NIRP Archives - Page 3 of 4 - The Automatic Earth

Bill Gross has some bad news for investors. In his June investment outlook released Thursday, the widely followed bond fund manager contended that bond and stock returns realized in the last 40 years are “a grey if not black swan event that cannot be repeated.” Investors should not expect 7% returns on bonds or returns in the high single digits or double digits on stocks, Gross told CNBC on Thursday. “The markets are entirely different and it would pay to travel to Mars as opposed to stay on Earth, because the returns here are very, very low,” the manager of the Janus Capital Unconstrained Bond Fund, said on CNBC’s “Power Lunch”. Gross said easy central bank policy could hold down bond returns. Central banks in Europe and Japan have adopted negative interest rates, while the Federal Reserve’s target rate is at 0.25 to 0.50%.

German and Japanese 10-year bonds currently have negative yields, while their 30-year bonds yield less than 1%. The U.S. 10-year Treasury note yield sat around 1.8% Thursday. Gross contended those rate trends can hurt not only savers but also the broader economy. He said Fed policymakers, who have signaled they could hike rates at least once this year, realize they need to normalize policy. “Ultimately, they have to move back up and I think a certain number of Fed governors realize that the normalization process is necessary in order to save business models and to save capitalism basically because capitalism doesn’t work at 0% and it doesn’t work at negative interest rates,” he said.

Negative bonanza.

• Negative-Yielding Sovereign Debt Tops $10 Trillion (WSJ)

The amount of global sovereign debt with negative yields surpassed $10 trillion for the first time in May, according to Fitch Ratings. The measure stood at $10.4 trillion on May 31, up 5% from $9.9 trillion on April 25, when the rating agency last measured the amount, according to a Thursday report. It is spread across 14 countries, with Japan by far the largest source of negative-yielding bonds. Of the total, $7.3 trillion was long-term debt and $3.1 trillion was short-term debt.

The amount of debt with yields below zero has increased sharply this year as global central banks have instituted unconventional policy measures, such as negative interest rates. The Bank of Japan in January surprised markets by driving its rates below zero, pushing Japanese government-bond yields sharply lower. Banks in the euro currency bloc have also increased demand for government debt to meet regulatory requirements, another factor weighing on yields, Fitch said. “Higher amounts of Japanese and Italian sovereign securities with sub-zero yields were the biggest contributors to the monthly changes,” said Fitch analysts, led by Robert Grossman.

Because it’s shifting into private hands. The BOJ buys it all. Which allows the government to keep on borrowing with abandon.

• Japan’s Sovereign Debt Burden Is Quietly Falling the Most in the World (BBG)

Japan for years has been renowned for having the world’s largest government debt load. No longer. That’s if you consider how the effective public borrowing burden is plunging – by one estimate as much as the equivalent of 15 percentage points of GDP a year, putting it on track toward a more manageable level. Accounting for the Bank of Japan’s unprecedented government bond buying from private investors, which some economists call “monetization” of the debt, alters the picture. Though the bond liabilities remain on the government’s balance sheet, because they aren’t held by the private sector any more they’re effectively irrelevant, according to a number of analysts looking at the shift. “Japan is the country where public debt in private hands is falling the fastest anywhere,” said Martin Schulz at Fujitsu Research Institute in Tokyo.

While Japan’s estimated gross government debt is now over twice the size of the economy, according to Schulz’s calculations using BOJ data, the shuffle of holdings from private actors like banks and households to the central bank is having a big impact. It means debt in private hands will fall to about 100% of GDP in two to three years, from 177% just before Prime Minister Shinzo Abe took power in late 2012, he estimates. It’s not like Japan is slowing down on borrowing. Abe’s administration is now laying the groundwork for another burst of fiscal stimulus, which could be funded by selling bonds. He also announced Wednesday a delay to a sales tax hike planned for April 2017, rebuffing fiscal hawks who argued it was vital to raise revenue.

Finance Minister Taro Aso explained Tuesday that “the biggest problem is that private consumption hasn’t risen,” making now not a good time to raise the levy. Helping improve household sentiment could be one reason for making it explicit that at least some of the government bonds in the BOJ’s holdings will be written off. If Japanese consumers understand they’re not on the hook for all the gross debt outstanding, their mood could potentially perk up.

What can we say but: Anything Goes!

• Explosion in Quasi-Sovereign Bond Issuance Is Making Analysts Queasy (BBG)

Which fixed-income asset class is growing fast, outperforms similar debt issues, and rarely defaults? Emerging market ‘quasi-sovereign’ bonds, of course! At some $600 billion, debt sold by state-supported companies in emerging markets ranging from China to Oman has surpassed the amount of emerging market government debt outstanding, according to a new note from Bank of America Merrill Lynch. Such quasi-sovereign debt issuance has helped propel the stunning growth of the overall bond market, with EM issuance accounting for 47% of the growth in global debt between 2007-14, compared to 22% in the previous seven years, according to S&P Global Ratings.

But the surge in ‘quasi’ bonds is making some feel, well, queasy. “Quasi-sovereigns are effectively a ‘contingent liability’ for a country,” write the BofAML analysts, led by Kay Hope. They note that quasi-sovereign issuance now makes up half of the $1.6 – 1.8 trillion euro- and dollar-denominated corporate bond market for emerging markets, which could put added pressure on strained emerging market coffers.

China, with its lumbering state-owned enterprises, accounts for a full quarter of this kind of debt — despite the Chinese sovereign itself lacking virtually any foreign-denominated bonds. Meanwhile, the amount of debt from Brazilian quasi-sovereigns has nearly quadrupled, according to BofAML, while that sold by Mexico’s state-owned companies has just about doubled. Much of the growth has been driven by companies in the energy and commodities sectors, with giants of industry including Pemex, Petrobras, China National Offshore Oil and Gazprom all tapping the market in recent years.

There’s going to be trouble.

• US-China Trade Troubles Grow (WSJ)

The U.S. and China, facing mounting political pressures at home, are seeing economic tensions flare to their worst point in years over currency and trade practices. China has pushed the yuan to a five-year low against the dollar, reviving charges from American firms of currency manipulation to gain a competitive advantage for Chinese goods. The Obama administration has fired off a series of trade complaints and levied duties on several Chinese industries, from chicken feet to cold-rolled steel used in appliances and auto parts. The friction between the world’s two largest economies could worsen as domestic politics collide with already weak growth.

The U.S., seeing heightened anti-China rhetoric in the presidential election, wants China to press ahead with promised policies to open up its markets and allow greater international investment. Chinese leaders, worried about a deeper economic slowdown, are trying to keep factories humming and prevent the kind of market unrest that gripped global investors over the past year. [..] Some analysts think President Xi Jinping, wanting to consolidate power in the Communist Party ahead of a leadership transition next year, has paused reform efforts and instead is revving up the old playbook of credit-fueled growth and infrastructure spending. His aim: Ensure economic stability and mollify rivals, they say.

An attempt last year by Beijing to allow markets to play a role in setting its exchange rate was mismanaged, adding to a summertime of woe for China’s financial markets and sparking global jitters. The reaction surprised Chinese officials and created a headache for reformers. The Chinese government is keeping steel mills, coal plants and a host of manufacturing industries afloat despite dwindling demand and a tumble in commodity prices that should have closed many. [..] By supporting excess production capacity, the Chinese government is “engaged in economic warfare against the U.S.,” said John Ferriola, chief executive of North Carolina steel giant Nucor Corp. “Thousands of hardworking Americans have lost their jobs because of these illegal, unfair trade practices.”

“..nearly half of all respondents said they could not cover an unexpected expense of $400..”

• One Third Of Americans Are ‘Just Getting By’ (NY Times)

In the United States, nearly one-third of adults, about 76 million people, are either “struggling to get by” or “just getting by,” according to the third annual survey of households by the Federal Reserve Board. That finding, dismal though it is, represents a mild improvement in general well-being last year, compared with the two years before. The improvement, however, was clearly too little to raise Americans’ spirits: The new survey, which was conducted in late 2015 and released last week, also shows that optimism about the future has tempered. The Fed policy committee should take the survey to heart when it meets this month to decide whether to raise interest rates.

Higher rates are a way to slow an economy that is at risk of overheating – a far-fetched proposition when tens of millions of Americans are barely hanging in there. Congress and other economic policy makers, as well as the presidential candidates, could also use the survey to get some insight into Americans’ real economic problems. Among them is deep insecurity. Nearly 70% of adults said they were “living comfortably” or “doing O.K.” — up a bit from previous years — but nearly half of all respondents said they could not cover an unexpected expense of $400, or could do so only by selling something or borrowing money. Americans seeking a path upward through education are staggering under a load of debt. The median debt load for someone with a bachelor’s degree was $19,162.

For a master’s, it was $36,000, and for a professional degree, $100,000. Many students with debt use deferments or other plans to delay or extend repayments, but in most cases that increases the balance they owe. For those making payments, the average monthly bill was $533. By all indications, however, they are the relatively lucky ones. Americans who had attended college accounted for most of the improvement reported in the survey. Financial stress was more prevalent among less-educated people who responded to the survey, as well as racial and ethnic minorities and adults making less than $40,000 a year.

Please remember and compare to yesterday’s (also OECD): “We’re a little concerned about housing prices in the greater Vancouver area and Toronto..”

• OECD Sees ‘Dramatic And Destabilising’ End To Australia Property Boom (AFR)

Australia may be on the cusp of a “dramatic and destabilising” end to the housing boom rather than a hoped-for soft landing because of the apartments building boom, the Organisation for Economic Co-operation and Development said. In its latest assessment of the threats to the economy, the Paris-based think tank said jitters over the federal election are adding to risks, and called for an increase in the goods and services tax. Somewhat paradoxically, the OECD appears particularly worried about how to interpret changes in the housing market – even as it notes simultaneously that risks of a boom appear to be receding which, it argues, provides leeway for even more official interest rate cuts.

“Domestically, the unwinding of housing market tensions to date may presage dramatic and destabilising developments, rather than herald a soft landing,” it said. Parts of the real estate industry have already warned about failed settlements as record numbers of new apartments come due for completion in Sydney, Melbourne and Brisbane this year and next. The warning, which is accompanied by graphs showing dwelling approvals retreating from a peak and house prices levelling out, appears to have been prepared ahead of more recent evidence of a rebound in both measures.

First things first.

• Fed Likely To Avoid Rate Hike Before Britain Votes On Leaving EU (R.)

The U.S. Federal Reserve may be forced to delay a rate hike at its June meeting because of mounting concern over the economic fallout from Britain’s vote on whether to leave the European Union. The geopolitical risk likely will push any rate increase until at least July, despite apparent consensus among Fed officials that a hike is warranted by stronger U.S. growth and tight labor markets. The Fed’s June 14-15 rate-setting meeting comes just a week before the British vote on June 23. A “leave” vote is expected to roil financial markets, cause credit spreads to widen, trigger a rush into safe assets and bolster the dollar. The dollar’s recent stability is one reason the Fed has become more comfortable with raising rates, and officials may want to let the threat of Brexit pass before moving to tighten financial conditions.

Fed Board Governor Daniel Tarullo on Thursday joined the chorus of those warning of his concerns over the British vote, telling Bloomberg that Brexit would be a “factor” he would consider at the Fed’s June policy meeting and said that the British vote’s impact on markets would be key. [..] If the Fed does indeed take a pass at its June meeting, officials have signaled they’ll be ready to move in July. Minutes of the Fed’s March policy meeting showed officials preparing the ground for higher rates sometime in the summer months. After July, the next option would be September, in the middle of a U.S. election campaign, in which the Fed and Yellen could well become targets of debate.

The illusion gets expensive, as returns diminish.

• Draghi Insists ECB Stimulus Only Half Done (BBG)

Mario Draghi’s insistence that his stimulus program is only half done brings with it a worrying thought. What if its best effects are already spent anyway? At least four times at Thursday’s press conference in Vienna, the European Central Bank president emphasized how policy makers need to see the “full impact” and must “focus on implementation” of their measures. That augurs a busy month ahead as officials keep hoovering up government debt, start buying corporate bonds and enact the first of four long-term loan offerings to banks. While Draghi’s remarks suggest the next major calendar point for the ECB’s assessment of its stimulus will be September – after the release of economic-growth data and coinciding with its fresh forecasts – the omens so far are weak.

Yet another report of negative consumer prices this week underscored the challenge of revitalizing an economy fatigued by years of debt crises and delayed reforms, and battered by global forces beyond the ECB’s control. “We’re getting to the point of radically diminishing effectiveness of these interventions,” Andrew Balls, Pimco’s global fixed income chief investment officer, said on Bloomberg Television. “If we get a recession, which is perfectly plausible over the next three to five years, there’s a real question in terms of how policy makers can respond.”

France blames emerging economies.

• Bank of France Cuts Inflation Outlook, 2017 GDP Forecast (WSJ)

The Bank of France cut its inflation forecasts and trimmed its 2017 economic growth forecast in a semi-annual economic outlook Friday. The Bank of France pared back its GDP forecast for 2017 to 1.5% from 1.6% in December as it expects weaker trade to drag on the French economy. Despite a stronger-than-expected first quarter, it kept its GDP forecast for the whole of 2016 at 1.4%. The softer forecasts indicate how weak oil prices and uncertainty over the outlook for the global economy are cooling eurozone economies just as they emerge from a long period of weak growth. “While global demand is dynamic, it will accelerate only slightly in 2016, due to a less favorable growth outlook than previously forecast in emerging economies,” the Bank of France said.

Germany blames exports in general. Stingy Greeks?!

• Bundesbank Cuts German GDP Forecasts On Weaker Export Demand (R.)

The Bundesbank cut its German inflation and growth forecasts on Friday citing weaker demand for exports, even as it predicted that robust consumer demand and a tightening labor market would keep the domestic economy buoyant. The euro zone’s biggest economy has been an outperformer in recent years, posting healthy growth and driving the currency bloc’s best run since the start of the global financial crisis almost a decade ago. Exporters have been forced to “surrender” some of their market share gained in recent years, however, and this trend may continue this year and offset strong domestic factors, the central bank said in a biannual economic outlook.

“This should probably be interpreted mainly as a correction of previous market share gains not explained by price competitiveness,” the Bundesbank said. “This process could continue further into 2016 according to Ifo and DIHK surveys, in which industrial firms reported subdued export expectations and only a comparatively moderate increase in exports this year,” it said. The bank now sees GDP growing at 1.7% this year, below a December projection for 1.8%, and 1.4% in 2017, down from 1.7% seen earlier. The growth rate would then rebound to 1.6% in 2018.

Not going to happen.

• President Obama, Pardon Edward Snowden and Chelsea Manning (G.)

As he wraps up his presidency, it’s time for Barack Obama to seriously consider pardoning whistleblowers Chelsea Manning and Edward Snowden. Last week, Manning marked her six-year anniversary of being behind bars. She’s now served more time than anyone who has leaked information to a reporter in history – and still has almost three decades to go on her sentence. It should be beyond question at this point that the archive that Manning gave to WikiLeaks – and that was later published in part by the Guardian and New York Times – is one of the richest and most comprehensive databases on world affairs that has ever existed; its contribution to the public record at this point is almost incalculable. To give you an idea: in just the past month, the New York Times has cited Manning’s state department cables in at least five different stories.

And that’s almost six years after they first started making headlines. We know now that, despite being embarrassing for the United States, the leaks caused none of the great harm that US government officials said would come to pass. Even the government admitted during Manning’s trial that no one died because of her revelations, despite the hyperbolic government comments at the time, including that WikiLeaks had “blood on its hands”. (By the way, the US officials knew they were exaggerating in the media at the time.) Even if you think that she deserves some punishment for breaking the law, six years behind bars (and being tortured during her pretrial confinement) should be more than enough.

Creepy.

• Facial Recognition Will Soon End Your Anonymity (MW)

Nearly 250 million video surveillance cameras have been installed throughout the world, and chances are you’ve been seen by several of them today. Most people barely notice their presence anymore – on the streets, inside stores, and even within our homes. We accept the fact that we are constantly being recorded because we expect this to have virtually no impact on our lives. But this balance may soon be upended by advancements in facial recognition technology. Soon anybody with a high-resolution camera and the right software will be able to determine your identity. That’s because several technologies are converging to make this accessible. Recognition algorithms have become far more accurate, the devices we carry can process huge amounts of data, and there’s massive databases of faces now available on social media that are tied to our real names.

As facial recognition enters the mainstream, it will have serious implications for your privacy. A new app called FindFace, recently released in Russia, gives us a glimpse into what this future might look like. Made by two 20-something entrepreneurs, FindFace allows anybody to snap a photo of a passerby and discover their real name — already with 70% reliability. The app allows people to upload photos and compare faces to user profiles from the popular social network Vkontakte, returning a result in a matter of seconds. According to an interview in the Guardian, the founders claim to already have 500,000 users and have processed over 3 million searches in the two months since they’ve launched.

What’s particularly unsettling are the use cases they advocate: identifying strangers to send them dating requests, helping government security agencies to determine the identities of dissenters, and allowing retailers to bombard you with advertisements based on what you look at in stores. While there are reasons to be skeptical of their claims, FindFace is already being deployed in questionable ways. Some users have tried to identify fellow riders on the subway, while others are using the app to reveal the real names of porn actresses against their will. Powerful facial recognition technology is now in the hands of consumers to use how they please.

American history 101.

• The Fat Lady Always Sings Twice (Jim Kunstler)

That was the week Hillary began to look like the candidate who fell off a truck wearing a Nixon mask. Email-gate is taking on the odor of Watergate — the main ingredient of which was not the dopey crime itself but the stonewalling around it. The State Department Inspector General’s report saying definitively, no, she was not “allowed” to use a private, unsecured email server validated Donald Trump’s juvenile name-calling of “Crooked Hillary.” We may never hear the end of that now (if Trump is actually nominated). And, of course, there lurks the Godzilla-sized skeleton in her closet of the still-unreleased Goldman Sachs speech transcripts, the clamor over which is sure to grow. Meanwhile the specter of the California primary looms, a not inconceivable loss to Bernie Sanders.

And onto the convention in Philly which I contend will be even more fractious and violent than the 1968 fiasco in Chicago. I’ll say it again: Hillary is a horse that ain’t gonna finish. The Democrats better be prepared to haul Uncle Joe out of the closet, fluff up his transplanted hair, wax his dentures, give him a few Vitamin B-12 shots, and stick a harpoon in his fist for the autumn run against the White Whale (if Trump is actually nominated). The Republican convention in Cleveland is apt to be as bloody and violent a spectacle too (if Trump is actually nominated), with Black Lives Matters cadres having already promised to put on a show for global television and their Latino counterparts marching with Mexican Flags and cute signs saying: Trump: Chingate tu madre, perhaps garnished with the sobriquet pendejo.

In such a situation, Trump has enormous potential to make things worse with his childish snap-backs. Hubert Humphrey in 1968 at least had the good sense to keep his mouth shut about the moiling multitudes out on Michigan Avenue inveighing against him. The Vietnam War was a grave debacle, and it especially pissed off the young men subject to being drafted to fight in it, but the woof and warp of American life was otherwise intact. Blue collar workers still pulled in high wages in the Big Three auto plants, and women had not yet declared war on men, and the airwaves weren’t pornified, and there were still people in government with moral authority who loudly opposed official policy. The sobering martyrdoms of Martin Luther King and Robert Kennedy sanctified the opposition to the status quo.

Even Hubert Humphrey himself, a thoughtful man underneath his Rotarian clown mask, began to turn away from Lyndon Johnson’s war hawks. Nixon won. He surely benefited most not so much from the war issue and the riots in the streets as from the mass defection of Southern states from the long-entrenched domination of the Democratic Party — directly due to Johnson’s dismantling of the old Jim Crow laws. As a personality, Nixon was as much a pendejo as Donald Trump, but no one doubted his ability to run the machinery of government, if not the way they wanted to run it.

” The figures of migrant unemployment follow a trend in Sweden of high unemployment for foreigners.”

• Fewer Than 500 of 163,000 Migrants Find Jobs In Sweden (BB)

Sweden’s state-funded broadcaster has revealed that of 163,000 migrants who came to Sweden, less than 500 have found jobs. Sweden saw a record 163,000 applications for asylum last year as a result of the migrant crisis and many Swedes were assured that the new arrivals would contribute to the economy; but new research from Sweden’s state-owned SVT reveals that fewer than 500 migrants have found work. Using data from the Swedish employment agency and the Swedish migration authority, Migrationsverket, the network claims that only 494 asylum seekers are contributing to the economy, The Local reports. While in many countries asylum seekers are banned from formally working while their application is being processed, in Sweden there are exceptions.

The “at-und” is an exemption granted by Migrationsverket which allows asylums seekers access to the labour market. In an effort to explain the incredibly low number of migrants working, Lisa Bergstrand of Migrationsverket told SVT: “There was an incredible number of people applying for asylum in Sweden and so that we should be able to register them, we had to de-prioritise certain tasks, and that was the matter of jobs”. Of the migrants who claimed asylum in 2015 approximately one third of the men and women aged 20-64 were given the exemption to allow them to work, which is around 53,790 migrants. The figures of migrant unemployment follow a trend in Sweden of high unemployment for foreigners. The unemployment for those born in Sweden is at the lowest point since the 2008 financial crisis at around 4.8%, while foreign born unemployment is at 14.9%.

Question to Italian readers: what effect has the death of Casaleggio had on Beppe?

• Corruption Gripes Help Five Star Movement Top Italy Local Election Polls (G.)

Alessandro Aquilini had her by the hand. And he wasn’t letting go. Virginia Raggi, the woman tipped to be the next mayor of Rome, was hunting for votes in the street market in Boccea, a lower middle-class district of the Italian capital. Raggi’s trademark is exquisite courtesy – she proffers a slender hand even to reporters who approach her with hostile questions. At the butcher’s stall, though, she got more of a handshake than she bargained for. “We need help,” the 50-year-old Aquilini began. “Left. Right. Centre. We can’t take any more [of party politicians]. This country needs a bit more honesty.” Still gripping Raggi’s hand as he stretched across the slabs of veal, the burly butcher added: “We’re up to here with taxes and corruption.”

His monologue captured many of the reasons why Raggi, the candidate of the Five Star Movement (M5S), is leading the polls ahead of local elections in Rome and other Italian cities on Sunday. Unlike other non-traditional movements that have prospered in Europe, such as Syriza in Greece, the M5S’s protest is not so much against austerity as the corruption and cronyism of Italy’s mainstream parties. Nowhere has this been highlighted more vividly than Rome, where establishment politicians and officials are on trial alongside alleged mobsters, charged with conspiring to pocket millions of euros from rigged public contracts. All three of the final polls released before a ban took effect on 21 May put Raggi ahead by 3-6%age points in the mayoral race.

Run-offs between the two leading candidates in each town are slated for 19 June. Only then will it be known if the 37-year-old lawyer – almost unknown to the public until a few months ago – has won. A victory for Raggi would be a stinging reverse for Italy’s prime minister, Matteo Renzi, who leads the centre-left Democratic party, and a dramatic breakthrough for the internet-based M5S. Founded less than seven years ago by the comedian Beppe Grillo and his digital guru, the late Gianroberto Casaleggio, the M5S is today Italy’s leading opposition party. Grillo has said he will set fire to himself in public if Raggi fails to win. But he may yet regret that pledge.

Is there hope?

• US Announces Near-Total Ban On Trade Of African Elephant Ivory (AFP)

US authorities announced a near-total ban on the trade of African elephant ivory Thursday, finalizing a years-long push to protect the endangered animals. “Today’s bold action underscores the United States’ leadership and commitment to ending the scourge of elephant poaching and the tragic impact it’s having on wild populations,” Secretary of the Interior Sally Jewell said. The new rule “substantially limits” imports, exports and sales of such ivory across state lines, the US Fish and Wildlife Service (FWS) said. However, it does make exceptions for some “pre-existing manufactured” items, such as musical instruments, furniture and firearms that contain less than 200 grams of ivory and meet other specific criteria, according to the FWS.

Antiques, as defined under the Endangered Species Act, are also exempt. The new measures fulfill restrictions in an executive order on combating wildlife trafficking issued by President Barack Obama in 2013, the FWS said in its statement announcing the ban. It said that once illegal ivory enters the market it becomes virtually impossible to tell apart from legal ivory, adding that demand for elephant ivory, particularly in Asia, “is so great that it grossly outstrips the legal supply and creates a void in the marketplace that ivory traffickers are eager to fill.”

“We hope other nations will act quickly and decisively to stop the flow of blood ivory by implementing similar regulations, which are crucial to ensuring our grandchildren and their children know these iconic species,” Jewell said. The Wildlife Conservation Society welcomed the ban, calling it historic and groundbreaking. “The USA is shutting down the bloody ivory market that is wiping out Africa’s elephants,” WCS president and chief executive Cristian Samper said in a statement. “The USA is boldly saying to ivory poachers: You are officially out of business.” Some 450,000 elephants can be found on the African continent and it is estimated that more than 35,000 of these animals are killed each year.

Debt Rattle May 30 2016

May 302016

May 30, 2016 Posted by Raúl Ilargi Meijer at 7:59 am Finance Tagged with: Abe, bad loans, Brexit, coral, debt, default, deflation, NIRP, obesity, productivity, WMP 9 Responses »

Jack Delano Foggy night in New Bedford, Massachusetts 1941

• The Mystery of Weak US Productivity (Luce)

• China Default Chain Reaction Threatens Products Worth 35% of GDP (BBG)

• China’s Veiled Loans May Prove Lethal (BBG)

• How Many Bad Loans Might China Have? (BBG)

• Easy Money = Overcapacity = Trade Wars = Deflation (Rubino)

• Negative Rates Fail to Spur Investment for Corporate Europe (BBG)

• Saudi Arabia’s Petrodollar Reserves Fall to 4-Year Low (BBG)

• CEO of No. 1 Asian Commodity Trader Noble Group Resigns In Surprise Move (R.)

• Japan Must Delay Sales-Tax Rise to Recover, Abe Aide Says (BBG)

• The Butterfly Effect: Cheap Oil Means Fewer Nose Jobs (BBG)

• The Source of Failure: We Optimize What We Measure (CH Smith)

• 30.4% Of Americans Were Obese In 2015 (Forbes)

• Tory Turmoil Escalates With Open Call For Cameron To Quit (G.)

• Half Of Central, Northern Great Barrier Reef Corals Are Dead (SMH)

“This year, for the first time in more than 30 years, US productivity growth will almost certainly turn negative..”

“Unless we become smarter at how we work, growth will start to exhaust itself too.” Er, no, that has already happened.

“For the first time the next generation of US workers will be less educated than the previous..”

• The Mystery of Weak US Productivity (Luce)

Look around you. From your drone home delivery to that oncoming driverless car, change seems to be accelerating. Warren Buffett, the great investor, promises that our children’s generation will be the “luckiest crop in history”. Everywhere the world is speeding up except, that is, in the productivity numbers. This year, for the first time in more than 30 years, US productivity growth will almost certainly turn negative following a decade of sharp slowdown. Yet our Fitbits seem to be telling us otherwise. Which should we trust — the economic statistics or our own lying eyes? A lot hinges on the answer. Productivity is the ultimate test of our ability to create wealth. In the short term you can boost growth by working longer hours, for example, or importing more people.

Or you could lift the retirement age. After a while these options lose steam. Unless we become smarter at how we work, growth will start to exhaust itself too. Other measures bear out the pessimists. At just over 2%, US trend growth is barely half the level it was a generation ago. As Paul Krugman put it: “Productivity isn’t everything, but in the long run it is almost everything.” It is possible we are simply mismeasuring things. Some economists believe the statistics fail to capture the utility of setting up a Facebook profile, for example, or downloading free information from Wikipedia. The gig economy has yet to be properly valued. Yet this argument cuts both ways. Productivity is calculated by dividing the value of what we produce by how many hours we work — data provided by employers.

But recent studies — and common sense — say our iPhones chain us to our employers even when we are at leisure. We may thus be exaggerating productivity growth by undercounting how much we work. The latter certainly fits with the experience of most of the US labour force. It is no coincidence that since 2004 a majority of Americans began to tell pollsters they expected their children to be worse off — the same year in which the internet-fuelled productivity leaps of the 1990s started to vanish. Most Americans have suffered from indifferent or declining wages in the past 15 years or so. A college graduate’s starting salary today is in real terms well below where it was in 2000. For the first time the next generation of US workers will be less educated than the previous, according to the OECD, which means worse is probably yet to come. Last week’s US productivity report bears that out.

“All the risks are accumulating in an overcrowded financial system.”

• China Default Chain Reaction Threatens Products Worth 35% of GDP (BBG)

The risk of a default chain reaction is looming over the $3.6 trillion market for wealth management products in China. WMPs, which traditionally funneled money from Chinese individuals into assets from corporate bonds to stocks and derivatives, are now increasingly investing in each other. Such holdings may have swelled to as much as 2.6 trillion yuan ($396 billion) last year, based on estimates from Autonomous Research this month. The trend has China watchers worried. For starters, it means that bad investments by one WMP could infect others, causing a loss of confidence in products that play an important role in bank funding. It also suggests WMPs are struggling to find enough good assets to meet their return targets.

In the event of widespread losses, cross-ownership will create more uncertainty over who’s vulnerable – a key source of panic in 2008 when soured U.S. mortgage securities triggered a global financial crisis. Those concerns have become more pressing this year after at least 10 Chinese companies defaulted on onshore bonds, the Shanghai Composite Index sank 20% and China’s economy showed few signs of recovery from the weakest expansion in a quarter century. “There’s abundant liquidity in the financial system, but a scarcity of high-yielding assets to invest in,” said Harrison Hu, the chief Greater China economist at RBS in Singapore. “All the risks are accumulating in an overcrowded financial system.”

Issuance of WMPs, which are sold by banks but often reside off their balance sheets, exploded over the past three years as lenders competed for funds and fees while savers sought returns above those offered on deposits. The products, which offer varying levels of explicit guarantees, are regarded by many as having the implicit backing of banks or local governments. The outstanding value of WMPs rose to 23.5 trillion yuan, or 35% of China’s gross domestic product, at the end of 2015 from 7.1 trillion yuan three years earlier, according to China Central Depository & Clearing Co. An average 3,500 WMPs were issued every week last year, with some mid-tier banks, such as China Merchants Bank and China Everbright Bank, especially dependent on the products for funding.

Interbank holdings of WMPs swelled to 3 trillion yuan as of December from 496 billion yuan a year earlier, according to figures released by the clearing agency last month. As much as 85% of those products may have been bought by other WMPs, according to Autonomous Research, which based its estimate on lenders’ public disclosures and data on interbank transactions. The firm speculates that in some cases the products are being “churned” to generate fees for banks. “We’re starting to see layers of liabilities built upon the same underlying assets, much like we did with subprime asset-backed securities, collateralized debt obligations, and CDOs-squared in the U.S.,” Charlene Chu, a partner at Autonomous who rose to prominence in her former role at Fitch Ratings by warning of the risks of bad debt in China, said in an interview on May 17.

“The unconsolidated structured entities managed by the Group consist primarily of collective investment vehicles (“WMP Vehicles”) formed to issue and distribute wealth management products (“WMPs”), which are not subject to any guarantee by the Group of the principal invested or interest to be paid.”

• China’s Veiled Loans May Prove Lethal (BBG)

Credit is a risky business, but loans that dare not speak their name? They are possibly even more dangerous, as China is about to find out.As many as 15 publicly traded Chinese lenders, large and small, report roughly $500 billion of such debt between them, which they hold not as loans but as receivables from shadow banking products. While the traditional credit business of these banks is 16 times bigger, receivables have jumped sixfold in three years. Explosive growth of this type usually ends badly. It’s hard to see why it’ll be different for the People’s Republic. Before they can brace themselves – or embrace the risk, if they think the rewards are worth it – equity investors need to know where to look. Flitting from one explanatory note to another in dense annual reports isn’t everybody’s idea of a day well spent.

But the effort may be worth it. For instance, page 184 of Agricultural Bank’s 2015 annual report informs us that the bank has 557 billion yuan ($85 billion) worth of assets tied in “debt instruments classified as receivables.” On page 245, we further learn that most of this is old hat, and the only fast-growing portion is an 18.7 billion yuan chunk helpfully titled as “Others.” A footnote adds that the category primarily consists of “unconsolidated structured entities managed by the group.” Give up? Then you miss the big reveal that occurs 34 pages later: “The unconsolidated structured entities managed by the Group consist primarily of collective investment vehicles (“WMP Vehicles”) formed to issue and distribute wealth management products (“WMPs”), which are not subject to any guarantee by the Group of the principal invested or interest to be paid.” That’s broadly how Chinese lenders disclose their cryptic linkages with shadow banks.

The names keep changing, from “investment management products under trust scheme” and “investment management products managed by securities companies” to “trust beneficiary rights” and “wealth management products.” The latter have swelled to the equivalent of 35% of GDP, and account for 3 trillion yuan of interbank holdings. The common thread to these products is that they’re all exposed to corporate credit and designed to get around lenders’ minimum capital requirements and maximum loan-to-deposit norms, with scant loss provisioning in case things go wrong.There’s plenty that could. The reported nonperforming loan ratio of 1.75% is a joke. CLSA says bad loans have already snowballed to 15 to 19% of the loan book; Autonomous Research partner Charlene Chu estimates the figure will reach 22% by the end of this year. A 20% loss on a $500 billion portfolio of loans masquerading as receivables would wipe out 58% of annual profit of the 15 banks under our scanner.

” In the basic resources sector, 46% of loans are with firms without enough income to cover interest payments. ”

• How Many Bad Loans Might China Have? (BBG)

How many of China’s loans could turn bad? The official data show a non-performing loan ratio of 1.75%, but that’s widely believed to reflect optimistic accounting. Bloomberg Intelligence Economics has estimated the %age of “at risk” loans – those where the borrower doesn’t have sufficient earnings to cover interest payments. The results show 14% of corporate borrowing at risk of default, up from a low of 5% in 2010. By sector, the basic resources, retail and industrial sectors are among the highest risk. In the basic resources sector, 46% of loans are with firms without enough income to cover interest payments.

Telecommunications, utilities, and travel and leisure sectors look more secure, reflecting stronger earnings and lower debt. The methodology is based on an approach used by the IMF. For a universe of 2,865 Chinese listed firms (excluding financial companies), we screened for firms with interest costs higher than their EBITDA. We then calculated total debt of those firms as a %age of total debt of all listed firms. We assume that the ratio of “at risk” loans for the corporate sector as a whole is the same as for listed companies.

“..over-investment produces slow growth and falling prices while ever-more-aggressive monetary policy distorts markets beyond recognition and encourages new over-investment in different sectors, which then proceed to follow oil and steel into the deflationary abyss.”

• Easy Money = Overcapacity = Trade Wars = Deflation (Rubino)

So what happens to all that Chinese steel that was on its way to the US and EU before slamming into those prohibitively high tariffs? One of three things: Either it’s sold elsewhere, probably at even steeper discounts, thus pricing US and EU steel exports out of those markets. Or it’s stockpiled in China for future use, thus lowering future demand for new steel production and, other things being equal, depressing tomorrow’s prices. Or many of China’s newly-built steel mills will close, and China will eat the losses related to this malinvestment. Each scenario results in lower prices and financial losses somewhere. Put another way, as far as steel is concerned, the world’s fiat currencies are rising in value, which is the common definition of deflation.

And since steel is just one of many basic industries burdened with massive overcapacity, it’s safe to assume that the process which began with oil and recently spread to steel will continue to metastasize throughout the developed and developing worlds. Next up: real estate. “Modern” monetary policy, designed to achieve exactly the opposite outcome (that is, rising prices for real things), will in response be ratcheted up to ever-more-extreme levels — which in this analytical framework is like trying to douse a fire with gasoline. The result is a world in which past over-investment produces slow growth and falling prices while ever-more-aggressive monetary policy distorts markets beyond recognition and encourages new over-investment in different sectors, which then proceed to follow oil and steel into the deflationary abyss. And so on, until the system collapses under the weight of its own absurdity.

Because they are deflationary.

• Negative Rates Fail to Spur Investment for Corporate Europe (BBG)

A prolonged period of negative interest rates is failing to revive investment at Europe’s companies, with the vast majority of businesses in the region saying the stimulus measures have had no affect at all on their growth plans. Some 84% of the 9,440 companies surveyed by Swedish debt collector Intrum Justitia AB for its European Payment Report 2016 say low interest rates haven’t affected their willingness to invest. And perhaps more alarmingly, the number is up from 73% last year. “Creating economic growth requires stability and optimism,” Intrum Justitia Chief Executive Officer Mikael Ericson said in the report. “Evidently, the strategy of keeping interest rates record low for more than a year has not created the much sought-after stability.”

Signs of stalling investment mark a blow to central banks hoping to revive growth across Europe through negative rates and quantitative easing. Europe needs its businesses to invest more if it’s to create the jobs needed to spur growth. In the euro area, where interest rates have been negative since mid-2014, gross domestic product will slow to 1.6% this year, compared with 2.3% in the U.S., the European Commission estimates. “A calculation of an investment includes assumptions of the future,” Intrum said. “To get the calculation to go together those assumptions need to include a belief in stability and prosperity in that future. Perhaps the negative interest rates do not signal that stability at all – rather that we are still in an extraordinary situation?”

The survey also identified another threat to growth, namely late payments. Some 33% of survey participants said they regard not being paid on time as a threat to overall survival while 25% said they are likely to cut jobs if clients pay late or not at all. That problem is more pronounced among Europe’s 20 million small and medium-sized companies, with many reporting that bigger firms are forcing them to accept late payments. “It is a market failure that costs job opportunities for millions of Europeans that big corporations deliberately force SMEs to finance their cash flow,” Ericson said. “As much as two out of five SMEs say late payments prohibit growth of the company. That large corporations use their much smaller sub-suppliers to act as financier of their own cash-management processes is not only wrong, it also creates an imbalance in society.”

Might as well devalue now.

• Saudi Arabia’s Petrodollar Reserves Fall to 4-Year Low (BBG)

Saudi Arabia’s net foreign assets fell for a 15th month in April, as the kingdom announced its “vision” for a post-oil future. The Saudi Arabian Monetary Agency said on Sunday net foreign assets declined 1.1% to $572 billion, the lowest level in four years. The slump in crude prices has forced the government to sell bonds and draw on its currency reserves, still among the world’s largest. Net foreign assets fell by $115 billion last year, when the kingdom ran a budget deficit of nearly $100 billion.

The fiscal crunch has pushed Saudi Arabia’s rulers to look beyond oil, consider new taxes, and plan an initial public offering of state giant Saudi Arabian Oil Co. Deputy Crown Prince Mohammed bin Salman sketched out the planned changes dubbed Saudi Vision 2030 on April 25. The strain on reserves has also fueled speculation that the kingdom will adjust its decades-old riyal peg to the dollar. New central bank Governor Ahmed Alkholifey told Al-Arabiya on Thursday that Saudi Arabia doesn’t plan to change its exchange rate policy.

Firesale. Given what’s happened in commodities the past year, not surprising.

• CEO of No. 1 Asian Commodity Trader Noble Group Resigns In Surprise Move (R.)

Embattled commodity trader Noble Group announced the surprise resignation of CEO Yusuf Alireza on Monday and said it planned to sell a U.S. unit to bolster its balance sheet as it seeks to regain investor confidence. Alireza, a former Goldman Sachs banker had steered Asia’s biggest commodity trader to sell assets, cut business lines and take big writedowns as it battled weak commodity markets and the fallout from an accounting dispute. “With this transformation process now largely complete, Mr. Alireza considered that the time was right for him to move on,” Noble said in a statement. It appointed senior executives William Randall and Jeff Frase as co-chief executive officers and said it would begin a sale process for Noble Americas Energy Solutions, “expected to generate both significant cash proceeds and profits to substantially enhance the balance sheet.”

Noble came under the spotlight in February last year when it was accused by Iceberg Research of overstating its assets by billions of dollars, claims which Noble rejected. Its shares have since plunged by about 75% and its debt costs have risen as the company has been hit hard by credit rating downgrades and weak investor confidence. “The first task is to stabilize the situation and convey stability and continuity,” said Nirgunan Tiruchelvam at Religare Capital Markets. “That would be the immediate task of somebody in this business which has volatility,” he said. Noble won the backing of banks earlier this month to refinance its debt. In February, Noble reported its first annual loss since 1998, battered by a $1.2 billion writedown for weak coal prices. The company’s shares slumped 65% last year, knocking it out of the benchmark Straits Times index.

So a delay in the tax hike would trigger elections. And Abe counts on the Japanese to be blind enough to re-elect him.

• Japan Must Delay Sales-Tax Rise to Recover, Abe Aide Says (BBG)

Japan needs to delay increasing its sales tax until late 2019 to sustain its economic recovery, an aide to Prime Minister Shinzo Abe said Sunday. There is a possibility that such a move could trigger a general election. The government will probably hold off raising the tax because it needs to give priority to economic growth, Abe aide Hakubun Shimomura said on Fuji television. Japan’s lower house of parliament would need to be dissolved for a general election if the planned increase is delayed again, Finance Minister Taro Aso was cited by Kyodo News as saying on Sunday at a meeting of the ruling party’s members. Abe has said he’ll make a decision before an upper-house election this summer on whether to go ahead with a planned increase in the levy next April to 10%, from 8% at present.

He had previously said the matter would be decided at an appropriate time and that it would be postponed only if there was a shock on the scale of a major earthquake or a corporate collapse like that of Lehman Brothers. An increase in the levy in 2014 pushed Japan into a recession. “We have no other options but to postpone the sales-tax increase,” Shimomura said. “If the increase means a decline in tax revenue for the government, that would threaten the achievement of the goals under Abenomics.” The prime minister told Finance Minister Taro Aso and LDP’s Secretary General Sadakazu Tanigaki on Saturday to delay the sales-tax increase to October 2019, NHK reported.

Aso advised the prime minister to be cautious about the idea, NHK said. “If the tax increase is delayed, a general election is needed to put the plan to the public,” Aso was quoted by Kyodo News as saying on Sunday. Kyodo reported later that Abe doesn’t plan to call snap elections on the same day as the Upper House vote. If Abe fails to go ahead with his plan of raising the tax in April, it means his economic policies have failed and he and his cabinet members should resign to take responsibility, Tetsuro Fukuyama, vice secretary general of the opposition Democratic Party of Japan, said in a program aired by public broadcaster NHK on Sunday.

Unexpected advantages.

• The Butterfly Effect: Cheap Oil Means Fewer Nose Jobs (BBG)

Oil slumps. Middle Eastern patients cancel treatments abroad. Thai hospital stocks slide. It’s the butterfly effect in action. Weak growth outlooks in the Gulf states are prompting greater competition from local clinics, stemming the flow of visitors to the world’s top medical tourism destination. That’s clouding the outlook for Thailand’s health-care shares, which surged more than 800% over the past seven years, as valuations start to look stretched amid the falling demand. Bangkok’s Bumrungrad Hospital, known as the grandaddy of international clinics, has slumped 16% since early March after patient volumes from the United Arab Emirates, its second-biggest source of overseas visitors, fell 20% in the first quarter.

Thailand attracted as many as 1.8 million international patients in 2015, many of whom stayed on afterward for a beach holiday. More than one in three foreigners treated at Bumrungrad are from the Gulf states and Kasikorn Securities says declining growth in the region and a rise in competition from clinics in the U.A.E., where the government is encouraging its citizens to stay home for medical care, are curbing demand. “In the short term, the economic slowdown in the the Middle East will weaken some investors’ confidence on earnings growth for domestic hospital operators,” said Jintana Mekintharanggur at Manulife Asset Management. “We are still bullish on the sector” in the long term as it will benefit from growth in countries like Myanmar and Vietnam that have less-developed health systems, she said.

Hey, look, we are born as liars. And we will lie to ourselves about that, too.

• The Source of Failure: We Optimize What We Measure (CH Smith)

The problems we face cannot be fixed with policy tweaks and minor reforms. Yet policy tweaks and minor reforms are all we can manage when the pie is shrinking and every vested interest is fighting to maintain their share of the pie. Our failure stems from a much deeper problem: we optimize what we measure. If we measure the wrong things, and focus on measuring process rather than outcome, we end up with precisely what we have now: a set of perverse incentives that encourage self-destructive behaviors and policies. The process of selecting which data is measured and recorded carries implicit assumptions with far-reaching consequences. If we measure “growth” in terms of GDP but not well-being, we lock in perverse incentives to boost ‘growth” even at the cost of what really matters, i.e. well-being.

If we reward management with stock options, management has a perverse incentive to borrow money for stock buy-backs that push the share price higher, even if doing so is detrimental to the long-term health of the company. Humans naturally optimize what is being measured and identified as important. If students’ grades are based on attendance, attendance will be high. If doctors are told cholesterol levels are critical and the threshold of increased risk is 200, they will strive to lower their patients’ cholesterol level below 200. If we accept that growth as measured by GDP is the measure of prosperity, politicians will pursue the goal of GDP expansion.

If rising consumption is the key component of GDP, we will be encouraged to go buy a new truck when the economy weakens, whether we need a new truck or not. If profits are identified as the key driver of managers’ bonuses, managers will endeavor to increase net profits by whatever means are available. The problem with choosing what to measure is that the selection can generate counterproductive or even destructive incentives. This is the result of humanity’s highly refined skill in assessing risk and return. All creatures have been selected over the eons to recognize the potential for a windfall that doesn’t require much work to reap.

Can’t leave out the ones that are diabetic without knowing it. Oh, and: “..these obesity rates are calculated from self-reported heights and weights.”

• 30.4% Of Americans Were Obese In 2015 (Forbes)

If recent headlines are to be believed, we are rapidly approaching the future depicted in Wall-E, with a morbidly obese population that can get from place to place only with the help of a hover-scooter. “Americans are fatter than ever, CDC finds,” trumpets CNN. “This Many Americans Need To Go On A Diet ASAP, According To New CDC Report,” content farm Elite Daily smugly proclaims. But is it really that cut-and-dried? The report both articles refer to is succinctly titled “Early Release of Selected Estimates Based on Data from the National Health Interview Survey, 2015.” It was released on Tuesday, and it provides an early look at annual data from the titular survey on 15 different points, from health insurance and flu shots to smoking rates and, yes, obesity.

The publication says 30.4% of Americans were obese in 2015, with a 95% confidence interval (so somewhere between 29.62% and 31.27%). That’s compared to 19.4% in 1997. Obesity rates were higher among middle-aged people (ages 40 to 59), with the rate for that group hitting 34.6%. Ages 20 to 39, perhaps predictably, were the least obese, with 26.5% of that population having a BMI of 30 or more. Obesity was highest for black women (45%), followed by black men (35.1%), Latina women (32.6%), Latino men (32%), white men (30.2%) and white women (27.2%). The data in the release didn’t provide any information on other ethnic or racial groups, nor did it break obesity rates down by household income.

In concert with rising obesity rates, Americans are getting more diabetic. In 1997, 5.1% of U.S. adults had been diagnosed with diabetes. By 2015, that number had nearly doubled, to 9.5%. Although, again, the data here don’t break everything down to my satisfaction–there are no numbers for each specific type of diabetes, for instance–it’s safe to say that these correlations are the consequence of rising obesity, as 95% of people diagnosed with diabetes have type 2.

Managed to monopolize the entire Brexit debate, but they can’t leave well enough alone…

• Tory Turmoil Escalates With Open Call For Cameron To Quit (G.)

David Cameron’s hopes of being able to avoid terminal damage to Conservative party unity after the EU referendum campaign were dented on Sunday when two rebel MPs openly called for a new leader and a general election before Christmas. The attacks came from Andrew Bridgen and Nadine Dorries – both Brexiters, and longstanding, publicity-hungry opponents of the prime minister – and their claim that even winning the EU referendum won’t stop Cameron facing a leadership challenge in the summer was dismissed by fellow Tories. But their comments coincided with the ministers in charge of the leave campaign launching some of their strongest personal attacks yet on Cameron, prompting Labour’s Alan Johnson to say that the Tory infighting was getting “very ugly indeed”.

Bridgen told the BBC’s 5 Live that Cameron had been making “outrageous” claims in his bid to persuade voters to back remain and that, as a consequence, he had effectively lost his parliamentary majority. “The party is fairly fractured, straight down the middle and I don’t know which character could possibly pull it back together going forward for an effective government. I honestly think we probably need to go for a general election before Christmas and get a new mandate from the people,” he said. Bridgen said at least 50 Tory MPs – the number needed to call a confidence vote – felt the same way about Cameron and that a vote on the prime minister’s future was “probably highly likely” after the referendum.

Dorries told ITV’s Peston on Sunday she had already submitted her letter to the chairman of the Tory backbench 1922 committee expressing no confidence in the prime minister. “[Cameron] has lied profoundly, and I think that is actually really at the heart of why Conservative MPs have been so angered. To say that Turkey is not going to join the European Union as far as 30 years is a lie.”

Australia will keep debating this while the last bits die off.

• Half Of Central, Northern Great Barrier Reef Corals Are Dead (SMH)

More than one-third of the coral reefs of the central and northern regions of the Great Barrier Reef have died in the huge bleaching event earlier this year, Queensland researchers said. Corals to the north of Cairns – covering about two-thirds of the Great Barrier Reef – were found to have an average mortality rate of 35%, rising to more than half in areas around Cooktown. The study, of 84 reefs along the reef, found corals south of Cairns had escaped the worst of the bleaching and were now largely recovering any colour that had been lost. Professor Terry Hughes, director of the ARC Centre of Excellence for Coral Reef Studies at James Cook University, said he was “gobsmacked” by the scale of the coral bleaching which far exceeded the two previous events in 1998 and 2002.

“It is fair to say we were all caught by surprise,” Professor Hughes said. “It’s a huge wake up call because we all thought that coral bleaching was something that happened in the Pacific or the Caribbean which are closer to the epicentre of El Nino events.” The El Nino of 2015-16 was among the three strongest on record but the starting point was about 0.5 degrees warmer than the previous monster of 1997-98 as rising greenhouse gas emissions lifted background temperatures. Reefs in many regions, such as Fiji and the Maldives, have also been hit hard. Bleaching occurs when abnormal conditions, such as warm seas, cause corals to expel tiny photosynthetic algae, called zooxanthellae. Corals turn white without these algae and may die if the zooxanthellae do not recolonise them.

The northern end of the Great Barrier Reef was home to many 50- to 100-year-old corals that had died and may struggle to rebuild before future El Ninos push tolerance beyond thresholds. “How likely is it that they will fully recover before we get a fourth or a fifth bleaching event?” Professor Hughes said. The health of the reef has been a contentious political issue, with Environment Minister Greg Hunt pledging more funds in the May budget to improve water quality – one aspect affecting coral health. But Mr Hunt has also had to explain why his department instructed the UN to cut out a section on Australia from a report that dealt with the threat of climate change to World Heritage sites including the Great Barrier Reef and Kakadu.

Debt Rattle May 24 2016

May 242016

May 24, 2016 Posted by Raúl Ilargi Meijer at 9:40 am Finance Tagged with: bailout, China, debt, derivatives, Deutsche, Greece, iron, NIRP, refugees, SOE, yen, yuan Comments Off

Lewis Hine A heavy load for an old woman. Lafayette Street below Astor Place, NYC 1912

• ‘Massive Bailout’ Needed in Debt-Saddled China: Charlene Chu (BBG)

• SOE Debt Could Easily Overwhelm China’s Banking System (Abc.au)

• China Takes Back Control Over Yuan (WSJ)

• Negative Rates Prompt Japan Banks to Opt Out Via Derivatives (BBG)

• Iron Ore Price Falls 27% In Past Month (BI)

• Deutsche Bank Ratings Cut by Moody’s (BBG)

• Greece Is Never Going To Grow Its Way Out Of Debt (Coppola)

• Austerity Means Privatizing Everything We Own (G.)

• US Court Opens Door Over Libor Claims (FT)

• Italy Helps Rescue 2,600 Migrants From Sea In 24 Hours (R.)

• Greece Starts Clearing Makeshift Refugee Camp On Border (R.)

Selling vehicles to vehicles: “The WMPs [wealth management product] used to be predominantly sold to the public, but now they’re increasingly being sold to banks and other WMPs.”

• ‘Massive Bailout’ Needed in Debt-Saddled China: Charlene Chu (BBG)

Charlene Chu, a banking analyst who made her name warning of the risks from China’s credit binge, said a bailout in the trillions of dollars is needed to tackle the bad-debt burden dragging down the nation’s economy. Speaking eight days after a Communist Party newspaper highlighted dangers from the build-up of debt, Chu, a partner at Autonomous Research, said she was yet to be convinced the government is serious about deleveraging and eliminating industry overcapacity. She also argued that lenders’ off-balance-sheet portfolios of wealth-management products are the biggest immediate threat to the nation’s financial system, with similarities to Western bank exposures in 2008 that helped to trigger a global meltdown.

The former Fitch Ratings analyst uses a top-down approach to calculating China’s bad-debt levels as the credit to GDP ratio worsens, requiring more credit to generate each unit of GDP. She’s on the bearish side of the debate about the outlook for China and has sounded warnings since the nation’s credit binge began in 2008. “China’s debt problems are large and severe, but in some respects a slow burn. Over the near term, we think the biggest risk is banks’ WMP [wealth management product] portfolios. The stock of Chinese banks’ off-balance-sheet WMPs grew 73% last year. There is nothing in the Chinese economy that supports a 73% growth rate of anything at the moment.

Regardless of all of the headlines and announcements about the authorities cracking down on WMPs, they have done very little, really, and issuance continues to accelerate. “We call off-balance-sheet WMPs a hidden second balance sheet because that’s really what it is – it’s a hidden pool of liabilities and assets. In this way, it’s similar to the Special Investment Vehicles and conduits that the Western banks had in 2008, which nobody paid attention to until everything fell apart and they had to be incorporated on-balance-sheet. “The mid-tier lenders is where these second balance sheets are very large. China Merchants Bank is a good example. Their second balance sheet is close to 40% of their on-balance-sheet liabilities. Enormous.”

“Although contributing to less than one-third of economic output and employment, SOEs take up nearly half of bank lending..”

• SOE Debt Could Easily Overwhelm China’s Banking System (Abc.au)

Chinese banks are looking down the barrel of a staggering RMB 8 trillion – or $1.7 trillion – worth of losses according to the French investment bank Societe Generale. Put another way, 60% of capital in China’s banks is at risk as authorities start the delicate and dangerous process of reining in the debt-bloated and unprofitable state-owned enterprise (SOE) sector. Disturbingly though, debt is not only not shrinking, it is accelerating, making the eventual reckoning far worse. China’s overall non-financial debt grew by 15.2% in 2015 to RMB 167 trillion ($35 trillion) or almost 250% of GDP. That is up from 230% of GDP the year before and the 130% it was eight years ago before the global financial crisis hit.

The problem is largely centred on China’s 150,000 or so SOEs, which suck-up an entirely disproportionate amount of the nation’s capital. “Although contributing to less than one-third of economic output and employment, SOEs take up nearly half of bank lending (RMB 37 trillion) and more than 80% of corporate bond financing (RMB 9.5 trillion),” Societe Generale found. “While the inefficiency of SOEs is gradually dragging down economic growth, recognising even a small share of SOEs’ non-performing debt would easily overwhelm the financial system.” Despite their moribund financial performance, the SOEs still enjoy a considerable advantage in access to funding through the banking system than the private sector.

“To put things into perspective, a quarter of SOEs’ loans and bonds are equivalent to the entire capital base of commercial banks plus their loan-loss reserves, equivalent to 23% of GDP,” Societe Generale’s China economist Wei Yao said. On the bank’s figures, if just 3% of loans to SOEs sour, commercial banks’ non-performing loans would double.

Wanting to control the yuan exchange rate is a threat to reserves.

• China Takes Back Control Over Yuan (WSJ)

Behind closed doors in March, some of China’s most prominent economists and bankers bluntly asked the People’s Bank of China to stop fighting the financial markets and let the value of the nation’s currency fall. They got nowhere. “The primary task is to maintain stability,” said one central-bank official, according to previously undisclosed minutes of the meeting reviewed by The Wall Street Journal. The meeting left little doubt China’s top leaders have lost interest in a major policy shift announced in a surprise move just nine months ago. In August 2015, the PBOC said it would make the yuan’s value more market-based, an important step in liberalizing the world’s second-largest economy.

In reality, though, the yuan’s daily exchange rate is now back under tight government control, according to meeting minutes that detail private deliberations and interviews with Chinese officials and advisers who spoke with The Wall Street Journal about the country’s currency policy. On Jan. 4, the central bank behind closed doors ditched the market-based mechanism, according to people close to the PBOC. The central bank hasn’t announced the reversal, but officials have essentially returned to the old way of adjusting the yuan’s daily value higher or lower based on whatever suits Beijing best. The flip-flop is a sign of policy makers’ deepening wariness about how much money is fleeing China, a problem driven by its slowing economy.

For now, at least, officials believe the benefits of freeing the yuan are outnumbered by the number of threats. Re-emphasizing the yuan’s stability would also bring a sigh of relief to trading partners who worried a weaker currency would boost Chinese exports at the expense of those produced elsewhere. Freeing the yuan, the biggest overhaul of China’s currency policy in a decade, was meant to empower consumers and help invigorate the economy. The negative reaction, from financial markets world-wide and Chinese who sped their efforts to take money out of the country, was so jarring that the top leadership, headed by President Xi Jinping, began to have second thoughts.

At a heavily guarded conclave of senior Communist Party officials in December, Mr. Xi called China’s markets and regulatory system “immature” and said “the majority” of party officials hadn’t done enough to guide the economy toward more sustainable growth, according to people who attended the meeting. To the central bank, there was only one possible interpretation: Step on the brakes.

Turns out, it can still get worse.

• Negative Rates Prompt Japan Banks to Opt Out Via Derivatives (BBG)

Japanese banks reluctant to pay for the privilege of lending are opting out by using derivatives. The options set a floor on rates used to determine interest on loans, and the holder will be paid if the rates fall below that level, according to Aozora Bank and Tokyo Star Bank. The benchmark three-month Tokyo interbank offered rate has plunged to a record low of 6 basis points since the Bank of Japan announced it would start charging fees on some lenders’ reserves in January. Options with floors at zero% or minus rates have been traded recently, according to Aozora Bank. “There’s a need to hedge against money-losing lending that could happen if the Tibor falls to negative levels,” said Tetsuji Matsuka, the head of the ALM planning treasury department at Tokyo Star Bank.

“We think demand will increase” for such products, he said. Japanese banks are getting hurt as the negative-rate policy compresses their lending margins, with the top-three firms including Mitsubishi UFJ Financial forecasting this month that net income will fall a combined 5.2% in the year started April 1. The BOJ’s radical stimulus has already dragged yields on more than 70% of Japanese government bonds to below zero, meaning that investors will have to effectively pay a fee to hold such debt to maturity. In the yen London interbank offered rate market, where some rates are already below zero, options have been traded with floors as low as minus 1%, according to Nobuyuki Takahashi, the general manager of the derivatives sales division at Aozora Bank.

The three-month yen Libor was at minus 0.02% on Friday. Companies that borrow at floating rates may also be able to use floor options to ensure that interest-rate swaps they use to hedge against rising rates don’t end up costing them due to negative rates, Takahashi said. Actual trades of such derivatives are still not that common because the contracts are expensive to buy now, he said. “It will be hard to price these options unless we get more liquidity,” said Tateo Komatsu, a deputy general manager of global markets at Sumitomo Mitsui Trust Bank Ltd. “It will take time for the market to get used to minus rates.”

Roller coaster in a casino.

• Iron Ore Price Falls 27% In Past Month (BI)

The iron ore price is imploding. Following the ugly lead provided by Chinese futures on Monday, the spot iron ore price followed suit, suffering one of the largest declines seen in years. According to Metal Bulletin, the spot price for benchmark 62% fines fell by 6.69%, or $3.67, to $51.22 a tonne, leaving it down 27.3% from the multi-year peak of $70.46 a tonne struck on April 21. The decline was the third-largest in percentage terms in the past two years, and left the price at the lowest level seen since March 3 this year. The losses in physical and futures markets followed news that Chinese iron ore port inventories swelled to over 100 million tonnes last week, leaving them at the highest level seen since March last year.

That followed the revelation that Chinese crude steel output contracted in April after hitting a record high in March, declining marginally according to figures released by the China Iron and Steel Association (CISA). Given the increasing correlated relationship between the two, it’s also clear that an unwind of speculative positioning in Chinese iron ore futures is also impacting prices in the physical iron ore market. After watching prices in many bulk commodity futures rally more than 50% in less than two months, regulators at both the Dalian Commodities Exchange and Shanghai Futures Exchange introduced measures in recent weeks to discourage excessive levels of speculation in these markets.

Slow death?!

• Deutsche Bank Ratings Cut by Moody’s (BBG)

Deutsche Bank had its credit rating cut by Moody’s Investors Service, which said the German lender faces mounting challenges in carrying out its turnaround. The bank’s senior unsecured debt rating was lowered to Baa2 from Baa1, Moody’s said Monday in a statement. That left the grade two levels above junk. The firm’s long-term deposit rating fell to A3 from A2. “Deutsche Bank’s performance over the last several quarters has been weak, and substantial operating headwinds, including continuing low interest rates and macroeconomic uncertainty, will challenge the firm,” Moody’s said in the statement. CEO John Cryan’s planned overhaul of the bank, laid out in October, ran into an industrywide slump in trading and investment banking, as well as interest rates that have gone from low to negative in parts of Europe and Asia.

Net income fell 61% in the first quarter, leaving the company at risk of a second straight annual loss this year as it tries to resolve legal cases. Results so far and the challenges ahead, including a chance of further slumps in retail and market-linked businesses, will probably force Deutsche Bank to balance restructuring costs with the need to amass capital for stiffened regulatory requirements, Moody’s wrote. “The plan they’re trying to execute is a good plan for the bondholder in the long run, but they face some pretty challenging headwinds when you look at the current operating environment,” Peter Nerby, a senior vice president at Moody’s, said in a phone interview. “They’re working on it, but it’s tougher than it was.”

“A whole generation will have been consigned to the scrapheap.”

• Greece Is Never Going To Grow Its Way Out Of Debt (Coppola)

The IMF has just released its latest Debt Sustainability Analysis (DSA) for Greece. It makes grim reading. Greece is never going to grow its way out of debt. And the 3.5% primary surplus to which the Syriza government seems hell-bent upon committing is frankly unbelievable: the IMF thinks sustaining even 1.5% would be a stretch. Banks will need another €10bn (on top of the €43bn the Greek government has already borrowed to bail them out). Asset sales are a lost cause, mainly because the banks – which were a large proportion of the assets up for sale – won’t be worth anything for the foreseeable future. Like it or not, debt relief will be necessary. If there is no debt relief, by 2060 debt service will soar to an impossible 60% of government spending. Of course, Greece would default long before that – but that would make the situation in Greece even worse.

None of this is news. The IMF has been saying for nearly a year now that Greece will need debt relief. This latest DSA is designed to shock the Europeans into giving it serious consideration. It is not surprising, therefore, that the debt sustainability projections are significantly worse than in previous DSAs. No doubt the European creditors will disagree with them, the Syriza government will side with the Europeans because the only alternative is Grexit, and the European Commission will claim there is “progress” when all that is really happening is that a very battered can is being kicked once again. But buried in the IMF’s report are some very unpleasant numbers indeed – the IMF’s projections for population and employment out to 2060. And I think the world should know about them. Here is what the IMF has to say about the outlook for Greek unemployment:

Demographic projections suggest that working age population will decline by about 10 percentage points by 2060. At the same time, Greece will continue to struggle with high unemployment rates for decades to come. Its current unemployment rate is around 25%, the highest in the OECD, and after seven years of recession, its structural component is estimated at around 20%. Consequently, it will take significant time for unemployment to come down. Staff expects it to reach 18% by 2022, 12% by 2040, and 6% only by 2060. So even if the Greek economy returns to growth and its creditors agree to debt relief, it will take 44 years to reduce Greek unemployment to something approaching normal. For Greece’s young people currently out of work, that is all of their working life. A whole generation will have been consigned to the scrapheap.

Think Britain is bad? Try Greece.

• Austerity Means Privatizing Everything We Own (G.)

Almost everyone who gives the matter serious thought agrees that George Osborne and David Cameron want to reshape Britain. The spending cuts, the upending of the NHS, even this month’s near-miss over the BBC: signs lie everywhere of how this will be a decade, maybe more, of massive change. Yet even now it is little understood just how far Britain might shift – and in which direction. Take austerity, the word that will define this government. Even its most astute critics commit two basic errors. The first is to assume that it boils down to spending cuts and tax rises. The second is to believe that all this is meant to reduce how much the country is borrowing. What such commonplaces do is reduce austerity to a technical, reversible project.

Were it really so simple all we would need to do is turn the spending taps back on and wash away all traces of Osbornomics. Austerity is far bigger than that: it is a project irreversibly to transfer wealth from the poorest to the richest. It’s doing the job very nicely: while the typical British worker is still earning less after inflation than he or she was before the banking crash, the number of UK-based billionaires has nearly quadrupled since 2009. Even while he slashes benefits, Osborne is deep into a programme to hand over much of what is still owned by the British public to the wealthiest. Privatisation is the multibillion-pound centrepiece of Osborne’s austerity – yet it rarely gets a mention from either politicians or press. The Queen mentioned it in her speech last week, but the headline writers ignored it.

And if you don’t know that this Thursday is the closing date for consultation on the sale of the Land Registry, our public record of who owns what property, that’s hardly your fault – I haven’t spotted it in the papers, either. But without getting rid of prize assets, Osborne’s austerity programme falls apart. At a time when tax revenues are more weak stream than healthy flood, those sales bring much-needed cash into the Treasury and make his sums add up. The independent Office for Budget Responsibility has ruled that the only reason the chancellor met his debts target last year was because he flogged off our public assets. And what a fire sale that was, with everything from our last remaining stake in the Royal Mail to shares in Eurostar shoved out the door in the biggest wave of privatisations of any year in British history.

And maybe sometime in the next century something will be done. But they’re all still too big to fail.

• US Court Opens Door Over Libor Claims (FT)

A US appeals court has opened the door for more claims against the big banks for rigging benchmark interest rates, by overturning a three-year-old ruling which threw out a host of private antitrust-related lawsuits. Monday’s decision by the 2nd US Circuit Court of Appeals in Manhattan could be a setback for the likes of Bank of America, JPMorgan Chase and Citigroup, which had hoped that most of the wave of post-crisis litigation was behind them. The decision reverses a lower court decision from 2013, in which US District Judge Naomi Reice Buchwald dismissed claims on the grounds that the plaintiffs had failed to plead antitrust injury.

The lawsuits had accused 16 major banks of collusion in manipulating the London interbank offered rate, or Libor, which approximates the average rate at which a select group of banks can borrow money. Beginning in 2007, the plaintiffs argued, the banks engaged in a horizontal price-fixing conspiracy, with each submitting an artificially low cost of borrowing US dollars in order to drive Libor down. At the time of her rejection, Judge Buchwald reasoned that the Libor-setting process was co-operative rather than competitive, and so any attempt to depress the rate did not cause investors to suffer anti-competitive harm. At best, she said, investors had a fraud claim based on misrepresentation.

But the appeals court on Monday disagreed and sent the case back to the lower court for further proceedings. A three-judge panel found that price-fixing was an antitrust violation in itself, and therefore needed no separate plea of harm. “The crucial allegation is that the banks circumvented the Libor-setting rules, and that joint process thus turned into collusion,” the panel said. The private suits are separate from the criminal and civil probes into Libor rigging, which have ensnared banks and traders around the world and drawn about $9bn so far in penalties.

Do we even still notice?

• Italy Helps Rescue 2,600 Migrants From Sea In 24 Hours (R.)

Italian vessels have helped rescue more than 2,600 migrants from boats trying to reach Europe from North Africa in the last 24 hours, the coastguard said on Monday, indicating that numbers are rising as the weather warms up. Some 2,000 migrants were rescued off the Libyan coast from 14 rubber dinghies and one larger boat in salvage operations by the Italian navy and coastguard, the medical charity Medecins Sans Frontieres and an Irish navy vessel, the coastguard said. Another 636 migrants were rescued from two boats in Maltese waters, in operations involving Maltese and Italian vessels, it said. It gave no information about the nationalities of those saved. More than 31,000 migrants have reached Italy by boat so far this year, slightly fewer than in the same period of 2015.

Humanitarian organizations say the sea route between Libya and Italy is now the main route for asylum seekers heading for Europe, after an EU deal on migrants with Turkey dramatically slowed the flow of people reaching Greece. Officials fear the numbers trying to make the crossing to southern Italy will increase as conditions improve in warmer weather. More than 1.2 million Arab, African and Asian migrants fleeing war and poverty have streamed into the European Union since the start of last year. Most of those trying to reach Italy leave the coast of lawless Libya on rickety fishing boats or rubber dinghies, heading for the Italian island of Lampedusa, which is close to Tunisia, or toward Sicily.

Peaceful until now.

• Greece Starts Clearing Makeshift Refugee Camp On Border (R.)

Greek police started moving migrants and refugees out of a sprawling tent camp on the sealed northern border with Macedonia on Tuesday where thousands have been stranded for months trying to get into western Europe. Reuters witnesses saw several bus loads of migrants leaving the makeshift camp of Idomeni early on Tuesday morning, with about another dozen buses lined up. It appeared to be mainly families who were on the move. Greek authorities said they planned to move individuals gradually to state-supervised facilities further south in an operation expected to last several days. “The evacuation is progressing without any problem,” said Giorgos Kyritsis, a government spokesman for the migrant crisis.

A Reuters witness on the Macedonian side of the border said there was a heavy police presence in the area but no problems were reported as people with young children packed up huge bags with their belongings. Media on the Greek side of the border were kept at a distance and a group of people dressed as clowns waved balloon hearts and animals as the buses drove past. “Those who pack their belongings will leave, because we want this issue over with. Ideally by the end of the week. We haven’t put a strict deadline on it, but more or less that is what we estimate,” Kyritsis told Reuters. At the latest tally, 8,199 people were camped at Idomeni after a cascade of border shutdowns throughout the Balkans in February barred migrants and refugees from central and northern Europe. More than 12,000 lived in the camp at one point.

Debt Rattle May 18 2016

May 182016

May 18, 2016 Posted by Raúl Ilargi Meijer at 8:54 am Finance Tagged with: casino, China, debt, depression, EU, NIRP, refugees, shadow banks, steel, tax, ZIRP 3 Responses »

Russell Lee South Side market, Chicago 1941

• US Debt Dump Deepens In 2016 (CNN)

• The Humungous Depression (Gore)

• Negative Rates Are A Form Of Tax (MW)

• The Negative Interest Rate Gap (Dmitry Orlov)

• The EU Has “Run Its Historical Course” (ZH)

• Italy Wins Brussels’ ‘Flexibility’ On Debt Reduction Targets (FT)

• US Raises China Steel Taxes By 522% (BBC)

• Chinas Debt Bubble Is Getting Only More Dangerous (WSJ)

• China To Curb Shadow Banking Via Checks On Fund House Subsidiaries (R.)

• Abenomics: The Reboot, Rebooted (R.)

• Trump and Sanders Shift Mood in Congress Against Trade Deals (BBG)

• Smugglers Made $5-6 Billion Off Refugees To Europe In 2015 (R.)

• Refugees Will Repay EU Spending Almost Twice Over In Five Years (G.)

“There’s still this fear of ‘everything is going to fall apart.'”

• US Debt Dump Deepens In 2016 (CNN)

China, Russia and Brazil sold off U.S. Treasury bonds as they tried to soften the blow of the global economic slowdown. They each sold off at least $1 billion in U.S. Treasury bonds in March. In all, central banks sold a net $17 billion. Sales had hit a record $57 billion in January. So far this year, the global bank debt dump has reached $123 billion. It’s the fastest pace for a U.S. debt selloff by global central banks since at least 1978, according to Treasury Department data published Monday afternoon. Treasuries are considered one of the safest assets in the world, but some experts say a sense of panic about the global economy drove the selloff.

“It’s more of global fear than anything,” says Ihab Salib, head of international fixed income at Federated Investors. “There’s still this fear of ‘everything is going to fall apart.'” Judging by the selloff, policymakers across the globe were hitting the panic button often and early in the year as oil prices fell, concerns about China’s economy rose and stock markets were very volatile. In response, countries may be selling Treasuries to prop up their currencies, some of which lost lots of value against the dollar last year. By selling U.S. debt, central banks can get hard cash to buy up their local currency and prevent it from losing too much value.

Also, as investors have pulled money out of developing countries, central bankers seek to replenish those lost funds by selling their foreign reserves. The leader in the selloff: China. “We’ve seen Chinese central bank foreign reserves fall dramatically,” says Gus Faucher, senior economist at PNC Financial. “Their currency is under pressure.” Between December and February, China’s central bank sold off an alarming $236 billion to help support its currency, which China is slowly letting become more controlled by markets and less by the government. In March, China sold $3.5 billion in U.S. Treasury bonds, Treasury data shows. Experts say the sell off may be slowing down now that global concerns have eased. If anything, demand is still high for U.S. Treasury bonds – it’s just coming from private investors.

ZIRP and NIRP feed the casino.

• The Humungous Depression (Gore)

Economic depressions unfold slowly, which obscures their analysis, although they are simple to understand. Governments and central banks turn recessions into depressions, which are preceded by unsustainable expansions of debt untethered from the real economy. The reduction and resolution of excess debt takes time, and governments and central banks usually act counterproductively, retarding necessary adjustments and lengthening the adjustment, and consequently, the depression. If one dates the beginning of a depression from the beginning of the unsustainable expansion of debt that preceded it, then the current depression began in 1987. Newly installed chairman of the Fed Alan Greenspan quelled a stock market crash, flooding the financial system with fiat liquidity. It was a well from which he and his successors would draw repeatedly.

Throughout the 1990s he would pump whenever it appeared the market and the US economy were about to dump. In 1999, he pumped because the Y2K computer transition might adversely affect the economy and financial system (it didn’t). If one dates the beginning of a depression from the time when the benefits of debt are, in the aggregate, outweighed by its burdens, the depression began in 2000, with the implosion of the fiat-credit fueled, high-tech and Internet stock market bubble. Unsustainable debt and artificially low interest rates lower the rate of return on productive investment and saving, increasing the relative attractiveness of speculation. Central bankers and their minions refer to this as “forcing investors out on the risk curve,” crawling way out on a limb for fruitful returns. They have no term for when markets saw off the branch, as they did in 2000 and again in 2008.

Most people don’t see 2000 as the beginning of a depression, but Washington and Wall Street cloud their vision. Stock markets were once essential avenues for raising capital and valuing corporations. Since central bankers’ remit was broadened to their care and feeding, stock markets have become engines of obfuscation. The “wealth effect” supposedly justified solicitude for markets: a rising stock market would increase wealth, spending, and economic growth. For seven years a rising market has coexisted with an anemic rebound and one hears little about the wealth effect anymore. The stock market is the preeminent symbol of economic health, so keeping it afloat has become a political exercise. Sure, central bankers and governments know what they’re doing, just look at those stock indices.

“They impose a levy on the banking system that has to be paid by someone..”

• Negative Rates Are A Form Of Tax (MW)

Central banks have slashed interest rates to nothing. They have printed money on a vast scale. Where that has not quite worked, and if we are being honest that is most places, they now have a new tool. Negative interest rates. Across a third of the global economy, money you put in the bank does not only generate nothing in the way of a return. You actually get charged for keeping it there. That is already producing strange, Alice-in-Wonderland economics, where nothing is quite what it seems. Governments want you to delay paying taxes as long as possible, the mortgage company pays you to stay in the house, and cash becomes so sought after there is even talk of abolishing it. But the real problem with negative rates may be something quite different.

As a fascinating new paper from the St. Louis Fed argues, they are in fact a form of tax. They impose a levy on the banking system that has to be paid by someone — and that someone is probably us. That may explain why central banks and governments are so keen on them. Hugely indebted governments are always in the market for a new tax, especially one that their voters probably won’t notice. But it also explains why they don’t really work — because most of the economics in trouble, especially in Europe, are already suffocating under an impossible high tax burden. Negative interest rates have, like a fast-mutating virus, started to spread across the world. The Swiss first tried them out all the way back in the 1970s.

In June 1972 it imposed a penalty rate of 2% a quarter on foreigners parking money in Swiss francs amid the turmoil of the early part of that decade, but the experiment only lasted a couple of years. In the modern era, the ECB kicked off the trend in June 2014 with a negative rate on selected deposits. Since then, they have spread to Sweden, Denmark, Switzerland (again), and more recently Japan, while the ECB has cut even deeper into negative territory. They already cover about a third of the global economy, and there is no reason why they should not reach further. The Fed might be raising rates this year, but it is the only major central bank to do so, and if, or rather when, there is another major downturn, it may have no choice but to impose negative rates as well.

“..how can an interest rate be negative? Does it become a “disinterest rate”?

• The Negative Interest Rate Gap (Dmitry Orlov)

Back in the early 1980s the US economy was experiencing stagflation: a stagnant economy and an inflating currency. Paul Volcker, who at the time was Chairman of the Federal Reserve, took a decisive step and raised the Federal Funds Rate, which determines the rate at which most other economic players get to borrow, to 18%, freezing out inflation. This was a bold step, not without negative consequences, but it did get inflation under control and, after a while, the US economy stopped stagnating. Well, not quite. Wages didn’t stop stagnating; they’ve been stagnant ever since. But the fortunes of the 1% of the richest Americans have certainly improved nicely! Moreover, the US economy grew quite a bit since that time.

Of course, most of this growth came at the expense of staggering structural deficits and an explosion of indebtedness at every level, but so what? Sure, the national debt went exponential and the government’s unfunded liabilities are now over $200 trillion, but that’s OK. You just have to like debt. Keep saying to yourself: “Debt is good!” Because if everyone started thinking that debt is bad, then the entire financial house of cards would implode and we would be left with nothing. But once interest rates peaked in the early 1980s, they’ve been on a downward trend ever since, with little ups and downs now and again but an unmistakable overall downward trend.

The Federal Reserve had to do this in order to, in Fed-speak, “support economic activity and job creation by making financial conditions more accommodative.” Once it started doing this, it found that it couldn’t stop. The US had entered a downward spiral—of sloth, obesity, ignorance, substance abuse, expensive and disastrous foreign military adventures, bureaucratic insanity, massive corruption at every level—and under these circumstances it needed ever-cheaper money in order to keep the financial house of cards from imploding. And then, in late 2008, the Fed finally reached the ultimate target: the Fed Funds Rate went all the way to zero. This is known as ZIRP, for Zero Interest Rate Policy. And, unfortunately, it stayed there.

It stayed there, instead of continuing to gently drift down as before, because of a conceptual difficulty: how can an interest rate be negative? Does it become a “disinterest rate”? How can that work? After all, lenders are “interested” in lending because they get back more than they lend out (accepting some amount of risk); and depositors are “interested” in keeping money in banks because they get back more than they put in. And if these activities become “of zero interest,” why would lenders lend and depositors deposit? They wouldn’t, now, would they? They’d buy gold, or Bitcoin, or bid up real estate.

As long as we can see things only in terms of money nothing we do has any real value.

• The EU Has “Run Its Historical Course” (ZH)

None other than the former head of MI6 (the British Secret Intelligence Service) Richard Dearlove expressed his quite candid thoughts on the immigration crisis, as well as the possibility of a British exit from the EU during a speech recently at the BBC. The speech is well worth the listen. Here are some notable quotes from the speech as it relates to the immigration crisis. The former head of intelligence is quick to point out that despite what the public perception may be, the reality is that there are terrorists already among us.

“When massive social forces are at work, and mass migration is such a force, a whole government response is required, and a high degree of international cooperation.” “In the real world, there are no miraculous James Bond style solutions. Simply shutting the door on migration is not an option. History tells us that human tides are irresistible, unless the gravitational pull that causes them is removed. Edward Gibbon elegantly charted how Rome, with all it’s civic and administrative sophistication and military prowess, could not stop its empire from being overrun by the mass movement of Europe’s tribes.”

“We should not conflate the problem of migration with the threat of terrorism. High levels of immigration, particularly from the Middle East, coupled with freedom of movement inside the EU, make effective border conrol more difficult. Terrorists can, and do exploit these circumstances as we saw recently in their movement between Brussels and Paris, and to and from Syria. With large numbers of people on the move, a few of them will inevitably carry the terrorist virus.” A number of the most lethal terrorists are from inside Europe, including the UK. They are already among us.” “The EU, as opposed to its member states, has no operational counter-terrorist capability to speak of. Many of the European states look to the UK for training.”

“The argument that we would be less secure if we left the EU, is in reality rather difficult to make. There would in fact be some gains if we left, because the UK would be fully master of its own house. Counter-terrorist coordination across Europe would certainly continue, and the UK would remain a leader in the field. The idea that the quality of that cooperation depends in any significant way on our EU membership is misleading.” “Is the EU, faced with the problem of mass migration, able to coordinate an effective response from its member countries. Should the UK stay in and continue struggle for fundamental change, or do we conclude that the effort would be wasted, and that the EU in its extended form has run its historical course. For each of us, this is possibly the most important choice we may ever have to make.”

“Whether we will each be worse off, whether our national security might be damaged, even whether the economy might falter, and sterling be devalued, are subsidiary to the key question, which is whether we have confidence in the EU to manage Europe’s future. If Europe cannot act together to persuade a majority of its citizens that it can gain control of its migrant crisis, then the EU will find itself at the mercy of a populist uprising which is already stirring. The stakes are very high, and the UK referendum is the first roll of the dice in a bigger geopolitical game.”

Unlike Greece, Italy is so big it can make or break the EU. So goalposts are moved as they go along.

• Italy Wins Brussels’ ‘Flexibility’ On Debt Reduction Targets (FT)

Brussels has granted Italy “unprecedented” flexibility in meeting EU debt reduction targets, using its political leeway to the full as it cautiously polices the eurozone’s fiscal rule book. Italy has emerged as a big winner from the European Commission’s latest review of national budget policies, which is set to pull back from — or postpone — painful corrective measures it had the power to impose. The decisions have sparked an intense debate within the commission over what critics see as its record of tolerating fiscal lapses by countries such as France, Italy and Spain. Some officials were on Tuesday pushing to delay parts of the package to avoid punishing Spain and Portugal before Spain’s election on June 26.

The need for the debate on timing shows the commission under Jean-Claude Juncker has acted as a self-described political body, even at the risk of undermining the credibility of the eurozone’s strengthened fiscal regime. After months of heavy lobbying from Matteo Renzi, the Italian premier, Rome secured most of the “budgetary flexibility” it sought, helping it avoid so-called excessive deficit procedures for failing to bring down its debt levels fast enough. Italy would be allowed extra fiscal room equivalent to 0.85%of GDP — or about €14bn — this year compared with the target mandated under EU budget rules. Such “flexibility” approaches the 0.9% of GDP Italy demanded in drawn-out negotiations with Brussels.

Valdis Dombrovskis and Pierre Moscovici, the two European commissioners responsible for eurozone budget issues, said in a letter to Rome that “no other member state has requested nor received anything close to this unprecedented amount of flexibility”. Zsolt Darvas of the Bruegel think-tank said that “if the rules were taken literally” Italy would be placed under the excessive deficit procedure. Overall the EU fiscal rules “have very low credibility”, he added. “Many countries are violating the rules almost constantly from one year to the next.” Mr Renzi’s government is not completely in the clear, however. In exchange for the flexibility, the commission demanded a “clear and credible commitment” that Italy would respect its budget targets in 2017 to reduce the country’s high debt-to-GDP ratio, which stood at 132.7%of GDP last year.

Brilliant! What’s not to like? Can’t wait for the response.

• US Raises China Steel Taxes By 522% (BBC)

The US has raised its import duties on Chinese steelmakers by more than five-fold after accusing them of selling their products below market prices. The taxes specifically apply to Chinese-made cold-rolled flat steel, which is used in car manufacturing, shipping containers and construction. The US Commerce Department ruling comes amid heightened trade tensions between the two sides over several products, including chicken parts. Steel is an especially sensitive issue. US and European steel producers claim China is distorting the global market and undercutting them by dumping its excess supply abroad. The ruling itself is only directed at what is small amount of steel from China and Japan and won’t have much of an impact – but it is the politics of the ruling that’s worth noting.

It is an election year, and US presidential candidates have been ramping up the rhetoric on what they say are unfair trade practices by China. US steel makers say that the Chinese government unfairly subsidises its steel exports. Meanwhile China has been under pressure to save its steel sector, which is suffering from over-capacity issues because of slowing demand at home. China’s Ministry of Finance has not directly responded to the US ruling but on its website this morning it has said that China will maintain its tax rebate policy for steel exports as part of its efforts to help the bloated steel sector recover. These tax rebates are seen as favourable policies to shore up ailing steel companies in China, and to avoid massive job losses. Expect more fiery rhetoric from the US on China’s unfair trading practices soon.

“..China’s richest man — at least on paper — lost half of his wealth in less than half an hour.”

• Chinas Debt Bubble Is Getting Only More Dangerous (WSJ)

It would be like finding out Warren Buffett’s financial empire may have been, quite possibly, a sham. That’s what happened last year when China’s richest man — at least on paper — lost half of his wealth in less than half an hour. It turned out that his company Hanergy may well just be Enron with Chinese characteristics: Its stock could only go up as long as it was borrowing money, and it could only borrow money as long as its stock was going up. Those kind of things work until they don’t. The question now, though, is how much the rest of China’s economy has come down with Hanergy syndrome, papering over problems with debt until they can’t be anymore. And the answer might be a lot more than anyone wants to admit. Although we should be careful not to get too carried away here.

Hanergy is now a nothing that used debt to look like a very big something, while China’s economy actually is a very big something that is using debt to look even bigger. In other words, one looks like a boondoggle and the other a bubble. But in both cases, excessive borrowing — especially from unregulated “shadow banks,” such as trading firms — has made things look better today at the expense of a worse tomorrow. In Hanergy’s case, there will, of course, be no tomorrow. To step back, the first thing to know about Hanergy is that it’s really two companies. There’s the privately owned parent corporation Hanergy Group, and the publicly traded subsidiary Hanergy Thin Film Power (HTF). The latter, believe it or not, started out as a toymaker, somehow switched over to manufacturing solar panel parts, and was then bought by Hanergy Chairman Li Hejun.

And that’s when things really got strange. The majority of HTF’s sales, you see, were to its now-parent company Hanergy — and supposedly at a 50% net profit margin! — but it wasn’t actually getting paid, you know, money for them. It was just racking up receivables. Why? Well, the question answers itself. Hanergy must not have had the cash to pay HTF. Its factories were supposed to be putting solar panels together out of the parts it was getting from HTF, but they were barely running — if at all. Hedge-fund manager John Hempton didn’t see anything going on at the one he paid a surprise visit to last year. It’s hard to make money if you’re not making things to sell. But it’s a lot easier to borrow money and pretend that you’re making it. At least as long as you have the collateral to do so — which Hanergy did when HTF’s stock was shooting up.

Indeed, it increased 20-fold from the start of 2013 to the middle of 2015. But it was how more than how much it went up that raised eyebrows. It all happened in the last 10 minutes of trading every day. Suppose you’d bought $1,o00 of HTF stock every morning at 9 a.m. and sold it every afternoon at 3:30 p.m. from the beginning of 2013 to 2015. How much would you have made? Well, according to the Financial Times, the answer is nothing. You would have lost $365. If you’d waited until 3:50 p.m. to sell, though, that would have turned into a $285 gain. And if you’d been a little more patient and held on to the stock till the 4 p.m. close, you would have come out $7,430 ahead. (Those numbers don’t include the stock’s overnight changes).

Problem is: curb shadow banks and you curb local governments. Not at all what Xi is looking for.

• China To Curb Shadow Banking Via Checks On Fund House Subsidiaries (R.)

China plans to tighten supervision over fund houses’ subsidiaries and rein in the expansion of a sector worth nearly 10 trillion yuan ($1.53 trillion) as regulators target a key channel for so-called shadow banking to contain financial risks, according to a copy of the draft rules seen by Reuters. The Asset Management Association of China (AMAC) will set thresholds for fund houses to establish subsidiaries and use capital ratios to limit the subsidiaries’ ability to expand businesses, the draft rules said. Loosely-regulated subsidiaries set up by mutual fund firms have grown rapidly over the past year, managing 9.8 trillion yuan worth of assets by the end of March, according to the AMAC, and becoming a key channel for shadow banking activities.

Under the proposed rules, fund houses applying to set up subsidiaries must manage at least 20 billion yuan in assets excluding money-market funds, and have a minimum 600 million yuan in net assets. Current thresholds are much lower. The new rules would also require that a subsidiary’s net capital not be lower than the company’s total risk assets, while net assets must not be lower than 20% of its liability, in effect slashing the leverage ratio of the business. China’s prolonged crackdown on riskier practices in the lesser-regulated shadow banking system has taken on fresh urgency amid a growing number of corporate defaults as the economy struggles, and as top policymakers appear increasingly worried about the risks of relying on too much debt-fuelled stimulus.

You don’t have to watch it to know it’s a failure. That was clear from the start.

• Abenomics: The Reboot, Rebooted (R.)

Abenomics has over-promised and under-delivered. Japanese Prime Minister Shinzo Abe’s bid to revive anaemic growth, reverse falling prices and rein in government debt has relied too heavily on the central bank and been sideswiped by a global slowdown. Keeping the project alive now requires fresh boldness. When he took office in December 2012, Abe set out to lift real economic growth to 2% a year, with consumer prices rising at the same rate. His main weapons were the famous “three arrows” of aggressive monetary policy, a flexible fiscal stance, and widespread structural reform. Abe has achieved some success. Unemployment is just 3.2%, a low last seen in 1997. In his first three calendar years in office, the economy expanded about 5% in nominal terms.

A weaker yen has helped deliver record corporate earnings; as of May 13 the Topix stock index had returned 70% including dividends. Prices have inched upwards. But the core targets remain out of reach. The IMF expects Japan’s GDP to grow just 0.5% this year. Even after cutting out volatile prices for fresh food and energy, the Bank of Japan’s preferred measure of inflation is running at just 1.1%. And the central bank keeps delaying its deadline for hitting the 2% target, which it now expects to reach in the year ending March 2018. Analysts still think that optimistic. Meanwhile, the yen has rallied unhelpfully and the BOJ faces accusations it is ineffective, after unexpectedly making no change to policy at its last meeting.

One snag is psychological: the deflationary mindset is hard to shake. Firms can borrow very cheaply yet hoard lots of cash and resist big pay rises. Workers are not pushy about wage hikes, and reluctant to spend. There were errors, too. Abe faced concerns that Japan’s government debt, at 2.4 times GDP, could become unsustainable. So he kept fiscal policy relatively orthodox, promising that taxes would cover public spending, excluding interest payments, by 2020. He hiked the country’s sales tax in 2014, denting growth and confidence. And he relied heavily on BOJ Governor Haruhiko Kuroda, whose institution now buys an extraordinary 80 trillion yen a year ($740 billion) of bonds. Meanwhile, structural reforms remain far from complete – in everything from encouraging more women into the workforce to reconsidering a deep aversion to immigration.

We can hope…

• Trump and Sanders Shift Mood in Congress Against Trade Deals (BBG)

Congress has embraced free trade for two generations, but the protectionist bent of the 2016 election campaign may mark the end of that era. The first casualty may be the 12-nation Trans-Pacific Partnership, which was already facing a skeptical Congress. A European trade pact in the works may also be in trouble. Lawmakers from both parties are taking lessons from the insurgent campaigns of Donald Trump and Bernie Sanders, which have harnessed a wave of discontent on job losses by linking them to free-trade deals. Even Hillary Clinton has stepped up criticism of the pacts. While past presidential candidates have softened their stance on trade after winning election, the resonance of the anti-free-trade attacks among voters in the primaries may create a more decisive shift. Opponents of these deals are already sensing new openings.

“The gravity has shifted,” said Representative Marcy Kaptur, an Ohio Democrat. She said it could give new traction to proposals like one she’s put forth that would reopen trade deals with nations that have a trade deficit of $10 billion with the U.S. for three years in a row. The success of Trump and Sanders in Rust Belt states and elsewhere will make it even harder, if not impossible, for Congress to back TPP, even in a lame-duck session after the election. Lawmakers say it could also hamper a looming agreement between the U.S. and the EU if it looks like the next president would change course. “It’s a very heavy lift at this point,” said Representative Charlie Dent, a Pennsylvania Republican and longtime free-trade advocate, noting that all three remaining presidential contenders have expressed reservations about the TPP.

We never stood a chance. They’re oh so cunning and devious: “..smugglers ran their proceeds through [..] grocery stores..”. My question would be: how much of this went to the Erdogan family?

• Smugglers Made $5-6 Billion Off Refugees To Europe In 2015 (R.)

People smugglers made over $5 billion from the wave of migration into southern Europe last year, a report by international crime-fighting agencies Interpol and Europol said on Tuesday. Nine out of 10 migrants and refugees entering the European Union in 2015 relied on “facilitation services”, mainly loose networks of criminals along the routes, and the proportion was likely to be even higher this year, the report said. About 1 million migrants entered the EU in 2015. Most paid 3,000-6,000 euros ($3,400-$6,800), so the average turnover was likely between $5 billion and $6 billion, the report said. To launder the money and integrate it into the legitimate economy, couriers carried large amounts of cash over borders, and smugglers ran their proceeds through car dealerships, grocery stores, restaurants or transport companies.

The main organisers came from the same countries as the migrants, but often had EU residence permits or passports. “The basic structure of migrant smuggling networks includes leaders who coordinate activities along a given route, organisers who manage activities locally through personal contacts, and opportunistic low-level facilitators who mostly assist organisers and may assist in recruitment activities,” the report said. Corrupt officials may let vehicles through border checks or release ships for bribes, as there was so much money in the trafficking trade. About 250 smuggling “hotspots”, often at railway stations, airports or coach stations, had been identified along the routes – 170 inside the EU and 80 outside.

People understand things only when expressed in monetary terms. Maybe we need a real deep collapse to change that. Meanwhile, it looks like refugees make everyone rich except for themselves.

• Refugees Will Repay EU Spending Almost Twice Over In Five Years (G.)

Refugees who arrived in Europe last year could repay spending on them almost twice over within just five years, according to one of the first in-depth investigations into the impact incomers have on host communities. Refugees will create more jobs, increase demand for services and products, and fill gaps in European workforces – while their wages will help fund dwindling pensions pots and public finances, says Philippe Legrain, a former economic adviser to the president of the European commission. Simultaneously refugees are unlikely to decrease wages or raise unemployment for native workers, Legrain says, citing past studies by labour economists.

Most significantly, Legrain calculates that while the absorption of so many refugees will increase public debt by almost €69bn (£54bn) between 2015 and 2020, during the same period refugees will help GDP grow by €126.6bn – a ratio of almost two to one. “Investing one euro in welcoming refugees can yield nearly two euros in economic benefits within five years,” concludes Refugees Work: A Humanitarian Investment That Yields Economic Dividends, a report released on Wednesday by the Tent Foundation, a non-government organisation that aims to help displaced people.

A fellow at the London School of Economics, Legrain says he hopes the report will dispel the myth that refugees will cause economic problems for western society. “The main misconception is that refugees are a burden – and that’s a misconception shared even by people who are in favour of letting them in, who think they’re costly but it’s still the right thing to do,” said Legrain in an interview. “But that’s incorrect. While of course the primary motivation to let in refugees is that they’re fleeing death, once they arrive they can contribute to the economy.” While their absorption puts a short-term strain on public finances, Legrain says, it also increases short-term economic demand, which acts as a welcome fiscal stimulus in countries where demand would otherwise be low.

Debt Rattle May 16 2016

May 162016

May 16, 2016 Posted by Raúl Ilargi Meijer at 9:28 am Finance Tagged with: CERN, China, Lincoln, Nigeria, NIRP, overvalued, particle economics, refugees, steel, stimulus, Trump Comments Off

Harris&Ewing Ford Motor Co. New medical center parking garage, Washington, DC 1938

• Goldman: The Median Stock Has NEVER Been More Overvalued (ZH)

• The Business Of Corporate America Is No Longer Business – It Is Finance (FT)

• Stockman: Trump Will Scare The Hell Out Of The Markets, But That’s OK (CNBC)

• Trump’s ‘Print the Money’ Proposal Echoes Franklin and Lincoln (E. Brown)

• India’s Central Bank Governor Warns On Stimulus Overuse (FT)

• Average Asking Price For UK First-Time Buyer Home Jumps 6.2% In A Month (G.)

• CERN Discovers New Particle Called The FERIR (Steve Keen)

• Isn’t it Time to Stop Calling it “The National Debt”? (Steve Roth)

• Forget the Saudis, Nigeria’s the Big Oil Worry (BBG)

• China Housing Revival Props Up Economy (WSJ)

• China’s Record $26 Billion Buyout Deals at Risk of Unraveling (BBG)

• China Private Sector Investment Is Declining (R.)

• China’s Record Daily Steel Output Bodes Ill for Global Industry (BBG)

• How Investors Are Duped Each Earnings Season (MW)

• Battle Brews in Spain, Portugal Over Negative Mortgage Rates (WSJ)

• Refugee Numbers Returned To Turkey Fall Short Of EU ‘Expectations’ (FT)

In some places, this would be called a bubble.

• Goldman: The Median Stock Has NEVER Been More Overvalued (ZH)

When Goldman warned on Friday that a “big drop” in the market is possible before the S&P hits the firm’s year end price target of 2,100, one of the bearish reasons brought up by the firm’s chief strategist David Kostin is that stocks are now massively overvalued. In fact, according to Goldman , while the aggregate market is more overvalued than 86% of all recorded instances, the median stocks has never been more overvalued, i.e., is in the 100% valuation percentile, according to some key metrics such as Price-to-Earnings growth and EV/sales.

This is what Goldman said: “Valuation is a necessary starting point of any drawdown risk analysis. At 16.7x the forward P/E multiple of the S&P 500 index ranks in the 86th percentile relative to the last 40 years. Most other metrics paint a similar picture of extended valuation. The median stock in the index trades at the 99th percentile of historical valuation on most metrics (see Exhibit 3).” Goldman’s conclusion: “The most likely future path of US equities involves a lower valuation.”

America no longer makes much of anything anymore.

• The Business Of Corporate America Is No Longer Business – It Is Finance (FT)

One of the great ironies of business today is that the richest and most powerful companies in the world are more involved than ever before in the capital markets at a time when they do not actually need any capital. Take Apple, which has around $200bn sitting in the bank, yet has borrowed billions of dollars in recent years to buy back shares in order to bolster its stock price, which has lagged recently. Why borrow? Because it is cheaper than repatriating cash and paying US taxes, of course. The financial engineering helped boost the California company’s share price for a while. But it did not stop activist investor Carl Icahn — who had manically advocated borrowing and buybacks — from dumping the stock the minute revenue growth took a turn for the worse in late April. Apple is not alone in eschewing real engineering for the financial kind.

Top-tier US businesses have never enjoyed greater financial resources. They have $2tn in cash on their balance sheets – enough money combined to make them the tenth largest economy in the world. Yet they are also taking on record amounts of debt to buy back their own stock, creating a corporate debt bubble that has already begun to burst (witness Exxon’s recent downgrade). The buyback bubble is only one part of a larger trend, which is that the business of corporate America is no longer business – it is finance. American firms today make more money than ever before by simply moving money around, getting about five times the revenue from purely financial activities, such as trading, hedging, tax optimisation and selling financial services, than they did in the immediate postwar period. No wonder share buybacks and corporate investment into research and development have moved inversely in recent years.

It is easier for chief executives with a shelf life of three years to try to please investors by jacking up short-term share prices than to invest in things that will grow a company over the long haul. It is telling that private firms invest twice as much in things like new technology, worker training, factory upgrades and R&D as public firms of similar size — they simply do not have to deal with market pressure not to. Indeed, the financialisation of business has grown in tandem with the rise of the capital markets and the financial industry itself, which has roughly doubled in size as a percentage of gross domestic product over the past 40 years (even the financial crisis did not keep finance down; the industry itself shrank only marginally and the largest institutions that remained became even bigger). As finance grew, so did its profits — the industry creates only 4% of US jobs yet takes around 25% of the corporate profit share.

“..Why would you hang in a boiling pot where the upside is 2% and the downside is 40?”

• Stockman: Trump Will Scare The Hell Out Of The Markets, But That’s OK (CNBC)

Former Reagan administration aide David Stockman has a message for the next president: The markets are going down for the count and you can’t do anything about it! President Ronald Reagan’s director of the Office of Management and Budget said in a recent CNBC interview it doesn’t matter if Hillary Clinton or Donald Trump gets elected in November — neither will be able to stop the economic meltdown that’s looming. Wall Street seems to have its mind made up about which candidate it prefers. More than 70% of respondents to a recent Citigroup poll of institutional clients said the former secretary of state, first lady and New York senator would likely become the U.S.’s 45th president. Just over 10% gave Trump the nod, and small business owners appear to be divided between the GOP and Democratic standard bearers.

Stockman, however, doesn’t believe either one can prevent what may be on the horizon. “There’s no way the next president can stop a recession that’s already baked into the cake,” Stockman said Thursday in the “Futures Now” interview. Stockman has been calling for a major market downturn and global recession for some time, but he is more certain than ever that it could happen during this political cycle. He pointed to depleting earnings, peaked auto sales, inventory ratios and issues in the freight and rail space as some key indicators that the U.S. economy is more unstable than people would like to believe. “The idea that this economy is somehow going to get stronger in the second half, or that the next president can stall a recession I think is wrong,” he said.

According to Stockman, there is “plenty of evidence” that the U.S. will slip into a recession by year-end or shortly after. And as he sees it, that could send the S&P 500 spiraling to levels not seen since 2012. “The market can easily drop to 1,300,” Stockman warned. That represents a nearly 40% fall from where the large-cap S&P 500 Index is currently trading. “We have been trading in a range for the last 600 days plus or minus days 2,060 on the S&P 500. … Why would you hang in a boiling pot where the upside is 2% and the downside is 40?” Stockman noted that if given a choice between Trump and Clinton, he certainly would not want another Clinton in the White House. Instead, he said America needs a disruptor like Trump to “break the chains of the status quo” and manage the country in a different way than what has been done in the last decade.

It’s time this becomes a serious discussion.

• Trump’s ‘Print the Money’ Proposal Echoes Franklin and Lincoln (E. Brown)

“Print the money” has been called crazy talk, but it may be the only sane solution to a $19 trillion federal debt that has doubled in the last 10 years. The solution of Abraham Lincoln and the American colonists can still work today.
“Reckless,” “alarming,” “disastrous,” “swashbuckling,” “playing with fire,” “crazy talk,” “lost in a forest of nonsense”: these are a few of the labels applied by media commentators to Donald Trump’s latest proposal for dealing with the federal debt. On Monday, May 9th, the presumptive Republican presidential candidate said on CNN, “You print the money.”

The remark was in response to a firestorm created the previous week, when Trump was asked if the US should pay its debt in full or possibly negotiate partial repayment. He replied, “I would borrow, knowing that if the economy crashed, you could make a deal.” Commentators took this to mean a default. On May 9, Trump countered that he was misquoted:

People said I want to go and buy debt and default on debt – these people are crazy. This is the United States government. First of all, you never have to default because you print the money, I hate to tell you, okay? So there’s never a default.

That remark wasn’t exactly crazy. It echoed one by former Federal Reserve Chairman Alan Greenspan, who said in 2011:

The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.

Paying the government’s debts by just issuing the money is as American as apple pie – if you go back far enough. Benjamin Franklin attributed the remarkable growth of the American colonies to this innovative funding solution. Abraham Lincoln revived the colonial system of government-issued money when he endorsed the printing of $450 million in US Notes or “greenbacks” during the Civil War. The greenbacks not only helped the Union win the war but triggered a period of robust national growth and saved the taxpayers about $14 billion in interest payments. But back to Trump. He went on to explain:

I said if we can buy back government debt at a discount – in other words, if interest rates go up and we can buy bonds back at a discount – if we are liquid enough as a country we should do that.

Apparently he was referring to the fact that when interest rates go up, long-term bonds at the lower rate become available on the secondary market at a discount. Anyone who holds the bonds to maturity still gets full value, but many investors want to cash out early and are willing to take less. As explained on MorningStar.com:

If a bond with a 5% coupon and a ten-year maturity is sold on the secondary market today while newly issued ten-year bonds have a 6% coupon, then the 5% bond will sell for $92.56 (par value $100).

“..central banks “cannot claim to be out of ammunition because immediately that would create the wrong kind of expectations..”

• India’s Central Bank Governor Warns On Stimulus Overuse (FT)

Central banks and governments of rich countries are running out of ammunition for stimulating their economies, says Raghuram Rajan, the head of the Indian central bank — but they can never admit as much. Speaking to the Financial Times at the University of Chicago Booth School of Business in London, Mr Rajan criticised efforts to use fiscal and monetary policy and infrastructure programmes to boost growth rates in advanced economies. Long a critic of low interest rates in rich countries that can drive hot-money flows to poorer parts of the world, the governor of the Reserve Bank of India suggested that loose policies were also weakening the underlying performance of advanced economies.

Although Mr Rajan said there were limits on stimulus, he said central banks “cannot claim to be out of ammunition because immediately that would create the wrong kind of expectations, so there’s always something up their sleeves”. Mr Rajan said he was a supporter of stimulus policies to “balance things out” over short periods when households or companies were proving excessively cautious with their spending. But eight years after the financial crisis, we “have to ask ourselves is that the real problem?”. “I have this image of stimulus as a bridge,” he said. “As the economy goes down, there is an expectation it will come up. Stimulus is a bridge which smoothes over the growth rate of the economy and prevents damaging expectations from building up.”

If stimulus went on for a long time, if it did not work, he said, the adjustment would be sharp, indicating there was little room for further stimulus. Mr Rajan warned governments not to rely too much on fiscal stimulus through cutting taxes or increasing public spending. “If your debt to GDP is over 100%, [and you] do more fiscal stimulus, you’d better have a pretty high rate of return in mind, otherwise your younger and middle-aged generations are thinking ‘This thing is not going to return enough, but I’m going to have to pay for it’.”

Want to know how to bankrupt a society?

• Average Asking Price For UK First-Time Buyer Home Jumps 6.2% In A Month (G.)

The average asking price of a typical first-time buyer home leapt by 6.2% in a month after buy-to-let investors rushed to buy properties before last month’s stamp duty increase, according to figures on Monday. The average for properties coming on to the market in England and Wales with two bedrooms or fewer was £11,298 higher in May than in April, at £194,224, according to data from the property website Rightmove. The figures, based on properties listed during the month, showed that across the UK the average price of a first-time buyer property had risen by 11.4% since May 2015. In hotspots such as Croydon, Dartford and Luton – all towns within easy commuting distance of central London – asking prices were up by more than 18% over the year.

The figures do not include inner-London homes. The website said strong demand from investors keen to buy before the introduction of the surcharge on second homes had caused a “property drought” at the lower end of the market, putting upwards pressure on prices for those homes that were being made available. However, Rightmove’s director, Miles Shipside, said: “It remains to be seen if these prices can be achieved and there may be some over pricing in the market. It is also a reflection of better quality property coming to market in this sector which is now targeting owner-occupiers rather than landlords.”

Brilliantly hilarious must read.

• CERN Discovers New Particle Called The FERIR (Steve Keen)

CERN has just announced the discovery of a new particle, called the “FERIR”. This is not a fundamental particle of matter like the Higgs Boson, but an invention of economists. CERN in this instance stands not for the famous particle accelerator straddling the French and Swiss borders, but for an economic research lab at MIT—whose initials are coincidentally the same as those of its far more famous cousin. Despite its relative anonymity, MIT’s CERN is far more important than its physical namesake. The latter merely informs us about the fundamental nature of the universe. MIT’s CERN, on the other hand, shapes our lives today, because the discoveries it makes dramatically affect economic policy.

CERN, which in this case stands for “Crazy Economic Rationalizations for aNomalies”, has discovered many important sub-economic particles in the past, with its most famous discovery to date being the NAIRU, or “Non-Accelerating Inflation Rate of Unemployment”. Today’s newly discovered particle, the FERIR, or “Full Employment Real Interest Rate”, is the anti-particle of the NAIRU. Its existence was first mooted some 30 months ago by Professor Larry Summers at the 2013 IMF Research Conference. The existence of the FERIR was confirmed just this week by CERN’s particle equilibrator, the DSGEin. Asked why the discovery had occurred now, Professor Krugman explained that ever since the GFC (“Global Financial Crisis”), economists had been attempting to understand not only how the GFC happened, but also why its aftermath has been what Professor Summers characterized as “Secular Stagnation”.

Their attempts to understand the GFC continued to fail, until Professor Summers suggested that perhaps the GFC had destroyed the NAIRU, leaving the ZLB (“Zero Lower Bound”) in its place. This could have happened only if there was a mysterious second particle, which was generated when a NAIRU equilibrated with a GFC. Rather than remaining in equilibrium, as sub-economic particles do in DSGEin, NAIRU apparently vanished instantly when the GFC appeared. Something else must have taken its place. DSGEin was unable to help here, since it rapidly returned to equilibrium—while the real world that it was supposed to simulate clearly had not. CERN’s attempts to model this phenomenon in DSGEin were frustrated by the fact that a GFC does not exist inside a DSGEin—in fact, the construction of the DSGEin was predicated on the non-existence of GFCs.

The ever-practical Professor Krugman recently suggested a way to overcome this problem. Why not turn to the real world, where GFCs exist in abundance, and feed one of those into the DSGEin? Unfortunately, the experiment destroyed the DSGEin, since the very existence of a GFC within it put it through an existential crisis. However, before it broke down (while mysteriously singing the first verse of “Daisy, Daisy, give me your answer do”), the value for the NAIRU in DSGEin suddenly turned negative. This led Professor Summers to the conjecture that perhaps there was a negative anti-particle to the NAIRU, which he dubbed the FERIR.

It’s all in the eye of the beholder.

• Isn’t it Time to Stop Calling it “The National Debt”? (Steve Roth)

Fourteen. Trillion. Dollars. That’s how much the U.S. government “owes.” You hear that massive number all the time, right? And people are forever telling you that you and your family are on the hook to pay off that scary huge number. There are 125 million U.S. households. You do the arithmetic. The horror. What those scare-mongers don’t tell you, and generally don’t even understand: it actually makes almost no sense to call that figure “the national debt.” And no, you’re not on the hook to pay it back. Imagine this: you’re the queen or king of a sovereign country. You decide to mint and issue a bunch of tin coins that your people will find useful. You use those coins to buy stuff from people in the private sector, and pay them to do work. Voilà, the people have money.

Is your government now in “debt” as a result of that “deficit spending”? Does it have to “pay” something to somebody at some point in the future? Do you have to redeem those coins for wheat or pigs or anything else? Obviously not. There’s just a bunch of money out there that people can use. You’ve made no promise that your treasury will ever redeem those coins for anything. They just circulate. Those government-issued assets, held by the private sector, are only “liabilities” to the government in the most pettifogging accounting sense. If you “owed” some money that you would never, ever have to pay, would you put that on your balance sheet as a liability? Would it be anything beyond a pro forma entry designed to satisfy some obsessive impulse for accounting closure? A debt that will never be paid off is a very questionable “liability.”

That’s essentially the situation with the U.S. national “debt.” The U.S. issues money by deficit spending. It puts more money into private accounts than it takes out via taxes. The private sector has more balance-sheet assets (but no more liabilities, so it has more “net worth,” the balancing item on the righthand side of its balance sheet). The treasury has made no promises to redeem that new money for…anything (except maybe…different government-issued assets). It’s just out there. Now it’s true that the U.S. et al operate under an arguably archaic and purely self-imposed rule: their treasuries are required to issue bonds equal to that deficit spending. This is a straightforward asset swap: the private sector gives checking-account deposits (back) to the government, and the government gives bonds in return.

Private sector assets and net worth are unaffected by that accounting swap; it just changes the private-sector portfolio mix — more bonds, less “cash.” (Treasury “forces” the private sector to make that collective portfolio-adjusting swap through the simple expedient of selling bonds at an attractive price — a point or two below similar deals in the private sector.) The same kind of asset swap happens when the Fed “prints money” for quantitative easing. The private sector gives bonds (back) to the government, and the Fed gives “reserves” in return — deposits in banks’ Fed accounts. Sure, the Fed creates those reserves ab nihilo, but they’re not a money injection into the private sector, like deficit spending. They’re just swapped for bonds. That accounting event doesn’t increase private-sector assets or net worth. It just changes the private-sector portfolio mix (more reserves, less bonds).

In any case, the private sector is holding government-issued assets. Whether they consist of bonds, “cash,” or reserves, is it realistic to call that money originally spent into private accounts a “debt” for the government? Is it in any real sense a government “liability” if it will never be redeemed for anything?

Big Oil’s decades of criminal activity come home to roost.

• Forget the Saudis, Nigeria’s the Big Oil Worry (BBG)

Drag your attention away from the Middle East for a moment. While policymakers have been focused on Saudi Arabia’s oil market machinations, what really matters right now is happening 3,000 miles away in the Niger River delta. The country that was, until recently, Africa’s biggest crude producer is slipping back into chaos. A wave of attacks and accidents have hit infrastructure, taking Nigeria’s output down to 20-year lows. Oil prices are responding, rising to their highest in more than six months. Part of this is explained by the IEA lifting demand estimates this week. But taking both things together, it’s easy to doubt whether current oil surpluses are sustainable. With no solution in sight to the problems that beset the delta’s creeks and mangrove swamps, production from onshore and shallow-water oil fields looks vulnerable.

If the latest group of freedom fighters seeks to outdo its predecessors, then deepwater facilities may be at risk too.The Niger Delta Avengers have certainly been busy, forcing Shell’s Forcados terminal to shut in about 250,000 barrels of daily exports; and breaching an offshore Chevron facility in the 160,000 barrels per day Escravos system. In April, ENI had to declare force majeure – letting it stop shipments without breaching contracts – on exports of its Brass River grade after a pipeline fire. It’s hard to see any long-term let-up given Nigeria’s record on fixing this problem. The previous wave of discontent, which hit a peak in 2009, only came to an end when President Yar’Adua offered amnesty, training programs and monthly cash payments to nearly 30,000 militants, at a yearly cost of about $500 million.

Some leaders of the Movement for the Emancipation of the Niger Delta (MEND), the militant group, got lucrative security contracts. But the failure to properly address local grievances means it was only a matter of time before another wave of angry young men took up the fight for a better deal for southern Nigeria. The crisis has been hastened by new president Muhammadu Buhari’s termination of the ex-militants’ security contracts and his seeking the arrest of former MEND leaders. The Avengers now say they want independence for the Niger River delta. And it’s not as if Nigeria’s oil woes are limited to the militants. Exxon had to declare force majeure on Qua Iboe exports after a drilling platform ran aground and ruptured a pipeline, while Shell did similar with Bonny Light exports after a leak from a pipeline feeding the terminal.

Beijing will flood in enough money to ‘reach its targets’ while talking about clamping down.

• China Housing Revival Props Up Economy (WSJ)

China’s housing market is showing nascent signs of recovery after a two-year downturn, helping to counter a slowdown in the broader economy but prompting fresh warnings about a buildup of debt. Property prices and sales have risen in recent months, driven by looser lending policies, accompanied by a sustained advance in new construction. That occurred even though China is weighed down by unsold homes with enough square footage to fill seven Manhattan islands. “Property developers’ appetite has returned,” said Xia Qiang, a senior partner at Yi He Capital, which provides loans to property firms. “Just two weeks ago four developers from Fujian and Zhejiang asked if there were any projects they could invest in in Shanghai.”

From January to April, housing sales rose 61.4% to 2.41 trillion yuan ($369 billion) from a year ago, the National Bureau of Statistics said on Saturday. Property investment in the first four months of this year rose 7.2% to 2.54 trillion yuan. Construction starts gained 21.4% to 434.3 million square meters. But the rosy statistics present a quandary for Chinese officials. After engineering a credit-fueled property upturn, Beijing has started tapping the brakes amid concern that it has overshot, economists say. Among the fixes Beijing has imposed are a decrease in bank lending and more purchase restrictions on some of the hottest property markets, including Shanghai and Shenzhen. A column in the official People’s Daily recently criticized debt-fueled growth policies, warning that China faces a “property bubble.”

The zigzag policy reflects China’s tough balancing act in a nation where empty apartment towers ring many smaller cities. It wants to boost the property sector enough to hit its 6.5%-plus growth target for 2016 without making its overcapacity and debt problems too much worse, economists said. “New loans are pouring into the real-estate sector,” said Alicia Garcia-Herrero, economist with investment bank Natixis, part of France’s Groupe BPCE. “But the elephant in the room is credit risk.”

This is about money that doesn’t at all want to move back home, no matter how lucrative that may seem.

• China’s Record $26 Billion Buyout Deals at Risk of Unraveling (BBG)

The great retreat of Chinese companies from the U.S. stock market is hitting a snag. Concern last week that Chinese regulators may restrict overseas-traded companies from returning home helped erase more than $5 billion in the market value of firms seeking to do so. Shares of companies from Momo to 21Vianet have plunged at least 20% since May 6 amid speculation that the management-led investor groups may back away from the buyout deals or lower their purchase prices. The selloff marks another twist in the saga of U.S.-listed Chinese companies seeking to go private, lured by the prospect of relisting at higher valuations in Shanghai or Shenzhen. More than 40 have received buyout offers worth at least $35 billion since the beginning of 2015.

About three quarters of the deals are still pending, including Qihoo 360, whose $9.3 billion offer is the largest. The unraveling started on May 6 when the China Securities Regulatory Commission said that it’s studying the impact of companies seeking to relist domestically after withdrawing from overseas. The regulators are concerned the valuations estimated for some domestic backdoor listings are too high and could affect the stability of the stock market, according to the people familiar with matter. Policy makers also want to avoid encouraging more buyouts that could prompt capital outflows, the people said.

The one sector Beijing cannot control is the biggest there is. “Pushing on a string” comes to mind. “Interest rates are low, but investment is declining, which shows that the overall market – domestic and overseas market – is not good,” he said.”

• China Private Sector Investment Is Declining (R.)

Xia Xiaokang and Bruno Chen, who both run private-sector companies, are the sort of businessmen that Chinese leaders are increasingly concerned about as economic growth slows. Beijing is counting on the private sector to invest more in the economy and take up the slack as the government tries to engineer a shift away from largely state-run heavy industry to more entrepreneurial and services-led growth. Unfortunately, just when China needs the private sector to step up, they look to be stepping back. “We plan to downsize our business rather than expand,” said Chen, who runs Ningbo Tengsheng Garments Co in the coastal export hub of Zhejiang province in eastern China. “We cannot feel any improvement in the economy,” he said.

Xia, general manager of Wenzhou Kingsdom Sanitary Ware, some 400 km from Shanghai, similarly lacks confidence in the economy. “We have hardly made any fixed-asset investment since last year and we now plan to rent out part of our factory building because it’s too big,” he said. After March data suggested that economic activity was finally picking up after a long slowdown, April figures released at the weekend suggested otherwise. Overall investment, factory output and retail sales all grew more slowly than expected. Private-sector investment for January to April grew just 5.2%, its weakest pace since the National Bureau of Statistics (NBS) started recording the data in 2012. More worrying, private-sector investment is decelerating sharply from rates near 25% in 2013, to just 10% last year and now just over 5%.

Damn the torpedoes!

• China’s Record Daily Steel Output Bodes Ill for Global Industry (BBG)

China’s record daily steel output in April bodes ill for an embattled global steel industry already reeling from a deluge of exports from the world’s top producer. Crude steel output over the month rose 0.5% to 69.42 million metric tons from a year earlier, the National Bureau of Statistics said on Saturday. The gains came after mills ramped up production to take advantage of a spurt higher in prices that has given them the best profits this decade. While below March’s record monthly figure of 70.65 million tons, the daily rate of 2.314 million tons was higher due to fewer producing days and surpassed the previous best set in June 2014. “Given how high margins went, we’ve been expecting to see a supply response like this,” Ian Roper at Macquarie said in a WeChat message. “Chinese mills will likely look back to the export market as domestic oversupply reappears.”

China’s overseas sales in the first four months were already running 7.6% higher than a year earlier, piling on the pressure after the nation shipped a record 112 million tons in 2015. Output remaining at such elevated levels “definitely adds to oversupply risks and exports may continue to rise,” said Helen Lau, Hong Kong-based analyst at Argonaut Securities. In a sign that China is recommitting to the reform of its bloated state sector, its top producer, Hebei Iron & Steel, said Friday it’ll cut 5.02 million tons of capacity. That still leaves a way to go. Japan’s biggest mill, Nippon Steel & Sumitomo Metal, also said Friday that it would take control of a smaller domestic steelmaker in a bid to weather a “rapid deterioration of the business environment” caused in part by overcapacity in China of some 400 million tons.

It’s all so sad it’s funny.

• How Investors Are Duped Each Earnings Season (MW)

A year ago, we explained the many ways companies make reading their quarterly earnings reports a miserable task. We weren’t just whining. We wanted to remind companies that our readers regularly tell us they struggle to understand earnings announcements, and our job is to decode them for investors. Making that difficult isn’t helping anyone. We noted that some of their tactics – inventing or manipulating numbers, using meaningless jargon, distributing lame executive quotes, and more — can be outright damaging, eroding investor trust and creating skepticism. We hoped they’d change their ways. We’re sorry to say that today, as another earnings season draws to a close, things are even worse.

“Companies are definitely less transparent than they used to be,” said Leigh Drogen, founder and chief executive of Estimize, which crowdsources earnings estimates. They are “using accounting schemes that are more specific to … how they want investors to perceive their results.” Earnings are a crucial quarterly update for investors, as they provide the “best unbiased” view of what’s going on with companies, sectors and the economy, said Karyn Cavanaugh, senior market strategist at Voya Investment Management. “Earnings discount all the noise,” she said. But today, according to FactSet, more than 90% of S&P 500 companies use their own metrics in an attempt to make their numbers look better. Some conceal revenue and other key numbers in hard-to-access tables.

And a recent NYSE rule change has led some companies to report very early in the morning and pushed others to join the posse reporting after the closing bell, creating bottlenecks. While all this has meant more stress for reporters and analysts, it’s also made things harder for everyday investors trying to do due diligence on the companies they own. Experts say more companies seem to be breaking the most fundamental pact they have with their co-owners: to keep them informed of the true state of their business. “It’s a holographic presentation bubble distorting underlying operational reality,” said analyst Nicholas Heymann at William Blair. “Companies are working all the angles.”

What you get when decision makers don’t understand their fields.

• Battle Brews in Spain, Portugal Over Negative Mortgage Rates (WSJ)

As interest rates in Europe fall near or below zero, lawmakers and consumer advocates in Spain and Portugal are attacking an ancient tenet of finance by insisting that lenders can owe money to borrowers. Banks in the two countries, struggling to recover from recessions that shook their financial systems, are fighting back, with billions of dollars in mortgage interest payments potentially at stake. Portugal’s central-bank governor, in a reversal, has rushed to defend the banks against a proposed law that would require them to pay borrowers when interest rates turn negative. Banks in both countries are rewriting new mortgage contracts to warn homeowners that they could never profit from subzero rates.

In Spain and Portugal, banks typically tie interest rates on mortgages to the euro interbank offered rate, or Euribor, a fluctuating rate banks pay to borrow from each other. In addition, interest rates in both countries include a fixed percentage of the loan, called the spread. In much of Europe, by contrast, fixed mortgage rates are common. Euribor began turning negative last year after the ECB cut interest rates below zero—charging lenders to hold deposits—to stimulate the Continent’s economies. That has pulled mortgage rates into negative territory in a few isolated cases in Portugal.

The vast majority of Spanish and Portuguese mortgage holders still pay interest, because Euribor hasn’t dropped enough to wipe out the spreads. But while lenders consider further steep drops unlikely, they are taking steps to protect themselves just in case. Europe already has a precedent: Banks in Denmark are paying thousands of borrowers interest on their home loans, nearly four years after the central bank introduced negative interest rates. Danish banks have increased some fees to compensate but never mounted serious legal objections. In Spain and Portugal, bank executives said they would pay borrowers when pigs fly.

Europeans have established the ultimate NIMBY.

Another EU plan that goes predictably off track. “Brussels wants to see group returns but Greece is looking at applications for asylum on a case-by-case basis.”

• Refugee Numbers Returned To Turkey Fall Short Of EU Expectations (FT)

The number of migrants being sent back to Turkey from Greece has fallen well short of EU expectations, prompting fears that a fresh wave of arrivals could overwhelm the Aegean Islands during this summer. Fewer than 400 of the 8,500 people who have arrived on the Greek islands since the March 20 EU deal with Ankara — aimed at reducing migrant flows — have been returned to Turkey, according to figures from the Greek government’s migration co-ordination unit. Instead, Athens has approved more than 30% of the 600 asylum applications from Syrians that have been assessed since March 20, a significantly higher percentage than anticipated, according to European officials and aid workers. While the slow pace of returns will irk many in Brussels, Greek officials say it reflects their own policy on asylum requests.

They dismiss fears that the deal between the EU and Turkey could collapse if the trend continues – leading to a fresh influx – and stress that Greece’s migration laws do not recognise Turkey as a safe third country for refugees. Maria Stavropoulou, a former UN official who heads the Greek asylum service, said: “We fully understand the [EU] concerns but if you look at it from the perspective of the rule of law, it is going exactly as it should. “We have many vulnerable people on the islands … a lot of very sick people. By law they are exempt from the return process.” Epaminondas Farmakis of Solidarity Now, a refugee charity funded by the billionaire investor George Soros, said: “Brussels wants to see group returns but Greece is looking at applications for asylum on a case-by-case basis.”

Debt Rattle May 2 2016

May 022016

May 2, 2016 Posted by Raúl Ilargi Meijer at 9:28 am Finance Tagged with: Australia, bitcoin, Brexit, Fed, Halliburton, NATO, Nikkei, NIRP, piggy bank, Puerto Rico, refugees, TTIP, yen 11 Responses »

NPC Walker Hill Dairy, Washington, DC 1921

• Japanese Stocks Fall Sharply in the Morning (WSJ)

• Asian Economies Stay Sluggish, Stimulus Lacks Traction (R.)

• World’s Longest NIRP Experiment Shows Perverse Effects (BBG)

• Leaked TTIP Documents Cast Doubt On EU-US Trade Deal (G.)

• ‘The Fed Is Afraid Of Its Own Shadow’ (CNBC)

• Fed May Need More Powers To Support Securities Firms During Crises: Dudley (R.)

• Puerto Rico To Default On Government Development Bank Debt Monday (CNBC)

• Banks Told To Stop Pushing Own Funds (FT)

• Halliburton and Baker Hughes Scrap $34.6 Billion Merger (R.)

• Will Australia’s Ever-Growing Debt Pile Peak In Six Years? (BBG)

• Europe’s Liberal Illusions Shatter As Greek Tragedy Plays On (G.)

• Bank Of England Busy Preparing For Brexit Vote (FT)

• Nearly Half Of British Parents Raid Children’s Piggy Banks To Pay Bills (PA)

• ‘Bitcoin Creator Reveals Identity’ (BBC)

• Storm Clouds Gathering Over Kansas Farms (WE)

• NATO Moves Ever Closer To Russia’s Borders (RT)

• Austria, Germany Press EU To Prolong Border Controls (AFP)

• Newborn Baby Among 99 Dead After Shipwrecks In Mediterranean (G.)

The yen keeps rising. Pressure is building. Relentlessly.

• Japanese Stocks Fall Sharply in the Morning (WSJ)

Japanese stocks fell sharply early Monday, leading declines in the rest of Asia, on the yen’s surge to a new 1 1/2-year high against the dollar, weak earnings results from several firms and selling after the Bank of Japan’s inaction on Thursday. The Nikkei Stock Average was down 3.6% at the lunch break in Tokyo. Japanese markets were closed on Friday for a national holiday. Australia’s ASX 200 was 1.3% lower, New Zealand’s NZX-50 was down 0.2% and South Korea’s Kospi was 0.5% lower. Many markets in Asia were closed for national holidays, including China, Hong Kong and Singapore. Japanese stocks are extending falls following the BOJ’s decision to keep its policies unchanged despite slowing inflation and previous expectations for a boost for its asset-purchase program, particularly in exchange-traded funds.

The yen’s surge against the dollar is also hitting Japanese exporters. The dollar was at ¥106.48 after falling to as low as ¥106.14, the lowest level since October 2014, according to EBS. “Bad news takes place all at once,” said Katsunori Kitakura, strategist at Sumitomo Mitsui Trust Bank. He said market turbulence around the BOJ policy meetings suggests the central bank’s communication with markets isn’t as smooth as it should be.“Westpac’s miss on headline expectations has set the tone for a nervous market this morning,” CMC Markets chief market analyst Ric Spooner said. He adds while Westpac’s first-half earnings were only marginally below expectations and there doesn’t appear to be anything seriously alarming, investors are concerned it is struggling to get cost growth down. Westpac is down 4.1%.

There’s only one thing to keep the BAU facade going in China and Japan: debt. And more debt.

• Asian Economies Stay Sluggish, Stimulus Lacks Traction (R.)

Japanese manufacturing activity shrank in April at the fastest pace in more than three years as deadly earthquakes disrupted production, while output in China and the rest of Asia remained lukewarm at best. Even the former bright spot of India took a turn for the worse as both domestic and foreign orders dwindled, pulling its industry barometer to a four-month trough. Surveys due later on Monday are expected to show only sluggish activity in Europe and the US as the world’s factories are dogged by insufficient demand and excess supply. “The backdrop remains one of sub-trend growth, inflation that is below target, difficulty in increasing revenue as margins are sacrificed to win modest volume gains, slow wage growth cramping spending and central banks that have used up much of their policy ammunition,” said Alan Oster at National Australia Bank.

That is exactly why the U.S. Federal Reserve has been dragging its feet on a follow-up to its December rate hike, leaving the markets in a sweat in case they move in June. Doubts about policy ammunition mounted last week when the Bank of Japan refrained from offering any hint of more stimulus, sending stocks reeling as the yen surged to 18-month highs. The Nikkei was down another 3.6% on Monday while the yen raced as far as 106.14 to the dollar and squeezed the country’s giant export sector. Industry was already struggling to recover from the April earthquakes that halted production in the southern manufacturing hub of Kumamoto. The impact was all too clear in the Markit/Nikkei Japan Manufacturing Purchasing Managers Index (PMI) which fell to a seasonally adjusted 48.2 in April, from 49.1 in March.

The index stayed below the 50 threshold that separates contraction from expansion for the second straight month. The news was only a little better in China where the official PMI was barely positive at 50.1 in April, a cold shower for those hoping fresh fiscal and monetary stimulus from Beijing would enable a speedy pick up. The findings were “a little bit disappointing”, Zhou Hao, senior emerging market economist at Commerzbank in Singapore, wrote in a note. “To some extent, this hints that recent China enthusiasm has been a bit overpriced and the data improvement in March is short-lived.”

Negative rates lead to the exact opposite of what they’re allegedly intended for. And that’s predictable.

• World’s Longest NIRP Experiment Shows Perverse Effects (BBG)

When interest rates are high, people borrow less and save more. When they’re low, savings go down and borrowing goes up. But what happens when rates stay negative? In Denmark, where rates have been below zero longer than anywhere else on the planet, the private sector is saving more than it did when rates were positive (before 2012). Private investment is down and the economy is in a “low-growth crisis,” to quote Handelsbanken. The latest inflation data show prices have stagnated. As the Danes head even further down their negative-rate tunnel, the experiences of the Scandinavian economy may provide a glimpse of what lies ahead for other countries choosing the lesser known side of zero. Denmark has about $600 billion in pension and investment savings.

The people who help oversee those funds say the logic of cheap money fueling investment doesn’t hold once rates drop below zero. That’s because consumers and businesses interpret such extreme policy as a sign of crisis with no predictable outcome. “Negative rates are counter-productive,” said Kasper Ullegaard at Sampension in Copenhagen. The policy “makes people save more to protect future purchasing power and even opt for less risky assets because there’s so little transparency on future returns and risks.” The macro data bear out the theory. The Danish government estimates that investment in the private sector will be equivalent to 16.1% of GDP this year, compared with 18.1% between 1990 and 2012. Meanwhile, the savings rate in the private sector will reach 26% of GDP this year, versus 21.3% in the roughly two decades until Danish rates went negative, Finance Ministry estimates show.

From ZH: “..55% of Germans and 53% of Americans thought the TTIP deals was beneficial for the two respective countries as recently as 2014; a recent YouGov poll found that support for the deal had tumbled to just 17% and 15% respectively…”

• Leaked TTIP Documents Cast Doubt On EU-US Trade Deal (G.)

Talks for a free trade deal between Europe and the US face a serious impasse with “irreconcilable” differences in some areas, according to leaked negotiating texts. The two sides are also at odds over US demands that would require the EU to break promises it has made on environmental protection. President Obama said last week he was confident a deal could be reached. But the leaked negotiating drafts and internal positions, which were obtained by Greenpeace and seen by the Guardian, paint a very different picture. “Discussions on cosmetics remain very difficult and the scope of common objectives fairly limited,” says one internal note by EU trade negotiators. Because of a European ban on animal testing, “the EU and US approaches remain irreconcilable and EU market access problems will therefore remain,” the note says.

Talks on engineering were also “characterised by continuous reluctance on the part of the US to engage in this sector,” the confidential briefing says. These problems are not mentioned in a separate report on the state of the talks, also leaked, which the European commission has prepared for scrutiny by the European parliament. These outline the positions exchanged between EU and US negotiators between the 12th and the 13th round of TTIP talks, which took place in New York last week. The public document offers a robust defence of the EU’s right to regulate and create a court-like system for disputes, unlike the internal note, which does not mention them.

Jorgo Riss, the director of Greenpeace EU, said: “These leaked documents give us an unparalleled look at the scope of US demands to lower or circumvent EU protections for environment and public health as part of TTIP. The EU position is very bad, and the US position is terrible. The prospect of a TTIP compromising within that range is an awful one. The way is being cleared for a race to the bottom in environmental, consumer protection and public health standards.” US proposals include an obligation on the EU to inform its industries of any planned regulations in advance, and to allow them the same input into EU regulatory processes as European firms.

American firms could influence the content of EU laws at several points along the regulatory line, including through a plethora of proposed technical working groups and committees. “Before the EU could even pass a regulation, it would have to go through a gruelling impact assessment process in which the bloc would have to show interested US parties that no voluntary measures, or less exacting regulatory ones, were possible,” Riss said.

“In a world that’s already choking on too much debt, the cost of money really isn’t an important variable and it is not a binding constraint on anybody’s decision making.”

• ‘The Fed Is Afraid Of Its Own Shadow’ (CNBC)

The Federal Reserve surprised few last week when it keep interest rates unchanged, noting that it “continues to closely monitor inflation indicators and global economic and financial developments.” However, one market watcher has a blunt message for Fed chair Janet Yellen: You’re placing your hope in a fairy tale. On a recent CNBC’s “Futures Now,” Lindsey Group chief market analyst Peter Boockvar made the case that the Fed will never get the “perfect” conditions they seek before increasing short-term rates once again. The Fed’s mandate “isn’t to have a perfect world. That only exists in fairy tales, dreams and in your econometric models,” Boockvar said in a recent note to clients. He believes that the Fed’s monetary has been far too accommodative under Yellen as well as under Ben Bernanke.

Boockvar argued that the Fed has been taking cues from shaky international banks, and that doing so will always offer a reason to keep interest rates low. In Wednesday’s statement, the strategist noted new suggestions that the Fed is shifting its focus to concerns over international development. In its March statement, the Fed said that “global economic and financial developments continue to post risks,” a line that does not appear in the more recent language. “It’s been excuse, after excuse, after excuse,” Boockvar said. “This is why, eight years into an expansion, they’ve only raised interest rates once. They’re afraid of their own shadow. They’re in a terrible hole that they’re not going to be able to get out of.”

Whether looking at the Fed, the Bank of Japan, or the European Central Bank, Boockvar sees a landscape littered with policy errors. “They all believe that, by making money cheaper, you can somehow generate faster growth,” Boockvar said. Based on this, Boockvar said that central bankers are losing their credibility and their ability to generate higher asset prices, putting the stock market in a precarious position. “In a world that’s already choking on too much debt, the cost of money really isn’t an important variable and it is not a binding constraint on anybody’s decision making.”

The Fed wants to hold investors’ hands at the crap table.

• Fed May Need More Powers To Support Securities Firms During Crises: Dudley (R.)

The U.S. Federal Reserve may need more powers to provide emergency funding to securities firms in times of extreme stress in order to deal with a liquidity crunch, New York Federal Reserve President William Dudley said on Sunday. “Providing these firms with access to the discount window might be worth exploring,” Dudley said in prepared remarks at a financial markets conference in Amelia Island, Florida organized by the Atlanta Fed. The discount window is a credit facility through which banks borrow directly from the U.S. central bank in order to cope with liquidity shortages. The Fed currently has limited ability to provide funding to securities firms in such situations, with the discount window only available to depository institutions.

But the transformation of securities firms since the financial crisis, Dudley said, with the major ones now part of bank holding companies and subject to capital and liquidity stress tests, meant the environment has now changed. “To me, this is a more reasonable proposition now than it was prior to the crisis when the major dealers weren’t subject to those safeguards,” he said. Other “significant gaps” remain in the lender-of-last-resort function, Dudley added. On this, he cited work being done on a global level by the Bank of International Settlements, which is studying deficiencies with respect to systemically important firms that operate across countries. Dudley called for greater attention in order to determine which country would be the lender-of-last-resort for such companies during another crisis. “Expectations about who will be the lender-of-last-resort need to be well understood in both the home and host countries,” he said.

The perhaps most interesting part: How will this spread to other states? Are we seeing a blueprint emerge?

• Puerto Rico To Default On Government Development Bank Debt Monday (CNBC)

Puerto Rico will miss a major debt payment due to creditors Monday, registering the largest default to date for the fiscally struggling U.S. territory. Governor Alejandro Garcia Padilla announced on Sunday the “very difficult decision” to declare a moratorium on the $389 million debt service payment due to bondholders of the island’s Government Development Bank (GDB), which acts as the island’s primary fiscal agent and lender of last resort. “We would have preferred to have had a legal framework to restructure our debts in an orderly manner,” Gov. Garcia Padilla said via a televised address in Spanish.

“But faced with the inability to meet the demands of our creditors and the needs of our people, I had to make a choice … I decided that essential services for the 3.5 million American citizens in Puerto Rico came first,” he said. This will not be the first default for Puerto Rico — according to Moody’s Investors Services, the government has failed to make about $143 million in debt obligation payments since its historic default in August on subject-to-appropriation bonds issued by the Public Finance Corporation (PFC). The commonwealth will pay the approximately $22 million in interest due on the GDB bonds, as well as the nearly $50 million owed to creditors on a handful of other securities that have payments slated for Monday, according to a source familiar with the situation.

Late on Friday, the bank announced it was able to come to an agreement with credit unions that hold approximately $33 million of the bonds due Monday. Under the deal, these bondholders will swap existing securities with new debt that matures in May, 2017. Gov. Garcia Padilla reiterated his plea to Congress to give the commonwealth the legal tools necessary to address Puerto Rico’s $70 billion debt pile and ensure the sustainability of the island. “Puerto Rico needs Speaker Paul Ryan to exercise his leadership and honor his word…we need this restructuring mechanism now,” he said.

Stupid games resulting from unconditional TBTF central bank support.

• Banks Told To Stop Pushing Own Funds (FT)

Brussels has moved to stamp out the practice of large banks funnelling clients towards poorly performing in-house asset management products under new rules designed to improve investor protection across Europe. Over the past two years, independent asset managers and investor rights groups have raised concerns that bank advisers are increasingly recommending in-house funds to clients when investors might be better off in external products. These concerns have been fuelled by the rapid growth of banks’ asset management divisions. Seven of the 10 bestselling asset management companies in Europe last year were subsidiaries of banks. But under new EU legislation known as Mifid II, bank advisers who want to continue receiving commission payments will have to offer funds from external investment companies.

Guidelines on how the rules will apply, released last month, state that advisers can only receive commissions if they offer a “number of instruments from third-party product providers having no close links with the investment firm”. Commentators said the new rules would be a big change for the market. Sean Tuffy, head of regulatory affairs at BBH, the financial services company, said the additional Mifid II guidelines were “unexpected”. He added: “Asset managers would welcome that provision. One of their biggest concerns is the ever-closed architecture world [where banks only push their own funds].” James Hughes at lobby group Cicero said: “When the new rules come into force in 2018] banks won’t be able to only offer their own products. This will be monitored by national [regulators] through a mixture of mystery shopping tests and customer service panels.”

Under the existing system, many banks solely recommend internal products to investors. This keeps fees and commission payments in-house and boosts the parent company’s profitability. Some banks, such as UBS, say they offer a small number of external funds to clients. Others — including Goldman Sachs, Deutsche Bank, Credit Suisse and Morgan Stanley — say they offer a high proportion of external funds to clients, a model known in the industry as “open architecture”. None of the banks mentioned are willing to provide a breakdown of the level of external funds sold versus internal products. The push to make banks recommend more external products can be circumvented if an adviser agrees to assess the suitability of a client’s investments on at least an annual basis.

“..Baker Hughes, which was valued at $34.6 billion when it was announced in November 2014, and is now worth about $28 billion..”

• Halliburton and Baker Hughes Scrap $34.6 Billion Merger (R.)

Oilfield services provider Halliburton and smaller rival Baker Hughes announced the termination of their $28 billion merger deal on Sunday after opposition from U.S. and European antitrust regulators. The tie-up would have brought together the world’s No. 2 and No. 3 oil services companies, raising concerns it would result in higher prices in the sector. It is the latest example of a large merger deal failing to make it to the finish line because of antitrust hurdles. “Challenges in obtaining remaining regulatory approvals and general industry conditions that severely damaged deal economics led to the conclusion that termination is the best course of action,” said Dave Lesar, chief executive of Halliburton.

The contract governing Halliburton’s cash-and-stock acquisition of Baker Hughes, which was valued at $34.6 billion when it was announced in November 2014, and is now worth about $28 billion, expired on Saturday without an agreement by the companies to extend it, Reuters reported earlier on Sunday, citing a person familiar with the matter. Halliburton will pay Baker Hughes a $3.5 billion breakup fee by Wednesday as a result of the deal falling apart. The U.S. Justice Department filed a lawsuit last month to stop the merger, arguing it would leave only two dominant suppliers in 20 business lines in the global well drilling and oil construction services industry, with Schlumberger being the other. “The companies’ decision to abandon this transaction – which would have left many oilfield service markets in the hands of a duopoly – is a victory for the U.S. economy and for all Americans,” U.S. Attorney General Loretta Lynch said in a statement on Sunday.

One thing only is sure: the debt is growing. All the rest is somewhere between propaganda and wishful thinking. If more debt is projected to provide more votes, what do you think will happen?

• Will Australia’s Ever-Growing Debt Pile Peak In Six Years? (BBG)

Australia’s drive to balance the books will see the federal government’s debt pile top out within about five or six years and then start to shrink again, according to Treasurer Scott Morrison. Speaking in Canberra just ahead of his first budget on Tuesday, Morrison said he expects the fiscal deficit to narrow over the government’s four-year forecast horizon and pledged to keep expenditure under control. “To start reducing the debt you’ve got to get the deficit down. To get the deficit down you’ve got to get your spending down,” Morrison said in a Channel Nine television interview on Sunday. “The deficit will decrease over the budget and forward estimates and we will see both gross and net debt peak over about the next five or six years, and then it will start to fall.”

The Australian budget was last in surplus in 2007-08 and attempts to rein in the deficit have been stymied by a slump in revenue as commodity prices fell. Morrison’s challenge is to maintain Australia’s public finances on a sound footing without increasing risks to the economy as it reduces its reliance on mining. He must also contend with the prospect of an upcoming election, which Prime Minister Malcolm Turnbull is expected to call for July 2. Total outstanding federal debt is now more than seven times larger than it was before the 2008 global crisis and net debt is predicted to increase to 18.5% of GDP in 2016-17, according to a Bloomberg survey of economists. The underlying cash deficit is expected to reach A$35 billion ($27 billion) next fiscal year, A$1.3 billion more than the government had forecast in its December fiscal update.

“It will then be punished further for being unable to do what was impossible in the first place.”

• Europe’s Liberal Illusions Shatter As Greek Tragedy Plays On (G.)

Greece is running out of money. The government in Athens is raiding the budgets of the health service and public utilities to pay salaries and pensions. Without fresh financial support it will struggle to make a debt payment due in July. No, this is not a piece from the summer of 2015 reprinted by mistake. Greece, after a spell out of the limelight, is back. Another summer of threats, brinkmanship and all-night summits looms. The problem is a relatively simple one. Greece is bridling at the unrealistic demands of the EC and the IMF to agree to fresh austerity measures when, as the IMF itself accepts, hospitals are running out of syringes and buses don’t run because of a lack of spare parts. Athens has already pushed through a package of austerity measures worth €5.4bn as the price of receiving an €86bn bailout agreed at the culmination of last summer’s protracted crisis and expected the deal to be finalised last October.

Disbursements of the loan have been held up, however, because neither the commission or the IMF believe that Greece will make the promised savings. So they are demanding that Alexis Tsipras’s government legislate for additional “contingency measures” worth €3.6bn to be triggered in the event that Greece fails to meet its fiscal targets. This is almost inevitable, given that the target is for the country to run a primary budget surplus of 3.5% of GDP by 2018 and in every year thereafter. This means that once Greece’s debt payments are excluded, tax receipts have to exceed public spending by 3.5% of GDP. The exceptionally onerous terms are supposed to whittle away Greece’s debt mountain, currently just shy of 200% of GDP. If this all sounds like Alice in Wonderland economics, then that’s because it is.

Greece is being set budgetary targets that the IMF knows are unrealistic and is being set up to fail. It will then be punished further for being unable to do what was impossible in the first place. Predictably enough, the government in Athens is not especially taken with this idea. It has described the idea as outlandish and unconstitutional, but is in a weak position because it desperately needs the bailout loan and threw away its only real bargaining chip last year by making it clear that it would stay in the single currency whatever the price. So Tsipras is doing what he did last year. He is playing for time, hopeful that by hanging tough and threatening another summer of chaos he can force Europe’s leaders to offer him a better deal – less onerous deficit reduction measures coupled with a decent slug of debt relief. For the time being though, the matter is being handled by the eurozone’s finance ministers, who want their full pound of flesh.

Not preparing to assist people, only banks.

• Bank Of England Busy Preparing For Brexit Vote (FT)

The Bank of England is consumed with preparing contingency plans for Britain to leave the EU, with staff across its financial stability, monetary policy and regulatory wings ready to calm any turmoil. In the days leading up to the June 23 poll, the Bank will hold additional auctions of sterling to ensure the banking system has sufficient funds to operate in a potentially chaotic moment. Three exceptional auctions of cash have already been planned for June 14, 21 and 28. But stuffing the banks full of cash will not prevent foreigners and UK households and companies dumping sterling in the event of a Brexit vote. Michael Saunders, the new member of the bank’s Monetary Policy Committee, expects the pound to come under severe pressure.

While still at Citi, he wrote that Brexit risks were “nowhere near priced yet”, adding that Britain should expect a 15 to 20% depreciation of sterling against Britain’s main trading partners. If such a decision to flee sterling leads British banks to become short of foreign currency, the BoE will rapidly offer foreign currency loans to the financial system, using swap lines with other central banks still in existence from the financial crisis. Philip Shaw of Investec said that using such swap lines would be needed only in “fairly extreme circumstances” and the BoE would also need to “make reassuring noises about the soundness of the financial system” to help shore up confidence.

Officials are already pointing to the 2014 stress test of banks, which assumed a reassessment of the health of the UK economy led to a “depreciation of sterling”, to suggest that the banking system would cope. “Unless any UK financial institutions have bet their shirt on an early recovery of sterling it is hard to see what Brexit would do in immediate terms,” said Stephen Wright, a professor at Birkbeck College, London University. The week after the referendum, the Financial Policy Committee will have an opportunity to loosen the requirements for banks to hold capital if there is a financial panic, putting in place the new regime of measures to counter the credit cycle. But even if the BoE could cope with immediate market gyrations from Brexit, it would soon face what Mr Saunders called “a major policy dilemma” over interest rates.

UK 2016. Lovely. And Cameron’s not done.

• Nearly Half Of British Parents Raid Children’s Piggy Banks To Pay Bills (PA)

Nearly half of parents admit to being “piggy bank raiders” who occasionally dip into their children’s cash to cover costs such as parking, takeaways, taxis, school trips and paying the window cleaner. Some 46% of parents of children aged between four and 16 years old said they have taken money from their child’s savings, a survey by Nationwide Building Society has found. The average amount taken over the past year was £21.41, while one in 10 parents had taken £50 or more during that period. Mums are more likely to raid their child’s savings than dads, but dads tend to swipe larger amounts the survey found. The months after Christmas, when many families are getting their finances back on track, also appear to be the time when piggy bank raiders are most prolific.

The survey of 2,000 parents found those in Yorkshire and the Humber, north-east England and south-west England were the most likely to use children’s savings, with those in London, Wales and north-west England the least likely. About 15% of piggy bank raiding parents said they used the cash to pay school lunch money, while the same proportion also use it to pay a bill; 11% used the money for school trips and 11% used it as loose change for parking. One in 12 took the money to tide themselves over as they were broke. A further 12% used the cash for other purposes, including bus fares, hair cuts, petrol costs, takeaways, paying the window cleaner and for the “tooth fairy”.

The vast majority of parents (93%) said they put the money back afterwards – and only 39% of children noticed the money had disappeared. Nearly a third of parents who took money said they had confessed to their child, while 23% sneaked the money back into their child’s piggy bank. One in seven added interest to the amount they had borrowed. Andrew Baddeley-Chappell, Nationwide’s head of savings and mortgage policy, said: “Despite being in charge of instilling a good approach to finance, almost half of parents have been caught in spring raids on their kid’s piggy bank stash. While liberating change for parking or to pay school lunch money could be viewed as excusable, one in 10 parents borrowed more than £50 in the last year, including for paying bills.

And the media are overflowing with questions.

• ‘Bitcoin Creator Reveals Identity’ (BBC)

Australian entrepreneur Craig Wright has publicly identified himself as Bitcoin creator Satoshi Nakamoto. His admission ends years of speculation about who came up with the original ideas underlying the digital cash system. Mr Wright has provided technical proof to back up his claim using coins known to be owned by Bitcoin’s creator. Prominent members of the Bitcoin community and its core development team have also confirmed Mr Wright’s claim. Mr Wright has revealed his identity to three media organisations – the BBC, the Economist and GQ.

At the meeting with the BBC, Mr Wright digitally signed messages using cryptographic keys created during the early days of Bitcoin’s development. The keys are inextricably linked to blocks of bitcoins known to have been created or “mined” by Satoshi Nakamoto. “These are the blocks used to send 10 bitcoins to Hal Finney in January [2009] as the first bitcoin transaction,” said Mr Wright during his demonstration. Renowned cryptographer Hal Finney was one of the engineers who helped turn Mr Wright’s ideas into the Bitcoin protocol, he said.

Meanwhile below the radar….

• Storm Clouds Gathering Over Kansas Farms (WE)

While the lush green sea of wheat filling Kansas fields will turn gold in a few weeks, beneath the comforting cycle of planting and harvest lies big trouble for the state’s farmers and rural communities. The value of farm ground here and across the country is beginning to fall. That drop can cause havoc for the farmers and ranchers who have borrowed a record amount of debt, as well as the banks that made loans to them and the governments that tax them. It will almost certainly lead to more farm foreclosures and ownership consolidation across Kansas and the country. How much is impossible to know, because it is just starting to unfold. But, so far, no one is saying that a return to the mass foreclosures of the 1980s farm crisis is likely. The state’s farm economy produced about $8.5 billion in 2015, about 6% of the state economy, according to the U.S. Bureau of Economic Analysis.

At the moment, farm foreclosures, loan delinquency and debt-to-asset ratios are near record lows, but conditions are eroding. A recent forecast by Mykel Taylor, a farm economist at Kansas State University, calls for a drop of 30 to 50% from the peak as land prices return to their long-term trend. Others are predicting somewhat less of a drop. Brokers say the decline has already started, with the price for prime Kansas crop ground down about 10% from its peak, while marginal crop land has fallen twice or three times that. Pasture land has not fallen yet, although it is expected to. How fast prices deflate will dictate the level of pain, Taylor said. “People keep asking: ‘Is this like the ’80s? Is this like the ’80s?’ ” she said. “I don’t know, but it’s going to be bad.”

NATO is an increasingly dangerous entity. It’ll take us to war. That’s its reason to exist.

• NATO Moves Ever Closer To Russia’s Borders (RT)

NATO is deploying an additional four battalions of 4,000 troops in Poland and the three Baltic States, according to a report citing US Deputy Secretary of Defense Robert Work. Work confirmed the number of troops to be sent to the border with Russia, the Wall Street Journal reports. He said the reason for the deployment is Russia’s multiple snap military exercises near the Baltics States. “The Russians have been doing a lot of snap exercises right up against the borders, with a lot of troops,” Work said. “From our perspective, we could argue this is extraordinarily provocative behavior.” Although there have already been talks about German troops to be deployed to Lithuania, Berlin is still mulling its participation.

“We are currently reviewing how we can continue or strengthen our engagement on the alliance’s eastern periphery,” Chancellor Angela Merkel said on Friday, in light of a recent poll from the Bertelsmann Foundation that found only 31% of Germans would welcome the idea of German troops defending Poland and the Baltic States. London has not made its mind either, yet is expected to do so before the upcoming NATO summit in Warsaw in July. Ahead of the deployment, NATO officials are also discussing the possibility of making the battalions multinational, combining troops from different countries under the joint NATO command and control system. Moscow has been unhappy with the NATO military buildup at Russia’s borders for some time now.

“NATO military infrastructure is inching closer and closer to Russia’s borders. But when Russia takes action to ensure its security, we are told that Russia is engaging in dangerous maneuvers near NATO borders. In fact, NATO borders are getting closer to Russia, not the opposite,” Russian Foreign Minister Sergey Lavrov told Sweden’s Dagens Nyheter daily. Poland and the Baltic States of Lithuania, Latvia and Estonia have regularly pressed NATO headquarters to beef up the alliance’s presence on their territory. According to the 1997 NATO-Russia Founding Act, the permanent presence of large NATO formations at the Russian border is prohibited. Yet some voices in Brussels are saying that since the NATO troops stationed next to Russia are going to rotate, this kind of military buildup cannot be regarded as a permanent presence.

How to kill a union in a few easy steps. They don’t even know that’s what they’re doing.

• Austria, Germany Press EU To Prolong Border Controls (AFP)

Austria and Germany said on Saturday they were in talks with the European Union’s executive body to extend temporary border controls brought in last year to help stem the migrant flow. The measures – triggered in case of “a serious threat to public policy or internal security” – are due to expire on May 12. “I can confirm that we are having discussions with the EU Commission and our European partners about this,” Austrian interior ministry spokesman Karl-Heinz Grundboeck told AFP. Member states must “be able to continue carrying out controls on their borders,” German Interior Minister Thomas de Maiziere said in a written statement to AFP. “Even if the situation along the Balkan route is currently calm, we are observing the evolution of the situation on the external borders with worry”.

His Austrian counterpart, Wolfgang Sobotka, said checkpoints along the Hungarian border had been reinforced in late April after “a rise in people-smuggling activity”. “The introduction of a coordinated border management system with our neighbouring countries after the [May 12] deadline expires would be the first step in the direction of a joint European solution,” Sobotka said. The remarks came after German media had reported that several EU states were urging Brussels to extend the temporary controls inside the passport-free Schengen zone for at least six months. The EU allowed bloc members to introduce the restrictions after hundreds of thousands of migrants and refugees began trekking up the Balkans from Greece towards western and northern Europe last September.

Austria, Belgium, Denmark, France, Germany and Sweden have all clamped down on their frontiers as the continent battles its biggest migration crisis since the end of World War II. “We request that you put forward a proposal, which will allow those member states who consider it necessary to either extend or introduce the temporary border controls inside Schengen as of May 13,” the six countries said in a letter addressed to the EU, according to German newspaper Die Welt. A source close to the German government told AFP the letter would be sent on Monday.

Doesn’t anybody have any decency left? Where is the UN?

• Newborn Baby Among 99 Dead After Shipwrecks In Mediterranean (G.)

A newborn baby is among 99 people believed to have drowned in two separate shipwrecks off the Libyan coast this weekend, according to survivors who arrived in Italy. Twenty-six survivors were rescued by a commercial vessel after a rubber dinghy in which they were travelling sank in the Mediterranean on Friday, a few hours after departing from Sabratha in Libya. They were transferred to Italian coastguard ships before being brought ashore in Lampedusa, Italy’s southernmost island, according to the International Organization for Migration (IOM). The baby was among 84 people still missing on Saturday..

“The dinghy was taking on water, in very bad conditions. Many people had already fallen in the sea and drowned,” said Flavio Di Giacomo, IOM spokesman in Italy. “They are all very shocked,” Di Giacomo said, adding they would receive psychological support in Lampedusa. The UN refugee agency, UNHCR, said that after taking on water the boat broke into two pieces and 26 people were saved from the sea. Survivors from a second shipwreck arrived in the Sicilian port of Pozzallo on Sunday, after an accident during a search-and-rescue operation the day before. Two bodies were recovered and brought ashore along with eight of about 105 people saved, who were taken to hospital in serious condition.

The shipwrecks are the latest incidents in which hundreds of people have lost their lives in the Mediterranean. Last week, up to 500 people were feared dead after a shipping boat hoping to reach Italy from eastern Libya sank. Forty-one survivors told UNHCR that smugglers had taken them out to sea and tried to move them to a larger, overcrowded boat that then capsized. So far this year, at least 1,360 people have been reported dead or missing after trying to cross the Mediterranean, including the latest two shipwrecks, while more than 182,800 have reached European shores.

Debt Rattle May 1 2016

May 012016

May 1, 2016 Posted by Raúl Ilargi Meijer at 9:32 am Finance Tagged with: China, collapse, cult, Fraud, home sales, Mitsubishi, NIRP, NPL, refugees, Trump, yen 5 Responses »

George N. Barnard Nashville, Tennessee. Rail yard and depot 1864

• This is The Biggest Fraud In The History Of The World (SHTF)

• China’s Debt Reckoning Cannot Be Deferred Indefinitely (Magnus)

• The Cult Of Central Banking Is Dead In The Water (Stockman)

• The Real Story Behind The US New Home Sales Collapse (Adler)

• Recent Rise In Yen ‘Extremely Worrying’: Japan Finance Minister (AFP)

• UK ‘Is In The Throes Of A Housing Crisis’ (G.)

• No, Russia Is Not In Decline – At Least Not Any More And Not Yet (FT)

• Germany Should Stop Whining About Negative Rates (Economist)

• Could Italy Be The Unlikely Saviour Of Project Europe? (PS)

• Future Of Scandal-Hit Mitsubishi Motors In Doubt – Again (AFP)

• Trump Saves American TV (Brown)

• Greece Concludes Agreement With Creditors On Sale Of NPLs (Kath.)

• EU Has Made A Mess Of Refugee Reception System In Greece: Oxfam (Kath.)

• 84 Migrants Missing After Boat Sinks Off Libya’s Coast (AFP)

“..We now exist in an environment where the financial system as a whole has been flipped upside down just to make it function…”

• This is The Biggest Fraud In The History Of The World (SHTF)

The stock market may be hovering near all-time highs, but according to Greg Mannarino of Traders Choice that doesn’t mean the valuations are actually real: We exist, beyond any shadow of any doubt, in an environment of absolute fakery where nothing is real… from the prices of assets to what’s occurring here with regard to the big Wall Street banks, the Federal Reserve, interest rates and everything in between. …All of this is being played in a way to keep people believing, once again, that the system is working and will continue to work:

President Obama has suggested that people like Greg Mannarino who are exposing the fraud for what it is are just peddling fiction. And just this week the President argued that he saved the world from a great depression and that the closing credits of the 2008 crash movie “The Big Short” were inaccurate when they claimed that nothing has been done to fundamentally curb the fraud and fix the system under his administration. But as Mannarino notes, the President and his central bank cohorts are making these statements because the system is so fragile that if the public senses even the smallest problem it could derail the entire thing:

“Let’s just look at the stock market… there’s no possible way at this time that these multiples can be justified with regard to what’s occurring here with the price action of the overall market… meanwhile, the market continues to rise. … Nothing is real. I can’t stress this enough… and we’re going to continue to see more fakery… and manipulation and twisting of this entire system… We now exist in an environment where the financial system as a whole has been flipped upside down just to make it function… and that’s very scary. … We’ve never seen anything like this in the history of the world… The Federal Reserve has never been in a situation like this… we are completely in uncharted territory where the world’s central banks have gone negative interest rates… it’s all an illusion to keep the stock market booming.

… Every single asset now… I don’t care what asset… you want to look at currency, debt, housing, metals, the stock market… pick an asset… there’s no price discovery mechanism behind it whatsoever… it’s all fake… it’s all being distorted. … The system is built upon on one premise and that is confidence that it will work… if that confidence is rattled the whole thing will implode… our policy makers are well aware of this… there is collusion between central banks and their respective governments… and it will not stop until it implodes… and what I mean by implode is, correct to fair value.”

And when that confidence is finally lost and the fraud exposed – and it will be as has always been the case throughout history – the destruction to follow will be one for the history books. In a previous interview Mannarino warned that things could get so serious after the bursting of such a massive bubble that millions of people will die on a world-wide scale:

“It’s created a population boom… a population boom has risen in tandem with the debt. It’s incredible. So, when the debt bubble bursts we’re going to get a correction in population. It’s a mathematical certainty. Millions upon millions of people are going to die on a world-wide scale when the debt bubble bursts. And I’m saying when not if… … When resources become more and more scarce we’re going to see countries at war with each other. People will be scrambling… in a worst case scenario… doing everything that they can to survive… to provide for their family and for themselves. There’s no way out of it.”

“..credit growth is probably running at about 25-30%, or about twice as fast as official data suggest, and roughly four times the growth in money GDP..”

• China’s Debt Reckoning Cannot Be Deferred Indefinitely (Magnus)

[..] there is a bit of folklore about the topping out of skyscrapers: the builders’ ceremonial placing of the final beam often heralds the onset of grim economic news, coinciding with the end of a credit cycle that has funded a frenzy of lending for ever-bigger projects. And indeed, as the economy slows markedly, China is increasingly dependent on credit creation. The share of total credit in the economy is approaching 260% and, on current trends, could surpass 300% by 2020 – exceptional for a middle-income country with China’s income per head. The debt build-up must sooner or later end — and when it does it will have a significant impact on the global economy.

Back in 2008, as the western financial crisis spread, China tried to insulate itself with a big credit stimulus programme to counter factory closures and an accompanying return of millions of migrants to the countryside. By 2011 the growth rate had peaked. Its decline was led by a fall in investment in property, then manufacturing. Subsequent stimulus measures have not altered the trend for long but one constant is a relentless build-up in the indebtedness of property companies, state enterprises and local governments. Conventional measures of credit, however, do not fully reflect the growth of total banking assets. Local and provincial governments have been allowed to issue new bonds on yields a bit below bank loans, bought by banks — but they have not paid down more expensive earlier debts to banks as planned.

Banks, moreover, have also increased their lending, often through instruments such as securitised loans, to non-banking financial intermediaries, such as insurance companies, asset managers and security trading firms. When this is taken into account, credit growth is probably running at about 25-30%, or about twice as fast as official data suggest, and roughly four times the growth in money GDP, the cash value of national output. For now, China’s credit surge seems to have stabilised the economy after a sharp slowdown around the turn of the year. The property market has picked up, attracting funds from a stock market that has fallen out of favour with investors after pronounced instability in the middle of last year and early in 2016. The volume of property transactions has risen and prices have rebounded, especially in the biggest cities.

Timing the end of a credit boom is more luck than judgment. There is no question that lenders own bad loans, reckoned unofficially by some banks and credit rating agencies to amount to about 20% of total assets, the equivalent of around 60% of GDP. These will have to be written off or restructured, and the costs allocated to the state, banks, companies or households. Yet in a state-run banking system, where loans can be extended and there are institutional obstacles to realising bad debts, the day of reckoning can be postponed for some time. More likely, the other side of the lenders’ balance sheets, or their liabilities, is where the limits to the credit cycle will appear sooner.

“..Uncle Sam has gotten $4 trillion of “something for nothing” during the last 16 years, while the Washington politicians and policy apparatchiks were happy to pretend that the “independent” Fed was doing god’s work..”

• The Cult Of Central Banking Is Dead In The Water (Stockman)

The Fed has been sitting on the funds rate like some monetary mother hen since December 2008. Once it punts again at the June meeting owing to Brexit worries it will have effectively pegged money market rates at the zero bound for 90 straight months. There has never been a time in financial history when anything close to this happened, including the 1930s. Nor was interest-free money for eight years running ever even imagined in the entire history of monetary thought. So where’s the fire? What monumental emergency justifies this resort to radical monetary intrusion and repression? Alas, there is none. And that’s as in nichts, nada, nope, nothing! There is a structural growth problem, of course. But it has absolutely nothing to do with monetary policy; and it can’t be fixed with cheap money and more debt, anyway.

By contrast, there is no inflation deficiency – even by the Fed’s preferred measure. Indeed, the very idea of a central bank pumping furiously to generate more inflation comes straight from the archives of crank economics. The following two graphs dramatize the cargo cult essence of today’s Keynesian central banking regime. Since the year 2000 when monetary repression began in earnest, the balance sheet of the Fed has risen by 800%, while the amount of labor hours used in the US economy has increased by 2%. At a ratio of 400:1 you can’t even try to argue the counterfactual. That is, there is no amount of money printing that could have ameliorated the “no growth” economy symbolized by flat-lining labor hours.

Owing to the recency bias that dominates mainstream news and commentary, the massive expansion of the Fed’s balance sheet depicted above goes unnoted and unremarked, as if it were always part of the financial landscape. In fact, however, it is something radically new under the sun; it’s the footprint of a monetary fraud breathtaking in its magnitude. In essence, during the last 15 years the Fed has gifted the US economy with a $4 trillion free lunch. Uncle Sam bought $4 trillion worth of weapons, highways, government salaries and contractual services but did not pay for them by extracting an equal amount of financing from taxes or tapping the private savings pool, and thereby “crowding out” other investments.

Instead, Uncle Sam “bridge financed” these expenditures on real goods and services by issuing US treasury bonds on a interim basis to clear his checking account. But these expenses were then permanently funded by fiat credits conjured from thin air by the Fed when it did the “takeout” financing. Central bank purchase of government bonds in this manner is otherwise and cosmetically known as “quantitative easing” (QE), but it’s fraud all the same. In essence, Uncle Sam has gotten $4 trillion of “something for nothing” during the last 16 years, while the Washington politicians and policy apparatchiks were happy to pretend that the “independent” Fed was doing god’s work of catalyzing, coaxing and stimulating more jobs and growth out of the US economy. No it wasn’t! What it was actually doing was not stimulating the main street economy, but falsifying and inflating the price of financial assets.

“ZIRP has enabled corporate CEOs to game the stock market to massively increase their own pay while encouraging them to cut worker salaries and shift higher paying jobs overseas.”

• The Real Story Behind US New Home Sales Collapse (Adler)

Comparing the growth in the number of full time jobs versus the growth in new home sales starkly illustrates both the horrible quality of the new jobs, and how badly ZIRP has served the US economy. Growth in new home sales has always been dependent on growth in full time jobs. For 38 years until the housing bubble peaked in 2006, home sales and full time jobs always trended together, subject to normal cyclical swings. With the exception of 1981-83 when Paul Volcker pushed rates into the stratosphere, new home sales always fluctuated between 550 and 1,100 sales per million full time workers in the month of March. But in the housing crash in 2007-09 sales fell to a low of 276 per million full time workers. Since then the number of full time jobs has recovered to greater than the peak reached in 2007. In spite of that, new home sales per million workers remain at depression levels.

With 30 year mortgage rates now at 3.6% sales are lower today than they were when mortgage rates were above 17% in 1982. Sales have never reached 400 sales per million workers in spite of the recovery in the number of jobs, in spite of ZIRP, in spite of mortgage rates often under 4%. ZIRP has actually made the problem worse. It has caused raging housing inflation which has caused median monthly mortgage payments for new homes to rise by 20% since 2009. ZIRP has enabled corporate CEOs to game the stock market to massively increase their own pay while encouraging them to cut worker salaries and shift higher paying jobs overseas. That leaves the US economy to create only low skill, low pay jobs that do not pay enough for workers to be able to purchase new homes. The perverse incentives of ZIRP are why the housing industry languishes at depression levels.

At WHAT point does WHO become a currency manipulator? The US issued a warning, also to Japan, this week. But Tokyo is being taken to task by the markets. The question becomes: what will seal the fate of Abenomics? A high yen or a low one?

• Recent Rise In Yen ‘Extremely Worrying’: Japan Finance Minister (AFP)

Japan’s finance minister said late Saturday the recent sharp rise in the yen is “extremely worrying”, adding Tokyo will take action when necessary. The remarks, which suggest Tokyo’s possible market intervention, came after the Japanese unit surged to an 18-month high against the dollar in New York Friday. It extended the previous day’s rally, which was boosted by a surprising monetary decision made by the BoJ. On Thursday, the central bank shocked markets by failing to provide more stimulus, confounding expectations it would act after a double earthquake and a string of weak readings on the world’s number three economy. The dollar tumbled to 106.31 yen in New York Friday, its lowest level since October 2014, from 108.11 yen. The greenback had bought 111.78 yen in Tokyo before the BoJ announcement on Thursday.

“The yen strengthened by five yen in two days. Obviously one-sided and biased, so-called speculative moves are seen behind it,” Japanese Finance Minister Taro Aso told reporters. “It is extremely worrying,” he said. The finance minister left on a trip, which will also take him to an annual Asian Development Bank meeting in Germany. “Tokyo will continue watching the market trends carefully and take actions when necessary,” he added. A strong currency is damaging for Japan’s exporting giants, such as Toyota and Sony, as it makes their goods more expensive overseas and shrinks the value of repatriated profits. Aso has reiterated that Japan could intervene in forex markets to stem the unit’s steep rise, saying moves to halt the currency’s “one-sided, speculative” rally would not breach a G20 agreement to avoid competitive currency devaluations.

You don’t say… Who figured that out?

• UK ‘Is In The Throes Of A Housing Crisis’ (G.)

David Cameron’s pledge to build a property-owning democracy is called into serious question by a landmark survey revealing that almost four in 10 of those who do not own a home believe they will never be able to do so. According to an exclusive poll for the Observer on attitudes to British housing, 69% of people think the country is “in the throes of a housing crisis”. A staggering 71% of aspiring property owners doubt their ability to buy a home without financial help from family members. More than two-thirds (67%) would like to buy their own home “one day”, while 37% believe buying will remain out of their reach for good. A further 26% think it will take them up to five years. With affordable homes in short supply and demand for social housing rising, more than half of Britons cite immigration and a glut of foreign investment in UK property as factors driving prices beyond reach.

The findings cast doubt on the prime minister’s claim before last year’s general election that Tory housing policies would transform “generation rent” into “generation buy”. In April last year, as he launched plans to force local authorities to sell valuable properties to fund new “affordable homes”, Cameron said: “The dream of a property-owning democracy is alive and well and we will help you fulfil it.” The poll – which found that 58% of people want more, not less, social housing as a way to ease the crisis – comes as the government’s highly controversial housing and planning bill returns to the Commons on Tuesday. The bill will force councils to sell much of their social housing and curb lifelong council tenancies, introducing “pay to stay” rules that will force better-off council tenants to pay rents closer to market levels.

Described by housing experts as the beginning of the end of social housing, the bill has been savaged by cross-party groups in the Lords. They have inflicted a string of defeats on ministers and forced numerous concessions. The government’s flagship plan for “starter homes” has also been widely attacked on the grounds that the properties – which in London will cost up to £450,000 – will not be affordable. With local elections and the London mayoral election on Thursday, ministers now face the dilemma of whether to back down and accept many of the Lords’ amendments to the bill or face legislative deadlock.

There is no credible news about Russia left in the west.

• No, Russia Is Not In Decline – At Least Not Any More And Not Yet (FT)

A survey of recent writings on Russia by western scholars reveals a widely-held view that the largest of the 15 post-Soviet republics has continued to decline in the 21st century. Yet an examination of the data suggests that Russia has actually risen in comparison with some of its western competitors. Neil Ferguson, the British, Harvard-based historian, wrote in 2011 that Vladimir Putin’s Russia was in decline and “on its way to global irrelevance.” His Harvard colleagues Joseph Nye and Stephen Walt hold similar views. “Russia is in long-term decline,” Nye wrote in April 2015; also last year, Walt wrote of Russia’s decline at least twice. Other western thinkers who have pronounced Russia’s decline in the 21st century include John Mearsheimer of the University of Chicago, Ian Bremmer of Eurasia Group, Nicholas Burns of Harvard University and Stephen Blank of the American Foreign Policy Council.

Others go further. Alexander Motyl of Rutgers University recently wrote of a “coming Russian collapse”. Lilia Shevtsova, a Russian scholar affiliated with the Brookings Institution, believes the collapse has already begun. But is Russia really in decline, as western scholars claim? A comparison of its performance with the world as a whole or with the west’s leading economies suggests that the claim that post-Communist Russia has continued its decline into the 21st century is highly contestable at the very least. I have compared Russia with the US, the UK, France, Germany and Italy – the west’s biggest economy, western Europe’s four biggest and all of the west’s nuclear powers – in the period 1999 to 2015 (with some exceptions when data is not available). I relied on data supplied by the World Bank, the Stockholm International Peace Research Institute and the World Steel Association, turning to data from national governments only in the absence of data from the three organisations.

One traditional way of measuring nations’ power relative to each other is to compare their GDP. By this measure, Russia gained economically on all of its competitors as well as on the world as a whole in 1999-2015. Russian GDP was equal to less than 5% of US GDP in 1999. That share grew to 6% in 2015, a 36% increase. Over the same period, Russia’s share of global GDP increased by 23%, from 1.32% in 1999 to 1.6% in 2015. Meanwhile, the US, UK, French, German and Italian shares in global GDP declined by 10%, 11%, 19%, 20% and 32%, respectively. It is well known that the Russian economy has been declining since 2014. According to the World Bank, it is poised to contract by 1% yet again in 2016 before it resumes growth. However, this projected decline will not erase the cumulative gains that the Russian economy has made since 1999 against those of the US, UK, France, Germany and Italy and against the world as a whole.

Germany doesn’t want a union, it wants a sales market.

• Germany Should Stop Whining About Negative Rates (Economist)

Germany and the Netherlands are usually great supporters of central-bank independence. In the 1990s Germany blocked France’s push for a political say over monetary policy in the new ECB. The Dutchman who first headed that bank, Wim Duisenberg, said that it might be normal for politicians to express views on monetary policy, but it would be abnormal for central bankers to listen to them. That was then. Now German and Dutch politicians are trying to browbeat Mario Draghi, the ECB’s current president, into ending the bank’s policy of negative interest rates. The German finance minister, Wolfgang Schäuble, accused Mr Draghi of causing “extraordinary problems” for his country’s financial sector; wilder yet, he also pinned on the ECB half of the blame for the rise of the populist Alternative for Germany (AfD) party.

Both countries’ politicians attack low rates as a conspiracy to punish northern European savers and let southern European borrowers off the hook. ECB autonomy was sacred when rates suited Germany; now that rates do not fit the bill, and are imposed by an Italian to boot, it is another matter. The critics are not just hypocritical. They are partly responsible—let’s say 50% to blame—for the mess. As Mr Draghi has pointed out, his mandate is to raise the euro zone’s inflation rate back towards 2%. It is currently at zero, and periodically dips into negative territory. There is a legitimate debate to be had about how far a negative-interest-rate policy can go. The banks are unwilling to pass on negative rates to depositors, which means their own earnings are dented. And yes, savers are undoubtedly suffering at the moment. But raising rates would squash the recovery, and with it any chance of a normalisation of monetary policy.

The ECB’s policies of ultra-low rates and quantitative easing (printing money to buy bonds) are the same as those used by other central banks in the rich world since the onset of the financial crisis. Even the Bundesbank, whose allergy to inflation largely explains why the ECB was slower to embrace unconventional monetary policy than its peers, has felt compelled to defend Mr Draghi from attacks in Germany. The fundamental reason for Europe’s low interest rates and bond yields is the fragility of its economy. Its unemployment rate is stuck at 10%. While the ECB has been doing what it can to press down the accelerator, however, the austerity preached by the likes of the German and Dutch governments has slammed on the brakes. For years, Mr Draghi has been saying that monetary policy alone cannot speed up the economy, and that creditworthy governments must use fiscal policy as well, ideally by raising public investment.

If Mr Schäuble wants higher yields for German savers, he should be spending more money. Instead, his government is running a budget surplus. A hesitation to spend might be understandable if it were difficult for the German government to find good investment opportunities. But Germany has suffered from low infrastructure spending for decades. Investment by municipalities has fallen by about half since 1991, according to a 2015 report by the German Institute for Economic Research; since 2003 it has failed even to keep pace with the deterioration of infrastructure.

Kaletsky’s dreaming in technicolor: “..The enormous programme of quantitative easing that Draghi pushed through, against German opposition, has saved the euro…”

• Could Italy Be The Unlikely Saviour Of Project Europe? (PS)

As the EU begins to disintegrate, who can provide the leadership to save it? German chancellor Angela Merkel is widely credited with finally answering Henry Kissinger’s famous question about the Western alliance: “What is the phone number for Europe?” But if Europe’s phone number has a German dialling code, it goes through to an automated answer: “Nein zu Allem.” This phrase –“No to everything” –is how Mario Draghi, the ECB president, recently described the standard German response to all economic initiatives aimed at strengthening Europe. A classic case was Merkel’s veto of a proposal by Italian prime minister Matteo Renzi to fund refugee programmes in Europe, North Africa, and Turkey through an issue of EU bonds, an efficient and low-cost idea also advanced by leading financiers such as George Soros.

Merkel’s high-handed refusal even to consider broader European interests if these threaten her domestic popularity has become a recurring nightmare for other EU leaders. This refusal underpins not only her economic and immigration policies, but also her bullying of Greece, her support for coal subsidies, her backing of German carmakers over diesel emissions, her kowtowing to Turkey on press freedom, and her mismanagement of the Minsk agreement in Ukraine. In short, Merkel has done more to damage the EU than any living politician, while constantly proclaiming her passion for “the European project”. But where can a Europe disillusioned with German leadership now turn? The obvious candidates will not or cannot take on the role: Britain has excluded itself; France is paralysed until next year’s presidential election and possibly beyond; and Spain cannot even form a government.

That leaves Italy, a country that, having dominated Europe’s politics and culture for most of its history, is now treated as “peripheral”. But Italy is resuming its historic role as a source of Europe’s best ideas and leadership in politics, and also, most surprisingly, in economics. Draghi’s transformation of the ECB into the world’s most creative and proactive central bank is the clearest example of this. The enormous programme of quantitative easing that Draghi pushed through, against German opposition, has saved the euro by circumventing the Maastricht Treaty’s rules against monetising or mutualising government debts. Last month, Draghi became the first central banker to take seriously the idea of helicopter money – the direct distribution of newly created money from the central bank to eurozone residents.

Germany’s leaders have reacted furiously and are now subjecting Draghi to nationalistic personal attacks. Less visibly, Italy has also led a quiet rebellion against the pre-Keynesian economics of the German government and the European commission. In EU councils and again at this month’s IMF meeting in Washington, DC, Pier Carlo Padoan, Italy’s finance minister, presented the case for fiscal stimulus more strongly and coherently than any other EU leader. More important, Padoan has started to implement fiscal stimulus by cutting taxes and maintaining public spending plans, in defiance of German and EU commission demands to tighten his budget. As a result, consumer and business confidence in Italy have rebounded to the highest level in 15 years, credit conditions have improved, and Italy is the only G7 country expected by the IMF to grow faster in 2016 than 2015 (albeit still at an inadequate 1% rate).

“It would be silly to buy a Mitsubishi car after this..”

• Future Of Scandal-Hit Mitsubishi Motors In Doubt – Again (AFP)

Sales are falling off a cliff. Its reputation is in tatters. And even its top executive is talking about whether the automaker will survive. Mitsubishi Motors’ future is hanging in the balance for the second time in a decade after a bombshell admission that it has been cheating on fuel-economy tests for years. The crisis is threatening to put the company into the ditch permanently, but some analysts think the vast web of shareholdings among Japanese firms may just save it from the scrap yard. “I really think the future of Mitsubishi Motors is grim,” said Hideyuki Kobayashi, a business professor at Hitotsubashi University, who authored a book about the company’s struggles with an earlier cover-up. “It would be silly to buy a Mitsubishi car after this (scandal). This isn’t the first time this has happened.”

In 2005, the maker of the Outlander SUV and Lancer cars was pulled back from the brink of bankruptcy after it was discovered that it covered up vehicle defects that caused fatal accidents. The vast Mitsubishi group of companies stepped in with a series of bailouts, saving the embattled firm. But it is not clear if they would be so willing to help this time around as the automaker faces possibly huge fines, lawsuits and customer compensation costs. The scandal has shone a light on the cozy relationships between Japanese firms – including the big equity stakes they hold in each other – which have come under renewed scrutiny in recent years.

Lowest common denominator.

• Trump Saves American TV (Brown)

My friends in the TV news business are in a state of despair about Donald Trump, even as their bosses in the boardroom are giddy over what he’s doing for their once sagging ratings. “It feels like it’s over,” one old friend from my television days told me recently. Any hope of practicing real journalism on TV is really, finally finished. “Look, we’ve always done a lot of stupid shit to get ratings. But now it’s like we’ve just given up and literally handed over control hoping he’ll save us. It’s pathetic, and I feel like hell.” Said another friend covering the presidential campaign for cable news, “I am swilling antidepressants trying to figure out what to do with my life when this is over.” I’ve been there, and I sure am sympathetic.

When I left cable news in 2010 after 14 years as a correspondent and anchor for NBC News and CNN, this kind of ratings pressure was a big reason why (and I don’t take for granted that I had the luxury of being able to walk away). I was not so interested in night-after-night coverage of Michael Jackson’s death or Britney Spears’ latest breakdown—topics that were “breaking news” at the time. And yes, as my friend reminded me, we did “stupid shit” to get the numbers up when it came to political coverage then, too. (Anyone remember the correspondent’s hologram that appeared on set during CNN’s 2008 election coverage?) But it was nothing like what we’re seeing today. I really would like to blame Trump. But everything he is doing is with TV news’ full acquiescence. Trump doesn’t force the networks to show his rallies live rather than do real reporting.

Nor does he force anyone to accept his phone calls rather than demand that he do a face-to-face interview that would be a greater risk for him. TV news has largely given Trump editorial control. It is driven by a hunger for ratings—and the people who run the networks and the news channels are only too happy to make that Faustian bargain. Which is why you’ll see endless variations of this banner, one I saw all three cable networks put up in a single day: “Breaking news: Trump speaks for first time since Wisconsin loss.” In all these scenes, the TV reporter just stands there, off camera, essentially useless. The order doesn’t need to be stated. It’s understood in the newsroom: Air the Trump rallies live and uninterrupted. He may say something crazy; he often does, and it’s always great television.

This must be such a relief for the TV executives managing a business in decline, suffering from a thousand cuts from social media and other new platforms. Trump arrived on the scene as a kind of manna from hell. I admit I have been surprised by the public candor about this bounty. A “beaming” Jeff Zucker, president of CNN Worldwide, told New York Times media columnist Jim Rutenberg, “These numbers are crazy—crazy.” But if their bosses are frank about the great ratings, some of my friends left at the cable networks are in various degrees of denial. “Give me a break,” one told me. “You can’t put this on us. Reality has changed because of technology. Look at the White House. They’re basically running their own news organization. They bypass us every day. We’re just trying to keep up.” And then there’s this attempt to put the best face on things, which is the most universal comment I hear: “At least this shows how much we still matter.”

Anything the EU agrees to can be seen as inconsequential.

• Greece Concludes Agreement With Creditors On Sale Of NPLs (Kath.)

An agreement between Greece and its lenders will lead to the vast majority of non-performing loans (NPLs) linked to primary residences with a taxable value under 140,000 euros being protected from sale until 2018, Economy Ministry sources have said. The government said on Saturday that the framework for the sale to distressed debt fund of overdue bank loans had been agreed, a necessary condition for the current bailout review to be concluded. According to the Economy Ministry, income criteria will not apply to the primary residence-backed NPLs that will be excluded from sale.

When coupled with the 140,000-euro “objective value” ceiling, this means that 94% of mortgages linked to main homes will be exempt from sale, the government says. The ministry added that the homeowners whose loans will be sold by banks will not experience any major change. The organizations that buy the loans will be required to use debt collection agencies that are registered in Greece and which have been licensed by the Bank of Greece.

And on purpose too.

• EU Has Made A Mess Of Refugee Reception System In Greece: Oxfam (Kath.)

The EU is failing to deliver a fair and safe system for receiving people in Greece, according to charity group Oxfam. The Greek government’s limited capacity and the pressure to meet the terms of the EU-Turkey agreement has led to refugees and migrants being kept in poor conditions, stressed the humanitarian organization in a statement on Friday. “Europe has created this mess and it needs to fix it in a way that respects people’s rights and dignity,” said Giovanni Riccardi Candiani, Oxfam’s representative in Greece. “The EU says it champions the rights of asylum-seekers beyond its borders but these rights are not being respected within EU countries.” Oxfam highlighted problems at the hotspots on Lesvos, where there have been riots in the past few days.

“Moria center is now very overcrowded, holding more than 3,000 people. Non-Syrians are unable to access asylum processes and about 80 unaccompanied children are among those being held,” said the humanitarian organization. “Nearby Kara Tepe camp, which has freedom of movement and provides care for vulnerable people such as unaccompanied children, pregnant women and the elderly, is almost full, leaving people in need of special care and support stranded at Moria center,” added Oxfam. The organization said it is working at six sites across Greece: Kara Tepe on Lesbos island, and in Katsika, Doliana, Filipiada, Tsepelovo and Konista camps in North-West Greece. Oxfam suspended its presence at Moria after the EU-Turkey deal was agreed and the site was converted into a closed facility.

Europe’s shame continues.

• 84 Migrants Missing After Boat Sinks Off Libya’s Coast (AFP)

84 migrants are still missing after an inflatable craft sank off the coast of Libya, according to survivors cited by the International Organization for Migration (IOM) on Saturday. Twenty-six people were rescued from the boat which sank on Friday and were questioned overnight. “According to testimonies gathered by IOM in Lampedusa 84 people went missing,” IOM spokesperson in Italy Flavio Di Giacomo wrote on his Twitter feed. Di Giacomo told AFP that the survivors indicated 110 people, all from assorted west African states, had embarked in Libya. In an email, he added that the vessel “was in a very bad state, was taking on water and many people fell into the water and drowned”.

“Ten fell very rapidly and several others just minutes later.” Earlier Saturday, Italy’s coastguard said an Italian cargo ship had rescued 26 migrants from a flimsy boat sinking off the coast of Libya but voiced fears that tens more could be missing. The coastguard received a call from a satellite phone late Friday that helped locate the stricken inflatable and called on the merchant ship to make a detour to the area about four miles (seven kilometres) off the Libyan coast near Sabratha. Rough seas and waves topping two metres (seven feet) hampered attempts to find any other survivors.

Debt Rattle April 15 2016

Apr 152016

April 15, 2016 Posted by Raúl Ilargi Meijer at 9:34 am Finance Tagged with: angst, China, debt, gold, Greece, IMF, manipulation, NIRP, oil, outflows, refugees, tax evasion 2 Responses »

Gottscho-Schleisner Plaza buildings from Central Park, NY 1933

• A Year After European Stocks Hit Record, Crash Angst Hits Traders (BBG)

• The One Chart That Shows ECB Money Printing Is Failing (Ind.)

• Oil Demand Falls Much Faster Than Supply (Berman)

• Oil Producers Head For Doha Counting $315 Billion Cost Of Slump (BBG)

• Soured Corporate Loans Surge at Biggest US Banks on Oil (BBG)

• China’s Economy Faces Recovery Without Legs (WSJ)

• China’s Giant Bonfire Of Debt Needs One Spark To Become An Inferno (MW)

• Funny Numbers Show Money Leaving China (Balding)

• China Is Set to Allow Banks to Swap Bad Loans for Equity in Borrowers (WSJ)

• China’s Giant Steel Industry Just Churned Out Record Supply (BBG)

• What Negative Interest Rates Mean for the World (WSJ)

• Negative Rates: Danish Couple Gets Paid Interest on Their Mortgage (WSJ)

• Deutsche Bank Settles Silver, Gold Price-Manipulation Suits (BBG)

• IMF Says Greek Debt Numbers Don’t Add Up as EU Defends Its Plan (BBG)

• UK and European Allies Plan To Deal ‘Hammer Blow’ To Tax Evasion (G.)

• Spanish Industry Minister Resigns After Panama Papers Revelations (AFP)

• Ten European Nations Want Military Planes For Refugee Deportations (AP)

Let that graph sink in.

• A Year After European Stocks Hit Record, Crash Angst Hits Traders (BBG)

A year ago today, European equities hit their highest levels ever. But the euphoria about Mario Draghi’s stimulus program didn’t last, and trader skepticism is now rampant. The Stoxx Europe 600 Index has lost 17% since its record, and investors who piled in last year are now unwinding bets at the fastest rate since 2013 as analysts predict an earnings contraction. The trading pattern looks familiar: a fast run to just over 400 on the gauge, then disaster. Optimism has turned to doubt with ECB President Draghi’s bond-buying program doing little to bolster the economy while sowing concerns about bank profitability. To Benedict Goette of Crossbow Partners, the odds of another crisis are higher than a rally to fresh records.

“The 2009-2015 rally originated from two main drivers: a massive stimulus, and credit expansion in China,” said Goette. “European earnings have not followed suit so far. Skepticism regarding central-bank operations has started to emerge.” Even with a recent rebound, the Stoxx 600 remains 6% lower for the year, and strategists are predicting the gauge will end 2016 at about the same level where it started. Analysts, who in January called for earnings growth, are now expecting declines of 2.8%. Investors have withdrawn money from funds tracking the region’s equities for nine straight weeks, the longest streak since May 2013, according to a Bank of America note dated April 7 that cited EPFR Global data.

Since last year’s peak, all industry groups in the Stoxx 600 have fallen, with lenders, miners and automakers down more than 25%. Traders have had to contend with a rebound in the euro despite additional ECB stimulus, persistently low inflation and slowing growth from China. Fewer than one in five fund managers are confident Draghi’s easing will be a major source of growth for Europe, a Bank of America survey showed April 12.

In case that wasn’t clear yet.

• The One Chart That Shows ECB Money Printing Is Failing (Ind.)

Good news: prices are no longer falling in the eurozone. But don’t break out the champagne. According to the European number crunchers Eurostat consumer prices across the 19 nation bloc were flat on a year earlier in March. The inflation rate was zero. This means the eurozone remains very much within the deflationary danger zone. The ECB has been trying to break the grip of deflation – which can be lethal for economic growth – on the bloc for more than a year now. To this end the ECB’s president Mario Draghi announced a major programme to buy up eurozone government bonds and company debt in January 2015.

The central bank has been buying €60bn of these assets a month in the hope that that flood of money entering the continent’s financial system would lift inflation into positive territory. The trouble is, as the chart below shows, is that all that money printing doesn’t seem to be working in pushing up prices. But the ECB is not giving up. In December it announced that it would continue its programme until March 2017 “or beyond”. The programme was originally supposed to end in September 2016. And in March it upped the size of the monthly bond purchases to €80bn. In other words, the ECB will continue printing money until inflation rises to the central bank’s target of (just below) 2% a year.

“Supply increased only 20,000 barrels per day in March. Consumption, however, decreased by 250,000 barrels per day.”

• Oil Demand Falls Much Faster Than Supply (Berman)

Oil prices have increased 60% since late January. Is this an oil-price recovery? Two previous price rallies ended badly because they had little basis in market-balance fundamentals. The current rally will probably fail for the same reason. Although oil prices reached the highest levels so far in 2016 during the past few days, the global over-supply of oil worsened in March. EIA data released this week shows that the net surplus (supply minus consumption) increased to 1.45 million barrels per day (Figure 1). Compared to February, the surplus increased 270,000 barrels per day. That’s a bad sign for the durable price recovery that some believe is already underway.

The production freeze that OPEC plus Russia will discuss this weekend has already arrived. Supply increased only 20,000 barrels per day in March. Consumption, however, decreased by 250,000 barrels per day. That’s not good news for the world economy although first quarter consumption is commonly lower than levels during the second half of the year. Meanwhile on Wednesday, April 12, Brent futures closed at almost $45 and WTI futures at more than $42 per barrel, the highest oil prices since early December 2015.

Figure 1. EIA world liquids market balance (supply minus consumption). Source: EIA STEO April 2016 Labyrinth Consulting Services, Inc.

Any agreement willl exist on paper only.

• Oil Producers Head For Doha Counting $315 Billion Cost Of Slump (BBG)

The world’s top oil exporters are burning through their petrodollar assets at an accelerating pace, increasing the pressure to reach a deal to freeze production to bolster prices. The 18 nations set to gather in Doha on Sunday to discuss a production freeze have spent $315 billion of their foreign-exchange reserves – about a fifth of their total – since the oil slump started in November 2014, according to data compiled by Bloomberg. In the last three months of 2015, reserves fell nearly $54 billion, the largest quarterly drop since the crisis started. The petrodollar burn has consequences beyond the oil nations, affecting international fund managers like Aberdeen Asset Management and global currencies markets.

Oil nations have traditionally held their reserves in U.S. Treasuries and other liquid securities. Nonetheless, the impact in credit markets has been muted as central banks continue to buy debt. “We expect 2016 to be yet another painful year for most of the oil states,” said Abhishek Deshpande, oil analyst at Natixis in London. The gathering in Doha will comprise both OPEC and non-OPEC states, though any deal to boost prices will probably be largely cosmetic as countries are already pumping nearly at record levels. In a letter inviting countries to the Doha meeting, Qatar Energy Minister Mohammed Al Sada said oil countries need to stabilize the market in “the interest of a healthier world economy as the present low price is seen to be benefiting no one.”

Saudi Arabia accounts for nearly half of the decline in foreign-exchange reserves among oil producers, with $138 billion – or 23% of its total – followed by Russia, Algeria, Libya and Nigeria. In the final three months of last year, Saudi Arabia burned through $38.1 billion, the biggest quarterly reduction in data going back to 1962.

“Soured loans to companies jumped 67% at the three biggest U.S. banks in the first quarter..”

• Soured Corporate Loans Surge at Biggest US Banks on Oil (BBG)

Soured loans to companies jumped 67% at the three biggest U.S. banks in the first quarter, the latest sign that corporate credit quality is eroding after energy prices plunged. At Bank of America, JPMorgan and Wells Fargo, bad loans to companies reached their highest levels since at least 2013. For now, weakness is mainly confined to oil and gas and related industries, executives said. U.S. crude has tumbled more than 60% since June 2014, although they have rallied since February. Troubled loans have broadly been declining at big banks for years, and at JPMorgan and Bank of America, are less than 1% of total assets.

But there are signs that default risk is rising in sectors outside of energy, including health care, James Elder, a director in corporate and financial institutions at Standard & Poor’s, said in a presentation this week. Charles Peabody, a banking analyst at Portales Partners, downgraded JPMorgan to “underperform” from “market perform” in February in part because of concerns about the potential for mounting credit losses. “We’re at the very early stages of an inflection point in corporate credit quality, and it’s getting worse from here,” Peabody said. Pri de Silva, an analyst at CreditSights, is among those who see current credit problems as limited to oil and gas and related industries. “At this point, I don’t see much contagion,” he said.

Banks have been getting ready for loans to deteriorate – the industry added $1.43 billion in the fourth quarter to the total money it has set aside to cover bad loans, according to Federal Deposit Insurance Corp. data compiled by Bloomberg, the first time banks in aggregate added to reserves since 2009. Banks usually classify loans to companies as “nonperforming” after the borrower is delinquent for 90 days. Loans that are unlikely to be repaid are also typically designated as “nonperforming.” Now loans are actually souring. At JPMorgan, bad loans to companies more than doubled to $2.21 billion from $1.02 billion in the fourth quarter, according to company filings. Bank of America said they rose 32% to $1.6 billion. And at Wells Fargo, they rose 64% to $3.97 billion, which includes $343 million from loans it acquired from GE Capital.

This is such a contradiction in terms it’s crazy the WSJ prints it: “China’s economy may have stabilized for now, thanks to gobs of new debt..”

• China’s Economy Faces Recovery Without Legs (WSJ)

China’s economy may have stabilized for now, thanks to gobs of new debt and a reflating property bubble. Dipping into that old bag of tricks, however, seems likely to dredge up the same old problems. Official data showed China’s GDP slowed to 6.7% in the first quarter from a year earlier. As expected, that is the slowest in years, but underlying data showed activity picked up toward the end of the quarter. Home buyers, for instance, continued to splash out for new property, with residential sales rising 54% in the first quarter from a year earlier. That has emboldened developers to start to build again, with housing starts rising 16% in the first quarter, after falling 15% last year. That augurs well for employment and demand for raw materials. But it is hard to see China’s property market—which in past years generated directly and indirectly up to a third of all economic activity—returning to its past glory.

Much of the recovery in prices and activity has been in China’s so-called tier one cities—the four largest cities—and regulators there are already clamping down to prevent things from getting out of hand. In the rest of China, the property recovery is far more subdued, and inventories of unsold apartments remain substantial. Around 95% of real estate sales occur outside of those top four cities, notes Louis Kuijs of Oxford Economics, so unless the boom spreads, the impact on the broader economy will remain muted. China’s old economy sectors also seem to have awoken somewhat from their slumber. Industrial production grew 6.8% in March, the fastest in nine months. Fixed asset investment, spending on things like factories and infrastructure, grew 11.2%, much faster than the 6.8% low it hit in December.

Driving all this activity: easy money. Real interest rates have fallen. And nominal GDP grew faster than real GDP for the first time in five quarters, which in theory makes servicing debt easier. What should trouble investors is that while China’s economic activity is ticking up, debt is piling up faster. The stock of total financing in the economy, including bond issuance as part of a local government bailout program, rose 15.8% in March from a year ago, the fastest rate since mid-2014. With nominal GDP growing 7.2%, Beijing’s plans to deleverage the economy continue to be overwhelmed by the need to support growth. China bulls will be pleased by the data, hoping that a proper recovery is at hand. Those hopes may prove short lived. The more the recovery is fueled by debt and property, the more concerned Beijing will be that it is pushing the gas too hard and will have to ease off sooner than people think.

“In a developed economy, Ponzi lending of such an enormous scale would lead to widespread bankruptcies, unemployment and massive losses for investors and lenders. This hasn’t happened yet because Chinese debt has been expanding at an ever-faster rate.”

• China’s Giant Bonfire Of Debt Needs One Spark To Become An Inferno (MW)

China’s debt bonfire has been building for decades, but recent news and data points to it growing faster than ever with a greater risk of becoming an economy-scorching inferno. There are three key components to this analogy: the wood, the accelerant and the matches. First the wood, which is an ever-growing stockpile of debt that cannot be serviced from profits. Macquarie Research found that 23% of bonds issued were by companies that don’t generate enough operating profit to cover their interest. This aligns with a Bloomberg report that the median Chinese listed company generates enough operating profit to cover their interest two times, down from a ratio of six times in 2010. Another report found that 45% of new company debt is raised to pay interest on existing debt.

In a developed economy, Ponzi lending of such an enormous scale would lead to widespread bankruptcies, unemployment and massive losses for investors and lenders. This hasn’t happened yet because Chinese debt has been expanding at an ever-faster rate. China’s total debt levels grew to about 300% of GDP last year from about 250% of GDP in 2014 and set a new record for a single month in January, growing at roughly 5% of the size of the economy. Problems have been covered over as the Chinese banking regulator is forcing banks to lend to companies that can’t pay their interest and would otherwise default. We know the bonfire is big and the wood is dry. The next step is to figure how quickly a fire could spread once it begins.

The second key component is the accelerant, which is the relatively high proportion of debt borrowed for short periods. Chinese wealth management products are typically sold by banks as an alternative to term deposits that pay much higher interest rates. Borrowers are almost always promised their money back within six months. The underlying investments are typically loans to companies that banks are unwilling to lend to. These borrowers have little prospect of repaying the debt at maturity unless someone else is willing to provide more debt. Another source of short-term funding is peer-to-peer platforms. However, 28% of these are thought to be fraudulent. In the institutional funding market, there’s commercial paper, which is composed of corporate debts of 270 days or less. Outstanding Chinese commercial paper was $1.61 trillion at the end of 2015, far larger than the U.S. equivalent at $1.05 trillion.

As shown by the financial crisis in 2008, short-term debt is an accelerant to fires in credit systems. Within a week of the collapse of Lehman Brothers, 26% of U.S. commercial paper disappeared. Investors were no longer willing to lend without asking questions and borrowers were sent scurrying for other sources of capital. A run on short-term funding sources quickly spreads the fire from one bankrupt borrower to many other borrowers.

“Chinese customs officials reported $1.68 trillion in imports last year. Banks, on the other hand, claimed to have paid $2.2 trillion for those same imports. While the official balance-of-payments records a current account surplus of $331 billion in 2015, banks’ payments and receipts show a $122 billion deficit.”

• Funny Numbers Show Money Leaving China (Balding)

News that China’s foreign-exchange reserves rose by $10 billion in March rather than declining has quieted doomsayers. Worries that the reserves could dip to dangerous levels as soon as this summer – after shrinking by an estimated $1 trillion last year – appear to have been premature. Still, questions linger over exactly how much money is leaving China and why. The true picture may not be as rosy as the headline numbers suggest. Before the March upturn, capital had been flooding out of China at a rapid clip – an average of $48 billion per month over the previous six months, according to official bank data. The reasons were several. Fearing further declines in the value of the yuan, several companies paid off their dollar loans; others pursued big acquisitions abroad. Individual investors sought out higher returns as the Fed prepared to raise rates.

The government spent billions to prop up the value of the currency. Some individuals and companies reduced their offshore yuan deposits. Still others looked to spirit money out of the country to safer havens. The question is how much money has been leaving for which reasons. Some analysts, including economists at the Bank for International Settlements, have argued that the bulk of these outflows are healthy, mostly involving companies paying down their foreign debt. However, the BIS study, which estimates that such repayments accounted for nearly a quarter of the $163 billion of non-reserve outflows in the third quarter of 2015, focuses on a very narrow slice of time. Foreign debt obligations grew rapidly in late 2014 and the first half of 2015, then shrunk dramatically in the third quarter.

Moreover, what those official figures miss are hidden outflows, disguised primarily as payments for imports, which appear to have created a $71 billion current account deficit in the same quarter, according to bank payments data. In effect, enterprising Chinese are overpaying massively for the products they’re importing. Chinese customs officials reported $1.68 trillion in imports last year. Banks, on the other hand, claimed to have paid $2.2 trillion for those same imports. While the official balance-of-payments records a current account surplus of $331 billion in 2015, banks’ payments and receipts show a $122 billion deficit. Overpaying for imported goods and services is a clever way for Chinese companies and citizens to move money out of the country surreptitiously.

Let’s say a foreign country exports $1 million worth of goods to China. Chinese customs officials will faithfully record $1 million in imports. But when the importer goes to the bank, he’ll either use fraudulent documentation or bribe a bank official to record a $2 million payment to the foreign counterparty. Presumably, the excess $1 million ends up in a private bank account. While some discrepancies are to be expected in data like this, the size and steady increase in the gap since 2012 implies that something shadier is going on. When Chinese companies pay down debt, or make big acquisitions abroad, they do so openly. These other outflows – which topped half a trillion dollars last year – seem far more likely to be driven by individuals and companies simply seeking to get their money out of the country.

The timing is also telling. The discrepancy began to grow rapidly in 2012, just as growth peaked and concerns began to rise among affluent Chinese about the economy and a political transition. Since then, fake import payments have grown from $140 billion to $524 billion in 2015. During that period, growth in China has slowed, rates of return on investment have declined and surplus capacity has exploded. Investment opportunities have shrunk, while state-owned enterprises have crowded out private investors. Certainly the latter have good reason to seek better returns elsewhere.

“Corporate debt now amounts to 160% of China’s GDP… That is up from 98% in 2008 and compares with a current U.S. level of 70%.”

• China Is Set to Allow Banks to Swap Bad Loans for Equity in Borrowers (WSJ)

China is planning a debt-for-equity swap program that could provide large companies mired in overcapacity a way to reduce their debt burdens, the country’s top central banker said on Thursday. The deepening slowdown in the world’s second-largest economy has heightened the need for Chinese authorities to come up with ways to help the country’s heavily-indebted corporate sector deleverage. A plan in the works involves enabling banks to exchange bad loans for equity in companies they lend to. Speaking at a small-business financing event hosted by the OECD on Thursday, Zhou Xiaochuan, Gov. of the People’s Bank of China, said the planned debt-for-equity swap program would mainly help large companies plagued with excessive industrial capacity cut bank debt.

The event was held on the sidelines of a Group of 20 finance-chief meeting this week. Small Chinese companies, Mr. Zhou said, aren’t expected to benefit significantly from this program as they’re less indebted than their bigger brethren. He pointed to a persistent challenge faced by China’s policy makers: Despite a relative high leverage ratio in China’s economy, small businesses “still have difficulty in accessing bank loans.” In the past couple of years, the central bank has taken a number of steps—such as targeted credit-easing measures—to encourage banks to lend to small and private companies. But so far progress has been slow as large state banks, which dominate corporate lending in China, still prefer to lend to large state-owned corporate clients.

“We don’t have enough community banks to lend to small- and medium-sized enterprises,” Mr. Zhou said. The planned debt-for-equity swap program is a potentially controversial step that many Chinese bankers say could saddle banks with near-worthless stock and squeeze their liquidity. Analysts also say the move could risk keeping “zombie” companies afloat while making lenders even more strapped for capital. [..] Corporate debt now amounts to 160% of China’s GDP, according to Standard & Poor’s Ratings Services. That is up from 98% in 2008 and compares with a current U.S. level of 70%.

Steel exports are Beijing’s only window to avert widespread job losses and hence unrest.

• China’s Giant Steel Industry Just Churned Out Record Supply (BBG)

The world’s biggest steel producer pushed output to a record in March as mills in China fired up plants to take advantage of a price surge since the start of the year that’s rescued profit margins. Output rose 2.9% to 70.65 million metric tons from a year earlier, the National Bureau of Statistics said on Friday. That’s the highest ever, according to data from state-owned researcher Beijing Antaike Information. Still, for the first quarter, supply fell 3.2% to 192 million tons. The country’s steelmakers are ramping up output after cuts at the end of 2015 fueled a major price surge that has rippled out to world markets. The mills’ busiest-ever month came as figures showed that China’s economy stabilized, aided by a rebound in the property market.

Last year, the country’s steel output shrank for the first time since 1981 as demand contracted and mills battled surging losses and too much capacity, and forecasters including Australia’s government expect a further decline in 2016. “It’s normal to see higher output in March but this is a significant increase,” said Kevin Bai, a Beijing-based researcher at consultancy CRU Group. “Right now, the mills are making money. The market is still relatively tight and this has encouraged some producers to return.”

They mean price discovery is dead for the moment. But it will be back. And what will central banks do then?

• What Negative Interest Rates Mean for the World (WSJ)

Central bankers around the world are pushing deeper into the once-unthinkable world of negative interest rates — essentially charging customers to hold their cash. Denmark set negative interest rates as early as 2012, followed by the ECB in 2014. Since then, they’ve been joined by Switzerland and Sweden. In Asia, the Bank of Japan announced a negative interest rate policy in January this year. Hungary became the first emerging market to experiment with negative rates, taking the plunge in March. With more of the world’s central banks joining in, and rates pushing further below zero, The Wall Street Journal this week explores how negative rates appear to be working in various settings and what they mean for policymakers and markets.

In Denmark: Some mortgage holders are the envy of home owners around the world. With negative interest rates, they’re actually receiving interest payments from the banks they initially borrowed from.

In Switzerland: Few banks are dealing with negative interest rates by passing them on to their customers, but Alternative Bank Schweiz in Switzerland is bucking the trend, and charging clients to hold their deposits.

In Germany: Life insurance companies with long term liabilities are feeling the squeeze of negative interest rates. Some groups require an annual yield of more than 5% to sustain their businesses, driving a typically low risk industry into increasingly risky assets.

In Japan: The announcement of negative interest rates spurred a massive rise in prices on the government’s 40 year bond, gains only usually seen on bonds in emerging markets like Venezuela. But even in Japanese government bonds, investors are taking on a new risk: duration. Money market trading is also withering in Japan, as the new interest rates set into place. The trading confirmation system used by domestic banks wasn’t fully updated until a month after the Bank of Japan’s rate cut.

In the U.S: policymakers are weighing up whether the policy could work for them. The U.S. economy is preparing for higher rather than lower rates, but even the Federal Reserve is investigating whether going negative might work in the event of another downturn.

And for monetary policy: What comes after negative rates? Helicopter money is one answer, according to James Mackintosh, as perverse effects of negative rate policies begin to crop up. Around the world, it looks like negative interest rates are here to stay. And like it or not, so are their effects.

“The ECB and the Bank of Japan, grappling with stagnant economies, are using subzero rates to stimulate growth.” Which clearly doesn’t work.

• Negative Rates: Danish Couple Gets Paid Interest on Their Mortgage (WSJ)

Hans Peter Christensen got some unusual news when he opened his most recent mortgage statement. His quarterly interest payment was negative 249 Danish kroner. Instead of paying interest on the loan he got a decade ago to buy a house in [Aalborg] , his bank paid him the equivalent of $38 in interest for the quarter. As of Dec. 31, his mortgage rate, excluding fees, stood at negative 0.0562%. It has been nearly four years since Denmark entered the world of negative monetary policy, and borrowers and lenders alike are still trying to make sense of the upside-down world it has brought. “My parents said I should frame it, to prove to coming generations that this ever happened,” said Mr. Christensen, a 35-year-old financial consultant, about his bank statement.

Denmark isn’t the only place where central bankers are experimenting with negative rates. The ECB and the Bank of Japan, grappling with stagnant economies, are using subzero rates to stimulate growth. Switzerland and Sweden, like Denmark, are trying negative rates to keep their currencies in line with the struggling euro. Denmark, where the central bank’s benchmark rate stands at minus 0.65%, has lived in negative territory longer than any other country. Neighboring Sweden has been below zero for 14 months, and its central bank has said it would go lower than the current benchmark of negative 0.5% if it needs to. In Norway, the central bank still has positive rates, but it is considering resorting to negative ones to prop up an economy hit hard by the prolonged spell of low oil prices.

Scandinavia’s experience has given economists a chance to study what happens when rates drop below zero—long considered an inviolable floor on rates. Already, there are concerns about undesirable side effects. Consumer savings accounts pay no interest, and there is pressure on bank profitability. A boom in real-estate borrowing has kindled fears that problems will arise if rates bounce back up. “If you had said this would happen a few years ago, you would have been considered out of your mind,” said Torben Andersen, a professor at Denmark’s Aarhus University who serves on the government’s economic-advisory council.

Watch derivatives.

• Deutsche Bank Settles Silver, Gold Price-Manipulation Suits (BBG)

Deutsche Bank has reached settlements in lawsuits over allegations it manipulated gold and silver prices, lawyers for traders of the commodities said in court filings. Attorneys for futures contract traders in two private lawsuits said in letters filed Wednesday and Thursday in Manhattan federal court that the bank has executed term sheets and is negotiating final details for the accords. The German financial firm also agreed to help the plaintiffs pursue similar claims against other banks as part of the settlements, according to the letters. Vincent Briganti and Robert Eisler, attorneys for traders in the silver-fixing lawsuit, said Deutsche Bank will turn over instant messages and other communications to help further their case. Financial terms of the settlements weren’t disclosed.

“In addition to valuable monetary consideration to be paid into a settlement fund, the term sheet also provides for other valuable consideration such as provisions requiring Deutsche Bank’s cooperation in pursuing claims against the remaining defendants,” attorneys Daniel Brockett and Merrill Davidoff said in their letter Thursday in the gold-fixing lawsuit. Silver and gold futures traders sued groups of banks in 2014 alleging they rigged prices for the precious metals and their derivatives. Silver traders brought claims against Deutsche Bank, HSBC, Bank of Nova Scotia and UBS. Gold traders additionally sued Barclays and Societe Generale.

The traders alleged the banks abused their positions of controlling daily silver and gold fixes to reap illegitimate profits from trading and hurting other investors in those markets who use the benchmark in billions of dollars of transactions, according to versions of the complaints filed in 2015. Of those banks, only Deutsche Bank has reached a settlement.

This discussion is sinking to Forrest Gump levels.

• IMF Says Greek Debt Numbers Don’t Add Up as EU Defends Its Plan (BBG)

The IMF raised doubts about Greece’s ability to keep up repayments under a plan being negotiated with its European creditors, who insisted they’ve already provided plenty of debt relief. “Currently, as envisaged, the debt is not sustainable and what is required is a debt operation,” IMF Managing Director Christine Lagarde said Thursday in Washington, where finance ministers and central bankers are attending the fund’s spring meetings. Lagarde said she’s skeptical about Greece’s ability to meet the budget surplus target set under an €86 billion bailout by euro-area governments, who are reviewing whether to release the loan’s second installment. Under the EU program, Greece is committed to posting a fiscal surplus before interest payments of 3.5% of gross domestic product within two years.

The IMF has said it might be willing to pitch in a new loan itself, but Lagarde said the fund wants the country’s recovery plan to be based on “realism and sustainability.” “We cannot have far-fetched fantasy hypotheticals concerning the future of the Greek economy,” said the IMF chief, who was reappointed in February for a second five-year term. She said debt relief by euro-area countries doesn’t necessarily have to involve a “haircut” on principal, and could take the form of maturity extensions, interest reductions or a “debt holiday.” The more Greece cuts spending through reforms, the less debt restructuring will be required, Lagarde said. “Bottom line, it needs to all add up,” she said. The EU line has been that the numbers already add up.

On Thursday, a spokesman for euro-area finance ministers rejected the notion that Greece’s debt is unsustainable. “We did already a lot to make it more sustainable – lowering the interest rates, lengthening the maturities,” said Jeroen Dijsselbloem of the Netherlands, president of the Eurogroup, made up of the currency zone’s finance ministers. “So for the coming five to 10 years, I don’t think there is a big debt-service issue. I think the Greeks can pay on an annual basis.”

What you find in the dictionary under both ‘Useless’ and ‘Lip service’. Nothing happened for years and years, and one leak later they’re all knights of justice?!

• UK and European Allies Plan To Deal ‘Hammer Blow’ To Tax Evasion (G.)

Britain and its European allies have announced new “hammer blow” rules against tax evasion in direct response to the Panama Papers leak that exposed how the world’s richest and most powerful people hide their wealth from the taxman. George Osborne announced on Thursday, in partnership with his counterparts from France, Germany, Spain and Italy, new rules that will lead to the automatic sharing of information about the true owners of complex shell companies and overseas trusts. The chancellor said the new rules, agreed this week in direct response to the Panama Papers leak, were “a hammer blow against those that would illegally evade taxes and hide their wealth in the dark corners of the financial system.

“Britain will work with our major European partners to find out who really owns the secretive shell companies and trusts that have been used as conduits for evading tax, laundering money and benefiting from corruption. “Strong words of condemnation are not enough, populist outrage doesn’t by itself collect a single extra pound or dollar in tax or put a single criminal in jail,” Osborne said at the spring meetings of the IMF in Washington. “What we need is international action now, and that’s precisely what we are doing today with real concrete action in the war against tax evasion.” He said the transparency rules on beneficial ownership showed that Britain and other governments are working to shine a spotlight on “those hiding spaces, those dark corners of the global financial system”.

He said he hoped the rules, which will come into effect in January 2017, would be followed up by other countries. Ángel Gurría, the secretary general of the OECD, said the release of the Panama Papers showed that there was no room for complacency in the international effort to crack down on tax evasion. He said it was no surprise that the rich and the powerful were using Panama to evade tax as “it is one of the few jurisdictions that has pushed against” international measures to improve tax and ownership transparency. “We have to crack down on the professional enablers – lawyers, accountants, financial institutions – that play a key role in maintaining the veil of secrecy,” he said.

Whackamole.

• Spanish Industry Minister Resigns After Panama Papers Revelations (AFP)

Spain’s industry minister resigned Friday after he was named in the Panama Papers and other media revelations that claimed he had links to offshore firms, the latest political victim from the global scandal. Jose Manuel Soria said in a statement that he had tendered his resignation “in light of the succession of mistakes committed along the past few days, relating to my explanations over my business activities… and considering the obvious harm that this situation is doing to the Spanish government.” Soria’s troubles began on Monday when Spanish online daily El Confidencial, which has had access to the Panama Papers – files leaked from law firm Mossack Fonseca – said he had was an administrator of an offshore firm for two months in 1992.

Soria called a news conference to deny any link to any Panamanian company, but as the week went by, more allegations emerged from other media outlets, revealing further alleged connections to offshore havens. It is unclear as yet whether any of his alleged actions were illegal. Soria is the latest political victim of the Panama Papers, which resulted from what the law firm blamed on a computer hack launched from abroad, and revealed how the world’s wealthy stashed assets in offshore companies. Iceland’s Prime Minister Sigmundur David Gunnlaugsson was also forced to resign over the leaks.

We keep thinking it’s not possible, but Europe keeps finding ways to sink deeper in its moral morass. It’s almost an achievement.

• Ten European Nations Want Military Planes For Refugee Deportations (AP)

Austria and nine East European and Balkan states are calling for an EU declaration endorsing the use of military aircraft for the deportation of migrants who have no chance for asylum, or whose request for that status have been rejected. The Austria Press Agency says the request is being made in a letter to EU foreign policy chief Federica Mogherini, signed by Austrian Defense Minister Hans Peter Doskozil on behalf of Austria and the other countries. APA on Thursday quoted the letter as saying the use of military aircraft should be “seen as an integral and decisive element of a full repatriation program.” The agency said the letter asked for the issue to be on the agenda of the next EU foreign ministers’ meeting in Luxembourg on April 19.

Debt Rattle March 28 2016

Mar 282016

March 28, 2016 Posted by Raúl Ilargi Meijer at 8:40 am Finance Tagged with: bubble, buybacks, crisis, debt, GMO, Japan, Libya, NIRP, refugees, Yemen 3 Responses »

Albert Freeman Mrs. Alice White at the War Fund Victory Store, Hardwick, VT 1942

• The Seven Countries Most Vulnerable To A Debt Crisis (Steve Keen)

• Capital and Credit (Mr. Practical)

• Japan’s Negative Rates A Looming Headache For Central Bank (Reuters)

• Japan Seen Stuck With Negative Yields on 70% of Bonds for 2016 (BBG)

• China’s Pension Fund To Flow Into Stock Market This Year (CD)

• China Hunts Source of Letter Urging Xi to Quit (WSJ)

• US Energy Companies Pay Up to Raise Cash (WSJ)

• Negative Gearing Has Created Empty Houses And Artificial Scarcity (SMH)

• Has The Brics Bubble Burst? (Guardian)

• In Yahoo, Another Example of the Buyback Mirage (NY Times)

• Wealthier Countries Have More Leisure Time – With One Big Exception (Wef)

• Is Monsanto Losing Its Grip? (WS)

• Pentagon, CIA-Armed Militias Fight Each Other In Syria (LA Times)

• Saudi Arabia Campaign Leaves 80% Of Yemen Population Needing Aid (G.)

• Smugglers Prepare New Human Trafficking Route To Italy (DW)

• EU Prepares For Massive Migration Flows From Libya (EurActiv)

It’s Steve’s birthday today!

• The Seven Countries Most Vulnerable To A Debt Crisis (Steve Keen)

For decades, some of the most important data about market economies was simply unavailable: the level of private debt. You could get government debt data easily, but (with the outstanding exception of the USA—and also Australia) it was hard to come by. That has been remedied by the Bank of International Settlements, which now publishes a quarterly series on debt—government & private—for over 40 countries. This data lets me identify the seven countries that, on my analysis, are most likely to suffer a debt crisis in the next 1-3 years. They are, in order of likely severity: China, Australia, Sweden, Hong Kong (though it might deserve first billing), Korea, Canada, and Norway. I’ve detailed the logic behind my argument too many times to count, and I won’t repeat it here.

The bottom line is that private sector expenditure in an economy can be measured as the sum of GDP plus the change in credit, and crises occur when (a) the ratio of private debt to GDP is large; (b) growing quickly compared to GDP. When the growth of credit falls—as it eventually must, as growing debt servicing exhausts the funds available to finance it, new borrowers baulk at entry costs to house purchases, and numerous euphoric and Ponzi-based debt-financed schemes fail—then the change in credit falls, and can go negative, thus reducing demand rather than adding to it.

This is what caused the Global Financial Crisis, and the simplest way to simply substantiate my argument—which virtually every other economist on the planet will advise you is crazy (except Michael Hudson, Dirk Bezemer and a few others)—is to show you this data for the USA. The crisis began as the rate of growth of credit began to fall, and the Great Recession was dated as starting in 2008 and ending in 2010. As you can see from Figure 1, the sum of GDP plus credit growth peaked in 2008, and fell till 2010—at which point the recovery began.

Figure 1: America’s crisis began when the rate of growth of credit began to fall

The BIS database lets me identify other countries—several of which managed to avoid a serious downturn during the GFC—which fill these two pre-requisites: a high level of private debt to GDP, and a rapid growth of that ratio in the last few years. The American ex-banker turned philanthropist and debt reformer Richard Vague, in his excellent empirical study of crises over the last 150 years, concluded that crises occur when (a) private debt exceeds 1.5 times GDP and (b) the level grows by about 20% (say from 140% to 160%) over a 5 year period.

America fitted those gloves in 2008, as did many other countries—all of which are either still in a crisis (especially in the Eurozone), or are suffering “inexplicably” low growth after an apparent recovery (as is the case in the USA, the UK, and so on). Using the BIS database, I can identify 21 countries that meet Richard’s first criteria, but to “go for broke” on this forecast, I restricted myself to the 16 countries that had a private debt to GDP ratio exceeding 175% of GDP. To simplify my analysis, I then limited the second criteria to countries where the increase in private debt last year exceeded 10% of GDP. That combination gave me my list.

Figure 2: Countries with private debt/GDP > 175% & debt growth in 2015 > 10% of GDP, ranked by debt growth

“If all the savings are chased out of banks, what is left for investment for the future?”

• Capital and Credit (Mr. Practical)

Central banks have altered the definition of debt. Debt was once created by banks when they lent out deposits, transferring the liquid capital of the depositor to the debtor; the bank, acting as a clearing house, guaranteed the deposit. The Federal Reserve allows banks to lever that functionality by requiring banks to keep just 10% of the deposit as collateral; ergo, a bank could lend ten times its deposit base. That was the first step in levering capital up in the economy. It was and is called fractional banking. Over the last 30 years, central banks, regulators, and Wall Street have created various methods to increase that leverage even more; in other words, they have taken a modicum of capital and created mountains of debt with it. In other words, financial engineering creates new and different ways to increase leverage.

Most of those vehicles are disguised as derivatives. For example, some stocks allow investors to buy them on margin of 50%: they put up half of the cost and a broker lends them the other half so the investor’s capital is levered two-to-one. Alternatively, through derivatives, they can buy an SP500 futures contract and only put up 5% in capital and the broker will lend them the other 95%, so the investor’s capital is levered twenty to one! The derivatives market has a notional value of ~$1 quadrillion (one thousand trillions; pause to let the enormity of that number sink in); this provides a glimmer of the risk and leverage embedded in the derivatives markets, and by extension the stock and commodity markets. The system imploded under this debt in 2008 because there was not enough income being generated to pay back interest and principal.

Central banks and governments responded by adding $60 trillion of fresh global debt to reflate the bubble. How is that working? Well, we’re now seeing negative interest rates (NIRP) in Europe and Asia and many think they are coming to the U.S. Negative interest rates mean savers are now being charged to keep their money at the bank; there now is a cost to holding cash in a savings account. This is not natural and has revolting consequences. If you buy an Italian government bond you actually have to pay them interest to lend them money. This is ridiculous on its face but especially since Italy is bankrupt. The only reason it is possible is that the central bank of Europe is buying them up to that price. And why is this happening? The bubble is fraying. It is about to pop again for all of the new debt created since 2008; that debt is even less productive than the previous debt and generates even less income to pay it back.

Bureaucrats can either lever capital or re-distribute it. t seems they are having trouble levering it any further so negative rates are an attempt to re-distribute capital. All of the savings in liquid capital within the banks must be chased out to buy increasingly risky assets like stocks and houses to stimulate the economy. This is like Dr. Frankenstein raising the dead. If all the savings are chased out of banks, what is left for investment for the future?

“The JGB market is really in a bubble, when you think about it as an investment vehicle..”

• Japan’s Negative Rates A Looming Headache For Central Bank (Reuters)

Driving interest rates below zero, the Bank of Japan has turned a comatose government bond market into an enormous free-for-all, complicating the central bank’s own efforts to kick-start growth and end deflation. The $9 trillion market for Japanese government bonds had been all but paralyzed since the BOJ began a massive monetary easing three years ago that made the bank the dominant buyer. But in the two months since the BOJ announced it was imposing a negative interest rate, JGBs have become a volatile commodity, with prices swinging wildly as below-zero yields confound investors’ attempts to find fair market value. “The JGB market is really in a bubble, when you think about it as an investment vehicle,” said Takuji Okubo at Japan Macro Advisors. “Their prices have moved away from fundamentals, and people don’t have a traditional way to measure their value.”

As the BOJ’s dominance distorts bond market functions and dries up liquidity, the central bank could have a hard time tapering its buying binge when it eventually chooses to exit its “quantitative and qualitative easing” program. The bank theoretically could just sit on its enormous holdings until the bonds mature, but policymakers are unlikely to want those assets to remain on the balance sheet for decades. On the other hand, it might be difficult to smoothly taper off its asset purchases, much less sell its holdings. So far, the BOJ’s money printing has kept the cost for financing the government’s massive public debt very low. A spike in that cost could stoke market fears Japan may be losing control of its finances, potentially triggering a damaging bond sell-off, some analysts say. “It would be quite tough for the BOJ to taper such an enormous balance sheet without disrupting markets,” said a person familiar with the BOJ’s thinking.

Abe to call snap elections, the opposition melting into blocks to prevent a 2/3 majority.

• Japan Seen Stuck With Negative Yields on 70% of Bonds for 2016 (BBG)

Japanese primary dealers say negative bond yields are here to stay in 2016, and room for capital gains has run out. [..] Three years after the start of the Bank of Japan’s unprecedented quantitative and qualitative easing, or QQE, and two months since the surprise announcement of negative interest rates, bond investors are still trying to adjust to the conditions that have turned yields on 70% of the market negative. Even amid such extreme measures, the central bank has failed to prevent inflation from flatlining for more than a year. Most of the dealers surveyed expect a further expansion of stimulus. “The BOJ has dominated the bond market,” said Takafumi Yamawaki at JPMorgan, who sees the 10-year note yielding minus 0.15% at year-end. “Yields will remain deeply depressed.” An investor would just about break even if the 10-year JGB yield ended the year at minus 0.1%, after accounting for reinvested interest.

The 10-year yield was at minus 0.095% on Friday, the lowest globally after Switzerland’s minus 0.35%. The equivalent U.S. Treasury note yielded 1.9%. JGBs have returned 5.3% over the past six months, the most of 26 sovereign debt markets tracked by Bloomberg, as yields pushed ever lower amid pressure from BOJ easing. “We expect an expansion of stimulus, and if the market happens to rule out any additional boost in stimulus, that would create an opportunity to go long,” said Takeki Fukushima at Citigroup in Tokyo, who predicts the 10-year note will yield about minus 0.15% at year-end. The BOJ owns an unprecedented one-third of outstanding JGBs, more than any other class of investor, as it snaps up as much as 12 trillion yen ($106 billion) of the debt each month. The result has been a loss of liquidity that has heightened volatility and hurt market functionality.

There goes the kitchen sink.

• China’s Pension Fund To Flow Into Stock Market This Year (CD)

China’s massive pension fund may begin investing in the nation’s A-share markets this year, an anticipated move that will channel approximately 600 billion yuan ($92.28 billion) into the equity market and likely improve its liquidity. The target date comes several months after China’s State Council published an investment guideline that would allow the country’s pension fund to invest in more diversified and risker products, with the maximum proportion of investments in stocks and equities set at 30% of total net assets. As of last Friday, the nation’s A-share markets’ combined value totaled about 44 trillion yuan. China’s pension fund, which accounts for approximately 90% of the country’s total social security fund pool, had net assets of 3.98 trillion yuan by the end of 2015.

By the end of last year, total investible pension fund nationwide reached approximately 2 trillion yuan, according to data from the Ministry of Human Resources and Social Security. Yin Weimin, the minister of Human Resources and Social Security, said last week: “Detailed guidelines about how the investments will be conducted are expected shortly and the investments will be made through commissioned institutional investors.” According to a survey by the Shenzhen Stock Exchange, which polled 3,874 small investors from 219 cities around China, more than 77.5% of respondents said they had been anticipating the pension fund investments and that the move will bring a wave of liquidity.

The move is expected to not only benefit the equity market but also the pension fund itself, because yields from investing in equities are normally higher than that from treasury bonds or interest rates from bank accounts. Critics have said that the low yields earned from bank accounts or bonds will not meet the increasing demands of a rapidly growing elderly population. Researchers said it will take time for all of the investible portion of the pension fund to become fully injected into the equity market. Provinces that have already piloted their local pension funds to be invested in the equity market have reported positive yields. South China’s Guangdong province reportedly accrued a combined yield of 17.34 billion yuan from a 100-billion-yuan investment.

China, Turkey, Saudi: what’s the difference? And they’re all our friends…

• China Hunts Source of Letter Urging Xi to Quit (WSJ)

A Chinese news portal’s publication of a mysterious letter calling for President Xi Jinping’s resignation appears to have triggered a hunt for those responsible, in a sign of Beijing’s anxiety over bubbling dissent within the Communist Party. The letter, whose authorship remains unclear, appeared on the eve of China’s legislative session in early March, the most public political event of the year. Since then, at least four managers and editors with Wujie Media—whose news website published the missive—and about 10 people from a related company providing technical support have gone missing, according to their friends and associates, who say the disappearances are linked to a government probe into the letter.

A U.S.-based dissident author said authorities have also taken away his family in southern China over claims that he had helped disseminate the letter – an allegation he denies. The editor of an overseas Chinese website that also published the letter said he has received harassing phone calls and anonymous death threats. Wujie Media -which is based in Beijing and partly owned by the government of China’s far western Xinjiang region- hasn’t published any original news content since mid-March, while its social-media accounts have also gone silent. Many among its more than 100 employees worry that the company may soon be shut down, according to a Wujie employee and two people familiar with the situation.

[..] Analysts said the incident highlights the party’s concerns over the letter and a broader pushback against Mr. Xi’s domineering style of leadership. The response “shows a real brittleness of power and of high levels of nervousness,” said Kerry Brown, professor of Chinese studies at King’s College London. “If this sort of complaint spreads, then there could be real problems,” he said. [..] “The concentration of power in Xi’s hands, as well as the budding personality cult, have come to arouse dissent among party circles,” said Daniel Leese, a professor of Chinese history and politics at Germany’s University of Freiburg. Over the past two months, divisions between the disgruntled party members and Mr. Xi’s camp have spilled out into the open. After prominent real-estate tycoon and party member Ren Zhiqiang questioned Mr. Xi’s demands for loyalty from the media, party news outlets savaged the retired businessman.

“These firms have come to rely on selling new shares to pay down debt and keep rigs drilling..”

• US Energy Companies Pay Up to Raise Cash (WSJ)

Energy companies tapping the stock market to fill their coffers are deepening the pain for shareholders. These firms have come to rely on selling new shares to pay down debt and keep rigs drilling since oil and gas prices began tumbling in late 2014. The further commodity prices and energy stocks slid, the more shares that companies have had to sell at ever lower prices to raise the desired proceeds. This has further diluted the stakes held by existing shareholders, who are already suffering from falling share prices. North American oil and gas producers have raised more than $10 billion selling new shares this year. That’s in line with the amount raised over the same period last year, which went on to be a record year for so-called follow-on stock offerings with about $18 billion raised.

The cash injections haven’t guaranteed stability for the companies selling shares, though. Emerald Oil, which sold $27.5 million of new shares last year, filed Tuesday for chapter 11 bankruptcy protection. Wunderlich Securities estimates that a prearranged sale of Emerald’s North Dakota drilling fields will yield roughly enough to pay back its bank lenders, leaving little for other creditors and nothing for shareholders. Those who bought roughly $50 million of stock that Goodrich Petroleum sold last March have been basically wiped out. The Houston company’s stock, which ended the week trading at 8 cents, was delisted from the New York Stock Exchange earlier this year. Earlier this month Goodrich said that when it discloses its 2015 financial results, its auditors are likely to express “substantial doubt” about its ability to stay in business.

Much of the money raised by oil and gas producers this year has been through deals that involve banks putting up their own capital to buy a chunk of the company’s stock—below the market rate because of the risk they are taking on—before selling it to investors. A bigger discount in these so-called block, or bought, deals reflects the risk perceived by banks when it comes to energy companies at a time when the price of oil has been fluctuating and large U.S. banks have said they are seeing more energy loans go bad. Last June, Energen raised about a net $400 million in a sale of 5.7 million shares, according to Dealogic. Following the offering, shares declined by nearly 70% by Feb. 16, more than the nearly 60% decline of the SIG Oil Exploration and Production stock index, an industry benchmark, in the same period.

Australia is belatedly waking up. It won’t stop the pain.

• Negative Gearing Has Created Empty Houses And Artificial Scarcity (SMH)

A major myth that permeates the recent debate on housing affordability is that the present level of housing supply is not meeting demand. Scarcity of housing, we are repeatedly told, is driving up prices. The same voices simplistically suggest, reduce the barriers caused by planners and housing supply will respond, bringing affordability back into the market. But more reasoned voices can be heard above the clamour, focussing on the perverse effects of our highly skewed housing taxation and subsidy system, as well as a complete lack of a national housing policy framework to support affordable housing. Nevertheless, throughout this debate there is little recognition of the broader shifts in housing stock, tenure and housing opportunity that these policies have created.

At the last census there were nearly 120,000 empty dwelling in the greater Sydney region alone, representing nearly one fifth of the projected new housing demand to be met by 2031, or equivalent to nearly five years of projected dwelling need. When this is combined with under-utilised dwellings, such as those let out as short-term accommodation, the total number of dwellings reaches 230,000 in Sydney, and 238,000 in Melbourne. There is a possibility that these aggregate figures could be accounted for by a spatial mismatch between supply and demand. That is, they are in places that people simply don’t want to live. But this isn’t the case. When these numbers are mapped there is a clear concentration of unoccupied dwellings in central parts of all our metropolitan areas. In Sydney there is a clear bias towards inner, eastern suburb and north shore locations.

This aligns with established areas of highest rents and prices. This picture is repeated in the other cities. If you chose to accept that there is a housing shortage in Sydney, then the sheer scale and location of these figures strongly suggest that this is an artificially produced scarcity. The number of empty dwellings could more than account for the notional supply shortfalls. Why, then, are these homes left vacant when they could command the highest prices or rents? To answer this, we mapped rental yields for the same period. What it reveals is that rental yields tend to be highest in the outer suburbs, where residential property is cheaper to purchase. Where rental yields are lowest is in the inner city and eastern and north shore suburbs, where capital values (and therefore gains) are highest. And this is where we also see higher rates of vacant properties. This is not a coincidence.

There’s a lot more bursting in the offing.

• Has The Brics Bubble Burst? (Guardian)

The political crisis in Brazil over economic mismanagement and high-level corruption, likely to come to a head next week, has reinforced the fashionable view, popular among western governments and businesses, that the Brics bubble has burst. Members of the exclusive Brics club of leading developing countries – Brazil, Russia, India, China and South Africa – are failing to justify predictions that, separately and together, they will dominate the 21st century world, or so the argument goes. The Brics concept, plus acronym, was dreamed up in 2001 by Jim O’Neill, chairman of Goldman Sachs Asset Management. He highlighted the combined potential of non-western powers controlling one quarter of the world’s land mass and accounting for more than 40% of its population. O’Neill’s idea morphed into a formal association, with South Africa joining the original Bric group in 2011.

The five nations, with a joint estimated GDP of $16tn, set up their own development bank in parallel to the US-dominated IMF and World Bank and hold summits rivalling the G7 forum. Their next meeting will be in Goa, India, in October. But ambitious plans to create an alternative reserve currency to the US dollar and challenge American dominance in IT and global security surveillance have come to little. Meanwhile, adverse economic conditions compounded by falling global demand and lower oil and commodity prices are taking their toll. Last November, Goldman Sachs, where the idea originated, closed its Bric investment fund after assets reportedly declined in value by 88% from a 2010 peak. The bank told the SEC it did not expect “significant asset growth in the foreseeable future”. “The promise of Bric’s rapid and sustainable growth has been challenged very much for the last five years or so,” Jorge Mariscal at UBS told Bloomberg Business. “The Bric concept was popular. But nothing is eternal.”

“..Yahoo, if it had invested that same amount of money in its operations, would have had to generate only a 3.2% after-tax return to produce overall net profit growth of 16% annually over those years.”

• In Yahoo, Another Example of the Buyback Mirage (NY Times)

It is one of the great investment conundrums of our time: Why do so many stockholders cheer when a company announces that it’s buying back shares? Stated simply, repurchase programs can be hazardous to a company’s long-term financial health and often signal a management that has run out of better ways to invest in the business. And yet investors love them. Not all stock repurchases are bad, of course. But given the enormous popularity of buybacks nowadays, those that are harmful probably outnumber the beneficial. Those who run companies like buybacks because they make their earnings look better on a per-share basis. When fewer shares are outstanding, each one technically earns more. But a company’s overall profit growth is unaffected by share buybacks.

And comparing increases in earnings per share with real profit growth reveals the impact that buybacks have on that particular measure. Call it the buyback mirage. Consider Yahoo. The company bought back shares worth $6.6 billion from 2008 to 2014, according to Robert L. Colby, a retired investment professional and developer of Corequity, an equity valuation service used by institutional investors. These purchases helped increase Yahoo’s earnings per share about 16% annually, on average. But a good bit of that performance was the buyback mirage. Growth in Yahoo’s overall net profits came in at about 11% annually. Given these figures, Mr. Colby reckoned that Yahoo, if it had invested that same amount of money in its operations, would have had to generate only a 3.2% after-tax return to produce overall net profit growth of 16% annually over those years.

Some companies argue that the money they spend repurchasing stock is a shrewd use of their capital. And given Yahoo’s track record in recent years, its management team seems to have had a hard time identifying profitable investments. But Mr. Colby pointed out that buybacks provide only a one-time benefit, while smart investments in a company’s operations can generate years of gains. This analysis may be of interest to Starboard Value, an activist investor that is a large and unhappy Yahoo shareholder. On Thursday, Starboard nominated nine directors to replace the company’s entire board, saying its current members lack “the leadership, objectivity and perspective needed to make decisions that are in the best interests of shareholders.”

“Sure, the French may have day care and five-week vacations and 35-hour work weeks,” we’ve argued. “But we’ve got flat-screen TVs, $5 footlongs and big cars.”

• Wealthier Countries Have More Leisure Time – With One Big Exception (Wef)

The American work ethic can basically be boiled down to one well-worn phrase: “Work hard, play hard.” But new research from a pair of Stanford University economists suggests we are failing, miserably, at the latter half of that maxim. Take a look at the chart below. It’s a plot of hours worked per capita versus GDP, and one country really stands out. As countries get wealthier, their annual hours worked per capita tend to decrease, at least in the sample examined here by economists Charles Jones and Peter Klenow. They measure GDP in fractions of U.S. GDP, because they’re most interested in how other countries stack up to the United States in terms of economic well-being. For instance, Russia’s GDP per capita is less than half of that in the United States, so it lands halfway down the chart’s X axis.

The relationship between GDP and working hours harkens back to economist John Maynard Keynes’ famous prediction that his grandchildren would be working 15-hour work weeks – thanks, in part, to increased productivity from new machines and technology. Since you’re probably reading this story at your office or on your commute, you’re well aware that things didn’t exactly work out this way. We didn’t trade our productivity gains for more time, we traded them instead for more stuff. But the extent of that trade-off -time versus stuff- hasn’t been the same in all countries, as the chart above illustrates. “Average annual hours worked per capita in the U.S. are 877 versus only 535 in France: the average person in France works less than two-thirds as much as the average person in the U.S.,” Jones and Klenow write. You see similar numbers in Spain, Italy and the UK.

For a long time we’ve used our stuff to justify our workaholism. “Sure, the French may have day care and five-week vacations and 35-hour work weeks,” we’ve argued. “But we’ve got flat-screen TVs, $5 footlongs and big cars.” Or, in strictly economic terms: “France’s per capita GDP is only 67% of ours. Who’s living the good life now?” But in their new research, forthcoming in the American Economic Review, Jones and Klenow attempt to devise a “a summary statistic for the economic well-being” that goes beyond GDP. Economists have proposed alternative measures incorporating everything from “greenness” to “gross national happiness.” The Stanford economists make the latest contribution to the genre with their measure that “combines data on consumption, leisure, inequality, and mortality.”

They find that when you throw these other qualities into the mix, the economic well-being gap between the United States and other wealthy countries shrinks – but it doesn’t disappear completely. “Living standards in Western Europe are much closer to those in the United States than it would appear from GDP per capita,” Jones and Klenow conclude. “Longer lives with more leisure time and more equal consumption in Western Europe largely offset their lower average consumption vis a visthe United States.” So, even when you factor in our ridiculously long work weeks, the things we miss out on when we work long hours, and the myriad ways that overwork iskilling us, the United States is still No. 1! Which is irksome, I’m sure, to the millions of French workers who spend literally the entire month of August at the beach.

Monsanto counts on the TPP and TTiP.

• Is Monsanto Losing Its Grip? (WS)

Monsanto is not having a good year. The company recently slashed its 2016 earnings forecast from the $5.10-$5.60 per share it had forecast in December to $4.40-$5.10, claiming that about 25-30 cents of the reduction was due to the stronger dollar. But judging by recent trends, a strong dollar could soon be the least of its concerns. Across a number of key markets, the company is facing growing resistance, not only from farmers and consumers but also, amazingly, governments. In India, the world’s biggest cotton producer, the Ministry of Agriculture accuses Monsanto of price gouging. It even imposed a 70% cut in the royalties that the firm’s Indian subsidiary could charge farmers for their crop genes, prompting Monsanto to threaten that it would withdraw its biotech crop genes from the country. If Monsanto’s threat was a bluff, it’s just been called.

According to Mandava Prabhakara Rao, the president of the National Seed Association of India (NSAI), Monsanto’s threat came as a big relief: All these years, the company has restrained us from using technologies other than the one developed by it. It forced the seed firms to sign the licence agreements that barred them from using other technologies. India’s government also seems unconcerned by the prospect of Monsanto’s withdrawal.“It’s now up to Monsanto to decide whether they want to accept this rate or not,” said Minister of state for agriculture and food processing, Sanjeev Balyan. “We’re not scared if Monsanto leaves the country, because our team of scientists are working to develop (an) indigenous variety of (GM) seeds.” India’s pushback against Monsanto is part of a gathering global backlash against Monsanto and the GMO industry as a whole.

Even in the U.S., where GMOs are estimated to represent more than 90% of corn, soybean, and cotton acres, the trend is no longer Monsanto’s friend. Earlier this year the company filed a lawsuit against the state of California for its intent to label glyphosate, the main chemical used in Monsanto’s flagship Roundup herbicide, as a probable carcinogen, in accordance with the World Health Organization’s recent findings. There’s also growing pressure on major food outlets to stop using GMO ingredients. After the USDA’s 2015 approval of genetically modified apples and potatoes, companies including McDonald’s and Wendy’s claimed they didn’t plan to use them, saying they were happy with non-GMO suppliers. Even more importantly, the Orwellian-titled Deny Americans the Right to Know (DARK) act, aimed at prohibiting mandatory GMO labelling, was defeated in the Senate last week.

Meanwhile, in Mexico, Monsanto’s fourth biggest market after the U.S., Brazil, and Argentina, a moratorium remains in place on the granting of licenses for GMO seed manufacturers like Monsanto, Dow, and Du Pont. In the face of growing public and judicial opposition, Monsanto & Friends have pinned their hopes on the Peña Nieto government’s upcoming agrarian reform act. Manuel Bravo, Monsanto’s director for Latin America, recently told El País that he is confident that once the legal problems in the courts are “resolved,” the issue will become a central plank in the current administration’s agenda. “The Government has been very clear about the importance of these technologies,” he said. Across the Atlantic, Monsanto’s problems are somewhat more intractable. Already more than half of EU countries have moved to bar GMO cultivation, while a last-minute mutiny by four EU states (France, Sweden, Italy, and the Netherlands) recently forced the postponement of a vote in Brussels on re-licensing glyphosate.

“This is a complicated, multi-sided war where our options are severely limited..”

• Pentagon, CIA-Armed Militias Fight Each Other In Syria (LA Times)

Syrian militias armed by different parts of the U.S. war machine have begun to fight each other on the plains between the besieged city of Aleppo and the Turkish border, highlighting how little control U.S. intelligence officers and military planners have over the groups they have financed and trained in the bitter five-year-old civil war. The fighting has intensified over the last two months, as CIA-armed units and Pentagon-armed ones have repeatedly shot at each other while maneuvering through contested territory on the northern outskirts of Aleppo, U.S. officials and rebel leaders have confirmed. In mid-February, a CIA-armed militia called Fursan al Haq, or Knights of Righteousness, was run out of the town of Marea, about 20 miles north of Aleppo, by Pentagon-backed Syrian Democratic Forces moving in from Kurdish-controlled areas to the east.

“Any faction that attacks us, regardless from where it gets its support, we will fight it,” Maj. Fares Bayoush, a leader of Fursan al Haq, said in an interview. Rebel fighters described similar clashes in the town of Azaz, a key transit point for fighters and supplies between Aleppo and the Turkish border, and on March 3 in the Aleppo neighborhood of Sheikh Maqsud. The attacks by one U.S.-backed group against another come amid continued heavy fighting in Syria and illustrate the difficulty facing U.S. efforts to coordinate among dozens of armed groups that are trying to overthrow the government of President Bashar Assad, fight the Islamic State militant group and battle one another all at the same time. “It is an enormous challenge,” said Rep. Adam Schiff (D-Burbank), the top Democrat on the House Intelligence Committee, who described the clashes between U.S.-supported groups as “a fairly new phenomenon.”

“It is part of the three-dimensional chess that is the Syrian battlefield,” he said. The area in northern Syria around Aleppo, the country’s second-largest city, features not only a war between the Assad government and its opponents, but also periodic battles against Islamic State militants, who control much of eastern Syria and also some territory to the northwest of the city, and long-standing tensions among the ethnic groups that inhabit the area, Arabs, Kurds and Turkmen. “This is a complicated, multi-sided war where our options are severely limited,” said a U.S. official, who wasn’t authorized to speak publicly on the matter. “We know we need a partner on the ground. We can’t defeat ISIL without that part of the equation, so we keep trying to forge those relationships.”

More refugees.

• Saudi Arabia Campaign Leaves 80% Of Yemen Population Needing Aid (G.)

It is difficult to view Saudi Arabia’s relentless war of attrition in Yemen as anything other than a destructive failure. The military intervention that began one year ago has killed an estimated 6,400 people, half of them civilians, injured 30,000 more and displaced 2.5 million, according to the UN. Eighty per cent of the population, about 20 million people, are now in need of some form of aid. The Saudis’ principal aim – to restore Yemen’s deposed president, Abd Rabbuh Mansur Hadi – has not been achieved. If they hoped to contain spreading Iranian regional influence, that has not worked, either. If the US-backed coalition’s campaign was intended to combat terrorism, that too has flopped. Al-Qaida in the Arabian Peninsula (AQAP), in particular, and Islamic State (Isis) have profited from the continuing anarchy.

The conflict pits Aden-based Hadi government forces and their Sunni Arab allies against Houthi Shia militias, backed by Tehran, who control the capital, Sana’a, and much of central and northern Yemen. Already one of the world’s poorest countries before fighting escalated last year, Yemen now faces widespread famine. Food shortages are being exacerbated by a growing bank and credit crisis, Oxfam warned this week. “The destruction of farms and markets, a de facto blockade on commercial imports, and a long-running fuel crisis have caused a drop in agricultural production, a scarcity of supplies and exorbitant food prices,” Oxfam said. Sajjad Mohamed Sajid, Oxfam’s country director, said: “A brutal conflict on top of an existing crisis … has created one of the biggest humanitarian emergencies in the world today – yet most people are unaware of it. Close to 14.4 million people are hungry and the majority will not be able to withstand the rising prices.”

Inevitable. Refugee streams flow like water. Impossible to stop.

• Smugglers Prepare New Human Trafficking Route To Italy (DW)

Trafficking gangs are arranging a new way to ship migrants from Turkey to the EU by sailing to Italy, a leading German newspaper reports. Demand for alternative routes has been rising for weeks, according to the article. The smugglers intended to start transporting refugees via the new Italian route in the first week of April, according to the Sunday edition of the “Frankfurter Allgemeine Zeitung” newspaper. They would reportedly use small cargo vessels and fishing ships to ferry their customers from the seaside resort Antalya in Turkey, the Turkish city of Mersin near the Syrian border, and the Greek capital Athens. According to the paper, the price for such trip is between 3,000 and 5,000 euros ($3,400 -$5,600), which is much more expensive than traveling the usual route from Turkish shores to one of the Greek islands.

However, refugees face growing obstacles attempting to reach Western Europe through Greece, with several countries along the Balkan route closing their borders to migrants. Last week, the EU also forged an agreement with Ankara about shipping migrants back to Turkey, slowing the influx to a trickle. The traffickers responded to growing demand for alternative routes in recent weeks by preparing their new venture, according to the Sunday article. Some of the smugglers aimed to offer two trips per week, and at least one claimed he could fit 200 people on a boat. They also advised migrants to stay below deck until the vessels reached international waters. In addition to migrants in Turkey and Greece, hundreds of thousands of people were waiting to cross to Italy from Libya, EU officials said. The Italian interior ministry has registered almost 14,000 arrivals this year.

“..In August [2015], we had 40-50 Moroccans, and in November, their number was over 7,000.”

• EU Prepares For Massive Migration Flows From Libya (EurActiv)

EU leaders will discuss the critical situation in Libya and potential waves of immigrants trying to reach Europe on 18 April, EurActiv Greece has been informed. The discussion will take place following the regular Foreign Affairs Council meeting and ahead of Foreign Affairs Council Defence on 19 April, in Luxembourg. French Defence Minister Jean-Yves Le Drian said yesterday (24 March) that some 800,000 migrants are in Libya hoping to cross to Europe. Le Drian told Europe 1 radio that “hundreds of thousands” of migrants were in Libya, having fled conflict and poverty in the Middle East and elsewhere, adding that the figure of 800,000 was “about right”. In an interview with EurActiv in December, Greece’s Alternate Foreign Minister for European Affairs, Nikos Xydakis, noted that new routes and new compositions [in migration flows] were found.

“The people who now come from the Turkish coast to the Greek islands are from the Maghreb. Let me give you an example. In August [2015], we had 40-50 Moroccans, and in November, their number was over 7,000.” “The route we have identified is the following: Moroccans and Algerians can travel without a visa from Maghreb countries, with a very cheap ticket with Turkish Airlines, directly to Constantinople [Istanbul], and then they easily reach the coast and go to the other side [Greece],” Xydakis said. But the presence of NATO in the Aegean Sea combined with a possible “isolation” in Greece due to the closed borders on the north might have discouraged migrants and re-directed the routes.

Debt Rattle March 10 2016

Mar 102016

March 10, 2016 Posted by Raúl Ilargi Meijer at 9:56 am Finance Tagged with: Brexit, China, Draghi, Foucault, Idomeni, NIRP, NPL, rate cut, refugees, rhino 5 Responses »

William Henry Jackson Tunnel 3, Tamasopo Canyon, San Luis Potosi, Mexico 1890

• IMF Says World At Risk Of ‘Economic Derailment’ (BBC)

• Whole Of Europe Risks Spinning Into Crisis If Leaders Mishandle Brexit (AEP)

• This Is Jeff Gundlach’s Favorite -& Scariest- Chart (ZH)

• “However It Takes” #Draghi (BM)

• Senior European Bankers Voice Concerns Over ECB Cut (FT)

• Markets Betting On Near-Zero Interest Rates For Another Decade (Reuters)

• What’s In A Growth Target? For China, Hope And Simple Math (WSJ)

• China To Allow Commercial Banks To Swap Bad Debt For Equity Stakes (Reuters)

• Albany Can Solve the World’s Sovereign Debt Crisis (BBG)

• Germany Needs 470,000 Immigrants Per Year For Next 25 Years (GM)

• Record Number Of African Rhinos Killed In 2015 (Guardian)

• Syrians Under Siege: ‘We Have No Children Any More, Only Small Adults’ (G.)

• Did Michel Foucault Predict Europe’s Refugee Crisis? (Baele)

• Refugees At Border Should Move To Camps, Says Greek Minister (AP)

• Conditions At Idomeni Refugee Camp Worsen By The Day (Kath.)

• Five Iranians, Afghans Drown Trying To Reach Greece (Reuters)

And the IMF worked hard to get it there.

• IMF Says World At Risk Of ‘Economic Derailment’ (BBC)

The IMF has warned that the global economy faces a growing “risk of economic derailment.” Deputy director David Lipton called for urgent steps to boost global demand. “We are clearly at a delicate juncture,” he said in a speech to the National Association for Business Economics in Washington on Tuesday. “The IMF’s latest reading of the global economy shows once again a weakening baseline,” he warned. The comments come after weaker-than-expected trade figures from China showing that exports in February plunged by a quarter from a year ago. With the world’s second largest economy often referred to as as “the engine of global growth”, weaker global demand for its goods is read as an indicator of the general global economic climate. The IMF has already said it is likely to downgrade its current forecast of 3.4% for global growth when it releases its economic predictions in April.

Last month, the international lender had warned that the world economy was “highly vulnerable” and called for new efforts to spur growth. In a report ahead of last month’s Shanghai G20 meeting, the IMF said the group should plan a co-ordinated stimulus programme as world growth had slowed and could be derailed by market turbulence, the oil price crash and geopolitical conflicts. In his Washington speech, Mr Lipton said “the burden to lift growth falls more squarely on advanced economies” which have fiscal room to move. “The downside risks are clearly much more pronounced than before, and the case for more forceful and concerted policy action, has become more compelling.” “Moreover, risks have increased further, with volatile financial markets and low commodity prices creating fresh concerns about the health of the global economy,” he added. The downbeat picture is one that has continuing ramifications for businesses and industries that bet on China’s growth story.

“..the whole of Europe is sitting on a bed of nitroglycerin..”

• Whole Of Europe Risks Spinning Into Crisis If Leaders Mishandle Brexit (AEP)

[..] Personally, I find talk about “retaliation” against Britain to be a little odd, though I do not rule it out. Any such madness would risk a political crisis in Denmark and Sweden, and ultimately spread to Germany. British withdrawal would be a thunderous shock to the EU project. The immediate imperative for Europe’s leaders at that point would be to patch things up and ensure a velvet divorce as quickly as possible to stop the crisis spinning out of control. France’s Marine Le Pen likens Brexit to the collapse of the Berlin Wall. “It will be the beginning of the end. If Britain knocks down part of the wall, it s finished, it’s over, she said. Whether she is right or wrong depends on the statecraft of Angela Merkel, Francois Hollande, Mateo Renzi and Poland’s Beata Szydlo. A report this week by Morgan Stanley spells out the grim price Europeans will pay if they mishandle this event.

Foreign investors would start to withdraw their $8.3 trillion of investments in the eurozone. There might be a bond run with Spain in the firing line. The bank’s base case for Brexit is that the MSCI Europe index of equities will fall 15pc-20pc, and 0.7 percentage points will be knocked off growth by late 2017. Its “high stress” scenario is a stock market crash of up to 30pc, a tightening in financial conditions by 200 basis points, severe contagion, and a 2pc blow to GDP that pushes the eurozone into recession, with “growing concerns around the sustainability of the entire European project”. Whether the eurozone could withstand a fresh shock of this force is an open question. The region already has one foot in deflation, with toxic effects on debt dynamics. Public debt ratios are massively higher than they were at the top of the last credit cycle in 2008, and pushing safe limits of 133pc of GDP in Italy and 129pc in Portugal.

The hysteresis effects of mass unemployment have done lasting damage to economic dynamism, lowering the eurozone’s speed limit for a decade to come. There is no fiscal union, and no genuine banking union. Little has been done to make monetary union viable. The ECB is running low on ammunition. Populist movements are simmering everywhere. I do not wish to gloss over the risks to the UK. These are real and have been widely aired, emphatically by the Bank of England recently. My point is that the whole of Europe is sitting on a bed of nitroglycerin. It is a fair bet that EU leaders would refrain from reprisals that would make their crisis infinitely worse, but it is only a bet. No level of folly can ever be excluded in the march of human affairs.

“These lines will converge..”

• This Is Jeff Gundlach’s Favorite -& Scariest- Chart (ZH)

According to DoubleLine’s Jeff Gundlach, this is his favorite chart – backing his persepctive that equity markets have “2% upside and 20% downside) from here. In his words: “These lines will converge…” It should be pretty clear what drove the divergence, and unless (and maybe if) The Fed unleashes another round of money-printing (or worse), one can’t help but agree with Gundlach’s ominous call.

Chart: Bloomberg

“We don’t want to play any more.” Sounds nice, but a ton of bankers, investors etc. MUST play.

• “However It Takes” #Draghi (BM)

Never has an ECB meeting been so eagerly anticipated, and yet so confused. In October’s meeting, we expected nothing. Instead we got that “things have changed” about “going into further negative territory”. Sell the Euro! Buy Euribors! In December’s meeting, we expected everything. But we thought we didn’t. So we got a market that was overly short of Euros/long of Euribors and forced to exit. Buy the Euro! Sell Euribors! In January’s meeting, we didn’t want to listen. But we had to, because this time Draghi didn’t leave it to the Q&A to deliver his own thoughts. He managed to shoehorn some kind of consensus towards further easing into the actual statement: ‘we decided to keep the key ECB interest rates unchanged and we expect them to remain at present or lower levels for an extended period of time’. Sell the Euro a bit! Buy Euribors a bit more!

Now the time has come. It’s the March meeting and they can present new staff forecasts as they indicate just how much lower, and for how much longer, the stimulus can continue. Are we buying or selling everything? There was an important step between 3 and 4, however, and that was the impact of the Bank of Japan moving into negative rates, as well as the ongoing cumulative bout of fear subsuming the markets. In February, we all decided that lower interest rates might not actually be very good for the banking system. Which is a bit of a shame, given that the banks are the transmission mechanism by which those super-stimulative rates are supposed to super-stimulate the economy. This now leaves us in this position:
• October: We forgot that Draghi always over-delivers!
• December: No, we didn’t, and EUR/USD has its biggest upmove of the year
• January: No, we were wrong again, he does want to over-deliver, here he is putting in his fresh order for a kitchen sink
• March: We don’t want to play any more.

Don’t think the ECB is done blowing bubbles.

• Senior European Bankers Voice Concerns Over ECB Cut (FT)

Some of Europe’s most senior bankers have warned the European Central Bank of the dangers of negative interest rates ahead of a widely anticipated cut at the bank’s policy meeting on Thursday. The ECB is expected to cut its deposit rate by 10 basis points to minus 0.4% as it takes further action in its struggles to lift persistently low inflation and boost economic growth back to normal levels. Bank leaders are alarmed by the crippling effect on their profits of negative rates which they cannot pass on to ordinary customers, adding to concerns about the fragility of financial stability in some parts of the eurozone. But any attempt by the ECB to shield lenders from the effects of negative rates could weaken the policy and open the central bank to claims that it is engaged in a beggar-thy-neighbour devaluation.

Andreas Treichl, chief executive of Austria’s Erste Bank, told the Financial Times that another cut could encourage financial bubbles, hurt economic growth and create “social disparity” by penalising savers. José García Cantera, Santander’s chief financial officer, added that the banks that would take the biggest hit to their profits if rates were cut again were those least able to bear it. Last week, Sergio Ermotti, UBS chief executive, warned that excessively low rates were prompting banks to extend too many risky loans because they “don’t know what to do” with deposits. The industry hopes to lay out concrete evidence of the detrimental impact negative rates are already having in mid-April, when the European Banking Federation will present the results of a review into how its members are being affected.

Nobody oversees 10 years in this climate.

• Markets Betting On Near-Zero Interest Rates For Another Decade (Reuters)

World markets may have recovered their poise from a torrid start to the year, but their outlook for global growth and inflation is now so bleak they are betting on developed world interest rates remaining near zero for up to another decade. Even though the U.S. Federal Reserve has already started what it expects will be a series of interest rate rises, markets appear to have bought into a “secular stagnation” thesis floated by former U.S. Treasury Secretary Larry Summers. The idea posits that the world is entering a peculiarly prolonged period in which structurally low inflation and wage growth – hampered by aging populations and slowing productivity growth – means the inflation-adjusted interest rate needed to stimulate economic demand may be far below zero.

As there’s likely a lower limit to nominal interest rates just below zero – because it’s cheaper to hold physical cash and bank profitability starts to ebb – then even these zero rates do not gain traction on demand. For all the debate about the accuracy of that view, it’s already playing out in world markets, with long-term projections from the interest rate swaps market showing developed world interest rates stuck near zero for several years. Take overnight interest rate swaps. They imply ECB policy rates won’t get back above 0.5% for around 13 years and aren’t even expected to be much above 1% for at least 60 years. Japan’s main interest rate won’t reach 0.5% for at least 30 years, they suggest, and even U.S. and UK rates are set to remain low for years. It will be six years before U.S. rates return to 1%, and a decade until UK rates reach that level.

Poetry in motion: “In China, you can see it visibly”, she said.”

• What’s In A Growth Target? For China, Hope And Simple Math (WSJ)

What’s in an economic growth target? When it comes to China, not all that much. That the government has a passion for setting targets is well-established; the nation’s top economic planning agency lists 59 in the appendix of its annual report to China’s parliament, of which it says it only undershot in four categories last year. Given that, one might assume that the policymakers of Beijing arrive at their numbers through reams of Excel sheets and several lecture-hall chalkboards worth of mathematical formula. Not so, according to Wu Xiaoling, deputy director of China’s congressional finance and economy committee. Ms. Wu is a former deputy governor of the central bank, the former head of its foreign-exchange regulator, and a respected thinker in China’s financial policy circles.

In explaining China’s current monetary policy, which is trying to strike a balance between providing enough money for growth without sparking another round of debt bingeing, Ms. Wu walked reporters through the steps the government takes to build its target for M2, the broadest measurement of money, capturing all the cash, savings and deposits flowing through an economy. M2 is an indicator that economists watch not just for its sheer size in China, but also because it s driving an accumulation of debt at twice the speed that the world’s second-largest economy is growing. M2’s growth is the result of deliberate government policy. Last year, it set a goal of 12%; the actual expansion came in at 13.3%. This year, Beijing is setting an expansion in the money supply by 13%. How did the officials arrive at these numbers? It begins, Ms. Wu says, with China s’all-important indicator: its economic growth target.

Last year, the gross domestic product expansion target was 7%. This year, as growth slows, the government has lowered the target to a range of 6.5% to 7%. That target is the minimum that would enable Beijing to accomplish a lofty government goal to double household income per capita between 2010 and 2020. The central bank then takes that GDP target and tacks on its expectations of consumer price inflation -3% both this and last year- and “then we add 2% or 3% points to take into account ‘uncertainty'”, Ms. Wu said earlier this week. The final sum becomes the government’s goal of monetary expansion for the year: 12% last year, and 13% this year, since the central bank this year chose to use the upper bound of the GDP growth range for its planning purposes. The nub of China’s M2 growth strategy isn t unique. Economists have long theorized that monetary supply can have a strong correlation with economic growth; managing M2 is therefore potentially a key way that central banks influence economic growth.

The problem, as Ms. Wu also acknowledged, is that an unbridled reliance on monetary expansion often drives debt and inflation. “In China, you can see it visibly”, she said. “Property prices have risen a lot since 2009.” The other major problem for China is that such an expansion in money supply is coinciding with a period of currency weakness fueled by worries over its economic slowdown and the ability of China s leaders to manage it that has led to an unprecedented rundown of its foreign-exchange reserves. Economists look at the correlation between broad money and foreign reserves for clues to how likely an economy is exposed to the risk of capital flight. The higher the M2-to-reserves ratio or conversely, the lower the reserves-to-M2 ratio the higher the likelihood of capital flight. In China s case, the reserves-to-M2 measurement is currently about 15%, which is about as low as Indonesia s when the Asian financial crisis struck in 1997. Indonesia saw capital flight, a plummeting currency and civil unrest.

Until truly nobody knows what anything is worth anymore. Just nationalize everything that smells bad.

• China To Allow Commercial Banks To Swap Bad Debt For Equity Stakes (Reuters)

China’s central bank is preparing regulations that would allow commercial banks to swap non-performing loans of companies for stakes in those firms, two sources with direct knowledge of the new policy told Reuters. The sources, who spoke on condition of anonymity, said the release of a new document explaining the regulatory change was imminent. On paper, the move would represent a way for indebted corporates to reduce their leverage, reducing the cost of servicing debt and making them more worthy of fresh credit. It would also reduce NPL ratios at commercial banks, reducing the cash they would need to set aside to cover losses incurred by bad loans. These funds could then be freed up for fresh lending for investment in the new wave of infrastructure products and factory upgrades the government hopes will rejuvenate the Chinese economy.

The sources said the new regulations would be promulgated with special approval from the State Council, China’s cabinet-equivalent body, thus skirting the need to revise the current commercial bank law, which prohibits banks from investing in non-financial institutions. In the past Chinese commercial banks usually dealt with NPLs by selling them off at a discount to state-designated asset management companies. The AMCs would turn around and attempt to recover the debt or resell it at a profit to distressed debt investors. The sources did not have further detail about how the banks would value the new stakes, which would represent assets on their balance sheets, or what ratio or amount of NPLs they would be able to convert using this method. Official data from the China Banking Regulatory Commission shows Chinese banks held NPLs and “special mention” troubled loans in excess of 4 trillion yuan ($614.04 billion) at the end of 2015.

Paul Singer won’t let them.

• Albany Can Solve the World’s Sovereign Debt Crisis (BBG)

In recent years, many countries – including Greece, Argentina and Ukraine – have found themselves indebted beyond their ability to pay. Argentina may now be on the brink of resolving a decade-long dispute with some of its creditors, but its predicament highlights a fundamental problem of sovereign debt. Unlike individuals and corporations, countries cannot use bankruptcy laws to restructure unsustainable debt. They are forced to try to separately renegotiate each of their debt contracts, which often fails because it requires unanimity. Although attempts have been made to try to bypass this requirement by including so-called collective action clauses in sovereign debt contracts, many contracts still lack them. Furthermore, most collective action clauses only bind a party to the particular contract that includes it.

The parties to any given sovereign debt contract, therefore, can act as holdouts in any debt restructuring plan that requires the parties to all of the country’s other debt contracts to agree to it. Recent judicial decisions interpreting New York law, which governed the relevant Argentine debt contracts, have made sovereign debt restructuring even harder; they allow “vulture funds” to extract ransom money by buying debt claims to block the ability of majority creditors to reach a settlement. These decisions broadly threaten New York’s dominance as the law that governs sovereign debt contracts. Yet New York has the unique ability not only to preserve its dominance but also to help solve the sovereign debt crisis. Because around half the world’s sovereign debt contracts are governed by New York law, the state could pass a measure to amend the voting requirements under those contracts.

For example, contracts that now require unanimity for revisions could be amended to allow changes that are approved by at least a supermajority of similarly situated creditors (even if those creditors’ claims arise under different debt contracts); such a law would overcome the major hurdle to sovereign debt restructuring. That, in turn, would give struggling nations the real prospect of equitably restructuring their debt to sustainable levels, thereby lowering sovereign borrowing costs and increasing creditor confidence by reducing uncertainty. This is a financially powerful opportunity for New York. Never before has a U.S. state had the power to influence the international community to such an extent. Being that New York City is the world’s financial center and home of the United Nations headquarters, it is fitting that circumstances have endowed the state with this power. Enactment of such a measure would also reinforce New York’s legitimacy as the governing law for future sovereign debt contracts.

Try tell that to the right wing.

• Germany Needs 470,000 Immigrants Per Year For Next 25 Years (GM)

German Chancellor Angela Merkel continues to receive both praise and criticism for her decision last year to open Germany’s doors to hundreds of thousands of the migrants arriving on Europe’s shores. ‘It goes without saying that we help and accommodate people who seek safe haven with us,’ she declared. However, while recent immigration has added enough people to offset any natural population shrinkage as a result of increasing death rates compared to birth rates, the next few decades are still likely to see the country’s increasingly elderly population go into a steady decline. Destatis, Germany’s national statistics office, estimates that the number of Germans between the ages of 20 and 66 is expected to shrink by a quarter – around 13 million people – between 2013 and 2040, while the number of people over 67 is expected to rise from 15.1 million to 21.5 million over the same time.

‘The shrinking of the population has consequences,’ explains Stephan Sievert, researcher at the Berlin Institute for Population and Development. ‘It has repercussions on the economy, on social security, and on infrastructure. A more gradual, incremental shrinking would be preferable to a rapid decline. The more time you have to adjust to the new situation, the more time you have to adapt the functioning of your society.’ Destatis confirms that immigration cannot be expected to make up this shortfall. It concludes that the country would require an estimated 470,000 immigrants ready to join the workforce every year between now and 2040 to prevent a significant demographic shift, a rate which the current unprecedented period of high immigration cannot be expected to sustain.

‘It’s not necessarily about the number of people, it’s about what they bring to the table,’ continues Sievert. ‘What kind of qualifications do they have? Can they find employment? Can they relieve some of the burden on the social security systems that increasingly more people are getting money out of than people are paying in to?’ He also raises the issue of where immigrants might settle spatially; whether they could help revive rural parts of the country where populations are dwindling. ‘It’s a different question to whether or not this would be desirable,’ he adds. ‘To have immigration on the scale that could make up for these losses, we’d be talking about more than half a million every year, and that doesn’t make the task of integration any easier.’

The animal man truly is.

• Record Number Of African Rhinos Killed In 2015 (Guardian)

A record number of rhinos were killed by poachers across Africa last year, driven by demand in the far east for their horn. The number slaughtered in their heartland in South Africa, which has four-fifths of the continent’s rhino, dipped for the first time since the crisis exploded nearly a decade ago. But increases in the number of rhino poached in Nambia and Zimbabwe offset the small signs of hope in South Africa, leading to a record 1,338 to be killed continent-wide. A total of 5,940 have been poached since 2008. Conservationists said it was possible that a clampdown by authorities in South Africa, where ministers have stepped up efforts against an illegal trade that they say threatens the tourism industry, have led to organised criminals moving their operations.

“They [poachers] operate like an amoeba so if you push in one place they expand elsewhere. What you may be seeing is a response at the regional level, where increased pressure in South Africa makes it more difficult for operatives to operate, having a response elsewhere,” said Mike Knight, chair of the respected International Union for the Conservation of Nature’s African rhino specialist group.

The legacy of the ‘developed’ world.

• Syrians Under Siege: ‘We Have No Children Any More, Only Small Adults’ (G.)

Sick children dying as lifesaving medicine waits at checkpoints, youngsters forced to survive on animal feed and leaves, and families burning their mattresses just to find something to keep them warm. Schools moving underground for shelter from barrel bombs, the crude, explosive-filled and indiscriminate crates that fall from the sky and are so inaccurate that some observers have said their use is a de facto war crime. The wounded left to die for lack of medical supplies, anaesthetics, painkillers and chronic medicine; children dying of malnutrition and even rabies due to the absence of vaccines, while landmines and snipers await anyone trying to escape. The scenes are not from second world war death camps or Soviet gulags.

They are the reality of life for more than a million Syrians living in besieged areas across the war-torn nation, according to a report by Save the Children. Tanya Steele, the charity’s chief executive, said: “Children are dying from lack of food and medicines in parts of Syria just a few kilometres from warehouses that are piled high with aid. They are paying the price for the world’s inaction.” At least a quarter of a million children are living in besieged areas across Syria, Save the Children estimates, in conditions that the charity describes as living in an open-air prison. The report is based on a series of extensive interviews and discussions with parents, children, doctors and aid workers on the ground in besieged zones.

It illustrates with startling clarity the brutality with which the conflict in Syria is being conducted, five years into a revolution-turned-civil-war that has displaced half the country and killed more than 400,000 people. The suffering of people in besieged areas in Syria is also an indictment of the failure of the international community to bring an end to the crisis. Less than 1% of them were given food assistance in 2015 and less than 3% received healthcare. Rihab, a woman living in eastern Ghouta near Damascus, which has been besieged by Bashar al-Assad’s regime, was quoted as saying: “Fear has taken control. Children now wait for their turn to be killed. Even adults live only to wait for their turn to die.”

Nice theory, though maybe a little farfetched.

• Did Michel Foucault Predict Europe’s Refugee Crisis? (Baele)

In March 1976, philosopher Michel Foucault described the advent of a new logic of government, specific to Western liberal societies. He called it biopolitics. States were becoming obsessed with the health and wellbeing of their populations. And sure enough, 40 years later, Western states are prodigiously promoting healthy food, banning tobacco, regulating alcohol, organizing breast cancer checks, and churning out information on the risk probabilities of this or that disease. Foucault never claimed this was a bad trend—it saves lives after all. But he did warn that paying so much attention to the health and wealth of one population necessitates the exclusion of those who are not entitled to—and are perceived to endanger—this health maximization program. Biopolitics is therefore the politics of live and let die.

The more a state focuses on its own population, the more it creates the conditions of possibility for others to die, “exposing people to death, increasing the risk of death for some people.” Rarely has this paradox been more apparent than in the crisis that has seen hundreds of thousands of people seeking asylum in Europe over the past few years. It is striking to watch European societies investing so much in health at home and, at the same time, erecting ever more impermeable legal and material barriers to keep refugees at bay, actively contributing to human deaths. The conflict in the Middle East is a deadly war. Most estimates suggest 300,000 have been killed in Syria alone. The conflict has shown us some of the most gruesome practices that war can produce, including the gassing of several thousands of civilians in Damascus in 2013.

Extremist groups such as the Islamic State display unimaginable levels of violence. They have beheaded people with knives or explosives, burned people locked in cages, crucified people, thrown people from the tops of buildings, or more recently exploded people locked in a car (a child supposedly detonated the bomb). This violence has been exported to Europe. Some of the biggest Syrian cities now look pretty much like Stalingrad in 1943. Inevitably, people escape—just like, for example, the Belgians who fled their country in the first years of World War I (250,000 to the UK alone, with up to 16,000 individuals arriving per day). This emigration is inevitable simply because normal life has become impossible in most parts of the country—and it will continue for almost as long as there are people living in this war-torn region. Jordan—a country just short of 10 million inhabitants—currently hosts more than a million refugees. Turkey hosts almost two million.

Faced with this disaster in its neighbourhood, what do the EU and its member states do? Exactly what Foucault predicted. Germany apart, they compete in imagination to design policies making sure refugees don’t arrive, and send ever-clearer deterrent signals. Austria has unilaterally fixed quotas on the number of asylum seekers that will be accepted at its border each day, effectively leaving bankrupt Greece to handle the burden of the influx alone. A week previously, French prime minister Manuel Valls announced that France and Europe “cannot accept more refugees.” His country originally agreed to receive 30,000 refugees over two years. To put that in perspective in terms of population size, if France was a village of 2,200 inhabitants, it would accept no more than a single person over that time.

Makes sense, but most won’t want to. Greek government indicates it wants to start moving people out of Idomeni as per Sunday. Reports of dozens of sick children.

• Refugees At Border Should Move To Camps, Says Greek Minister (AP)

Greece’s public order minister says refugees living in a squalid camp at the country’s border with Former Yugoslav Republic of Macedonia (FYROM) must accept that the border is shut and move to organized facilities. Nikos Toskas says the country can provide better conditions in other camps within 10-20 kilometers (6-12 miles) of the Idomeni crossing, where up to 14,000 people live in a waterlogged tent city. Toskas told state ERT TV Wednesday that Greece can offer “no serious support” to such a large number of people gathered in one spot. He said authorities will hand out fliers telling refugees seeking to reach central Europe that “there is no hope of you continuing north, therefore come to the camps where we can provide assistance.” More than 36,000 transient refugees and migrants are stuck in financially struggling Greece.

42,000 refugees stuck in Greece today. One week from now, it’ll be over 60,000.

• Conditions At Idomeni Refugee Camp Worsen By The Day (Kath.)

Refugees were still flowing into the Idomeni border camp in northern Greece Wednesday, despite the complete border closure by authorities in the Former Yugoslav Republic of Macedonia over the last few days, while torrential rain has made conditions even worse. “The situation is stifling as more people are arriving daily on foot,” the coordinator of the Hellenic Red Cross in northern Greece, Despina Filipidaki, told Kathimerini on Wednesday. “The biggest problem is that the bad living conditions are worsening the health problems,” she added. According to the latest estimates, more than 12,000 refugees are camped there in deplorable conditions while a further 3,050 are at Piraeus port, bringing the total number of migrants throughout Greece to 35,945.

Government sources told Kathimerini that the total cost of managing the crisis has risen to 278 million euros but that EU assistant funds are on the way. Giorgos Kyritsis, spokesman for the Coordinating Body for the Management of Migration, reiterated Wednesday that the main priority is to eventually evacuate Idomeni and “transfer people to structures affording better living conditions.” But, he said, it won’t be an easy task to convince the refugees. Nor will it be easy to overcome the reaction of locals in other areas where shelters are being erected.

No comment anymore.

• Five Iranians, Afghans Drown Trying To Reach Greece (Reuters)

Five migrants, including a baby, hoping to reach Europe via Greece drowned when their speedboat capsized off the Turkish coast, Dogan News Agency said on Thursday. The Turkish Coast Guard rescued nine people after they called for help late on Wednesday and recovered five bodies, it said. The group, comprised of Afghans and Iranians, were trying to reach the Greek island of Lesvos in the Aegean Sea. The EU has offered Turkey billions of euros in aid to curb illegal migration. Under a draft deal struck on Monday, Turkey agreed to take back all irregular migrants in exchange for more funding, faster visa liberalisation for Turks, and a speeding up of Ankara’s long-stalled EU membership talks. The aim is to discourage illegal migrants and break the grip of human smugglers who have sent them on perilous journeys across the Aegean. But migrants have continued to try to cross from Turkey’s coast in recent days.

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