bank of Japan Baffled by Negative Reaction to Negative-Rate Policy (WSJ)
Nomura Sees Yen Falling More Than 10% on BOJ Negative Rates (BBG)
Abenomics? How About Kurodanomics? (BBG)
OECD Calls for Urgent Increase in Government Spending (WSJ)
China Bears Say the Capital Outflow Is Just Beginning (BBG)
Red Ink In China (Economist)
Overproduction Swamps Smaller Chinese Cities, Revealing Depth of Crisis (WSJ)
You Cannot Print Your Way to Prosperity (Ron Paul)
The Real Economy Is Talking, but Treasuries Aren’t Listening (BBG)
Number Of UK Homes Worth More Than £1 Million Set To ‘Triple By 2030’ (G.)
400,000 Americans In Jeopardy As Giant Pension Fund Plans 50% Benefit Cuts (ZH)
The Political War on Cash (WSJ)
Swiss MPs Want New 5,000-Franc Banknotes To ‘Save Privacy And Freedom’ (L.)
The Stressed-Out Oil Industry Faces an Existential Crisis (BBG)
Oil Gives Up Gains as Inventories Build (WSJ)
Anglo American Cut to Junk for Third Time This Week (BBG)
Wary On Turkey, EU Prepares For Refugee Crisis In Greece (Reuters)

As QE and ZIRP did before them. This started years ago.

Negative Interest Rates Set The Stage For The Next Crisis (Stephen Roach)

In what could well be a final act of desperation, central banks are abdicating effective control of the economies they have been entrusted to manage. First came zero interest rates, then quantitative easing, and now negative interest rates — one futile attempt begetting another. Just as the first two gambits failed to gain meaningful economic traction in chronically weak recoveries, the shift to negative rates will only compound the risks of financial instability and set the stage for the next crisis. The adoption of negative interest rates — initially launched in Europe in 2014 and now embraced in Japan — represents a major turning point for central banking. Previously, emphasis had been placed on boosting aggregate demand — primarily by lowering the cost of borrowing, but also by spurring wealth effects from appreciating financial assets.

But now, by imposing penalties on excess reserves left on deposit with central banks, negative interest rates drive stimulus through the supply side of the credit equation — in effect, urging banks to make new loans regardless of the demand for such funds. This misses the essence of what is ailing a post-crisis world. As Nomura economist Richard Koo has argued about Japan, the focus should be on the demand side of crisis-battered economies, where growth is impaired by a debt-rejection syndrome that invariably takes hold in the aftermath of a “balance sheet recession.” Such impairment is global in scope. It’s not just Japan, where the purportedly powerful impetus of Abenomics has failed to dislodge a struggling economy from 24 years of 0.8% inflation-adjusted growth in GDP.

It’s also the U.S., where consumer demand — the epicenter of America’s Great Recession — remains stuck in an eight-year quagmire of just 1.5% average real growth. Even worse is the eurozone, where real GDP growth has averaged just 0.1% over the 2008-2015 period. All of this speaks to the impotence of central banks to jump-start aggregate demand in balance-sheet-constrained economies that have fallen into 1930s-style “liquidity traps.” As Paul Krugman noted nearly 20 years ago, Japan exemplifies the modern-day incarnation of this dilemma. When its equity and property bubbles burst in the early 1990s, the keiretsu system — “main banks” and their tightly connected nonbank corporates — imploded under the deadweight of excess leverage.

But the same was true for over-extended, saving-short American consumers — to say nothing of a eurozone that was basically a levered play on overly inflated growth expectations in its peripheral economies — Portugal, Italy, Ireland, Greece, and Spain. In all of these cases, balance-sheet repair pre-empted a resurgence of aggregate demand, and monetary stimulus was largely ineffective in sparking classic cyclical rebounds. This could be the greatest failure of modern central banking. Yet denial runs deep. then-Federal Reserve Chair Alan Greenspan’s “mission accomplished” speech in early 2004 is an important case in point. Greenspan took credit for using super-easy monetary policy to clean up the mess after the dot-com bubble burst in 2000, while insisting that the Fed should feel vindicated for not leaning against the speculative madness of the late 1990s.

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“When, not if, central banks go completely negative, they will wind up paying banks to borrow money from them. That’s quantitative easing by another name.”

Why Negative Interest Rates Spell Doom For Capitalism (Romano)

Interest rates in Switzerland, Denmark, Sweden, the European Central Bank and now the Bank Japan have now plunged into negative territory, starting a new phase in the era of central banking that is very much uncharted. Time will tell if it leaves the global economy lost at sea. So far, banks are primarily being charged for keeping excess reserves on account at these central banks, a policy designed to jumpstart lending by making it more expensive for banks to sit on reserves. In some cases, like Sweden, the deposit rates have gone negative, too. Whether it will all work out or not remains to be seen — initiating inflation and economic growth. Maybe it will, but so far it’s not really looking good. So what if it doesn’t work? The longer term implication is that central banks will then feel compelled to move their discount rates and other rates negative, too.

Once that Pandora’s Box is open, it will mean that when financial institutions borrow money from the central bank, they will earn interest instead of owing it. You read that right. When, not if, central banks go completely negative, they will wind up paying banks to borrow money from them. That’s quantitative easing by another name. Say, the interest rate is -1%. For every $1 trillion that is lent, the central bank in theory would owe an additional $10 billion in interest to the borrowing banks. Fast forward 10 or 20 years into the future. Can you imagine a world where commercial banks pay their customers to borrow money? Sure, scoff now. But mark my words. Central banks are so desperate to kick start the economy and credit creation, they will do almost anything. So, if they have to bribe you to borrow money to start acquiring more things, then that’s exactly what they’ll do.

A few problems immediately emerge. If it ends up costing money for banks to lend money, how will they make any profits? The answer might be that the profits will be the difference between the interest earned from that bank borrowing the money from the central bank less the interest owed to the borrowing customer. So, say the bank borrowed from the central bank at -5% and then issued a loan with that money at -1%. The customer still earns 1%age point of negative interest, and the bank still gets to pocket the remaining 4%age points of negative interest from the central bank. But what about savers? Would they be charged just to put money into the bank? If so, why would they keep it there? Since banks depend on deposits to make up their capital requirements, they would have a powerful disincentive against charging customers to keep deposits, lest it provoke a run on the banks. But why invest in bonds? This is where the real rub comes.

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Chicken and the egg. Central bankers incompetence will drag us all down.

Central Banking Is In Crisis. Can The World Economy Be Far Behind? (Economist)

A world of helicopter drops is anathema to many: monetary financing is prohibited by the treaties underpinning the euro, for example. Incomes policies are even more problematic, as they reduce flexibility and are hard to reverse. But if the rich world ends up stuck in deflation, the time will come to contemplate extreme action, particularly in the most benighted economies, such as Japan’s. Elsewhere, governments can make use of a less risky tool: fiscal policy. Too many countries with room to borrow more, notably Germany, have held back. Such Swabian frugality is deeply harmful. Borrowing has never been cheaper. Yields on more than $7 trillion of government bonds worldwide are now negative.

Bond markets and ratings agencies will look more kindly on the increase in public debt if there are fresh and productive assets on the other side of the balance-sheet. Above all, such assets should involve infrastructure. The case for locking in long-term funding to finance a multi-year programme to rebuild and improve tatty public roads and buildings has never been more powerful. A fiscal boost would pack more of a punch if it was coupled with structural reforms that work with the grain of the stimulus. European banks’ balance-sheets still need strengthening and, so long as questions swirl about their health, the banks will not lend freely. Write-downs of bad debts are one option, but it might be better to overhaul the rules so that governments can insist that banks either raise capital or have equity forced on them by regulators.

Deregulation is another priority—and no less potent for being familiar. The Council of Economic Advisors says that the share of America’s workforce covered by state-licensing laws has risen to 25%, from 5% in the 1950s. Much of this red tape is unnecessary. Zoning laws are a barrier to new infrastructure. Tax codes remain Byzantine and stuffed with carve-outs that shelter the income of the better-off, who tend to save more. The problem, then, is not that the world has run out of policy options. Politicians have known all along that they can make a difference, but they are weak and too quarrelsome to act. America’s political establishment is riven; Japan’s politicians are too timid to confront lobbies; and the euro area seems institutionally incapable of uniting around new policies.

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Makes sense, since they have no idea what they’re doing. Then again, since this is a double negative…

Bank of Japan Baffled by Negative Reaction to Negative-Rate Policy (WSJ)

A clash Thursday between Japan’s central-bank chief and lawmakers highlighted the downside of negative interest rates: They are making the Japanese public feel negative. Bank of Japan Gov. Haruhiko Kuroda, who announced the nation’s first move into minus rates three weeks ago, found himself dodging a concerted attack in Parliament from lawmakers who charged the policy was victimizing consumers and sending a message of despair. Even a ruling-party member, Masahiro Ishida, called the policy hard to grasp. “It could have the opposite effect of confusing the market,” he said. The criticism has come as a surprise to central-bank officials who thought their efforts to spark lending and faster economic growth would gain more public support.

“Those who understand this policy are criticizing us, and those who do not are also criticizing us,” said one official this week. It is a symptom of a global problem. The more central banks move into unconventional policies, the harder it becomes to get their message across. That is a particular problem when the policies are supposed to work in part by inspiring confidence. It also highlights an open question about negative rates: Commercial banks, for the most part, haven’t started charging depositors to hold their cash, despite increasing pressure on margins. But what happens if they do? Under new rules that took effect Tuesday, the Bank of Japan started imposing an interest rate of minus -0.1% on some deposits it holds for commercial banks, meaning the banks have to pay to store their money.

The goal was to bring down interest rates generally, including long-term rates charged for home loans. The move followed years of attempts to defeat deflation and stimulate moribund spending, including by pumping ¥80 trillion ($701 billion) of cash annually into the economy with purchases of government bonds. The immediate impact was muted as global markets swooned and the yen, seen as a haven in times of trouble, rose against the dollar, threatening the profits of Japanese exporters. This week, markets have stabilized, but the central bank is struggling with a different and equally hard-to-control force: public opinion.

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But if that’s true for all negative rates, who would the yen fall against?

Nomura Sees Yen Falling More Than 10% on BOJ Negative Rates (BBG)

Nomura is sticking to its forecast for the yen to weaken to 130 per dollar by year-end on the view Japan’s negative interest-rate policy will prompt investors to buy more overseas assets and U.S. borrowing costs will rise. Japan’s biggest brokerage has maintained the projection since December 2014, when the yen completed a six-month slide to 119.78 after the central bank boosted its debt purchases to a record. The yen has rallied 5.5% this year against the dollar, about 14% stronger than Nomura’s target, as a flight to haven assets from tumbling global stocks burnished the currency’s allure. “There is nothing convincing yet to alter the outlook,” said Yunosuke Ikeda at Nomura Securities in Tokyo. “The most important check points for now are a set of U.S. data in early March. If we can confirm recession risks are low, the 130-yen forecast can be maintained.”

The yen’s recent strength was partly driven by the dollar’s weakness as concerns over a slowdown in China and the health of banks in Europe caused traders to pare bets that the Federal Reserve will raise rates again this year after moving in December. There’s a 41% probability the Fed will boost rates by the end of December, according to futures data compiled by Bloomberg. The odds were more than 90% at the end of last year. The yen’s advance is being driven by “low conviction” risk aversion, according to Nomura’s Ikeda, a trend that may lose momentum should the U.S. show signs of strength when economic figures are released next month. “The worst case scenario is the low-conviction risk off will become high-conviction should the U.S. economy become decisively bad,” he said. “ For this, ISM manufacturing and non-manufacturing as well as jobs data due in early March are very significant.”

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I’ve suggested seppuku before.

Abenomics? How About Kurodanomics? (BBG)

Despite all Prime Minister Shinzo Abe has done, Japan’s economy contracted an annualized 1.4% in the final three months of 2015, the government announced on Feb. 15. Consumer prices rose just 0.2% year to year, perilously close to deflation. Japanese consumers, hurt by tepid growth in wages and bonuses and a 3%age point rise in the consumption tax in 2014, are holding on to their wallets, with private consumption dropping 0.8% in the quarter. The yen has gained 5.6% against the dollar since the start of the year, eroding profits for exporters such as Toyota Motor and Panasonic. These companies have benefited from the yen’s weakness since the prime minister came to office in late 2012 and began the policy changes known as Abenomics.

“There’s no clear driver to support Japan’s economy,” says Yuichi Kodama at Meiji Yasuda Life Insurance in Tokyo. Yet on the same day the government announced the economy’s contraction, the benchmark Nikkei stock index rose more than 7%. Investors hope that the weak data could spur Bank of Japan Governor Haruhiko Kuroda, who pushed through a negative interest rate last month, to move even deeper into negative territory, or purchase even more bonds. They also hope Abe will postpone another hike in the consumption tax. Handpicked by Abe in 2013, Kuroda has aggressively implemented the monetary policy envisioned by Abenomics. He has championed a quantitative easing program of bond and other asset purchases by the central bank that has left the BOJ with a balance sheet about three-quarters the size of Japan’s $4.6 trillion economy.

Kuroda’s bold and unconventional moves helped drive down the yen, contributing to an increase in corporate earnings and stock prices. In January, the Bank of Japan started charging 0.1% on part of the cash deposited at the central bank by big financial institutions. The idea is to encourage banks to lend instead of watching their cash lose value. “Kuroda is doing everything he can,” says Marcel Thieliant, Japan economist for Capital Economics. Abe’s program has what he calls three “arrows”: an easy-money policy, fiscal stimulus, and structural reforms. Although the BOJ has done its part in terms of interest rates and bond purchases, Abenomics has been a disappointment in the other two areas. The government has moved slowly on reforms of labor laws and other regulations.

As for fiscal stimulus, Abe has increased spending, but also raised the consumption tax to 8%. He wants to raise it to 10%. “Abe and the government have no choice but to depend on Bank of Japan policy,” says Kazuhiko Ogata at Crédit Agricole. But with the BOJ rate negative, Kuroda has little room to maneuver. GDP growth for the fiscal year ending in March will be just 0.8%, according to Bloomberg Intelligence, lower than the central bank’s target of 1.1%. Confidence in Abenomics is falling. In a Yomiuri poll published on Feb. 16, approval of Abe’s economic policies fell to a record low of 39%.

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Can we talk about timing here, OECD?

OECD Calls for Urgent Increase in Government Spending (WSJ)

Governments in the U.S., Europe and elsewhere should take “urgent” and “collective” steps to raise their investment spending and deliver a fresh boost to flagging economic growth, the Organization for Economic Growth and Development said on Thursday. In its most forceful call to action since the financial crisis, the OECD said the global economy is suffering from a weakness of demand that can’t be remedied through stimulus from central banks alone. Releasing its first economic forecasts of 2016, it urged governments that can borrow at very low interest rates to boost their spending on infrastructure. The OECD said that if governments work together, fresh borrowing could have such a positive impact on growth that it would reduce rather than increase their debts relative to economic output.

Speaking to The Wall Street Journal, OECD Chief Economist Catherine Mann said that without such action, governments will be unable to honor their pledges to deliver a “better life” for young people, adequate pensions and health care for old people, and the returns anticipated by investors. “The economic performance generated by today’s set of policies is insufficient to make good on these commitments,” said Ms. Mann, who has worked at the U.S. Federal Reserve and the Council of Economic Advisers. “Those commitments will not be met unless there is a change in policy stance.” The Paris-based think tank lowered its forecasts for global growth this year and next. It now expects the U.S. economy to grow by 2.0% in 2016 and 2.2% in 2017, having in November projected expansions of 2.5% and 2.4%, respectively.

The OECD lowered its eurozone growth forecasts to 1.4% and 1.7% from 1.8% and 1.9%, and nudged down its Japanese growth forecast for this year to 0.8% from 1.0%. It left its growth forecasts for China unchanged. Overall, it expects the global economy to grow by 3% this year, the same rate of expansion as in 2015 but slower than the 3.3% it anticipated in November. “The downgrade in forecasts is broadly based, reflecting a wide range of disappointing incoming data for the fourth quarter of 2015 and the recent weakness and volatility in global financial markets,” the OECD said. “These trends have been apparent in both advanced and emerging economies.” Last month, the IMF cut its global growth forecast for this year, but still expected a pickup from 2015.

Ms. Mann said the sharp and varying falls in prices of assets and commodities since the start of the year largely reflect a delayed response to weaker growth prospects around the world, and not just in China. “We should have had a decline starting a year ago,” she said. “We can see in those different rates of decline both investor views of prospects, but some over shooting.” The OECD said that budget policy in a number of major economies -including Japan, the U.K. and the U.S.- is “contractionary,” while some developing economies had also made recent budget decisions that will slow growth. It urged governments to reverse course.

“Governments in many countries are currently able to borrow for long periods at very low interest rates, increasing fiscal space,” the OECD said. “Many countries have room for fiscal expansion to strengthen demand. This should focus on policies with strong short-run benefits and that also contribute to long-term growth. A commitment to raising public investment collectively would boost demand while remaining on a fiscally sustainable path.”

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Seems obvious.

China Bears Say the Capital Outflow Is Just Beginning (BBG)

Yuan bears say this month’s rally shouldn’t be taken as a sign China’s great reversal in capital flows has finished. Goldman Sachs warns that any further shock depreciation will only accelerate the exit. Daiwa Capital Markets, which predicted the outflow risks back in 2014, says less than half of the $3 trillion of dollar debt that ended up in China has been repaid. Commerzbank said record new yuan loans in January showed companies are raising money to repay more debt abroad. Corporate bond sales onshore have more than doubled this year, as offshore issuance in the greenback dropped about 30%. Goldman Sachs says there have been $550 billion of outflows in the second half of 2015, and that every 1% yuan weakening risks $100 billion more.

The yuan’s appreciation in the four years through 2013 prompted companies to borrow dollars offshore and use the money to profit from a strong currency and higher interest rates in China. The one-way bets began to fade in 2014 as the exchange rate to the dollar plunged the most since 1994. This month’s 0.9% rally hasn’t dissuaded analysts from forecasting a further 3.4% drop by year-end. “We’re less than halfway done” in terms of carry trade unwinding, said Kevin Lai at Daiwa. “My main focus is not about unwinding, but the reverse carry trade. People are taking fresh positions to sell the yuan. We’re talking about a massive deflationary scenario now, which is very bad for the market, economy, for everything.” Daiwa’s estimate for the carry trade is on the high side because it includes borrowing by companies outside China, such as Hong Kong and Taiwan.

Oversea-Chinese Banking economist Tommy Xie estimates the positions at around $1 trillion, based on data from the Bank of International Settlements and the Hong Kong Monetary Authority. Chinese companies’ total foreign-currency debt dropped by about $140 billion in the second half of 2015 to $1.69 trillion, including corporate borrowing from onshore banks, Goldman estimates. That was dwarfed by the $370 billion outflows by Chinese residents buying foreign currencies, it said. “A risk is that any further shocks to renminbi confidence and the perception of policy uncertainty could sharply compound the outflow pressure and render any subsequent stabilization attempts much less effective,” Goldman wrote in a note released to media on Jan. 26.

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Much worse now: “As of 2014, according to an estimate by the McKinsey Global Institute, total debt in China stood at 282% of GDP.”

Red Ink In China (Economist)

This week began with the release of a staggering number. In January, new debt issued in China rose to just over $500 billion, an all-time high. Not all of the “new” debt was actually new; some represented a move out of foreign-currency loans and into local-currency borrowing (in order to reduce foreign-currency risk). But the flow of red ink is not a mirage. China’s government opened the credit taps early in 2016 in order to reduce the odds of a sharp economic slowdown. Private borrowing in China has grown rapidly and steadily since 2008, even as nominal output growth has slowed. As of 2014, according to an estimate by the McKinsey Global Institute, total debt in China stood at 282% of GDP. China is rapidly becoming one of the most indebted countries in the world.

So what? There is a cottage industry of analysts out there gaming out the ways in which a crisis of some sort might unfold within China. But with debts of this magnitude accumulating, you don’t need to posit a looming crisis to draw some reasonably strong, and reasonably gloomy conclusions about the near-term future of the Chinese economy—and the world as a whole. At some point, Chinese corporates will need to deleverage. It is hard to say precisely when or why, but a deleveraging at some point is inevitable. The result of that deleveraging, when it occurs, will be a big drag on demand growth within China. That, in turn, will translate into much slower GDP growth, unless some other source of demand can be found. China could try to boost demand by encouraging more spending and investment by non-corporates.

This probably wouldn’t work especially well, if the history of other economies in such circumstances is any guide. Households have also been adding debt at a good clip. To get them to borrow at an even faster pace, especially at a time when (presumably, given the corporate deleveraging) animal spirits are not at their most spirited, the Chinese government would basically have to force new loans down households’ throats. Certainly, we could expect China to hit the zero lower bound on interest rates and to begin QE. Zero rates and QE would place significant downward pressure on the value of the yuan. That’s just as well, since another thing history tells us is that demand-deficient, deleveraging economies depreciate their currencies and rely on exernal demand to support growth.

Of course, most countries in the situation we’re imagining here aren’t already running big trade surpluses. It is possible, given the importance to China of supply-chain trade, that even a big depreciation wouldn’t boost demand in the economy very much, since it would make imported components more expensive even as it made exports cheaper. If those arguments are right, they suggest that a Chinese adjustment would require either a really big depreciation, or would be slower and more painful, or a bit of both. Conventional wisdom has it, however, that China does not want to depreciate the currency. Depreciation might not boost net exports by much, but it would make dollar-denominated loans more expensive (increasing the pressure on some of those deleveraging corporates), it would squeeze Chinese consumers, and it would represent a big loss of face for the government.

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Delusional: “The government aims to urbanize 100 million lower-income people within five years to expand a middle class that can afford movies and medicine, and sustain China’s upward trajectory.”

Overproduction Swamps Smaller Chinese Cities, Revealing Depth of Crisis (WSJ)

Even in China’s remotest places, relentless overproduction—here it is mushrooms and cement trucks—is clouding the country’s path to prosperity and jolting the global economy. When 48-year-old farmer Yang Qun began trading at Suizhou’s bustling morning mushroom market a half decade ago, the fungus industry was expanding, even attracting a rural lending arm of British financial giant HSBC. Ms. Yang saved enough to buy a minivan. When wet snow fell last month, she was settling for closeout prices to unload six bags of dried mushrooms that took a half year to cultivate. For Xu Song, a clanging sound was once a welcome reminder that his 200 colleagues were busy pounding steel into the giant barrels used on cement trucks.

On a recent day, he sat alone watching videos in an unheated office, the only worker left on an abandoned factory floor where dozens of rusting barrels were stacked like multi-ton footballs. “The decline was steep,” says Mr. Xu, standing inside the all-but-defunct Hubei Aoma Special Automobile Co. factory, where he was hired to do quality control. “I don’t know what had really happened to us.” Beyond the glut of steel and apartments that weighed down growth in recent years, China’s economy is also saturated with surplus goods from farms and factories. Numerous small and midsize cities such as Suizhou, which boomed on easy credit and government support for agribusiness and construction, were supposed to provide the second wave in China’s growth story. Instead they are now sputtering, wearing down prices, profits and job opportunities.

The struggles in Suizhou show how China’s slowdown is broad and deep and hard to fix. It has fueled volatile market trading around the world and has contributed to anxiety about potentially stalled U.S. growth. Domestic overproduction means China is now spending less overseas, while businesses that sell to China are bracing for possible protectionist moves aimed at propping up local companies. And with Chinese demand at risk, its industrial giants with idle capacity are looking to capture market share abroad, including construction and railway equipment makers. The government has made a priority of eliminating “zombie companies,” kept alive with loans to produce unneeded goods, to clear the path for more vibrant parts of the economy. The squeeze won’t be easy because in small, remote places such as Suizhou, overbuilt industries are often the economic backbone.

[..] China’s future is dependent on spreading opportunity more widely. While Shanghai and other gleaming metropolises on the coast powered the first decades of market liberalization, Beijing is now counting on smaller cities for the next phase. The government aims to urbanize 100 million lower-income people within five years to expand a middle class that can afford movies and medicine, and sustain China’s upward trajectory.

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How many times have we said this?!

You Cannot Print Your Way to Prosperity (Ron Paul)

Last week US stock markets tumbled yet again, leaving the Dow Jones index down almost 1500 points for the year. In fact, most major world markets are in negative territory this year. There are many Wall Street cheerleaders who are trying to say that this is just a technical correction, that the bottom is near, and that everything will be getting better soon. They are ignoring the real message the markets are trying to send: you cannot print your way to prosperity. People throughout history have always sought to acquire wealth. Most of them understand that it takes hard work, sacrifice, savings, and investment. But many are always looking for that “get rich quick” scheme. Monetary cranks throughout history have thought that just printing more money would result in greater wealth and prosperity. Every time this was tried it resulted in failure.

Huge economic booms would be followed by even larger busts. But no matter how many times the cranks were debunked both in theory and practice, the same failed ideas kept coming back. The intellectual descendants of those monetary cranks are now leading the world’s central banks, which is why the last decade has seen an explosion of money creation. And what do the central bankers have to show for it? Lackluster employment numbers that have not kept up with population growth, increasing economic inequality, a rising cost of living, and constant fear and uncertainty about what the future holds. The past decade has been a lot like the 1920s, when prices wanted to drop but the Federal Reserve kept the price level steady through injections of easy money into the economy. The result in the 1920s was the Great Depression.

But in the 1920s prices were dropping because of increased production. More goods being produced meant lower prices, which the Fed then tried to prop up by printing money. Unlike the “Roaring 20s” however, the economy isn’t quite as strong today. It’s more of a gasp than a roar. Production today is barely above 2007 levels, while heavily-indebted households already hurt during the financial crisis don’t want to keep spending. The bad debts and mal-investments from the last Federal Reserve-induced boom were never liquidated, they were merely papered over with more easy money. The underlying economic fundamentals remain weak but the monetary cranks who run the Fed keep trying to pump more and more money into the system. They fail to realize that easy money is the cause, not the cure, of recessions and depressions. [..] The more money the Federal Reserve creates, the more ordinary Americans will end up suffering.

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What happens when you make it all up.

The Real Economy Is Talking, but Treasuries Aren’t Listening (BBG)

There’s a massive divergence between recent economic data and U.S. Treasury yields. Amid widespread risk aversion, the yield on 10-year debt fell below 1.60% this month before recovering to back over 1.75% on Thursday. According to Deutsche Bank Chief International Economist Torsten Sløk, that’s still far too low. The Atlanta Fed’s GDPNow indicator provides an estimate for quarterly economic growth based on recently released economic data, which currently stands at 2.6% for the first quarter: “Using the historical relationship between the Atlanta Fed GDP Now estimate and 10y rates shows that 10y rates today should not be 1.82% but instead 2.3%,” he wrote. “Put differently, markets are currently pricing a deep recession, but that is simply not what the data is showing.”

Some caveats apply: The sample size depicted here is quite small, so there’s no guarantee the Atlanta Fed’s GDPNow will prove accurate, and the composition of growth, not merely the headline rate, is important in assessing economic health. Additionally, while it makes intuitive sense for there to be a relationship between yields on sovereign debt, it’s worth remembering what goes into a bond yield: expectations regarding short-term interest rates, market-based measures of inflation compensation, and the term premium (what investors demand for taking on more duration). At present, market-implied expectations for the federal funds rate and inflation are quite low. Term premiums are also suppressed, due in part to strong demand for U.S. assets that are perceived as a safe haven, particularly in times of market turmoil. Those assets also provide a yield that’s more attractive than most other advanced economies.

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How the Anglo model of ownership obsession ritually murders itself.

Number Of UK Homes Worth More Than £1 Million Set To ‘Triple By 2030’ (G.)

The number of properties in Britain worth £1m or more is set to more than triple by 2030, widening the gap between the housing haves and have-nots, according to a report. Less than half a million homes in the UK are currently valued at £1m-plus, but a study by high street lender Santander claims this number will rise to more than 1.6m in the next 15 years. The report also warns that affordability will worsen considerably by the end of the next decade as house price rises far outstrip growth in household incomes. The average property price amounts to 7.9 times the average income at present, but by 2030 this is expected to hit a multiple of 9.7. Santander said: “By 2030 the UK will be even more starkly divided into the housing wealthy and the housing poor than it is now.”

There is a stark geographical divide among the projected members of the £1m club, according to Santander. One in four homes in London will cost £1m-plus by 2030, rising to 70% in two boroughs in the capital – Kensington and Chelsea and the City of Westminster. More than half of homes in three more London boroughs – Camden, the City of London and Hammersmith and Fulham – will also be worth more than £1m. Across the south-east, 7% of homes are expected to be valued at that level. However, many areas of the UK – the north-east, north-west, Yorkshire and Humber, Scotland and the East Midlands – are expected to host a negligible number of such expensive houses (less than 1%). One area, Torfaen in Wales, home to more than 90,000 people, will have none.

The report, carried out in partnership with Paul Cheshire, professor of economic geography at the London School of Economics, predicts that prices in London, which are currently 11.5 times average incomes, will soar to a multiple of 16.5 by 2030. Cheshire said: “By 2030, the divide between housing haves at the top and the have-nots at the bottom will be even wider than it is now. More owners will enjoy millionaire status, as homes that many would consider modest fetch seven figure prices in sought-after areas. “It will make entering the market more difficult still for new buyers, further highlighting the importance of the right timing, advice, support and financial planning; and not just having a mum and dad who bought a house, but a grandparent, too.”

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Make that the entire western world; pensions are Ponzi’s: “What’s happening to us is a microcosm of what’s going to happen to the rest of the pensions in the United States..”

400,000 Americans In Jeopardy As Giant Pension Fund Plans 50% Benefit Cuts (ZH)

Dale Dorsey isn’t happy. After working 33 years, he’s facing a 55% cut to his pension benefits, a blow which he says will “cripple” his family and imperil the livelihood of his two children, one of whom is in the fourth grade and one of whom is just entering high school. Dorsey attended a town hall meeting in Kansas City on Tuesday where retirees turned out for a discussion on “massive” pension cuts proposed by the Central States Pension Fund, which covers 400,000 participants, and which will almost certainly go broke within the next decade. “A controversial 2014 law allowed the pension to propose [deep] cuts, many of them by half or more, as a way to perhaps save the fund,” The Kansas City Star wrote earlier this week adding that “two much smaller pensions also have sought similar relief under the law, and still more pensions are significantly underfunded.”

“What’s happening to us is a microcosm of what’s going to happen to the rest of the pensions in the United States,” said Jay Perry, a longtime Teamsters member. Jay is probably correct. Public sector pension funds are grossly underfunded in places like Chicago and Houston, while private sector funds are struggling to deal with rock bottom interest rates, which put pressure on expected returns and thus drive the present value of funds’ liabilities higher. Illinois’ pension burden has brought the state to its knees financially speaking and in November, Springfield was forced to miss a $560 million payment to its retirement fund. In the private sector, GM said on Thursday that it will sell 20- and 30-year bonds in order to meet its pension obligations.

“At the end of last year GM’s U.S. hourly pension plan was underfunded by $10.4 billion,” The New York Times writes. “About $61 billion of the obligations were funded for the plan’s roughly 360,000 pensioners.” Maybe it’s time for tax payers to bail themselves out. Speaking of GM, Kenneth Feinberg – the man who oversaw the distribution of cash compensation to victims who were involved in accidents tied to faulty ignition switches – is now tasked with deciding whether the Central States Pension Fund’s proposal to cut benefits passes legal muster. “Central States’ proposal would allow the retirees to work and still collect their reduced benefits. But some are no longer able to work, and the idea didn’t seem plausible to others,” the Star goes on to note.

“You know anybody hiring a 73-year-old mechanic?” Rod Heelan asked Feinberg. “I’m available.” “I’ll have to go find a job. I don’t know. I’m 68,” Gary Meyer of Concordia, Mo said. “It would probably be a minimum-wage job.” To be sure, retirees’ frustrations are justified. That said, the fund is simply running out of money. “We simply can’t stay afloat if we continue to pay out $3.46 in pension benefits for every $1 paid in from contributing employers,” a letter to retirees reads. The fund is projected to go broke by 2026. Without the proposed cuts, no benefits at all will be paid from that point forward.

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Not even the WSJ is fooled.

The Political War on Cash (WSJ)

These are strange monetary times, with negative interest rates and central bankers deemed to be masters of the universe. So maybe we shouldn’t be surprised that politicians and central bankers are now waging a war on cash. That’s right, policy makers in Europe and the U.S. want to make it harder for the hoi polloi to hold actual currency. Mario Draghi fired the latest salvo on Monday when he said the ECB would like to ban €500 notes. A day later Harvard economist and Democratic Party favorite Larry Summers declared that it’s time to kill the $100 bill, which would mean goodbye to Ben Franklin. Alexander Hamilton may soon—and shamefully—be replaced on the $10 bill, but at least the 10-spots would exist for a while longer. Ol’ Ben would be banished from the currency the way dead white males like him are banned from the history books.

Limits on cash transactions have been spreading in Europe since the 2008 financial panic, ostensibly to crack down on crime and tax avoidance. Italy has made it illegal to pay cash for anything worth more than €1,000, while France cut its limit to €1,000 from €3,000 last year. British merchants accepting more than €15,000 in cash per transaction must first register with the tax authorities. Fines for violators can run into the thousands of euros. Germany’s Deputy Finance Minister Michael Meister recently proposed a €5,000 cap on cash transactions. Deutsche Bank CEO John Cryan predicted last month that cash won’t survive another decade. The enemies of cash claim that only crooks and cranks need large-denomination bills. They want large transactions to be made electronically so government can follow them.

Yet these are some of the same European politicians who blew a gasket when they learned that U.S. counterterrorist officials were monitoring money through the Swift global system. Criminals will find a way, large bills or not. The real reason the war on cash is gearing up now is political: Politicians and central bankers fear that holders of currency could undermine their brave new monetary world of negative interest rates. Japan and Europe are already deep into negative territory, and U.S. Federal Reserve Chair Janet Yellen said last week the U.S. should be prepared for the possibility. Translation: That’s where the Fed is going in the next recession. Negative rates are a tax on deposits with banks, with the goal of prodding depositors to remove their cash and spend it to increase economic demand. But that goal will be undermined if citizens hoard cash. And hoarding cash is easier if you can take your deposits out in large-denomination bills you can stick in a safe. It’s harder to keep cash if you can only hold small bills.

So, presto, ban cash.

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First Austria, now Switzerland. 5000 francs is well over $5000.

Swiss MPs Want New 5,000-Franc Banknotes To ‘Save Privacy And Freedom’ (L.)

Two MPs from the canton of Zug’s parliament are calling on the Swiss federal government to create 5,000-franc banknotes to “save the privacy and freedom” of citizens. Philip Brunner and Manuel Brandberg, members of the right-wing Swiss People’s Party, have proposed a motion that they hope Zug will support for a cantonal initiative seeking changes to the federal currency law. They argue that the creation of 5,000-franc notes will ensure that the Swiss franc maintains its status as a safe haven currency. The move goes in the opposite direction of in the European Union, where finance ministers have talked about withdrawing 500-euro bills from circulation to deter their use for financing terrorism, money laundering and other illegal activities.

But Brunner and Brandberg maintain that the tendency in the EU and in OECD member countries is to “weaken individual liberties” and to exercise greater control over citizens. In this context “cash is comparable to the service firearm kept by Swiss citizen soldiers,” the pair argued in their motion, saying they both “guarantee freedom”. “In France and Italy already cash payments of only up to 1,000 euros are allowed and the question of the abolition of cash is being seriously discussed and considered in Europe, “ Brunner said on his Facebook page. The move toward electronic payments allows governments “total surveillance” over individuals, the pair claim. Switzerland already has a 1,000-franc note (worth around $1,008), which is the most valuable banknote in Europe and second in the world only to the Singapore $10,000 note among currencies in general circulation.

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“You can’t have these conversations when oil is $125 because then you can’t get it out of the ground quickly enough. And you can’t have it at $27 because you’re just trying to survive.”

Hmmm. Looks to me like it’s at $27 that you can’t get it out of the ground quickly enough.

The Stressed-Out Oil Industry Faces an Existential Crisis (BBG)

The Saudis may go public, OPEC’s in disarray, the U.S. is suddenly a global exporter, and shale drillers are seeking lifelines from investors as banks abandon them. Welcome to oil’s new world order, full of stresses, strains and fractures. For leaders gathering in Houston next week at the IHS CERAWeek conference – often dubbed the Davos of the energy industry – a key question is: what will break first? Will it be the balance sheets of big U.S. shale companies? The treasuries of Venezuela and Nigeria? The resolve of Saudi Arabia, whose recent deal with Russia to freeze output levels offered the first hint of a rethink? After watching prices crash through floor after floor in the worst slump for a generation, the industry is eager for answers.

Insiders say it’s not too hard to visualize what markets might look like after the storm – say five years down the line, when today’s cost-cutting creates a supply vacuum that will push up prices. But it’s what happens in the meantime that’s got them scratching their heads. “This is a weird thing for a market analyst to say because it’s usually the opposite case, but I have more conviction in my five-year outlook than my one-year outlook,” said Mike Wittner at Societe Generale. “Maybe I’m letting my head get turned upside down by the last couple months.” Seeking clarity at closed-door sessions, cocktail hours and water-coolers in Houston will be some of the industry’s biggest players, from Saudi Petroleum Minister Ali al-Naimi to Shell CEO Ben Van Beurden.

In a less volatile year, the long-term viability of fossil fuels might have been high on their agenda after December’s breakthrough climate deal in Paris. But within the industry, that debate has “fallen into the abyss of $27 oil,” said Deborah Gordon, director of the Carnegie Endowment for International Peace’s energy and climate program. “It seems like it’s never a good time,” she said. “You can’t have these conversations when oil is $125 because then you can’t get it out of the ground quickly enough. And you can’t have it at $27 because you’re just trying to survive.”

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Keep watching below.

Oil Gives Up Gains as Inventories Build (WSJ)

U.S. oil prices eked out a gain Thursday as the U.S. government’s weekly oil-inventory report showed another increase in stockpiles of crude oil. U.S. crude inventories rose by 2.1 million barrels last week to 504.1 million barrels, a new weekly record high, the Energy Information Administration said. In monthly data, which don’t line up exactly with weekly data, inventories last exceeded 500 million barrels in 1930. Light, sweet crude for March delivery settled 0.4%, at $30.77 a barrel on the New York Mercantile Exchange. Brent, the global benchmark, slipped 0.6% to $34.28 a barrel on ICE Futures Europe. Both benchmarks had been up about 3% ahead of the government data, which was delayed one day due to the Presidents Day holiday. Oil prices are down more than 70% since a peak in June 2014, driven lower by a mismatch between ample supplies and tepid demand for crude around the globe.

“U.S. and global inventories are nearing maximums, and global production is showing little sign of slowing,” said Rob Haworth at U.S. Bank Wealth Management in a note. Price moves have been especially volatile in recent weeks amid uncertainty about the pace of global demand growth. The U.S. oil benchmark settled up or down by 1% or more for 23 straight sessions until Thursday, the longest such streak since 2009. U.S. crude stockpiles have climbed since the start of the year as production continued to outpace demand. Inventories fell in the week ended Feb. 5 as imports declined, but imports rose again last week, the EIA data show. ”It’s back to business as usual,” said Bob Yawger at Mizuho. He predicted that prices “will eventually cave under the weight of these storage numbers.”

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Better come clean before you’re forced to?!

Anglo American Cut to Junk for Third Time This Week (BBG)

Anglo American’s credit rating was cut to junk by Standard & Poor’s, following similar downgrades by Moody’s Investors Service and Fitch Ratings this week, amid questions about the miner’s ability to sell assets. The company’s rating was reduced to BB from BBB- with a stable outlook, S&P said in a statement Thursday. Moody’s cut Anglo to Ba3, and Fitch lowered the rating to BB+ earlier in the week. The shares slid 4.6% as of 2:25 p.m. in London. Anglo, which became the first major London-based miner to be rated junk, has said it’s looking to speed up sales of coal and iron ore assets after losses bled into a fourth year. It’s trying to engineer a turnaround by focusing on its best mines that produce diamonds, platinum and copper. The company wants to raise $4 billion from mine sales and cut net debt to less than $10 billion this year.

Anglo said on Thursday it will start a tender for a maximum of $1.3 billion of bonds to reduce debt and interest costs. It may purchase $1 billion of notes maturing in 2016, 2017 and 2018 in euros and pounds as well as a maximum of $300 million in dollar-denominated securities, according to company statements.= On Tuesday, Anglo added mines including coal in Australia and nickel in Brazil to an already long list of assets for sale as it seeks to scale back its $12.9 billion debt. CEO Mark Cutifani expects to sell 10 assets by the first half of 2016 and because there are so many up for sale, Anglo wouldn’t be forced to accept any offer, he said.

“Although the program should enable Anglo to lower its debt levels, the depressed market means that we view the proceeds and timeline as very uncertain,” S&P said in the statement. “Because other companies are also seeking to divest assets at this time, we remain very cautious about the timing of any sales and the level of proceeds they will generate.” Goldman Sachs said Tuesday that the miner’s plan to sell off assets was “ambitious” in such a tough environment. Bank of America questioned whether the market trusted the management team to execute sales, while Citigroup said the process was coming too late.

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Translation: Dump ’em all in Greece. And then dump Greece itself.

Wary On Turkey, EU Prepares For Refugee Crisis In Greece (Reuters)

The European Union hopes Turkey will prevent as many migrants reaching Greece as last year but is readying “contingency” plans to shelter large numbers who may arrive but can no longer trek north toward Germany. Migration Commissioner Dimitris Avramopoulos told Reuters on Thursday that it was unclear how far Turkey could reduce numbers once the weather improves and, with efforts under way to prevent a repeat of last summer’s chaotic treks through the Balkans, the EU was working with Athens to shelter refugees in Greece. “As long as our cooperation agreement we made with Turkey doesn’t start giving results, the situation will not be easy at all. The flows will continue,” said Avramopoulos. “That is why we have already started working on contingency planning.”

“If this happens, we are going to be confronted with a huge humanitarian crisis and this has to be avoided.” When more than 800,000 people, many Syrian refugees, arrived in Greece last year, most moved north through the Balkans to Germany. Berlin does not want a repeat, leaving states to the south along the route tightening borders and raising a prospect that a large proportion of new arrivals may be halted in Greece. Assessing how far Turkey will help reduce the flow in return for cash and closer ties with the EU is difficult. Avramopoulos noted that arrivals had dropped sharply in the past week or so, despite good sailing weather, but spiked again on Wednesday.

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Feb 182016
 
 February 18, 2016  Posted by at 8:46 am Finance Tagged with: , , , , , , , , ,  


Russell Lee “Yreka, California, seat of a county rich in mineral deposits” 1942

Negative Interest Rates A ‘Dangerous Experiment’, Warns Morgan Stanley (MW)
Negative Interest Rates Are A ‘Gigantic Fiscal Failure’ (AEP)
Japan’s Exports Drop Most Since 2009 as Sales to China Fall (BBG)
Japan Shelves Plan to Let Pension Fund Directly Invest in Stocks (WSJ)
China’s Banks May Be Getting Creative About Hiding Their Losses (BBG)
China Central Bank Takes Another Step To Guide Interest Rates Lower (BBG)
High Chance of China Hard Landing, Says Adviser to Japan’s Abe (BBG)
Why the Chinese Yuan Will Lose 30% of its Value (CHS)
China’s $600 Billion Subprime Crisis Is Already Here (BBG)
Not Even a Wave of Oil Bankruptcies Will Shrink Crude Production (WSJ)
Less Than 4% Of World Oil Supply In The Red At $35/b (Platts)
Venezuela Lifts Gasoline Price by 6,200% and Devalues Currency by 37% (BBG)
The Real Crisis is for Bank Bonds, Not Banks (WSJ)
Fed’s Kashkari: 25% Capital Requirement May Be Right for Banks (WSJ)
Banking Reform Is More Complex Than It Needs To Be (Chu)
Italy Would Veto Any Cap On Banks’ Government Debt Holding (Reuters)
German Central Bank Chief On Collision Course With Draghi Over QE (T.)
Russia Sues Ukraine in London High Court Over $3 Billion Default (BBG)
WikiLeaks Releases Classified Data On EU Military Op Against Refugee Flows (RT)
European States Deeply Divided On Refugee Crisis Ahead Of Summit (Guardian)

“..the “ECB is ready to do its part” and would “not hesitate to act” to crisis-proof the eurozone.” You don’t crisis-proof by creating a crisis.

Negative Interest Rates A ‘Dangerous Experiment’, Warns Morgan Stanley (MW)

After ECB chief Mario Draghi on Monday hinted more economic stimulus could be coming in March, expectations have risen that deposit rates will be pushed further into negative territory in a bid to fend off the impact from lower oil prices and world-wide economic jitters. While rate cuts usually are seen as a way to stimulate economic growth and weaken the currency, analysts at Morgan Stanley on Wednesday raised concerns that exactly the opposite would happen were the ECB to take rates even lower. Part of this is because investors already have rejigged their portfolios to account for the policy, they explained. Here’s the bank’s thinking:

“Further moves into negative rates will have much less of an impact on the euro, in our view, given that most of the portfolio adjustment is already complete. Rather, we are concerned it erodes bank profitability, creating other systemic risks,” they said in a note. “Could the most bullish ECB outcome be no rate cut?,” Morgan Stanley analysts asked. Calling negative interest rates a “dangerous experiment’, the economists argued such policy would erode bank profits 5%-10% and risk curbing lending across eurozone borders. European banks have already been off to a rough start to the year, down 21% on concerns about the fallout from negative rates, lackluster profits, tougher regulation and a slowdown in global growth. “The credit impulse has turned negative, new loan origination has slowed, and systemic stress in the financial system has risen,” the Morgan Stanley analysts said.

The comments come ahead of the ECB’s March 10 meeting, where investors increasingly are banking on some easing action. The central bank massively disappointed investors in December by introducing a smaller-than-expected rate cut and choosing not to pump more new money into the eurozone economy each month. But at the January meeting, Draghi opened the door for more easing if the economy and inflation showed no signs of improvement. Fast forward a few weeks, and markets have taken a serious beating as investors started to get really nervous about the impact of persistently low oil prices and a slowdown in the world economy.This didn’t go unnoticed by the ECB boss. At his quarterly hearing before the European Parliament on Monday he stressed the “ECB is ready to do its part” and would “not hesitate to act” to crisis-proof the eurozone.

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Negative rates and the war on cash.

Negative Interest Rates Are A ‘Gigantic Fiscal Failure’ (AEP)

[..] negative rates are a creeping threat to civil liberties since the only way to enforce such a regime over time is to abolish cash, for otherwise people will move their savings beyond reach. Mao Zedong briefly flirted with the idea during the Cultural Revolution in his bid to destroy every vestige of China’s ancient culture, but even he recoiled. The eurozone already plans to eliminate the €500 note – allegedly to hurt organized crime – and from there it is a slide down the scales to notes in daily use and then to curbs on quasi-money. It is a step to FDR’s gold embargo and Emergency Banking Act of 1933, when Americans were ordered to hand over their bullion or face 10 years in prison. One policymaker in Davos this year let slip that drastic action to scrap cash would be needed to fight a decade-long war against “secular stagnation” once rates test the limits of -1pc or -2pc.

The Bank of England’s Andrew Haldane floated the idea in a speech last September, suggesting that central banks may have to take radical action to circumvent the constraints of the “lower zero-bound”. Mr Haldane said NIRP reinforced by electronic money is a safer course than going down the “most slippery of slopes” by printing money to cover government spending. Here he is wrong. As Lord Turner argues, there is nothing inherently more slippery about direct monetary financing of fiscal stimulus than any other crisis measure. “Everything we are doing is risky,” he says. One can hardly claim that chronic use of QE to inflate asset prices and to stoke more credit is sound practice, or socially just. A monetary policy committee can calibrate what is judged to be the proper level of debt monetisation needed to avert deflation in exactly the same way as the MPC or the FOMC calibrate interest rates.

The money creation must be permanent to avoid “Ricardian Equivalence”, where people anticipate that more spending now merely mean more debt in the future. All debt accumulated by central banks under QE should be converted to perpetual non-interest bearing debt, and preferably burned on a pyre in public squares to the sound of trumpets to drive home the message that the debt has been eliminated forever. This will pre-empt the panic that might occur among investors and politicians should public debt ever cross some arbitrary totemic level. Any New Deal should be funded in the same way – partly or in whole – with the same vow that the debt will never be repaid. The money creation should continue at the therapeutic dose until the objective is achieved.

There is no technical objection to this form of “fiscal dominance”, as monetary guru Lars Svensson told the IMF forum. All that is missing is political will. Needless to say, the eurozone cannot venture down this path. Maastricht prohibits the ECB from overt financing of deficits and any such thinking in Frankfurt would lead to a court challenge and destroy German consent for monetary union. This augurs ill, because they will need it. Thankfully, those of us with our own currencies, central banks and fully sovereign governments always have the means to prevent the collapse of nominal GDP and to avert debt-deflation. We can run out of wit: we can never run out of monetary ammunition.

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Japan exports to China down 18%. Japan imports also down 18%. World trade falls off a cliff.

More numbers:

January Exports from Asia’s Largest Economies

Singapore -9.9%
China -11.2%
Japan -12.9%
Taiwan -13%
Korea -18.5%
Indonesia -20.7%

Japan’s Exports Drop Most Since 2009 as Sales to China Fall (BBG)

Japan’s exports fell for a fourth consecutive month and dropped the most since 2009, underscoring continued weakness in an economy that contracted in the final months of 2015. Exports to China, Japan’s largest trading partner, were down almost 18%, driving an overall decline of nearly 13% in the value of overseas shipments in January from a year earlier. Imports dropped 18%, leaving a 645.9 billion yen ($5.7 billion) trade deficit, the Ministry of Finance said on Thursday. Falling exports compound poor sentiment in Japan, where wage gains have stagnated, consumer prices are barely rising and households are reluctant to spend. This year stocks have plunged and the yen has gained more than 5% against the dollar amid concerns over China’s slowdown and U.S. growth.

This adds to worries about the seesawing nature of Japan’s economy between modest growth and contraction. “The environment for Japanese exports is looking bad as Japanese companies shift production abroad, the global economy slows and the yen strengthens,” said Yasunari Ueno at Mizuho. “It’s becoming clear that that there is no driver to support Japan’s economy.” While exports to China typically ease in the weeks before lunar new year holidays, and the break came earlier this year, shipments to Japan’s neighbor have dropped for six straight months. Part of the weakness in the export figure is also because Japanese companies received lower prices for sales of steel and chemical products amid the general downturn in commodity and energy markets, said Atsushi Takeda at Itochu in Tokyo.

By volume, exports fell 9.1% in January from a year earlier, the biggest drop since February 2013, while import volumes declined 5.1%. Earlier this week, GDP data showed the Japanese economy shrank an annualized 1.4% in the three months ended Dec. 31. After that, Nomura cut its forecast for Japan’s fiscal 2016 GDP to 1% from a previous projection of 1.4%. The firm sees a high chance that the Bank of Japan will expand monetary stimulus at its March meeting if the market turmoil continues. Itochu’s Takeda doesn’t think it is likely that Japan will fall into a recession though he said “there are growing downside risks to the economy.” “Should gains in the yen and declines in stocks continue, they may take a toll on capital spending, exports and consumption,” he said.

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A sign of Abe’s waning clout?!

Japan Shelves Plan to Let Pension Fund Directly Invest in Stocks (WSJ)

Japan’s government has put off a plan to let its $1.1 trillion public pension fund buy and sell stocks directly, following criticism that the move could lead to excessive state influence on the market. The decision dashes the hopes of the Government Pension Investment Fund’s chief investment officer and some foreign money managers who believed that a direct role in the stock market could make the fund a more effective investor and improve corporate governance in Japan. A committee in Prime Minister Shinzo Abe’s ruling Liberal Democratic Party decided Tuesday to postpone consideration of the issue for three years, said LDP lawmaker Shigeyuki Goto, the committee’s secretary-general. “There won’t be any in-house stock investing, but it remains to be debated in the future,” Mr. Goto said. “The stock issue was the biggest sticking point for those involved in the discussions.”

The GPIF currently outsources decisions on its nearly ¥60 trillion ($520 billion) stock portfolio to more than a dozen outside asset managers. It handles domestic bonds in-house. Mr. Abe’s government has pushed to make the GPIF a more sophisticated investor in line with its overseas peers. The fund has moved more money into stocks and foreign bonds. Yet opposition from business and union leaders shows concern about allowing too much change at the GPIF, whose investment decisions ultimately affect how much Japan’s pensioners can receive. Recent market turmoil has made the fund a politically sensitive subject. The GPIF was criticized by opposition politicians after losing nearly ¥8 trillion in the third quarter of 2015 as global stock prices fell, and it is expected to post more losses in the coming months.

Mr. Abe was asked about the issue in parliament Monday and responded, “If expected returns aren’t met, that will of course impact pension payments.” Japan’s leading business group, Keidanren, as well as Rengo, an umbrella group for labor unions, both opposed letting the fund directly invest in stocks. They expressed concern about the GPIF being used to influence management at Japanese companies by using its voting rights as a shareholder. “It’s a very serious issue if the GPIF were to become a direct shareholder,” said Keidanren official Susumu Makihara at a meeting to debate the change in January. He said “a massive state organization would become a market player” under the proposal and it wasn’t clear how it would use its clout at companies.

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“We tend to think that the Chinese government is likely to provide support if there is any sign of a crisis.” Well, they would like to, but can they?

China’s Banks May Be Getting Creative About Hiding Their Losses (BBG)

Chinese lenders are reacting to a regulatory crackdown on shadow financing by increasing activity in their more opaque receivables accounts, a practice Commerzbank estimates may result in losses of as much as 1 trillion yuan ($153 billion) over five years. Banks are increasingly using trusts or asset management plans to lend and recording them as funds to be received rather than as loans, which are subject to stricter regulatory oversight and capital limits. The German bank’s forecast is based on total outstanding receivables of around 11.5 trillion yuan. “Chinese banks haven’t provisioned for receivables and those are essentially riskier loans,” said Xuanlai He at Commerzbank. “The eventual losses will have significant impact on China’s economy because you could have contagion risk in banking sector.”

Official data show nonperforming loans at Chinese commercial banks jumped 51% last year to a decade-high of 1.27 trillion yuan amid a stock market rout and the worst economic growth in a quarter century. While Moody’s Investors Service doesn’t expect a banking crisis in China in the next 12 to 18 months, it said in a Jan. 26 note that it does see higher loan delinquencies, more defaults on corporate debt and some losses in wealth-management products. “The receivables portfolio in Chinese banks is opaque so we can’t make an assumption on the asset quality,” said Christine Kuo, analyst at Moody’s in Hong Kong. “Provisions for receivables are indeed very low compared to that for loans. We tend to think that the Chinese government is likely to provide support if there is any sign of a crisis.”

China CITIC Bank’s assets under receivables tripled to 900 billion yuan by June 30, from 300 billion yuan at the end of 2013, according to the bank’s financial statements. Concerns about Chinese banks’ creditworthiness are mounting with the cost of insuring Industrial & Commercial Bank of China’s debt against default reaching an all-time high of 199.5 basis points on Jan. 21. The bank’s 6% perpetual notes that count as Additional Tier 1 capital fell to a record low of 99.5 cents last Thursday. The securities traded at 102.5 cents on the dollar Wednesday. The yield spread on China CITIC’s $300 million 6% 2024 notes surged to a one-year high of 336 basis points over U.S. Treasuries Wednesday.

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How afraid is Beijing of deflation? Apparently enough to blow another bubble.

China Central Bank Takes Another Step To Guide Interest Rates Lower (BBG)

China’s central bank took another step to guide interest rates lower, offering to reduce the medium-term borrowing cost it charges lenders in the second such move this year. The People’s Bank of China has told banks it can provide cash through its Medium-term Lending Facility at 2.85% for six-month loans, down from 3%, according to a person with direct knowledge of the matter. The one-year borrowing rate would be eased to 3% from 3.25%, according to the person, who asked not to be identified because the plans aren’t public. Such a reduction would amount to a kind of monetary easing outside of traditional tools such as lowering benchmark lending or deposit rates or the reserve-requirement ratio for the biggest banks.

Overuse of RRR cuts may add too much pressure on short-term interest rates and would therefore be bad for stabilizing capital flows and the exchange rate, PBOC researcher Ma Jun said in a China Business News report published last month. “The PBOC is trying to find ways for monetary easing without making a high-profile interest-rate cut,” said Louis Kuijs at Oxford Economics in Hong Kong. “There’re likely to be more following steps in a similar direction, since a single move will not be enough to turn around the momentum of the economy.” China’s consumer price index climbed 1.8% in January from a year earlier, the National Bureau of Statistics said on Thursday. That was below the medium estimate of 1.9%.

The producer-price index fell 5.3%, extending declines to a record 47 months. “The data show that the economy is pretty weak,” said Larry Hu at Macquarie Securities in Hong Kong. The central bank is attempting to square the circle of supporting growth without using up limited monetary policy space or putting more downward pressure on the yuan, said Bloomberg Intelligence economist Tom Orlik. “That means more use of low-visibility instruments like the MLF to guide rates lower, rather than cuts in benchmark rates,” he said. “The trade off for low visibility, is the confidence boosting effect on the market is reduced.”

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Very high.

High Chance of China Hard Landing, Says Adviser to Japan’s Abe (BBG)

The chances are high China will have a hard landing, and it must undergo a severe adjustment period, an economic adviser to Japanese Prime Minister Shinzo Abe said. “There’s a high possibility of a hard landing in China” as its economy is oversupplied and adjusting demand and supply will cause a shock, Etsuro Honda said in an interview late Tuesday in Tokyo. The problem is more acute as “China can’t use monetary policy for quantitative easing as it has been used to stabilize its currency.” While officials from the IMF to the Bank of Japan have said China will avoid an economic crash, Honda’s comments echo concerns among investors about the direction of China’s economy.

A surprise currency devaluation, the slowest growth in a quarter century and perceived policy missteps are raising anxiety about the world’s second-largest economy. Unlike the idea of capital controls suggested by BOJ Governor Haruhiko Kuroda, Honda recommended China adopt a floating exchange rate system. Otherwise, China’s economy will suffer from a problem of oversupply for quite a while, he said. Honda, 61, is an academic and has been an adviser to Abe for the past three years. “I really don’t think that China’s economic fundamentals are good and it’s just real estate markets and stock markets that are panicking,” Honda said. “China has to go through massive structural reforms and its impact on other economies is quite large. That’s different from other nations.”

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The yuan has turned toxic.

Why the Chinese Yuan Will Lose 30% of its Value (CHS)

The U.S. dollar has gained over 35% against major currencies since 2011. China’s government has pegged its currency, the yuan (renminbi) to the USD for many years. Until mid-2005, the yuan was pegged at about 8.3 to the dollar. After numerous complaints that the yuan was being kept artificially low to boost Chinese exports to the U.S., the Chinese monetary authorities let the yuan appreciate from 8.3 to about 6.8 to the dollar in 2008. This peg held steady until mid-2010, at which point the yuan slowly strengthened to 6 in early 2014. From that high point, the yuan has depreciated moderately to around 6.5 to the USD. Interestingly, this is about the same level the yuan reached in 2011, when the USD struck its multiyear low.

Since 2011, the USD has gained (depending on which index or weighting you choose) between 25% and 35%. I think the chart above (trade-weighted USD against major currencies) is more accurate than the conventional DXY index. Due to the USD peg, the yuan has appreciated in lockstep with the U.S. dollar against other currencies. On the face of it, the yuan would need to devalue by 35% just to return to its pre-USD-strength level in 2011. This would imply an eventual return to the yuan’s old peg around 8.3–or perhaps as high as 8.7.

[..] Here’s the larger context of China’s debt/currency implosion. From roughly 1989 to 2014 -25 years- the “sure bet” in the global economy was to invest in China by moving production to China. This flood of capital into China only gained momentum as the yuan appreciated in value against the USD once Chinese authorities loosened the peg from 8.3 to 6.6 and then all the way down to 6 to the dollar. Every dollar transferred to China and converted to yuan gained as much as 25% over the years of yuan appreciation. Those hefty returns on cash sitting in yuan sparked a veritable tsunami of capital into China. Now that the tide of capital has reversed, nobody wants yuan: not foreign firms, not FX punters and not the Chinese holding massive quantities of depreciating yuan.

This is why “housewives” from China are buying homes in Vancouver B.C. for $3 million. That $3 million could fall to $2 million as the yuan devalues to the old peg around 8.3 to the USD. Who’s left who believes the easy money is to be made in China? Nobody. Anyone seeking high quality overseas production is moving factories to the U.S. for its appreciating dollar and cheap energy, or to Vietnam or other locales with low labor costs and depreciated currencies. For years, China bulls insisted China could crush the U.S. simply by selling a chunk of its $4 trillion foreign exchange reserves hoard of U.S. Treasuries.

Now that China has dumped over $700 billion of its reserves in a matter of months, this assertion has been revealed as false: the demand for USD is strong enough to absorb all of China’s selling and still push the USD higher. The stark truth is nobody wants yuan any more. Why buy something that is sure to lose value? the only question is how much value? The basic facts suggest a 30% loss and a return to the old peg of 8.3 is baked in. But that doesn’t mean the devaluation of the yuan has to stop at 8.3: just as the dollar’s recent strength is simply Stage One of a multi-stage liftoff, the yuan’s devaluation to 8 to the USD is only the first stage of a multi-year devaluation.

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“China’s bad loans have grown 256% in six years even as their ratio to total lending dropped.”

China’s $600 Billion Subprime Crisis Is Already Here (BBG)

Sorry, Kyle Bass, you’re a bit late to the game. The debt problem in China has already reached the proportions of the U.S. subprime mortgage debacle. Don’t worry, though: Chinese authorities are on the case – discussing reducing the required coverage for bad loans so that banks can keep booking profits and lending. Including “special-mention” loans, which are those showing signs of future repayment risk, the industry’s total troubled advances swelled to 4.2 trillion yuan ($645 billion) as of December, representing 5.46% of total lending. That number is already higher than the $600 billion total subprime mortgages in the U.S. as of 2006, just before that asset class toppled the world into the worst financial crisis since 1929.

The amount of loans classed as nonperforming at Chinese commercial banks jumped 51% from a year earlier to 1.27 trillion yuan by December, the highest level since June 2006, data from the China Banking Regulatory Commission showed on Monday. The ratio of soured debt climbed to 1.67% from 1.25%, while the industry’s bad-loan coverage ratio, a measure of its ability to absorb potential losses, weakened to 181% from more than 200% a year earlier. The news looks to have scared Chinese authorities into reacting. Note that they aren’t curbing the ability of Chinese banks to lend or asking them to write off bad credit. Instead they’re considering putting aside checks already in place that are aimed at ensuring the health of the financial system: by reducing the ratio of provisions that banks must set aside for bad debt, currently set at a minimum 150%.

Perhaps, they’re hoping banks will lend even more if they ease the rules. That’s one way to keep the ratio of nonperforming loans under control. As the denominator increases the ratio remains steady or even drops. The absolute number of bad loans, however, keeps swelling. Guess what? Banks are lending more. China’s new yuan loans jumped to a record 2.51 trillion yuan in January, the People’s Bank of China reported on Tuesday. Aggregate financing, the broadest measure of new credit, also rose to a record, at 3.42 trillion yuan. China’s bad loans have grown 256% in six years even as their ratio to total lending dropped. The true amount of debt that isn’t being repaid is open for debate.

One example of how the data can be distorted: Banks are making increasing use of their more opaque receivables accounts to mask loans and potential losses. Still, adding special-mention loans to those classed as nonperforming gives some measure of the size of the bad-debt problem. Unfortunately, the CBRC started to publish special-mention loan numbers only last year, so it’s hard to put them in historical context. The dynamic is clear. A splurge of new lending can help to dilute existing bad loans, but only at a cost. This is a game that can’t continue forever, particularly if credit is being foisted on to an already over-leveraged and slowing economy. At some point, the music will stop and there will have to be a reckoning. The longer China postpones that, the harder it will be.

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Selling at a loss is often preferable over not selling at all, because of sunk costs or expected restart costs.

Not Even a Wave of Oil Bankruptcies Will Shrink Crude Production (WSJ)

More than one-third of oil and natural-gas producers around the world are at risk of declaring bankruptcy this year, according to a new report from Deloitte. Oil prices have plunged from more than $100 a barrel in mid-2014 to about $30 a barrel today. Yet just 35 so-called exploration and production companies filed for bankruptcy between July 2014 and the end of last year, Deloitte says. Most producers managed to stay afloat by raising cash through capital markets, asset sales and spending cuts. Those options are running out.

The only moves left for most producers are dividend cuts and share buybacks, Deloitte says. The firm estimates that 175 companies, or 35% of the E&Ps listed world-wide, are in danger of declaring bankruptcy this year. The conundrum for many investors is that a slew of bankruptcies won’t necessarily shrink the global glut of crude. Companies need cash to repay their debts, so their existing wells are unlikely to stop operating throughout the bankruptcy process. In fact, those wells will probably be sold to better-financed buyers, who can afford to keep production going or even increase it.

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“Given the cost of restarting production, many producers will continue to take the loss in the hope of a rebound in prices.” (h/t ZH)

Less Than 4% Of World Oil Supply In The Red At $35/b (Platts)

Fears of a deepening non-OPEC supply crunch in response to the latest oil price slump may be overdone as many producers are absorbing short-term losses in the hope of a price rebound, according a new study by research group Wood Mackenzie. Citing up-to-date analysis of production data and cash costs from over 10,000 oil fields, Wood Mac said it believes 3.4 million b/d, or less than 4% of global oil supply, is unprofitable at oil prices below $35/b. Even the majority of US shale and tight oil, which has been under the spotlight due to higher-than-average production costs, only becomes cash negative at Brent prices “well-below” $30/b, according to the study.

For many producers, being cash negative is not enough of an incentive to shut down fields as restarting flow can be costly and some are able to store output with a view to selling it when prices recover. “Curtailed budgets have slowed investment, which will reduce future volumes, but there is little evidence of production shut-ins for economic reasons,” Wood Mac’s vice president of investment research Robert Plummer said in a note. “Given the cost of restarting production, many producers will continue to take the loss in the hope of a rebound in prices.” Even since oil prices began sliding in late 2014, there have been relatively few outright field production halts due to low prices, with only around 100,000 b/d shut in globally, according to the study.

Despite widespread fears of a major supply collapse, the US’ shale oil output since late 2014, sharp deflation in service sector costs and greater drilling efficiencies have seen shale oil output remain more resilient to lower prices than first thought. Wood Mac said falling production costs in the US over the last year have resulted in only 190,000 b/d being cash negative at a Brent price of $35/b. The latest study contrasts with a similar report from the research group a year ago when it estimated that up to 1.5 million b/d of output – focused in the US – was vulnerable to being shut in at $40/b Brent.

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Count the failed states the west has created.

Venezuela Lifts Gasoline Price by 6,200% and Devalues Currency by 37% (BBG)

Venezuela hiked gasoline prices for the first time in almost two decades and devalued its currency as President Nicolas Maduro attempts to address triple-digit inflation and the economy’s deepest recession in over a decade. The primary exchange rate used for essential imports, such as food and medicine, will weaken to 10 bolivars per dollar from 6.3, Maduro said in a televised address to the nation. The government will also eliminate an intermediate rate that last sold dollars for about 13 bolivars and improve an alternative “free-floating, complementary” market that trades around 203 bolivars per dollar. The devaluation will ease the drain on government coffers by giving state oil company Petroleos de Venezuela more bolivars for each dollar of oil revenue, while higher gasoline prices will reduce expenditure on subsidies.

At the same time, the devaluation will probably force the government to raise the cost of staple foods such as rice and bread that most of the country now depends on to eat. “Faced with a criminal, chaotic inflation induced a long time ago, we must act with the power of the state to control and regulate markets,” Maduro said below a portrait of South American independence leader Simon Bolivar. While Maduro’s measures may fall short of fully addressing Venezuela’s ailing economy, the announcements may “bring some relief that it’s something after months (years) of nothing,” Sibohan Morden at Nomura Securities said in a note to clients published prior to Maduro’s speech. “It is also important that Chavismo shifts toward pragmatism and finally realizes that the Bolivarian revolution has failed.”

Something had to change after the bolivar lost 98% of its value on the black market since Maduro took office in 2013. The government was hemorrhaging funds as it struggled to meet international debt obligations and maintain the supply of essential items amid the collapse in oil prices. By long subsidizing the cost of fuel, the government has ensured that Venezuelans enjoy the cheapest gasoline in the world. Gasoline prices on Thursday will leap more than 60-fold to 6 bolivars a liter from 9.7 centavos. That’s equal to about 11 U.S. cents per gallon using the weakest legal exchange rate of 202.94 bolivars per dollar, up from about 0.2 U.S. cents per gallon. The price of 91-octane gasoline will increase to 1 bolivar a liter from 7 centavos. Even after these increases, Venezuela still has the lowest gasoline prices in the world.

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Then again, they’re not separate entities.

The Real Crisis is for Bank Bonds, Not Banks (WSJ)

The fall from grace has been swift and hard. Buying high-yielding subordinated bank bonds that count toward Tier 1 capital was a hot trade in a world where investors were scrambling for yield. This is a case where markets have been their own worst enemy. European banks have been at the center of the recent market storm, with Deutsche Bank’s bonds particularly in focus. The move in prices has been big, even with a bounce in the last couple of days. Bank of America Merrill Lynch’s index of contingent capital bonds—popularly known as CoCos—has dropped 7.6% this year. Europe clearly has unresolved issues to address in its fragmented banking system. But this is hardly news. The issue lies more with the securities and the investors that hold them than the balance sheets of the banks that issued them.

The big risk that investors have woken up to isn’t that these bonds can be bailed-in if a bank hits trouble—it is that interest payments on them can be skipped under certain circumstances. In turn, falling prices have raised concerns that banks won’t exercise their option to redeem them at the first opportunity, requiring a further repricing downwards. That has upset the apple cart of what had become a so-called crowded trade—one that caught many investors’ imagination as central banks poured liquidity into markets. During the good times these instruments looked like more lucrative versions of safer, lower-yielding senior debt. But now their equity-like features have come to the fore. That is a big shift for holders to take on board and one that is unlikely to be reversed quickly.

In the meantime, it isn’t clear that there is a natural buyer for these securities. For those holders who wish to sell, that poses an immediate problem: there is no way out, and the turmoil may not be over yet. Longer term, the economics of these hybrid structures may depend on buyers seeing them as safe debt while issuers consider them as quasi-equity. If they are priced more like equity, they may not be so attractive to issuers. Regulators may have helped create an instrument that is only truly viable in fair-weather conditions.

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Kashkari seems to go mostly for the shock effect, and turns opaque as soon as he’s called on his words.

Fed’s Kashkari: 25% Capital Requirement May Be Right for Banks (WSJ)

Q: You talk about higher capital requirements. How high should they be?

MR. KASHKARI: I don’t have a number in my head. I’ve seen some proposals for a 25% capital requirement. So leverage ratios, effectively, just to keep it simple, you know, 4:1. You know, I think that’s a place we could discuss. I don’t have that – I don’t have a magic number yet. And also, importantly, we’re not suggesting that we at the Minneapolis Fed necessarily have all the answers. What we’re trying to do is launch a process where we can bring all of these ideas out from across the country and give them the serious analysis and consideration that I feel like they deserve.

Because when I look at the Dodd-Frank Act – and I was – I had already left government by then – but from the outside, it appeared that the more transformational solutions were just taken off the table – like, OK, that’s too bold; let’s keep the financial system roughly in its current form, and let’s make it safer and stronger. And that’s not an irrational conclusion for legislators to have drawn at that time, because we were – the recovery was still so unclear. But here we are, six years later, the economy is a lot stronger than it was coming out of the crisis. In my judgment, we still have the problem of too-big-to-fail banks, and now feels like the right time to look at this again.

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That second graphic here is very scary. The UK banking sector is 480% of GDP. With a reserve requirement of 3%, tops.

Banking Reform Is More Complex Than It Needs To Be (Chu)

“All that is necessary for the triumph of evil is that good men do nothing.” There’s some uncertainty over whether Edmund Burke actually made this observation. But, regardless of its provenance, the wisdom merits a tweak for our times. Today the necessary condition for vested interests to prevail over the public interest is that good men don’t understand what the hell is going on. Something has happened in the UK banking reform debate. Sir John Vickers, a central figure in the Government’s post-crisis financial overhaul, has questioned whether the Bank of England’s latest proposals to shore up the sector go far enough. Yet this debate is perfectly impenetrable to the non-expert. Read the exchanges between Sir John and the Bank and you will soon slip into a numbing bath of acronyms and jargon from which you will very likely not resurface any the wiser.

G-SIBs, D-SIBs, SRBs, RWAs, Tier 1, Basel III, CoCos … These names will float across your vision, like the members of the world’s most boring rap group. You will read about the appropriate threshold for the activation of “a risk-weighted SRB rate of 3%” and the relevance of “counter-cyclical buffers” and, you will, quite understandably, conclude there is something better you could be doing with your time. But ignore the detail. This complexity is the outcome of years, perhaps even decades, of horse trading between bank lobbyists, regulators and politicians from all around the world. As a non-expert you’re not supposed to be able to follow it. It hasn’t been designed to confuse ordinary people. That’s just a happy side-effect (as far as the banks are concerned).

So clear it from your mind. Focus, instead, on the essentials. Banks are not as complex as they are made out to be by bankers and regulators. A bank has a balance sheet just like any other business. On the asset side of the balance sheet are its loans to customers. On the liabilities side are the current account deposits of customers, plus borrowings from the wholesale capital markets and, most importantly of all, the equity of its investors. The liabilities of a bank fund its assets. Equity is what gets eaten into first when a bank makes losses. If the equity is all used up, the bank is bust. And as we saw in 2008, that can mean taxpayers forced to step in to stop these institutions collapsing and taking the entire economy down with them. That’s why regulators must make sure banks have a sufficiently large tranche of equity financing on their balance sheets.

In support of his case Sir John has chosen to cite the analysis of the respected independent expert in finance, Anat Admati of Stanford University. This is interesting. Ms Admati has recommended that a private bank’s equity cushion should be equivalent to between 20 to 30% of its assets. So what would you guess is the current level of equity for banks being targeted by the Bank of England? 15%? 10%? Try 3%. Or 4% at most. And even Sir John’s report, despite his complaints today, only wanted banks to hold equity worth a maximum of around 4% of assets. Consider what this means: it implies that a mere 3 or 4% fall in the value of a bank’s assets would bankrupt it – and government ministers and regulators would, once again, need to consider whether to step in. To state what should be obvious: that’s not very much. And that simple ratio – known as the “leverage ratio” – should be focus of debate.

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Bye bye banking union. Renzi’s clear: clean up Deutsche first.

Italy Would Veto Any Cap On Banks’ Government Debt Holding (Reuters)

Italy would oppose capping banks’ holdings of domestic sovereign bonds, Prime Minister Matteo Renzi said on Wednesday, throwing down the gauntlet to European policymakers who are considering a cap to strengthen the euro zone banking system. The European Commission plans to review the current rules on banks’ exposure to their home countries’ debt as a way to reduce the risk that wobbly public finances might pose to a national financial system. “We will veto any attempt to put a ceiling on government bonds in banks’ portfolios,” Renzi told the upper house Senate. The European Central Bank’s chief supervisor has proposed a limit on national sovereign debt holdings at 25% of a bank’s equity, but the ECB vice president favours a risk-weighted approach.

Bond markets in Italy and Spain would likely see the biggest impact among major euro zone countries if a cap were imposed, as banks in both countries hold piles of state-issued bonds. Around €405 billion ($451 billion), or 21.6% of all Italian government debt, is owned by its banks. The 41-year-old prime minister said Italy would take a firm line on the issue, adding: “Rather than worrying about government bonds in the banks we should be strong enough to say that (banks elsewhere in Europe) hold too many toxic assets.” Renzi, who has recently taken several swipes at Germany’s banking sector, mentioned the case of Deutsche Bank, which said last week it would buy back more than $5 billion in senior debt.

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Plus ça change..

German Central Bank Chief On Collision Course With Draghi Over QE (T.)

Germany’s powerful central bank chief has said quantitative easing is no longer appropriate for Europe, putting Berlin on a collision course with the ECB over expanding stimulus measures to revive the single currency area. Jens Weidmann, head of the Bundesbank and a member of the ECB’s governing council, said QE was “no longer necessary” for the eurozone, despite the widespread expectation that more stimulus will be announced as early as next month. However, Mr Weidmann defended the ECB’s bond-buying scheme – launched in March last year – at a hearing at the German Constitutional Court on Tuesday, arguing that it did not contravene the principles of the German constitution. But his resistance to expanding QE suggests the ECB’s hawkish members are hardening in their stance against expanding the stimulus programme from its current €60bn a month.

Crucially, Mr Weidmann will not be able to take part in the March vote under the ECB’s rotating voting rules. The Bundesbank chief’s position is in stark opposition to that of ECB president Mario Draghi, who has repeated the central bank’s willingness to “do its part” to revive inflation and growth in the bloc as turmoil has engulfed global markets this year. Draghi’s failure to ramp up QE in December sent markets into a tailspin and has helped European equities plunge by as much 13pc this year. Mr Weidmann was speaking as a witness in front of Germany’s powerful constitutional court in Karlsruhe on Tuesday. The court – which has the power to strike down EU laws it deems incompatible with Germany’s supreme federal constitutional law – was meeting to consider the legality of the ECB’s landmark Outright Monetary Transactions scheme (OMT), first announced in 2012.

Mr Weidmann has been a vociferous opponent of OMT, which acts as a financial backstop for the euro’s distressed debtors but has never been deployed, arguing that it represents the illegal financing of government debt. But he refrained from repeating his criticisms on Tuesday, saying only that the QE measures were less “problematic” than the more ambitious OMT. ECB board member Yves Mersch said OMT was devised to “confront an extraordinary crisis situation” when the future of the eurozone was in doubt. “This crisis situation was characterised by massive distortions of the government bond market that developed their own momentum,” said Mr Mersch. “This in turn led to a disruption of the monetary policy transmission mechanism, which posed a threat for price stability.” The German court is not expected to make a formal ruling until later in the year.

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Ukraine has been turned into a failed state. Even if Russia wins in court, what are the odds it will ever be paid?

Russia Sues Ukraine in London High Court Over $3 Billion Default (BBG)

Russia said it filed a lawsuit against Ukraine in the High Court in London after the government in Kiev defaulted on $3 billion in bonds. Cleary Gottlieb Steen & Hamilton was hired to represent the government in Moscow in a case that will seek to recover the principal in full, $75 million of unpaid interest and legal fees, Russian Finance Minister Anton Siluanov said on Wednesday. The filing comes after Germany attempted to mediate talks between the two former-Soviet neighbors to try to reach an out-of-court settlement. “I expect that the process in the English court will be open and transparent,” Siluanov said. “This lawsuit was filed after numerous futile attempts to encourage Ukraine to enter into good faith negotiations to restructure the debt.”

The case brings to a head a standoff between the two countries after Russia declined to take part in a $15 billion restructuring that Ukraine negotiated with its other Eurobond holders last year. Siluanov reiterated that Russia was demanding better treatment than private creditors, which include Franklin Templeton, and wants to be treated as a sovereign debtor. Russia has to pursue legal action against Ukraine in the U.K. because the bond was structured under English Law. President Vladimir Putin bought the debt in December 2013 to bail out his former Ukrainian counterpart and ally, Viktor Yanukovych, just months before he was toppled and Russia annexed Crimea. The notes were priced to yield 5%, less than half the rate on Ukrainian debt at the time.

The filing poses another obstacle to Ukraine’s government as it faces political infighting that’s threatening to sink the ruling coalition and further stall a $17.5 billion IMF lifeline that the country needs to stay afloat. The IMF warned last week the aid package risked failure if the government doesn’t kick start an overhaul of its economy.

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The smugglers are by now better funded than the military.

WikiLeaks Releases Classified Data On EU Military Op Against Refugee Flows (RT)

WikiLeaks has released a classified report detailing the EU’s military operations against refugee flows in Europe. It also outlines a plan to develop a “reliable” government in Libya which will, in turn, allow EU operations to expand in the area. The leaked report, dated January 29, 2016, is written by the operation’s commander, Rear Admiral Enrico Credendino of the Italian Navy, for the EU Military Committee and the Political and Security Committee of the EU. The document gives refugee flow statistics and details of performed and planned operation phases of the joint EU forces operating in the Mediterranean. The report also places pressure on the responsible EU bodies to help speed up the process of forming a “reliable” government in Libya, which is expected to invite EU forces to operate within its territorial waters, and later give permission to extend EU military operations onshore.

“Through the capability and capacity building of the Libyan Navy and Coastguard we will be able to give the Libyan authorities something in exchange for their cooperation in tackling the irregular migration issue. This collaboration could represent one of the elements of the EU comprehensive approach to help secure their invitation to operate inside their territory during Phase 2 activities,” the document states. Admiral Credendino writes that the task force is ready to proceed to phase 2B despite political and legal challenges: “…We are ready to move to phase 2B (Territorial Waters) where we can make a more significant impact on the smuggler and traffickers business model.” “However, in order to move into the following phases we need to have a government of national accord with which to engage.” “A suitable legal finish is absolutely fundamental to the transition to phase 2B (Territorial Waters) as without this, we cannot be effective.”

“Central to this and to the whole transition to phase 2B, is an agreement with the Libyan authorities. Ultimately they have the casting vote on the legal finish which will in turn drive the transition to phase 2B and the appetite for Member States to provide assets. As a European Union, we must therefore apply diplomatic pressure appropriately to deliver the correct outcome,” the document states. The leak comes less than five months after it was reported that Operation Sophia would consist of 22 member states and 1,300 personnel which would board and seize suspect vessels in the Mediterranean. However, the document notes that when the operation progresses into phases 2B and 3, “the smugglers will again most likely adapt quickly to the changing situation. The primary concern for smugglers will likely remain to avoid being apprehended so they can continue their illegal activities.”

The operation’s objective is primarily to disrupt smuggling routes by human traffickers, rather than to stop migration flows, according to the European Union Institute for Security Studies, which wrote in a document that the operation began on July 27, 2015. The Institute noted, however, that there is a “real uncertainty on whether the operation will ever be able – for either legal or political reasons – to get to the core of its mandate, i.e. neutralising the smuggling networks through deterrence or open coercion, both off the Libyan coast and onshore.” It went on to note that regardless of the operation’s support for EU member states, only “a very few” are likely to “have the skills and experience for such missions, let alone the will.” It also stressed that the operation cannot be a “solution” to the refugee crisis, and that “no one in Brussels is contending that it could.”

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They can talk for years and still won’t agree. Sticks and carrots galore, but those don’t keep the EU together.

European States Deeply Divided On Refugee Crisis Ahead Of Summit (Guardian)

Europe’s deep divide over immigration is to be laid bare at an EU summit in Brussels on Thursday, with German chancellor Angela Merkel struggling to salvage her open-door policy while a growing number of countries move to seal borders to newcomers along the Balkan routes. A dinner debate on the migration crisis on Thursday evening will do little to resolve the differences, senior EU officials predict. Donald Tusk, the president of the European council, has avoided putting any new decisions on the agenda in an attempt to avoid fresh arguments. The leaders of four anti-immigration eastern European countries met in Prague on Monday and demanded alternative EU policies by next month.

Their plan amounts to exporting Hungary’s zero-immigration razor-wire model to the Balkans, sealing Macedonia’s border with northern Greece, and bottling up the vast numbers of refugees in Greece unless they are deported back to Turkey. Merkel, by contrast, is to lead a rival meeting of leaders of 10 countries on Thursday in an attempt to invigorate a pact with Turkey, which is aimed at trading money and refugee quotas for Ankara’s efforts to minimise the numbers crossing the Aegean to Greece. Merkel’s plan hinges on EU countries volunteering to take in quotas of refugees directly from Turkey. But even among her allies – a so-called coalition of the willing – support for the policy is fading. Austria, which is hosting Thursday’s meeting at its embassy in Brussels, announced much stiffer national border controls this week.

It has also told Brussels and Balkan governments that it could close its borders within weeks. France, also part of the coalition, announced that it would not participate in any new quotas system. “You can’t have 20 [EU] countries refusing to take in refugees,” said a European commissioner. But senior officials in Brussels admit that there is now a solid majority of EU states opposing Merkel. In a pre-summit statement to parliament in Berlin on Wednesday, Merkel stoutly defended the policies that are under fire at home and across Europe. Despite the problems, she said, 90% of Germans continued to support taking in people fleeing war, terror and persecution. “I think that’s wonderful,” Merkel said.

Her speech dwelt overwhelmingly on the faltering pact with Turkey, struck in November. Ahmet Davutoglu, the Turkish prime minister, is to attend the mini-summit in Brussels. The issue at the EU summit, Merkel said, will be whether to press ahead with the Turkey pact or whether to concentrate on the closed scenario of more fences and quarantining Greece.

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Feb 142016
 
 February 14, 2016  Posted by at 9:59 am Finance Tagged with: , , , , , , , ,  


Dorothea Lange Water supply in squatter camp near Calipatria CA 1937

China’s Central Bank Says No Basis for Continued Yuan Decline (BBG)
Why Kuroda’s ‘Bazooka’ May Be Out of Ammunition (WSJ)
BoJ Deputy Says Japan Needs Bolder Measures To Unlock Growth (FT)
Swedish Central Bank Move Creates a Global Shudder (NY Times)
Bond Investors Looking Out for Stimulus Hint in Draghi Testimony (BBG)
There Are Still a Few Tricks Seen Up Central Bankers’ Sleeves
Former Dallas Fed President Calls Out Central Banks (CNBC)
Nomura Drops to Pre-Abenomics Level as Japan’s Brokers Slump (BBG)
Deutsche Bank Buyback Sparks Backlash From Newest Investors (BBG)
This is How Financial Chaos Begins (WS)
Pension Funds See 20% Spike In Deficit (AP)

A Debt Rattle largely filled with central banks and various opinions and assumptions about them. Just happened that way.

China’s Central Bank Says No Basis for Continued Yuan Decline (BBG)

China’s central bank governor said there was no basis for continued depreciation of the yuan as the balance of payments is good, capital outflows are normal and the exchange rate is basically stable against a basket of currencies, according to an interview published Saturday in Caixin magazine. Zhou Xiaochuan dismissed speculation that China planned to tighten capital controls and said there was no need to worry about a short-term decline in foreign-exchange reserves, adding that the country had ample holdings for payments and to defend stability. The comments come as Chinese financial markets prepare to reopen Monday after the week-long Lunar New Year holiday.

The country’s foreign-exchange reserves shrank to the smallest since 2012 in January, signaling that the central bank sold dollars as the yuan fell to a five-year low. The weakening exchange rate and declining share markets in China have fueled global turmoil and helped send world stocks to their lowest level in more than two years. The bank will not let “speculative forces dominate market sentiment,” Zhou said, adding that a flexible exchange rate should help efforts to combat speculation by effectively using “our ammunition while minimizing costs.”Policy makers seeking to support the yuan amid slower growth and increasing outflows have been using up reserves. The draw-down has continued since the devaluation of the currency in August and holdings fell by $99.5 billion in January to $3.23 trillion, according to the central bank on Feb. 7.

The stockpile slumped by more than half a trillion dollars in 2015. China has no incentive to depreciate the currency to boost net exports and there’s no direct link between the nation’s GDP and its exchange rate, Zhou said. Capital outflows need not be capital flight and tighter controls would be hard to implement because of the size of global trade, the movement of people and the number of Chinese living abroad, he added. The country will not peg the yuan to a basket of currencies but rather seek to rely more on a basket for reference and try to manage daily volatility versus the dollar, Zhou said. The bank will also use a wider range of macro-economic data to determine the exchange rate, he said.

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By his own admission, no clue: “..what we have to do is to devise new tools, rather than give up the goal..”

Why Kuroda’s ‘Bazooka’ May Be Out of Ammunition (WSJ)

Bank of Japan Gov. Haruhiko Kuroda once awed the markets. Now he looks like just another central banker running out of options. Mr. Kuroda took the helm of the BOJ in March 2013, vowing to do whatever it takes to vault Japan out of more than a decade of deflation. He fired one “monetary bazooka” and then another, seeming to bend markets to his will both times. Japanese stocks rose, and the yen sank, key developments for “Abenomics,” Prime Minister Shinzo Abe’s growth program. But the introduction of negative interest rates two weeks ago failed to impress—except in the minds of some as confirmation that what the BOJ had been doing for three years wasn’t working. Japan’s economy is sputtering and Mr. Kuroda’s primary target—2% inflation—is as far away as ever, heightening skepticism about the limits of monetary policy and the fate of Abenomics.

It is an ominous development for Mr. Kuroda. He sees Japan’s long bout of deflation as a psychological disorder as much as an economic disease. His job as BOJ chief has been part central banker, part national psychologist. It has been all about creating confidence. From the start, many said he was attempting the impossible. Deflation is notoriously difficult to escape, and had taken deep root in Japan after years of policy missteps. Last summer he invoked a fairy tale to describe his task. “I trust that many of you are familiar with the story of Peter Pan, in which it says, ‘The moment you doubt whether you can fly, you cease forever to be able to do it,’” Mr. Kuroda said in June last year. “Yes, what we need is a positive attitude and conviction.”

Answering questions in parliament Friday, Mr. Kuroda dismissed claims that the introduction of negative interest rates were to blame for the recent stock market selloff. He pointed to global market volatility, and said the negative rates have had their intended effects, driving down yields on short- and long-term government bonds. “I believe those effects will steadily spread through the economy and prices going forward,” he said. Mr. Kuroda has also repeatedly rejected the notion that the central bank is running out of ammunition, insisting that there is “no limit” to its policy options. “If we judge that existing measures in the tool kit are not enough to achieve the goal, what we have to do is to devise new tools, rather than give up the goal,” he said.

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Peter Pan rules.

BoJ Deputy Says Japan Needs Bolder Measures To Unlock Growth (FT)

The deputy governor of the Bank of Japan has called on the country’s government to pull its weight, as the central bank strains to haul the world’s third-largest economy decisively out of deflation. Last month the BoJ embarked on its latest round of easing, saying it would start charging for excess reserves deposited at the central bank. At the time, it said it wanted to provide a shot of stimulus at a critical moment, just ahead of the annual Spring round of wage negotiations between companies and workers’ groups. In a speech in New York on Friday, deputy governor Hiroshi Nakaso said that the government now needed to do more to boost Japan’s growth potential. He referred to a joint statement on overcoming deflation, signed by the BoJ and the government in January 2013, a few months before the bank embarked on its first round of easing under the current governor, Haruhiko Kuroda.

In it, the central bank pledged to stimulate demand through ultra-aggressive monetary policy while the government promised to pursue ‘all possible’ supply-side reforms. Now that the Bank of Japan has taken monetary easing one step further … I think that the original third arrow of Abenomics, the growth strategy, must also fly faster, he said. The unusually candid speech comes as the success of the mix of the policies pursued by prime minister, Shinzo Abe, remains in the balance. After three separate bursts of monetary stimulus from the BoJ, inflation has gained some momentum while corporate profits have been boosted by a sharp drop in the value of the yen. However, Japan’s potential growth rate remains so low — around or slightly below 0.5%, according to the BoJ’s estimate – that any setback has the potential to tip the country into recession.

Economists at Goldman Sachs expect that the first reading of GDP figures for the fourth quarter, due on Monday, will show an annualised contraction of 1.2% from the third quarter, hit by a slump in consumer spending due to a mild weather and smaller winter bonuses. The BoJ now fears that many cash-hoarding companies are set to resist calls for higher wages, as they assume that inflation will be kept in check by a combination of weak demand, a lower oil price and a stronger currency. The national trades union group, Rengo, has already signalled a less aggressive stance in this year’s negotiations, saying it is aiming at an across-the-board increase of “around 2%” — less than the 2015 demand for “at least” 2%. That could threaten progress toward the BoJ’s sole policy target: an inflation rate of 2%. In December Japan’s consumer price index stood at 0.1%, excluding fresh food, and 0.8% excluding energy.

“The sluggish increase in nominal wages is thought to reflect low productivity growth and the strong deflationary mindset,” said Mr Nakaso. “My answer to what kind of policies are needed, is that both monetary and fiscal policies and structural reforms are indispensable.” Mr Nakaso is likely to make similar remarks during a speech to business leaders next month in Okinawa, according to people familiar with his thinking, imploring the government to take bolder measures to unlock growth. Takuji Okubo, managing director at Japan Macro Advisors, a research boutique, said that the government’s ‘third arrow’ record has been poor, citing a lack of true reform of the labour market, the service sector or the public pension system. He added that the sharp sell-off in the Japanese stock market since the beginning of the year, coupled with a renewed appreciation of the yen, seems strong enough to put an end to the Abenomics boom. “The expiry date has now come to pass,” he said.

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“What central bankers are doing now feels like a Jedi trick..”

Swedish Central Bank Move Creates a Global Shudder (NY Times)

What if the bazooka is shooting blanks? Since the financial crisis, it has been gospel for many investors that some combination of actions by central banks — bond buying, bold promises or flirtations with negative interest rates — would be enough to keep the global economy out of recession. But investors’ distress over the latest volley by a major central bank, the surprise decision on Thursday by the Swedish central bank to lower its short-term rate to minus 0.50% from minus 0.35%, has heightened fears that brazen actions by central bankers are now making things worse, not better. Global stock markets sank, the price of oil plunged to a 13-year low and investors fled to safe haven instruments like gold and United States Treasury bills.

Markets generally embrace conviction and run away from indecision — which is what many see in the policy making of some of the large central banks these days. The Swedish central bank, the Riksbank, for example, has been criticized in the past for prematurely raising rates, and Thursday’s rate cut was opposed by two bank deputies. At the ECB Jens Weidmann, the head of the powerful German Bundesbank, remains at odds with the president, Mario Draghi, in terms of how loose the central bank’s policies should be. And in the United States, the Federal Reserve is seen by some market participants to be wavering in its commitment to higher rates in light of the market turmoil.

[..] “What central bankers are doing now feels like a Jedi trick,” said Albert Edwards, global strategist for Société Générale in London. “Everyone is in a currency war and inflation expectations are collapsing.” In other words, drastic steps by central bankers in Europe, Japan and China to keep their currencies weak and exports strong may not only be counterproductive in terms of stimulating global growth — someone has to buy all those Chinese and Japanese goods — but has other consequences as well. Negative interest rates, for example, are not only bad for bank profits and lending prospects, they can also make savers more fearful, hampering the central aim, which is to get people to spend, not hoard. All of which can lead to a global recession.

A perma-bear like Mr. Edwards is always in possession of a multitude of negative economic indicators to prove his thesis, which, in his case, is a fall of 75% in the S.&P. 500 from its peak last summer. Some are obvious and have been highlighted by most economists, like the increasing interest rates on corporate bonds in the United States — both investment grade and junk. But he also pointed to a recent release from the Fed that showed that loan officers at United States banks said that they had been tightening their loan standards for two consecutive quarters. “You tend to see that in a recession,” Mr. Edwards said. His prediction of a so-called deflationary ice age is still considered a fringe view of sorts, although he did say that a record 950 people (up from 700 the year before) attended his annual conference in London last month. Still, the notion that the global economy has not responded as it should to years of shock policies from central banks is more or less mainstream economic thinking right now.

[..] The well-known bond investor William H. Gross of Janus Capital took up this theme in his latest investment essay, arguing that there was no evidence to show that the financial wealth (and increased levels of debt) created by a long period of extra-low interest rates would spur growth in the real economy. As proof, he cited Japan’s persistent struggles to grow despite near-zero interest rates; subpar growth in the United States; and emerging market problems in China, Brazil and Venezuela. “There is a lot of risk in the global financial marketplace,” Mr. Gross said in an interview on Thursday. “It is incumbent on me to focus on safe assets now.”

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Debt is king, and Draghi its oracle.

Bond Investors Looking Out for Stimulus Hint in Draghi Testimony (BBG)

Investors will look next week for a whiff of confirmation from Mario Draghi that they weren’t wrong to push bond yields to record lows in anticipation of fresh stimulus from the ECB. The ECB president’s speech to European lawmakers in Brussels on Monday will come after a turbulent five days in which global markets exposed a schism in the euro region’s debt markets. German 10-year bund yields approached their record low from April while Portugal’s jumped by the most since May 2012, before Draghi made his famous “whatever it takes” speech in July that year. Investor demand for havens at these lower yields faces a challenge on Feb. 17 when Germany auctions €5 billion ($5.6 billion) of 10-year bonds.

That’s followed the next day by France selling up to €8.5 billion of conventional and inflation-linked bonds. The offerings come while the prospects of slowing growth and depressed inflation are prompting investors to pile into the region’s safer fixed-income assets, driving yields down toward levels that triggered a selloff last April and May. “Investors will keep a close eye for any hints for what type of policy easing will be forthcoming,” said Nick Stamenkovic at broker RIA Capital Markets. “People are plumping for safety, core government bonds and demanding a higher risk premium on peripherals in particular, and also some semi-core bonds. The upcoming auctions outside of Germany will be a good test of sentiment.”

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“Pessimism is unwarranted.” Darn, and I though it was time to panic. Finally. They can’t even agree on that.

There Are Still a Few Tricks Seen Up Central Bankers’ Sleeves

If one line of reasoning for the plunge in bank stocks is that monetary policy has lost its punch, investors would do well to recall a law of modern investing: “Don’t fight the Fed.” As the week draws to a close, some Wall Street economists and strategists say monetary authorities have plenty more tricks up their sleeve – even after more than 635 interest-rate cuts since the financial crisis by Bank of America’s reckoning and with central banks now sitting on more than $23 trillion of assets. “Time and time again policy makers have shown themselves to be bolder and more inventive than asset markets give them credit for,” Stephen Englander, Citigroup’s New York-based global head of Group-of-10 currency strategy, said in a report to clients late on Thursday. “Pessimism is unwarranted.”

His proposal is that officials focus their policy more on boosting demand rather than just increasing liquidity in the hope that consumers and companies will find a need for it. While he thinks targeted lending could help achieve that, he advocates what he calls “cold fusion” in which politicians would cut taxes and boost spending with central banks covering the resulting rise in borrowing by purchasing even more bonds. “The next generation of policy tools is likely to be designed to act more directly on final demand, using persistently below target inflation as a lever to justify policies that will be anathema otherwise,” Englander said. In a similar vein, Hans Redeker at Morgan Stanley in London, is declaring it’s time for central banks to begin using quantitative easing to buy private assets having previously focused on government debt.

“I would actually look into the next step of the monetary toolbox,” Redeker said in a Bloomberg Television interview. “We need to fight demand deficiency.” Critics say that’s the source of the problem. There’s little more bond-buying and rate cutting can do to stoke the real economy. And markets, they say, now recognize that. Part of this week’s pain in markets has stemmed from the concern that the negative interest rates increasingly embraced by the likes of the Bank of Japan and European Central Bank do more harm than good by hitting bank profits. That hasn’t stopped JPMorgan economists led by Bruce Kasman suggesting central banks could cut much deeper without any major side effects so long as they limit the reserves they are targeting. Citigroup said yesterday that Israel, the Czech Republic, Norway and perhaps Canada could also join the subzero club in the next couple of years.

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“Look, these are very smart people..”

Former Dallas Fed President Calls Out Central Banks (CNBC)

Are central banks’ aggressive monetary policies to blame for the today’s economic woes? Former Dallas Federal Reserve President Robert McTeer says yes. Speaking to CNBC’s “Fast Money” this week, McTeer explained that while the Fedis comprised of smart and carefully minded individuals, they dropped the ball when it comes to their current approach. “[The Fed] waited too long to begin the tightening process,” noted the former FOMC member and 36-year veteran of the Federal Reserve system. The central banker’s critique echoed that of other economists, whom have argued that the trillions of cheap dollars flooding the system have exacerbated the current downturn, and made the market addicted to the liquidity.

Known for his prolific writing and plain-speaking style while at the Fed, McTeer has been a critic of the Fed’s ultra-loose monetary policy, which he previously argued stayed too low for too long. However, McTeer admitted that bad luck and unfortunate timing has compounded the current undesirable circumstances. He told CNBC that “as soon as they took the first step [to tighten], international developments overwhelmed the situation.” At that time, China’s slowdown became more pronounced, upsetting markets. McTeer further believes that the Fed’s delay enabled other central banks—from Japan to the European Central Bank—to enact negative interest rates, a policy move with which he disagreed. Now, with international markets in crisis, McTeer says Fed chair Janet Yellen needs to take a more proactive approach in addressing global concerns.

The former central banker advised that “she should probably show more concern [related] to recent market turmoil” when speaking in the future. On Friday, international markets saw a sell-off in Asia where the Nikkei dropped 4.8% to 14,952, its lowest close since October, 2014. Additionally, the yen ended the week down 11%, unwinding some of the massive flight to safety buying that has recently boosted Japan’s currency. The Dow Jones Industrial Average, S&P 500 Index and Nasdaq all posted big gains, and snapped a five day losing streak. At the same time, the market’s latest mantra has become negative interest rates, which have been introduced in Japan and Europe. Earlier this week, Yellen refused to rule out the policy move for the world’s largest economy, but acknowledged the issue needed more study.

Negative rates, however, is an idea McTeer does not endorse. The central bank “is not going to do it, but furthermore they can’t do it,” he noted, speaking of the Fed’s next potential move. In McTeer’s interpretation, negative rates are not an options because the Fed has adopted a new mechanical procedure for establishing the Fed funds rate, which is the interest rate that banks use to calculate overnight loans to other institutions. The rate currently calls for a positivity on bank deposits. McTeer believes that if the Fed tries to go negative, it would take years to re-work the system.

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Buybacks then! Solves everything.

Nomura Drops to Pre-Abenomics Level as Japan’s Brokers Slump (BBG)

It’s as if Abenomics never happened for Japan’s biggest brokerages. Nomura and Daiwa Securities fell for an eighth straight day in Tokyo as the deepening stock-market rout continues to pummel investment banks around the world. Nomura is now trading below its price when Shinzo Abe became prime minister in December 2012, ushering in an economic-stimulus policy that sparked a stock-market rally and a profit rebound at Japan’s largest securities firm. The selloff may be overdone because brokerages remain stronger than they were before the Abe administration, according to SBI Securities analyst Nobuyuki Fujimoto. “Their fundamentals haven’t deteriorated that much,” Fujimoto said by phone. “The tide will turn as overseas investors in particular decide whether their profitability is really worse than it was before Abenomics.”

Shares of Tokyo-based Nomura closed 9.2% lower Friday, extending their decline to 33% since the company posted worse-than-estimated earnings on Feb. 2. At 446.6 yen, the price is the lowest since Dec. 21, 2012. Daiwa dropped 8.2% to 591.1 yen, the weakest since the month before Bank of Japan Governor Haruhiko Kuroda unveiled his first round of monetary easing in April 2013. An index of securities firms was the third-worst performer on the benchmark Topix, which slumped 5.4%. Investors continued dumping Nomura shares even after Chief Executive Officer Koji Nagai said this week that the company is considering buying back stock while it’s cheap. “The brokerage must also be advising Japanese firms to consider share buybacks, if the CEO’s remarks are any guide,” said Fujimoto. “I wouldn’t be surprised to see companies start announcing such plans soon, which will be beneficial to brokerages.”

Nomura has announced five share buybacks since May 2013, including two last year. The company is now trading at 0.57 times the book value of its assets, the cheapest since November 2012, according to data compiled by Bloomberg. Daiwa has a price-to-book ratio of 0.80 “We’re considering returning profit appropriately” to shareholders, Nagai said in an interview on Tuesday. “There’s no doubt that it’s better for us to do it when they’re cheap,” he said, declining to comment on the timing and size of any buyback.

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Oh wait, not everything…

Deutsche Bank Buyback Sparks Backlash From Newest Investors (BBG)

Investors who scooped up bonds sold by Deutsche Bank last month are pushing for better terms in the bank’s $5.4 billion debt buyback plan, saying they were misled because the German lender failed to disclose its true financial position before the sale, according to people with knowledge of the matter. Some of the bondholders who participated in the $1.75 billion, two-part offering say the bank, which announced a fourth-quarter earnings loss less than two weeks after the sale, should’ve made that disclosure before selling the bonds, the people said, asking not to be identified as the discussions are private. Some investors are so upset that they may raise the issue with regulators, the people said.

The money managers are planning to hold discussions next week to explore their options on how best to challenge the bank, the people said. In addition to raising concern about disclosure, the bondholders are pushing for greater priority and better terms in the bank’s buyback offer announced Friday. Deutsche Bank’s buyback comes as the lender attempts to reassure investors who dumped European bank bonds and shares this week amid concerns over declining earnings and slowing global growth. The lender’s debt in a Bloomberg investment-grade bond index have dropped 2.7% in the past month compared with a 0.4% decline for all bank debt. The $750 million of 4.1% notes sold in January slumped 5.7%.

The firms that bought the biggest piece of the January offering at 100 cents on the dollar are now getting an offer to sell them back to the bank at as much as 97.3 cents, according to calculations by Bloomberg Intelligence analyst Arnold Kakuda. The securities traded at 95.6 cents on Thursday. Deutsche Bank, which unveiled the sale of the bonds on Jan. 8, said on Jan. 21 that it would post a €2.1 billion loss for the fourth quarter after setting aside more money for legal matters and taking a restructuring charge. Moody’s Investors Service cut its long-term debt rating on the bank to Baa1 from A3, citing structural issues that contributed to “weak profitability,” and the expense of maintaining a global capital-market footprint, the ratings firm said in a Jan. 25 statement.

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Junk bonds will be back.

This is How Financial Chaos Begins (WS)

There are over $1.8 trillion of US junk bonds outstanding. It’s the lifeblood of over-indebted corporate America. When yields began to soar over a year ago, and liquidity began to dry up at the bottom of the scale, it was “contained.” Yet contagion has spread from energy, metals, and mining to other industries and up the scale. According to UBS, about $1 trillion of these junk bonds are now “stressed” or “distressed.” And the entire corporate bond market, which is far larger than the stock market, is getting antsy. The average yield of CCC or lower-rated junk bonds hit the 20% mark a week ago. The last time yields had jumped to that level was on September 20, 2008, in the panic after the Lehman bankruptcy. Today, that average yield is nearly 22%! Today even the average yield spread between those bonds and US Treasuries has breached the 20% mark. Last time this happened was on October 6, 2008, during the post-Lehman panic:

At this cost of capital, companies can no longer borrow. Since they’re cash-flow negative, they’ll run out of liquidity sooner or later. When that happens, defaults jump, which blows out spreads even further, which is what happened during the Financial Crisis. The market seizes. Financial chaos ensues. It didn’t help that Standard & Poor’s just went on a “down-grade binge,” as S&P Capital IQ LCD called it, hammering 25 energy companies deeper into junk, 11 of them into the “substantial-risk” category of CCC+ or below. Back in the summer of 2014, during the peak of the wild credit bubble beautifully conjured up by the Fed, companies in this category had no problems issuing new debt in order to service existing debt, fill cash-flow holes, blow it on special dividends to their private-equity owners, and what not. The average yield of CCC or lower rated bonds at the time was around 8%.

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Beware: “.. which would take their pension fund contribution rates from an average of about 18% of payroll to nearly 30%..”

Pension Funds See 20% Spike In Deficit (AP)

Oregon Treasurer and Portland mayoral candidate Ted Wheeler issued a statement last week noting that the state pension fund’s investment returns were 2.1% in 2015. That beat the Standard & Poor’s 500 index and topped the performance of 88% of comparable institutional investment funds. What Wheeler’s statement didn’t mention was that investment returns for the year still fell 5.6 percentage points below the system’s 7.75% assumed rate of return for 2015. That’s terrible news for public employers and taxpayers. It means the pension system’s unfunded liability just increased by another 20% — growing from $18 billion at the end of 2014 to between $21 and $22 billion a year later. That will put renewed upward pressure on payments the system’s 925 public-sector employers are required to make.

Public employers had already been warned to expect maximum increases over the next six years, which would take their pension fund contribution rates from an average of about 18% of payroll to nearly 30%, redirecting billions of dollars out of public coffers and into the retirement system. In reality, those “maximum” increases could be a lot bigger. Milliman Inc., the actuary for the Public Employees Retirement System, told board members at their regular meeting Feb. 5 that the pension fund now has 71 to 72 cents in assets for every $1 in liabilities. That’s an average number across the entire system. Some individual employers’ accounts, including the system’s school district rate pool, are flirting with the 70% threshold that triggers larger maximum rate increases.

Here’s how it works: To prevent rate spikes, PERS limits the biennial change in employers’ payments to 20% of their existing rate. For example, if an employer is required to make contributions equal to 20% of payroll, the rate increase is “collared” to 20% of that number, or a 4 percentage-point increase. That 20% increase is what employers have been warned to expect every other year for the next six years. But when an employer’s funded status falls below 70%, that collar begins to widen on a sliding scale — up to a maximum of 40%.

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