Jul 262015
 
 July 26, 2015  Posted by at 11:13 am Finance Tagged with: , , , , , , , , ,  


Jack Delano Jewish stores in Colchester, Connecticut 1940

The Last Bubble Standing – Amazon’s Same Day Trip Through The Casino (Stockman)
Europe Braces Itself For Revolutionary Leftist Backlash After Greece (Telegraph)
Varoufakis – A New Kind Of Politics? (Paul Tyson)
Varoufakis Claims He Had Approval To Plan Parallel Banking System (Kathimerini)
Greece, The Sacrificial Lamb (Joe Stiglitz)
Depression’s Advocates (J. Bradford DeLong)
The Latest Rising Greek Political Star Who Says No To Austerity (HuffPo)
How the Euro Turned Into a Trap (NY Times Ed.)
Greek Bailout Talks Pushed Back By A Few Days On Logistics (Reuters)
Renewed Bailout Talks Between Greece And Creditors Hit Snags (FT)
Greek Gov’t Braces For Talks With Creditors Amid Upheaval In SYRIZA (Kath.)
Greek Bank Boldholders Fear Portuguese-Style “Bad Bank” Split (Reuters)
Chancellor George Osborne Takes EU Reform Campaign To Paris (Reuters)
Puerto Rico: Austerity For Residents, But Tax Breaks For Hedge Funds (Guardian)
What A Federal Financial Control Board Means To Puerto Rico (The Hill)
Judge Finds Chicago’s Changes To Pension Funds Unconstitutional (Tribune)
Foreign Criminals Use London Real Estate To Launder Billions Of Pounds (Guardian)
The – Goldman-Related – Scandal That Ate Malaysia (Bloomberg)
Olive Oil Prices Surge Due To Drought And Disease In Spain And Italy (Guardian)
The Future of Food Finance (Barron’s)
Archaeologists Find Possible Evidence Of Earliest Human Agriculture (Guardian)

“..the Wall Street brokers’ explanation for AMZN’s $250 billion of bottled air is actually proof positive that the casino has become unhinged.”

The Last Bubble Standing – Amazon’s Same Day Trip Through The Casino (Stockman)

Right. Amazon is the greatest thing since sliced bread. Like millions of others, I use it practically every day. And it was nice to see that it made a profit -thin as it was at 0.4% of sales- in the second quarter. But the instantaneous re-rating of its market cap by $40 billion in the seconds after its earnings release had nothing to do with Amazon or the considerable entrepreneurial prowess of Jeff Bezos and his army of disrupters. It was more in the nature of financial rigor mortis – the final spasm of the robo-traders and the fast money crowd chasing one of the greatest bubbles still standing in the casino. And, yes, Amazon’s $250 billion market cap is an out and out bubble. Notwithstanding all the “good things it brings to life” daily, it is not the present day incarnation of General Electric of the 1950s, and for one blindingly obvious reason.

It has never made a profit beyond occasional quarterly chump change. And, what’s more, Bezos -arguably the most maniacal empire builder since Genghis Khan- apparently has no plan to ever make one. To be sure, in these waning days of the third great central bank enabled bubble of this century, GAAP net income is a decidedly quaint concept. In the casino it’s all about beanstalks which grow to the sky and sell-side gobbledygook. Here’s how one of Silicon Valley’s most unabashed circus barkers, Piper Jaffray’s Gene Munster, explains it: “Next Steps For AWS… SaaS Applications? We believe AWS has an opportunity to move up the cloud stack to applications and leverage its existing base of AWS IaaS/PaaS 1M + users. AWS dipped its toes into the SaaS pool earlier this year when it expanded its offerings to include an email management program and we believe it will continue to extend its expertise to other offerings. We do not believe that this optionality is baked into investors’ outlook for AWS.”

Got that? Instead, better try this. AMZN’s operating free cash flow in Q2 was $621 million -representing an annualized run rate right in line with its LTM figure of $2.35 billion. So that means there was no cash flow acceleration this quarter, and that AMZN is being valued at, well, 109X free cash flow! Moreover, neither its Q2 or LTM figure is some kind of downside aberration. The fact is, Amazon is one of the greatest cash burn machines ever invented. It’s not a start-up; it’s 25 years old. And it has never, ever generated any material free cash flow – notwithstanding its $96 billion of LTM sales. During CY 2014, for example, free cash flow was just $1.8 billion and it clocked in at an equally thin $1.2 billion the year before that.

In fact, beginning with net revenues of just $8.5 billion in 2005 it has since ramped its sales by 12X, meaning that during the last ten and one-half years it has booked $431 billion in sales. But its cumulative operating free cash flow over that same period was just $6 billion or 1.4% of its turnover. So, no, Amazon is not a profit-making enterprise in any meaningful sense of the word and its stock price measures nothing more than the raging speculative juices in the casino. In an honest free market, real investors would never give a quarter trillion dollar valuation to a business that refuses to make a profit, never pays a dividend and is a one-percenter at best in the free cash flow department -that is, in the very thing that capitalist enterprises are born to produce. Indeed, the Wall Street brokers’ explanation for AMZN’s $250 billion of bottled air is actually proof positive that the casino has become unhinged.

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We may hope so.

Europe Braces Itself For Revolutionary Leftist Backlash After Greece (Telegraph)

A pre-revolutionary fervour is sweeping Europe. “The atmosphere is a little similar to the time after 1968 in Europe. I can feel, maybe not a revolutionary mood, but something like widespread impatience”. These were the words of European council president Donald Tusk, 48 hours after Greece’s paymasters imposed the most punishing bail-out measures ever forced on a debtor nation in the eurozone’s 15-year history. A former Polish prime minister and a politician not prone to hyperbole, Tusk’s comments revealed Brussels’ fears of a bubbling rebellion across the continent. “When impatience becomes not an individual but a social experience of feeling, this is the introduction for revolutions” said Tusk. “I am really afraid of this ideological or political contagion”.

His unease reflects a widespread conviction that Europe’s elites had no choice but to make an example out of Greece. Alexis Tsipras was forced to submit to a deal that punished his government’s insolence, so the argument goes, and destroy the fantasy that a “new eurozone” could be forged for the economies of the southern Mediterranean. Having emerged from the talks, Tusk declared victory, dismissing the “radical leftist illusion that you can build some alternative to this traditional European vision of the economy.” Syriza’s unprecedented rise to power in January marked a watershed in post-crisis Europe, hitherto dominated by conservative-leaning governments from Portugal to Finland.

The first radical-Left regime in Europe’s post-war history, Syriza vowed to tear up the Troika’s austerity contract, forge a Mediterranean alliance against the dominant creditor-bloc, and transform the terms of Greece’s euro membership. Seven months later, these dreams are in tatters. A tortuous 30-hour weekend in Brussels led to Tsipras capitulating to austerity terms more egregious than any negotiated by Greece’s previous centre-right and Socialist governments. Greek assets will now be sequestered into a private fund to pay off debts, external monitors will return to the country, and everything from the price of milk and bakery bread will be subject to Brussels’ scrutiny. “Syriza was the big Leftist experiment and it has gone disastrously wrong in a short period of time,” says Luke March, author of Radical Left Parties in Europe and lecturer at Edinburgh University.

“The Left elsewhere are now being forced to take stock and say “we are not Greece””. But the shadow of 1968 – a year when Europe was gripped by mass discontent, student rebellions, and labour strikes – looms over Europe’s institutions. Over the course of the next 10 months, the entire complexion of the European south could be transformed. General elections in Portugal, Spain and Ireland are poised to bring anti-austerity, Left leaning parties to power. It is the wildfire of political contagion that spooks Europe’s federalists. Greece’s humiliation, rather than cowing the revolutionary Left, is set to embolden the southern calls for mass debt relief and cease the enforcement of the euro’s contractionary dogma.

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“..it seems all too likely that the ‘logic’ of Eurozone finance is a function of Thucydides’ description of primal human barbarity. Here the strong do as they will and the weak suffer as they must.”

Varoufakis – A New Kind Of Politics? (Paul Tyson)

Strangely, one of the most disturbing aspects of Varoufakis’ stint as a Finance Minister concerns the fact that he is an economist. One thing we now readily assume is that economics is the language of power. This gives academic economists a status somewhat like a theologian in relation to the practical priestcraft of public office. However, there are very few professors of economics that actually get into office as politicians, just as you seldom get institutionally savvy bishops or mega-church leaders who are serious theologians. When an economist becomes a politician, this is going to be interesting.

In a few short months, Varoufakis completely exploded the idea that economics is the language of power. What we saw when an actual economist landed in the middle of the Eurozone crisis is that the most basic truths about economic reality have nothing to do with power. The idea that asphyxiating Greek banks and killing the Greek state is good for its economy makes no economic sense at all. The idea that continuing to pursue a savagely contractionary austerity agenda will make it possible to generate sustained state surpluses large enough to repay impossible debt burdens, defies any sort of economic rationality. The conviction that it is somehow both moral and necessary to fiscally execute the Greek polity or eject Greece in order to preserve the financial integrity of the Eurozone, is not a stance grounded in economic science.

Yet these agenda commitments are, obviously, immovable Eurogroup dogmas. When Varoufakis patiently, logically and persuasively sought to point out the economic problems with the sacred Eurozone dogmas, this got him into trouble for “lecturing” his peers. Somehow, the economic irrationality of what the Eurogroup must do was obvious to the Eurogroup, and they could not for the life of them see why Varoufakis didn’t understand this. So Varoufakis became branded as “combative” and “recalcitrant” due to his refusal to be on the same page as all the other European finance ministers, when all along it was the Eurogroup who would not talk about obvious economic realities with Varoufakis. Varoufakis’ failed attempt to negotiate even a modicum of constructive economic and political sanity with Brussels strongly suggests that the governing principles of financial power in Europe are not grounded in economic science or democratic politics.

Indeed, it seems all too likely that the ‘logic’ of Eurozone finance is a function of Thucydides’ description of primal human barbarity. Here the strong do as they will and the weak suffer as they must. The complete lack of impact which Varoufakis’ economic arguments achieved leads one to fear that when it comes to economics and politics, we are being conned: the main purpose of economic speak in politics is obfuscation. If that is indeed the case, then having someone point out the obvious elephant in the room – the economic impossibility of the prevailing dogmas governing high finance and domestic politics – is just too much. It looks like our ruling elites do not want a real economist meddling with power.

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A story that seems to surprise many people. But V already told it ages ago. Only thing new is that it started in December.

Varoufakis Claims He Had Approval To Plan Parallel Banking System (Kathimerini)

Former Finance Minister Yanis Varoufakis has claimed that he was authorized by Alexis Tsipras last December to look into a parallel payment system that would operate using wiretapped tax registration numbers (AFMs) and could eventually work as a parallel banking system, Kathimerini has learned. In a teleconference call with members of international hedge funds that was allegedly coordinated by former British Chancellor of the Exchequer Norman Lamont, Varoufakis claimed to have been given the okay by Tsipras last December – a month before general elections that brought SYRIZA to power – to plan a payment system that could operate in euros but which could be changed into drachmas “overnight” if necessary, Kathimerini understands.

Varoufakis worked with a small team to prepare the plan, which would have required a staff of 1,000 to implement but did not get the final go-ahead from Tsipras to proceed, he said. The call took place on July 16, more than a week after Varoufakis left his post as finance minister. The plan would involve hijacking the AFMs of taxpayers and corporations by hacking into the General Secretariat of Public Revenues website, Varoufakis told his interlocutors. This would allow the creation of a parallel system that could operate if banks were forced to close and which would allow payments to be made between third parties and the state and could eventually lead to the creation of a parallel banking system, he said.

As the general secretariat is a system that is monitored by Greece’s creditors and is therefore difficult to access, Varoufakis said he assigned a childhood friend of his, an information technology expert who became a professor at Columbia University, to hack into the system. A week after Varouakis took over the ministry, he said the friend telephoned him and said he had “control” of the hardware but not the software “which belongs to the troika.” [..] The work was more or less complete: We did have a Plan B but the difficulty was to go from the five people who were planning it to the 1,000 people that would have to implement it. For that I would have to receive another authorisation which never came.”

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“..The Germans say there is to be no debt write-off and that the IMF must be part of the program. But the IMF cannot participate in a program in which debt levels are unsustainable”

Greece, The Sacrificial Lamb (Joe Stiglitz)

As the Greek crisis proceeds to its next stage, Germany, Greece and the triumvirate of the International Monetary Fund, the European Central Bank and the European Commission (now better known as the troika) have all faced serious criticism. While there is plenty of blame to share, we shouldn’t lose sight of what is really going on. I’ve been watching this Greek tragedy closely for five years, engaged with those on all sides. Having spent the last week in Athens talking to ordinary citizens, young and old, as well as current and past officials, I’ve come to the view that this is about far more than just Greece and the euro. Some of the basic laws demanded by the troika deal with taxes and expenditures and the balance between the two, and some deal with the rules and regulations affecting specific markets.

What is striking about the new program (called “the third memorandum”) is that on both scores it makes no sense either for Greece or for its creditors. As I read the details, I had a sense of déjà vu. As chief economist of the World Bank in the late 1990s, I saw firsthand in East Asia the devastating effects of the programs imposed on the countries that had turned to the IMF for help. This resulted not just from austerity but also from so-called structural reforms, where too often the IMF was duped into imposing demands that favored one special interest relative to others. There were hundreds of conditions, some little, some big, many irrelevant, some good, some outright wrong, and most missing the big changes that were really required. Back in 1998 in Indonesia, I saw how the IMF. ruined that country’s banking system.

I recall the picture of Michel Camdessus, the managing director of the IMF at the time, standing over President Suharto as Indonesia surrendered its economic sovereignty. At a meeting in Kuala Lumpur in December 1997, I warned that there would be bloodshed in the streets within six months; the riots broke out five months later in Jakarta and elsewhere in Indonesia. Both before and after the crisis in East Asia, and those in Africa and in Latin America (most recently, in Argentina), these programs failed, turning downturns into recessions, recessions into depressions. I had thought that the lesson from these failures had been well learned, so it came as a surprise that Europe, beginning a half-decade ago, would impose this same stiff and ineffective program on one of its own.

Whether or not the program is well implemented, it will lead to unsustainable levels of debt, just as a similar approach did in Argentina: The macro-policies demanded by the troika will lead to a deeper Greek depression. That’s why the IMF’s current managing director, Christine Lagarde, said that there needs to be what is euphemistically called “debt restructuring” – that is, in one way or another, a write-off of a significant portion of the debt. The troika program is thus incoherent: The Germans say there is to be no debt write-off and that the IMF must be part of the program. But the IMF cannot participate in a program in which debt levels are unsustainable, and Greece’s debts are unsustainable.

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Geez, I’m even quoting Brad DeLong now?

Depression’s Advocates (J. Bradford DeLong)

Back in the early days of the ongoing economic crisis, I had a line in my talks that sometimes got applause, usually got a laugh, and always gave people a reason for optimism. Given the experience of Europe and the United States in the 1930s, I would say, policymakers would not make the same mistakes as their predecessors did during the Great Depression. This time, we would make new, different, and, one hoped, lesser mistakes. Unfortunately, that prediction turned out to be wrong. Not only have policymakers in the eurozone insisted on repeating the blunders of the 1930s; they are poised to repeat them in a more brutal, more exaggerated, and more extended fashion. I did not see that coming.

When the Greek debt crisis erupted in 2010, it seemed to me that the lessons of history were so obvious that the path to a resolution would be straightforward. The logic was clear. Had Greece not been a member of the eurozone, its best option would have been to default, restructure its debt, and depreciate its currency. But, because the European Union did not want Greece to exit the eurozone (which would have been a major setback for Europe as a political project), Greece would be offered enough aid, support, debt forgiveness, and assistance with payments to offset any advantages it might gain by exiting the monetary union. Instead, Greece’s creditors chose to tighten the screws.

As a result, Greece is likely much worse off today than it would have been had it abandoned the euro in 2010. Iceland, which was hit by a financial crisis in 2008, provides the counterfactual. Whereas Greece remains mired in depression, Iceland – which is not in the eurozone – has essentially recovered. To be sure, as the American economist Barry Eichengreen argued in 2007, technical considerations make exiting the eurozone difficult, expensive, and dangerous. But that is just one side of the ledger. Using Iceland as our measuring stick, the cost to Greece of not exiting the eurozone is equivalent to 75% of a year’s GDP – and counting.

It is hard for me to believe that if Greece had abandoned the euro in 2010, the economic fallout would have amounted to even a quarter of that. Furthermore, it seems equally improbable that the immediate impact of exiting the eurozone today would be larger than the long-run costs of remaining, given the insistence of Greece’s creditors on austerity. That insistence reflects the attachment of policymakers in the EU – especially in Germany – to a conceptual framework that has led them consistently to underestimate the gravity of the situation and recommend policies that make matters worse.

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Tsipras can’t afford to lose her.

The Latest Rising Greek Political Star Who Says No To Austerity (HuffPo)

Greece’s charismatic head of parliament, Zoe Konstantopoulou, is one of the most dynamic and outspoken members of the country’s ruling Syriza party. This week, she sent shockwaves through the party by refusing to approve a financial reform bill proposed by her supposed Syriza ally, Prime Minister Alexis Tsipras – for the second time. Konstantopoulou considers measures proposed by Tsipras as part of an agreement with Greece’s European lenders to unlock fresh loans for the country a “violent attack on democracy,” she wrote in a letter to Tsipras and Greek President Prokopis Pavlopoulos. Konstantopoulou’s adamant opposition to the newest austerity reforms is resonating with Greeks who feel the Europe-imposed reforms are excruciatingly harsh.

Konstantopoulou, 38, is the daughter of renowned lawyer Nikos Konstantopoulos, who led of one of Syriza’s largest factions, and well-known journalist Lina Alexiou. She studied law at the University of Athens, La Sorbonne in Paris and Columbia University in New York before becoming a lawyer in Greece in 2003, focusing on international criminal law and human rights. Konstantopoulou first ran for Syriza in 2009 and was elected to the Greek parliament in 2012. She was elected head of the parliament in 2015, the youngest person to hold the position. As parliament chief, her forthright remarks and dedication to formal legal procedure have gained her passionate praise as well as fierce opposition. Her forceful interventions have annoyed some politicians, especially those in opposition parties.

Stavros Theodorakis, leader of To Potami (The River), for example, has called her arrogant and has demanded her resignation. Others have praised her fiery energy, saying her forceful defense of her convictions is invigorating. Despite Konstantopoulou’s rising favor, she remains far less popular than other Syriza politicians, especially Tsipras. Her blunt rejection of the prime minister’s reforms has raised speculation she may leave the party and go her own way, according to Greek daily newspaper Kathimerini. Konstantopoulou denies that scenario. After a one-hour meeting with Tsipras on Thursday, she told reporters that both share “an understanding built on camaraderie and honesty, along with the common wish to protect the rights of the people as well as the unity of Syriza, which some would want to see shattered.”

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NY Times ed staff changing its tack.

How the Euro Turned Into a Trap (NY Times Ed.)

When they introduced the euro in 1999, European leaders said the common currency would be irreversible and would lead to greater economic and political integration among their countries. That pledge of permanence, long doubted by euro-skeptics, seems ever less credible. While the eurozone may have temporarily avoided a Greek exit, it is hard to see how a deal that requires more spending cuts, higher taxes and only vague promises of debt relief can restore the crippled economy enough to keep Greece in the currency union. On Thursday, the Greek Parliament passed a second set of reforms required by the country’s creditors. Other changes, like higher taxes on farmers, are expected later in the year.

The combative finance minister of Germany, Wolfgang Schäuble, has further undermined confidence in the euro’s cohesion by saying that Greece would be better off leaving the common currency for a five-year “timeout.” As a practical matter, an exit from the currency union would almost certainly be permanent, since readmission involves a grueling process. The eurozone requires new members to keep inflation below 2% and to have a maximum fiscal deficit of 3% of GDP and a public debt that is no more than 60% of GDP. The plight of the Greeks has made countries that do not use the euro, like Poland and Hungary, far less eager to join the currency union, which has come to mean a loss of sovereignty and a commitment to austerity, regardless of economic reality.

Of course, the euro was never entirely about economics. European leaders believed the single currency was a big step toward creating an irrevocable alliance among countries on the continent. But many experts warned that it could make its members less stable unless it was followed by a tighter political and budgetary union. Since that did not happen, the currency union was left fully vulnerable to economic crises and to the will of Europe’s more powerful economies. All those fears have played out in Greece, even as the threat of exits from the euro hangs over other weakened countries, like Italy, Portugal and Spain. Senior leaders in Germany, Finland and Slovakia who have publicly suggested a Greek exit seem to think it would scare weaker economies into accepting more austerity.

That may not be necessary; some radical parties in those countries are already openly talking about leaving the euro. The question now is what is the cost of leaving? Can a modern economy withstand the immediate damage of an abrupt currency change if the benefits of devaluation and regaining full control over fiscal and monetary policies could be limited and could take years to realize?

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Not enough 5-star hotel rooms?

Greek Bailout Talks Pushed Back By A Few Days On Logistics (Reuters)

Talks between Greece and its international creditors over a new bailout package will be delayed by a couple of days because of organisational issues, a finance ministry official said on Saturday. The meetings with officials from the EC, ECB and IMF were supposed to start on Monday after being delayed for issues including the location of talks and security last week. A finance ministry official, who declined to be named, said talks between the technical teams of the lenders will start on Tuesday, while the mission chiefs will arrive in Athens with a delay of a couple of days for technical reasons. “The reasons for the delay are neither political, nor diplomatic ones,” the official added.

Greeks have viewed inspections visits by the lenders in Athens as a violation of the country’s sovereignty and six months of acrimonious negotiations with EU partners took place in Brussels at the government’s request. Another finance ministry official denied earlier on Saturday that the government was trying to keep the lenders’ team away from government departments and had no problem with them visiting the General Accounting Office.. Asked if the government would now allow EU, IMF and ECB mission chiefs to visit Athens for talks on a new loan, State Minister Alekos Flabouraris said: “If the agreement says that they should visit a ministry, we have to accept that.”

The confusion around the expected start to the talks on Friday underlined the challenges ahead if negotiations are to be wrapped up in time for a bailout worth up to €86 billion to be approved in parliament by Aug. 20, as Greece intends. Already, Prime Minister Alexis Tsipras is struggling to contain a rebellion in his left-wing Syriza party that made his government dependent on votes from pro-European opposition parties to get the tough bailout terms approved in parliament. One of Tsipras’ closest aides said that the understanding with the opposition parties could not last long and a clear solution was needed, underlining widespread expectations that new elections may come as soon as September or October. “The country cannot go on with a minority government for long. We need clear, strong solutions,” State Minister Nikos Pappas told the weekly Ependysi in an interview published on Saturday.

Apart from the terms of a new loan, Greece and its lenders are also expected to discuss the sustainability of its debt, which is around 170% of GDP. Greece has repeatedly asked for a debt relief and the IMF has said this is needed for the Greek accord to be viable. [..] Tsipras, who is by far the most popular politician in Greece according to opinion polls, has said his priority is to secure the bailout package before dealing with the political fallout from the Syriza party rebellion.

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“..the decision to pursue a new IMF program means euro zone leaders may have to open talks on granting Greece significant debt relief much earlier than originally anticipated..”

Renewed Bailout Talks Between Greece And Creditors Hit Snags (FT)

Talks to agree a new €86bn bailout for Greece ran into trouble on Friday after Athens raised hurdles for negotiators in the Greek capital, forcing them to postpone their arrival amid renewed acrimony. Alexis Tsipras, the Greek prime minister, agreed last week to “fully normalize” talks with creditors on the ground in Athens after resisting their presence for months — a key demand made by euro zone leaders when they agreed to reopen rescue talks after coming close to pushing Greece out of the euro zone. But three senior officials from Greece’s bailout monitors said Athens had instead demanded restrictions on negotiators, including on whom creditors could meet and what topics were to be discussed in the talks.

Two of the officials said Greek authorities had also insisted negotiators no longer use the Athens Hilton as their base — a hotel close to central Syntagma Square and a short drive to the finance ministry — instead proposing hotels far from the capital’s government quarter. “It is fundamentally more of the same,” said a senior official from one of the bailout monitors,colloquially known as the “troika” after the three institutions originally involved in the talks, the EC, ECB and IMF. “They don’t want to engage with the troika.” Greek officials insisted the renewed stand-off was only a temporary delay and that talks would resume over the weekend or Monday at the latest.

George Stathakis, economy minister, said he was confident the negotiations would be finished by mid-August, when Athens needs the bailout cash to pay off a €3.2bn bond held by the ECB. Mr Stathakis said Greece and its creditors had already found common ground on many of the main issues,including fiscal targets, stabilizing the banking sector, liberalization of product markets and professions, labor market reforms and privatizations of state assets. “We have three weeks,and I’m confident that it’s enough for the existing agenda,” Mr Stathakis told the Financial Times. “We agree in certain areas. In others, there are different views and some distance needs to be covered. But the last European summit gave a framework that indicates which directions to follow, and that’s why I think three weeks will be enough.”

Still, one creditor official said negotiating teams were “sitting on their suitcases” and had no plans to go to Athens until the logistical issues were resolved. Adding another potential complication, the Greek government on Friday lodged a formal request with the IMF to begin discussions on a new, third bailout program. The request came after officials at the IMF determined that the current Greek program, which still has about €16.5bn to disburse and was due to expire in March, had become outdated. Those negotiations between Athens and the IMF could take months. But the decision to pursue a new IMF program means euro zone leaders may have to open talks on granting Greece significant debt relief much earlier than originally anticipated, since the IMF will not sign on to a new program unless euro zone lenders agree to restructure their bailout loans.

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Syriza differences are being magnified by the press.

Greek Gov’t Braces For Talks With Creditors Amid Upheaval In SYRIZA (Kath.)

Even as Prime Minister Alexis Tsipras grapples with serious divisions within SYRIZA, government officials are bracing for the launch of face-to-face negotiations with representatives of the country’s creditors which are expected to begin next week. The government is hoping to seal a deal with creditors by mid-August and certainly before August 20 when a €3.2 billion debt repayment to the ECB is to come due. Greece does not have the money to repay the debt and is hoping for a deal to be reached, allowing the partial disbursement of some funding, either from a new program or from residual funding from the recapitalization of Greek banks. But sources indicate that creditors are less optimistic about a deal being finalized so soon.

As a result officials are said to be considering the possibility of a second bridge loan to Greece, which would allow it to cover the ECB debt and other obligations, before an agreement on a third bailout is finalized. Although officials from countries that have taken a hard line opposite Greece, including Germany and some north European states, reportedly want Athens to commit to more prior actions, European Economy and Monetary Affairs Commissioner Pierre Moscovici has indicated that this will not be necessary. Creditors are expected to seek additional measures at some point, however, to plug a widening fiscal gap.

Tsipras is also struggling to keep a lid on dissent within SYRIZA as a bloc of around 30 of the party’s 149 MPs object to his compromise with creditors, which foresees more austerity. The premier has indicated that a party congress should be held in September to refocus SYRIZA. Early elections, which are considered inevitable in view of the upheaval within the party, are expected to take place immediately after the congress, either later in September or in October or even November. In comments on Saturday, State Minister Nikos Pappas acknowledged that the country cannot continue indefinitely with a minority government, referring to the mass defections by SYRIZA MPs in recent parliamentary votes. A meeting of SYRIZA’s political secretariat is due on Monday.

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As long as small depositors are left alone, fine by me.

Greek Bank Boldholders Fear Portuguese-Style “Bad Bank” Split (Reuters)

National Bank of Greece bondholders are nervous that they will suffer heavy losses if authorities decide to siphon off all of the bank’s healthy assets leaving a “bad bank” to deal with their claims, a source close to a creditor group said. A group of senior bondholders in NBG sent a letter to European institutions last week saying they were concerned about measures that may be taken to revitalise the Greek banking sector after months of economic upheaval. After drawn-out negotiations, Greece is close to clinching a third bailout deal but has kept in place the capital controls it used to prevent a bank run last month.

The investors, who hold a significant portion of a €750 million NBG senior bond issued last year, are worried the bank may be split into a good bank and a bad bank as was the case for Portugal’s Banco Espirito Santo last year. Portugal separated out and pumped money into the healthy part of the bank creating a new entity “Novo Banco”, while remaining BES shareholders and subordinated bondholders were left with near worthless investments in the remaining bad bank. NBG bondholders are concerned that such a split in Greece could require a level of recapitalisation that would also see senior bondholders left behind in the bad bank.

Under current Greek law, junior bondholders should contribute to a bail-in, while new legislation passed on Wednesday will also force senior bondholders to contribute from January 1 2016. Recapitalisations of Greek banks may be needed before then, however, leaving the option of a bad bank solution on the table. ECB governing council member Christian Noyer said an initial injection of capital for Greek banks would be preferable before stress tests in the autumn.

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To talk to Le Pen?

Chancellor George Osborne Takes EU Reform Campaign To Paris (Reuters)

Chancellor of the Exchequer George Osborne will take Britain’s case for European Union reform to Paris on Sunday, seeking support from his French counterpart for a deal the Conservative government can put before voters in a promised in-out referendum. British Prime Minister David Cameron has pledged to renegotiate ties with the European Union ahead of a vote on the country’s continuing membership by the end of 2017. Osborne’s trip to Paris, the first in a series of visits to European capitals, will seek to build on Cameron’s meetings with all 27 leaders of the bloc earlier this year, the government said. He will argue that with public support for reform rising across the EU, now is the time to deliver lasting change. “The referendum in Britain is an opportunity to make the case for reform across the EU,” he will say, according to excepts of his speech.

“I want to see a new settlement for Europe, one that makes it a more competitive and dynamic continent to ensure it delivers prosperity and security for all of the people within it, not just for those in Britain.” Cameron’s promise of a referendum was made before national elections in May to neutralise a threat from the anti-EU UK Independence Party and to pacify Euro sceptics in his own party. The possibility that Britain could leave the European Union as a result of the tactic has worried allies such as the United States and opposition parties in Britain. U.S. President Barack Obama said on Friday that a Britain within the European union gave Washington much greater confidence in the strength of the transatlantic union. Some lawmakers were angered by his intervention in the debate, saying he was lecturing Britain.

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What a refreshing MO.

Puerto Rico: Austerity For Residents, But Tax Breaks For Hedge Funds (Guardian)

Caught between the demands of billionaires, pro-bankruptcy activists and more than three million people plagued by unemployment, poverty and government debt, who would you choose? As Puerto Rico confronts the quagmire of its $72bn financial crisis, it has come up with an answer: humouring a few very wealthy people. The island has for three years courted some of Wall Street’s richest citizens, from solitary investors to hedge fund elites. Last year it sold at auction hundreds of millions of its debt to various funds, displeasing many who believe the “vulture funds” only want a quick profit off Puerto Rico as it desperately tries to repay debt with high local taxes and austerity cuts.

Hedge fund manager John Paulson, best known for making billions off the 2008 subprime loan market crash, led the charge last year when he declared the island “the Singapore of the Caribbean”. His fund bought more than $100m of Puerto Rico’s junk-rated bonds last year. The most visible effect has been a rush to buy property akin to the buying spree by two billionaires in Detroit as that city filed for bankruptcy. Detroit’s woes are often held up for comparison to Puerto Rico’s but the island lacks the statehood or permission from Congress it would need to file for bankruptcy and follow Michigan’s decision to declare Motor City bust. While funds have inched away from Puerto Rico’s debt debacle, Paulson has bought into land.

In 2014 he spent more than $260m to buy three of the island’s largest resort properties, and announced plans to develop $500m-worth of “residences and resort amenities” to add to the existing beachfront condos and golf courses. He has a fellow cheerleader in billionaire Nicholas Prouty, who has invested more than $550m into turning San Juan’s marina into a bastion of the elite that includes an exclusive club and slips for “megayachts of 200 feet or larger”. As in Detroit, ultra-high-end developments abut scores of empty buildings, either for sale or abandoned by owners searching for work. With unemployment more than twice the US national average, the island’s median household income is nearly $7,000 less than that in Detroit, and less than half the US average.

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Feudalism?

What A Federal Financial Control Board Means To Puerto Rico (The Hill)

Puerto Rico is spiraling out of control and the Federal government will not break the fall. Island leaders may not have the will, popular support, or financial tools to pay down the $72 billion debt. So it is no surprise that calls for a federal financial control board intensified after Governor Alejandro Garcia Padilla announced that Puerto Rico’s debt is unpayable. Establishing a control board may be the easy way out for a wary Congress but it is not as simple as it seems and could backfire. A federal financial control board for Puerto Rico was first proposed a year ago by supporters of Doral Bank in its dispute with the Puerto Rican government over a $230 million tax refund. Most of Doral’s supporters are affiliated with the conservative Koch brothers.

They include Republican Reps. Jeff Duncan (SC), Scott Garrett (NJ), Darrell Issa (CA) and Matt Salmon (AZ) who received Koch Industries PAC contributions and who prior to Doral had never been involved with Puerto Rico. Last month, Duncan recommended to his House colleagues that a control board be established. The 60 Plus Association, another Koch funding recipient, is lobbying for a control board. While frustrated Puerto Ricans are increasingly talking about the need for a control board, the majority of the Island opposes it with good reason. First, Puerto Ricans feel that given the right tools, they can fix the fiscal crisis on their own. Right now the most important tool is access to Chapter 9 federal bankruptcy. From 1933 until 1984, Puerto Rico could allow its municipalities and public corporations to declare bankruptcy in the same way as the 50 states.

In 1984 Congress amended the bankruptcy code and excluded Puerto Rico for reasons unknown. Most agree that overall losses to investors will be higher if Puerto Rico is not given access to Federal bankruptcy and defaults. To avoid this scenario Puerto Rico passed its own bankruptcy law which was challenged by bondholders of electricity provider PREPA which owes $9 billion. The law was recently struck down in Federal court. The Puerto Rican government may appeal to the U.S. Supreme Court. The same group of creditors is fighting bankruptcy legislation introduced in Congress. Issa, who sits in the subcommittee reviewing the bill, opposes it. The conservative Heritage Foundation calls it a bailout even though it supported Chapter 9 for Detroit.

Second, Puerto Ricans are distrustful of any financial control board established by a national government that has denied it political representation for 117 years. The distrust is heightened by knowledge that the chief supporters of a control board are members of the conservative Koch brothers’ network and creditors whose objective is to make money off Puerto Rico rather than enable Puerto Rico to remake itself.

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It’s not easy being Rahm.

Judge Finds Chicago’s Changes To Pension Funds Unconstitutional (Tribune)

Mayor Rahm Emanuel’s administration said it will appeal a Cook County judge’s decision Friday that ruled unconstitutional a state law reducing municipal worker pension benefits in exchange for a city guarantee to fix their underfunded retirement systems. The 35-page ruling by Judge Rita Novak, slapping down the city’s arguments point by point, could have wide-ranging effects if upheld by the Illinois Supreme Court. Her decision appeared to also discredit efforts at the state and Cook County levels to try to curb pension benefits to rein in growing costs that threaten funding for government services. The issue of underfunded pensions, and how to restore their financial health, is crucial for the city and its taxpayers.

The city workers and laborers funds at issue in Friday’s ruling are more than $8 billion short of what’s needed to meet obligations – and are at risk of going broke within 13 years – after many years of low investment returns fueled by recession and inadequate funding. Without reducing benefits paid to retired workers, or requiring current workers to pay more, taxpayers could eventually be on the hook for hundreds of millions of dollars more in annual payments to those city funds — before the even worse-funded police and fire retirement accounts are factored into the taxing equation. Friday’s ruling also could further harm the city’s rapidly diminishing credit rating. Even before the decision, Moody’s Investors Service had downgraded the city’s debt rating to junk status based on pension concerns.

And after Novak’s ruling, Standard & Poor’s Ratings Service warned that it would lower the rating on city debt within the next six months without a fix. Novak’s ruling was not unexpected because of a decision in May by the Illinois Supreme Court on a similar pension case. The state’s high court unanimously struck down a law changing state pensions, saying the Illinois Constitution’s protection against “diminished or impaired” pension benefits for public workers and current retirees was absolute. City officials had argued that an agreement reached with 28 of 31 labor unions to alter retirement benefits out of the municipal and laborers pension funds – two of the city’s four pension plans – was different from the plan struck down by the Supreme Court.

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Color me stunned.

Foreign Criminals Use London Real Estate To Launder Billions Of Pounds (Guardian)

Foreign criminals are using the London housing market to launder billions of pounds, pushing up house prices for domestic buyers, a senior police officer has warned. Donald Toon, the director of economic crime at the National Crime Agency, spoke after a spike in receipts from a tax on homes bought up by companies, trusts and investment funds rather than individuals. Such corporations, usually based in offshore tax havens, are sometimes used by buyers keen to hide ownership of assets from their own countries’ tax authorities. The secrecy they offer can equally be used to squirrel away ill-gotten gains. Toon told the Times: “I believe the London property market has been skewed by laundered money. Prices are being artificially driven up by overseas criminals who want to sequester their assets here in the UK.”

He spoke after provisional tax receipts showed the Treasury had made £142m from the annual tax on enveloped dwellings in just the first three months of the financial year. The tax, introduced last year, is payable every year by companies that own a UK residential property valued above a certain amount. The City of Westminster and the Royal Borough of Kensington and Chelsea accounted for 82% of the revenue, but inflation at the top of the market is thought to ripple down to cheaper properties as wealthy buyers are pushed down the housing chain. Toon’s comments come amid increasing concern that billions of pounds of corruptly gained money has been laundered by criminals and foreign officials buying upmarket London properties through anonymous offshore front companies.

Experts say that London, with its myriad links to tax haven crown dependencies, is arguably the global capital of money laundering. This month a Channel 4 investigation found that estate agents in Britain’s wealthiest postcodes are willing to turn a blind eye to apparent money laundering by corrupt foreign buyers. In the documentary, titled From Russia With Cash, two undercover reporters posed as an unscrupulous Russian government official called Boris in London to purchase an upmarket property for his mistress. The couple viewed five properties ranging in price from £3m to £15m, on the market with five estate agents in Kensington, Chelsea and Notting Hill.

Despite being made aware they are dealing with apparently laundered money, the estate agents agreed to continue with a potential purchase. In several instances the estate agents recommended law firms to help a buyer hide his identity. The agents suggested that secretive purchases of multimillion-pound houses were common in the capital. One claimed that 80% or more of his transactions were with international, overseas-based buyers and “50 or 60%” of them were conducted in “various stages of anonymity … whether it be through a company or an offshore trust”.

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Blowing up one country at a time.

The – Goldman-Related – Scandal That Ate Malaysia (Bloomberg)

In the spring of 2013, Song Dal Sun, head of securities investment at Seoul-based Hanwha Life Insurance, sat down to a presentation by a Goldman Sachs banker. The young Goldman salesman, who had flown in from Hong Kong, made a pitch for bonds to be issued by 1Malaysia Development Bhd., a state-owned company closely tied to Malaysian Prime Minister Najib Razak. It was enticing. The 10-year, dollar-denominated bonds offered an interest rate of 4.4%, about 100 basis points higher than other A-minus-rated bonds were yielding at the time, he recalls. But Song, a veteran of 25 years in finance, sensed something was amiss. With such an attractive yield, 1MDB could easily sell the notes directly to institutional investors through a global offering.

Instead, Goldman Sachs was privately selling 1MDB notes worth $3 billion backed by the Malaysian government. “Does it mean ‘explicit guarantee’?” he recalls asking the Goldman salesman, whom he declined to name. “I didn’t get a straight answer,” Song says. “I decided not to buy them.” The bond sale that Song passed up is part of a scandal that has all but sunk 1MDB, rattled investors, and set back Malaysia’s quest to become a developed nation. Najib, who also serves as Malaysia’s finance minister, sits on 1MDB’s advisory board as chairman. The scandal’s aftershocks have rocked his office, his government, and the political party he leads, United Malays National Organisation, or UMNO.

A state investment company trumpeted as a cornerstone of Najib’s economic policy after he became prime minister in April 2009, 1MDB is now mired in debts of at least $11 billion. Former Prime Minister Mahathir Mohamad, a one-time political mentor who’s turned on Najib, says “vast amounts of money” have “disappeared” from 1MDB funds. 1MDB has denied the claim and said all of its debts are accounted for. From the moment in 2009 when Najib took over a sovereign wealth fund set up by the Malaysian state of oil-rich Terengganu and turned it into a development fund owned by the federal government, 1MDB has been controversial. Since the beginning of this year—with coverage driven by the Sarawak Report, a blog, and The Edge, a local business weekly—the scandal has moved closer and closer to the heart of government, sparking calls for Najib’s ouster and recalling Malaysia’s long struggle with corruption and economic disappointment.

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“..a bacterial disease nicknamed “olive ebola”..”

Olive Oil Prices Surge Due To Drought And Disease In Spain And Italy (Guardian)

Salads have rarely been so expensively dressed after a combination of drought and disease pushed the price of olive oil up 10% so far this year, amid warnings from suppliers that harvests are the worst they have seen. The Italian government has declared a “state of calamity” in the provinces of Lecce and Brindisi on the heel of the country, where olive groves are being attacked by a bacterial disease nicknamed “olive ebola”. Up to 1m centuries-old olive trees could be felled in one of the most picturesque tourist spots of Italy in an attempt to contain the problem. The cost of the raw material has been increasing for two years as crops have been hit by drought in Spain, the world’s biggest producer of the oil, and the bacterial disease Xylella fastidiosa, which is destroying trees in Italy.

Analysts are expecting prices to remain high in coming months as demand is increasing. Retailers and distributors wanted to buy 12% more olive oil than exporters were able to deliver last month, according to industry insiders. Buyers in Latin America have turned to Europe in the wake of poor harvests over the Atlantic, while eastern Europeans have also been using increasing amounts of olive oil. The next harvest from southern Europe is not expected until September, but fears of a third poor harvest in a row in Spain and Italy continue to push up wholesale prices of remaining stocks over the summer. The other two large olive oil producers, Greece and Tunisia, had good yield and production, but not enough to compensate for Spain and Italy.

In the UK, heavy price competition between retailers, led by the rise of discounters Aldi and Lidl, has helped keep prices relatively low for shoppers. But this year, retailers and processors have been forced to pass on increases as the cost of the raw material from Italy has hit a 10-year high. The average retail price of a litre of extra virgin olive oil has risen from £6.32 in December to £6.95 this month, according to data from trade journal the Grocer.

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Humane society.

The Future of Food Finance (Barron’s)

The way people produce and eat food is changing in major ways, presenting both risks and opportunities for those invested in the sustenance sector. Historically, much of our protein has come from animals, but producing just one pound of meat means feeding an animal up to 16 pounds of grains and other crops. The caloric conversion is weak, too: According to a recent report produced in collaboration with the World Bank, even the most efficient sources of meat convert only around 11% of gross feed energy into human food. As global population and per capita meat consumption have grown, this inefficient system has become overburdened. In 1950, the total number of farm animals in the U.S. was somewhere near 100 million; by 2007, that number was roughly 9.5 billion.

To accommodate the enormous demand, nearly all of those animals were moved from farms to factories. According to Agriculture Department data, during the same period that the number of farm animals increased by 9,400%, the number of farmers producing those animals decreased by 60%. So many more animals being reared by so few farmers has come with consequences for consumers, animals, producers, and investors. Take pig production. Over the past several decades, the vast majority of breeding pigs have been moved into “gestation crates,” which are tiny cages that confine animals so tightly they can’t even turn around. The cages are iron maidens for sows. Not surprisingly, some consumers have responded with anger. “Cruel and senseless” is what the New York Times called the cages. “Torture on the farm,” reported the American Conservative magazine.

This outcry has led major food companies to demand changes. More than 60 of the world’s largest food retailers – McDonald’s, Nestlé, Burger King, Oscar Mayer, Safeway, Kroger, Costco, and dozens more – have announced plans to eliminate gestation crates from their pork-supply chains. Addressing animal welfare in corporate-responsibility programs is becoming the norm. “Active concern about how we treat the world around us has moved from the left of center to the mainstream, and savvy businesses are playing a part,” noted an editorial in Nation’s Restaurant News. “The growing number of animal-welfare-related commitments made by companies large and small reflect well-thought-out business –strategies.”

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“11,000 years before the generally recognised advent of organised cultivation..”

Archaeologists Find Possible Evidence Of Earliest Human Agriculture (Guardian)

Israeli archaeologists have uncovered dramatic evidence of what they believe are the earliest known attempts at agriculture, 11,000 years before the generally recognised advent of organised cultivation. The study examined more than 150,000 examples of plant remains recovered from an unusually well preserved hunter-gatherer settlement on the shores of the Sea of Galilee in northern Israel. Previously, scientists had believed that organised agriculture in the Middle East, including animal husbandry and crop cultivation, had begun in the late Holocene period – around 12,000 BC – and later spread west through Europe. The new research is based on excavations at a site known as Ohalo II, which was discovered in 1989 when the water level in the sea of Galilee dropped because of drought and excessive water extraction.

Occupied by a community of hunter-gatherers at the height of the last ice age 23,000 years ago, it revealed evidence of six brush huts with hearths as well as stone tools and animal and plant remains. A series of fortuitous coincidences led to the site’s preservation. The huts had been built over shallow bowls dug by the occupants and later burned. On top of that a deposit of sandy silt had accumulated before the rising lake had left it under 4 metres of water. The study looked for evidence of early types of invasive weeds – or “proto-weeds” – that flourished in conditions created by human cultivation. According to the researchers, the community at Ohalo II was already exploiting the precursors to domesticated plant types that would become a staple in early agriculture, including emmer wheat, barley, pea, lentil, almond, fig, grape and olive.

Significantly, however, they discovered the presence of two types of weeds in current crop fields: corn cleavers and darnel. Microscopic examination of the edges of stone blades from the site also found material that may have been transferred during the cutting and harvesting of cereal plants. Prof Ehud Weiss, head of the archaeological botany lab at the Department of Land of Israel Studies, told the Guardian: “We know what happened ecologically: that these wild plants, some time in history, became weeds. Why? The simple answer is that because humans changed the environment and created new ecological niches, that made it more comfortable for species that would become weeds, meaning they only have to compete with one species.”

According to Weiss, the mixture of “proto-weeds” and grains that would become domesticated mirrors plant findings from later agricultural communities. The site also revealed evidence of rudimentary breadmaking from starch granules found on scorched stones, and that the community may have been largely sedentary, with evidence of consumption of birds throughout the year, including migrating species. “This botanical find is really opening new windows to the past,” Weiss said. “You have to remember Ohalo is a unique preservation. Between Ohalo and the beginning of the Neolithic we have a blank. And when the early Neolithic arrives people start [agriculture again] from scratch.

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Dec 222014
 
 December 22, 2014  Posted by at 12:05 pm Finance Tagged with: , , , , , , , ,  


Russell Lee Secondhand store in Council Bluffs, Iowa Dec 1936

Age of Plenty Seen Over for Gulf Arabs as Oil Tumbles (Bloomberg)
Ready for $20 Oil? (A. Gary Shilling)
Houston Suddenly Has A Very Big Problem (Feroli via ZH)
Saudis Insist Oil Supply Cuts Are Not Needed (Independent)
Oil Crash Wipes $11.7 Billion From Buyout Firms’ Holdings (Bloomberg)
North Sea Oil Summit Announced By Aberdeen City Council (BBC)
Southwest’s Oil Swap Trade Waiver Raises CFTC Questions (Reuters)
US Gas Prices Fall To Lowest Since May 2009 (Reuters)
Rosneft Repays $7 Billion and Says Has No Need to Buy Dollars (Bloomberg)
China Offers Russia Help With Currency Swap Suggestion (Bloomberg)
China Investigates Possible Stock-Price Manipulation (WSJ)
China Stock Connect Scheme Scorecard Throws Up Surprises (Reuters)
The Fallacy of Keynesian Macro-Aggregates (Ebeling)
Europe in Wonderland Wants Russia to Bail Out Ukraine (Mish)
Greek Premier Makes Offer In Bid To Avoid Snap Elections (WSJ)
Greece’s Radical Left Could Kill Off Austerity In The EU (Guardian)
Rising Price Of Olive Oil Is A Pressing Matter (FT)
Leaked CIA Docs Teach Operatives How To Infiltrate EU (RT)

Tall building syndrome?!

Age of Plenty Seen Over for Gulf Arabs as Oil Tumbles (Bloomberg)

The boom that adorned Gulf Arab monarchies with glittering towers, swelled their sovereign funds and kept unrest largely at bay may be over after oil prices dropped by almost 50% in the last six months. The sheikhdoms have used the oil wealth to remake their region. Landmarks include man-made islands on reclaimed land, as well as financial centers, airports and ports that turned the Arabian desert into a banking and travel hub. The money was also deployed to ward off social unrest that spread through the Middle East during the Arab Spring. “The region has had 10 years of abundance,” said Simon Williams, HSBC chief economist for central and eastern Europe, the Middle East and North Africa. “But that decade of plenty is done. The drop in oil prices will hurt performance in the near term, even if the Gulf’s buffers are powerful enough to ensure there’s no crisis.”

Brent crude, which has averaged $102 a barrel since the end of 2009, plunged to about $60 by the end of last week. The slump accelerated after the Organization of Petroleum Exporting Countries, whose top producer is Saudi Arabia, decided in November to keep output unchanged. At $65 a barrel, the six nations of the Gulf Cooperation Council, which hold about a third of the world’s crude reserves, would run a combined budget deficit of about 6% of gross domestic product, according to Arqaam Capital, a Dubai-based investment bank. Cheaper oil “will force a reassessment of the ambitious infrastructure investment program” in the region, Qatar National Bank said in a report. One exception is likely to be Qatar, which is spending on infrastructure to host the 2022 soccer World Cup final, QNB said. The oil-price drop has already prompted economists to cut next year’s growth estimates for Saudi Arabia, the United Arab Emirates and Kuwait, according to data compiled by Bloomberg.

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Complex political games.

Ready for $20 Oil? (A. Gary Shilling)

When the U.S. Federal Reserve ended its quantitative-easing program in October, it also ended the primary driver of U.S. stocks during the past six years. So long as the central bank kept flooding the markets with money, investors had little reason to worry about a broader economy limping along at 2% real growth. Now investors face more volatile markets and securities that no longer move in lock-step. At the same time, investors must cope with slower growth in China, minuscule growth in the euro area and negative growth in Japan. Such widespread sluggish demand – along with ample supplies of oil and most everything else – is the reason commodity prices are falling. They have been since early 2011, but many people failed to notice until recently, when crude oil prices nosedived.

Normally, less demand and a supply glut would lead OPEC, beginning with Saudi Arabia, to cut production. As the de facto cartel leader, the Saudis would often reduce output to prevent supply increases from driving down prices. Of course, this also cost the Saudis market share and encouraged cheating by OPEC members. Saudi leaders must grind their teeth over the last decade’s unchanged demand for OPEC oil, while all the global growth has been among non-OPEC suppliers, principally in North America. That may explain why, while Americans were enjoying their Thanksgiving turkeys, OPEC surprised the world. Pressed by the Saudis and other rich Persian Gulf producers, it refused to cut output despite a 38% drop in the price of Brent crude, the global benchmark, since June.

OPEC, in effect, is challenging other producers to a game of chicken. Sure, the wealthier producers need almost $100 a barrel to finance bloated budgets. But they also have huge cash reserves, which they figure will outlast the cheaters and the U.S. shale-oil producers when prices are low. The Saudis also seized the opportunity to damage their opponents, especially Iran and what they see as Iran-dominated Iraq, in the Syria conflict. They also want to help allies Egypt and Pakistan reduce expensive energy subsidies as prices fall.

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“.. the four states where oil is more important to the local economy than Texas have a combined GSP that is only 16% of the Texas GSP.”

Houston Suddenly Has A Very Big Problem (Feroli via ZH)

The well-known energy renaissance in the US has occurred in both the oil and natural gas sectors. Some states that are huge natural gas producers have limited oil production: Pennsylvania is the second largest gas producing state but 19th largest oil producer. The converse is also true: North Dakota is the second largest crude producer but 14th largest gas producer. However, most of the economic data as it relates to the energy sector, employment, GDP, etc, often lump together the oil and gas extraction industries. Yet oil prices have collapsed while natural gas prices have held fairly steady. To understand who is vulnerable to the decline in oil prices specifically we turn to the EIA’s state-level crude oil production data.

The first point, mentioned at the outset, is that Texas, already a giant, has become a behemoth crude producer in the past few years, and now accounts for over 40% of US production. However, there are a few states for which oil is a relatively larger sector (as measured by crude production relative to Gross State Product): North Dakota, Alaska, Wyoming, and New Mexico. For two other states, Oklahoma and Montana, crude production is important, though somewhat less so than for Texas. Note, however, that these are all pretty small states: the four states where oil is more important to the local economy than Texas have a combined GSP that is only 16% of the Texas GSP. Finally, there is one large oil producer, California, which is dwarfed by such a huge economy that its oil intensity is actually below the national average, and we would expect it, like the country as a whole, to benefit from lower oil prices.

As discussed above, Texas is unique in the country as a huge economy and a huge oil producer. When thinking about the challenges facing the Texas economy in 2015 it may be useful, as a starting point, to begin with the oil price collapse of 1986. Then, like now, crude oil prices collapsed around 50% in the space of a few short months. As noted in the introduction, the labor market response was severe and swift, with the Texas unemployment rate rising 2.0%-points in the first three months of 1986 alone. Following the hit to the labor market, the real estate market suffered a longer, slower, burn, and by the end of 1988 Texas house prices were down over 14% from their peak in early 1986 (over the same period national house prices were up just over 14%). The last act of this tragedy was a banking crisis, as several hundred Texas banks failed, with peak failures occurring in 1988 and 1989.

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Chances they’ll do anything shrink by the day.

Saudis Insist Oil Supply Cuts Are Not Needed (Independent)

Gulf states yesterday insisted that oil prices will recover without intervention from the OPEC cartel, arguing that current prices will boost global economic growth. Crude oil prices have plummeted as global demand has eased and new supplies such as US shale oil have come on to the market. The cost of benchmark Brent crude has nearly halved from $115 a barrel in June to below $60 last week. But although oil producers and explorers from Aberdeen to Alberta are struggling to operate at a profit, OPEC has refused to cut supply in order to lift prices. Ali al-Naimi, the Saudi oil minister, yesterday said he was “100% not pleased” with current prices, but insisted: “I am confident the oil market will improve.” He added: “Current prices do not encourage investment, but they stimulate global economic growth, leading ultimately to an increase in global demand and a slowdown in the growth of supplies.”

Saudi Arabia, OPEC (and the world’s) largest oil exporter, has been the “swing supplier” in the past, cutting or increasing production in order to stabilise global oil prices at around $100 a barrel. The Gulf state blames the current price slump on speculators and a lack of co-operation from producers outside OPEC, and Mr Naimi said the kingdom would not act this time. “If they [non-OPEC oil producers] want to cut production they are welcome,” he told reporters on the sidelines of the 10th Arab Energy Conference in the United Arab Emirates. “Certainly Saudi Arabia is not going to cut.” Attempts to get non-OPEC producers such as Russia to sign up to output reductions before last month’s meeting of the oil cartel failed. “I don’t think we [OPEC] need to cut,” Kuwait’s oil minister told Reuters yesterday. “We gave a chance to others, they were not willing to do so.”

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“It’s been a really volatile period, and frankly that’s how Saudi Arabia wants it,” [..] “This is a battle of endurance.”

Oil Crash Wipes $11.7 Billion From Buyout Firms’ Holdings (Bloomberg)

Oil’s plunge makes energy a great investment for the coming years, according to Blackstone’s Stephen Schwarzman and Carlyle’s David Rubenstein. For private equity firms, it’s also been painful. More than a dozen firms – including Apollo Global , Carlyle, Warburg Pincus and Blackstone – have lost a combined $11.7 billion in 27 publicly traded oil producers since June, when crude prices reached this year’s peak before beginning their six-month slide, according to data compiled by Bloomberg. Stocks of buyout firms with exposure to energy have slumped, and bond prices suggest some closely held oil producers may struggle to pay for their debt. “It’s been a really volatile period, and frankly that’s how Saudi Arabia wants it,” said Francisco Blanch, head of global commodity research at Bank of America. “This is a battle of endurance.”

Brent crude oil slumped 47% to about $61 late last week from its high this year of $115 a barrel, dragging down energy stocks, as the Organization of Petroleum Exporting Countries sought to defend market share amid a U.S. shale expansion that’s adding to a global glut. The group, responsible for 40% of the world’s supply, will refrain from curbing output, U.A.E. Energy Minister Suhail al-Mazrouei said on Dec. 14. Kosmos Energy, Antero Resources, EP Energy, Laredo Petroleum and SandRidge Energy, each of which is backed by a buyout firm as its largest shareholder, fell by an average of 50% in U.S. trading from oil’s peak through Dec. 19 in New York. Warburg Pincus is the top stakeholder in Kosmos, Antero and Laredo; Apollo is the largest investor in EP Energy; and Carlyle, with a partner, owns the biggest piece of SandRidge, according to data compiled by Bloomberg.

Apollo has $5 billion invested in energy debt and equity, including companies that are closely held. Carlyle has directed 10% of its $203 billion in assets into the industry. Blackstone, the second-biggest shareholder in Kosmos, has backed drilling projects off Ghana’s coast and in the Gulf of Mexico. The deals highlight private equity’s role in the debt-fueled shale push, as hydraulic fracturing in search of oil and gas leads to higher production. After investing billions of dollars, the firms are preparing to step in with more cash to fund development when prices stabilize.

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More consequences.

North Sea Oil Summit Announced By Aberdeen City Council (BBC)

A plan for a summit to look at the challenges facing the North Sea oil industry has been announced by Aberdeen City Council. Council leader Jenny Laing said the UK and Scottish governments, trade unions and industry bodies needed “to get round the table as soon as possible”. The Labour councillor said a “strategic plan” was required to save jobs as the price of oil continued to fall. Labour called on Nicola Sturgeon and David Cameron to attend the summit. It comes after a warning that the UK’s oil industry is in “crisis”. On Thursday, Robin Allan, chairman of the independent explorers’ association Brindex, told the BBC that the industry was “close to collapse”. He claimed almost no new projects in the North Sea were profitable with oil below $60 a barrel. However, Sir Ian Wood, another leading industry figure, said Mr Allan’s warning was “well over-the-top and far too dramatic”. Sir Ian predicted conditions would begin to recover next year.

Ms Laing said Aberdeen was the oil capital of Europe and as such it was her job, as leader of the city council, to work with the governments in Edinburgh and Westminster and the oil industry to ensure jobs in the city were protected and companies remained based there. She said: “I have today instructed Angela Scott, our chief executive, to arrange a summit between senior politicians, government officials, industry representatives, trade unions, and local politicians. “The aim will be to ensure an agreement to develop a strategic plan to ensure job losses are either avoided or kept to a minimum. “It must concern us all that the price of oil has dropped so heavily in such a short space of time and we need to agree a strategy to deal with fluctuations that undermine confidence in the North Sea.” Ms Laing said the council chief executive would write to various politicians within both the UK and Scottish governments, as well as UK Oil and Gas, other industry leaders and trade unions to encourage them to take part in the summit.

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Dangerous development.

Southwest’s Oil Swap Trade Waiver Raises CFTC Questions (Reuters)

Last month’s move by the U.S. commodities regulator to let Southwest Airlines Co keep its multibillion-dollar oil trades secret for 15 days offered the world’s biggest low-cost carrier a break it has been seeking for three years. However, the decision to grant the airline an exemption from rules calling for greater derivatives transparency raised concerns about its market impact and sparked a debate among regulators, according to people familiar with the approval process. All other swap trades except Southwest’s must be reported “as soon as technologically practicable.” The Dallas-based airline has argued that its deals are so specific that immediate disclosure could cause the market to move against it, adding tens of millions of dollars to its costs. For years, that argument was not enough to sway the Commodity Futures Trading Commission and its former chairman, Gary Gensler. One concern was that granting an exemption to just one company is unusual and could hurt others in a similar position.

Also, the waiver could set a precedent that would encourage others to seek similar special treatment, restoring a veil over bigger parts of derivative markets. The agency is already looking into problems the Mexican government is facing in its vast oil hedging program after news organizations, including Reuters, reported on the country’s trades using publicly available swaps trading data, said one person familiar with the agency’s procedures. A CFTC spokesman said Tim Massad, Gensler’s successor, had issued the waiver to Southwest after his staff had done proper analysis to confirm the company’s claims, and the relief was a lot narrower than what the company had originally requested. But the person familiar with the approval process said the decision caused “a big stink” within the agency.

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Still happy?

US Gas Prices Fall To Lowest Since May 2009 (Reuters)

The average price of a gallon of gasoline in the United States fell 25 cents in the past two weeks, tumbling to its lowest level in more than five-and-a-half years, according to the Lundberg survey released Sunday. Prices for regular-grade gasoline fell to $2.47 a gallon in the survey dated Dec. 19, down 25 cents since the previous survey on Dec. 5. The recent drop has taken prices down more than $1.25 a gallon since a recent peak in May of this year.

“This is mostly driven by crude oil prices, and absent a sudden spike we very well may see a drop of a few pennies more,” said the survey’s publisher, Trilby Lundberg. “That said, demand is up at these low prices.” U.S. crude futures have been sharply weaker of late, dropping for four straight weeks, as well as in 11 of the past 12 weeks. Crude prices fell 14.2% over the past two weeks, though they rose 5.1% on Friday, settling at $57.13 per barrel. The highest price within the survey area in 48 U.S. states was recorded in Long Island at $2.82 per gallon, with the lowest in Tulsa, at $2.06 per gallon.

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Wonder if Russia stress tests its companies.

Rosneft Repays $7 Billion and Says Has No Need to Buy Dollars (Bloomberg)

Rosneft repaid $7 billion in debt and said it is generating enough dollars to meet the obligations taken on to buy TNK-BP last year and become the world’s largest traded oil producer. The state-led company, hit by sanctions from the U.S. and EU limiting access to capital markets, said it has settled $24 billion this year in line with credit agreements. Rosneft has sufficient foreign currency to cover debt, Chief Executive Officer Igor Sechin said in a statement. “To service debt the company does not need to enter the currency market, because it generates enough foreign currency earnings,” Sechin said. The latest repayment doesn’t mean the end of financial pressure on Rosneft however.

The oil producer has to grapple with the slump in oil prices, sanctions that bar it from international capital markets and a Russian economy at risk of sliding into recession. Rosneft is scheduled to repay another bridge loan of $7.1 billion on Feb. 13, the first part of $19 billion in debt repayments scheduled for next year, according to data compiled by Bloomberg. Sechin, who denied speculation last week the company had been selling rubles to buy dollars, said today that the company may get state support from Russia’s state Wellbeing Fund. The money would be used to develop oil projects at home, he said.

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“For the sake of national interests, China should deepen cooperation with Russia when such cooperation is in need.”

China Offers Russia Help With Currency Swap Suggestion (Bloomberg)

Two Chinese ministers offered support for Russia as President Vladimir Putin seeks to shore up support for the ruble without depleting foreign-exchange reserves. China will provide help if needed and is confident Russia can overcome its economic difficulties, Foreign Minister Wang Yi was cited as saying in Bangkok in a Dec. 20 report by Hong Kong-based Phoenix TV. Commerce Minister Gao Hucheng said expanding a currency swap between the two nations and making increased use of yuan for bilateral trade would have the greatest impact in aiding Russia, according to the broadcaster. The ruble strengthened 4.1% against the dollar today amid the signs of willingness by China, the world’s second-largest economy, to prop up its neighbor.

Russia, the biggest energy exporter, saw its currency tumble as much as 59% this year as crude oil prices slumped and U.S. and European sanctions hurt the economy. President Xi Jinping last month called for China to adopt “big-country diplomacy” as he laid out goals for elevating his nation’s status. “Many Chinese people still view Russia as the big brother, and the two countries are strategically important to each other,” said Jin Canrong, Associate Dean of the School of International Studies at Renmin University in Beijing, referring to the Soviet Union’s backing of Communist China in its first years. “For the sake of national interests, China should deepen cooperation with Russia when such cooperation is in need.”

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Still corrupt to the bone.

China Investigates Possible Stock-Price Manipulation (WSJ)

China is investigating possible stock-price manipulation amid the recent run-up in the country’s equity market, according to officials with direct knowledge of the matter, a move that serves as a stark reminder of the problems that have long haunted Chinese stocks. The probe launched by the China Securities Regulatory Commission comes as stocks traded in mainland China rallied to their highest level in three years on Monday despite the country’s weakening economic growth. Much of the surge, analysts and officials say, has been triggered by short-term speculators betting on looser monetary conditions as opposed to investors with long-term belief in China’s economy. The securities commission is focusing its investigation on a practice that involves groups of investors pumping up prices of certain targeted stocks. Such practices were common during the early and mid-2000s when China’s stock market boomed along with the country’s breathtaking economic growth.

The market peaked in 2007 and started to plummet a year later as the global financial crisis weighed on China’s growth. The practice, which was common in China’s previous market boom, “is making a comeback,” one of the officials said. The securities agency said on Friday that it had launched investigations into 18 stocks, but didn’t explain the reasons for the probe at the time. Most of the stocks targeted are those of small-cap companies, such as a maker of automobile tires in eastern China’s Shandong province and a government-controlled hydroelectric power company in central China’s Hunan province. Shares in larger companies are harder to manipulate because the volumes are bigger. The probes mainly focus on the “individuals and institutions” who recently bought into the stocks, and the companies themselves aren’t the target, the officials said.

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“.. early trade volumes in the program launched in mid-November were completely dominated by hedge funds and banks’ proprietary trading desks ..”

China Stock Connect Scheme Scorecard Throws Up Surprises (Reuters)

A month after China opened up its equity markets in a landmark trading link with Hong Kong, demand has been subdued and the bulk of activity has come from short-term speculative investors. The authorities had hoped mutual and pension funds and private banks would form the bedrock of the Shanghai-Hong Kong stock connect. But early trade volumes in the program launched in mid-November were completely dominated by hedge funds and banks’ proprietary trading desks, according to five traders at some of the biggest brokerages participating in the scheme. Regulatory hurdles have kept out a large swathe of the investment community – and the steady business the financial industry and regulators had hoped they would bring – despite a sizzling stock market rally on the mainland.

Market players say it could take months for long-term investors to eventually trickle into the program, as they devise ways to cope with its peculiarities. “We are not participating in the scheme yet because of the operational issues that have yet to be resolved and we prefer to access the mainland markets via exchange traded funds,” Robert Cormie, Asia CEO of BMO Private Bank, told Reuters. Edmund Yun, executive director of investment at the same wealth management firm, agreed, citing a number of prohibitive issues. These include beneficial ownership, tax and trading settlement. Hedge funds use banks’ prime brokerages, which help them more deftly manage those regulatory constraints.

Stock portfolios of hedge funds are often held by the prime brokers themselves to facilitate quick trading decisions so they are unaffected by ownership constraints. For example, under the scheme, funds wanting to sell holdings of Shanghai-listed shares have to deliver the shares to brokers a day before they are to be sold, a peculiarity that exists in no other major stock market. While regulators have looked for ways to encourage long-term funds, including fast-tracking applications for products benchmarked under the stock connect scheme, industry officials say that persuading pension funds to participate could take months.

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“.. there are no such things as “aggregate demand,” or “aggregate supply,” or output and employment “as a whole.” These are statistical creations constructed by economists and statisticians ..”

The Fallacy of Keynesian Macro-Aggregates (Ebeling)

A specter is haunting the world, the specter of two% inflationism. Whether pronounced by the U.S. Federal Reserve or the European Central Bank, or from the Bank of Japan, many monetary central planners have declared their determination to impose a certain minimum of rising prices on their societies and economies. One of the oldest of economic fallacies continues to dominate and guide the thinking of monetary policy makers: that printing money is the magic elixir for the creating of sustainable prosperity. In the eyes of those with their hands on the handle of the monetary printing press the economic system is like a balloon that, if not “fully inflated” at a desired level of output and employment, should be simply “pumped up” with the hot air of monetary “stimulus.”

The fallacy is the continuing legacy of the British economist, John Maynard Keynes, and his conception of “aggregate demand failures.” Keynes argued that the economy should be looked at in terms of series of macroeconomic aggregates: total demand for all output as a whole, total supply of all resources and goods as a whole, and the average general levels of all prices and wages for goods and services and resources potentially bought and sold on the overall market. If at the prevailing general level of wages, there is not enough “aggregate demand” for output as a whole to profitably employ all those interested and willing to work, then it is the task of the government and its central bank to assure that sufficient money spending is injected into the economy. The idea being that at rising prices for final goods and services relative to the general wage level, it again becomes profitable for businesses employ the unemployed until “full employment” is restored.

Over the decades since Keynes first formulated this idea in his 1936 book, The General Theory of Employment, Interest, and Money, both his supporters and apparent critics have revised and reformulated parts of his argument and assumptions. But the general macro-aggregate framework and worldview used by economists in the context of which problems of less than full employment continue to be analyzed, nonetheless, still tends to focus on and formulate government policy in terms of the levels of and changes in output and employment for the economy as a whole. In fact, however, there are no such things as “aggregate demand,” or “aggregate supply,” or output and employment “as a whole.” These are statistical creations constructed by economists and statisticians, out of what really exists: the demands and supplies of multitudes of individual and distinct goods and services produced, and bought and sold on the various distinct markets that comprise the economic system of society.

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“.. the EC wants Russia to bail out Ukraine while accusing Russia of invading Ukraine. Icing on the wonderland-cake is the Russian Ruble has plunged nearly 50% this year, but Ukraine needs money from Russia to fight Russia. Is this complete lunacy or what?”

Europe in Wonderland Wants Russia to Bail Out Ukraine (Mish)

Ukraine’s president, speaking a day after the nation’s junk credit rating was cut further, said next year’s budget mustn’t cut corners on military spending and should account for the possibility of an invasion. “The war made us stronger, but has crushed the economy,” Poroshenko said. “There’s one article of spending that we won’t save on and that’s security. Ukraine is finalizing next year’s fiscal plan amid a new cease-fire in the conflict that’s ravaged its industrial heartland near Russia’s border. As its economy shrinks and reserves languish at a more than 10-year low, it’s also racing to secure more international aid to top up a $17 billion rescue.

Standard & Poor’s said Dec. 19 that a default may become inevitable, downgrading Ukraine’s credit score one step to CCC-. With official forecasts putting this year’s contraction at 7%, the government needs $15 billion on top of its bailout to stay afloat, according to the European Union. The European Union and the U.S. are discussing $12 billion to $15 billion in aid to Ukraine and “there needs to be a Russian contribution to the package,” Pierre Moscovici, the 28-nation bloc’s economy commissioner, said at a Bloomberg Government event this week in Washington. A decision is needed in January, he said.

Ukraine president says “War has made us stronger“. That lie is so stupid my dead grandmother knows it from the grave. The evidence is a CCC- debt rating, a step or so above above default, with default imminent. The story gets even stranger. To avoid default, Ukraine needs a “Russian contribution to the package” according to Pierre Moscovici, the economic policy commissioner for the European Commission. Europe and the US have crippling sanctions on Russia for the conflict in Ukraine, yet the EC wants Russia to bail out Ukraine while accusing Russia of invading Ukraine. Icing on the wonderland-cake is the Russian Ruble has plunged nearly 50% this year, but Ukraine needs money from Russia to fight Russia. Is this complete lunacy or what?

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“Once we are shielded economically and politically, we can find the appropriate schedule for national elections, even by the end of 2015 ..”

Greek Premier Makes Offer In Bid To Avoid Snap Elections (WSJ)

Greek Prime Minister Antonis Samaras reached out to lawmakers Sunday, offering a set of compromises to resolve an impasse over the selection of Greece’s future head of state and to avoid snap elections early next year. Speaking in an unscheduled televised address, the Greek premier called for consensus over the government’s presidential candidate. In return, he offered to hold general elections by the end of 2015 – before the term of the current government expires – but only after Greece concluded negotiations with its international creditors and passed political and constitutional reforms. “Once we are shielded economically and politically, we can find the appropriate schedule for national elections, even by the end of 2015,” Samaras said.

“We cannot enter into a period of uncertainty as soon as we finish another one. The problems of the country cannot stagnate in a permanent election campaign.” Samaras also offered to reshuffle his cabinet to include ministers who would be appointed by other political parties, a move aimed at winning over undecided lawmakers from smaller parties in parliament. Elected to a four-year term in mid-2012, the country’s current coalition government — composed of the conservative New Democracy and the socialist Pasok parties — isn’t due to face elections again until June 2016. But it faces an uphill struggle convincing a supermajority of lawmakers to back its candidate for head of state, a largely ceremonial role.

The opposition Syriza party is blocking the election of the government’s candidate in the hopes of forcing early elections. Under Greece’s constitution, parliament has three tries to elect a president — a first vote took place last week, a second is due on Tuesday and the last tentatively scheduled for Dec. 29. If it fails, parliament would be dissolved and fresh elections called within a month. In the first two rounds, the president must be elected by a two-thirds majority of the 300 lawmakers in parliament, but that threshold falls to 180 votes in the third and final round.

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” .. It has conjured up the example of a European debt conference to wipe away a portion of the debt, as happened with Germany in 1953.”

Greece’s Radical Left Could Kill Off Austerity In The EU (Guardian)

What misery has been inflicted on Greece. One in four of its people are out of work; poverty has surged from 23% before the crash to 40.5%; and research has demonstrated how key services such as health have been hammered by cuts, even as demand has risen. No wonder the country has experienced a political polarisation that has prompted comparisons with Weimar Germany. The neo-Nazi Golden Dawn – which makes other European rightist movements look like fluffy liberals – at one point attracted up to 15% in the polls; though still a menace, its support has thankfully subsided to half that.

But unlike many other European societies – with the notable exceptions of Spain and Ireland – fury and despair with austerity has been channelled into the ranks of the populist left. After years on the fringes of Greek politics, Syriza only became a fully fledged party in 2012, and yet it won Greece’s elections to the European parliament earlier this year. The latest opinion polls give Syriza a substantial lead over the governing centre-right New Democracy party. A radical leftwing government could well assume power for the first time in the EU’s history. After years of social ruin, Syriza is offering Greeks that precious thing: hope. Although it has shifted from demanding an immediate cancellation of debt, it is demanding a negotiated solution.

It has conjured up the example of a European debt conference to wipe away a portion of the debt, as happened with Germany in 1953. Syriza’s manifesto proposes that repayment of debt could come through economic growth, rather than from budget cuts. It wants a European new deal backed up by an investment bank; an all-out war against the tax avoidance endemic in Greek society; an emergency employment programme; a raised minimum wage; and the restoration of collective bargaining. In alliance with anti-austerity forces such as Spain’s surging Podemos party, Syriza wants the EU to abandon crippling austerity policies in favour of quantitative easing and a growth-led recovery.

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Getting worse.

Rising Price Of Olive Oil Is A Pressing Matter (FT)

Never mind the shale revolution, or OPEC’s deliberations. Some oil producers are enjoying the highest prices in six years. A severe drought in Spain and a fruitfly infestation in Italy have caused a surge in the price of olive oil. The two countries normally account for just under 70% of output, and the Madrid-based International Olive Oil Council forecasts that production will drop next year by 27%. “Production in Spain is very, very short,” Rafael Pico Lapuente, director-general of Asoliva, the Spanish Olive Oil Exporters Association, said. The shortage has been pushing up wholesale prices for months. Premium-quality extra virgin olive oil rose to $4,282 a tonne last month, the highest since 2008, according to the International Monetary Fund. The civil war in Syria has also hit production there. Most Syrian output is consumed domestically, but some argue that this is providing further psychological support for prices.

Vito Martielli, analyst at Rabobank, said higher costs might further hit consumption in southern Europe, traditionally the largest market. The economic crisis in 2008 hit olive oil demand in Spain, Italy and Greece, and appetite has been waning as shoppers have turned to cheaper substitutes. Favorable weather in most parts of the world this year has meant that harvests of oilseed crops have been plentiful and prices have been falling. The price of soya oil has fallen 20% so far this year; palm oil has declined 17%, and rapeseed oil is down 5%. “We are in a situation where there are cheaper alternatives in Europe,” Mr Martielli said. The IOC expects olive oil consumption in 2015 to fall 7% to 2.8 million tonnes. Italy, the largest consumer of olive oil, is forecast to see a fall of 16% to 520,000 tonnes, Spain is expected to see a 3% decline to 515,000 tonnes, while Greece’s consumption is expected to fall 6% to 160,000 tonnes.

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That’s what friends are for.

Leaked CIA Docs Teach Operatives How To Infiltrate EU (RT)

Wikileaks has released two classified documents instructing CIA operatives how best to circumvent global security systems in international airports, including those of the EU, while on undercover missions. The first of the documents, dated September 2011, advises undercover operatives how to act during a secondary airport screening. Secondary screenings pose a risk to an agent s cover by focusing significant scrutiny on an operative via thorough searches and detailed questioning. The manual stresses the importance of having a “consistent, well-rehearsed, and plausible cover,” in addition to cultivating a fake online presence to throw interrogators off track. Meanwhile, the second document, dated January 2012, presents a detailed overview of EU Schengen Border Control procedures. The overview outlines the various electronic security measures, including the Schengen Information System (SIS) and the European fingerprint database EURODAC, used by border control and the dangers these measures may pose to agents on clandestine missions.

WikiLeaks’ chief editor Julian Assange explains that these documents show that under the Obama administration the CIA is still intent on infiltrating European Union borders and conducting clandestine operations in EU member states.” The document also demonstrates the CIA s increasing concern over the risks to operatives’ assumed identities posed by biometric databases the very same systems the US pushed for after 9/11. On Friday, WikiLeaks released a CIA report suggesting that though targeted killing programs, including drone strikes, may be effective in some cases, there is also a risk that the programs may backfire. For example, targeted strikes may prompt local populations to sympathize with insurgents or further radicalize remaining militants.

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Dec 032014
 
 December 3, 2014  Posted by at 12:25 pm Finance Tagged with: , , , , , , , , , ,  


Harris&Ewing National Emergency War Garden Commission display, Wash. DC 1918

New US Oil And Gas Well November Permits Tumble Nearly 40% (Reuters)
Think Collapsing Oil Is Bullish? Think Again (MarketWatch)
Deficit Spending And Money Printing: A German Point Of View (Salzer)
OPEC Is Wrong To Think It Can Outlast US On Oil Prices (MarketWatch)
Oil War Slams Venezuela, Probability of Default Soars to 84% (Wolfstreet)
Why Oil Is Finally Declining, Which May Lead to Disaster (Lee Adler)
The Financialization of Oil (CH Smith)
Oil, the Ruble and Putin Are All Headed for 63. A Russian Joke (Bloomberg)
What Low Oil Prices Mean For The Environment (Reuters)
French Bank Tells Investors To Dump UK Assets (CNBC)
Australia Headed Into Perfect Storm In 2015 (CNBC)
If Deflation Is So Terrible, Why Are Spain, Greece Growing? (MarketWatch)
Eurozone Business Activity Slumps To 16-Month Low (CNBC)
Non-Eurozone Czech Central Banker: We Need ECB Easing Too (CNBC)
The Gold Fairy Tale Fails Again (Barry Ritholtz)
Stop Talking about NATO Membership for Ukraine (Spiegel)
We Are Starting To Learn Who Owns Britain (Monbiot)
Mediterranean Diet Keeps People ‘Genetically Young’ (BBC)
Olive Oil Prices Soar After Bad Harvest (Guardian)
Stephen Hawking Warns Artificial Intelligence Could End Mankind (BBC)

Putting a brave face on the desperate hope for higher prices, soon. Or else.

New US Oil And Gas Well November Permits Tumble Nearly 40% (Reuters)

Plunging oil prices sparked a drop of almost 40% in new well permits issued across the United States in November, in a sudden pause in the growth of the U.S. shale oil and gas boom that started around 2007. Data provided exclusively to Reuters on Tuesday by industry data firm Drilling Info Inc showed 4,520 new well permits were approved last month, down from 7,227 in October. The pullback was a “very quick response” to U.S. crude prices, which settled on Tuesday at $66.88, said Allen Gilmer, chief executive officer of Drilling Info. New permits, which indicate what drilling rigs will be doing 60-90 days in the future, showed steep declines for the first time this year across the top three U.S. onshore fields: the Permian Basin and Eagle Ford in Texas and North Dakota’s Bakken shale. The Permian Basin in West Texas and New Mexico showed a 38% decline in new oil and gas well permits last month, while the Eagle Ford and Bakken permit counts fell 28% and 29%, respectively, the data showed.

That slide came in the same month U.S. crude oil futures fell 17% to $66.17 on Nov. 28 from $80.54 on Oct. 31. Prices are down about 40% since June. U.S. prices fell below $70 a barrel last week after the Organization of Petroleum Exporting Countries agreed to maintain output of 30 million barrels per day. Analysts said the cartel is trying to squeeze U.S. shale oil producers out of the market. Total U.S. production reached an average of 8.9 million barrels per day in October, and is expected to surpass 9 million bpd in December, the highest in decades, according to the U.S. Energy Information Administration. Gilmer said last month’s pullback in permits was more about holding off on drilling good locations in a low-price environment than breaking even on well economics. “I think in this case this was just a quick response, saying ‘there are enough drill sites in the inventory, let’s sit back, take a look and see what happens with prices,'” he said.

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Hey, that’s my headline!

Think Collapsing Oil Is Bullish? Think Again (MarketWatch)

The biggest story of 2014 isn’t the end of quantitative easing. It’s the unrelenting collapse in oil prices, and what that means for stock markets worldwide. The meme out there? Falling oil is bullish. After all, the more oil falls, the more consumers and companies save. I’m sorry, but there are a number of flaws with this argument. First of all, falling oil can be bullish, but collapsing oil tends to historically be very bearish. Many major corrections and bear markets have been preceded by oil in a precipitous fall. Second, people forget that several state budgets actually rely on tax revenue that is derived from oil drilling and exploration activities. If that tax revenue collapses because those companies collapse on that oil decline, what’s the response by those states? Raises taxes on, you guessed it, consumers.

Third, you might want to be careful what you wish for when it comes to falling oil prices. A good amount of many junk-debt indices is made up of energy-sector bonds. Junk-debt spreads have been widening, and should defaults occur in the energy space, that could serve as a butterfly effect for all bonds. The biggest thing that counters the “collapsing oil is bullish” meme is the behavior of defensive sectors of the stock market, which our equity sector ATAC Beta Rotation Fund BROTX, +0.68% has the ability to position all in to based on our proprietary risk trigger. If indeed falling oil were bullish, shouldn’t more cyclical areas of the market rally on that? If falling oil were bullish, shouldn’t U.S. small-cap stocks — which are heavily dependent upon domestic U.S. revenue growth — be substantially outperforming?

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And that’s my line! “Why do we insist upon economic growth, if we don’t actually need the products which are additionally produced every year?” Good to see I’m not the only one writing about that.

Deficit Spending And Money Printing: A German Point Of View (Salzer)

What we experience today is completely contrary to the German (maybe not the U.S.) understanding of the role of the Central Bank. The ECB has now assumed a role not only to protect the value of our common currency against inflation but also to take action as if it is responsible to create economic growth and full employment with instruments like money printing, zero interest rates and unlimited investments in bonds which the free market is rejecting.

We pay a high price for the chimera that we need constant economic growth and that it is a stigma if our GDP-growth is only 1.5% p.a. Can’t we accept that after 50 years of undisturbed peace and continuous prosperity we have reached a certain degree of personal satisfaction where we don’t need a new car every year, another cell-phone, additional furniture, more TV-sets, more laptops etc, etc.

Why do we insist upon economic growth, if we don’t actually need the products which are additionally produced every year? Is it really worth it to increase the already heavy burden of public debt, which our children must service someday, by accepting even more debt in a vain effort to increase public demand? Let’s instead be happy with zero GDP growth, zero inflation and zero growth of public debt! That could be a more rational solution. Why don’t we consider it?

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To what extent is North Dakota spinning its numbers? ” .. the state of North Dakota says the average cost per barrel in America’s top oil-producing state is only $42 [..] In McKenzie County, which boasts 72 of the state’s 188 oil rigs, the average production cost is just $30, the state says.”

OPEC Is Wrong To Think It Can Outlast US On Oil Prices (MarketWatch)

Give Saudi Arabia credit: Whoever sets oil-production policy for the desert kingdom has guts. Unfortunately, the sheiks have made what’s likely to become a sucker’s bet. You know this part already, but the 12-nation Organization of the Petroleum Exporting Countries last week declined to cut production, sending Brent crude oil futures tumbling to their cheapest point since 2009. The Saudis appear to be spoiling for a fight, trying to find out exactly how cheap oil must be to force surging U.S. shale-oil production to seize up like an unlubricated engine. “Naimi declares price war on U.S. shale oil,” a Reuters headline shouted, referring to Saudi Arabia Oil Minister Ali al-Naimi. But there are at least three big problems with this strategy.

One, North American crude isn’t as expensive to produce as it used to be. Two, there’s more than you think in the pipeline to make it even cheaper. And third, OPEC nations, including Saudi Arabia, have squandered their edge in cheap oil supplies on welfare states rulers can’t easily cut back. In 2012, when U.S. shale burst into public consciousness, common wisdom was that it would cost at least $70 to $75 a barrel to produce. As recently as last week, saying U.S. producers could tolerate $60 oil seemed aggressive. But data from the state of North Dakota says the average cost per barrel in America’s top oil-producing state is only $42 — to make a 10% return for rig owners. In McKenzie County, which boasts 72 of the state’s 188 oil rigs, the average production cost is just $30, the state says.

Another 27 rigs are around $29. That’s part of why oil companies aren’t cutting capital spending much — and they say they can keep production rising without spending more, by getting more out of wells they have already drilled. A key example is mega-independent Devon, which produces about 200,000 of the 9 million-plus barrels the U.S. drills each day. Devon wouldn’t give an interview, but said last month that it expects production to rise 20%-25% next year with little growth in capital spending. It has room to work because its pretax cash profit margins have widened by 37% in the first nine months of this year, to almost $30 per barrel of oil equivalent. More than half its 2015 production is protected by hedges if prices stay below $91 a barrel, the company says.

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Can the CIA finally take over?

Oil War Slams Venezuela, Probability of Default Soars to 84% (Wolfstreet)

OPEC member Venezuela has one of the largest oil and natural gas proven reserves in the world. It’s the 12th largest producer in the world. It’s still one of the top suppliers of crude oil to the US. Oil produces 95% of Venezuela’s export earnings. Oil and gas account for 25% of GDP. Oil is Venezuela’s single most important product. Oil is its critical source of foreign currency with which to pay for all manner of imported consumer and industrial products. But the price of oil has plunged 35% since June. Venezuela was already in trouble before the price of oil plunged. The fracking boom in the US and the tar-sands boom in Canada have been replacing Venezuelan imports of crude to the US for years.

The Keystone pipeline, if Congress approves it, will replace costly oil trains to move Canadian tar-sands crude to US refineries, making it even more competitive with Venezuelan crude. Shipments of crude from Venezuela to the US will continue to dwindle. Venezuela’s budget deficit is 16% of GDP, the worst in the world. Inflation is running at a white-hot 63%, also the worst in the world. The economy is heavily subsidized, but now the money for the subsidies is running out. Currency controls have been instituted to shore up the Bolivar. But instead, they’re strangling what is left of the economy. Anti-government protests and riots burst on the scene earlier this year as the exasperated people couldn’t take it any longer. The scarcity of even basic consumer products such as toothpaste and toilet paper has now spread across the spectrum, including medical supplies. Next year, scarcity is going to be even worse.

Venezuelan economist Angel Garcia Banchs worries that “what’s coming to Venezuela is chaos that will probably lead to barbarity and people looting.” It doesn’t help the budget that the government sells its most valuable export commodity at heavily subsidized prices at home, based on a special though iffy deal: the people get cheap energy, and in return, hopefully, they don’t riot, or outright revolt. The hope is that the government gets to stay in power a little longer even as it is going bankrupt. Yet social spending isn’t going to get cut, promised President Nicolas Maduro on state TV on Friday. “If we had to cut anything in our budget, we would cut extravagances, we would cut our own salaries as high officials, but we will never cut one Bolivar of the money that goes to education, food, housing, the missions of our nation,” he said.

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“For the biggest speculators and financiers in the world, oil was a money substitute, a hedge against the massive money printing campaigns of the Fed, the BoJ, and the ECB.”

Why Oil Is Finally Declining, Which May Lead to Disaster (Lee Adler)

The price of oil has finally started to obey the law. What law is that? The Law of Supply and Demand. Thanks to the US fracking boom that has done this (see chart) to US production, the supply of oil worldwide has outstripped demand since 2012. So why haven’t prices fallen before this summer? And are falling oil prices now a good thing? Or not? While US production was exploding, other countries had level or declining production. Meanwhile consumption was falling in developed nations, but the developing world more than made up for that. Worldwide consumption has been steadily increasing since 2009. However, because of the US fracking boom, with the exception of 2011 supply has exceeded demand. Prices should have been declining since 2012, right? After the oil price bubble peaked in 2008, the price of oil did crash when demand dropped. That drop in demand created a huge oversupply just as the US fracking boom was in its infancy.

Then the Fed and its cohort central banks started printing money helter skelter in 2009. The results showed up not only in world stock markets but in commodities as well, particularly oil. The price of oil rose in spite of the fact that world oil production continued to outstrip demand. For the biggest speculators and financiers in the world, oil was a money substitute, a hedge against the massive money printing campaigns of the Fed, the BoJ, and the ECB. It worked for a while, and the oil market even helped in 2011 when supply fell below consumption for a year. But then the US production increase again overran world wide consumption.

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Prices don’t have to sink further to cause mayhem, they only need to stay where they are now.

The Financialization of Oil (CH Smith)

Like home mortgages, oil has been viewed as a “safe” asset. The financialization of the oil sector has followed a slightly different script but the results are the same: A weak foundation of collateral is supporting a mountain of leveraged, high-risk debt and derivatives. Oil in the ground has been treated as collateral for trillions of dollars in junk bonds, loans and derivatives of all this new debt. The 35% decline in the price of oil has reduced the underlying collateral supporting all this debt by 35%. Loans that were deemed low-risk when oil was $100/barrel are no longer low-risk with oil below $70/barrel (dead-cat bounces notwithstanding). Financialization is always based on the presumption that risk can be cancelled out by hedging bets made with counterparties.

This sounds appealing, but as I have noted many times, risk cannot be disappeared, it can only be masked or transferred to others. Relying on counterparties to pay out cannot make risk vanish; it only masks the risk of default by transferring the risk to counterparties, who then transfer it to still other counterparties, and so on. This illusory vanishing act hasn’t made risk disappear: rather, it has set up a line of dominoes waiting for one domino to topple. This one domino will proceed to take down the entire line of financial dominoes. The 35% drop in the price of oil is the first domino. All the supposedly safe, low-risk loans and bets placed on oil, made with the supreme confidence that oil would continue to trade in a band around $100/barrel, are now revealed as high-risk. [..]

The failure of one counterparty will topple the entire line of counterparty dominoes. The first domino in the oil sector has fallen, and the long line of financialized dominoes is starting to topple. Everyone who bought a supposedly low-risk bond, loan or derivative based on oil in the ground is about to discover the low risk was illusory. All those who hedged the risk with a counterparty bet are about to discover that a counterparty failure ten dominoes down the line has destroyed their hedge, and the loss is theirs to absorb. All the analysts chortling over the “equivalent of a tax break” for consumers are about to be buried by an avalanche of defaults and crushing losses

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Putin is still very popular in Russia. Western media will tell you that’s because of domestic propaganda, but they themselves engage in anti-Putin propaganda over here.

Oil, the Ruble and Putin Are All Headed for 63. A Russian Joke (Bloomberg)

Heard the one about Vladimir Putin, the oil price and the ruble’s value against the dollar? They will all hit 63 next year. That’s the joke doing the rounds of the Kremlin as the Russian government digs in to weather international sanctions over the conflict in Ukraine. According to at least five people close to Putin, pressure from the U.S. and Europe is galvanizing Russians to withstand a siege on their economy. The black humor is part of an image of defiance not seen since the Cold War. As the economy enters its first recession in more than five years, the ruble depreciates to records and money exits the country, Putin’s supporters are closing ranks and say he’s sure to run for another six-year term in 2018. “We are becoming poorer, our savings vanish, prices grow, however we see an opposite effect to the one that is wanted by people who wish to see Putin knocked down,” said Olga Kryshtanovskaya, a sociologist studying the elite at the Russian Academy of Sciences. The jokes just underline their determination to stand till the end, she said.

Putin celebrates his 63rd birthday on Oct. 7. The price of Brent crude sank to a five-year low of $67.53 a barrel this week. The ruble has dropped to near 55 to the dollar from as strong as 34 less than six months ago, meaning it needs to lose another 13% to complete the joke. A friend of Putin who spoke on condition of anonymity said sanctions won’t work because the U.S. and European Union don’t understand the Russian mentality. The country endured the Leningrad siege for more than two years during World War II and will survive this too, he said. “The West is wrong in its understanding of the motivation Putin and his inner circle have,” said Evgeniy Minchenko, head of the International Institute of Political Expertise in Moscow. “They think Putin is a businessman, that money is the most important thing for him and that by pressing him and his allies financially they will break them.”

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Not much so far.

What Low Oil Prices Mean For The Environment (Reuters)

Are low oil prices good or bad for the environment? From one perspective, they’re bad: lower oil prices mean lower gas prices, which in turn encourage people to drive rather than use more environmentally friendly means of transportation. But in the case of U.S. shale oil, lower prices are good for Mother Earth, if only temporarily. Oil prices have been falling steadily since June, and given OPEC’s recent decision not to curb production, it seems they’ll remain low for a while. As Myles Udland pointed out in Business Insider last week, a lot of shale projects have break-even prices beneath the $80-per-barrel price level, but producers become less and less incentivized to start new projects as prices fall. [..] shale drilling permits fell 15% across 12 major shale formations in October, a sign that shale producers are willing to slow their rapid expansion until they can get more bang for their buck. It comes down to opportunity cost.

As Harold Hamm, an early shale pioneer who has lost $10 billion since August (let that sink in), told Bloomberg, “Nobody’s going to go out there and drill areas, exploration areas and other areas, at a loss. They’ll pull back and won’t drill it until the price recovers. That’s the way it ought to be.” Many see OPEC’s refusal to curb output as a multi-billion-dollar game of chicken with U.S. shale producers, whose booming production can be credited with the recent fall in world oil prices. Early evidence shows that it may be working—for now; fuelfix.com reported yesterday that Texas shale permits were down 50% in November. Ultimately, the case can be made that low oil prices are bad for the environment, as they encourage more oil use now, which makes investments in alternative energy less urgent. And the shale isn’t going anywhere–it’s just waiting there patiently for prices to become sufficient for new extraction projects.

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“Stay away from U.K. assets into the 7 May elections ..”

French Bank Tells Investors To Dump UK Assets (CNBC)

French bank Société Générale has told investors to steer clear of U.K. assets and sell sterling, because “zero” reform and political deadlock pose key risks to the country’s economy. “Stay away from U.K. assets into the 7 May elections,” the SocGen global asset strategy team, led by Alain Bokobza, said in the bank’s 2015 outlook. “In the U.K., 2015 will be marked by the General Election, triggering some volatility and pushing the risk premium on the FTSE 100 higher as the debate on the European Union exit gains momentum.” As such, Bokobza recommended: “Minimal exposure to U.K. assets as political deadlock and delayed tightening by the Bank of England should lead to a weakening of sterling.”

This warning comes despite the U.K.’s robust economic growth compared with the euro zone. U.K. GDP grew by 0.7% in the third quarter on the previous quarter, while the euro zone and France grew by just 0.2% and 0.3% respectively over the same period. But the French banking group insisted that U.K. assets remained risky, and had continually underperformed. “We have been underweight on U.K. assets in the last quarters, with little reason for regret. In particular, U.K. equities are underperforming all developed markets, and a lower GBP/USD is one of our strategic calls (with a 1.50 target),” the bank’s asset strategy team said. “So far there has been zero structural reform and no improvement in twin deficits or exports despite a significant devaluation of the currency. Also, the spillover effects of weak euro zone fundamentals have been underestimated. We are concerned, and therefore seek to protect our asset allocation.”

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The perils of having just one main client.

Australia Headed Into Perfect Storm In 2015 (CNBC)

Australia’s economy will undergo a crucial stress test in 2015, faced with a triple whammy from the lagged impact of plunging commodity prices, sharp declines in mining investment and renewed fiscal tightening, says Goldman Sachs. “The challenges are now widely known…but these challenges still lie mainly ahead for Australia rather than behind,” Tim Toohey, chief economist, Australia at Goldman Sachs wrote in a note on Wednesday. On top of the these headwinds, the economy also needs to contend with tighter financial conditions and lower levels of housing investment, said Toohey, factors that had previously helped to offset the slump in the mining sector. The bank expects GDP growth to average just 2.0% next year, down from an estimated 2.9% in 2014, as the economy continues to search for new growth drivers.

The decline in mining investment will continue to be a major drag on the economy, leaving commodity exports and consumption to pick up the slack, the bank said. Australia’s third quarter GDP data published on Wednesday pointed to a sluggish domestic economy, suggesting rebalancing away from mining-driven growth is taking longer than hoped. The economy expanded 2.7% on year in the three months to September, undershooting expectations for growth of 3.1%, as construction spending fell while sliding export prices hit incomes. “This GDP result concurs broadly with the perceived wisdom on the Australian economy, albeit with perhaps a little more domestic weakness than expected, said David de Garis, director and senior economist at National Australia Bank.

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A perfect example of why seeing deflation only as falling prices is so completely useless and dumbing. If you refuse to look a WHY prices fall, you never learn a thing, and you will always be behind. Apart from the fact that the idea of Greece and Spain doing well can easily be refuted by 1000 other data sources, looking at one day or week or month tells you nothing. You need to look at consumer spending over at least the past few years. That would also show more respect for the 25% of the working population, and 50% of youth, who are unemployed in both countries.

If Deflation Is So Terrible, Why Are Spain, Greece Growing? (MarketWatch)

Prices are starting to fall across the European continent. Mass unemployment, and a grinding recession are forcing companies with too much capacity to charge less for their products. Company profits will soon be collapsing, while government debt ratios threaten to spiral out of control. The threat of deflation is so worrying, the European Central Bank is expected to throw everything in its armory to prevent it, and to get prices rising again. It may even move towards full-blown quantitative easing as early as Thursday. But here’s a puzzle. The two countries with the worst deflation in Europe are Greece and Spain. And two of the countries with the best growth? Funnily enough, that also happens to be Greece and Spain. So if deflation is so terrible, how come those two are recovering fastest?

The answer is that deflation is not nearly as bad as it sometimes made out to be by mainstream economists. The real problem is debt. But if that is true, perhaps the eurozone would be better off trying to fix its debt crisis than campaigning to raise prices — especially as it probably won’t have much success with that anyway. There is no question that the eurozone is sliding inexorably towards deflation. Only last week, we learned that the inflation rate across the zone ratcheted down to 0.3% last month, from 0.4% a month earlier, and a significantly lower figure than the market expected. It has been going steadily down for some time. Consumer inflation has not hit the ECB’s target level of 2% since the start of 2013. It has been falling steadily since it peaked at 3% in late 2011

It would be rash to expect that to change any time soon. The oil price has collapsed, and other commodity prices are coming down as well. That will all feed into the inflation rate. Retail sales are still weak, and unemployment is still rising. People who have lost their job don’t spend money — and companies don’t hike prices when the shops are empty.

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Super Mario to the rescue.

Eurozone Business Activity Slumps To 16-Month Low (CNBC)

Business activity in the euro zone fell to a 16-month low in November, according to data released on Wednesday, confirming fears that the region’s economy is faltering. Final euro zone composite Purchasing Manager’s Index (PMI) data from Markit came in at 51.1 in November, below flash estimates of 51.4 released last month. It marks a fall from October’s final reading of 52.1. The composite reading measures both manufacturing and services activity, with the 50-point mark separating contraction from expansion. The figures could put more pressure on the ECB to increase stimulus measures ahead of its next monetary policy announcement on Thursday. There is growing pressure on the bank to start buying government bonds, although Germany has opposed the move to date.

The euro zone data was preceded by disappointing services PMI figures for Germany and France, the euro zone’s largest and second-largest economies respectively. The slowdown across the 18-country region reflected weakness in new order inflows, as new business fell for the first time since July last year. Job creation also remained near-stagnant, Markit said. Chris Williamson, chief economist at Markit, said there were “worrying signs” of economic performance deteriorating in the euro zone’s core countries, which, if sustained, “could drive the region back into recession.” “France remains the biggest concern, suffering an ongoing decline in business activity, but growth has also slowed to the weakest for one-and-a-half years in Germany,” he added.

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“ECB easing is necessary for us, we are closely related with the euro zone and ECB easing should, in the long run, generate more demand in the euro zone, which is helpful for us ..”

Non-Eurozone Czech Central Banker: We Need ECB Easing Too (CNBC)

As the European Central Bank’s (ECB) next policy meeting looms, the governor of the Czech central bank has insisted that further euro zone easing will have “necessary” knock-on benefits for the Czech Republic. The ECB is expected to leave monetary policy unchanged on Thursday, although there are growing calls for the bank to launch a full-blown quantitative easing package. ECB President Mario Draghi is likely to wait until the new year before deciding on sovereign bond-buying measures – a move that Czech National Bank (CNB) Governor Miroslav Singer said he supported. “It (further easing) is helpful for us. ECB easing is necessary for us, we are closely related with the euro zone and ECB easing should, in the long run, generate more demand in the euro zone, which is helpful for us,” Singer told CNBC.

Speaking from the CNB in Prague, Singer said that easing could take some time to filter through to some weaker parts of the euro zone, but added that a weaker euro would help “shield” the Czech Republic’s economy by giving some of the region’s biggest countries a boost. The Czech Republic is a member of the European Union, but doesn’t yet use the euro. Its currency is called the Czech koruna. The euro has weakened against the dollar and other currencies since the summer, falling to a two-year low against the greenback last month after Draghi hinted that the bank was prepared to undertake more stimulus. Singer added that a weaker euro had helped boost countries like Germany, which price their exports in euros. A weaker euro makes euro zone exports cheaper in the global market.

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Barry shares my worries.

The Gold Fairy Tale Fails Again (Barry Ritholtz)

Yesterday, oil rallied 4.3% and gold gained 3.6% as commodities had an up day after a long and painful fall. The fascinating aspect of the trading wasn’t the $45 pop in gold, nor the even greater%age rally in oil, but the accompanying narrative. (As of this writing, each has giving up about half of those gains). When it comes to speculating, especially in precious metals, it is all about storytelling. Over the years, I have tried to remind investors of the dangers of the narrative form (See this, this and this). Following a storyline is a recipe for losing money. Why? The spoken word emerged eons ago and narration was a convenient way to pass along information from person to person, generation to generation. Your DNA is coded to love a good yarn of heroes and villains and conflicts to resolve, preferably in a way that is both exciting and memorable. However, your genetic makeup wasn’t created with the risks and rewards of capital markets in mind. When it comes to being suckers for storytelling, I have been especially critical of the gold bugs.

Since 2011, the gold narrative has been a money loser, the secular bull market for the metal clearly over. However, gold often provides a plethora of teachable moments. I want to point out several recent gold narratives that have been dangerous to investors. One of my favorite narratives involves the SPDR Gold Shares, an exchange-traded fund. The history of this ETF is a fascinating tale, well told by Liam Pleven and Carolyn Cui of the Wall Street Journal. Since its peak in September 2011, GLD has declined 37%. As we discussed almost a year ago, the most popular gold narrative was that the Federal Reserve’s program of quantitative easing would lead to the collapse of the dollar and hyperinflation. “The problem with all of this was that even as the narrative was failing, the storytellers never changed their tale. The dollar hit three-year highs, despite QE. Inflation was nowhere to be found,” I wrote at the time.

More recently, the narrative has shifted. Switzerland was going to save gold based on a ballot proposal stipulating that the Swiss National Bank hold at least 20% of its 520-billion-franc ($538 billion) balance sheet in gold, repatriate overseas gold holdings and never sell bullion in the future. This was going to be the driver of the next leg up in gold. Except for the small fact that the “Save Our Swiss Gold” proposal was voted down, 77% to 23%, by the electorate. Why anyone believed this fairy tale in the first place is beyond me. Surveys of voters suggested that the ballot proposal was likely to fail. And yet there’s muddled thinking about gold among the bears too. Short sellers loaded up on bets that gold would plummet, a mistake in its own right since the outcome was all but foretold. When the collapse failed to materialize as the ballot initiative lost, the shorts had to cover their errant bets, sending spot prices higher (temporarily it seems).

Why do these narratives all tend to fail? For the most part, they reflect information that is already in prices. Markets are far from perfectly efficient (they are kinda- sorta-eventually-almost efficient). But they are more efficient than many seem to assume. What’s that you say? Consumers in China and India are big buyers of gold? You mean, the way they always have been? Indeed, most of the recent narratives contain information that is already reflected in prices. Yesterday, I read a breaking news article that said India’s decision to lift gold import restrictions would have a big, positive impact on prices. The problem with that narrative is that India eased import limits in May – and it moved gold prices higher by all of 0.5%.

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The Germans don’t like what NATO is up to.

Stop Talking about NATO Membership for Ukraine (Spiegel)

Just to be sure there is no misunderstanding: Vladimir Putin bears primarily responsibility for the new Cold War between the West and Russia. These days, you have to make that clear before criticizing Western policies so as not to be shoved into the pro-Putin camp. When NATO foreign ministers meet in Brussels today, the question of Ukraine’s possible future membership in the alliance is not on the agenda. It will, however, overshadow the meeting — and that is the fault of two politicians. During an interview with German public broadcaster ZDF on Sunday night, Ukrainian President Petro Poroshenko said he would like to hold a referendum on NATO membership at some point in the future. And new NATO General Secretary Jens Stoltenberg apparently had nothing better to do than to offer Poroshenko his verbal support and to reiterate the right of every sovereign nation in Europe to apply for NATO membership.

As if that weren’t enough, Stoltenberg added in comments directed at Moscow that “no third country outside NATO can veto” its enlargement. In the current tense environment, open speculation about possible Ukrainian membership in NATO is akin to playing with fire. German Chancellor Angela Merkel proposed the former Norwegian prime minister as NATO chief because he is considered to be a far more level-headed politician than predecessor Anders Fogh Rasmussen. But since he took the helm, differences between the two have been difficult to identify. Hawkish statements made by NATO’s top military commander, Philip Breedlove, haven’t done much to ease the situation either. Why is it even necessary for NATO officers to comment so frequently about Ukraine? Since the outbreak of the crisis, the alliance has expressed the opinion that the conflict cannot be resolved through military means. If that’s true, then wouldn’t it be better if Stoltenberg, Breedlove and company kept quiet?

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“David Cameron has been just as generous with our money: as he cuts essential services for the poor, he has almost doubled the public subsidy for English grouse moors, and frozen the price of shotgun licences, at a public cost of £17m a year.”

We Are Starting To Learn Who Owns Britain (Monbiot)

Bring out the violins. The land reform programme announced last week by the Scottish government is the end of civilised life on Earth, if you believe the corporate press. In a country where 432 people own half the private rural land, all change is Stalinism. The Telegraph has published a string of dire warnings – insisting, for example, that deer stalking and grouse shooting could come to an end if business rates are introduced for sporting estates. Moved to tears yet? Yes, sporting estates – where the richest people in Britain, or oil sheikhs and oligarchs from elsewhere, shoot grouse and stags – are exempt from business rates, a present from John Major’s government in 1994. David Cameron has been just as generous with our money: as he cuts essential services for the poor, he has almost doubled the public subsidy for English grouse moors, and frozen the price of shotgun licences, at a public cost of £17m a year.

But this is small change. Let’s talk about the real money. The Westminster government claims to champion an entrepreneurial society of wealth creators and hardworking families, but the real rewards and incentives are for rent. The power and majesty of the state protects the patrimonial class. A looped and windowed democratic cloak barely covers the corrupt old body of the nation. Here peaceful protesters can still be arrested under the 1361 Justices of the Peace Act. Here the Royal Mines Act 1424 gives the crown the right to all the gold and silver in Scotland. Here the Remembrancer of the City of London sits behind the Speaker’s chair in the House of Commons to protect the entitlements of a corporation that pre-dates the Norman conquest. This is an essentially feudal nation.

It’s no coincidence that the two most regressive forms of taxation in the UK – council tax banding and the payment of farm subsidies – both favour major owners of property. The capping of council tax bands ensures that the owners of £100m flats in London pay less than the owners of £200,000 houses in Blackburn. Farm subsidies, which remain limitless as a result of the Westminster government’s lobbying, ensure that every household in Britain hands £245 a year to the richest people in the land. The single farm payment system, under which landowners are paid by the hectare, is a reinstatement of a medieval levy called feudal aid, a tax the vassals had to pay to their lords.

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Sounds good, tastes good too.

Mediterranean Diet Keeps People ‘Genetically Young’ (BBC)

Following a Mediterranean diet might be a recipe for a long life because it appears to keep people genetically younger, say US researchers. Its mix of vegetables, olive oil, fresh fish and fruits may stop our DNA code from scrambling as we age, according to a study in the British Medical Journal. Nurses who adhered to the diet had fewer signs of ageing in their cells. The researchers from Boston followed the health of nearly 5,000 nurses over more than a decade. The Mediterranean diet has been repeatedly linked to health gains, such as cutting the risk of heart disease. Although it’s not clear exactly what makes it so good, its key components – an abundance of fresh fruit and vegetables as well as poultry and fish, rather than lots of red meat, butter and animal fats – all have well documented beneficial effects on the body. Foods rich in vitamins appear to provide a buffer against stress and damage of tissues and cells. And it appears from this latest study that a Mediterranean diet helps protect our DNA.

The researchers looked at tiny structures called telomeres that safeguard the ends of our chromosomes, which store our DNA code. These protective caps prevent the loss of genetic information during cell division. As we age and our cells divide, our telomeres get shorter – their structural integrity weakens, which can tell cells to stop dividing and die. Experts believe telomere length offers a window on cellular ageing. Shorter telomeres have been linked with a broad range of age-related diseases, including heart disease, and a variety of cancers. In the study, nurses who largely stuck to eating a Mediterranean diet had longer, healthier telomeres. No individual dietary component shone out as best, which the researchers say highlights the importance of having a well-rounded diet.

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But then this does not help. Especially for the poor in southern Europe.

Olive Oil Prices Soar After Bad Harvest (Guardian)

Take it easy with the salad dressing: the price of Italian olive oil has more than doubled in the past year to its highest level in a decade as the impact of drought and a fruit fly infestation has hit production. The price of extra virgin oil from Spain, the world’s biggest producer, is also up 15% year-on-year after olive trees across the Mediterranean suffered from drought and extreme heat in May and June, their peak blooming period when moisture is vital to develop a good crop. Analysts began warning that prices would rise this summer, but the cost of Italian extra virgin olive oil soared by nearly a quarter in November compared with October as the poor state of the harvest became clear, according to market analysts Mintec. Loraine Hudson at Mintec said demand could outstrip supply over the next year as Italian production would be down 35% and global production down 19% to 2.5m tonnes at a time when global consumption is rising.

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“It would take off on its own, and re-design itself at an ever increasing rate ..”

Stephen Hawking Warns Artificial Intelligence Could End Mankind (BBC)

Prof Stephen Hawking, one of Britain’s pre-eminent scientists, has said that efforts to create thinking machines pose a threat to our very existence. He told the BBC:”The development of full artificial intelligence could spell the end of the human race.” His warning came in response to a question about a revamp of the technology he uses to communicate, which involves a basic form of AI. But others are less gloomy about AI’s prospects. The theoretical physicist, who has the motor neurone disease amyotrophic lateral sclerosis (ALS), is using a new system developed by Intel to speak.

Machine learning experts from the British company Swiftkey were also involved in its creation. Their technology, already employed as a smartphone keyboard app, learns how the professor thinks and suggests the words he might want to use next. Prof Hawking says the primitive forms of artificial intelligence developed so far have already proved very useful, but he fears the consequences of creating something that can match or surpass humans. “It would take off on its own, and re-design itself at an ever increasing rate,” he said. “Humans, who are limited by slow biological evolution, couldn’t compete, and would be superseded.”

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