Jan 282018
 
 January 28, 2018  Posted by at 11:05 am Finance Tagged with: , , , , , , , , , ,  


Paul Cezanne Sugar Bowl, Pears and Blue Cup c.1866

 

Trump Moving On to Infrastructure Push (BBG)
Stock Market Setting Records In Levitation (Lyons)
Happy Landings (Jim Kunstler)
The Founding Fathers Worst Nightmare Come True (CH)
Illinois Ponders Pension-Fund Moonshot: a $107 Billion Bond Sale
The Dark Side of America’s Rise to Oil Superpower (BV)
Saudi Frees Billionaires Including Alwaleed as Ritz Jail Empties (BBG)
German Minister Urges Fast Passage Of EU Law On Chinese Takeovers (R.)
Spanish Court Suspends Puigdemont’s Return To Power In Catalonia (AFP)
British Lords Get Ready to Disrupt Brexit (BBG)
Corbyn Under Pressure To Change Direction On Brexit (G.)
Facebook Doesn’t Care (Atlantic)
In 2017, The Oceans Were By Far The Hottest Ever Recorded (G.)

 

 

State of the Union on Tuesday. Look for grand plans. $1.5 trillion?!

Trump Moving On to Infrastructure Push (BBG)

President Donald Trump plans to use Tuesday’s State of the Union address to build momentum for sweeping legislation on infrastructure and immigration that could buoy the White House and fellow Republicans ahead of crucial midterm elections. Emboldened by a booming economy and victory in his stare-down with Senate Democrats over government funding, Trump will make the case that the Republican tax cuts passed in December and his administration’s efforts to curb regulations are drawing investment to the U.S. and creating jobs, said a White House official who discussed the speech on condition of anonymity. There are few obvious areas for compromise, and little incentive to do so among increasingly polarized lawmakers whose chief concern remains an upcoming election season primed for a wave of votes protesting Trump.

Yet the president also aims to strike a bipartisan tone, the official said – a stark departure from his address to Congress a year ago. That speech delighted supporters, who saw his on-script performance as evidence that Trump, a mercurial political novice, could seize the power of the bully pulpit. This year, aides say, he’ll offer a future-focused vision. His agenda, the official said, includes a long-anticipated plan to rebuild and improve the nation’s infrastructure, continuing efforts to cut regulations, and an overhaul of the immigration system – campaign promises that got set aside last year as the administration focused on efforts to repeal Obamacare and pass the tax overhaul.

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Hell no, no bubble.

Stock Market Setting Records In Levitation (Lyons)

In our habitation within the investment-based social media realm, we have noticed a ongoing discussion between market observers related to the present stock rally. On the one hand, there is a loud chorus from folks (likely many of whom are frustrated non-participants in the rally) pointing out the unusual, and perhaps inorganic, nature of the incessant rally. On the other hand, you have the assured (condescending?) reminders from the other side (i.e., folks “killing it” at the moment) that an upward trajectory is the “normal” course of action for stocks, historically speaking. So which contingent is correct? They both are, to an extent. Yes, it has been far more typical for stocks to rise than fall over the past 100-plus years.

Thus, we should not be surprised by a rally, even in the face of elevated valuations, sentiment, etc. However, an unwillingness to acknowledge the noteworthy, even historic, nature of the current rally, would be an indication of either willful denial or potentially harmful ignorance. This week, we take a look at some of the ways in which our current rally is truly unique from a broad historical basis. Today, we note the torrid pace at which the stock market is racking up new 52-week highs. Specifically, the Dow Jones Industrial Average (DJIA) is in the midst of a historic run of new highs. Over the past 100 days, the index has scored no fewer than 46 new 52-week highs. That is the most new highs the DJIA has ever accumulated over a 100-day stretch.

This new record surpasses the former mark of 45 set in 1954. And looking back over the last 100-plus years, there have now been just 14 unique occasions with even 35 new highs over a 100-year span. So will the new highs continue from here – or is there nowhere to go but down at this point? Well, we’re not going to pretend that a new high is a bad thing. In fact, it’s about the most bullish thing a security or index can do – no resistance at all-time highs, you know. Furthermore, the momentum often generated by moves to new highs can be a powerful and (at least, temporarily) persisting phenomenon. That is, until the final high of the run. Obviously one high will eventually mark the top and the upward momentum will cease. Are we at that point now? Are stocks going to come crashing back to earth – or can the market continue its levitation act a little longer?

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“How long do you think the equity indexes will levitate once the bond market implodes?”

Happy Landings (Jim Kunstler)

A financial smash-up is really the only thing that will break the awful spell this country is in: the belief that everyday life can go on when nothing really adds up. It seems to me that the moment is close at hand. Treasury Secretary Mnuchin told the Davos crowd that the US has “a weak dollar” policy. Is that so? Just as his department is getting ready to borrow another $1.2 trillion to cover government operations in the year to come. I’m sure the world wants nothing more than to buy bucket-loads of sovereign bonds backed by a falling currency — at the same time that the Treasury’s partner-in-crime, the Federal Reserve, is getting ready to dump an additional $600 billion bonds on the market out of its over-stuffed balance sheet. I’d sooner try to sell snow-cones in a polar bomb-cyclone.

When folks don’t want to buy bonds, the interest rates naturally have to go higher. The problem with that is your country’s treasury has to pay the bond-holders more money, but the only thing that has allowed the Treasury to keep borrowing lo these recent decades is the long-term drop of interest rates to the near-zero range. And the Fed’s timid 25-basis-point hikes in the overnight Fed Fund rate have not moved the needle quite far enough so far. But with benchmark ten-year bond rate nosing upward like a mole under the garden toward the 3.00% mark, something is going to give.

How long do you think the equity indexes will levitate once the bond market implodes? What vaporizes with it is a lot of the collateral backing up the unprecedented margin (extra borrowed money) that this rickety tower of financial Babel is tottering on. A black hole is opening up in some sub-basement of a tower on Wall Street, and it will suck the remaining value from this asset-stripped nation into the vacuum of history like so much silage. Thus will begin the harsh era of America screwing its head back on and commencing the salvage operation. We’ll stop ricocheting from hashtag to hashtag and entertain a few coherent thoughts, such as, “…Gee, it turns out you really can’t get something for nothing….” That’s an important thought to have when you turn around and suddenly discover you’ve got nothing left.

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Founding fathers and inequality.

The Founding Fathers Worst Nightmare Come True (CH)

As the total debt grows (total debt now essentially equals GDP), the denominator is larger and the resultant debt spending must be that much larger to have the same impact. For example, to have the same impact as the ’09 debt binge, a $4+ trillion increase (annually) would be necessary to have the same impact as the $0.2 trillion spent in ’83 or the $2.1 trillion spent in ’09. However, in the next “crisis”, we should expect a $4 trillion jolt (annual) and perhaps as much as $20 trillion in the next episode of this ongoing “crisis” to achieve an ’83 or ’09 like stimuli. But this may not have nearly the impact as previous.

Typically, deficit spending and interest rate cuts have gone hand in hand but with rates having been at zero for nearly a decade before the recent, minor rise…a move to cut rates from anywhere near current levels back to zero will likely have little impact and not be capable of amplifying the deficit spending. Perhaps significantly greater debt creation will be necessary to have a like impact as that of ’83 or ’09. But, of course, the impact on the debt to GDP ratio will be an irrevocable moon shot into Japan style debt to GDP levels. Perhaps the sanity of an economy built on building new homes for a core population that is now shrinking is highly questionable (chart below)?

And to round it out, the annual growth of the 15-64yr/old US core population versus the Wilshire 5000 (representing the value of all publicly traded US stocks).

What should already be clear will be obvious for everyone…the federal “debt” being created isn’t actually “debt” at all. It is being created and spent with no intention of ever repaying it and the move back to zero % interest rates (or more likely NIRP) on that “debt” will make clear that it is simply centrally created and centrally directed monetization. And the resultant wealth is being centrally directed to a shrinking minority of asset holders at the expense of the vast majority. The founding fathers worst nightmare come true.

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Where greed meets despair.

Illinois Ponders Pension-Fund Moonshot: a $107 Billion Bond Sale

Lawmakers in Illinois are so desperate to shore up the state’s massively underfunded retirement system that they’re willing to entertain an eye-popping wager: Borrowing $107 billion and letting it ride in the financial markets. The legislature’s personnel and pensions committee plans to meet on Jan. 30 to hear more about a proposal advanced by the State Universities Annuitants Association, according to Representative Robert Martwick. The group wants Illinois to issue the bonds this year to get its retirement system nearly fully funded, assuming that the state can make more on its investments than it will pay in interest. It would be by far the biggest debt sale in the history of the municipal market, and in one fell swoop would be more than Puerto Rico amassed in the run up to its record-setting bankruptcy.

“We’re in a situation in Illinois where our pension debt is just crushing,” Martwick, a Democrat who chairs the committee, said in a telephone interview. “When you have the largest pension debt in the world, you probably ought to be thinking big.” Illinois owes $129 billion to its five retirement systems after years of failing to make adequate annual contributions. Because the state’s constitution bans any reduction in worker retirement benefits, the government’s pension costs will continue to rise as it faces pressure to pay down that debt, a squeeze that has pushed Illinois’s bond rating to the precipice of junk. Many American governments have sold bonds for their pensions, albeit on a much smaller scale. Illinois did so in 2003, when it issued a record $10 billion of them.

New Jersey also tried it, only to see its pension shortfall soar again after the state failed to make adequate payments into the system for years. Detroit’s pension-fund borrowing in 2005 and 2006 helped push it into bankruptcy. On the whole, the track record has been mixed, according to a study by the Center for Retirement Research at Boston College. Much hinges on timing the stock market: While most pension bonds have been profitable because of equity gains since the recession, those sold after the late 1990s rally or before the 2008 crash lost money, the study found. The S&P 500 Index climbed 19 percent last year and has continued to hit new highs.

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Oil is power.

The Dark Side of America’s Rise to Oil Superpower (BV)

The last time U.S. drillers pumped 10 million barrels of crude a day, Richard Nixon was in the White House. The first oil crisis hadn’t yet scared Americans into buying Toyotas, and fracking was an experimental technique a handful of engineers were trying, with meager success, to popularize. It was 1970, and oil sold for $1.80 a barrel. Almost five decades later, with oil hovering near $65 a barrel, daily U.S. crude output is about to hit the eight-digit mark again. It’s a significant milestone on the way to fulfilling a dream that a generation ago seemed far-fetched: By the end of the year, the U.S. may well be the world’s biggest oil producer. With that, America takes a big step toward energy independence. The U.S. crowing from the top of a hill long occupied by Saudi Arabia or Russia would scramble geopolitics. A new world energy order could emerge.

That shuffling will be good for America but not so much for the planet. For one, the influence of one of the most powerful forces of the past half-century, the modern petrostate, would be diminished. No longer would “America First” diplomats need to tiptoe around oil-supplying nations such as Saudi Arabia. OPEC would find it tougher to agree on production guidelines, and lower prices could result, reopening old wounds in the cartel. That would take some muscle out of Vladimir Putin’s foreign policy, while Russia’s oligarchs would find it more difficult to maintain the lifestyles to which they’ve become accustomed. President Donald Trump, sensing an opportunity, is looking past independence to what he calls energy dominance. His administration plans to open vast ocean acreage to offshore exploration and for the first time in 40 years allow drilling in the Arctic National Wildlife Refuge.

It may take years to tap, but the Alaska payoff alone is eye-popping—an estimated 11.8 billion barrels of technically recoverable crude. It sounds good, but be careful what you wish for. The last three years have been the hottest since recordkeeping began in the 19th century, and there’s little room in Trump’s plan for energy sources that treat the planet kindly. Governors of coastal states have already pointed out that an offshore spill could devastate tourism—another trillion-dollar industry—not to mention wreck fragile littoral environments. Florida has already applied for a waiver from such drilling. More supply could lower prices, in turn discouraging investments in renewables such as solar and wind. Those tend to spike when oil prices rise, so enthusiasm for nonpolluting, nonwarming energies of the future could wane. For now, though, the petroleum train is chugging. And you can thank the resilience of the U.S. shale industry for it.

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Oil is power. Twitter shares are not. They’re just money.

Saudi Frees Billionaires Including Alwaleed as Ritz Jail Empties (BBG)

Saudi Arabia freed Prince Alwaleed bin Talal and several of the kingdom’s most prominent businessmen from detention, clearing out the Ritz-Carlton hotel that served as a jail for the country’s elite during a controversial crackdown on corruption. Prince Alwaleed, the billionaire chairman of Riyadh’s Kingdom Holding Co. who owns stakes in Citigroup and Twitter, returned home on Saturday after reaching a settlement with authorities, a senior government official said on condition of anonymity. He will remain at the helm of his company, the official said, declining to provide the other terms of the deal. Waleed al-Ibrahim, head of a major media firm, and retail billionaire Fawaz Al Hokair were also freed after agreeing to deals, another government official said.

The prince’s release came just hours after Alwaleed told Reuters in an interview that he expected to go home soon and retain control of his company, calling his detention a “misunderstanding” and expressing support for the kingdom’s rulers. With the suspects’ names and evidence against them never officially announced, the detentions had raised concerns about transparency among foreign investors – vital to Crown Prince Mohammed bin Salman’s plan to diversify the economy away from oil. The departures from the hotel mark the end of the first phase of Prince Mohammed’s anti-corruption campaign, which shook the kingdom when it was launched in November. Hundreds of suspects were arrested, including some of the country’s richest men and its top economic policymaker.

Officials say the government expects to reap more than $100 billion from settlements with detainees in exchange for their freedom. Others have been transferred to prison to face trial, the Wall Street Journal reported. Also released after agreeing to settlements were Khalid al-Tuwaijri, head of the royal court under the late King Abdullah, and Prince Turki bin Nasser, who was involved in a massive arms sale that led to corruption probes in the U.K. and the U.S., one of the government officials said. Several of those released from detention earlier appear to be returning to their lives as usual. Among them is former finance minister and minister of state, Ibrahim al-Assaf, who recently led Saudi Arabia’s delegation to the World Economic Forum in Davos, Switzerland.

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While taking over and buying up southern Europe, Germans protect their own economy from the very same.

German Minister Urges Fast Passage Of EU Law On Chinese Takeovers (R.)

Germany wants to acquire the legal means to take a closer look at bids from Chinese companies to acquire German and European companies in order better to protect technologies, a German minister told newspaper Welt am Sonntag. Matthias Machnig, state secretary in Germany’s economics ministry, said it was urgent that proposed Europe-wide measures to police surging Chinese investment be adopted by the end of this year. “It is essential that we get a tougher law in the European Union this year to resist takeover fantasies or outflows of technology or know-how,” he said in an interview, excerpts of which were made available on Saturday.

The paper cited a study by the Cologne Institute for Economic Research that showed the volume of known Chinese investments in Germany had risen to €12.1 billion ($15.03 billion) in 2017 from around €11 billion the year before and just €100 million seven years ago. Concern has been growing across Europe at China’s buying spree on the continent, with investors snapping up often iconic businesses in a way many fear could threaten Europe’s position as a high-value economy. “With its innovative companies, the EU is attractive for many around the world,” Machnig said. “Takeovers are becoming more frequent, often under market-distorting conditions.”

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Rajoy lost two elections, one of which he himself called. This is very much how democracy is viewed in Europe.

Spanish Court Suspends Puigdemont’s Return To Power In Catalonia (AFP)

Spain’s constitutional court on Saturday announced it was blocking Catalonia’s ousted separatist leader Carles Puigdemont from returning to power in the region while he remains the subject of legal action. The court said in a statement that its 12 magistrates had decided unanimously “to preventively suspend the investiture of Puigdemont unless he appears in the (regional) parliament in person with prior judicial authorisation”. Puigdemont, who fled to Belgium after the Catalan parliament declared independence in October, was earlier this week chosen as candidate to lead Catalonia again, with the regional parliament set to vote on the issue in Barcelona on Tuesday . This despite the fact that he faces arrest for rebellion, sedition and misuse of public funds over his attempt to break Catalonia from Spain as soon as he returns to the country.

He has said he could be sworn in to office remotely, via videoconference from Brussels, a plan Spain’s central government opposes. The constitutional court warned all members of the Catalan parliament of “their responsibilities” and warned against disobeying the order to suspend any investiture. The magistrates said they needed six more days to consider a government bid to annul the nomination of Puigdemont as a candidate for the regional presidency. Puigdemont has said he would rather return to Spain, but without any risk of arrest. “The government must use every tool made available by the laws and the constitution to make sure that a fugitive, someone who is on the run from the law and the courts, cannot be illegitimately be sworn in,” Spain’s Deputy Prime Minister Soraya Saenz de Santamaria said Friday after the government lodged the legal bid to keep Puigdemont from returning to power.

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It’s getting hard to predict where Brexit will be by the end of 2018. Not where it is now, that’s for sure.

British Lords Get Ready to Disrupt Brexit (BBG)

The bumpy journey toward Brexit reaches another fork in the road this week as the upper chamber of the British parliament plans to rewrite a key piece of Prime Minister Theresa May’s legislation. What happens to the European Union Withdrawal Bill in the predominantly pro-EU House of Lords could lead to a smoother divorce, a showdown with the government or even a constitutional crisis. It makes planned changes by the peers more than just a perfunctory stage in the sometimes complex democratic machinery of Westminster. The law aims to replicate thousands of existing EU regulations so there’s no legal black hole on the day Britain’s membership ceases, currently set for March 29 next year. That process could go awry if the lords halt or, more likely, demand changes that might include delaying the exit date or increasing the chance of second public vote on the issue.

“Drama is not a word usually associated with the House of Lords,” said Tom Strathclyde, a Conservative peer who used to guide legislation through the upper house. “On this occasion, there really could be high drama.” Already the passage of the law has been far from smooth as opponents of May’s vision for Brexit – taking Britain out of the EU single market and customs union – try to tear it up. She suffered a serious defeat in the House of Commons last month at the hands of mutineers from her own Conservative party who are opposed to Brexit in its current form. She slapped down Chancellor of the Exchequer Philip Hammond last week after he said Brexit would only herald modest changes to Britain’s relationship with the EU. Now more rebels are set to vent their frustration in the Lords.

The role of the unelected lords is supposed to be to revise rather than block legislation that the elected members of parliament have passed. In the case of Brexit, a majority of lawmakers in the House of Commons also opposed it, although most cite the need to uphold the result of the referendum in 2016 that kicked off the whole Brexit process dominating U.K. politics. The key Commons amendment last month was that parliament will now get a final vote on the Brexit deal after an agreement with the EU on the cost of the divorce and future trading relationship. The lords can start proposing more changes on Jan. 31. A list of them will be published two days later and the government will decide how to proceed. “There is a large majority of people in the Lords who feel that Brexit is a national disaster, and we will be trying to mobilize that majority as we go through,” said Dick Newby, who leads the Liberal Democrat peers.

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But Corbyn was never a fan of the EU.

Corbyn Under Pressure To Change Direction On Brexit (G.)

Jeremy Corbyn has called key members of his shadow cabinet to an “away day” to re-examine the party’s policy and strategy on Brexit amid growing frustration in Labour ranks that it is failing to exploit mounting Tory turmoil over Europe. Party sources confirmed to the Observer that the meeting, scheduled for early February, would look at adapting and developing Labour’s approach during “phase two” of the Brexit process. The gathering – which will be seen as a response to unrest and the threat of rebellions by dozens of Labour MPs – will be held at a location “away from Westminster”, and will involve senior shadow cabinet members in policy areas most affected by the UK’s departure from the EU.

The news suggests Labour may soon announce a major shift in policy that would see it back permanent membership of some form of customs union with the EU after Brexit – opening a potentially decisive dividing line with Theresa’s May’s increasingly fractured government. A senior figure aware of the meeting said: “There are several among those who will attend who want the party to move on the single market and customs union. But Jeremy is a lifelong eurosceptic and there is still opposition to doing so. “The greatest pressure for change is from those who insist we must back permanent membership of a customs union with the EU after Brexit, not just a fudge position of backing it during a transition and leaving open what happens after, which we have at present.”

Those who have been asked to attend are understood to include members of the shadow cabinet Brexit subcommittee. They include the shadow chancellor John McDonnell, shadow Brexit secretary Keir Starmer, the shadow home secretary Emily Thornberry, and shadow home secretary Diane Abbott. Shadow ministers responsible for Northern Ireland, Scotland and Wales will also attend. With Theresa May’s government increasingly split over Brexit, and the EU withdrawal bill heading into the House of Lords on Tuesday, where it is expected to be savaged by pro-Remain peers of all parties as well as crossbenchers, a growing number of Labour MPs and peers are pressing the leadership to open up clearer dividing lines with the Tories.

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“People say they’re interested in a broad range of news from different political preferences, but Facebook knows they really want angry, outraged articles that confirm political prejudices.”

Facebook Doesn’t Care (Atlantic)

Facebook’s crushing blow to independent media arrived last fall in Slovakia, Cambodia, Guatemala, and three other nations. The social giant removed stories by these publishers from users’ news feeds, hiding them in a new, hard-to-find stream. These independent publishers reported that they lost as much as 80% of their audience during this experiment. Facebook doesn’t care. At least, it usually seems that way. Despite angry pushback in the six countries affected by Facebook’s algorithmic tinkering, the company is now going ahead with similar changes to its news feed globally. These changes will likely de-prioritize stories from professional publishers, and instead favor dispatches published by a user’s friends and family. Many American news organizations will see the sharp traffic declines their brethren in other nations experienced last year—unless they pay Facebook to include their stories in readers’ feeds.

At the heart of this change is Facebook’s attempt to be seen not as a news publisher, but as a neutral platform for interactions between friends. Facing sharp criticism for its role in spreading misinformation, and possibly in tipping elections in the United States and in the United Kingdom, Facebook is anxious to limit its exposure by limiting its role. It has long been this way. This rebalancing means different things for the company’s many stakeholders—for publishers, it means they’re almost certainly going to be punished for their reliance on a platform that’s never been a wholly reliable partner. Facebook didn’t talk to publishers in Slovakia because publishers are less important than other stakeholders in this next incarnation of Facebook. But more broadly, Facebook doesn’t talk to you because Facebook already knows what you want.

Facebook collects information on a person’s every interaction with the site—and many other actions online—so Facebook knows a great deal about what we pay attention to. People say they’re interested in a broad range of news from different political preferences, but Facebook knows they really want angry, outraged articles that confirm political prejudices. Publishers in Slovakia and in the United States may warn of damage to democracy if Facebook readers receive less news, but Facebook knows people will be perfectly happy—perfectly engaged—with more posts from friends and families instead. For Facebook, our revealed preferences—discovered by analyzing our behavior—speak volumes. The words we say, on the other hand, are often best ignored.

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Lots of Joules.

In 2017, The Oceans Were By Far The Hottest Ever Recorded (G.)

Among scientists who work on climate change, perhaps the most anticipated information each year is how much the Earth has warmed. That information can only come from the oceans, because almost all heat is stored there. If you want to understand global warming, you need to first understand ocean warming. This isn’t to say other measurements are not also important. For instance, measurements of the air temperature just above the Earth are really important. We live in this air; it affects us directly. A great commentary on 2017 air temperatures is provided by my colleague Dana Nuccitelli. Another measurement that is important is sea level rise; so too is ocean acidification. We could go on and on identifying the markers of climate change.

But in terms of understanding how fast the Earth is warming, the key is the oceans. This important ocean information was just released today by a world-class team of researchers from China. The researchers (Lijing Cheng and Jiang Zhu) found that the upper 2000 meters (more than 6000 feet) of ocean waters were far warmer in 2017 than the previous hottest year. We measure heat energy in Joules. It turns out that 2017 was a record-breaking year, 151×1022 Joules hotter than any other year. For comparison, the annual electrical generation in China is 600 times smaller than the heat increase in the ocean. The authors provide a long history of ocean heat, going back to the late 1950s.

By then there were enough ocean temperature sensors to get an accurate assessment of the oceans’ warmth. Their results are shown in the figure below. This graph shows ocean heat as an “anomaly,” which means a change from their baseline of 1981–2010. Columns in blue are cooler than the 1981-2010 period, while columns in red are warmer than that period. The best way to interpret this graph is to notice the steady rise in ocean heat over this long time period.

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Nov 182017
 
 November 18, 2017  Posted by at 9:58 am Finance Tagged with: , , , , , , , , , , , ,  


Henri Cartier Bresson Juvisny, France 1938

 

Consumers Are Both Confident And Broke (John Rubino)
You Have Been Warned (Lance Roberts)
Norway Plan to Sell Off $35 Billion in Oil, Gas Stocks Rattles Markets (BBG)
The World’s Biggest Wealth Manager Won’t Touch Bitcoin (BBG)
Trump’s Saudi Scheme Unravels (Alastair Crooke)
Saudi ‘Corruption’ Probe Widens: Dozens Of Military Officials Arrested (ZH)
Hariri Arrives in Paris With Family Amid Saudi-Iran Tensions (BBG)
Qatar Says It Has US Backing in Lingering Gulf Crisis (BBG)
House Prices Aren’t The Issue – Land Prices Are (G.)
ECB Denies EU Auditors Access To Information On Greek Bailouts (EuA)
Greek Pensioners Forced To Return ‘Social Dividend’ (K.)
UK Considers Tax On Single-Use Plastics To Tackle Ocean Pollution (G.)
Irish Catholic Priest Urges Christians To Abandon The Word Christmas (G.)

 

 

Powerful graph from Bob Prechter.

Consumers Are Both Confident And Broke (John Rubino)

Elliott Wave International recently put together a chart (click here or on the chart to watch the accompanying video) that illustrates a recurring theme of financial bubbles: When good times have gone on for a sufficiently long time, people forget that it can be any other way and start behaving as if they’re bulletproof. They stop saving, for instance, because they’ll always have their job and their stocks will always go up. Then comes the inevitable bust. On the following chart, this delusion and its aftermath are represented by the gap between consumer confidence (our sense of how good the next year is likely to be) and the saving rate (the portion of each paycheck we keep for a rainy day). The bigger the gap the less realistic we are and the more likely to pay dearly for our hubris.

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“Prior to 2000, debt was able to support a rising standard of living..” Two decades later, it can’t even maintain the status quo. That’s what you call a breaking point.

You Have Been Warned (Lance Roberts)

There is an important picture that is currently developing which, if it continues, will impact earnings and ultimately the stock market. Let’s take a look at some interesting economic numbers out this past week. On Tuesday, we saw the release of the Producer Price Index (PPI) which ROSE 0.4% for the month following a similar rise of 0.4% last month. This surge in prices was NOT surprising given the recent devastation from 3-hurricanes and massive wildfires in California which led to a temporary surge in demand for products and services.

Then on Wednesday, the Consumer Price Index (CPI) was released which showed only a small 0.1% increase falling sharply from the 0.5% increase last month.

This deflationary pressure further showed up on Thursday with a -0.3 decline in Export prices. (Exports make up about 40% of corporate profits) For all of you that continue to insist this is an “earnings-driven market,” you should pay very close attention to those three data points above. When companies have higher input costs in their production they have two choices: 1) “pass along” those price increase to their customers; or 2) absorb those costs internally. If a company opts to “pass along” those costs then we should have seen CPI rise more strongly. Since that didn’t happen, it suggests companies are unable to “pass along” those costs which means a reduction in earnings. The other BIG report released on Wednesday tells you WHY companies have been unable to “pass along” those increased costs.

The “retail sales” report came in at just a 0.1% increase for the month. After a large jump in retail sales last month, as was expected following the hurricanes, there should have been some subsequent follow through last month. There simply wasn’t. More importantly, despite annual hopes by the National Retail Federation of surging holiday spending which is consistently over-estimated, the recent surge in consumer debt without a subsequent increase in consumer spending shows the financial distress faced by a vast majority of consumers. The first chart below shows a record gap between the standard cost of living and the debt required to finance that cost of living. Prior to 2000, debt was able to support a rising standard of living, which is no longer the case currently.

With a current shortfall of $18,176 between the standard of living and real disposable incomes, debt is only able to cover about 2/3rds of the difference with a net shortfall of $6,605. This explains the reason why “control purchases” by individuals (those items individuals buy most often) is running at levels more normally consistent with recessions rather than economic expansions.

If companies are unable to pass along rising production costs to consumers, export prices are falling and consumer demand remains weak, be warned of continued weakness in earnings reports in the months ahead. As I stated earlier this year, the recovery in earnings this year was solely a function of the recovering energy sector due to higher oil prices. With that tailwind now firmly behind us, the risk to earnings in the year ahead is dangerous to a market basing its current “overvaluation” on the “strong earnings” story.

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Another way to push up prices?

Norway Plan to Sell Off $35 Billion in Oil, Gas Stocks Rattles Markets (BBG)

Norway’s proposal to sell off $35 billion in oil and natural gas stocks brings sudden and unparalleled heft to a once-grassroots movement to enlist investors in the fight against climate change. The Nordic nation’s $1 trillion sovereign wealth fund said Thursday that it’s considering unloading its shares of Exxon Mobil, Royal Dutch Shell and other oil giants to diversify its holdings and guard against drops in crude prices. European oil stocks fell. Norges Bank Investment Management would not be the first institutional investor to back away from fossil fuels. But until now, most have been state pension funds, universities and other smaller players that have limited their divestments to coal, tar sands or some of the other dirtiest fossil fuels. Norway’s fund is the world’s largest equity investor, controlling about 1.5% of global stocks. If it follows through on its proposal, it would be the first to abandon the sector altogether.

“This is an enormous change,” said Mindy Lubber, president of Ceres, a non-profit that advocates for sustainable investing. “It’s a shot heard around the world.” The proposal rattled equity markets. While Norwegian officials say the plan isn’t based on any particular view about future oil prices, it’s apt to ratchet up pressure on fossil fuel companies already struggling with the growth of renewable energy. Norway’s Finance Ministry, which oversees the fund, said it will study the proposal and will take at least a year to decide what to do. The fund has already sold off most of its coal stocks. “People are starting to recognize the risks of oil and gas,” said Jason Disterhoft of the Rainforest Action Network, which pushes banks to divest from fossil fuels.

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From the biggest wealth fund to the biggest wealth manager.

The World’s Biggest Wealth Manager Won’t Touch Bitcoin (BBG)

UBS, the world’s largest wealth manager, isn’t prepared to make portfolio allocations to bitcoin because of a lack of government oversight, the bank’s chief investment officer said. Bitcoin has also not reached the critical mass to be considered a viable currency to invest in, UBS’s Mark Haefele said in an interview. The total sum of all cryptocurrencies is “not even the size of some of the smaller currencies” that UBS would allocate to, he said. Bitcoin has split investors over the viability of the volatile cryptocurrency and UBS is among its critics. Bitcoin capped a resurgent week by climbing within a few dollars of a record $8,000 on Friday. Still, events such as a bitcoin-funded terrorist attack are potential risks which are hard to evaluate, he said.

“All it would take would be one terrorist incident in the U.S. funded by bitcoin for the U.S. regulator to much more seriously step in and take action, he said. “That’s a risk, an unquantifiable risk, bitcoin has that another currency doesn’t.” While skeptics have called bitcoin’s rapid advance a bubble, it has become too big an asset for many financial firms to ignore. Bitcoin has gained 17% this week, touching a high of $7,997.17 during Asia hours before moving lower in late trading. The rally through Friday came after bitcoin wiped out as much as $38 billion in market capitalization following the cancellation of a technology upgrade known as SegWit2x on Nov. 8.

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Former (and current?!) TAE contributor Alastair Crooke draws his conclusions.

Trump’s Saudi Scheme Unravels (Alastair Crooke)

Aaron Miller and Richard Sokolsky, writing in Foreign Policy, suggest “that Mohammed bin Salman’s most notable success abroad may well be the wooing and capture of President Donald Trump, and his son-in-law, Jared Kushner.” Indeed, it is possible that this “success” may prove to be MbS’ only success. “It didn’t take much convincing”, Miller and Sokolski wrote: “Above all, the new bromance reflected a timely coincidence of strategic imperatives.” Trump, as ever, was eager to distance himself from President Obama and all his works; the Saudis, meanwhile, were determined to exploit Trump’s visceral antipathy for Iran – in order to reverse the string of recent defeats suffered by the kingdom.

So compelling seemed the prize (that MbS seemed to promise) of killing three birds with one stone (striking at Iran; “normalizing” Israel in the Arab world, and a Palestinian accord), that the U.S. President restricted the details to family channels alone. He thus was delivering a deliberate slight to the U.S. foreign policy and defense establishments by leaving official channels in the dark, and guessing. Trump bet heavily on MbS, and on Jared Kushner as his intermediary. But MbS’ grand plan fell apart at its first hurdle: the attempt to instigate a provocation against Hezbollah in Lebanon, to which the latter would overreact and give Israel and the “Sunni Alliance” the expected pretext to act forcefully against Hezbollah and Iran.

Stage One simply sank into soap opera with the bizarre hijacking of Lebanese Prime Minister Saad Hariri by MbS, which served only to unite the Lebanese, rather than dividing them into warring factions, as was hoped. But the debacle in Lebanon carries a much greater import than just a mishandled soap opera. The really important fact uncovered by the recent MbS mishap is that not only did the “dog not bark in the night” – but that the Israelis have no intention “to bark” at all: which is to say, to take on the role (as veteran Israeli correspondent Ben Caspit put it), of being “the stick, with which Sunni leaders threaten their mortal enemies, the Shiites … right now, no one in Israel, least of all Prime Minister Benjamin Netanyahu, is in any hurry to ignite the northern front. Doing so, would mean getting sucked into the gates of hell”.

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Targeting the military means MbS does not feel safe. How desperate is he?

Saudi ‘Corruption’ Probe Widens: Dozens Of Military Officials Arrested (ZH)

After jailing dozens of members of the royal family, and extorting numerous prominent businessmen, 32-year-old Saudi prince Mohammed bin Salman has widened his so-called ‘corruption’ probe further still. The Wall Street Journal reports that at least two dozen military officers, including multiple commanders, recently have been rounded up in connection to the Saudi government’s sweeping corruption investigation, according to two senior advisers to the Saudi government. Additionally, several prominent businessmen also were taken in by Saudi authorities in recent days. “A number of businessmen including Loai Nasser, Mansour al-Balawi, Zuhair Fayez and Abdulrahman Fakieh also were rounded up in recent days, the people said. Attempts to reach the businessmen or their associates were unsuccessful.”

It isn’t clear if those people are all accused of wrongdoing, or whether some of them have been called in as witnesses. But their detainment signals an intensifying high-stakes campaign spearheaded by Saudi Arabia’s 32-year-old crown prince, Mohammed bin Salman. There appear to be three scenarios behind MbS’ decision to go after the military: 1) They are corrupt and the entire process is all above board and he is doing the right thing by cleaning house; 2) They are wealthy and thus capable of being extorted (a cost of being free) to add to the nation’s coffers; or 3) There is a looming military coup and by cutting off the head, he hopes to quell the uprising. If we had to guess we would weight the scenarios as ALL true with the (3) becoming more likely, not less.

So far over 200 people have been held without charges since the arrests began on November 4th and almost 2000 bank accounts are now frozen, which could be why, as The Daily Mail reports, Saudi prince and billionaire Al-Waleed bin Talal has reportedly put two luxury hotels in Lebanon up for sale after being detained in his country during a corruption sweep. The Saudi information ministry previously stated the government would seize any asset or property related to the alleged corruption, meaning the Savoy hotel could well become the state property of the kingdom. ‘The accounts and balances of those detained will be revealed and frozen,’ a spokesman for Saudi Arabia’s information ministry said. ‘Any asset or property related to these cases of corruption will be registered as state property.’

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France and Germany play completely different roles. Hariri has said he will return to Lebanon by Wednesday.

Hariri Arrives in Paris With Family Amid Saudi-Iran Tensions (BBG)

Saad Hariri arrived in France with his family amid mounting concern that his country, Lebanon, may once again turn into a battleground for a showdown between Saudi Arabia and Iran. The Lebanese prime minister and his family were invited to France by President Emmanuel Macron. French officials say they can’t say how long Hariri will stay. On Saturday, Macron and Hariri will meet at noon for talks, following which the Lebanese leader and his family will have lunch at the Elysee Palace. Hariri, 47, hasn’t returned to Lebanon since his shock resignation announcement from Saudi Arabia on Nov. 4, which sparked fears of an escalating regional conflict between the kingdom and Iran. The Saudi government has denied accusations it was holding Hariri against his will. The kingdom recalled its ambassador to Germany in response to comments made by Foreign Minister Sigmar Gabriel.

Hariri weighed in on the spat, suggesting that Gabriel has accused the kingdom of holding him hostage. “To say that I am held up in Saudi Arabia and not allowed to leave the country is a lie. I am on the way to the airport, Mr. Sigmar Gabriel,” he said on Twitter. In limited public comments and on Twitter, Hariri has sought to dispel speculation that Saudi Arabia asked him to resign because he wouldn’t confront Hezbollah, an Iranian-backed Shiite Muslim group that plays a key role in Lebanon’s fragile government. The group is considered a terrorist organization by countries including Israel and the U.S., and it has provided crucial military support to President Bashar al-Assad’s regime in Syria’s war.

Macron, who met with Saudi Arabia Crown Prince Mohammed bin Salman in Riyadh, said last week that the two agreed that Hariri “be invited for several days to France.” He also reiterated France’s pledge to help protect Lebanon’s “independence and autonomy.” Hariri will be welcomed in France “as a friend,” Foreign Minister Jean-Yves Le Drian said a press conference in Riyadh on Thursday after meeting with Saudi authorities. French officials have said they still regard Hariri as Lebanon’s prime minister since the country’s president, Michel Aoun, rejected his resignation on the grounds that it must be handed over on Lebanese soil.

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And if you weren’t confused enough yet, there’s this:

Qatar Says It Has US Backing in Lingering Gulf Crisis (BBG)

Qatar’s foreign minister said the tiny emirate has U.S. backing to resolve the ongoing crisis with a Saudi-led alliance, but the country is also prepared should its Gulf Arab neighbors make military moves. The Trump administration is encouraging all sides to end the dispute and has offered to host talks at the Camp David presidential retreat, but only Qatar has agreed to the dialogue, Foreign Minister Sheikh Mohammed Al-Thani said Friday. Four countries in the Saudi-led bloc severed diplomatic and transport links with Qatar in June, accusing it of backing extremist groups, a charge Doha has repeatedly denied. Saudi Arabia closed Qatar’s only land border. Sheikh Mohammed said he will meet Secretary of State Rex Tillerson next week after having talks this week with Senate Foreign Relations Committee chairman Bob Corker and ranking member Ben Cardin as well as other congressional leaders.

“The Middle East needs to be addressed as the top priority of the foreign policy agenda of the United States,” he told reporters in Washington on Friday. “We see a pattern of irresponsibility and a reckless leadership in the region, which is just trying to bully countries into submission.” The Middle East has been a key foreign policy issue for the Trump administration, with much of it centered around support for the Saudis. The White House has backed the kingdom’s “anti-corruption” campaign that has ensnared top princes and billionaires once seen as U.S. allies, it has provided support for the Saudis in their war in Yemen and it has been muted in criticism of the crisis sparked when Lebanon’s prime minister unexpectedly resigned this month while in Saudi Arabia. Meanwhile, mediation attempts by Kuwait and the U.S. have failed to settle the spat with the Saudi-led bloc and Qatar.

Sheikh Mohammed accused Saudi Arabia of interfering in other countries’ affairs, citing the resignation of Lebanese Prime Minister Saad Hariri as an example of the oil-rich kingdom’s overreach and warning that other countries could be next. Asked about the prospect of the Saudi-led bloc taking military action, Sheikh Mohammed said though Qatar hopes that won’t happen, his country is “well-prepared” and can count on its defense partners, including France, Turkey, the U.K. and the U.S., which has a base in Qatar. “We have enough friends in order to stop them from taking these steps,” but “there is a pattern of unpredictability in their behavior so we have to keep all the options on the table for us,” he said. On the U.S. military presence, “if there is any aggression when it comes to Qatar, those forces will be affected,” he added.

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There is nothing secret about land tax. Nor is it anything new. It can be implemented tomorrow morning.

House Prices Aren’t The Issue – Land Prices Are (G.)

While reporting on the recent court case where controversial landlord Fergus Wilson defended (but lost) his right to refuse to let to Indians and Pakistanis, I learned something about how he’s now making money. He is now far from being Britain’s biggest buy-to-let landlord. He’s down to 350 homes, from a peak of 1,000. And what’s he doing with the cash made from sales? Buying agricultural land close to Kent’s biggest towns. One plot he bought for £45,000 is now worth, he boasted, £3m with development permission. And therein lies the reason why we have a housing crisis.

As long ago as 1909, Winston Churchill, then promoting Lloyd George’s “people’s budget” and its controversial measures to tax land, told an audience in Edinburgh that the landowner “sits still and does nothing” while reaping vast gains from land improvements by the municipality, such as roads, railways, power from generators and water from reservoirs far away. “Every one of those improvements is effected by the labour and the cost of other people … To not one of those improvements does the land monopolist contribute, and yet by every one of them the value of his land is sensibly enhanced … he contributes nothing even to the process from which his own enrichment is derived.”

When Britain’s post-war housebuilding boom began, it was based on cheap land. As a timely new book, The Land Question by Daniel Bentley of thinktank Civitas, sets out, the 1947 Town and Country Planning Act under Clement Attlee’s government allowed local authorities to acquire land for development at “existing use value”. There was no premium because it was earmarked for development. The New Towns Act 1946 was similar, giving public corporation powers to compulsorily purchase land at current-use value. The unserviced land cost component for homes in Harlow and Milton Keynes was just 1% of housing costs at the time. Today, the price of land can easily be half the cost of buying a home..

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Democracy in 2017.

ECB Denies EU Auditors Access To Information On Greek Bailouts (EuA)

The European Central Bank (ECB) challenged an attempt by the European Court of Auditors (ECA), the watchdog of EU finances, to examine the Bank’s role in the Greek bailout and reform programmes and refused to provide access to some requested information, citing banking confidentiality. The European Court of Auditors published a report assessing the effectiveness and results of the Greek bailouts on Thursday (16 November). “In line with the ECA’s mandate to audit the operational efficiency of the management of the ECB, we have attempted to examine the Bank’s involvement in the Greek Economic Adjustment Programmes. However, the ECB questioned the Court’s mandate in this respect,” the report reads. The auditors examined the role of the European Commission and found some shortcomings in its approach, which they said overall lacked transparency.

They made a series of recommendations to improve the design and implementation of the Economic Adjustment Programmes. “These recommendations have been accepted in full,” the report said. However, the ECB had invoked the banking confidentiality and denied access to specific information. “It [ECB] did not provide sufficient amount of evidence and thus we were unable to report on the role of the ECB in the Greek programmes,” the auditors said. The report pointed out that the European Parliament had specifically asked the Court to analyse the role of the ECB in financial assistance programmes. It noted that EU auditors had faced similar problems with obtaining evidence from the ECB when reviewing the Single Supervisory Mechanism.

The report highlighted the ECB’s decision on 4 February 2015 to suspend the waiver for accepting Greek government bonds as loan collateral, thereby automatically increasing short-term borrowing costs for the banks. That happened during the tough negotiations between Greece’s leftist government and its international lenders before the third bailout. Many believed it was meant to put additional pressure on Alexis Tsipras’ government to back down and respect the obligations undertaken by the country’s previous governments.

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It just gets crazier all the time. If your intention was to make sure an economy slowly dies, this is the way to go.

“Retirees on low pensions will effectively have to return the handout they get in late December at the end of January..”

Greek Pensioners Forced To Return ‘Social Dividend’ (K.)

Salary workers, retirees on low pensions, property owners and families with three or more children will bear the brunt of the new austerity measures accompanying the 2018 budget, which come to 1.9 billion euros. Next year the primary budget surplus will have to rise to 3.5% of GDP, therefore more cuts will be required, with low-income pensioners – the recipients of next month’s so-called “social dividend” – set to contribute most, according to the new measures. Retirees on low pensions will effectively have to return the handout they get in late December at the end of January, as the cost of pension interventions according to the midterm fiscal strategy plan amounts to 660 million euros. This is just 60 million euros shy of the social dividend’s 720 million euros that Prime Minister Alexis Tsipras promised this week.

The new measures for 2018 are set to be reflected in the final draft of the budget that is to be tabled in Parliament on Tuesday. They are likely to further increase the amount of expired debts to the state, after the addition of 34 billion euros from unpaid taxes and fines in the last three years, owing to the inability of most taxpayers to meet their obligations to the tax authorities. Plans for next year provide for the further reduction of salaries in the public sector in the context of the single salary system, additional cuts to pensions and family benefits, as well as the abolition of the handout to most low-income pensioners (EKAS). Freelance professionals are also in for an extra burden in 2018, due to the increase in their social security contributions that will be calculated on the sum of their taxable incomes and the contributions they paid in 2017.

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The UN should be all over this.

UK Considers Tax On Single-Use Plastics To Tackle Ocean Pollution (G.)

The chancellor, Philip Hammond, will announce in next week’s budget a “call for evidence” on how taxes or other charges on single-use plastics such as takeaway cartons and packaging could reduce the impact of discarded waste on marine and bird life, the Treasury has said. The commitment was welcomed by environmental and wildlife groups, though they stressed that any eventual measures would need to be ambitious and coordinated. An estimated 12m tonnes of plastic enters the oceans each year, and residues are routinely found in fish, sea birds and marine mammals. This week it emerged that plastics had been discovered even in creatures living seven miles beneath the sea. The introduction just over two years ago of a 5p charge on single-use plastic bags led to an 85% reduction in their use inside six months.

Separately, the environment department is seeking evidence on how to reduce the dumping of takeaway drinks containers such as coffee cups through measures such as a deposit return scheme. Announcing the move on plastics, the Treasury cited statistics saying more than a million birds and 100,000 sea mammals and turtles die each year from eating or getting tangled in plastic waste. The BBC series Blue Planet II has highlighted the scale of plastic debris in the oceans. In the episode to be broadcast this Sunday, albatrosses try to feed plastic to their young, and a pilot whale carries her dead calf with her for days in mourning. Scientists working with the programme believed the mother’s milk was made poisonous by pollution. The call for evidence will begin in the new year and will take into account the findings of the consultation on drinks containers.

Tisha Brown, an oceans campaigner for Greenpeace UK, said the decades-long use of almost indestructible materials to make single-use products “was bound to lead to problems, and we’re starting to discover how big those problems are”. She said: “Ocean plastic pollution is a global emergency, it is everywhere from the Arctic Ocean at top of the world to the Marianas trench at the bottom of the Pacific. It’s in whales, turtles and 90% of sea birds, and it’s been found in our salt, our tap water and even our beer.

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It’s either Christ or Santa Claus. Makes sense.

Irish Catholic Priest Urges Christians To Abandon The Word Christmas (G.)

An Irish Catholic priest has called for Christians to stop using the word Christmas because it has been hijacked by “Santa and reindeer”. Father Desmond O’Donnell said Christians of any denomination need to accept Christmas now has no sacred meaning. O’Donnell’s comments follow calls from a rightwing pressure group for a boycott of Greggs bakery in the UK after the company replaced baby Jesus with a sausage roll in a nativity scene. “We’ve lost Christmas, just like we lost Easter, and should abandon the word completely,” O’Donnell told the Belfast Telegraph. “We need to let it go, it’s already been hijacked and we just need to recognise and accept that.”

O’Donnell said he is not seeking to disparage non-believers. “I am simply asking that space be preserved for believers for whom Christmas has nothing to do with Santa and reindeer. “My religious experience of true Christmas, like so many others, is very deep and real – like the air I breathe. But non-believers deserve and need their celebration too, it’s an essential human dynamic and we all need that in the toughness of life.”

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Nov 082017
 
 November 8, 2017  Posted by at 1:47 pm Finance Tagged with: , , , , , , , , , , ,  


Salvador Dalí The oecumenial council 1960

 

Trying to figure out what on earth is happening in the Middle East appears to have gotten a lot harder. Perhaps (because) it’s become more dangerous too. There are so many players, and connections between players, involved now that even making one of those schematic representations would never get it right. Too many unknown unknowns.

A short and incomplete list of the actors: Sunni, Shiite, Saudi Arabia, US, Russia, Turkey, ISIS, Syria, Iran, Iraq, Libya, Kurds, Lebanon, Hezbollah, Hamas, Qatar, Israel, United Arab Emirates (UAE), Houthis, perhaps even Chechnya, Afghanistan, Pakistan. I know I know, add your favorites. So what have we got, or what do we know we’ve got? We seem to have the US lining up with Israel, the UAE and Saudi Arabia against Russia, Iran, Syria, Hezbollah. Broadly. But that’s just a -pun intended- crude start.

Putin has been getting closer to the Saudis because of the OPEC production cuts, trying to jack up the price of oil. Which ironically has now been achieved on the heels of the arrests of 11 princes and scores of other wealthy and powerful in the kingdom. But Putin also recently signed a $30 billion oil -infrastructure- deal with Iran. And he’s been cuddling up to Israel as well.

In fact, Putin may well be the most powerful force in the Middle East today. Well played?! He prevented the demise of Assad in Syria, which however you look at it at least saved the country from becoming another Iraq and Libya style failed state. If there’s one thing you can say about the Middle East/North Africa it’s that the US succeeded in creating chaos there to such an extent that it has zero control left over any of it. Well played?!

 

One thing seems obvious: the House of Saud needs money. The cash flowing out to the princes is simply not available anymore. The oil price is a major factor in that. Miraculously, the weekend crackdown on dozens of princes et al, managed to do what all the OPEC meetings could not for the price of oil: push it up. But the shrinkage of foreign reserves shows a long term problem, not some momentary blip:

 

 

Another sign that money has become a real problem in Riyadh is the ever-postponed IPO of Saudi Aramco, the flagship oil company supposedly worth $2 trillion. Trump this week called on the Saudi’s to list it in New York, but despite the upsurge in oil prices you still have to wonder which part of that $2 trillion is real, and which is just fantasy.

But yeah, I know, there’s a million different stocks you can ask the same question about. Then again, seeing the wealth of some of the kingdom’s richest parties confiscated overnight can’t be a buy buy buy signal, can it? Looks like the IPO delay tells us something.

And then you have the 15,000 princes and princesses who all live off of the Kingdom’s supposed riches (‘only 2,000’ profit directly). All of them live in -relative- wealth. Some more than others, but there’s no hunger in the royal family. Thing is, overall population growth outdoes even that in the royal family. Which means, since the country produces nothing except for oil, that there are 1000s upon 1000s of young people with nothing to do but spend money that’s no longer there. Cue mayhem.

 

 

And things are not getting better, Saudi Arabia loses money on every barrel it produces. There are stories about them lowering their break-even price, but let’s take that with a few spoonfuls of salt. A 25% drop in break-even prices in just one year sounds a bit too good. Moreover, main competitors like Iran would still have a much lower break-even price. So even if prices would rise further, the Saudi’s might only break even while Iran gets much richer. Running vs standing still.

 

Saudi Arabia Leads Gulf Nations in Cutting Break-Even Oil Price

Saudi Arabia, OPEC’s biggest oil producer, is also a leader when it comes to slashing the crude price the country needs to balance its budget. The kingdom will need oil to trade at $70 a barrel next year to break even, the IMF said Tuesday in its Regional Economic Outlook for the Middle East and Central Asia. That’s down from a break-even of $96.60 a barrel in 2016, the biggest drop of eight crude producers in the Persian Gulf. The break-even is a measure of the crude price needed to meet spending plans and balance the budget.

 

 

Gulf oil producers are cutting spending and eliminating subsidies after crude plunged from more than $100 a barrel in 2014 to average just over half that this year. The need to curb spending is more urgent with the Organization of Petroleum Exporting Countries cutting output to reduce a global glut. Oil will trade at $50 to $60 a barrel for the “medium term,” the IMF said.

 

 

So a thorough cleansing job of the royal family is perhaps inevitable, albeit very risky. King Salman and crown prince Mohammed bin Salman are up against a very large group of rich people. But there’s no way back now.

 

Saudi Banks Freeze More Than 1,200 Bank Accounts in Anti-Corruption Purge

Saudi Arabian banks have frozen more than 1,200 accounts belonging to individuals and companies in the kingdom as part of the government’s anti-corruption purge, bankers and lawyers said on Tuesday. They added that the number is continuing to rise. Dozens of royal family members, officials and business executives have been detained in the crackdown and are facing allegations of money laundering, bribery, extorting officials and taking advantage of public office for personal gain. Since Sunday, the central bank has been expanding the list of accounts it is requiring lenders to freeze on an almost hourly basis…

Much more will have to follow that. Doing a half way job is far too risky once the job has started. Not even $800 billion sounds like all that much. Separate families and factions within the royal family have had decades to accumulate wealth.

 

Saudi Crackdown Targets Up to $800 Billion in Assets

The Saudi government is aiming to confiscate cash and other assets worth as much as $800 billion in its broadening crackdown on alleged corruption among the kingdom’s elite, according to people familiar with the matter. Several prominent businessmen are among those who have been arrested in the days since Saudi authorities launched the crackdown on Saturday, by detaining more than 60 princes, officials and other prominent Saudis, according to those people and others. The country’s central bank, the Saudi Arabian Monetary Authority, said late Tuesday that it has frozen the bank accounts of “persons of interest” and said the move is “in response to the Attorney General’s request pending the legal cases against them.”

The most visible – and perhaps richest- of all those arrested -in western eyes- is Al-Waleed. The Bloomberg estimate of his wealth that came out this week is $19 billion. But their own article seems to indicate a much higher number. He owns 5% of Apple -says Bloomberg-, and that share alone would be worth $45 billion.

 

Alwaleed, Caught in Saudi Purge, Has Assets Across the World

Apple – Alwaleed bought 6.23 million shares, or 5 percent, of the computer and mobile-device maker for $115.4 million in 1997. He made these purchases between mid-March and April of that year while the company was still struggling to turn itself around. He has since continued to hold the stake while Apple’s valuation has soared to as high as $900 billion.

 

Going through all these numbers, you can imagine why the ruling family, or rather the rulers within that family, are getting nervous. And that’s where we get to an interesting piece by Ryan Grim at the Intercept, who says it’s not even 32-year-old crown prince Mohammed bin Salman, known as MBS, or King Salman, 81, who control the kingdom these days, it’s the United Arab Emirates (UAE) -and maybe Washington-.

The coup has already been perpetrated.

 

Saudi Arabia’s Government Purge – And How Washington Corruption Enabled It

The move marks a moment of reckoning for Washington’s foreign policy establishment, which struck a bargain of sorts with Mohammed bin Salman, known as MBS, and Yousef Al Otaiba, the United Arab Emirates ambassador to the U.S. who has been MBS’s leading advocate in Washington. The unspoken arrangement was clear: The UAE and Saudi Arabia would pump millions into Washington’s political ecosystem while mouthing a belief in “reform,” and Washington would pretend to believe that they meant it.

MBS has won praise for some policies, like an openness to reconsidering Saudi Arabia’s ban on women drivers. Meanwhile, however, the 32-year-old MBS has been pursuing a dangerously impulsive and aggressive regional policy, which has included a heightening of tensions with Iran, a catastrophic war on Yemen, and a blockade of ostensible ally Qatar. Those regional policies have been disasters for the millions who have suffered the consequences, including the starving people of Yemen, as well as for Saudi Arabia, but MBS has dug in harder and harder. And his supporters in Washington have not blinked.

The platitudes about reform were also challenged by recent mass arrests of religious figures and repression of anything that has remotely approached less than full support of MBS. The latest purge comes just days after White House adviser Jared Kushner, a close ally of Otaiba, visited Riyadh, and just hours after a bizarre-even-for-Trump tweet. Whatever legitimate debate there was about MBS ended Saturday — his drive to consolidate power is now too obvious to ignore. And that puts denizens of Washington’s think tank world in a difficult spot, as they have come to rely heavily on the Saudi and UAE end of the bargain.

As The Intercept reported earlier, one think tank alone, the Middle East Institute, got a massive $20 million commitment from the UAE. And make no mistake, MBS is a project of the UAE — an odd turn of events given the relative sizes of the two countries. “Our relationship with them is based on strategic depth, shared interests, and most importantly the hope that we could influence them. Not the other way around,” Otaiba has said privately.

The kingdom’s broke. Not today, or tomorrow morning, but crown prince MBS is able to look at the numbers and go: Oh Shit! And if he doesn’t see it, he has Kushner (re: Israel) and Al-Otaiba to fill him in. All three relative youngsters -MBS is 32, Kushner is 36, Otaiba is 43- are exceedingly nervous by now.

And then you get war, or the threat of war. War in Yemen, a blockade of Qatar, and now ‘mingling’ in Lebanon with the somewhat mysterious removal of billionaire PM Hariri -allegedly on an Iran/Hezbollah assassination plot-, and outright threats against Iran and Hezbollah:

 

Lebanon’s Hariri Visits UAE As Home Crisis Escalates

Lebanon’s outgoing prime minister, Saad al-Hariri, made a brief visit to the United Arab Emirates from Saudi Arabia on Tuesday despite a deepening crisis back home and a rise in regional tensions triggered by his surprise resignation. Hariri announced his resignation on Saturday during a visit to his ally Saudi Arabia and has not yet returned to Lebanon. He said he believed there was an assassination plot against him and accused Iran, Saudi Arabia’s arch-rival, and its Lebanese ally Hezbollah of sowing strife in the Arab world.

His resignation has thrust Lebanon back into the frontline of the regional rivalry that pits a mostly Sunni bloc led by Saudi Arabia and allied Gulf monarchies against Shi‘ite Iran and its allies. Hariri’s office said he had flown to Abu Dhabi on Tuesday and then returned to Riyadh, but it gave no reason for the trip. It also did not say when he would return home. Hariri’s Future TV channel said he would also visit Bahrain but gave no reason.

In short: billionaire PM Hariri is a puppet. Just perhaps not of Saudi Arabia, but of Abu Dhabi. Whether he’s under house arrest in Riyadh, as has been suggested, is still unclear. But it’s a safe bet that he didn’t fly to Abu Dhabi -and back- alone, or of his own accord. He went to receive instructions.

 

Saudi Arabia Accuses Iran Of ‘Direct Military Aggression’ Over Yemen Missile

Saudi Arabia’s crown prince has accused Iran of “direct military aggression” by supplying missiles to Houthi rebels in Yemen, raising the stakes in an already tense standoff between the two regional rivals. Mohammed bin Salman linked Tehran to the launch of a ballistic missile fired from Yemen towards the international airport in the Saudi capital of Riyadh on Saturday. The missile was intercepted and destroyed.

“The involvement of the Iranian regime in supplying its Houthi militias with missiles is considered a direct military aggression by the Iranian regime,” the prince said on Tuesday during a phone conversation with the UK foreign secretary, Boris Johnson, according to the state-run Saudi Press Agency. He added that the move “may be considered an act of war against the kingdom”. Iran has called Riyadh’s accusations as baseless and provocative.

We have way of knowing what is true or not about this. We do know that Saudi Arabia have been executing a barbaric war in Yemen. With weapons from the US, UK, et al. So someone firing back wouldn’t be that far-fetched.

 

Regardless, Pepe Escobar, a journalist who knows much more than his peers, or at least doesn’t hold back as much as them, doesn’t see this end well for MBS, UAE, Israel, US, and whoever else is in their corner. Another losing war for the US in the Middle East? We’re losing count.

 

The Inside Story Of The Saudi Night Of Long Knives

A top Middle East business/investment source who has been doing deals for decades with the opaque House of Saud offers much-needed perspective: “This is more serious than it appears. The arrest of the two sons of previous King Abdullah, Princes Miteb and Turki, was a fatal mistake. This now endangers the King himself. It was only the regard for the King that protected MBS. There are many left in the army against MBS and they are enraged at the arrest of their commanders.” To say the Saudi Arabian Army is in uproar is an understatement. “He’d have to arrest the whole army before he could feel secure.”

[..] The story starts with secret deliberations in 2014 about a possible “removal” of then King Abdullah. But “the dissolution of the royal family would lead to the breaking apart of tribal loyalties and the country splitting into three parts. It would be more difficult to secure the oil, and the broken institutions whatever they were should be maintained to avoid chaos.” Instead, a decision was reached to get rid of Prince Bandar bin Sultan – then actively coddling Salafi-jihadis in Syria – and replace the control of the security apparatus with Mohammed bin Nayef. The succession of Abdullah proceeded smoothly.

Power was shared between three main clans: King Salman (and his beloved son Prince Mohammed); the son of Prince Nayef (the other Prince Mohammed), and finally the son of the dead king (Prince Miteb, commander of the National Guard). In practice, Salman let MBS run the show. And, in practice, blunders also followed. The House of Saud lost its lethal regime-change drive in Syria and is bogged down in an unwinnable war on Yemen, which on top of it prevents MBS from exploiting the Empty Quarter – the desert straddling both nations. The Saudi Treasury was forced to borrow on the international markets. Austerity ruled …

[..] aversion to MBS never ceased to grow; “There are three major royal family groups aligning against the present rulers: the family of former King Abdullah, the family of former King Fahd, and the family of former Crown Prince Nayef.” Nayef – who replaced Bandar – is close to Washington and extremely popular in Langley due to his counter-terrorism activities. His arrest earlier this year angered the CIA and quite a few factions of the House of Saud – as it was interpreted as MBS forcing his hand in the power struggle. According to the source, “he might have gotten away with the arrest of CIA favorite Mohammed bin Nayef if he smoothed it over but MBS has now crossed the Rubicon though he is no Caesar. The CIA regards him as totally worthless.”

[..] The source, though, is adamant; “There will be regime change in the near future, and the only reason that it has not happened already is because the old King is liked among his family. It is possible that there may be a struggle emanating from the military as during the days of King Farouk, and we may have a ruler arise that is not friendly to the United States.”

In the end, it all comes down to a familiar theme: follow the money. And we need to seriously question the economic reality of Saudi Arabia. That graph above of their foreign reserves looks downright grim.

With money comes power. Who loses money loses power. Saudi Arabia is bleeding money. The population surge is uncanny, and there are no jobs for all these young people. Perhaps the best they can do is be a US/Israel puppet in an attempt to ‘redo’ the map of the Middle East, but that has not been a very successful project off late -like the past 100 years-.

Then again, when you’re desperate you do desperate things. And when you’re a 32-year-old crown prince with more enemies than you can keep track of, you use what money is left to 1) keep up appearances, 2) steal what others have gathered, 3) buy weapons up the wazoo, and 4) go to war.

It all paints a very dark picture for the world. Russia won’t stand for attacks on Iran. And Iran won’t let attacks on Lebanon/Hezbollah go unanswered. All that is set to push up oil prices further, and all parties involved are just fine with that. Because they can buy more weapons with the additional profits.

I’ll leave you with Nassim Taleb’s comments on the situation. After all, Nassim’s from Lebanon, and knows that part of the world like the back of his hand:

 

 

 

Nov 072017
 
 November 7, 2017  Posted by at 10:07 am Finance Tagged with: , , , , , , , , , ,  


Edward S. Curtis Zuni Girl with Jar c. 1903

 

Saudi Arabia’s Government Purge — And How Washington Corruption Enabled It (IC)
Saudi Arabia Accuses Lebanon Of ‘Declaring War,’ Egypt Calls For Calm (CNBC)
Oil Prices Surge On Saudi Purge (CNBC)
The Black Swan In Plain Sight – Debt Out The Wazoo (Stockman)
What Could Go Wrong? (Jim Kunstler)
Growing Homeless Camps Contrast With West Coast Tech Wealth (AP)
Profiting from Puerto Rico’s Pain (New Yorker)
Sacked Catalan President Condemns ‘Brutal Judicial Offensive’ (G.)
Bernie Sanders Warns Of ‘International Oligarchy’ – Paradise Papers (G.)
End These Offshore Games Or Our Democracy Will Die (G.)
Four False Viral Claims Spread by Journalists on Twitter in One Week (GG)
Growing Number of Greeks Unable To Pay Taxes (K.)
Greek Notaries Refuse To Carry Out Foreclosures (K.)
Hawking: AI Could Be ‘Worst Event In The History Of Our Civilization’ (CNBC)
The Charter of the Forest (Standing)

 

 

Reading a lot on Saudi. This is good by Ryan Grim. ” And make no mistake, MBS is a project of the UAE — an odd turn of events given the relative sizes of the two countries.”

Saudi Arabia’s Government Purge — And How Washington Corruption Enabled It (IC)

Whatever the official explanation, it is being read around the world as a power grab by the kingdom’s rising crown prince. “The sweeping campaign of arrests appears to be the latest move to consolidate the power of Crown Prince Mohammed bin Salman, the favorite son and top adviser of King Salman,” as the New York Times put it. “The king had decreed the creation of a powerful new anti-corruption committee, headed by the crown prince, only hours before the committee ordered the arrests. The men are being held in the Ritz-Carlton Riyadh. “There is no jail for royals,” a Saudi source noted. The move marks a moment of reckoning for Washington’s foreign policy establishment, which struck a bargain of sorts with Mohammed bin Salman, known as MBS, and Yousef Al Otaiba, the United Arab Emirates ambassador to the U.S. who has been MBS’s leading advocate in Washington.

The unspoken arrangement was clear: The UAE and Saudi Arabia would pump millions into Washington’s political ecosystem while mouthing a belief in “reform,” and Washington would pretend to believe that they meant it. MBS has won praise for some policies, like an openness to reconsidering Saudi Arabia’s ban on women drivers. Meanwhile, however, the 32-year-old MBS has been pursuing a dangerously impulsive and aggressive regional policy, which has included a heightening of tensions with Iran, a catastrophic war on Yemen, and a blockade of ostensible ally Qatar. Those regional policies have been disasters for the millions who have suffered the consequences, including the starving people of Yemen, as well as for Saudi Arabia, but MBS has dug in harder and harder. And his supporters in Washington have not blinked.

The platitudes about reform were also challenged by recent mass arrests of religious figures and repression of anything that has remotely approached less than full support of MBS. The latest purge comes just days after White House adviser Jared Kushner, a close ally of Otaiba, visited Riyadh, and just hours after a bizarre-even-for-Trump tweet. Whatever legitimate debate there was about MBS ended Saturday — his drive to consolidate power is now too obvious to ignore. And that puts denizens of Washington’s think tank world in a difficult spot, as they have come to rely heavily on the Saudi and UAE end of the bargain. As The Intercept reported earlier, one think tank alone, the Middle East Institute, got a massive $20 million commitment from the UAE. And make no mistake, MBS is a project of the UAE — an odd turn of events given the relative sizes of the two countries.

“Our relationship with them is based on strategic depth, shared interests, and most importantly the hope that we could influence them. Not the other way around,” Otaiba has said privately. For the past two years, Otaiba has introduced MBS around Washington and offered assurances of his commitment to modernizing and reforming Saudi Arabia, according to people who’ve spoken with him, confirmed by emails leaked by the group, Global Leaks. When confronted with damning headlines, Otaiba tends to acknowledge the reform project is a work in progress, but insists that it is progress nonetheless, and in MBS resides the best chance of the region.

Read more …

“The region cannot support more turmoil..”

Saudi Arabia Accuses Lebanon Of ‘Declaring War,’ Egypt Calls For Calm (CNBC)

Egyptian President Abdel Fattah al-Sisi called on Middle Eastern nations to maintain stability just as tensions were suddenly spiking between Lebanon and Saudi Arabia. “The stability of the region is very important and we all have to protect it … I am talking to all the parties in the region to preserve it,” Al-Sisi said in an interview with CNBC over the weekend that aired Tuesday morning. On Saturday, Lebanese Prime Minister Saad al-Hariri shocked the political establishment in Beirut by announcing his resignation. The leader said he was stepping down amid concerns of a potential assassination plot against him. Speaking from Riyadh, Hariri criticized Iran, and its Lebanese ally Hezbollah, for igniting conflict in the region.

Following the CNBC interview, Reuters reported that Saudi Arabia sharply escalated rhetoric in the region by declaring that Lebanon had — figuratively at least — declared “war” against it because of aggression from Hezbollah. Saudi Gulf Affairs Minister Thamer al-Sabhan said the government of Lebanon “would be dealt with as a government declaring war on Saudi Arabia,” Reuters reported. When asked whether the time had come for Egypt to consider its own measures against Hezbollah, Al-Sisi replied, “The subject is not about taking on or not taking on, the subject is about the status of the fragile stability in the region in light of the unrest facing the region.” “The region cannot support more turmoil,” he said.

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What OPEC couldn’t do.

Oil Prices Surge On Saudi Purge (CNBC)

Oil prices surged to their highest levels since the summer of 2015 on Monday as a major political shakeup in Saudi Arabia underpinned a rally fueled by geopolitical risk, analysts said. Crude futures hit the new highs overnight after the powerful Saudi Crown Prince Mohammad bin Salman coordinated the arrest of several princes and ministers, ostensibly as part of crackdown on corruption. Prices pulled back in morning trade as the market digested a wealth of analysis on the Saudi purge, but futures suddenly shot higher at midday. International benchmark Brent crude oil topped $64 a barrel for the first time since June 2015. Meanwhile U.S. West Texas Intermediate crude broke above $57, a level the market has not seen since July 2015.

WTI finished Monday’s session $1.71 or 3.1 percent, higher at $57.35. Brent was trading up $2.04, or 3.3 percent, at $64.11 by 2:27 p.m. ET. Analysts cautioned against pinning the surge on any one headline, or even the Saudi arrests alone. Instead, they said a growing cloud of geopolitical uncertainty was unleashing animal spirits in an already bullish market. “You can grab all sorts of different headlines when you have a runaway market, and this is a runaway market right now,” said Tom Kloza, global head of energy analysis at Oil Price Information Service. In this kind of environment, “people throw caution to the wind, and this is like the grand finale of fireworks,” he said.

Read more …

More debt, fast.

The Black Swan In Plain Sight – Debt Out The Wazoo (Stockman)

The black swan in plain sight does emit the Donald’s orangish glow, but at the end of the day its true color is actually red. That is, monumental towers of rapidly rising debt loom everywhere on the planet. For the moment, the artificial cash flow from this unsustainable borrowing spree is keeping a simulacrum of growth and prosperity alive. Yet this whole outbreak of debt madness – represented by $225 trillion outstanding on a global basis – is careening toward a financial and economic dead end that will soon crush today’s fiscally profligate politicians and heedless financial punters, alike, in a devastating reset of bond yields. For our first case in point, the always excellent Wolf Richter published a great chart over the weekend on the exploding US public debt.

To say the least, it constitutes a clanging wake-up call amidst the absolute fantasy world that prevails on both ends of the Acela Corridor. That’s because during the mere 8 weeks since the public debt ceiling was suspended by the Donald’s end-run with Nancy and Chuckles in September, the national debt has spiked by $640 billion. That’s about $16 billion per Federal business day, and they are not done yet. The US Treasury will continue to borrow heavily until the current debt ceiling “suspension” expires on December 8 – at which time it will repair to the old game of divesting trusting funds and employing other gimmicks which circumvent the ceiling, while waiting for Congress to blink and raise the ceiling or authorize a new “temporary” suspension.

As Wolf pointed out, this pattern played out during the debt showdowns of 2013 and 2015, as well, when the resulting “temporary” suspension resulted in borrowing spikes of $464 billion and $650 billion, respectively. Accordingly, Washington has suspended it way into a $5.7 trillion increase in the public debt in just six years since October 2011. That is, during a period which supposedly constitutes the third longest business expansion in US history.

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“The “narrative” is firmest before its falseness is proved by the turn of events, and there are an awful lot of events out there waiting to present, like debutantes dressing for a winter ball.”

What Could Go Wrong? (Jim Kunstler)

The economy isn’t growing and can’t grow. The economy is a revenant of something that used to exist, an industrial economy that has rolled over and died and come back as a moldy ghoul feeding on the ghostly memories of itself. Stocks go up because the unprecedented low interest rates established by the Fed allow company CEOs to “lever-up” issuing bonds (i.e. borrow “money” from, cough cough, “investors”) and then use the borrowed “money” to buy back their own stock to raise the share value, so they can justify their companies’ boards-of-directors jacking up their salaries and bonuses — based on the ghost of the idea that higher stock prices represent the creation of more actual things of value (front-end-loaders, pepperoni sticks, oil drilling rigs).

The economy is actually contracting because we can’t afford the energy it takes to run the things we do — mostly just driving around — and unemployment is not historically low, it’s simply mis-represented by not including the tens of millions of people who have dropped out of the work force. And an epic wickedness combined with cowardice drives the old legacy news business to look the other way and concoct its good times “narrative.” If any of the reporters at The New York Times and The Wall Street Journal really understand the legerdemain at work in these “mysteries” of finance, they’re afraid to say. The companies they work for are dying, like so many other enterprises in the non-financial realm of the used-to-be economy, and they don’t want to be out of paycheck until the lights finally go out.

The “narrative” is firmest before its falseness is proved by the turn of events, and there are an awful lot of events out there waiting to present, like debutantes dressing for a winter ball. The debt ceiling… North Korea… Mueller… Hillarygate….the state pension funds….That so many agree the USA has entered a permanent plateau of exquisite prosperity is a sure sign of its imminent implosion. What could go wrong?

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All bubbles disrupt.

Growing Homeless Camps Contrast With West Coast Tech Wealth (AP)

SEATTLE — Housing prices are soaring here thanks to the tech industry, but the boom comes with a consequence: A surge in homelessness marked by 400 unauthorized tent camps in parks, under bridges, on freeway medians and along busy sidewalks. The liberal city is trying to figure out what to do. “I’ve got economically zero unemployment in my city, and I’ve got thousands of homeless people that actually are working and just can’t afford housing,” said Seattle City Councilman Mike O’Brien. “There’s nowhere for these folks to move to.” That struggle is not Seattle’s alone. A homeless crisis is rocking the entire West Coast, pushing abject poverty into the open like never before. Public health is at risk, several cities have declared states of emergency, and cities and counties are spending millions – in some cases billions – in a search for solutions.

San Diego now scrubs its sidewalks with bleach to counter a deadly hepatitis A outbreak. In Anaheim, 400 people sleep along a bike path in the shadow of Angel Stadium. Organizers in Portland lit incense at an outdoor food festival to cover up the stench of urine in a parking lot where vendors set up shop. Homelessness is not new on the West Coast. But interviews with local officials and those who serve the homeless in California, Oregon and Washington — coupled with an Associated Press review of preliminary homeless data — confirm it’s getting worse. People who were once able to get by, even if they suffered a setback, are now pushed to the streets because housing has become so expensive. All it takes is a prolonged illness, a lost job, a broken limb, a family crisis. What was once a blip in fortunes now seems a life sentence.

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“There is no European Union standing ready to bail out Puerto Rico.”

Profiting from Puerto Rico’s Pain (New Yorker)

In 2012, Cate Long was working at the news service Reuters, where she wrote a daily column on the municipal-bond market. Municipal bonds are typically a sleepy corner of investing. They are forms of debt issued by states, counties, or cities, usually to fund infrastructure projects, such as airports and highways, and they are generally considered a safe investment, paying relatively low levels of interest. Finding a compelling story about the municipal-bond market is not an easy task, so when Long came across a document related to an $800 million bond sale that Puerto Rico would be undertaking that spring, she decided to look at the numbers more closely. What she found was startling. “I sat down and read it for a couple of hours, and I said, ‘These people are going to default,’ ” she told me recently. “It was pretty obvious.”

In the column she wrote about her analysis, titled “Puerto Rico Is America’s Greece,” Long expressed concern about the island’s economic health, calling it “America’s own Third World country.” At the time, Puerto Rico’s per-capita income was just $15,203 (less than half that of Mississippi, the poorest of the fifty states), and 45% of its residents were living below the poverty line. Puerto Rico also had a “massive” amount of debt, and was issuing even more bonds, which mutual funds and individuals were eagerly buying up, in spite of the warning signs. In her article, Long seemed to charge almost everyone involved, borrowers and creditors alike, with disingenuousness, incompetence, or both. “As happened with Greece, bond investors continue to buy the debt assuming at some point the government will be bailed out by somebody, somewhere,” she wrote.

“Caution, bond investors: There is no European Union standing ready to bail out Puerto Rico.” The article sent shock waves through the investment community. Moody’s Investors Service, which provides credit ratings, asked Long to come to its offices and defend her findings. (Her defense was, essentially, “I’m looking at the numbers.”) Nevertheless, the island continued its unsustainable borrowing for years—and Wall Street investors kept lending it money. By 2017, five years after Long’s warning, Puerto Rico’s bond debt had soared to $74 billion, almost a third of which was held by hedge funds. Meanwhile, the government was struggling to provide basic services to residents.

Read more …

Guess: he won’t be back in Catalonia in time for the Dec 21 elections.

Sacked Catalan President Condemns ‘Brutal Judicial Offensive’ (G.)

The deposed Catalan president, Carles Puigdemont, has accused the Spanish authorities of conducting a “brutal judicial offensive” against members of his ousted government and said he was afraid they would not receive an unbiased hearing in Spanish courts. Writing in the Guardian, Puigdemont said it was a “colossal outrage” that he and 13 colleagues were being investigated over possible charges including sedition and rebellion in relation to their roles in last month’s declaration of independence. “Today, the leaders of this democratic project stand accused of rebellion and face the severest punishment possible under the Spanish penal code; the same as for cases of terrorism and murder: 30 years in prison,” he said.

Puigdemont said he doubted that he and his colleagues would get a “fair and independent hearing” and called for “scrutiny from abroad” to help bring the Catalan crisis to a political, rather than judicial, conclusion. He added: “The Spanish state must honour what was said so many times in the years of terrorism: end violence and we can talk about everything. We, the supporters of Catalan independence, have never opted for violence, on the contrary. But now we find it was all a lie that everything is up for discussion.” The former Catalan leader fled to Brussels with a handful of cabinet colleagues last week, hours before Spain’s attorney general announced he would be seeking to bring charges of rebellion, sedition and misuse of public funds against them.

On Thursday, a national court judge ordered the jailing of the eight Catalan politicians and, a day later, issued a European arrest warrant for Puigdemont and four of his allies. Late on Sunday, a Belgian judge granted the five conditional release. They will make their first appearance in court on 17 November when a judge will decide on whether to execute the arrest warrant. The conditions of release include a ban on them leaving Belgium until their appearance in the court of first instance in Brussels later this month. With the extradition process likely to take months rather than weeks, there is growing scope for Puigdemont’s presence in Belgium to cause the country’s coalition government serious difficulties.

Read more …

No kidding.

Bernie Sanders Warns Of ‘International Oligarchy’ – Paradise Papers (G.)

Bernie Sanders has warned that the world is rapidly becoming an “international oligarchy” controlled by a tiny number of billionaires, highlighted by the revelations in the Paradise Papers. In a statement to the Guardian in the wake of the massive leak of documents exposing the secrets of offshore investors, Sanders said that the enrichment of wealthy individuals and companies in tax havens was “the major issue of our time”. He said the Paradise Papers opened the door on a “major problem not just for the US but for governments throughout the world”. “The major issue of our time is the rapid movement toward international oligarchy in which a handful of billionaires own and control a significant part of the global economy. The Paradise Papers shows how these billionaires and multinational corporations get richer by hiding their wealth and profits and avoid paying their fair share of taxes,” the US senator from Vermont said.

Sanders, who came in a close second to Hillary Clinton in the race for the Democratic presidential nomination last year, pointed the finger of blame for the flourishing of offshore holdings on both Congress and the Trump administration. He told the Guardian that Republicans in Congress were responsible for providing “even more tax breaks to profitable corporations like Apple and Nike”. The same tax breaks, he said, were being seized upon by super-wealthy members of Trump’s cabinet “who avoid billions in US taxes by shifting American jobs and profits to offshore tax havens. We need to close these loopholes and demand a fair and progressive tax system.”

Read more …

“We must accept that Big Finance and runaway inequality are incompatible with either a functioning democracy or a sustainable economy.”

End These Offshore Games Or Our Democracy Will Die (G.)

Tax avoidance is now so systemic that the Queen’s own wealth managers apparently see nothing wrong with her receiving £82m a year from taxpayers while shunting £10m into the Caymans and elsewhere. Shuttling between tax havens is so commonplace that economist Gabriel Zucman describes it as an “elite sport” – a sport in which the loser each time is the rest of society, which sees its taxbase shrink. These papers are aptly named: they outline a model that is paradise for the super-rich and purgatory for the rest of us. The second myth of British politics is that austerity was the only correct response to the high-living of the New Labour boom. That was always opposed by some of us – now it is exploded with each new tax investigation.

Drawing in part on data from last year’s Panama Papers and the HSBC files leaked in 2015, Zucman recently co-published a study that found wealthy Britons have stashed about £300bn – equivalent to 15% of our GDP – in offshore tax havens. Three hundred billion quid would more than cover our entire education budget for the rest of this decade and into the 2020s. Or, if you prefer, it is the equivalent of £350m being paid into the NHS every week for the next 16 years. Instead, it is funnelled offshore and used to buy yachts and mansions and other baubles – tax efficiently, of course. The economics of David Cameron and George Osborne can be summed up simply: punish the poor, but reward the rich for fear they will flee offshore. To that end, they scrapped the 50p tax rate for millionaires, they drove down corporation tax to a record low, and cut sweetheart deals with companies such as Google who couldn’t be bothered to pay even that much.

The result is that London has more super-rich residents than any other city – yet however soft the kid gloves with which they are treated, our wealthiest 0.01% stick 30-40% of their wealth offshore. In high-tax Sweden, by contrast, the rich do not use havens half as much. The logic that has underpinned our tax system over this entire decade is rubbish. [..] Add the City of London to Britain’s crown dependencies such as Jersey and the Isle of Man, and overseas territories such as the Caymans, and Britain’s tax havens account for nearly a quarter of the entire offshore financial industry. According to Deutsche Bank, London itself receives about £1bn a month in what it calls “hidden capital flows”, much of it Russian. It ends up in Stucco-fronted houses and fine art.

Much of this could be changed, and quickly. Britain has previously ordered the Caymans and other overseas territories to decriminalise homosexuality and abolish the death penalty. It could do the same with tax transparency, in an Order of Council that, a Mayfair tax lawyer recently told me, need be no longer than two sides of A4. We could change the rules on Lords and Commons’ members’ interests so that all offshore holdings would have to be registered. These are the fixes, but a real solution is ultimately political. We must accept that Big Finance and runaway inequality are incompatible with either a functioning democracy or a sustainable economy. Britain either shrinks the City of London, or the City of London will swallow Britain.

Read more …

Lots of talk about this, with widely differing views.

Four False Viral Claims Spread by Journalists on Twitter in One Week (GG)

There is ample talk, particularly of late, about the threats posed by social media to democracy and political discourse. Yet one of the primary ways that democracy is degraded by platforms such as Facebook and Twitter is, for obvious reasons, typically ignored in such discussions: the way they are used by American journalists to endorse factually false claims that quickly spread and become viral, entrenched into narratives, and thus can never be adequately corrected. The design of Twitter, where many political journalists spend their time, is in large part responsible for this damage. Its space constraints mean that tweeted headlines or tiny summaries of reporting are often assumed to be true with no critical analysis of their accuracy, and are easily spread.

Claims from journalists that people want to believe are shared like wildfire, while less popular, subsequent corrections or nuanced debunking are easily ignored. Whatever one’s views are on the actual impact of Twitter Russian bots, surely the propensity of journalistic falsehoods to spread far and wide is at least as significant. Just in the last week alone, there have been four major factually false claims that have gone viral because journalists on Twitter endorsed and spread them: three about the controversy involving Donna Brazile and the DNC, and one about documents and emails published by WikiLeaks during the 2016 campaign. It’s well worth examining them, both to document what the actual truth is as well as to understand how often and easily this online journalistic misleading occurs:

Viral Falsehood #1: The Clinton/DNC agreement cited by Brazile only applied to the General Election, not the primary.

Viral Falsehood #2: Sanders signed the same agreement with the DNC that Clinton did.

Viral Falsehood #3: Brazile stupidly thought she could unilaterally remove Clinton as the nominee.

Viral Falsehood #4: Evidence has emerged proving that the content of WikiLeaks documents and emails was doctored.

Read more …

Deep deep deeper and down.

Growing Number of Greeks Unable To Pay Taxes (K.)

Almost half a million taxpayers were added to the long list of debtors to the state in the month of September, according to the latest data from the Independent Authority for Public Revenue. The authority’s figures are a reflection of citizens’ increasing inability to pay their taxes, with 410,000 not paying their second income tax installment and the ENFIA property tax in September. More specifically, 4,267,408 taxpayers owed money to the Greek state in September, up from 3,857,086 in August. Moreover, by the end of September, the amount of unpaid taxes since the beginning of the year came to 9.25 billion euros. What concerns the government is whether the 410,000 that couldn’t pay their taxes in September will join the Finance Ministry’s 12-month installment program, as the hole in tax revenues will only grow if they don’t.

Read more …

What good will kicking people out do?

Greek Notaries Refuse To Carry Out Foreclosures (K.)

The outlook for property foreclosures in Greece is unclear after notaries announced a boycott on auctions until the end of the year, citing abuse by protesters, though foreign creditors expect the first online auctions to take place this month. According to sources, Greece’s lenders have suggested that the responsibility for foreclosures be shifted from notaries to Greek courts or possibly to Justice Ministry officials. The latter model, which has been tried and tested in Germany and Spain, was first mooted last month during a visit to Athens by bailout monitors. The auditors made it clear that the resumption of foreclosures on the homes of overindebted Greeks, which have dragged during the crisis years due to strikes by lawyers and notaries and more recently due to anti-austerity protesters, is a prerequisite for the successful conclusion of Greece’s current bailout review.

In comments at Monday’s summit of eurozone finance ministers in Brussels, ECB President Mario Draghi indicated that the resumption of property auctions would help banks by reducing the large proportion of bad loans that they hold. Commenting, Greek Finance Ministry sources said Athens was committed to “not taking our foot off the gas in the implementation of reforms for the review.” One of the many conditions of the latest review is that Greece launch electronic foreclosures. The first is supposed to take place on November 29. However, it is unclear how that procedure will be carried out in view of the protracted walkout by Greek notaries.

In a joint statement on Monday, the associations representing notaries in Athens, Piraeus and the islands of the Aegean and the Dodecanese said they will not be conducting any property auctions through December 31. The decision was reached during a meeting on Saturday with a vote of 134 in favor and 132 against. The associations said the decision was aimed at initiating talks with the Justice Ministry in order to provide protection to notaries who have come under attack – often violent – by anti-establishment groups and protesters opposed to foreclosures. Notaries also want the Justice Ministry to be made responsible for electronic auctions, as well as to address any disputes that may arise from them.

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I don’t share his optimism.

Hawking: AI Could Be ‘Worst Event In The History Of Our Civilization’ (CNBC)

The emergence of artificial intelligence (AI) could be the “worst event in the history of our civilization” unless society finds a way to control its development, high-profile physicist Stephen Hawking said Monday. He made the comments during a talk at the Web Summit technology conference in Lisbon, Portugal, in which he said, “computers can, in theory, emulate human intelligence, and exceed it.” Hawking talked up the potential of AI to help undo damage done to the natural world, or eradicate poverty and disease, with every aspect of society being “transformed.” But he admitted the future was uncertain. “Success in creating effective AI, could be the biggest event in the history of our civilization. Or the worst. We just don’t know. So we cannot know if we will be infinitely helped by AI, or ignored by it and side-lined, or conceivably destroyed by it,” Hawking said during the speech.

“Unless we learn how to prepare for, and avoid, the potential risks, AI could be the worst event in the history of our civilization. It brings dangers, like powerful autonomous weapons, or new ways for the few to oppress the many. It could bring great disruption to our economy.” Hawking explained that to avoid this potential reality, creators of AI need to “employ best practice and effective management.” The scientist highlighted some of the legislative work being carried out in Europe, particularly proposals put forward by lawmakers earlier this year to establish new rules around AI and robotics. Members of the European Parliament said European Union-wide rules were needed on the matter. Such developments are giving Hawking hope.

“I am an optimist and I believe that we can create AI for the good of the world. That it can work in harmony with us. We simply need to be aware of the dangers, identify them, employ the best possible practice and management, and prepare for its consequences well in advance,” Hawking said.

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We want one!

The Charter of the Forest (Standing)

Eight hundred years ago this month, after the death of a detested king and the defeat of a French invasion in the Battle of Lincoln, one of the foundation stones of the British constitution was laid down. It was the Charter of the Forest, sealed in St Paul’s on November 6, 1217, alongside a shortened Charter of Liberties from 2 years earlier (which became the Magna Carta). The Charter of the Forest was the first environmental charter forced on any government. It was the first to assert the rights of the property-less, of the commoners, and of the commons. It also made a modest advance for feminism, as it coincided with recognition of the rights of widows to have access to means of subsistence and to refuse to be remarried. The Charter has the distinction of having been on the statute books for longer than any other piece of legislation.

It was repealed 754 years later, in 1971, by a Tory government. In 2015, while spending lavishly on celebrating the Magna Carta anniversary, the government was asked in a written question in the House of Lords whether it would be celebrating the Charter this year. A Minister of Justice, Lord Faulks, airily dismissed the idea, stating that it was unimportant, without international significance. Yet earlier this year the American Bar Association suggested the Charter of the Forest had been a foundation of the American Constitution and that it was more important now than ever before. They were right. It is scarcely surprising that the political Right want to ignore the Charter. It is about the economic rights of the property-less, limiting private property rights and rolling back the enclosure of land, returning vast expanses to the commons.

It was remarkably subversive Sadly, whereas every school child is taught about the Magna Carta, few hear of the Charter. Yet for hundreds of years the Charter led the Magna Carta. It had to be read out in every church in England four times a year. It inspired struggles against enclosure and the plunder of the commons by the monarchy, aristocracy and emerging capitalist class, famously influencing the Diggers and Levellers in the 17th century, and protests against enclosure in the 18th and 19th. At the heart of the Charter, which is hard to understand unless words that have faded from use are interpreted, is the concept of the commons and the need to protect them and to compensate commoners for their loss. It is scarcely surprising that a government that is privatising and commercialising the remaining commons should wish to ignore it.

In 1066, William the Conqueror not only distributed parts of the commons to his bandits but also turned large tracts of them into ‘royal forests’ – ie, his own hunting grounds. By the time of the Domesday Book in 1086, there were 25 such forests. William’s successors expanded and turned them into revenue-raising zones to help pay for their wars. By 1217, there were 143 royal forests. The Charter achieved a reversal, and forced the monarchy to recognise the right of free men and women to pursue their livelihoods in forests. The notion of forest was much broader than it is today, and included villages and areas with few trees, such as Dartmoor and Exmoor. The forest was where commoners lived and worked collaboratively.

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Jul 282017
 
 July 28, 2017  Posted by at 8:21 am Finance Tagged with: , , , , , , , , , , ,  


Gordon Burt Bond Street, Wellington, New Zealand c1957

 

Senate Blocks ‘Skinny’ Obamacare Repeal Bill In Dramatic Late-Night Vote (CNBC)
Russia Promises Retaliation As Senate Passes Sanctions Bill (G.)
US Housing Bubble 2.0 (Mark Hanson)
Is This The Bubble? (Lance Roberts)
Japan Defense Minister Quits Amid Plunging Support For PM Abe (R.)
Libor, The Scandal-Ridden Financial Benchmark, Doesn’t Have Long To Live (Qz)
Shell’s Profits Treble As Cost Cuts Take Effect (PA)
Oil Companies Trim Drilling Budgets in Sign of Rising Caution (BBG)
US Indicts Russian Suspected of $4 Billion Bitcoin Laundering Scheme (R.)
The Syrian Army Were Standing Up To Isis Long Before The Americans (Fisk)
France Plans Asylum ‘Hotspots’ In Libya (BBC)
Italy Loses Patience With France’s Macron Over Migrants, Libya (VoA)
EU Announces New Emergency Support For Greek Refugee Crisis (AP)

 

 

Three things:

1) Boy, was I right to say US politics should be observed through the eyes of Shakespeare.

2) Playing with people’s health care, let alone for petty political reasons, is not forgiveable.

3) What a bunch of has-beens these people are. Limit their terms, close the revolving doors, and let the future be decided by people young enough to actually have a future. Oh, and get money out of politics.

Senate Blocks ‘Skinny’ Obamacare Repeal Bill In Dramatic Late-Night Vote (CNBC)

The Senate blocked the latest Republican attempt to repeal Obamacare in a dramatic floor vote early Friday morning, yet again stalling — for now — the key campaign goal that eludes the GOP six months into the Trump administration. Three GOP defections — Sens. Susan Collins of Maine, Lisa Murkowski of Alaska and John McCain of Arizona — sank the measure in a 49-51 vote. McCain, who recently returned to the Senate after getting diagnosed with brain cancer, cast his “no” vote to audible gasps on the chamber’s floor, according to reporters there. Senate Republicans released the plan late Thursday just hours before voting on an amendment to take up the bill. The GOP could only afford to lose two votes on the proposal, which many senators suggested they would not even want to see become law.

The measure came after separate pushes to immediately replace the Affordable Care Act or repeal it with a two-year transition period failed amid GOP divisions. Several Republican senators slammed the plan and appeared to not even want it to become law. It marks another blow to the sprawling agenda that Republicans hoped to accomplish when President Donald Trump won the White House and the GOP held both chambers of Congress in November. After the vote, a visibly frustrated Senate Majority Leader Mitch McConnell called it “clearly a disappointing moment.” “So yes, this is a disappointment, a disappointment indeed … I regret that our efforts were simply not enough this time,” McConnell said.

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But this they do agree on. More reasons to get rid of the old order in Washington.

Russia Promises Retaliation As Senate Passes Sanctions Bill (G.)

Vladimir Putin has accused US lawmakers of “insolence”, and promised Russia will retaliate if the latest round of US sanctions against Russia are signed into law. The House of Representatives voted by 419 votes to three on Tuesday to pass the new sanctions bill, which targets Russia as well as North Korea and Iran. The US legislation was passed overwhelmingly by the Senate on Thursday, and will now go to Donald Trump for his signature. Trump, who enjoyed two warm conversations with Putin at the G20 summit earlier this month, is likely to face a major backlash if he attempts to veto the legislation, with his administration already embroiled in a Russia scandal. “We are behaving in a very restrained and patient way, but at some moment we will need to respond,” said Putin at a press conference with his Finnish counterpart, Sauli Niinistö.

“It’s impossible to endlessly tolerate this kind of insolence towards our country,” Putin said, referring to the sanctions. “This practice is unacceptable – it destroys international relations and international law.” Putin was vague on exactly how Russia might respond. The newspaper Kommersant quoted two unnamed sources saying a range of potential responses was under consideration in Moscow, including expelling US diplomats, seizing diplomatic properties, increasing restrictions on US companies working in Russia and halting enriched uranium shipments to US power plants. [..] Putin and other Russian officials have repeatedly denied any meddling in the US election, while US intelligence agencies say they have overwhelming evidence of a coordinated Russian campaign. Putin on Thursday described the allegations as “hysteria”, and said: “It’s a great pity that Russian-US relations are being sacrificed to resolve questions of domestic politics.”

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And you thought the US housing bubble was over?

US Housing Bubble 2.0 (Mark Hanson)

The striking Case-Shiller regional charts shown below, courtesy of MHanson.com, make Mark Hanson angry: “so, 2006/2007 was the largest house price bubble ever, but there is nothing to see here in 2017?” and sarcastically points out that “if this isn’t a house price bubble, I would hate to see one.” His bottom line: “If 2006/07 was the peak of the largest housing bubble in history with affordability never better vis a’ vis exotic loans; easy availability of credit; unemployment in the 4%’s; the total workforce at record highs; and growing wages, then what do you call “now” with house prices at or above 2006 levels; worse affordability; tighter credit; higher unemployment; a weakening total workforce; and shrinking wages? Whatever you call it, it’s a greater thing than the Bubble 1.0 peak.”

[..] Income required to buy the avg priced builder house is at historical highs and has completely diverged from the multi-decade trend line. Historically low growth & rebound relative to resales suggest “lack of supply” meme in the Existing Sales market is over-stated.

“Peak builder is here.”
1) New Home Sales “up to” 1995 levels after $15 TRILLION in debt and Fed liquidity aimed largely at the sector.
2) Builder pricing power largely flat for 2-years.
3) Income required to buy the average priced builder house has completely diverged from the multi-decade trend line. This obviously explains why sales are only at 600k SAAR now vs 1.2 million in Bubble 1.0. Reversion to this mean will occur…either thru a sharp rise in income; new exotic loan programs, which make payment less; or house prices dropping.

4) Last time builders were this euphoric was the peak of the biggest credit bubble in history.

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Rinse, forget and repeat.

Is This The Bubble? (Lance Roberts)

Every major market peak, and subsequent devastating mean reverting correction, has ever been the result of the exact ingredients seen previously. Only the ignorance of its existence has been a common theme. The reason that investors ALWAYS fail to recognize the major turning points in the markets is because they allow emotional “greed” to keep them looking backward rather than forward. Of course, the media foster’s much of this “willful” blindness by dismissing, and chastising, opposing views generally until it is too late for their acknowledgement to be of any real use. The next chart shows every major bubble and bust in the U.S. financial markets since 1871 (Source: Robert Shiller)

At the peak of each one of these markets, there was no one claiming that a crash was imminent. It was always the contrary with market pundits waging war against those nagging naysayers of the bullish mantra that “stocks have reached a permanently high plateau” or “this is a new secular bull market.” Yet, in the end, it was something that was unexpected, unknown or simply dismissed that yanked the proverbial rug from beneath investors. What will spark the next mean reverting event? No one knows for sure, but the catalysts are present from: • Excess leverage (Margin debt at new record levels) •IPO’s of negligible companies (Blue Apron, Snap Chat) • Companies using cheap debt to complete stock buybacks and pay dividends, and; • High levels of investor complacency.

Either individually, or in combination, these issues are all inert. Much like pouring gasoline on a pile of wood, the fire will not start without a proper catalyst. What we do know is that an event WILL occur, it is only a function of “when.” The discussion of why “this time is not like the last time” is largely irrelevant. Whatever gains that investors garner in the between now and the next correction by chasing the “bullish thesis” will be wiped away in a swift and brutal downdraft.

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Abe should just go. But before he does, he’ll throw Kuroda under the bus first, if he has the time.

Japan Defense Minister Quits Amid Plunging Support For PM Abe (R.)

Embattled Japanese Defence Minister Tomomi Inada on Friday said she was resigning, after a series of gaffes, missteps and a cover-up at her ministry that have contributed to a sharp plunge in public support for Prime Minister Shinzo Abe. Inada, 58, an Abe protege who shares his conservative views and had been suggested as a possible future premier, had already expected to be replaced in a likely cabinet reshuffle next week that Abe hopes will help rebuild his ratings. Support for the prime minister has sunk below 30% in some polls, due to scandals over suspected cronyism and a view among many voters that he and his aides took them for granted.

Abe apologized “to the people from my heart”, in comments to reporters carried live on national television after Inada announced her resignation. He said Foreign Minister Fumio Kishida would add the defense portfolio to his duties, to eliminate any gap at a time when Japan faces tough security challenges, such as from a volatile North Korea. “I want to make every effort to maintain a high degree of vigilance and protect the security of the people,” Abe said. Abe had drawn fire from both ruling and opposition party lawmakers for retaining Inada despite her perceived incompetence. “He should have thrown Inada under the bus long ago … doing so on the eve of a cabinet reshuffle only looks like desperation,” said Jeffrey Kingston, director of Asian Studies at Temple University Japan.

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Taking it out before the real big scandals come up?

Libor, The Scandal-Ridden Financial Benchmark, Doesn’t Have Long To Live (Qz)

A global borrowing benchmark that became synonymous with rigged financial markets, and cost banks some $9 billion in fines, is going away. Andrew Bailey, the head of Britain’s Financial Conduct Authority, said in a speech today that the regulator will phase out the indicator, Libor, by the end of 2021. Bailey said the reason the London interbank offered rate is being scrapped is because the market underpinning the benchmark—unsecured bank lending—has dried up. For one particular Libor benchmark—there are many rates for various durations and currencies—there were only 15 transactions last year, he said. Such benchmarks have long been problematic and susceptible to manipulation. Libor, for example, is based on an estimate of what supposed experts at banks think a borrowing rate would be.

Bloomberg describes the process like this: “The benchmark is the average rate a group of 20 banks estimate they’d be able to borrow funds from each other in five different currencies across seven time periods, submitted by a panel of lenders every morning. Its administration was overhauled in the wake of the scandal, with Intercontinental Exchange Inc. taking over from the then-named British Bankers’ Association.” Before the financial crisis, banks submitted daily estimates of borrowing rates to the BBA, which then averaged them to calculate that day’s Libor rate. Via allegedly colluding, the banks submitting rates could nudge the average up or down, depending on what was needed to increase a profit or reduce a loss in their portfolios.

Libor is of global importance because it’s used to help determine borrowing costs for more than $300 trillion in securities, for things like student loans and mortgages. But as a trader once said in a transcript uncovered by regulators, it’s “just amazing how libor fixing can make you that much money.” The Libor scandal was also part of an era in which recorded electronic communications—chat messages—became evidence and got a lot of people in a lot of trouble. Similar market manipulation was discovered in things like foreign-currency exchange rates and commodity prices. And now Libor is being scrapped. Banks didn’t really want to participate in the rate-setting process anymore anyway, Bailey said, given the market had shrank by so much. (Their recent history of being fined billions for their role in daily rate submissions probably didn’t help.) Some new indicator will have to be agreed on.

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When I saw the headline, I thought they must either have been real inefficient before, or they’re selling teh kitchen sink and not investing a penny. And whaddaya know?

Shell’s Profits Treble As Cost Cuts Take Effect (PA)

Royal Dutch Shell has reported a large rise in second quarter profits after the energy giant was boosted by higher oil and gas prices. The firm said adjusted earnings rose from £800m to £2.7bn, an increase of 245 per cent, as chief executive Ben van Beurden said he is making progress on “reshaping the company”. He said: “Cash generation has been resilient over four consecutive quarters, at an average oil price of just under $50 per barrel. “The external price environment and energy sector developments mean we will remain very disciplined, with an absolute focus on the four levers within our control, namely capital efficiency, costs, new project delivery, and divestments.

“I am confident that we are on track to deliver a world-class investment to our shareholders.” The figures were flattered by a disastrous second quarter in 2016, when it was stung by dilapidated crude prices and costs linked to its takeover of BG Group. This time last year Brent Crude was trading at round 45 US dollars a barrel compared to circa 50 US dollars today. Shell is also embarking on an ambitious cost-cutting drive and a £24.6bn divestment initiative. To this end, the oil major has sold off more than £16bn of assets since the BG takeover. Shell this year announced it will sell off a package of North Sea assets for up to £3bn to smaller rival Chrysaor, and recently agreed to sell its stake in Irish gas project Corrib in a deal worth up to £956 million.

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Everybody does it.

Oil Companies Trim Drilling Budgets in Sign of Rising Caution (BBG)

Caution lights are flashing for the oil industry. Facing lower-than-expected commodity prices, drillers from ConocoPhillips to Hess to Statoil have slashed their capital spending plans in recent days, as companies lay out their plans to cope with oil prices stuck below $50 a barrel. The budget cuts won’t necessarily mean less oil or natural gas on the market, with some of the companies saying they can now do more with less and expect to produce just as much oil and gas in 2017. But they speak to an investor community that’s grown anxious as a global rally in crude prices has stalled out this year.

“The expectation was that oil would be at least above $50 by this time,” said Brian Youngberg, an energy analyst with Edward Jones & Co. in St. Louis. “Right now, the market wants you to spend within your cash flow, no exceptions allowed. It’s just a response to that.” The “modest tweaks” in this week’s second-quarter earnings reports will probably continue in the coming days, Youngberg said, as drillers focused on U.S. shale plays take center stage. “Companies are going to be cautious,” he said. “No one wants to be the outlier.”

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The Mt. Gox link is interesting. Will BTC-e also close?

US Indicts Russian Suspected of $4 Billion Bitcoin Laundering Scheme (R.)

A US jury indicted a Russian man on Wednesday as the operator of a digital currency exchange he allegedly used to launder more than $4 billion for people involved in crimes ranging from computer hacking to drug trafficking. Alexander Vinnik was arrested in a small beachside village in northern Greece on Tuesday, according to local authorities, following an investigation led by the US Justice Department along with several other federal agencies and task forces. US officials described Vinnik in a Justice Department statement as the operator of BTC-e, an exchange used to trade the digital currency bitcoin since 2011.

They alleged Vinnik and his firm “received” more than $4 billion in bitcoin and did substantial business in the United States without following appropriate protocols to protect against money laundering and other crimes. US authorities also linked him to the failure of Mt. Gox, a Japan-based bitcoin exchange that collapsed in 2014 after being hacked. Vinnik “obtained” funds from the hack of Mt. Gox and laundered them through BTC-e and Tradehill, another San Francisco-based exchange he owned, they said in the statement.

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Robert Fisk is part of our conscience.

The Syrian Army Were Standing Up To Isis Long Before The Americans (Fisk)

I don’t like armies. They are dangerous institutions. Soldiers are not heroes just because they fight. And I’ve grown tired of saying that those who live by the sword sometimes die by the sword. But in an age when the Americans and the Iraqis and Isis can account for 40,000 civilian deaths in Mosul in the past twelve months, compared to 50,000 civilians slaughtered by the Mongols in 13th-century Aleppo – a human rights improvement of US aircrews, Iraqi brutality and Isis sadism over the Mongol hordes by a mere 10,000 souls – death sometimes seems to have lost its meaning. Unless you know the victims or their families. I have a friend whose mother was murdered in the Damascus suburb of Harasta near the start of the Syrian war, another whose brother-in-law was kidnapped east of the city and never seen again.

I met a little girl whose mother and small brother were shot down by al-Nusrah killers in the town of Jisr al-Shughour, and a Lebanese who believes his nephew was hanged in a Syrian jail. And then, this month, in the eastern Syrian desert, near the dust-swept shack village of al-Arak, a Syrian soldier I’d come to know was killed by Isis. He was, of course, a soldier in the army of the Syrian regime. He was a general in an army constantly accused of war crimes by the same nation – the United States – whose air strikes contributed so generously to the obscene massacre in Mosul. But General Fouad Khadour was a professional soldier and he was defending the oil fields of eastern Syria – the crown jewels of Syria’s economy, which was why Isis tried to occupy them all and why they killed Khadour – and the war in the desert is not a dirty war like so many of the conflicts perpetrated in Syria.

When I met him west of Palmyra, Isis had just conquered the ancient Roman city and publicly chopped or blown off the heads of the civilians and soldiers and civil servants who did not manage to flee. Just a year before, the general’s son, also a soldier, had been shot dead in battle in Homs. Fouad Khadour merely nodded when I mentioned this. He wanted to talk about the war in the hot, brown mountains south of Palmyra, where he was teaching his soldiers to fight back against the Isis suicide attackers, to defend their isolated positions around the oil pumping and electricity transmission station where he was based, and to save the T4 pipelines on the road to Homs. The Americans, who proclaimed Isis to be an “apocalyptic” force, sneered that the Syrian army did not fight Isis. But Khadour and his men were standing up to Isis before the Americans ever fired a missile, and learning the only lesson that soldiers can understand when confronted by a horrific enemy: not to be afraid.

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The idea is not exactly new. But Macron wants to go it alone.

France Plans Asylum ‘Hotspots’ In Libya (BBC)

France says it plans to set up “hotspots” in Libya to process asylum seekers, in a bid to stem the flow of migrants to Europe. President Emmanuel Macron said the move would stop people not eligible for asylum from “taking crazy risks”. The centres would be ready “this summer”. He said that between 800,000 and a million people were currently in camps in Libya hoping to get into Europe. But many of them did not have a right to asylum, Mr Macron said. The French leader said that migrants were destabilising Libya and Europe by fuelling people-smuggling, which in turn funded terrorism. “The idea is to create hotspots to avoid people taking crazy risks when they are not all eligible for asylum. We’ll go to them,” he said on Thursday at a naturalisation ceremony in the central city of Orléans.

On Tuesday, Mr Macron mediated talks in Paris between Libya’s opposing governments. UN-backed Prime Minister Fayez al-Sarraj and Khalifa Haftar, the rival military commander who controls the east, committed to a conditional ceasefire after the meeting. They are aiming to end the conflict which has engulfed the country since Col Muammar Gaddafi was ousted in 2011. Mr Macron and other EU leaders had been hoping for some sort of agreement, as Libya has become a key route for migrants making their way to Europe. The French leader said he hoped the deal would be a blow to the human traffickers who work in the region.

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This is not over. Macron wants to show he’s a tough guy, but pushing aside Italy is bad theater.

Italy Loses Patience With France’s Macron Over Migrants, Libya (VoA)

Macron’s Libya diplomacy is just one irritant in increasingly tension-filled Franco-Italian relations. In May, after meeting Gentiloni in Paris, Macron announced: “We have not listened enough to Italy’s cry for help on the migration crisis.” But Macron’s position since hasn’t changed much from Francois Hollande, his predecessor in the Elysee Palace, to the Italian government’s rising anger. “Italian pleas for more burden-sharing by other EU countries have, so far, fallen on deaf ears. Italy’s refugee centers and shelters have reached their capacity of 200,000. So far this year nearly 100,000 asylum seekers have crossed the Mediterranean from Libya — a 17% increase over the same period last year — and with months more of good weather, another 100,000 asylum seekers are likely to land at Italian ports.

This month, Italy’s deputy foreign minister, Mario Giro, complained, “it doesn’t seem like France wants to help us concretely.” French police are blocking hundreds of migrants on the Italian side of the border at Ventimiglia from entering France; the French government is refusing to allow asylum seekers rescued in the Mediterranean from landing at French ports and, like nearly every other EU country, France hasn’t come anywhere near meeting its quota of migrants as agreed to under a 2015 EU refugee relocation scheme. Macron this month talked of distinguishing between war refugees and economic migrants, indicating that France won’t admit any asylum-seekers who are just escaping poverty and hunger. But that doesn’t help Italy as it tries to cope with a mounting influx of mainly economic migrants, who, under EU rule, it has little alternative but to admit, at least for processing and to save lives.

Paris has also scorned an Italian proposal for an EU military mission to monitor and interdict migrants along Libya’s southern border. Italians question why a large French military mission in Niger isn’t being used to disrupt migrant trafficking when it is right by the main route being used by smugglers and would-be asylum seekers traveling north. Last month, the European Parliament’s most senior left-wing politician, Italian Gianni Pittella, launched a scathing attack on Macron after French police frogmarched back into Italy more than 100 migrants who’d crossed into France. “The situation is shameful. Italy and the Italians are being abandoned, they’re being expected to deal with all these migrants on their own with no support,” he said.

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I’ve said it before: help for refugees in fine, even though its distribution through NGOs is a colossal mess. But renting homes for refugees, and supplying them with money to live, is a huge blow in the face of the Greeks devastated by EU-induced austerity, who get nothing.

EU Announces New Emergency Support For Greek Refugee Crisis (AP)

The European Commission announced a new emergency support package for Greece Thursday to help it deal with the refugee crisis that has seen tens of thousands of migrants and refugees stuck in the country. The €209 million ($243 million) package includes a €151 million program to help refugee families rent accommodation in Greek cities and provide them with money in an effort to help them move out of refugee camps, EU officials said during a visit to Athens. The Commission said the new funding more than doubles the emergency support extended to Greece for the refugee crisis, bringing it to a total of €401 million.

The rental project is in cooperation with the UN High Commissioner for Refugees and will provide 22,000 rental places with the aim of increasing the number of refugees living in rented apartments to 30,000 by the end of the year, including 2,000 places on Greek islands. A parallel scheme worth €57.6 million will provide refugees and asylum seekers with monthly cash stipends distributed through cash-cards for expenses such as transport, food and medication. “The projects launched today are one part of our wider support to the country but also to those in need of our protection,” said Migration Commissioner Dimitris Avramopoulos. “Around €1.3 billion of EU funds are at the disposal of Greece for the management of the migration crisis.”

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Jun 262017
 
 June 26, 2017  Posted by at 11:49 am Finance Tagged with: , , , , , , , , , ,  


Paul Klee Ghost of a Genius 1922

 

The Automatic Earth has written many articles on the topic of EROEI (Energy Return on Energy Invested) through the years, there’s a whole chapter on it in the Automatic Earth Primer Guide 2017 that Nicole assembled recently, which contains 17 different articles.

Still, since EROEI is the most important energy issue there is at present, and not the price of oil or some new gas find or a set of windmills or solar panels or thorium, it can’t hurt to repeat it once again, in someone else’s words and from someone else’s angle. This one comes from Brian Davey on his site CredoEconomics, part of his book “Credo”.

It can’t hurt to repeat it because not nearly enough people understand that in the end everything, the survival of our world, our way of life, is all about the ‘quality’ of energy, about what we get in return when we drill and pump and build infrastructure, what remains when we subtract all the energy used to ‘generate’ energy, from (or at) the bottom line.

Anno 2017, our overall ‘net energy’ is nowhere near where it was for the first 100 years or so after we started using oil. And there’s no energy source that comes close to -conventional- oil (and gas) when it comes to what we are left with once our efforts are discounted, in calories or Joules.

The upshot of this is that even if we can ‘gain’ 10 times more than we put in, in energy terms, that won’t save our complex societies. To achieve that, we would need at least a 15:1 ratio, a number straight from our friend Charlie Hall, which is probably still quite optimistic. And we simply don’t have it. Not anymore.

Also, not nearly enough people understand that it has absolutely nothing to do with money. That you can’t go out and buy more or better energy sources. Which is why we use EROEI instead of EROI (Energy Return on Investment), because the latter leaves some sort of financial interpretation open that doesn’t actually exist, it suggests that a financial price of energy plays a role.

First, here’s Nicole from the Automatic Earth Primer Guide 2017. Below that, Brian Davey’s article.

 

 

Nicole Foss: Energy is the master resource – the capacity to do work. Our modern society is the result of the enormous energy subsidy we have enjoyed in the form of fossil fuels, specifically fossil fuels with a very high energy profit ratio (EROEI). Energy surplus drove expansion, intensification, and the development of socioeconomic complexity, but now we stand on the edge of the net energy cliff. The surplus energy, beyond that which has to be reinvested in future energy production, is rapidly diminishing.

We would have to greatly increase gross production to make up for reduced energy profit ratio, but production is flat to falling so this is no longer an option. As both gross production and the energy profit ratio fall, the net energy available for all society’s other purposes will fall even more quickly than gross production declines would suggest. Every society rests on a minimum energy profit ratio. The implication of falling below that minimum for industrial society, as we are now poised to do, is that society will be forced to simplify.

A plethora of energy fantasies is making the rounds at the moment. Whether based on unconventional oil and gas or renewables (that are not actually renewable), these are stories we tell ourselves in order to deny that we are facing any kind of future energy scarcity, or that supply could be in any way a concern. They are an attempt to maintain the fiction that our society can continue in its current form, or even increase in complexity. This is a vain attempt to deny the existence of non-negotiable limits to growth. The touted alternatives are not energy sources for our current society, because low EROEI energy sources cannot sustain a society complex enough to produce them.

 

 

Using Energy to Extract Energy – The Dynamics of Depletion

 

Brian Davey: The “Limits to Growth Study” of 1972 was deeply controversial and criticised by many economists. Over 40 years later, it seems remarkably prophetic and on track in its predictions. The crucial concept of Energy Return on Energy Invested is explained and the flaws in neoclassical reasoning which EROI highlights.

The continued functioning of the energy system is a “hub interdependency” that has become essential to the management of the increasing complexity of our society. The energy input into the UK economy is about 50 to 70 times as great as what the labour force could generate if working full time only with the power of their muscles, fuelled up with food. It is fossil fuels, refined to be used in vehicles and motors or converted into electricity that have created power inputs that makes possible the multiple round- about arrangements in a high complex economy. The other “hub interdependency” is a money and transaction system for exchange which has to continue to function to make vast production and trade networks viable. Without payment systems nothing functions.

Yet, as I will show, both types of hub interdependencies could conceivably fail. The smooth running of the energy system is dependent on ample supplies of cheaply available fossil fuels. However, there has been a rising cost of extracting and refining oil, gas and coal. Quite soon there is likely to be an absolute decline in their availability. To this should be added the climatic consequences of burning more carbon based fuels. To make the situation even worse, if the economy gets into difficulty because of rising energy costs then so too will the financial system – which can then have a knock-on consequence for the money system. The two hub interdependencies could break down together.

“Solutions” put forward by the techno optimists almost always assume growing complexity and new uses for energy with an increased energy cost. But this begs the question- because the problem is the growing cost of energy and its polluting and climate changing consequences.

 

The “Limits to Growth” study of 1972 – and its 40 year after evaluation

It was a view similar to this that underpinned the methodology of a famous study from the early 1970s. A group called the Club of Rome decided to commission a group of system scientists at the Massachusetts Institute of Technology to explore how far economic growth would continue to be possible. Their research used a series of computer model runs based on various scenarios of the future. It was published in 1972 and produced an instant storm. Most economists were up in arms that their shibboleth, economic growth, had been challenged. (Meadows, Meadows, Randers, & BehrensIII, 1972)

This was because its message was that growth could continue for some time by running down “natural capital” (depletion) and degrading “ecological system services” (pollution) but that it could not go on forever. An analogy would be spending more than one earns. This is possible as long as one has savings to run down, or by running up debts payable in the future. However, a day of reckoning inevitably occurs. The MIT scientists ran a number of computer generated scenarios of the future including a “business as usual” projection, called the “standard run” which hit a global crisis in 2030.

It is now over 40 years since the original Limits to Growth study was published so it is legitimate to compare what was predicted in 1972 against what actually happened. This has now been done twice by Graham Turner who works at the Australian Commonwealth Scientific and Industrial Research Organisation (CSIRO). Turner did this with data for the rst 30 years and then for 40 years of data. His conclusion is as follows:

The Limits to Growth standard run scenario produced 40 years ago continues to align well with historical data that has been updated in this paper following a 30-year comparison by the author. The scenario results in collapse of the global economy and environment and subsequently, the population. Although the modelled fall in population occurs after about 2030 – with death rates reversing contemporary trends and rising from 2020 onward – the general onset of collapse first appears at about 2015 when per capita industrial output begins a sharp decline. (Turner, 2012)

So what brings about the collapse? In the Limits to Growth model there are essentially two kinds of limiting restraints. On the one hand, limitations on resource inputs (materials and energy). On the other hand, waste/pollution restraints which degrade the ecological system and human society (particularly climate change).

Turner finds that, so far it, is the former rather than the latter that is the more important. What happens is that, as resources like fossil fuels deplete, they become more expensive to extract. More industrial output has to be set aside for the extraction process and less industrial output is available for other purposes.

With signficant capital subsequently going into resource extraction, there is insufficient available to fully replace degrading capital within the industrial sector itself. Consequently, despite heightened industrial activity attempting to satisfy multiple demands from all sectors and the population, actual industrial output per capita begins to fall precipitously, from about 2015, while pollution from the industrial activity continues to grow. The reduction of inputs produced per capita. Similarly, services (e.g., health and education) are not maintained due to insufficient capital and inputs.

Diminishing per capita supply of services and food cause a rise in the death rate from about 2020 (and somewhat lower rise in the birth rate, due to reduced birth control options). The global population therefore falls, at about half a billion per decade, starting at about 2030. Following the collapse, the output of the World3 model for the standard run (figure 1 to figure 3) shows that average living standards for the aggregate population (material wealth, food and services per capita) resemble those of the early 20th century.(Turner, 2012, p. 121)

 

Energy Return on Energy Invested

A similar analysis has been made by Hall and Klitgaard. They argue that to run a modern society it is necessary that the energy return on energy invested must be at least 15 to 1. To understand why this should be so consider the following diagram from a lecture by Hall. (Hall, 2012)

eroei

The diagram illustrates the idea of the energy return on energy invested. For every 100 Mega Joules of energy tapped in an oil flow from a well, 10 MJ are needed to tap the well, leaving 90 MJ. A narrow measure of energy returned on energy invested at the wellhead in this example would therefore be 100 to 10 or 10 to 1.

However, to get a fuller picture we have to extend this kind of analysis. Of the net energy at the wellhead, 90 MJ, some energy has to be used to refine the oil and produce the by-products, leaving only 63 MJ.

Then, to transport the refined product to its point of use takes another 5 MJ leaving 58MJ. But of course, the infrastructure of roads and transport also requires energy for construction and maintenance before any of the refined oil can be used to power a vehicle to go from A to B. By this final stage there is only 20.5 MJ of the original 100MJ left.

We now have to take into account that depletion means that, at well heads around the world, the energy to produce energy is increasing. It takes energy to prospect for oil and gas and if the wells are smaller and more difficult to tap because, for example, they are out at sea under a huge amount of rock. Then it will take more energy to get the oil out in the first place.

So, instead of requiring 10MJ to produce the 100 MJ, let us imagine that it now takes 20 MJ. At the other end of the chain there would thus, only be 10.5MJ – a dramatic reduction in petroleum available to society.

The concept of Energy Return on Energy Invested is a ratio in physical quantities and it helps us to understand the flaw in neoclassical economic reasoning that draws on the idea of “the invisible hand” and the price mechanism. In simplistic economic thinking, markets should have no problems coping with depletion because a depleting resource will become more expensive. As its price rises, so the argument goes, the search for new sources of energy and substitutes will be incentivised while people and companies will adapt their purchases to rising prices. For example, if it is the price of energy that is rising then this will incentivise greater energy efficiency. Basta! Problem solved…

Except the problem is not solved… there are two flaws in the reasoning. Firstly, if the price of energy rises then so too does the cost of extracting energy – because energy is needed to extract energy. There will be gas and oil wells in favourable locations which are relatively cheap to tap, and the rising energy price will mean that the companies that own these wells will make a lot of money. This is what economists call “rent”. However, there will be some wells that are “marginal” because the underlying geology and location are not so favourable. If energy prices rise at these locations then rising energy prices will also put up the energy costs of production. Indeed, when the energy returned on energy invested falls as low as 1 to 1, the increase in the costs of energy inputs will cancel out any gains in revenues from higher priced energy outputs. As is clear when the EROI is less than one, energy extraction will not be profitable at any price.

Secondly, energy prices cannot in any case rise beyond a certain point without crashing the economy. The market for energy is not like the market for cans of baked beans. Energy is necessary for virtually every activity in the economy, for all production and all services. The price of energy is a big deal – energy prices going up and down have a similar significance to interest rates going up or down. There are “macro-economic” consequences for the level of activity in the economy. Thus, in the words of one analyst, Chris Skrebowski, there is a rise in the price of oil, gas and coal at which:

the cost of incremental supply exceeds the price economies can pay without destroying growth at a given point in time.(Skrebowski, 2011)

This kind of analysis has been further developed by Steven Kopits of the Douglas-Westwood consultancy. In a lecture to the Columbia University Center on Global Energy Policy in February of 2014, he explained how conventional “legacy” oil production peaked in 2005 and has not increased since. All the increase in oil production since that date has been from unconventional sources like the Alberta Tar sands, from shale oil or natural gas liquids that are a by-product of shale gas production. This is despite a massive increase in investment by the oil industry that has not yielded any increase in “conventional oil” production but has merely served to slow what would otherwise have been a faster decline.

More specifically, the total spend on upstream oil and gas exploration and production from 2005 to 2013 was $4 trillion. Of that amount, $3.5 trillion was spent on the “legacy” oil and gas system. This is a sum of money equal to the GDP of Germany. Despite all that investment in conventional oil production, it fell by 1 million barrels a day. By way of comparison, investment of $1.5 trillion between 1998 and 2005 yielded an increase in oil production of 8.6 million barrels a day.

Further to this, unfortunately for the oil industry, it has not been possible for oil prices to rise high enough to cover the increasing capital expenditure and operating costs. This is because high oil prices lead to recessionary conditions and slow or no growth in the economy. Because prices are not rising fast enough and costs are increasing, the costs of the independent oil majors are rising at 2 to 3% a year more than their revenues. Overall profitability is falling and some oil majors have had to borrow and sell assets to pay dividends. The next stage in this crisis has then been that investment projects are being cancelled – which suggests that oil production will soon begin to fall more rapidly.

The situation can be understood by reference to the nursery story of Goldilocks and the Three Bears. Goldilocks tries three kinds of porridge – some that is too hot, some that is too cold and some where the temperature is somewhere in the middle and therefore just right. The working assumption of mainstream economists is that there is an oil price that is not too high to undermine economic growth but also not too low so that the oil companies cannot cover their extraction costs – a price that is just right. The problem is that the Goldilocks situation no longer describes what is happening. Another story provides a better metaphor – that story is “Catch 22”. According to Kopits, the vast majority of the publically quoted oil majors require oil prices of over $100 a barrel to achieve positive cash flow and nearly a half need more than $120 a barrel.

But it is these oil prices that drag down the economies of the OECD economies. For several years, however, there have been some countries that have been able to afford the higher prices. The countries that have coped with the high energy prices best are the so called “emerging non OECD countries” and above all China. China has been bidding away an increasing part of the oil production and continuing to grow while higher energy prices have led to stagnation in the OECD economies. (Kopits, 2014)

Since the oil price is never “just right” it follows that it must oscillate between a price that is too high for macro-economic stability or too low to make it a paying proposition for high cost producers of oil (or gas) to invest in expanding production. In late 2014 we can see this drama at work. The faltering global economy has a lower demand for oil but OPEC, under the leadership of Saudi Arabia, have decided not to reduce oil production in order to keep oil prices from falling. On the contrary they want prices to fall. This is because they want to drive US shale oil and gas producers out of business.

The shale industry is described elsewhere in this book – suffice it here to refer to the claim of many commentators that the shale oil and gas boom in the United States is a bubble. A lot of money borrowed from Wall Street has been invested in the industry in anticipation of high profits but given the speed at which wells deplete it is doubtful whether many of the companies will be able to cover their debts. What has been possible so far has been largely because quantitative easing means capital for this industry has been made available with very low interest rates. There is a range of extraction production costs for different oil and gas wells and fields depending on the differing geology in different places. In some “sweet spots” the yield compared to cost is high but in a large number of cases the costs of production have been high and it is being said that it will be impossible to make money at the price to which oil has fallen ($65 in late 2014). This in turn could mean that companies funding their operations with junk bonds could find it difficult to service their debt. If interest rates rise the difficulty would become greater. Because the shale oil and gas sector has been so crucial to expansion in the USA then a large number of bankruptcies could have wider repercussions throughout the wider US and world economy.

 

Renewable Energy systems to the rescue?

Although it seems obvious that the depletion of fossil fuels can and should lead to the expansion of renewable energy systems like wind and solar power, we should beware of believing that renewable energy systems are a panacea that can rescue consumer society and its continued growth path. A very similar net energy analysis can, and ought to be done for the potential of renewable energy to match that already done for fossil fuels.

eroei-renewables

Before we get over-enthusiastic about the potential for renewable energy, we have to be aware of the need to subtract the energy costs particular to renewable energy systems from the gross energy that renewable energy systems generate. Not only must energy be used to manufacture and install the wind turbines, the solar panels and so on, but for a renewable based economy to be able to function, it must also devote energy to the creation of energy storage. This would allow for the fact that, when the wind and the sun are generating energy, is not necessarily the time when it is wanted.

Furthermore, the places where, for example, solar and wind potential are at this best – offshore for wind or in deserts without dust storms near the equator for solar – are usually a long distance from centres of use. Once again, a great deal of energy, materials and money must be spent getting the energy from where it is generated to where it will be used. For example, the “Energie Wende” (Energy Transformation) in Germany is involving huge effort, financial and energy costs, creating a transmission corridor to carry electricity from North Sea wind turbines down to Bavaria where the demand is greatest. Similarly, plans to develop concentrated solar power in North Africa for use in northern Europe which, if they ever come to anything, will require major investments in energy transmission. A further issue, connected to the requirement for energy storage, is the need for energy carriers which are not based on electricity. As before, conversions to put a current energy flux into a stored form, involve an energy cost.

Just as with fossil fuels, sources of renewable energy are of variable yield depending on local conditions: offshore wind is better than onshore for wind speed and wind reliability; there is more solar energy nearer the equator; some areas have less cloud cover; wave energy on the Atlantic coasts of the UK are much better than on other coastlines like those of the Irish Sea or North Sea. If we make a Ricardian assumption that best net yielding resources are developed first, then subsequent yields will be progressively inferior. In more conventional jargon – just as there are diminishing returns for fossil energy as fossil energy resources deplete, so there will eventually be diminishing returns for renewable energy systems. No doubt new technologies will partly buck this trend but the trend is there nonetheless. It is for reasons such as these that some energy experts are sceptical about the global potential of renewable energy to meet the energy demand of a growing economy. For example, two Australian academics at Monash University argue that world energy demand would grow to 1,000 EJ (EJ = 10 18 J) or more by 2050 if growth continued on the course of recent decades. Their analysis then looks at each renewable energy resource in turn, bearing in mind the energy costs of developing wind, solar, hydropower, biomass etc., taking into account diminishing returns, and bearing in mind too that climate change may limit the potential of renewable energy. (For example, river flow rates may change affecting hydropower). Their conclusion: “We nd that when the energy costs of energy are considered, it is unlikely that renewable energy can provide anywhere near a 1000 EJ by 2050.” (Moriarty & Honnery, 2012)

Now let’s put these insights back into a bigger picture of the future of the economy. In a presentation to the All Party Parliamentary Group on Peak Oil and Gas, Charles Hall showed a number of diagrams to express the consequences of depletion and rising energy costs of energy. I have taken just two of these diagrams here – comparing 1970 with what might be the case in 2030. (Hall C. , 2012) What they show is how the economy produces different sorts of stuff. Some of the production is consumer goods, either staples (essentials) or discretionary (luxury) goods. The rest of production is devoted to goods that are used in production i.e. investment goods in the form of machinery, equipment, buildings, roads, infrastracture and their maintenance. Some of these investment goods must take the form of energy acquisition equipment. As a society runs up against energy depletion and other problems, more and more production must go into energy acquisition, infrastructure and maintenance. Less and less is available for consumption, and particularly for discretionary consumption.

hall

Whether the economy would evolve in this way can be questioned. As we have seen, the increasing needs of the oil and gas sector implies a transfer of resources from elsewhere through rising prices. However, the rest of the economy cannot actually pay this extra without crashing. That is what the above diagrams show – a transfer of resources from discretionary consumption to investment in energy infrastructure. But such a transfer would be crushing for the other sectors and their decline would likely drag down the whole economy.

Over the last few years, central banks have had a policy of quantitative easing to try to keep interest rates low. The economy cannot pay high energy prices AND high interest rates so, in effect, the policy has been to try to bring down interest rates as low as possible to counter the stagnation. However, this has not really created production growth, it has instead created a succession of asset price bubbles. The underlying trend continues to be one of stagnation, decline and crisis and it will get a lot worse when oil production starts to fall more rapidly as a result of investment cut backs. The severity of the recessions may be variable in different countries because competitive strength in this model goes to those countries where energy is used most efficiently and which can afford to pay somewhat higher prices for energy. Such countries are likely to do better but will not escape the general decline if they stay wedded to the conventional growth model. Whatever the variability, this is still a dead end and, at some point, people will see that entirely different ways of thinking about economy and ecology are needed – unless they get drawn into conflicts and wars over energy by psychopathic policy idiots. There is no way out of the Catch 22 within the growth economy model. That’s why degrowth is needed.

Further ideas can be extrapolated from Hall’s way of presenting the end of the road for the growth economy. The only real option as a source for extra resources to be ploughed into changing the energy sector is from what Hall calls “discretionary consumption” aka luxury consumption. It would not be possible to take from “staples” without undermining the ability of ordinary people to survive day to day. Implicit here is a social justice agenda for the post growth – post carbon economy. Transferring resources out of the luxury consumption of the rich is a necessary part of the process of finding the wherewithal for energy conservation work and for developing renewable energy resources. These will be expensive and the resources cannot come from anywhere else than out of the consumption of the rich. It should be remembered too that the problems of depletion do not just apply to fossil energy extraction coal, oil and gas) but apply across all forms of mineral extraction. All minerals are depleted by use and that means the grade or ore declines over time. Projecting the consequences into the future ought to frighten the growth enthusiasts. To take in how industrial production can hit a brick wall of steeply rising costs, consider the following graph which shows the declining quality of ore grades mined in Australia.

mining-australia

As ores deplete there is a deterioration of ore grades. That means that more rock has to be shifted and processed to refine and extract the desired raw material, requiring more energy and leaving more wastes. This is occurring in parallel to the depletion in energy sources which means that more energy has to be used to extract a given quantity of energy and therefore, in turn, to extract from a given quantity of ore. Thus, the energy requirements to extract energy are rising at the very same time as the amount of energy required to extract given quantities of minerals are rising. More energy is needed just at the time that energy is itself becoming more expensive.

Now, on top of that, add to the picture the growing demand for minerals and materials if the economy is to grow.

At least there has been a recognition and acknowledgement in recent years that environmental problems exist. The problem is now somewhat different – the problem is the incredibly naive faith that markets and technology can solve all problems and keep on going. The main criticism of the limits to growth study was the claim that problems would be anticipated in forward markets and would then be made the subject of high tech innovation. In the next chapter, the destructive effects of these innovations are examined in more depth.

 

 

Jun 222017
 
 June 22, 2017  Posted by at 9:35 am Finance Tagged with: , , , , , , , , , ,  


Paul Klee Analysis of Various Perversities 1922

 

The Little Putsch That Could Beget a Great Big Coup (Stockman)
US Should Mind Its Own Business; It Shouldn’t Be In Syria (Ron Paul)
US Is A “Second Tier” Country (ZH)
America Grows Older And More Ethnically Diverse (BBG)
The Wheels Come Off Uber (Yves Smith)
Oil Prices ‘Like A Falling Knife’ (CNBC)
The Rise of a Prince Ends Doubts Over Saudi Arabia’s Direction (BBG)
Canada’s Housing Bubble Will Burst (BBG)
Rehousing Of Grenfell Tower Families In Luxury Block Gets Mixed Response (G.)
China NPL Prices Up 30% as New Gold Rush Gets Under Way (BBG)
Strong Interest, Low Price For NPLs of Greece’s Eurobank (K.)
Greeks Skeptical About Benefits, Prospects of EU (K.)
Greek Tourism Minister Says Arrivals Will Top 30 Million This Year (K.)

 

 

Davis is getting upset. He’s offering a free copy of his Trump book to every American at the link.

The Little Putsch That Could Beget a Great Big Coup (Stockman)

Let’s start with two obvious points about the whole Russia fiasco… Namely, there is no “there, there.” First off, the president has the power to declassify secret documents at will. But in this instance he could also do that without compromising intelligence community (IC) “sources and methods” in the slightest. That’s because after Edward Snowden’s revelations in 2013, the whole world was put on notice — and most especially Washington’s adversaries — that it collects every single electronic digit that passes through the worldwide web and related communications grids. Washington essentially has universal and omniscient SIGINT (signals intelligence). Acknowledging that fact by publishing the Russia-Trump intercepts would provide new knowledge to exactly no one. Nor would it jeopardize the lives of any American spy or agent (HUMINT).

It would just document the unconstitutional interference in the election process that had been committed by the U.S. intelligence agencies and political operatives in the Obama White House. That pales compared to whatever noise comes out of Langley (CIA) and Ft. Meade (NSA). And I do mean noise. Yes, I can hear the boxes on the CNN screen harrumphing that declassifying the “evidence” would amount to obstruction of justice! That is, since Trump’s “crime” is a given (i.e. his occupancy of the Oval Office), anything that gets in the way of his conviction and removal therefrom amounts to “obstruction.” Given that he is up against a Deep State/Democratic/Neoconservative/mainstream media prosecution, the Donald has no chance of survival short of an aggressive offensive of the type I just described. But that’s not happening because the man is clueless about what he is doing in the White House.

And he’s being advised by a cacophonous coterie of amateurs and nincompoops. So he has no action plan except to impulsively reach for his Twitter account. That became more than evident — and more than pathetic, too — when he tweeted out an attack on his own Deputy Attorney General, Rod Rosenstein. At least Nixon fired Elliot Richardson (his Attorney General) and Bill Ruckelshaus (Deputy AG): “I am being investigated for firing the FBI Director by the man who told me to fire the FBI Director! Witch Hunt.” Alone with his Twitter account, clueless advisors and pulsating rage, the Donald is instead laying the groundwork for his own demise. Were this not the White House, this would normally be the point at which they send in the men in white coats with a straight jacket.

[..] Even Senator John Thune, an ostensible Swamp-hating conservative, had nothing but praise for Special Counsel Robert Mueller, that he would fairly and thoroughly get to the bottom of the matter. No he won’t! Mueller is a card-carrying member of the Deep State who was there at the founding of today’s surveillance monster as FBI Director following 9/11. Since the whole $75 billion apparatus that eventually emerged was based on an exaggerated threat of global Islamic terrorism, Russia had to be demonized into order to keep the game going — a transition that Mueller fully subscribed to.

Read more …

“One thing that I am concerned about – because I’ve seen it happen so often over the years, are false flags.”

US Should Mind Its Own Business; It Shouldn’t Be In Syria (Ron Paul)

RT: Australia halted its cooperation. How significant is this development? Why did they do it? Ron Paul: I think that is good. Maybe wise enough, I wish we could do the same thing – just come home. It just makes no sense; there’s a mess over there. So many people are involved, the neighborhood ought to take care of it, and we have gone too far away from our home. It has been going on for too long, and it all started when Obama in 2011 said: “Assad has to go.” And now as the conditions deteriorate …it looks like Assad and his allies are winning, and the US don’t want them to take Raqqa. This just goes on and on. I think it is really still the same thing that Obama set up – “Get rid of Assad” and there is a lot of frustration because Assad is still around and now it is getting very dangerous, it is dangerous on both sides.

One thing that I am concerned about – because I’ve seen it happen so often over the years, are false flags. Some accidents happen. Even if it is an honest accident or it is deliberate by one side or the other to blame somebody. And before they stop and think about it, then there is more escalation. When our planes are flying over there and into airspace where we shouldn’t be, and we are setting up boundaries and say “don’t cross these lines or you will be crossing our territory.” We have no right to do this. We should mind our own business; we shouldn’t be over there, when we go over there and decide that we are going to take over, it is an act of aggression, and I am positively opposed to that. And I think most Americans are too if they get all the information they need.

Read more …

“..the US received its lowest marks in the categories of “tolerance and inclusion” and “health and wellness.“

US Is A “Second Tier” Country (ZH)

Most Americans’ idea of happiness involves lounging by the water or on a beach somewhere. But it turns out, human happiness can flourish even in freezing climates far from the equator. To wit, the Social Progress Imperative, a US-based nonprofit, released the results of its annual Social Progress Index report, which purports to rank countries based on the overall wellbeing of their citizens. Four Scandinavian countries – Denmark, Finland, Iceland and Norway claimed the top spots, while the US placed 18th out of 128, leaving it in what the SPI defines as the “second-tier” of countries based on citizens’ wellbeing, according to Bloomberg. Luckily, being “second-tier” doesn’t seem that bad, according to a definition found in the report. “Second-tier countries demonstrate “high social progress” on core issues, such as nutrition, water, and sanitation.

However, they lag the first-tier, “very high social progress” nations when it comes to social unity and civic issues. That more or less reflects the U.S. performance. (There are six tiers in the study.)” “We want to measure a country’s health and wellness achieved, not how much effort is expended, nor how much the country spends on healthcare,” the report states. In a nod to the controversy surrounding President Donald Trump’s anti-immigrant rhetoric, as well as his efforts to repeal and replace Obamacare, the report noted that the US received its lowest marks in the categories of “tolerance and inclusion” and “health and wellness.” America’s “tolerance” score has been sliding since 2014, around the time that several high-profile shootings of unarmed black men ignited the “Black Lives Matter” movement, sparking a national conversation about the prevalence of racism in US society.

Read more …

Just very slowly.

America Grows Older And More Ethnically Diverse (BBG)

The United States is growing older and more ethnically diverse, a trend that could put strains on government programs from Medicare to education, the Census Bureau reported Thursday. Every ethnic and racial group grew between 2015 and 2016, but the number of whites increased at the slowest rate — less than one hundredth of 1% or 5,000 people, the Census estimate shows. That’s a fraction of the rates of growth for non-white Hispanics, Asians and people who said they are multi-racial, according to the government’s annual estimates of population. President Donald Trump’s core support in the racially divisive 2016 election came from white voters, and polls showed that it was especially strong among those who said they felt left behind in an increasingly racially diverse country.

In fact, the Census Bureau projects whites will remain in the majority in the U.S. until after 2040. “Even then, (whites) will still represent the nation’s largest plurality of people, and even then they will still inherit the structural advantages and legacies that benefit people on the basis of having white skin,” said Justin Gest, author of “The New Minority,” a book about the 2016 election. The Census Bureau reported that the median age of Americans — the age at which half are older and half are younger — rose nationally from just over 35 years to nearly 38 years in the years between 2000 and 2016, driven by the aging of the “baby boom” generation. The number of residents age 65 and older grew from 35 million to 49.2 million during those 16 years, jumping from 12% of the total population to 15%.

That’s a costly leap for taxpayers as those residents move to Medicare, government health care for seniors and younger people with disabilities, which accounted for $1 out of every $7 in federal spending last year, according to the Kaiser Family Foundation. By 2027, it will cost $1 out of every $6 of federal money spent. Net Medicare spending is expected to nearly double over the next decade, from $592 billion to $1.2 trillion, the KFF reported.

Read more …

Excellent take-down from Yves.

The Wheels Come Off Uber (Yves Smith)

Not surprisingly, the financial press has been all ago about the drama of Travis Kalanick’s forced departure from Uber’s CEO position yesterday, and has focused on getting salacious insider details of his ouster. That means journalists largely ignored what ought to be the real story, which is whether Uber has any future. I anticipate that Hubert Horan will offer a longer-form treatment of this topic. Hubert had already documented, in considerable detail in his ten-part series, how Uber has no conceivable path to profitability. Its business model has been based on a massive internal contradiction: using a ginormous war chest to try to achieve a near-monopoly position in a low-margin, mature business that is fragmented geographically and locally.

Monopolies and oligopolies are sustainable only when certain factors are operative: the ability to attain a superior cost position through scale economies, which include network effects, or barriers to entry, such as regulations, very high skill levels, or high minimum investment requirements. Neither of these apply in the local car ride business. Even if Uber were able to drive literally every competing cab operator in the world out of business due to its ability to continue its predatory pricing, once Uber raised prices to a level where it achieved profits, new entrants (or revived old entrants) would come in. Uber will thus never be able to charge the premium prices (in excess of the level for a traditional taxi operator to be profitable) for the very long period necessary for Uber to merely be able to recoup the billions of dollars it has burned, mainly in subsidizing the cost of rides, let alone to achieve an adequate return on capital.

And that’s before you get to the fact that systematically much higher prices would mean fewer fares. The developments of the last few months mean Uber’s decay path is sure to accelerate. I’ve been following the business press for over 30 years. I can’t think of a single case where even an established, profitable business with an established franchise has had so many top level positions vacant, and for such bad reasons. As reader vidimi quipped, “With no CEO, CFO, COO, and CIO, uber is coming very close to becoming a self-driving company.” And that’s not even a full list. World-class communications expert Rachel Whetstone, who is recognized as a key force in rebuilding the Tories’ brand in the UK, quit in April.

The heads of engineering departed for failing to disclose a previous sexual investigation; the head of product and growth was forced out over a sexual impropriety at a company function. And in a scandal that will have a much longer tail, Uber’s former head of its Waymo driverless car unit, Anthony Levandowski, has had his case involving alleged theft of intellectual property from Google referred to the Department of Justice. Kalanick was deeply involved in Levandowski sudden exodus. It seems implausible that Kalanick didn’t know Levandowski was making off with Google files. If the case does lead to a criminal prosecution, it is hard to see how Kalanick could escape scrutiny as a potential criminal co-conspirator.

Read more …

Just in case you were wondering why King Salman named a new crown prince…

Oil Prices ‘Like A Falling Knife’ (CNBC)

Oil prices could be poised to fall below $40 a barrel before too long, according to an analyst at Energy Aspects, as the commodity appeared set to post its largest price slide in the first half of the year for the past two decades. “This is like a falling knife right now, I genuinely haven’t seen sentiment this bad ever,” Amrita Sen, the co-founder and chief oil analyst at Energy Aspects, told CNBC on Wednesday. “We have had clients emailing saying they have been trading this for 20 or 30 years and they have never seen something like this,” she added. Oil prices have tumbled more than 20% his year, marking its worst performance for the first six months of the year since 1997 and putting the commodity in bear market territory.

The ongoing decline in prices appears to have stemmed from investors discounting evidence of robust compliance by OPEC and non-OPEC producers with a deal to curtail a global supply overhang. Prices took a fresh leg lower in the previous session – dipping 2% – as new signs of rising output from Nigeria and Libya, the two OPEC members exempt from a deal to cut production. Output from the 14-member exporter group ticked higher in May due to rising production in Nigeria, Libya and Iraq, raising concerns about OPEC’s effort to shrink global stockpiles of crude oil. OPEC and other producers have committed to keeping 1.8 million barrels a day off the market through March. Libya’s oil production rose more than 50,000 barrels per day to 885,000 bpd. Meanwhile, exports of Nigeria’s benchmark Bonny Light crude oil are set to rise by 62,000 barrels per day in August.

Read more …

Absolutely. He’s the War Prince.

The Rise of a Prince Ends Doubts Over Saudi Arabia’s Direction (BBG)

With the anointment of Prince Mohammed bin Salman as heir to the Saudi throne, any doubts over the continuation of policies that have shaken up the Middle East have gone. Western diplomats already referred to the 31-year-old as “Mr. Everything,” because of his control over most aspects of domestic, foreign and defense affairs. His elevation ends a behind-the-scenes struggle for power and answers the question of what would happen to his plans for Saudi Arabia when King Salman, now 81, dies or steps aside. The most ambitious of these, Vision 2030, seeks to recalibrate the economy to end the country’s near-total dependence on oil revenue. But internationally, there are also ramifications. Last month, the prince again raised the stakes in the regional rivalry with Iran, saying that dialog was “impossible” as they fight a proxy war in Yemen.

He also led a multi-nation effort to isolate neighboring Qatar, causing a rift among fellow members of the Gulf Cooperation Council. That also looks set to turn into another long and potentially fruitless test of wills as Iran and Turkey come to Qatar’s aid. “The switch offers him the legitimacy and consensus of becoming the next king and that will validate his vision, his plans and his policies,” said Sami Nader, head of the Beirut-based Levant Institute for Strategic Affairs. “There were a lot of question marks about the future of Saudi Arabia and the transition. Now this debate has ended.” Widely known as MBS, he was made crown prince just after dawn in Riyadh, displacing his older cousin, Mohammed bin Nayef, who was also stripped of his post as interior minister in charge of domestic security forces and counter-terrorism policy.

The move was neither a shock nor a coup, and it means he could be running the kingdom for decades to come. What’s more, his tough approach to the intractable problems of the Middle East would appear to mesh well with U.S. President Donald Trump, who visited Saudi Arabia last month. Trump called the new crown prince Wednesday to offer congratulations on his elevation, the White House said in a statement. Trump and the prince “committed to close cooperation to advance our shared goals of security, stability, and prosperity across the Middle East and beyond,” according to the statement. The problem is what comes next. On Tuesday, the U.S. Department of State questioned Saudi Arabia’s justification at striking out at Qatar by cutting it off from diplomatic and transport links.

The bombing campaign in Yemen aimed at destroying the rebel Houthi forces that Saudi Arabia sees as proxies for Iran, meanwhile, appears to have no end in sight. Two years later, it has become bogged down, bloody and increasingly unpopular. “On the foreign policy side he’s also embroiled Saudi Arabia in Yemen and Qatar without an exit strategy,” said James Dorsey at Singapore’s Nanyang Technological University. These aren’t changes of direction for Saudi Arabia, but “what he has done is to stretch up a notch and put some very sharp edges on it, and at this point those are backfiring.”

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Any Canadian with a substantial mortgage who’s not actively trying to sell right now…..

Canada’s Housing Bubble Will Burst (BBG)

Canadian home sales fell the most in five years last month. That didn’t stop an increase in prices, which were up 18% nationwide from a year earlier. When you consider that most houses are leveraged assets, this represents huge gains for homeowners. While leverage can help boost performance on the way up, it becomes very dangerous on the way down. Leverage can turn even the best investments into poor ones when things go wrong, as losses are amplified. Equity can get wiped out pretty quickly on an overleveraged asset. Canadian real estate has been on fire for years. The housing price data there has made the U.S. real estate market during the boom of the mid-2000s look mild. The Federal Reserve Bank of Dallas puts out a global housing price index for more than 20 countries every quarter. Using this data, I looked at the real house price index data for Canada and compared it with the same data in the U.S. going back to 1975. Here’s this relationship from 1975 through the end of 2005:

Although there were some divergences in the early and late 1980s, both housing markets essentially ended up in the same place after 30 years. Now let’s add in the most recent data to see how things have unfolded since:

An enormous divergence occurred in 2006, when U.S. housing prices really began to soften, while Canadian price barely skipped a beat. This makes any differences in the past look like blips. The rise in Canadian real estate prices has been relentless. The U.S. housing market peaked in late 2006. Since then, based on this index, U.S. housing prices are still down almost 13% from their peak through the end of 2016. In that same time frame, Canadian housing prices are up 56%. From the 2006 peak, it took until late 2012 for real estate in the U.S. to bottom. We’ve since witnessed a 19% recovery from what was a 27% decline nationwide, on average. While the U.S. real estate downturn lasted almost six years, Canada’s housing market experienced just a 7% drawdown that lasted less than a year. And house prices in Canada reclaimed those losses in about a year and a half. Canadian housing has also outpaced its neighbors to the south since the 2012 bottom in U.S. real estate, with a 30% gain in that time.

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You can’t even blame these people. It’s the whole crazy idea of cities and governments blowing housing bubbles on purpose, that’s what’s wrong here.

Rehousing Of Grenfell Tower Families In Luxury Block Gets Mixed Response (G.)

Two miles south of the charred skeleton of Grenfell Tower is a large complex of sleek new apartments that some of those displaced by last week’s inferno will soon be able to call home. Kensington Row’s manicured lawns, clipped trees and burbling fountains are a haven from the rumbling traffic of two busy London thoroughfares, and its spacious, air-conditioned foyers a relief from June’s oppressive heatwave. Four unfinished blocks house the 68 flats purchased by the Corporation of London for families who lost their homes in Grenfell Tower. Workmen had been instructed not to talk to the media, but one said there was now a rush to complete the building work. “It’s a brilliant idea,” he said of the resettlement plan. Among those exercising dogs and small children, the views were more mixed. “It’s so unfair,” said Maria, who was reading the news in the Evening Standard with two neighbours.

She bought her flat two years ago for a sum she was unwilling to disclose. “We paid a lot of money to live here, and we worked hard for it. Now these people are going to come along, and they won’t even be paying the service charge.” Nick, who pays £2,500 a month rent for a one-bedroom flat in the complex, also expressed doubts about the plan. “Who are the real tenants of Grenfell Tower?” he asked. “It seems as though a lot of flats there were sublet. Now the people whose names are on the tenancies will get rehoused here, and then they’ll rent the flats out on the private market. And the people who were actually living unofficially in the tower at the time of the fire won’t get rehoused. “I’m very sad that people have lost their homes, but there are a lot of people here who have bought flats and will now see the values drop. It will degrade things. And it opens up a can of worms in the housing market.”

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When your bad debt is in a bubble, I guess you got it made?! Or should that be: you should be afraid?

China NPL Prices Up 30% as New Gold Rush Gets Under Way (BBG)

Bad loans are rapidly becoming the latest hot commodity in China as more domestic and foreign investors rush into the market and bid up prices. Non-performing loan prices have risen more than 30% this year, according to distressed investor Belos Capital Asia. The average selling price of NPLs has climbed to around 50 cents on the dollar in the past two years, from 30 cents, said Victor Jong, a partner in the deals and business recovery services unit of PricewaterhouseCoopers in Shanghai. Such a high level is “very rare” in international markets, Jong said. “There are just too many buyers grabbing a limited supply of NPLs,” said Hanson Wong, CEO of Belos Capital in Hong Kong. “At these prices, it’s pretty hard for these NPLs to be profitable.” Distressed investors are increasing as Chinese authorities encourage market-oriented ways to resolve lenders’ mounting piles of non-performing debt amid slowing economic growth.

A jump in valuations of real estate, which often act as underlying assets for secured loans, has boosted the debt’s recovery prospects. Combined with a surge in money supply, this has lifted bad-loan prices even in some less-developed regions of China, according to domestic distressed debt investor Bald Eagle Asset Management. Foreign investors including Oaktree Capital, Lone Star, Goldman Sachs and PAG have bought China NPLs in the current cycle that began in 2014, according to a March report from PwC. Non-performing loans at the country’s lenders jumped 61% in the past two years to 1.58 trillion yuan ($231 billion) at the end of March. In the previous NPL cleanup in China, between 2001 and 2008, secured debt was typically sold at 20 cents on the dollar, and unsecured creditors got back only 5 cents, said Wang Yingyi, a partner at Bald Eagle in Beijing.

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Looks like Greece should try China’s bad debt recipe.

Strong Interest, Low Price For NPLs of Greece’s Eurobank (K.)

The loans portfolio put up for sale by Eurobank is attracting strong investment interest but low offers as the lender begins the process for the transfer of nonperforming loans. This is a portfolio valued at €2.8 billion which has attracted the interest of about 20 investment funds in the data room, illustrating the strong leverage the NPL market commands, partly due to the banks’ commitment to reducing their bad loans by 40% by the end of 2019. The portfolio that Eurobank is selling includes debt from consumer loans and credit cards that have gone unpaid for years, most for at least a decade – i.e. since before the financial crisis broke.

Eurobank has made all the necessary moves for the collection of part of the €2.8 billion, without getting a great response. Therefore the prices in the market are expected to be particularly low for the portfolio, with estimates speaking of just 5% of the original value. Market professionals note that Eurobank’s effort to recover part of the dues just before the opening of the portfolio’s sale, offering debtors a haircut of up to 95% without any significant results, means that the price will likely drop below 5% too.

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Greeks are still stuck in the mindset of being proud to be deemed worthy of being a full member of the EU. So much so that they can’t see they’re not.

Greeks Skeptical About Benefits, Prospects of EU (K.)

As the European Union’s cohesion faces being sorely test by the upcoming Brexit negotiations and other challenges, Greeks appear increasingly skeptical about the benefits and prospects of the EU, according to a new study by London-based international policy institute Chatham House and research company Kantar. 74% of Greeks are worried about the outlook for the EU, according to the survey which was carried out on a sample of 1,000 people in 10 European countries: Britain, Belgium, Germany, Greece, Spain, France, Italy, Austria, Hungary and Poland.

The Greek figure was almost double the research average of 38%. Greeks were also significantly more downbeat than their counterparts, with 60% declaring themselves to be pessimistic compared to a research average of 40%. An even larger proportion of Greeks, 80%, said they believed more members of the bloc would follow Britain’s lead and decide to break away from the Union in the next 10 years. Predictably, following seven years of belt-tightening imposed by foreign creditors, a significant proportion of Greeks (67%) said that austerity was the EU’s biggest failure. 73% of Greeks believe that the decision of Britain to leave the EU will weaken the Union.

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A debt colony AND a tourist colony. With most of the best assets sold off to foreigners.

BTW, both Greeks and tourists would be much better off if Greece had its own currency and could lower daily prices.

Greek Tourism Minister Says Arrivals Will Top 30 Million This Year (K.)

The tourism sector is showing genuine signs of growth this year that suggest it will be the main driver of the Greek recovery, as it will help state revenues, the private economy, the country’s current accounts and employment. The government is for the first time speaking of 30 million arrivals in 2017. Bank of Greece data show that in the first four months of the year travel receipts increased by 2.4% or 23 million euros year-on-year, reaching 997 million euros. This increase was thanks to the 3.2% rise in arrivals and not average spending per trip, which posted a 0.8% decline. This means the 4.8% drop in travel receipts during the first quarter was offset in April, when arrivals rose 12% and receipts 11.3% annually. This positive picture is expected to have continued in May.

Retail sector representatives are looking forward to cashing in on the increase in arrivals, to offset the losses resulting from Greek households’ ever shrinking disposable incomes. Based on the bookings picture, turnover in retail commerce could rise by up to 5% this year. Addressing a conference organized by the Panhellenic Exporters Federation, Tourism Minister Elena Kountoura said that the data of the first five months point to an increase in arrivals, revenues, nights stayed and occupancy rates. They also show an increase in bookings for the summer ranging between 15 and 70%, depending on area, which led to her conclusion that Greece will have more then 30 million tourists this year after welcoming 28 million in 2016 and 26 million in 2015. The growth in tourism is also reflected in employment and commerce. The number of unemployed registered last month dropped by 56,820 people from April to 913,518, mainly thanks to the rise in seasonal employment in tourism and commerce.

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May 082017
 
 May 8, 2017  Posted by at 9:32 am Finance Tagged with: , , , , , , , , , , ,  


RCA TV test pattern 1939

 

Macron Banks On De Gaulle’s ‘Majority Amplifier’ To Govern (R.)
In France, The Run Of Macron’s Life Starts Monday (Pol.)
Euro Gives Up Gains As Investors Look To Post-Election France (G.)
US Economy Can’t Even Match the “Sclerotic Statism” of France (CEPR)
Expect Dramatically Lower Stock Market Returns Over Next Decade (CNBC)
UK Consumer Spending Weakens With Sharp Slowdown in April (BBG)
Brexit Boom Gives Britain More Billionaires, Inequality Than Ever (G.)
China Tycoons Are Setting Up Shop In The US (BBG)
Hedge Funds Bail Just Before OPEC-Driven Oil Rally Vanishes (BBG)
Warning For Boomers: Your Gen X Kids Are Coming Back Home – For Good (MW)
Australia To Hold New Inquiry Into ‘Big Four’ Banks (R.)
How Zombie Companies Stop Productivity Growth (BBG)
German Army To Search All Barracks After Nazi Memorabilia Found (R.)
Greek PM Tsipras Rushes To Get Bailout Deal To Parliament With Eye On QE (K.)
1 Million Child Refugees Flee South Sudan’s Civil War (BBG)
Growing Numbers of Refugees In Northern Syria in Urgent Need of Aid (Kom)

 

 

Anyone would have won against Le Pen.

Macron Banks On De Gaulle’s ‘Majority Amplifier’ To Govern (R.)

Unknown just three years ago, and with a party only 12 months old, Emmanuel Macron has seized the presidency against all the odds. His challenge now is to govern. To do that he must build a parliamentary majority that supports his election pledges in June legislative elections, when France’s two established parties will put their huge machines to work. Macron has at least one thing in his favor: the “majority amplifier” effect of an electoral system designed by post-war leader Charles de Gaulle specifically to maximize presidential independence from parliament. Last week, the first opinion survey for the legislative elections showed Macron’s new movement “En Marche!” could win between 249 and 286 mainland France seats in the lower house. Even a figure at the bottom of that range would be a good outcome for him.

He only needs 289 for an absolute majority, and the poll excluded 42 seats in Corsica and overseas. It foresaw centrist and conservative parties winning around 200-210 mainland seats, the far-right National Front 15-25 and the Socialists 28-43. “In the lowest-case scenario, En Marche would still be the largest political grouping, which would be enough to try to constitute a majority. The question would then be how and with whom,” said OpinionWay’s Bruno Jeanbart, who directed the poll. En Marche is only a year old and has never fielded candidates before. Only 14 have been named so far, and at first glance a majority looks unlikely. But that reckons without de Gaulle’s amplifier – known as the “fait majoritaire” by French political scientists. [..] The last legislative vote in 2012 also showed the “fait majoritaire” in action.

Socialist Francois Hollande garnered less than 30% in the first rounds of both the presidentials and the legislatives, yet came away with over 40% of the second-round legislative vote and, with help from 17 Green party MPs, governed with a comfortable majority. “Macron can totally have an extremely solid majority of at least 350 MPs,” said Xavier Chinaud, an electoral expert. He added that to reach that number, the president would have to employ tactics like poaching popular MPs from other parties. The old parties will put up a fight, especially the conservative Republicans [..] Now led by Francois Baroin, they hope for enough seats to force Macron into France’s fourth “cohabitation” since 1958. Cohabitation does not have to mean paralysis, but rather that the prime minister and his camp in parliament have the upper hand over the president.

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“En Marche doesn’t have the money to finance a full-blown parliamentary run. It must ask its candidates to invest not only their time but also their money in the upcoming blitz campaign.”

In France, The Run Of Macron’s Life Starts Monday (Pol.)

Winning the presidency now looks like the easy bit. If Emmanuel Macron makes his way to the Élysée Palace, as expected, in the second round of France’s presidential election Sunday, another bruising political battle is looming. To be able to govern and not be sidelined by a hostile parliament, Macron’s nascent political movement En Marche will have to cobble together a majority in the National Assembly in an election beginning on June 11. And unlike in the second round of the presidential ballot — in which parties from across the political spectrum have urged their supporters to vote for him over his far-right opponent Marine Le Pen — Macron’s rivals will be devoting all their energies to defeating him.

The 39-year-old former economy minister will be counting on his army of 250,000 En Marche volunteers, and a crew made up mostly of political novices. And while Macron hopes that a victory in the presidential election will draw others to his banner, for a movement that was launched a little over a year ago, winning control of parliament looks like a tall order. The stakes are high. If Macron can’t clinch a majority, he won’t be able to appoint a prime minister of his liking. He’ll spend his term largely as a figurehead, his dreams of reforming France all but sunk. Macron needs 289 deputies to be ensured of an absolute majority in the lower house of parliament. So far, En Marche, the movement he still refuses to call a party, has endorsed 14.

True to form, Macron exudes a sense of confidence that the momentum of his election will carry over to the parliamentary polls, allowing him to clinch a majority just six weeks later. This may not be out of reach. A survey conducted this week by OpinionWay, although preliminary, indicated that En Marche could well obtain more than half the seats in the National Assembly. By weaving in electoral results from past elections with a recent poll, OpinionWay estimates that the next Parliament would be dominated by En Marche and the conservative Républicains party. The ruling Socialist Party would be decimated, and Le Pen’s National Front would obtain 25 MPs at most – due to France’s electoral system.

Sill, obstacles abound. En Marche will be facing an energized right. Both the mainstream center-right Républicains party and Le Pen’s National Front will emerge from the presidential election feeling that Macron has robbed them of a victory they at some point considered theirs. François Fillon’s failed campaign has left deep wounds in the Républicains, but one way to try to heal them could be to make Macron their common target in June. [..] En Marche doesn’t have the money to finance a full-blown parliamentary run. It must ask its candidates to invest not only their time but also their money in the upcoming blitz campaign. Political parties in France are provided with public funding according to their performance in previous elections. En Marche, founded a little over a year ago, has never put up a candidate for office before.

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Not THAT much trust perhaps.

Euro Gives Up Gains As Investors Look To Post-Election France (G.)

The euro rose to a six-month high in the wake of Emmanuel Macron’s convincing victory in the French election but the upside for the single currency could be short-lived, analysts warned. In Asian trading on Monday, the euro rose as high as $1.1024 , its highest since 9 November, and also jumped to a one-year high of 124.58 yen against its Japanese counterpart. But it had slipped almost 0.3% to $1.096 against the dollar by 5.30am GMT and lost a similar amount to the yen with traders remarking that gains had already been largely priced in thanks to Macron’s strong showing in the first round of voting two weeks ago. “The market already priced in the victory of Macron,” said Masafumi Yamamoto, chief currency strategist for Mizuho Securities in Tokyo.

“We saw some additional rise of the euro this morning, but considering the difficulty for Macron’s party to get a majority in the national assembly election, he may not bring higher growth.” Looking at positioning in the euro, he said, “the market has squared its short positions, but there are no fresh reasons to take long positions, as there will likely be no new positive developments, and limited scope for upside for the euro”. The muted analysis was partly based on an acknowledgment of the problems facing Macron, a 39-year-old former banker who has never held elected office. He was economy minister under outgoing president François Hollande but failed to turn around the fortunes of the beleaguered government. He has pledged to reform the country’s rigid labour laws – long seen by pro-market economists as a hindrance to growth – but such change was beyond the Hollande administration, despite a lengthy struggle.

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Reality check.

US Economy Can’t Even Match the “Sclerotic Statism” of France (CEPR)

The Washington Post has long pushed the view that a dollar (or euro) that is in the pocket of a middle class person is a dollar that should be in the pockets of the rich. (They are okay with crumbs for the poor.) In keeping with this position, in its lead editorial today the Post complained about the “sclerotic statism” of the French economy. It then called for increasing employment, “through reforms of the labor code, not by protectionism or restriction of immigration.” It is worth bringing a little bit of data to the fact free zone of the Washington Post opinion pages. France actually has consistently had a higher employment rate for its prime age workers (ages 25 to 54) than the United States.

As can be seen, the employment rate for prime age workers in France was roughly 2 percentage points higher in 2003. The gap expanded to almost 7 percentage points following the downturn, but it has in more recent years narrowed again to just under 2 percentage points. France does have much lower employment rates among younger and older workers than the United States, but this is due to policy choices. College is largely free in France and students get stipends from the government. Therefore many fewer young people work. France also makes it much easier for people to retire in their early sixties than in the United States, with largely free health care and earlier pensions. The merits of these policies can be debated, but they are not evidence of a sclerotic economy.

It is also not clear that the Washington Post’s desire to weaken protections for workers (euphemistically described as “reforms of the labor code”) will have a significant effect in reducing unemployment or raising employment. Extensive research has shown there is little relationship between worker protections and employment. It is also worth noting that the Post denounced protectionism in this editorial, but it is fine with protectionism in the form of ever longer and stronger copyright and patent protection, which benefit people it likes.

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Expect losses.

Expect Dramatically Lower Stock Market Returns Over Next Decade (CNBC)

Enjoy the stock indexes riding at record highs for now, but get ready for much stingier markets in the years to come. That’s the message consistently conveyed these days by investment counselors and finance scholars, who argue that with today’s starting equity valuations and low interest rates, the coming decade should produce dramatically lower returns than the historical average. The leaders of Vanguard Group, overseers of some $4 trillion in client assets, have been advising investors to expect a typical 60% stocks/40% bonds portfolio to deliver two- to- three percentage points less in nominal annual returns than its long-term norm. (Since 1926, such an asset mix has returned better than 8.5% annualized.)

Other forecasts are even less generous. Research Affiliates, a quantitative and “smart beta” fund manager, projects that U.S. stocks might only offer one% a year for the next decade, after inflation. This is based largely on the so-called Shiller P/E, a ratio of the S&P 500 index to its trailing ten-year average earnings, which is now above 29 and higher than any period aside from the run-up to the 1929 and 2000 market peaks. Jeremy Grantham of institutional value manager GMO has, by his admission, been wrong for years in assuming that corporate profit margins and equity valuations would revert to their pre-1990s trend levels. Yet even accounting for some more permanent upward shift in these gauges, he sees real (after inflation) returns of 2-3% a year looking out two decades.

And a simple plot of the market’s forward P/E ratio against subsequent market returns shows that, since 1978, when starting at today’s multiple of around 17.5 forecast earnings, ensuing seven- and 15-year nominal returns (before inflation) have been clustered in the mid- to low-single digits. These forward-return calculations vary in their approach and assumptions, but all are anchored on today’s stock valuations, long-term norms in corporate-profit growth and current interest rates. Stocks, even during the depths of the last bear market, never got dramatically cheap compared to prior cycles and certainly didn’t stay inexpensive for very long. And with risk-free 10-year government debt yielding a skimpy 2.3% in the U.S. and far less elsewhere, all other financial assets have repriced for skimpier future returns as well.

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The consumer is toast.

UK Consumer Spending Weakens With Sharp Slowdown in April (BBG)

U.K. consumer-spending growth slowed in April and is forecast to remain weak in the coming months, according to a report from Visa. Its index showed spending rose an annual 0.5% in April, down from 1% in March and marking one of the slowest rates of growth in the past three years. Weaker household demand is also taking a toll on retailers. A separate report from the Institute for Chartered Accountants in England and Wales showed while there was a jump in business confidence this quarter, retailing was the laggard among nine sectors covered. “The trend of relatively modest expenditure growth is likely to extend in to the coming months, as consumers are squeezed by both rising living costs and relatively lackluster wage growth,” said Annabel Fiddes, an economist at IHS Markit, which compiles the consumer index.

Inflation was at 2.3% last month and is forecast to keep accelerating through this year, outpacing wage increases and leaving workers facing a drop in real incomes. The Bank of England may raise its forecast for consumer-price growth this week, which could indicate an even bigger squeeze on households. The overall business sentiment gauge by the ICAEW jumped the highest in almost a year this quarter. Yet despite firms being more confident, the report showed they are still reluctant to make long-term commitments. While Brexit is dominating the agenda in the buildup to the U.K. election on June 8, the institute said all parties must spell out how they will “address the problem of business investment head-on.”

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No wonder consumer spending’s down.

Brexit Boom Gives Britain More Billionaires, Inequality Than Ever (G.)

Britain has more billionaires than ever in what equality campaigners said was a clear sign the UK economy is only working for the few at the top. There are now 134 billionaires based in the UK according to this year’s Sunday Times Rich List, 14 more than the previous highest total, as the super-rich reap the benefits of a “Brexit boom”. Fifteen years ago, there were 21. The annual rich list showed that the wealthiest 1,000 individuals and families in Britain have combined wealth of £658bn, up from £575bn last year, despite fears that the Brexit vote last June would plunge the economy into a fresh turmoil. The Equality Trust said the £83bn increase in wealth among the richest 1,000 people over the past year could pay the energy bills of all UK households for two and a half years and would be enough for the grocery bills for all food bank users for 56 years.

Wanda Wyporska, the executive director of the trust, said that an elite was sitting on mountains of wealth in the fifth largest economy of the world. “The super-rich continue to streak away from the rest of us, while the poorest see their wealth shrink. This is an economy working for the few, not the many,” she said. “Record numbers of people visited food banks last year, millions are locked out of a decent home and two-thirds of children in poverty are in working households. “We know that inequality damages our economy and society, and makes it harder for ordinary people and their children to get on. With the general election fast approaching, our politicians need to decide the sort of country they want to build. One where we can all prosper or one where we’re picking crumbs from the super-rich’s table.”

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China Shadow Banking Assets Estimated at 64.5t Yuan or 87% of GDP: Moody’s.

China Tycoons Are Setting Up Shop In The US (BBG)

When a new hedge fund opened in Mountainside, New Jersey, a leafy suburb that still holds an annual little-league parade, few would have guessed where much of its funding came from: Chinese billionaire Cai Kui. The credit hedge fund, Westfield Investment, was founded by former Goldman Sachs Managing Director Renyuan Gao and managed $139 million as of January. It’s part of a new crop of asset management firms that are expanding China’s reach on Wall Street as money has poured into the U.S. from the world’s second-biggest economy. China’s marquee names are among those setting up shop in the U.S. Chen Feng, who controls the HNA Group airline and hotel conglomerate, has opened a U.S. money management firm. China Vanke, the mainland’s second-largest residential developer, has indirectly taken a major stake in a manager.

All told, about 324 firms with financial ties to the mainland and Hong Kong had registered with regulators by last year, more than double the number in 2012, filings show. They are riding the wave of capital that left China on concerns about bank debt, a real estate bubble and the yuan, which plummeted about 11% against the dollar in the last two years. The currency flight was reflected in balance of payments data where capital outflows tripled to $220 billion last year from $70 billion in 2014, according to Derek Scissors, a China economist at the American Enterprise Institute. “There is so much Chinese money floating around the U.S. now,” Scissors said. “If you’re a Chinese money manager, why wouldn’t you come here?” The migration comes amid a Chinese shopping spree for an array of U.S. companies, including financial firms like New York’s Cowen Group and the Chicago Stock Exchange.

Chongqing Casin Enterprise led the purchase of the exchange, which was founded in 1882. The deal was reviewed by a U.S. panel on national security grounds and eventually cleared in December. In another deal with political overtones, a subsidiary of Chen’s HNA Group agreed in January to buy a stake in Anthony Scaramucci’s SkyBridge Capital, a New York fund of hedge funds firm. The announcement came after reports that Scaramucci had been tapped for a top job in the White House, stirring speculation that HNA’s motives were partly political. The registration of the China-linked firms with the SEC hasn’t drawn such scrutiny. The SEC began requiring hedge funds and buyout firms to sign up with the agency in 2012 as a result of the Dodd-Frank Act. About 30% of the Chinese firms that registered by 2016 are full-fledged money managers. The rest filed as exempt advisers that operate in the U.S. on a more limited basis.

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OPEC is fast losing what remained of its credibility.

Hedge Funds Bail Just Before OPEC-Driven Oil Rally Vanishes (BBG)

Hedge funds jumped out of the oil market just in time. Before West Texas Intermediate crude nosedived on Thursday, wiping out the rally driven by OPEC’s deal, money managers slashed bets on rising prices by 20%, according to U.S. Commodity Futures Trading Commission data. Now they may soon be well poised to start betting on the next rally. “We are moving toward a positioning where these money managers are no longer over-invested,” Tim Evans at Citi Futures Perspective in New York, said. “This opens up the potential for them to start buying again.” Oil collapsed Thursday amid concerns that OPEC has failed to ease a supply glut as U.S. shale drillers ramp up output. Shares of U.S.-based producers got crushed as investors worry they might be repeating the same pattern that led to the market crash in 2014.

Earlier this year, billionaire wildcatter Harold Hamm urged colleagues to take a “measured” approach to lifting production, or risk a new glut. In a gamble that things could get worse, about $7 million worth of options changed hands Friday that will pay off if WTI falls beneath $39 a barrel by mid-July, according to data compiled by Bloomberg. Hedge funds decreased their net-long position, or the difference between bets on a price increase and wagers on a drop, to 203,104 futures and options in the week ended May 2, the CFTC data show. Longs fell about 7%, while shorts surged 37%, following a 26% jump a week earlier. [..] Oil’s tumble to a five-month low was driven purely by technical trading and supply is still getting tighter, according to Citigroup and Goldman Sachs. The current price plunge began when WTI broke through its 200-day moving average. Once that gave way, another key technical indicator called a Fibonacci retracement was breached, paving the way to the low of the year and then $45 a barrel.

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Multigenerational households are the model of the past and the future. Come look in Greece.

Warning For Boomers: Your Gen X Kids Are Coming Back Home – For Good (MW)

Remove the door knockers. Pull down the shutters. Pretend no one’s home. Your adult children are coming back – for good. One-in-nine baby boomer parents said their adult children returned home within the last year, according to a new report from financial services firm Fidelity Investments and Stanford Center on Longevity, which surveyed 9,000 employees.The adult children save money on rent and household goods, but their parents are the ones who appear to be suffering: 68% said they were more stressed, 53% said they were less happy and another 53% said they had less leisure time after the return of their “boomerang kids.” More than three-quarters (76%) said they took on higher expenses, too. Even people who are now in their 40s and 50s are considering mom and dad an option.

Older millennials are 2.7 times more likely to live in their parents’ home than people under 55 years old than in 1999, while Generation-Xers, who are now in their mid-30s to early 50s, were 2.2 times as likely to live with their parents, according to separate data released last week by real estate site Trulia. “No parent is going to want to say no to a child who needs help, but certainly being realistic about the financial situation is important,” said Katie Taylor at Fidelity. More American adults are living with their parents and grandparents than ever before — 19% of the U.S. population (or nearly 61 million people) lived in a multigenerational household, up from 17% (42 million) in 2009 and 12% (27.5 million) in 1980, according to the Pew Research Center, nonprofit think tank based in Washington, D.C.

But not all millennials are as “lazy” or “entitled,” as they are often accused of being. About one in four 25- to 34-year-olds who live at home and are not working or going to school do so because of a health-related reason or because they are acting as caregivers to their family members. And more than a third of Americans, including millennials, expect to financially help their parents within the next few years, another survey found. Some are even making efforts to help their parents save for retirement.

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Wow, great timing! We’re coming to you live from the barn, and there’s not a horse in sight.

Australia To Hold New Inquiry Into ‘Big Four’ Banks (R.)

Australia will hold an inquiry into competition in the country’s financial system, following a series of scandals in the banking sector and public allegations against the “Big Four” banks of abuse of market power. The latest inquiry is part of a number of government measures since last year aimed at alleviating public concerns about the power of the big banks, after revelations of misconduct in the industry. Australia’s four major lenders – Commonwealth Bank of Australia, Westpac, ANZ and National Australia Bank – have come under fire recently following several scams involving misleading financial advice, insurance fraud and interest-rate rigging, as well as for refusing to pass on official interest rate cuts in full. The four together control 80% of Australia’s lending market and have posted record profits for years.

Westpac, NAB and ANZ all reported a rise in half-yearly cash profits this month, taking their total to about A$8.5 billion. CBA will report limited third-quarter figures on Tuesday. “The high concentration and degree of vertical integration in some parts of the Australian financial system has the potential to limit the benefits of competition…and should be proactively monitored over time,” Treasurer Scott Morrison said in a statement on Monday. “The Government is committed to ensuring that Australia’s financial system is competitive and innovative. That is why I have tasked the Productivity Commission to hold an inquiry into competition in Australia’s financial system.” The inquiry will consider the degree of concentration in key segments of the financial system, examine barriers to innovation in the system and look into competition in personal deposits and mortgages for households and small businesses.

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The benefits of ZIRP.

How Zombie Companies Stop Productivity Growth (BBG)

The global economy is picking up steam, but that’s deceptive. The foundations of expansion are soft, marked by weak productivity growth and inequality. The two are related. The productivity problem confronting the world’s advanced economies predates the financial crisis more than a decade ago. When we look beyond the headline statistics, patterns emerge. Advanced economies have become less dynamic and are at risk of becoming sclerotic unless the ambition for reform is revived. It’s essential that we understand three sources of the current productivity slump in particular, and identify the key reforms necessary to address them. First, the productivity slowdown masks a widening performance gap between more productive and less productive firms, as the chart below shows (the picture for service sector firms is even worse).

This divergence is not just driven by firms at the frontiers of their industry, pushing the technological boundaries, but also by stagnating productivity growth at what can be called laggard companies that have failed to adopt the leaders’ best practices. This is also bad news for inclusiveness, since rising wage inequality can be largely traced to the growing differentials in average wages paid across companies, with high-productivity ones paying high wages and low-productivity businesses paying low wages. Second, in well-functioning markets we would expect strong incentives for productive companies to aggressively expand and drive out less productive ones. The opposite has happened. The propensity for high-productivity companies to expand and low-productivity companies to downsize or exit the market has declined over time.

This pattern is evident in the U. S. and is particularly stark in southern Europe, where scarce capital has been increasingly misallocated to low-productivity firms. Third, across the 35 countries in the OECD, we are seeing a drop in the dynamism of the business sector. Not only has the share of recent entrants into the market declined, but marginal companies, which would typically exit or be restructured in a competitive market, are more likely to remain. At the same time, the average productivity of these marginal businesses has fallen. In other words, it has become easier for weak companies that do not adopt the latest technologies to survive. The survival of weak companies drags down average productivity, but the consequences for growth are even worse. Since such firms take up scarce resources, their prolonged survival (or their delayed restructuring) inflates wages relative to productivity, depresses market prices and undermines investment – all of which deters the expansion of productive companies, particularly startups, and amplifies the mismatch of skills.

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They’ve known about this for decades.

German Army To Search All Barracks After Nazi Memorabilia Found (R.)

The head of Germany’s armed forces has called for an inspection of all army barracks after investigators discovered Nazi-era military memorabilia in a garrison, broadening a scandal about right-wing extremism among soldiers. The discovery at a barracks in Donaueschingen, in southwest Germany, was made in an investigation that began after similar Nazi-era items were found in the garrison of an army officer arrested on suspicion of planning a racially motivated attack. As a result, General Inspector Volker Wieker ordered a wider search of barracks. “The General Inspector has instructed that all properties be inspected to see whether rules on dealing with heritage with regard to the Wehrmacht and National Socialism are being observed,” a Defence Ministry spokesman said. Defence Minister Ursula von der Leyen said the military must root out right-wing extremism.

“We must now investigate with all due rigor and with all candor in the armed forces,” the minister told broadcaster ARD on Sunday evening. “The process is starting now, and more is sure to come out. We are not through the worst of it yet.” Displaying Nazi items such as swastikas is punishable under German law, although possession of regular Wehrmacht items is not. Von der Leyen said last week, however, she would not tolerate the veneration of the Wehrmacht in today’s army, the Bundeswehr. Von der Leyen said the arrested officer – who had falsely registered as a Syrian refugee – had likely worked with others to squirrel away 1,000 rounds of ammunition, but the chief federal prosecutor was still investigating the matter. The suspect’s goal, she said, had likely been to carry out an attack and then pin the blame on migrants.

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Don’t hold your breath.

Greek PM Tsipras Rushes To Get Bailout Deal To Parliament With Eye On QE (K.)

After rallying his ministers, Prime Minister Alexis Tsipras must now get coalition MPs behind him for a new multi-bill of austerity measures that is set to go to Parliament this coming week. Although some lawmakers have expressed reservations about the deal, which foresees further cuts to pensions and more tax increases, along with changes to the energy and labor markets, it is widely expected that Tsipras will get the support he needs to push the bill into law. A raft of so-called countermeasures – social welfare interventions that will come into effect in 2019 if the government meets budget targets – will be voted on separately and is sure to get the support of coalition MPs. The government has also appealed to the main political opposition New Democracy to back the offsetting measures but ND has refused to oblige.

According to government sources, Tsipras is already looking beyond the vote, expected on May 15 or 16, and beyond a scheduled Eurogroup summit on May 22 where the agreement between Greece and its creditors is expected to be rubber-stumped. Aides to the prime minister said he is considering a cabinet reshuffle to give his government a lift and inspire investors as talks on lightening Greece’s debt and the inclusion of Greek bonds in the ECB’s QE program are next on the agenda. It remains unclear whether Tsipras is considering a “cosmetic” shake-up or a radical overhaul, or whether key cabinet members such as Finance Minister Euclid Tsakalotos would keep their posts. But it appears that the government is keen to send out a message that it is turning a page following the completion of a tough bailout review that dragged on for months.

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Our times, and our very selves, are defined by refugees and famine more than anything else. But we don’t like to look at what defines us.

1 Million Child Refugees Flee South Sudan’s Civil War (BBG)

More than 1 million children have fled South Sudan’s civil war, two United Nations agencies said Monday, part of the world’s fastest growing refugee crisis. Another 1 million South Sudanese children are displaced within the country, having fled their homes due to the civil war, said the U.N.’s child and refugee agencies in a statement Monday. “The future of a generation is truly on the brink,” said Leila Pakkala, UNICEF’s Regional Director for Eastern and Southern Africa. “The horrifying fact that nearly one in five children in South Sudan has been forced to flee their home illustrates how devastating this conflict has been for the country’s most vulnerable.”

Roughly 62% of refugees from South Sudan are children, according to the U.N. statement, and more than 75,000 children are alone or without their families. Roughly 1.8 million people have fled South Sudan in total. “No refugee crisis today worries me more than South Sudan,” said Valentin Tapsoba, UNHCR’s Africa Bureau Director. “That refugee children are becoming the defining face of this emergency is incredibly troubling.” For children still living in South Sudan, the situation is still grim. Nearly three quarters of children are out of school, according to the U.N. statement, which is the highest out-of-school population in the world. An official famine was declared in two counties of South Sudan in February, and hundreds of thousands of children are at risk of starvation in the absence of food aid, according to the U.N.

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Why Russia’s safety zones make sense.

Growing Numbers of Refugees In Northern Syria in Urgent Need of Aid (Kom)

The co-chair of the Syrian Democratic Council (SDC), Ilham Ehmed, said that the operations to push out the Islamic State (IS) has resulted in refugee flows into the northern parts of Syria controlled by the Kurdish-led Syrian Democratic Forces (SDF) and that the displaced people are in urgent need of aid. “We have gathered the refugees that came recently in two camps,” Ehmed said to ANF. “In one of the camps, 50 thousand refugees are living. A number of aid organisations are present but there are no serious aid efforts. Many of the organisations receive funding from Europe but they still don’t help,” she said. “One can’t help wondering if they want Syrians to die, if there is a plan to kill them first with war and then with hunger. And if that fails from the heat and the cold. That’s the sad conclusion one draws from the situation.”

The SDC co-chair said they had discussed the urgent needs of food, housing and health with the US-led coalition without any results. “This is not acceptable, they should at least provide support for the refugee camps,” she said, stressing that preparations must be made as the operation to evict IS from Raqqa will give rise to many more refugees. “38 refugees coming from Raqqa have already died, some were children. It’s a tragedy. The European countries and the coalition must take their responsability.” Ehmad stressed the need of mediaction, clinics and doctors in the camps. “This is really urgent. Some will be able to return after the area has been liberated but those who lost their homes will stay, so we must make preparations.”

Ehmad also criticized Europe for giving in to what she called Turkey’s “blackmailing.” “There is an approach to the issue which goes something like this: ‘Let’s give them [Turkey] money so that no refugees will come here’. But everyone knows that the refugees are remaining in our region [Syria] at the moment.” Last year, the United Nations estimated that more than 6 million were internally displaced within Syria, and over 4,8 million were refugees outside of the country.

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May 052017
 
 May 5, 2017  Posted by at 8:29 am Finance Tagged with: , , , , , , , , , , ,  


Fred Stein Under the El New York 1949

 

Senate GOP to Snub House Obamacare Repeal Bill and Write Its Own (BBG)
Cost Of Interest On US Government Debt Tops Half A Trillion Dollars (ZH)
Oil Extends Slump Below $45 (BBG)
Emerging-Market Companies Binge On Dollar-Denominated Debt (BBG)
Chemchina Clinches Landmark $43 Billion Takeover of Syngenta (R.)
Brexit Talks Could Become ‘Impossible’: EU Council President Tusk (Ind.)
Italy’s Bankrupt National Airline Is Being Put Up For Sale (Ind.)
Italy’s Rescue Of Its Airline Comes At Great Cost To The Economy (BBG)
Baumol’s Cost Disease Explains A Lot About Our Economies (Vox)
Russia Set to Police Syria Safe Zones Backed by Iran, Turkey (BBG)
Syria Safe Zones To Be Shut For US, Coalition Planes (R.)
EU Wants China’s Help To Stop Boats Being Used By Migrants (R.)
EU Seeks to Ward Off New Refugee Crisis (Spiegel)
Tensions Boiling Over On Greece’s Chios Amid Absence Of Migrant Facility (K.)
Greece Paying Asylum Seekers To Reject Appeals (EUO)
Greece Says Has Done Its Bit, Now Wants Debt Relief (R.)
Greek Pensioners’ Network Lists 23 Cuts Inflicted On Benefits (K.)

 

 

This could take a while. And that’s a good thing.

Senate GOP to Snub House Obamacare Repeal Bill and Write Its Own (BBG)

Several key Senate Republicans said they will set aside the narrowly passed House health-care bill and write their own version instead, a sign of how difficult it will be to deliver on seven years of promises to repeal Obamacare. Lamar Alexander of Tennessee, who chairs the Senate health committee, and Roy Blunt of Missouri, a member of GOP leadership, both described the plan, even as the House was celebrating passing its repeal after weeks of back and forth. The decision will likely delay even further the prospect of any repeal bill reaching President Donald Trump’s desk. Hospital stocks dipped on the House vote, but quickly bounced back on the news the Senate would start over with its own version, with the BI North America Hospitals Index up 0.9% at 2:39 p.m. Hospitals fear the winding-down of Obamacare’s Medicaid expansion will leave them with more customers who can’t afford to pay.

Trump celebrated the House vote with a news conference at the White House, standing alongside dozens of Republican lawmakers. “This has really brought the Republican Party together,” he said. But in the wake of the House’s razor-thin 217-213 vote, the Senate made clear it was going in a different direction. Alaska’s Lisa Murkowski, who has been very critical of the House bill, said Thursday she hopes they start with “a clean slate” in the Senate. To get some kind of bill through his chamber, Majority Leader Mitch McConnell will need to unite moderate and conservative wings of the party that want to pull the measure in entirely different directions. The GOP controls the chamber 52-48, meaning he can lose no more than two Republicans and still pass it, given the united Democratic opposition.

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At ZIRP.

Cost Of Interest On US Government Debt Tops Half A Trillion Dollars (ZH)

With debt ceilings, spending plans, and tax reforms focusing all eyes on Washington, we thought it notable that for the first time in US history, the cost of interest on US government debt has risen above half a trillion dollars… One wonders, given the grandiose spending plans, if we will ever get back below half a trillion dollars?

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We’ve been saying all along OPEC cuts were fantasy. US shale is a minor factor. Lack of demand is a major one.

Oil Extends Slump Below $45 (BBG)

Oil slid below $45 a barrel for the first time since OPEC agreed to cut output in November as U.S. shale confounds the producer group’s attempts to prop up prices. Futures have collapsed 11% this week, slumping to the lowest since Nov. 15 – two weeks before OPEC agreed to production curbs to boost prices and ease a global glut. The decline is being driven by expanding U.S. output that’s countering the group’s curbs. Energy companies in Asia slumped on Friday, after their American counterparts were hammered in the previous session. While news of OPEC’s cuts drove prices in early January to the highest since July 2015, that increase encouraged U.S. drillers to pump more.

The result has been 11 straight weeks of expansion in American production in the longest run of gains since 2012. Prices are still more than 50% below their peak in 2014, when surging shale output triggered crude’s biggest collapse in a generation and left rival producers such as Saudi Arabia scrambling to protect market share. “There’s disappointment that the production cuts we’ve seen from OPEC and others has not had any impact at this stage on global inventory levels,” said Ric Spooner, a chief market analyst at CMC Markets in Sydney. “The market seems to be much further away from a balanced situation than some had previously forecast. There is a possibility that oil could be headed to the low $40s range from here.”

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Expecting the dollar to fall. Doesn’t look all that wise.

Emerging-Market Companies Binge On Dollar-Denominated Debt (BBG)

Emerging-market companies are showing up to the U.S. debt market at the fastest pace ever, and finding plenty of appetite for their bonds. Sales of dollar-denominated notes have climbed to about $160 billion this year, more than double offerings at this point in 2016 and the fastest annual start on record, according to data compiled by Bloomberg going back to 1999. Emerging-market assets tanked after Donald Trump’s surprise election in November, but they’ve quickly recovered, with bonds returning 4% this year and outperforming U.S. investment-grade and high-yield debt. The deluge of issuance began when companies anticipating a surge in borrowing costs amid economic stimulus from Trump rushed to sell notes before his inauguration Jan. 20.

But the expected jump never materialized, extending the window for companies like Petroleo Brasileiro SA and Petroleos Mexicanos to pursue multi-billion-dollar deals. They found plenty of demand from investors keen to buy shorter-dated debt that’s better insulated against rising U.S. interest rates. Jean-Dominique Butikofer, the head of emerging markets for fixed income at Voya Investment Management in Atlanta, said he’s seen new interest in emerging markets from investors who already own U.S. high-yield bonds or emerging market sovereign debt that’s more vulnerable to rising interest rates. “You want to be less sensitive to U.S. rates, but you still want to diversify and you still want to play the EM catch-up growth story,” said Butikofer, whose firm manages $217 billion. “You’re going to gradually add emerging-market corporates.”

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There should never be something like a pesticides and seeds group. Break them up.

Chemchina Clinches Landmark $43 Billion Takeover of Syngenta (R.)

ChemChina has won more than enough support from Syngenta shareholders to clinch its $43 billion takeover of the Swiss pesticides and seeds group, the two companies said on Friday. The deal, announced in February 2016, was prompted by China’s desire to use Syngenta’s portfolio of top-tier chemicals and patent-protected seeds to improve domestic agricultural output. It is China’s biggest foreign takeover to date. It is one of several deals that are remaking the international market for agricultural chemicals, seeds and fertilisers. The other deals in the sector are a $130 billion proposed merger of Dow Chemical and DuPont, and Bayer’s plan to merge with Monsanto. The trend toward market consolidation has triggered fears among farmers that the pipeline for new herbicides and pesticides might slow.

Regulators have required some divestments as a condition for approving the Syngenta deal. Based on preliminary numbers, around 80.7% of Syngenta shares have been tendered, above the minimum threshold of 67% support, the partners said in a joint statement. [..] The transaction is set to close on May 18 after the start of an additional acceptance period for shareholders and payment of a special 5-franc dividend to holders of Swiss-listed shares on May 16. Holders of U.S.-listed depositor receipts will get the special dividend in July. Syngenta shares will be delisted from the Swiss bourse and its depository receipts from the New York Stock Exchange. Chief Executive Erik Fyrwald played down the transition from publicly listed group to becoming part of a Chinese state enterprise, stressing that Syngenta would remain a Swiss-based global company while under Chinese ownership.

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May has nothing, election or not. “..the 30-minute slot that we are going to devote to Brexit per week, for this week it’s up.”

Brexit Talks Could Become ‘Impossible’: EU Council President Tusk (Ind.)

The President of the EU’s ruling Council has intervened to calm Brexit tensions 24 hours after Theresa May launched a vicious attack on “Brussels bureaucrats” on the steps of No 10. Donald Tusk warned that talks would become “impossible” if emotions got out of hand between the UK and EU and called for “mutual respect” between the negotiating parties. The call for calm comes after Theresa May accused the EU’s bureaucracy of trying to influence the result of Britian’s general election by maliciously leaking the content of discussions to the media. In an aggressive speech on Wenesday she tore into officials, warning that her government would not let “the bureaucrats of Brussels run over us”.

The European Commission this morning reacted indignantly to Ms May’s conspiracy theory, with a spokesperson telling reporters that the organisation was “rather busy” and preoccupied with more important matters than trying to fix the poll. But Mr Tusk, a Polish national who represents the EU states’ heads of government in Brussels, said on Thursday afternoon: “Brexit talks [are] difficult enough. If emotions get out of hand, they’ll become impossible. Discretion, moderation and mutual respect needed. “At stake are the daily lives and interests of millions of people on both sides of the Channel.”

The call for calm contrasts with that of a Commission spokesperson earlier today, who said: “We are not naive, we know that there is an election taking place in the United Kingdom. People get excited whenever we have elections. “This election in the United Kingdom is mainly about Brexit. But we here in Brussels, we are very busy, rather busy, with our policy work. “We have too much to do on our plate. So, in a nutshell, we are very busy. And we will not Brexitise our work. “To put it in the words of an EU diplomat, the 30-minute slot that we are going to devote to Brexit per week, for this week it’s up.”

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10 years too late? 20?

Italy’s Bankrupt National Airline Is Being Put Up For Sale (Ind.)

Alitalia will be put up for sale in two weeks having earlier this week fallen into administration. In a radio interview cited by the Financial Times, Carlo Calenda, the country’s economic development minister, said that the priority is for the whole company to get bought. “Within 15 days the commissioners will be open to expressions of interest,” he said. On Tuesday, Alitalia started bankruptcy proceedings for the second time in a decade after employees rejected job cuts and concessions linked to a €2bn recapitalisation plan. Shareholders voted unanimously to file for special administration. According to the Financial Times, the government of Prime Minister Paolo Gentiloni has extended a bridge loan of €600m to keep Alitalia afloat for the next six months, but has ruled out nationalisation.

This loan should give the commissioners appointed by the government time to come up with a strategy that will ensure the airline’s fleet is not grounded. Speaking to the broadcaster, Mr Calenda said the €600m loan would be the “maximum” of state aid on offer. Speaking about possible buyers, Mr Calenda said “any idea is welcome”. He stressed, however, that “Alitalia needs an alliance with a big European group”. Alitalia, whose major shareholders are Abu-Dhabi based Etihad Airways and Italian banks, has about 12,500 employees. It has been struggling ever since a previous bankruptcy in 2008.

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Somone will buy it for pennies on the buck. China?

Italy’s Rescue Of Its Airline Comes At Great Cost To The Economy (BBG)

Given its rich history, Italy is rightly attached to its relics. Unfortunately, this affection for the past does not stop at the Colosseum: It applies to failing companies too. Take Alitalia, Italy’s loss-making flag carrier, which has survived for years thanks to a string of public and private rescues. On Tuesday, the airline went into administration, prompting the government to provide a fresh loan worth €600 million ($655 million) to guarantee another six months of operation. Surely the time has come for Italy to stop losses. Unless Alitalia can find a buyer, the government should allow it to go bust. Politically, that is a tall order, of course. Politicians want to protect workers, who stand to lose their jobs if a company shuts down. But every euro used in a bailout is one that can’t be spent elsewhere; what economists call “opportunity cost.” How many more jobs could have been created had the government invested €600 million into upgrading Italy’s digital infrastructure?

Keeping Alitalia alive is also a burden on productivity, since it takes resources that might be deployed by more efficient competitors. Last year, a study for the European Commission found that the misallocation of workers and capital in Italy has steadily worsened since 1995, accounting for a large fraction of Italy’s productivity slowdown. If the government is serious about Italy returning to sustainable growth, it should stop helping losers get in the way of productive companies. There are also questions of financial stability. Between 1974 and 2014, Italian taxpayers have spent €7.4 billion propping up Alitalia, according to Mediobanca. Italy’s addiction to helping companies in trouble has contributed to its huge government debt, which now stands at nearly 133% of GDP, exposing Rome to the risk of a financial crisis.

The same problem also applies to banks. From UniCredit to Intesa Sanpaolo, many of Italy’s big lenders have granted hundreds of millions in credit lines to Alitalia, only to see their loans go up in smoke. The list also includes Monte Dei Paschi di Siena, the troubled bank which in December had to apply for a multi-billion euro government bailout. The reason? It was struggling under the weight of non-performing loans, like those it provided to Alitalia. While European rules on state aid will make it difficult for Rome to help Alitalia beyond the initial six months, one should never underestimate the ability of the Italian government to find a way to stitch together another flawed rescue. But if Italy is to finally start focusing on future growth, it will have to stop dwelling on the ruins of the past.

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A great economist died.

Baumol’s Cost Disease Explains A Lot About Our Economies (Vox)

William Baumol — an economist who just died at the age of 95 — had a famous idea, commonly known as Baumol’s cost disease, that explains a lot about our modern world. It explains why barbers make more in San Francisco than in Cleveland and why services such as health care and education keep getting more expensive. And it provides a possible explanation for why rich countries like America are devoting more and more of their workforces to low-productivity services, dragging down the economy-wide rate of productivity growth. In the 1960s, Baumol was trying to understand the economics of the arts, and he noticed something surprising: Musicians weren’t getting any more productive — playing a piece written for a string quartet took four musicians the same amount of time in 1965 as it did in 1865 — yet musicians in 1965 made a lot more money than musicians in 1865.

The explanation wasn’t too hard to figure out. Rising worker productivity in other sectors of the economy, like manufacturing, was pushing up wages. An arts institution that insisted on paying musicians 1860s wages in a 1960s economy would find their musicians were constantly quitting to take other jobs. So arts institutions — at least those that could afford it — had to raise their wages in order to attract and retain the best musicians. The consequence is that rising productivity in the manufacturing sector of the economy inevitably pushes up the cost of labor-intensive services like live musical performances. Rising productivity allows factories to cut prices and raise wages at the same time. But when wages rise, music venues have no alternative but to raise ticket prices to cover the higher costs.

This became known as Baumol’s cost disease, and Baumol realized that it had implications far beyond the arts. It implies that in a world of rapid technological progress, we should expect the cost of manufactured goods — cars, smartphones, T-shirts, bananas, and so forth — to fall, while the cost of labor-intensive services — schooling, health care, child care, haircuts, fitness coaching, legal services, and so forth — to rise. And this is exactly what the data shows. Decade after decade, health care and education have gotten more expensive while the price of clothing, cars, furniture, toys, and other manufactured goods has gone down relative to the overall inflation rate — exactly the pattern Baumol predicted a half-century ago.

Baumol’s cost disease is a powerful tool for understanding the modern economic world. It suggests, for example, that the continually rising costs of education and health care isn’t necessarily a sign that anything has gone wrong with those sectors of the economy. At least until we invent robotic professors, teachers, doctors, and nurses, we should expect these low-productivity sectors of the economy to get more expensive. While some argue that prices keep rising because the government subsidizes health care through programs like Medicare and college educations through student loans and grants, you see the same basic pattern with services like summer camps, veterinary services, and Broadway shows that aren’t hamstrung by government regulations and subsidies.

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Putin keeps his enemies close.

Russia Set to Police Syria Safe Zones Backed by Iran, Turkey (BBG)

Russia said it’s ready to send peacekeepers to Syria as it won backing from Turkey and Iran for a plan to establish safe zones inside the war-torn country in an effort to shore up a shaky cease-fire brokered by the three powers. The three countries signed a memorandum on the creation of so-called de-escalation areas on Thursday after two days of talks in Kazakhstan that also included representatives of the Syrian government and rebel groups. Opposition leaders distanced themselves from the plan, saying they can’t accept Iran as a guarantor of the truce and that they want “clear and tangible” guarantees the deal will be enforced. The U.S. also expressed doubts. “Russia is ready to send its observers” to help enforce the safe zones, President Vladimir Putin’s envoy to Syria, Alexander Lavrentiev, told reporters in the Kazakh capital, Astana. “We believe the Syrian crisis can only be resolved through political methods.”

Putin said on Wednesday that he’d secured the backing of U.S. President Donald Trump for the proposal, which could include a ban on bombing raids. But State Department spokeswoman Heather Nauert said Thursday that the U.S. has “concerns” about the accord, “including the involvement of Iran as a so-called “guarantor,”’ and said Russia should do more to stop violence. [..] The latest initiative would establish four zones patrolled by foreign forces – possibly including Russian ones – in the northwestern Idlib province, Homs province in the west, the East Ghouta suburb of the capital Damascus and southern Syria. It will take a month to finalize the maps of the proposed safe zones, Iranian Deputy Foreign Minister Hossein Jaberi Ansari said. The United Nations’ Special Envoy for Syria, Staffan de Mistura, who also attended the Astana talks, described the agreement as a “step in the right direction.”

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That’ll go down well with Wolfowitz et al.

Syria Safe Zones To Be Shut For US, Coalition Planes (R.)

The safe zones which are being created in Syria will be closed for warplanes of the United States and those of the U.S.-led coalition, Russian news agencies quoted Russian envoy at Syria peace talks Alexander Lavrentyev as saying on Friday. Turkey and Iran agreed on Thursday to Russia’s proposal for “de-escalation zones” in Syria, a move welcomed by the United Nations but met with scepticism from the United States.

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Stop selling rubber boats, problem solved!

EU Wants China’s Help To Stop Boats Being Used By Migrants (R.)

The European Union wants China to help prevent migrants and refugees using Chinese-made inflatable boats to get into the bloc by stopping the boats reaching them, the European Commissioner for Migration said on Thursday. Dimitris Avramopoulos, speaking to reporters in Beijing after meeting Chinese Minister for Public Security Guo Shengkun, said the rubber boats used by people smugglers were made in China. “The rubber boats used by the smuggler networks in the Mediterranean are fabricated somewhere in China, they are exported to the countries in Asia and they are used by them,” Avramopoulos said.

“So I requested the support and cooperation from the Chinese authorities in order to track down this business and dismantle it, because what they produce is not serving the common good of the country. It is a very dangerous tool in the hands of ruthless smugglers.” He gave no further details, but said he and Guo had not discussed the possibility of China taking any of the refugees or migrants. More than a million people sought asylum in Europe’s rich north in 2015, mostly in Germany but also in large numbers in Sweden, straining the capacity of countries to cope. A contentious deal with Turkey to stop Syrian refugees from reaching Greece and the overland route to Germany, in return for EU funds, has reduced flows to a trickle, though thousands of migrants still try to reach Europe from Libya via sea routes.

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Who cares about the law? “..a more restrictive interpretation of asylum rights..”

EU Seeks to Ward Off New Refugee Crisis (Spiegel)

Merkel has promised that the refugee crisis seen two years ago will not be repeated: Never again will Europe see an uncontrolled inflow of millions of people. The refugee deal with Turkey is working, we are repeatedly told, and the crisis is over. That, though, could turn out to be wrong. With German voters set to go to the polls on Sept. 24, Merkel’s re-election campaign hinges on there not being a repeat of the refugee crisis, even if it’s not as substantial as the 2015 influx. But west of the closed Balkan route, a new migrant stream has been growing since the beginning of the year. From Jan. 1 to April 23, 36,851 migrants have followed the central Mediterranean route from North Africa to Italy. That represents a 45% increase over the same period last year, when a record 181,000 people crossed the Mediterranean on the route.

Even more concerning is the fact that summer hasn’t even begun. Experience has shown that most migrants only climb into the boats once the Mediterranean grows calmer. Italian authorities estimate that a quarter million people will arrive on its shores this year. “There are challenges ahead,” says a senior German security official. Berlin is particularly concerned because it’s not just Africans who are taking the Mediterranean route to Italy. An increasing number of South Asians are as well, which could mean that the route across the sea to Italy is now seen as a viable alternative to the defunct Balkan route. People from Bangladesh now represent the second largest group of migrants that have crossed over from Libya this year. From January to March 2016, by contrast, exactly one Bangladeshi was picked up on the route. Pakistanis have also chosen the Mediterranean route more often in recent months.

[..] The EU is currently working on an emergency plan in case a “serious crisis situation” develops. The discussions are focusing on a scenario under which more than 200,000 refugees would have to be redistributed each year. An unpublished report by Malta, which currently holds the rotating European Council presidency, calls for a more restrictive interpretation of asylum rights in such a case. In other words, should too many migrants begin arriving, the EU will increase efforts at deterrence. Controversial proposals for reception camps to be established in North Africa also remain under discussion. Most of those currently fleeing from countries like Nigeria, Guinea and the Ivory Coast are doing so to escape grinding poverty and in the hopes of finding better opportunities in Europe. Very few of them have much chance of being granted asylum. That reality has made redistribution within the EU even more difficult. According to current law, those with no chance at asylum are supposed to be sent back home as quickly as possible and not sent to other European countries.

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Now add a huge rise in arrival numbers.

Tensions Boiling Over On Greece’s Chios Amid Absence Of Migrant Facility (K.)

Tensions are rising on the eastern Aegean island of Chios, which is currently favored by human smugglers ferrying migrants over from neighboring Turkey, with an increasing number of brawls at overcrowded state reception centers and local residents’ tolerance wearing thin. Clashes between migrants of different ethnicities are an almost daily occurrence, residents said following a violent confrontation on Tuesday night between Afghan and Algerian nationals at the Vial reception facility. That incident started as a fight between two small groups throwing stones at each other and escalated into a full-blown brawl involving around 60 people. Riot police stationed nearby were eventually obliged to enter the facility and break up the fight.

According to sources at the Citizens’ Protection Ministry, migrants have been arriving in greater numbers on Chios as it still lacks a so-called pre-departure camp due to protests by local residents against the creation of new facilities on the island. As a result, migrants landing on Chios and deemed ineligible for asylum are not being deported to Turkey as foreseen in an agreement signed between Turkey and the EU in March last year. Around 200 migrants have arrived on Chios this week, according to government figures, compared to virtually none on other islands in the eastern Aegean. And, according to a top-ranking police official, the problem is unlikely to be resolved until a center is set up. “The message being sent to those deciding to make the journey is that if you get to Chios they won’t send you back,” he said.

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NGOs to be thrown off the islands this summer, Greek army and the Greek Red Cross to take over.

Greece Paying Asylum Seekers To Reject Appeals (EUO)

The Greek government is giving cash incentives for rejected asylum seekers on the islands to forgo their legal rights to appeal their cases. Some €1,000 and free plane tickets home are now part of a largely EU-financed package to send them packing as quickly as possible. “This is quite complicated and quite immoral,” a Greek lawyer working for Save the Children, an international NGO, told EUobserver on Tuesday (2 May). The move is part of a larger effort to return people to Turkey and free up administrative bottlenecks, but the plan has generated criticism from human rights defenders who say asylum seekers are being pushed into taking the money. People have five days to decide whether to take the cash, with reports emerging that even that short delay was not being respected by authorities. Previously, people were entitled to the assistance even if they appealed.

The scheme only applies to those in so-called eu hotspots on the Chios, Kos, Leros, Lesvos, and Samos islands, where arrivals are screened, given that Turkey does not accept people back from mainland Greece. Greek minister of migration Ioannis Mouzalas has said the financial bait was needed to prevent bogus claimants from abusing the asylum system. The new rules on excluding people who appeal their cases, imposed last month, also come after the European Commission pressured Athens into shortening its appeal process and removing administrative barriers to send more people home. The EU-Turkey deal last year was supposed to ensure that new asylum arrivals whose applications have been declared unfounded would be returned to the country. But only around 1,500 have been sent back since its launch, with the Greek appeals system consistently ruling in favour of initially rejected asylum seekers over broader concerns that Turkey was not safe.

[..] The whole appears to be part of bigger plan to squeeze asylum-seeker rights on the islands and get them out of Greece as fast as possible. It also comes on the heels of a new plan that aims to boot NGOs from the islands. “Many NGOs will longer be on the islands after July, it means there is going to be a lot less scrutiny and a lot less visibility on what is going on as well,” said Claire Whelan from the Norwegian Refugee Council, an independent humanitarian organisation. NGOs working in the medical field in the Vial hotspot in Chios island have already been replaced by the Greek army and the Greek Red Cross. All were informed earlier this year that DG ECHO, the EU Commission’s humanitarian branch, would no longer fund them. Instead, the money will be coming from the Commission’s interior and security department, DG Home. “One of the biggest gaps we see, that remains, is access to legal assistance and legal counseling. And I don’t know if that will be funded under DG Home and the government,” the Norwegian Refugee Council’s Whelan said.

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Europe doesn’t care what Greece wants.

Greece Says Has Done Its Bit, Now Wants Debt Relief (R.)

Prime Minister Alexis Tsipras called on Greece’s international lenders on Thursday to reach an agreement on easing its debt burden by May 22, when eurozone finance ministers meet in Brussels to discuss the country’s bailout progress. Athens and its creditors reached a long-awaited deal at staff-level this week on a series of bailout reforms Greece needs to unlock loans from its €86 billion rescue package, the country’s third since 2010. The EU and the IMF, which has yet to announce if it will participate in the bailout, have now started negotiations over Greece’s post-bailout fiscal targets, a key element for granting it further debt relief. Greece is being firm that it has done what was asked of it and now wants to see movement from the other side. “Medium-term debt relief measures must be clearly defined by the May 22 Eurogroup meeting,” Tsipras told his cabinet on Thursday.

“Greece has done its part and all parties must now fulfill their commitments.” The creditors have been not been quite as upbeat and there is no guarantee that the May 22 meeting will actually sign off on the new tranche of loans, let alone draft up debt relief. But Luxembourg Finance Minister Pierre Gramenga did cite progress when speaking to reporters on the sidelines of a conference in Luxembourg. “We’re one step closer. They [Greece] over-performed last year, they are on track this year, we have now an agreement looming that we will hopefully agree on in Eurogroup,” he said. “Those who have been pessimistic all the time have been proved wrong. I’m very pleased about that. The worst case is not always the scenario that plays out.” Greece’s economy and budget have improved markedly recently, although major problems of poverty and unemployment persist.

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Additional 18% cuts to come.

Greek Pensioners’ Network Lists 23 Cuts Inflicted On Benefits (K.)

At least 23 cuts have been inflicted on pensioners since 2010, with losses adding up to more than €50 billion. For some, their benefits have fallen by as much as 50%. The United Pensioners network has just added a 23rd cut to its list – the reduction of up to 18% of main and supplementary pensions agreed by the government this week. Network chief Nikos Hatzopoulos says the cuts have impoverished pensioners. The other 22 cuts on the list are as follows:

– In 2010, Christmas, Easter and holiday bonuses ended.

– In 2011, all pensioners under the age of 60 took a 6-10% cut.

– In the same year, pensioners were also slapped with a solidarity levy ranging from 3 to 13% for monthly pensions over €1,400. Also cuts to supplementary pensions started, from 3 to 10%.

– Main pensions to under-60s were slashed in 2011 and supplementary pensions of more than 150 euros a month fell by 15-30%.

– From January 2012, there were fresh cuts to any “high” pensions not affected until then.

– In 2012, monthly pensions over 1,000 euros were hit with a new cut.

– Summer 2014 saw a 5.2% cut to all supplementary pensions.

– In 2015, minimum pensions fell.

– In the same year, all early retirements incurred a 10% cut.

– From last May, all new pensioners were informed they would get up to 30% less.

– Some 250,000 supplementary pensions fell by up to 40%.

– The EKAS benefit to 160,000 low-income pensioners was ended.

– Civil servants’ share fund dividends were slashed 45%.

– High pensions took a retroactive cut from late 2016 to end-2018.

– Widows’ benefits fell and stricter criteria were introduced.

– The pensions of people with employment were slashed 60%.

– Early retirees took big cuts.

– Retirement lump sums shrank 15-20%.

– New disability pensions were slashed last May.

– The healthcare levy on main pensions rose.

– A similar 6% levy was imposed on supplementary pensions.

– Since January, 650,000 farmers have had to pay a 14% income levy.

Read more …

Apr 252017
 
 April 25, 2017  Posted by at 7:59 am Finance Tagged with: , , , , , , , , , ,  


Pablo Picasso Self portrait 1972

 

Trump Slaps 20% Duty on Canada Lumber, Intensifying Trade Fight (BBG)
Trump Summons Entire Senate To White House Briefing On North Korea (G.)
Trump Advisers To Lay Out Tax Plan For Top Republicans Tuesday (BBG)
The Oil Market Has One Big Problem: People Aren’t Buying Enough Gas (CNBC)
Canadians’ Confidence In Housing Hits Record High (HPoC)
Housing’s Echo Bubble Now Exceeds the 2006-07 Bubble Peak (CHSmith)
Bubble, Bubble, Toil And Trouble: Ultra-Low Mortgage Rates Are Dangerous (G.)
Rising Defaults In China Reveal Hidden Debt (BBG)
China Markets Reel as $1.7 Trillion in Shadow Funds Unwinds (BBG)
Naked Selfies Used As Collateral For Chinese Loans (AFP)
Italy Is the Euro-Area’s Swaps Loser Facing $9 Billion Bill (BBG)
Ontario To Pay Guaranteed Incomes To The Poor (AFP)
Kim Dotcom Wants FBI Director Comey Questioned By New Zealand Police (IBT)
At Least 16 Refugees Drown as Boat Sinks off Greece’s Lesbos (R.)

 

 

They’ve been doing this forever: “..the fight is the “longest-running battle since the Trojan War.”

Trump Slaps 20% Duty on Canada Lumber, Intensifying Trade Fight (BBG)

U.S. President Donald Trump intensified a trade dispute with Canada, slapping tariffs of up to 24% on imported softwood lumber in a move that drew swift criticism from the Canadian government, which vowed to sue if needed. Trump announced the new tariff at a White House gathering of conservative journalists, shortly before the Commerce Department said it would impose countervailing duties ranging from 3% to 24.1% on Canadian lumber producers including West Fraser Timber. “We’re going to be putting a 20% tax on softwood lumber coming in – tariff on softwood coming into the United States from Canada,” Trump said Monday, according to a tweet by Charlie Spiering at Breitbart News. A White House official confirmed the comment.

The step escalates an economic battle among neighboring countries that normally have one of the friendliest international relationships in the world. U.S. Commerce Secretary Wilbur Ross amplified Trump’s remarks in a statement afterward that also referenced a fight over a new Canadian milk policy that U.S. producers say violates Nafta. “It has been a bad week for U.S.-Canada trade relations,” Ross said, adding “it became apparent that Canada intends to effectively cut off the last dairy products being exported from the United States.” He said the Commerce Department “determined a need” because of unfair Canadian subsidies to the lumber industry to impose “countervailing duties of roughly one billion dollars.” In a dig at NAFTA, which Trump has said he wants to renegotiate, Ross added, “This is not our idea of a properly functioning Free Trade Agreement.”

[..] The so-called countervailing duties, which counter what the U.S. considers Canadian subsidies, came in below some analyst expectations. CIBC analyst Hamir Patel forecast the initial combined countervailing and anti-dumping duties could reach 45 to 55%, he said in an April 23 note. The U.S. may also apply anti-dumping duties if it determines Canadian firms are selling for below costs. That decision is expected in June. “It definitely could’ve been a heck of a lot worse,” Kevin Mason at ERA Forest Products Research said by phone. “I think a lot of people were bracing for a higher duty.”

[..] Most of the softwood in Canada is owned by provincial governments, which set prices to cut trees on their land, while in the U.S. it’s generally harvested from private property. The fees charged by Canadian governments are below market rates, creating an unfair advantage, U.S. producers say. Canada disputes that. Robert Lighthizer, Trump’s nominee to be the next U.S. Trade Representative, said at his confirmation hearing last month that he views the lumber dispute as the top trade issue between the U.S. and Canada. Oregon Democratic Senator Ron Wyden told Lighthizer the fight is the “longest-running battle since the Trojan War.”

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Huffin’-and-a-puffin’.

Trump Summons Entire Senate To White House Briefing On North Korea (G.)

The entire US Senate will go to the White House on Wednesday to be briefed by senior administration officials about the brewing confrontation with North Korea. The unusual briefing underlines the urgency with which the Trump administration is treating the threat posed by Pyongyang’s continuing development of nuclear weapons and missile technology. It follows a lunch meeting Trump held with ambassadors from UN member states on the security council on Monday where he emphasised US resolve to stop North Korea’s progress. “The status quo in North Korea is unacceptable and the council must be prepared to impose additional and stronger sanctions on North Korean nuclear and ballistic missile programs,” Trump said at the meeting. “North Korea is a big world problem, and it’s a problem we have to finally solve.”

On Friday the US secretary of state, Rex Tillerson, is due to chair a security council foreign ministers’ meeting on the issue in New York, at which the state department said he would call once more for the full implementation of existing UN sanctions or new measures in the event of further nuclear or missile tests. “This meeting will give the security council the opportunity to discuss ways to maximise the impact of existing security council measures and to show their resolve to response further provocations with appropriate new measures,” said Mark Toner, state department spokesman. Senators are to be briefed by the defence secretary, James Mattis, and Tillerson on Wednesday. Such briefings for the entire senate are not unprecedented but it is very rare for them to take place in the White House, which does not have large secure facilities for such classified sessions as Congress.

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Not going to be easy. Trump’s too desperate to get a deal done.

Trump Advisers To Lay Out Tax Plan For Top Republicans Tuesday (BBG)

President Donald Trump will call for cutting taxes for individuals and lowering the corporate rate to 15% to fulfill a promise he made during his campaign, according to a White House official. The president on Wednesday plans to make public the broad outlines of what he wants to change in the tax code, though the details likely will be left until later negotiations among congressional leaders and officials from Treasury. Trump’s top economic adviser Gary Cohn and Treasury Secretary Steven Mnuchin will brief House Speaker Paul Ryan, Senate Majority Leader Mitch McConnell and the leaders of congressional tax-writing committees – House Ways and Means Committee Chairman Kevin Brady and Senate Finance Committee Chairman Orrin Hatch.

While Trump and Ryan broadly agree on sharply cutting individual income and corporate taxes, there are areas of disagreement between the two. On the campaign, Trump called for a corporate tax rate of 15%; Ryan wants 20%, and he has warned that cutting it an additional 5 percentage points could prevent the ultimate tax plan from being revenue neutral. Without Democratic support, a plan would have to be revenue neutral to meet the criteria set by lawmakers to make tax changes permanent. “I’m not sure he’s going to be able to get away with that,” Hatch told reporters Monday. “You can’t very well balance the budget that way.”

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Demand goes down because people have less money to spend. All the rest is humbug.

The Oil Market Has One Big Problem: People Aren’t Buying Enough Gas (CNBC)

Lackluster gasoline demand is once again raising concerns that the oil market won’t be able to escape the doldrums. Demand for U.S. gasoline has recovered since January, but remained below 2016 levels throughout much of this year. Now, analysts are worried weak consumption will cause gasoline stockpiles to keep building and eventually result in weaker crude oil demand and pricing. U.S. gasoline futures were down more than 1% on Monday, reflecting demand concerns as refiners emerge from the winter maintenance season and prepare to turn out more fuel. Meanwhile, U.S. crude settled 39 cents lower at $49.23, extending last week’s deep losses. “As gas prices drop, that creates an undertow for the entire crude oil market,” said Tom Kloza, global head of energy analysis at Oil Price Information Service.

Part of the problem is a tough comparison with extraordinarily low gasoline prices last year. The national average gasoline price on Monday was nearly 28 cents above last year’s level, according to GasBuddy.com. “I’m in the camp that says last year was a little bit of the anomaly,” Kloza said. “Gas was so cheap that we drove a little bit more almost capriciously. This year, I just don’t think it’s going to happen.” In a troubling sign, the nation’s gasoline station operators have reported at industry conferences that their sales are down 1.5 to 2% this year, according to Andy Lipow, president of Lipow Oil Associates. “When you hear retailers telling you that their demand is down you’ve got to be a believer,” he told CNBC. Lipow said he fears that trend will carry through for the balance of 2017. Demand is certain to rise as the summer driving season ramps up, but Lipow sees stockpiles remaining relatively high.

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Stark raving madness. A housing market that is rising at ‘only’ 9.5% per year is labeled ‘rational’.

Canadians’ Confidence In Housing Hits Record High (HPoC)

The experts are getting louder in their warnings that a housing bubble has formed in some parts of Canada, but Canadians don’t seem worried. In fact, confidence in the housing market hit a record high in the latest weekly Bloomberg-Nanos index — even as respondents turned negative on their own personal finances. The survey found 48.5% of Canadians expect house prices to rise in the next six months, the highest level recorded in the survey since 2008. Fewer than 11% expect to see house prices decrease. “Bullish sentiment on real estate in Canada continues to drive consumer confidence,” pollster Nik Nanos said in a statement. “Household expectations have improved by roughly 10% since the start of the year as the effects of the oil price shock have stabilized and the focus has moved toward rising property values,” Bloomberg economist Robert Lawrie said.

“In recent weeks, however, consumer sentiment regarding personal finances began drifting lower, with extended household balance sheets perhaps the next focus of concern for policymakers.” High debt levels are precisely why many market observers are growing concerned about Canada’s priciest housing markets, namely the Toronto and Vancouver regions. House prices in Toronto jumped 33% in March from a year earlier, to an average of $916,567. While Vancouver’s house prices have moderated over the past six months, they remain elevated, with the benchmark price at $919,300 in March.

National Bank of Canada, which co-publishes the Teranet house price index, warned recently that “irrational exuberance” may be setting into some Canadian housing markets, noting that more than half of Canada’s regional markets are seeing price growth above 10% annually. With mortgages ballooning, Canadian household debt has repeatedly hit record highs in recent years, and now stands at $1.67 of debt for every dollar of disposable income. Those elevated debt levels are the main reason one why the Bank for International Settlements (BIS), a Geneva-based “central bank of central banks,” warned recently that Canada has the second-highest risk of a financial crisis, behind only China.

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Essential and repeated here a 1000 times: “Bubbles have a habit of overshooting on the downside when they finally burst.”

Housing’s Echo Bubble Now Exceeds the 2006-07 Bubble Peak (CHSmith)

A funny thing often occurs after a mania-fueled asset bubble pops: an echo-bubble inflates a few years later, as monetary authorities and all the institutions that depend on rising asset valuations go all-in to reflate the crushed asset class. Take a quick look at the Case-Shiller Home Price Index charts for San Francisco, Seattle and Portland, OR. Each now exceeds its previous Housing Bubble #1 peak:

It seems housing bubbles take about 5 to 6 years to reach their bubble peaks, and about half that time to retrace much or all of the gains. Bubbles have a habit of overshooting on the downside when they finally burst. The Federal Reserve acted quickly in 2009-10 to re-inflate the housing bubble by lowering interest rates to near-zero and buying over $1 trillion of mortgage-backed securities. When bubbles are followed by echo-bubbles, the bursting of the second bubble tends to signal the end of the speculative cycle in that asset class. There is no fundamental reason why housing could not round-trip to levels below the 2011 post-bubble #1 trough.

Consider the fundamentals of China’s remarkable housing bubble. The consensus view is: sure, China’s housing prices could fall modestly, but since Chinese households buy homes with cash or large down payments, this decline won’t trigger a banking crisis like America’s housing bubble did in 2008. The problem isn’t a banking crisis; it’s a loss of household wealth, the reversal of the wealth effect and the decimation of local government budgets and the construction sector. China is uniquely dependent on housing and real estate development. This makes it uniquely vulnerable to any slowdown in construction and sales of new housing. About 15% of China’s GDP is housing-related. This is extraordinarily high. In the 2003-08 housing bubble, housing’s share of U.S. GDP barely cracked 5%. Of even greater concern, local governments in China depend on land development sales for roughly 2/3 of their revenues.

If you need some evidence that the echo-bubble in housing is global, take a look at this chart of Sweden’s housing bubble. Oops, did I say bubble? I meant “normal market in action.”

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“..we may be in the latter stages of a bubble. As prices rise further and further out of reach, lenders need to find more and more ingenious tricks to keep rich people pumping their cash into an overheated market. The punch bowl has to keep going round, or the party stops.”

Bubble, Bubble, Toil And Trouble: Ultra-Low Mortgage Rates Are Dangerous (G.)

Between autumn 1977 and Christmas 1979, interest rates rose from 5% to 17%. If you were a young boomer whose biggest cost was a variable rate mortgage, that would have hurt. In 2009, by contrast, interest rates were cut to a record low of 0.5%, and stayed there for the better part of a decade. When eventually they did move again, it was down. You don’t know you’re born. Except, of course, you do – because, if you’re reading this and you’re under 40, there’s a pretty good chance you’re still stuck paying rent. Yes, interest rates are low; no, this is not particularly helpful. Even if you do have a mortgage, it’s probably a fixed rate one because, let’s be honest, those rates are going up again one day. But not, it seems, today. The Yorkshire Building Society has just launched a new mortgage that charges an interest rate of just 0.89%. “We are very pleased to offer borrowers the lowest mortgage rate ever available,” said a spokesman.

“The cost of funding has fallen in recent weeks and, as a financially strong building society with no external shareholders to satisfy, we have the ability to pass this on to borrowers.” (“We used to dream of mortgages at under 1%,” say the boomers.) So does that means that owning a home is now cheaper than it’s ever been? Well, no, of course not. For one thing, this isn’t a fixed rate deal. It’s actually a (bear with me on this) two-year-long discount of 3.85% to the standard variable rate (SVR) of 4.74%. That means it’s very, very unfixed indeed: a normal tracker mortgage moves in response to Bank of England rates; an SVR one moves in response to the lender’s whims. Accepting this mortgage means placing a bet that the Yorkshire Building Society will be nice to you. It also comes with an unusually high arrangement fee of £1,495, but this shouldn’t bother you, because you probably can’t get that rate anyway. To even be considered, you need a deposit worth 35% of the value of your home.

[..] But there’s another, more sinister, reading of the recent rash of ultra-low mortgage rates: it suggests we may be in the latter stages of a bubble. As prices rise further and further out of reach, lenders need to find more and more ingenious tricks to keep rich people pumping their cash into an overheated market. The punch bowl has to keep going round, or the party stops. But bubbles tend to burst. Prices can’t rise forever: one day, interest rates must surely rise. When the inevitable happens, there is a danger that those who took advantage of this deal may find their equity wiped out – and the rate they’re paying will shoot through the roof.

That would obviously be very sad for those who are affected; for those shut out of home ownership, though, it may be no bad thing. That’s because nine years of record-low interest rates have probably contributed to the fact that house prices have soared out of reach; and higher prices have meant increasingly unattainable deposits. A rise in interest rates could, paradoxically, make housing more affordable.

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Companies guaranteeing each other’s crappy debt. What could go wrong? Problem is, Beijing had let them do it for years.

Rising Defaults In China Reveal Hidden Debt (BBG)

Rising defaults in China are unearthing hidden debt at companies across the country. Small firms that can’t get loans by themselves have been winning banks over by getting other companies to guarantee their borrowings. The companies making those pledges exclude them from their balance sheets, leaving creditors in the dark. Borrowers often extend the guarantees for each other, raising the risk that failures could ricochet, at a time when increasing borrowing costs have already added to strains. China’s banking regulator has ordered checks of such cross-guaranteed loans, Caixin reported Friday. Scrutiny is mounting after a corn oil producer in the eastern province of Shandong said last month it had guaranteed debt of a neighboring aluminum product manufacturer which is now stuck in a cash crunch.

Just days before that, a local government financing vehicle in China’s southwest had to repay an auto parts maker’s loans it had guaranteed after the latter defaulted. “Disclosure of such guarantees isn’t timely,” said Qiu Xinhong at Shenzhen-based First State Cinda. “Sometimes, it’s like a buried mine and you don’t know when the risks will explode.” This debt minefield could be big. The amount of loan guarantees at privately held firms in China is equivalent to 11% of their equity, and at LGFVs is 18%, according to Citic Securities. The load is even heavier at weaker borrowers. About 44% of issuers rated lower than AA- have a ratio of more than 30%, according to Everbright Securities. The phenomenon is less common in the U.S. because banks don’t require such guarantees to offer loans, according to Fitch Ratings.

“If companies in the same region offer a huge amount of guarantees for each other’s debt, it would form a guarantee web and deepen interconnections among the companies,” said Gang Meng, director of rating at Golden Credit Rating International Co. in Beijing. “If one company has to repay debt for its guaranteed company, risks would quickly ripple to other companies in the web, which will result in a butterfly effect.” [..] Guarantors don’t mark the pledges on their balance sheets and often disclose them only on an annual basis. Such shadow debts pose rising risks after central bank tightening pushed up onshore corporate bond yields to two-year highs and defaults on local notes surged to a record.

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The distinction between state banks and shadows has become very murky.

China Markets Reel as $1.7 Trillion in Shadow Funds Unwinds (BBG)

A $1.7 trillion source of inflows into Chinese markets has suddenly switched into reverse, roiling the nation’s money management industry and sending local bonds and stocks to their biggest losses of the year. The turbulence has centered on so-called entrusted investments – funds that Chinese banks farm out to external asset managers. After years of funneling money into such investments, banks are now pulling back in response to a series of regulatory guidelines over the past three weeks that put a spotlight on the risks. Critics have blamed entrusted managers for adding leverage to China’s financial system and reducing transparency.

The banks’ withdrawals helped erase $315 billion of stock market value over the past six days and sent bond yields to the highest level in nearly two years, highlighting the challenge for Chinese authorities as they try to rein in shadow banking activity without destabilizing financial markets. While the government has plenty of firepower to prop up asset prices if it wants to, forecasters at Australia & New Zealand Banking predict the selloff will deepen this year. “We are seeing an exodus of funds,” said He Qian at HFT Investment Management, which oversaw about 189 billion yuan ($27.5 billion) as of last year. He was one of about half-a-dozen asset managers and analysts who said banks have started scaling back their entrusted investments.

The arrangements have become an important part of China’s shadow finance system. When banks sell wealth-management products – the ubiquitous savings vehicles that offer higher yields than deposits – the firms sometimes farm out client money to entrusted managers such as hedge funds and mutual funds. The managers invest the cash in bonds, stocks and other securities, hoping to generate enough income to cover the banks’ promised returns to WMP clients – plus some extra for themselves.

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You better look good than feel good.

Naked Selfies Used As Collateral For Chinese Loans (AFP)

Hundreds of photos and videos of naked women used as collateral for loans on a Chinese online lending service have leaked onto the web, highlighting regulatory problems in the fast-growing peer-to-peer marketplace. A 10-gigabyte file posted on the internet exposed the personal details of more than 160 young women who were asked to provide the explicit material to secure money through online lending platform Jiedaibao. Launched by JD Capital in 2015, Jiedaibao allows lenders to operate anonymously but requires borrowers to reveal their real names when making transactions. Loan amounts and interest rates can be customised to meet the needs of users – often people who have a hard time accessing loans through more traditional financial institutions, like banks.

Interest on the “nude loans” reached an astonishing 30% a week, according to the Global Times newspaper. Lenders told female borrowers that if they failed to repay the loans, their nude photos would be sent to their families and friends, whose information was also required for some transactions, the article said. Material in the file put on the web last Wednesday showed some borrowers also promised to repay loans with sexual favours, according to screen captures posted on social media websites. In a statement on its official Twitter-like Weibo account, Jiedaibao said it had tracked down the accounts of several borrowers through photos and ID information circulated online and had frozen the suspected lenders’ accounts. “The ‘nude loans’ deals were mainly initiated and completed offline, and Jiedaibao only played the role of a money transfer platform in the deals,” the statement said.

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Derivatives used this way are instruments of massive wealth destruction. Why use different rates for each side of the deal? “..the Italian Treasury “usually pays a flow anchored to a fixed rate, while receiving one indexed to the 6-month Euribor rate..”

Italy Is the Euro-Area’s Swaps Loser Facing $9 Billion Bill (BBG)

Derivatives burdened Italy’s public debt again last year for a record amount of €8.3 billion ($9 billion), making the country the biggest swaps loser in the euro region. Losses related to swaps held by the nation added €4.25 billion to the country’s debt while net liabilities’ burden totaled €4.07 billion, based on data released Monday by EU statistics office Eurostat. In the 2012-2016 period, the burden totaled €29.6 billion, also a euro-area record. Italy’s derivative-related losses and net liabilities were higher than those for the whole euro region combined both in 2016 and in the five-year period as some countries actually saw the swaps helping to alleviate their debts. Governments across the euro region have used derivatives to manage their debt-financing costs and to hedge against sudden changes in rates and excessive exchange-rate volatility.

Those deals have sometimes backfired with the effect of pushing nations’ debts even higher. In the existing interest-rate swaps the Italian Treasury “usually pays a flow anchored to a fixed rate, while receiving one indexed to the 6-month Euribor rate,” the government said earlier this month in an annex to its annual Economic and Financial Document. Since starting from November 2015, the Euribor stayed negative and the impact on the flow indexed to that rate was that the Treasury had to pay money to its counterparts, instead of being paid by them, the document also said. Italy’s public debt rose last year to €2.2 trillion, or 132.6% of the country’s GDP, Eurostat said in a separate report on Monday.

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it’s important to get it right.

Ontario To Pay Guaranteed Incomes To The Poor (AFP)

Ontario has launched a pilot program to provide a guaranteed basic income to a few thousand people to test its effects on recipients and public finances, the Canadian province announced on Monday. Provincial premier Kathleen Wynne said the program would provide a “basic income” for three years to 4,000 people living under the poverty line. “We want to find out whether a basic income makes a positive impact in people’s lives,” Ms Wynne said, adding that “everyone should benefit from Ontario’s economic growth.” Income support payments will be as high as Can$16,989 (£9,800) a year for an individual, or Can$24,027 for a couple, plus an additional Can$6,000 for the disabled.

The figures will be reduced for those holding part-time jobs – they will receive 50 cents less for each dollar earned. As a concrete example, a single person with a yearly salary of Can$10,000 will receive an additional payment of Can$11,989. The 4,000 participants, aged 18 to 65, have been chosen at random in three cities: Hamilton and Lindsay in the Toronto suburbs and Thunder Bay in the province’s west. The province estimates the cost of the program at Can$50 million a year. Ontario is the most heavily populated Canadian province, with 38% of the country’s 36.5 million inhabitants. 13% of Ontario residents live below the poverty line, according to Statistics Canada.

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What the FBI did has already been declared illegal in New Zealand courts.

Kim Dotcom Wants FBI Director Comey Questioned By New Zealand Police (IBT)

FBI Director James Comey is currently in New Zealand and if Kim Dotcom has his way, Comey could find himself being questioned by the New Zealand police. The internet entrepreneur, who is wanted by the United States on multiple charges including fraud and copyright infringement, filed a complaint with the police Tuesday against the FBI director for what Dotcom called theft of his data by the agency. The alleged theft happened when the police raided Dotcom’s home Jan. 20, 2012, as part of investigations instigated by the U.S. The charges against him are based on the now-defunct website Megaupload that he operated, where users could share content with each other.

Some of that content was illegal to share, but according to New Zealand laws, internet service providers are not held responsible for the actions of their users. In his complaint Tuesday, Dotcom’s lawyer urged the police to urgently question Comey, who is in New Zealand for a conference. The grounds for the complaint are that the FBI received copies of data that was taken from Dotcom’s home during the 2012 raid, an act which courts in the country have held to be illegal, according to the complaint.

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The value you put on someone else’s life inevitably becomes the value of your own life.

At Least 16 Refugees Drown as Boat Sinks off Greece’s Lesbos (R.)

At least 16 people, including two children, drowned after an inflatable boat carrying refugees and migrants sank off Greece’s Lesbos island, authorities said on Monday. They are believed to be the first confirmed deaths in Greek waters this year of migrants or refugees making the short but dangerous crossing from Turkey on overcrowded rubber dinghies. Nine bodies were recovered in Greek territory and another seven in Turkish waters, Greek and Turkish coastguard officials said. Two survivors have been rescued. The two women, one of whom is pregnant, told the United Nations refugee agency UNHCR that 20 to 25 people were on board when the dinghy capsized around 1900 GMT on Sunday. The women are from Cameroon and the Democratic Republic of Congo.

Though fewer than 10 nautical miles separate Lesbos from Turkish shores, hundreds of people have drowned trying to make the crossing since Europe’s refugee crisis began in 2015. In that year, Lesbos was the main gateway into the European Union for nearly a million Syrians, Iraqis and Afghans. But a deal in March 2016 between the EU and Ankara has largely closed that route. Just over 4,800 people have crossed to Greece from Turkey this year, according to UNHCR data. An average of 20 arrive on Greek islands each day. “The number of people crossing the Aegean to Greece has dropped drastically over the past year, but this tragic incident shows that the dangers and the risk of losing one’s life remains very real,” said Philippe Leclerc, UNHCR Greece representative.

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