Dec 212016
 
 December 21, 2016  Posted by at 9:47 am Finance Tagged with: , , , , , , , ,  1 Response »
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Laurits Andersen Ring At Breakfast 1898

Most Expensive Housing Ever: A 1% Mortgage Rate Surge Changes Everything (MH)
This Christmas Americans Will Spend An Average Of $422 Per Child (EC)
Ray Dalio Says Animal Spirits Under Donald Trump Just Getting Started (F.)
Someone Has to Tell The Fed Inflation Is Not Accelerating (CEPR)
Brace Yourself For Italy’s Bankruptcy (Gavekal)
Italy Bank Rescue Won’t Fill $54 Billion Hole in Balance Sheets (BBG)
Top French Banks Sue ECB To Reduce Capital Demands (R.)
Spanish Banks Lose EU Case on Mortgage Interest Repayments (BBG)
India’s Small Businesses Facing ‘Apocalypse’ (G.)
Let The Yuan Fall Or Not? Beijing’s Big Burning Currency Question (SCMP)
Yuan Bears Strike as Capital Outflows Override PBOC (BBG)
To Problems With China’s Financial System, Add the Bond Market (NYT)
China’s Anticorruption Drive Ensnares the Lowly and Rattles Families (WSJ)
Smog Refugees Flee Chinese Cities As ‘Airpocalypse’ Blights Half A Billion (G.)
Obama Invokes 1953 Law To Indefinitely Block Arctic, Atlantic Drilling (CNBC)

 

 

Income vs prices has never been more expensive. There’s much more in Hanson’s article.

Most Expensive Housing Ever: A 1% Mortgage Rate Surge Changes Everything (MH)

BUILDER HOUSES: The average $361k builder house requires nearly $65k in income assuming a 4.5% rate, 20% down, and A-grade credit. Problem is, 20% + A-credit are hard to come by. For buyers with less down or worse credit, far more than $65k is needed. For the past 30-YEARS income required to buy the average priced house has remained relatively consistent, as mortgage rate credit manipulation made houses cheaper. Bottom line: Reversion to the mean can occur through house price declines, credit easing, a mortgage rate plunge to the high 2%’s, or a combination of all three. However, because rates are still historically low and mortgage guidelines historically easy, the path of least resistance is lower house prices.

The following chart compares Bubble 1.0 (2004 and 2006) to Bubble 2.0 on an apples-to-apples basis using the popular loan programs of each era. Bottom line: Builder prices are up 19% from 2006 but the monthly payment is 43% greater and annual income needed to qualify for a mortgage 83% more.

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‘T is the season to be plastic.

This Christmas Americans Will Spend An Average Of $422 Per Child (EC)

For many Americans, the quality of Christmas is determined by the quality of the presents. This is especially true for our children, and some of them literally spend months anticipating their haul on Christmas morning. I know that when I was growing up Christmas was all about the presents. Yes, adults would give lip service to the other elements of Christmas, but all of the other holiday activities could have faded away and it still would have been Christmas as long as presents were under that tree on the morning of December 25th. Perhaps things are different in your family, but it is undeniable that for our society as a whole gifts are the central feature of the holiday season. And that is why so many parents feel such immense pressure to spend a tremendous amount of money on gifts for their children each year.

Of course this pressure that they feel is constantly being reinforced by television ads and big Hollywood movies that continuously hammer home what a “good Christmas” should look like. Once again in 2016, parents will spend far more money than they should because they want to make their children happy. According to a brand new survey from T. Rowe Price, parents in the United States will spend an average of 422 dollars per child this holiday season… “More than half of parents report they aim to get everything on their kids’ wish lists this year, spending an average of $422 per child, according to a new survey from T. Rowe Price.” To me, that seems like a ridiculous amount of money to spend on a single child, but this is apparently what people are doing.

But can most families really afford to be spending so wildly? Of course not. As I have detailed previously, 69% of all Americans have less than $1,000 in savings. That means that about two-thirds of the country is essentially living paycheck to paycheck. So all of this reckless spending brings with it a lot of additional financial pressure. But because we are a “buy now, pay later” society, we do it anyway. We are willing to mortgage a little bit of the future in order to have a nice Christmas now. Another new survey has found that close to half the country feels “pressure to spend more than they can afford during the holiday season”…

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Possible only -beyond short term- with Fed money. Animal spirits sounds cute, but all investors have is money based on ultra cheap rates.

Ray Dalio Says Animal Spirits Under Donald Trump Just Getting Started (F.)

During the dark days of the financial crisis Ray Dalio, head of the world’s largest hedge fund Bridgewater Associates, published papers and YouTube seminars to describe the forces that drive the economy and explain why severe cycles like the credit collapse occur. The effort was intended to guide productive responses to the implosion of Wall Street, which crippled Main Street, and avert policies that could diminish a recovery. With the Dow Jones Industrial Average nearing a record 20,000, unemployment below 5% and the U.S. economy in the seventh year of a recovery, Dalio’s tomes on ‘how the economic machine works’ aren’t as top of mind as they once were. But that’s not to say Dalio, one of Wall Street’s weightiest hedge fund investors, has lost interest in the subject.

On Tuesday morning, Dalio published a monthly update that indicates he believes the U.S. economy is poised for a sudden and dramatic shift under President-elect Donald Trump. If the economic machine is presently churning along in a steady but somewhat muted recovery from the Great Recession, Dalio believes it may kick into overdrive as Trump implements a pro-business agenda that could stimulate the animal spirits of investors and businesses across United States. “[T]he Trump administration could have a much bigger impact on the US economy than one would calculate on the basis of changes in tax and spending policies alone because it could ignite animal spirits and attract productive capital,” Dalio states in a post published to LinkedIn. He adds, “regarding igniting animal spirits, if this administration can spark a virtuous cycle in which people can make money, the move out of cash (that pays them virtually nothing) to risk-on investments could be huge.”

Dalio believes Trump has staffed his administration with business-people who will be inclined to take quick action on perceived drags on the economy, whether that involves taxation, regulation or labor laws. What’s also clear is Dalio believes there are presently major impediments to the economy that need to be lifted. “This new administration hates weak, unproductive, socialist people and policies, and it admires strong, can-do, profit makers,” says Dalio. The Trump administration “wants to, and probably will, shift the environment from one that makes profit makers villains with limited power to one that makes them heroes with significant power,” he adds [..] “A pro-business US with its rule of law, political stability, property rights protections, and (soon to be) favorable corporate taxes offers a uniquely attractive environment for those who make money and/or have money. These policies will also have shocking negative impacts on certain sectors,” Dalio says, without describing in more detail the winners and losers.

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The ongoing confusions about what inflation is. One key rule: if spending doesn’t rise, and by a lot, there will be no inflation. There may be higher prices for some things, but that’s not the same. And where could higher spending come from when 2/3 of Americans don’t even have $1000 saved for an emergency?

Someone Has to Tell The Fed Inflation Is Not Accelerating (CEPR)

The Federal Reserve Board raised interest rates last week and seem poised to do so again in the not distant future. The rationale is that the economy is now near or at full employment and that if job growth continues at its recent pace it will lead to a harmful acceleration in the inflation rate. We have numerous pieces raising serious questions about whether the labor market is really at full employment, noting for example the sharp drop in employment rates (for all groups) from pre-recession levels and the high rate of involuntary part-time employment. But the story of accelerating inflation is also not right. This is particularly important, since John Williams, the president of the San Francisco Fed, cited accelerating inflation as a reason to support last week’s rate hike, and possibly future rate hikes, in an interview in the New York Times.

Williams has been a moderate on inflation, so there are many members of the Fed’s Open Market Committee who are more anxious to raise rates than him. A close look at the data does not provide much evidence of accelerating inflation. The core PCE deflator, the Fed’s main measure of inflation, has risen 1.7% over the last year, which is still under the 2.0% target. This target is an average, which means that the Fed should be prepared to allow the inflation rate to rise somewhat above 2.0%, with the idea that inflation will drop in the next recession. Anyhow, the 1.7% rate is slightly higher than a low of 1.3% reached in the third quarter of 2015, but it is exactly the same as the rate we saw in the third quarter of 2014. In other words, there has been zero acceleration in the rate of inflation over the last two years.

Furthermore, even this modest acceleration has been entirely due to the more rapid increase in rent over the last two years. The inflation rate in the core consumer price index, stripped of its shelter component, actually has been falling slightly over the last year. It now stands at 1.1% over the last year. It is reasonable to pull shelter out of the CPI because rents do not follow the same dynamic as most goods and services. In fact, higher interest rates, by reducing construction, are likely to increase the pace of increase in rents rather than reduce them.

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Italy’s banks are about to do the country in.

Brace Yourself For Italy’s Bankruptcy (Gavekal)

Matteo Renzi has joined a long line of Italian prime ministers who failed to “reform” their country. This is another way of saying that he could not wave a magic wand and make Italy competitive with Germany. The grim reality is that no Italian leader stood a chance of changing their country once the fateful decision was made to peg its currency to Germany’s. At the time of the euro’s launch in 1999, I argued that the risk profile of Italy would change from being an economy where there was a high probability of many currency devaluations to the certain probability of eventual bankruptcy. Sadly, that moment is not so far away.

The chart below tells the story of Italy’s recent economic history in two parts, namely, (i) March 1979 to March 1999, and (ii) March 1999 to the present. Italy joined the Exchange Rate Mechanism in 1979 at 443 lira per deutschemark, yet by 1990 frequent devaluations meant that rate had slid to about 750 lira. By the early 1990s, the Bundesbank was overseeing a newly unified German monetary system and in order to fight inflation it had driven real interest rates to 7%. By September 1992 the stresses on the system caused the UK, Sweden and Italy to exit the ERM, which meant another huge currency devaluation, pushing the lira as low as 1250 against the deutschemark, but delivering a huge tourist boom to boot.

Still, from 1979 to 1998 Italian industrial production outpaced that of Germany by more than 10%, while Italian equities outperformed German equivalents by 16% (this indicates that Italian firms were earning a higher return on invested capital than those in Germany). Then came the euro. By 2003 it was clear that Italy was uncompetitive and subsequently, Italian equities have underperformed German equities by -65%, reversing the previous half century’s pattern when Italian equities outperformed on a total return basis. Similarly, since 2003 Italian factory output has lagged Germany’s by 40%.

The diagnosis is simply that Italy has become woefully uncompetitive, and as a result, is not solvent. This much is clear from the perilous state of its banking system, which is always the outcome when banks lend to firms that have been rendered uncompetitive by some reckless central banker. Short of imposing Greek-style slavery on Italy, there is not much hope of solving the problem, but I rather doubt that the Italian electorate will be as patient as its neighbours across the Ionian sea.

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Let Beppe Grillo have a go at this. What does Italy have to lose?

Italy Bank Rescue Won’t Fill $54 Billion Hole in Balance Sheets (BBG)

Italian banks need at least €52 billion ($54 billion) to clean up their balance sheets, much more than the rescue package proposed Monday by the government. The shortfall is an estimate of how much lenders would have to increase loan-loss provisions to allow for the sale of bad debt. It includes the 8 billion euros of provisions UniCredit has said it will add before selling €18 billion of its worst loans and uses that ratio as a proxy for the gap at other banks. The total also includes the 5 billion euros Banca Monte dei Paschi di Siena has been struggling to raise in recent months. The Italian government asked parliament this week to increase the public borrowing limit by as much as €20 billion to potentially backstop Monte Paschi and other lenders.

The rescue package needs to be closer to €30 billion to solve Italy’s bad-debt crisis, according to Paola Sabbione at Deutsche Bank. That conclusion assumes UniCredit and some other lenders can raise about €20 billion through capital markets, asset sales and profit retention – leaving the government to fill the rest of the €52 billion hole. “Some of the publicly traded banks can probably raise some of the funds needed for a cleanup, including Monte Paschi,” said Sabbione, who has covered Italian banks for the past decade. “So the government would have to plug in the rest. But still, at this level, it won’t do the full job.” UniCredit, the nation’s largest lender, plans to increase loan-loss provisions to 75% for nonperforming loans with the lowest chances of recovery and 40% for two other categories considered less dire.

The increased writedowns will help the Milan-based lender sell about a third of its bad loans to asset manager Fortress Investment. UniCredit is planning to raise €13 billion of new equity funding to cover the increased provisions as well as other restructuring costs and to improve its capital ratio. The company’s shares have jumped 15% since the Dec. 13 announcement, giving analysts confidence the bank will have little trouble tapping investors for the funds. Italian banks had €356 billion of bad loans at the end of June and €165 billion of provisions against them, according to the latest Bank of Italy data. To get the worst category to 75% provisioning and the rest to 40%, as UniCredit is doing, would take €52 billion.

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French banks in turn are heavily into Italian banks. Just like they were into Greek banks, but they dodged that one when their political clout made the EU shift their burden onto the Greek pople. Will Italy let them do the same?

Top French Banks Sue ECB To Reduce Capital Demands (R.)

France’s top lenders are suing the ECB to get an exemption from holding capital against deposits parked with a state-owned fund, the most high-profile challenge to supervision from Frankfurt to date. As well as providing euro zone banks with funding, the ECB has been their main regulator for the past two years, tasked with ending cozy relationships between the industry and national authorities that contributed to the financial crisis. The Frankfurt-based institution has been sued repeatedly over its bond-buying programs and by smaller banks seeking to escape its supervision. But this is the first case brought by major banks in the euro zone and is a rare confrontation between France’s financial elite and the ECB’s supervisory board, led by the former head of France’s own banking regulator, Daniele Nouy.

The lawsuits have been brought by BNP Paribas, Societe Generale, Credit Agricole, Credit Mutuel, Groupe BPCE and La Banque Postale over the past few weeks, filings with the European Court of Justice show. Sources with direct knowledge of the cases told Reuters the banks are protesting the ECB’s demand that they set aside capital against special deposits they have with state investment institution Caisse des Dépôts et Consignations (CDC). The legal action comes amid heightened tension between banks and the ECB, which is inundating the financial sector with excess cash to try to stimulate growth while charging banks for depositing it with the central bank overnight. “You are seeing banks more and more go to court to challenge the supervisor,” a senior legal source said. “Years ago that was unthinkable.”

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So, Italy, France and Spain too, all have severely troubled banks.

Spanish Banks Lose EU Case on Mortgage Interest Repayments (BBG)

Competition watchdogs won a partial victory at the EU’s top court over their attempt to force Spanish banks to pay back millions of euros in tax breaks for the acquisition of stakes in foreign firms, Bloomberg News reports. Lenders, including Banco Popular Espanol SA and Banco Bilbao Vizcaya Argentaria SA, may have to give back billions of euros to mortgage customers after a ruling by the court.

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Over 6 weeks later, “India’s Reserve Bank has issued around 1.7 billion new notes, with less than one-third the value of what was removed..”

India’s Small Businesses Facing ‘Apocalypse’ (G.)

India’s vast informal economy has been reeling since 8 November, the morning after India’s prime minister, Narendra Modi, announced the sudden voiding of the country’s two most-used bank notes. It is the largest-scale financial experiment in Indian history: gutting 14 trillion rupees – 86% of the currency in circulation – from the most cash-dependent major economy in the world. More than a month on, India’s Reserve Bank has issued around 1.7 billion new notes, with less than one-third the value of what was removed. The sixth-largest economy in the world is running on 60% less currency than before. Lines outside banks continue to stretch, and India’s small business lobby says its members are facing an “apocalypse”. But Modi insists he isn’t done.

Initially intended to flush out the “black money” said to be hoarded by elites and criminals, the government now frames demonetisation as the first step in a “cashless” revolution to shift the billions of transactions undertaken each day in India online – and onto the radar of tax authorities. This week, labour minister Bandaru Dattatreya announced it would soon be mandatory for employers to pay their staff into bank accounts, a hugely ambitious step in a country where as many as 90% of workers are paid in cash. Already struggling, businessmen such as Sharma are dreading the prospect of more enforced digital migration. “How do you think I can pay the workers with a cheque if they don’t have a bank account?” he asks, in a tiny office thick with incense smoke. “And it takes three days to clear a cheque. What will they eat during those days?”

His reasons are not just altruistic. Apart from potentially raising his tax bill – in a country where just 1% pay income tax – paying salaries electronically would mean giving staff Delhi’s mandated minimum wage, currently 9,724 rupees (£114) per month for unskilled workers. “Right now no one pays the minimum wage that the government decides,” Sharma says. “It will only make things expensive: we will charge the customer.” Outside his workers’ earshot, he adds: “If someone is doing the work of Rs.2000, why should we pay them Rs.15,000?” But workers too are wary of the big push online. Tens of millions of Indians have been given zero-deposit bank accounts in the past two years under a government scheme to boost financial inclusion. But even after demonetisation prompted a rush of new deposits, 23% of the accounts still lie empty.

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Stuck. A large depreciation would be too costly, but keeping it high would eat up foreign reserves.

Let The Yuan Fall Or Not? Beijing’s Big Burning Currency Question (SCMP)

As the Chinese yuan keeps weakening against the dollar, a question is becoming acute for Beijing: should China let the market take its course and permit a deep currency fall or should it keep burning its foreign exchange reserves to support the currency’s value? The debate over what Beijing should do about its currency is heating up as regulators’ ambiguity over the question is becoming costly and unsustainable, particularly since the Federal Reserve raised interest rates. Against Beijing’s desire for a “controllable” depreciation, the government is losing control over capital flight, depleting foreign exchange reserve stockpile at an alarming speed, and failing to convince investors that there is “no fundamental basis for the continuous depreciation”.

Yu Yongding, a renowned Chinese economist who sat on the central bank’s monetary policy committee when the yuan was revalued in July 2005, said it was time for Beijing to reconsider the matter. “The fear of the yuan’s depreciation has become a burden for us,” Yu told a forum over the weekend. Yu, who for years has called for liberalizing the yuan’s exchange rate over years, said China should give up foreign exchange interventions and safeguard its foreign exchange reserves so that China will “have sufficient ammunition” for future rainy days. While Yu’s view is not in line with Beijing’s current policy, it is winning academic support. Xu Sitao, the China chief economist at Deloitte, an auditing firm, said “the best strategy is to let the yuan fall in full, and the worst strategy is slowly depleting foreign exchange reserves”.

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“The currency is facing a triple whammy of accelerating capital outflows, faster U.S. interest-rate increases and concerns over domestic financial markets..”

Yuan Bears Strike as Capital Outflows Override PBOC (BBG)

China’s renewed efforts to curb declines in its currency are doing little to dissuade yuan bears. Traders have turned increasingly negative amid tighter liquidity, sending bets for further losses soaring. The gap between forward contracts wagering on the offshore yuan a year from now versus its current level is heading for a record monthly jump, just as the extra cost for options to sell the currency against the dollar hit a six-month high relative to prices for contracts to buy. The currency is facing a triple whammy of accelerating capital outflows, faster U.S. interest-rate increases and concerns over domestic financial markets as liquidity tightens.

Strategists say its weakening, set to be the biggest this year in more than two decades, may accelerate as the government restores the annual quota for citizens to convert yuan holdings into foreign exchange. President-elect Donald Trump has also threatened to slap 45% tariffs on China’s imports to the U.S. “Bears are adding positions because expectations for the yuan to depreciate are getting stronger and stronger,” said Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong. “The pressures will likely continue and could get even worse, considering capital outflows and concerns on the reset of individuals’ conversion quota.”

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..in China, state-run banks are by far the main source of funding. Shadow banks.

To Problems With China’s Financial System, Add the Bond Market (NYT)

Chinese officials cheered on the country’s stock market when it reached heady new highs, offering hope that it could become a new source of money to fix China’s economic problems. Then, last year, the market crashed. Now another fast-growing part of China’s vast and increasingly complicated financial market is showing signs of distress: its $9 trillion bond market. Prices for government and corporate bonds have tumbled over the past week, a sell-off that continued on Tuesday. The situation has spooked investors, prompting the government to temporarily restrain some trading and to make emergency loans to struggling financial institutions. The price drops have resulted in higher borrowing costs at a time when more Chinese companies need the money to cope with slowing economic growth. Yields reached new highs again on Tuesday.

In part, China is reacting to financial shifts across the globe. With the Federal Reserve raising short-term interest rates and many expecting the presidency of Donald J. Trump to lead to heavier government spending, investors worldwide are selling bonds. But China is struggling with its own balancing act. The Chinese bond slump also stems from Beijing’s efforts to wring excess money from its financial system and to stop potential bubbles that may lurk in shadowy, hard-to-track corners of its economy. Should it continue with those efforts, bonds could fall further. “The adjustment has not yet finished,” said Miao Zuoxing, a partner at the FXM Brothers Fund. “It will continue and normalize until money is put where the government can see it.”

[..] China has particular reason to worry. As the world’s second-largest economy, after the United States, it relies on a rickety financial system that is mired in debt and susceptible to hidden stresses. Higher overseas interest rates could also prompt more Chinese investors to move their money out of the country, either to chase higher returns elsewhere or to avoid what some see as China’s growing problems. In the mature financial system of the United States, businesses have plenty of ways to get money. They can borrow from a bank, raise money selling stocks or bonds, or seek funds directly from any number of investors.

But in China, state-run banks are by far the main source of funding. That helped power the country’s economic rise, but it also led to loans going to politically connected borrowers rather than to where the economy needed it most. That is one reason the Chinese economy is now stuck with more steel, glass, cement and auto factories than it needs. Particularly in the past two years, China has taken steps to encourage the development of robust stock and bond markets as well as private lenders, needing a way to ensure the flow of money was being directed by profit-minded investors rather than politicians and their allies at state-owned banks.

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Heavy fisted. It’s all history has taught.

China’s Anticorruption Drive Ensnares the Lowly and Rattles Families (WSJ)

When Liu Chongfu returned home to his pig farm in December 2014 after months in detention, he was haunted by what he had done. Under interrogation, he later told his family, he falsely admitted to bribing government officials. Back home, released without being charged, Mr. Liu had nightmares and splitting headaches. His conscience weighed on him, his family said. So he publicly recanted in March 2015. In a written statement sent to the court, he said interrogators had deprived him of sleep and threatened his family to extract a phony confession that helped send four other men to prison. In his statement, also posted online, he said he lied “because they forced me to where there was no other way than death. I didn’t want to die.”

President Xi Jinping has called his anticorruption campaign, one of the leader’s defining initiatives, a “life or death” matter. It is among the most popular elements of his administration, given how corruption has been endemic in China and how it threatens to undermine confidence in Communist Party control. Since the campaign began in 2013, its reach has allowed Mr. Xi to root out resistance to his rule and secure party control over a society that is more prosperous and demanding. Mr. Liu’s confession and retraction suggest a dark side to Mr. Xi’s efforts. Families around China say overzealous authorities have forced confessions, tortured suspects and made improper convictions.

The farmer tried to retract his confession before, while still in detention. “I cannot violate my conscience to do this,” he told his interrogators, according to his statement, a transcript of a video he made with his lawyer. He knew it would send innocent officials to jail, he said, and that “the real tragedy is still to follow.” The four were convicted anyway.

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“I finally saw the blue sky. It was wonderful!”

Smog Refugees Flee Chinese Cities As ‘Airpocalypse’ Blights Half A Billion (G.)

Tens of thousands of “smog refugees” have reportedly fled China’s pollution-stricken north after the country was hit by its latest “airpocalyse” forcing almost half a billion people to live under a blanket of toxic fumes. Huge swaths of north and central China have been living under a pollution “red alert” since last Friday when a dangerous cocktail of pollutants transformed the skies into a yellow and charcoal-tinted haze. Greenpeace claimed the calamity had affected a population equivalent to those of the United States, Canada and Mexico combined with some 460m people having to breathe either hazardous pollution or heavy levels of smog in recent days.

Lauri Myllyvirta, a Beijing-based Greenpeace activist who has been chronicling the red alert on Twitter, said that in an attempt to shield his lungs he was avoiding going outside and using two air purifiers and an industrial grade dust mask “that makes me look like Darth Vader”. “You just try to insulate yourself from the air as much as possible,” said Myllyvirta, a coal and air pollution expert. Others have simply opted to flee. According to reports in the Chinese media, flights to some pollution-free regions have been packed as a result of the smog. Ctrip, China’s leading online travel agent, said it expected 150,000 travellers to head abroad this month in a bid to outrun the smog. Top destinations include Australia, Indonesia, Japan and the Maldives.

Jiang Aoshuang, one of Beijing’s “smog refugees”, told the state-run Global Times she had skipped town with her husband and 10-year-old son in order to spare their lungs. Jiang’s family made for Chongli, a smog-free ski resort about three hours north-west of the capital, only to find it packed with other fugitives seeking sanctuary from the pollution. “It really felt like a refugee camp,” she was quoted as saying. Yang Xinglin, who also fled to Chongli, said she had requested time off from her job at a state-owned real estate firm so she did not have to inhale the smog. “You ask me why I left Beijing? It’s because I want to live,” Yang, 27, told the Guardian.

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But why in the last few days of an 8-year term?

Obama Invokes 1953 Law To Indefinitely Block Arctic, Atlantic Drilling (CNBC)

President Barack Obama on Tuesday moved to indefinitely block drilling in vast swaths of U.S. waters. The president had been expected to take the action by invoking a provision in a 1953 law that governs offshore leases, as CNBC previously reported. The law allows a president to withdraw any currently unleased lands in the Outer Continental Shelf from future lease sales. There is no provision in the law that allows the executive’s successor to repeal the decision, so President-elect Donald Trump would not be able to easily brush aside the action. Trump has vowed to open more federal land to oil and natural gas production in a bid to boost U.S. output. Obama on Tuesday said he would designate “the bulk of our Arctic water and certain areas in the Atlantic Ocean as indefinitely off limits to future oil and gas leasing, though the prospects for drilling in the affected areas in the near future were already questionable.

The lands covered include the bulk of the Beaufort and Chukchi seas in the Arctic and 31 underwater canyons in the Atlantic. The United States and Canada also announced they will identify sustainable shipping lanes through their connected Arctic waters. Canada on Tuesday also imposed a five-year ban on all oil and gas drilling licensing in the Canadian Arctic. The moratorium will be reviewed every five years. “These actions, and Canada’s parallel actions, protect a sensitive and unique ecosystem that is unlike any other region on earth,” Obama said in a statement. “They reflect the scientific assessment that, even with the high safety standards that both our countries have put in place, the risks of an oil spill in this region are significant and our ability to clean up from a spill in the region’s harsh conditions is limited.”

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Dec 022016
 
 December 2, 2016  Posted by at 10:34 am Finance Tagged with: , , , , , , , , , ,  2 Responses »
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Harris&Ewing Washington, DC, Storm damage..” Between 1913 and 1918

Global Bonds Suffer Worst Monthly Meltdown as $1.7 Trillion Lost (BBG)
What’s Causing The Fire Sale In The Bond Market (CNBC)
Donald Trump Promises to Usher In New ‘Industrial Revolution’ (WSJ)
Trump Will End Growth-Zapping Fiscal Austerity – McCulley (CNBC)
China’s Central Bank Is Facing a Major New Headache (BBG)
Rural China Banks With $4 Trillion Assets Face Debt Test (BBG)
Obama Set To Block Chinese Takeover Of German Semiconductor Supplier (BBG)
QE Infinity Eyed In Europe If Renzi Loses Crucial Italian Referendum (CNBC)
December 4 Could Trigger the “Most Violent Economic Shock in History” (IM)
How Putin, Khamenei And Saudi Prince Got OPEC Deal Done (R.)
Russian Oil Output Near Post-Soviet Record as It Prepares to Cut (BBG)
US Veterans Arrive At Pipeline Protest Camp In North Dakota (R.)
Joy As China Shelves Plans To Dam ‘Angry River’ (G.)
World’s Growing Inequality Is ‘Ticking Time Bomb’: Nobel Laureate Yunus (R.)
This Is The Most Dangerous Time For Our Planet (Stephen Hawking)

 

 

Things get crowded, it’s inevitable. And much more so in manipulated markets.

Global Bonds Suffer Worst Monthly Meltdown as $1.7 Trillion Lost (BBG)

The 30-year-old bull market in bonds looks to be ending with a bang. The Bloomberg Barclays Global Aggregate Total Return Index lost 4% in November, the deepest slump since the gauge’s inception in 1990. Treasuries extended declines Thursday along with European bonds on speculation that the ECB will consider sending a signal that stimulus will eventually end. The reflation trade has been driving markets since Donald Trump’s election victory due to his promises of tax cuts and $1 trillion in infrastructure spending. Calling an end to the three-decade bond bull market is no longer looking like a fool’s errand: the Federal Reserve is expected to raise interest rates again – and do so more often than once a year, inflationary expectations are climbing and there are hints global central banks may buy less sovereign debt going forward.

Investors pulled $10.7 billion from U.S. bond funds in the two weeks after Trump’s victory, the biggest exodus since 2013’s “taper tantrum,” while American stock indexes jumped to records. “The market has moved with remarkable swiftness to price in the anticipated reflationary impact of a Trump administration,” said Matthew Cairns, a strategist at Rabobank International in London. “This has, in turn, prompted a notable rotation out of fixed income and into equities.” Still, Cairns cautioned the moves are “remarkable given the distinct lack of clarity as regards what policies the president-elect will actually pursue.” November’s rout wiped a record $1.7 trillion from the global index’s value in a month that saw world equity markets’ capitalization climb $635 billion.

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Eevrybody’s been on the same side of the boat for too long.

What’s Causing The Fire Sale In The Bond Market (CNBC)

There’s a fire sale in the bond market, and the November jobs report could make it burn even hotter. The wild move came amid speculation that Friday’s employment report could be better-than-expected and drive interest rates even higher. Interest rates surged Thursday, with the 10-year yield spiking as much as 12 basis points at its peak, to 2.49%, the highest yield since June 2015. Yields move inversely to prices and rates snapped higher across the whole yield curve. The 2-year pressed up against 1.17% and the 30-year rose to as high as 3.15%. In afternoon trading, some of the selling subsided, and the 10-year yield slipped back to just under 2.44%, but 2.50 is being watched as the next psychological line in the sand.

“In order to stay above 2.50, it’s got to be a really good number. The way we’re going, it’s like an unhinged market. It’s also going to be counterproductive for things down the road. This is not a healthy adjustment in rates. There’s going to be some losses on this,” said George Goncalves at Nomura. The 10-year yield affects consumer loans especially home mortgage rates, which have already risen near 4%, slowing borrowing activity. The 2-year is the rate most closely watched as a signal about the market’s expectation for Fed rate activity. The Fed is expected to hike rates Dec. 14 but traders have been speculating a stronger economy could force it into a faster hiking cycle next year.

Strategists say Thursday’s rate spike was driven by a combination of factors and at the same time inexplicable in its scope. The overriding themes are that the world is moving to a higher interest rate environment and for the first time in years, there could be inflation. OPEC’s deal to cut production Wednesday, drove oil prices 15% higher in just two days, ramping up inflation expectations that already had been on the rise.

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“There is no global anthem, no global currency..”

Donald Trump Promises to Usher In New ‘Industrial Revolution’ (WSJ)

President-elect Donald Trump on Thursday said his administration would usher in a new “Industrial Revolution,” one of numerous promises he made in Cincinnati as he began a nationwide “Thank You” tour following his Nov. 8 election. Mr. Trump used the 53-minute speech, the first of its kind since he became president-elect, to reflect on his victory but also to outline a number of goals, many of them lofty, for his term as president. The speech was more than just thematic, however. He said for the first time that on Monday he would announce that he was nominating Ret. Gen. James Mattis as his first secretary of defense. Mr. Trump promised sweeping changes to trade policy, national security, infrastructure, military spending and immigration. He said he wanted to work with Democrats but said he could get the work done without them, even without his supporters.

“Now that you put me in this position, even if you don’t help me one bit, I’m going to get it done,” he said. “Don’t worry.” The Cincinnati rally resembled, in some ways, the campaign rallies he held for months as his candidacy gained steam during the year. There were chants of “U.S.A.,” and vendors sold Trump campaign memorabilia. But there was one notable difference: with the election over, the crowd was far smaller[..] During his speech, he stuck to many of his campaign promises. He said a wall would be built along the U.S.-Mexico border. He said his administration would “repeal and replace” the Affordable Care Act. He said the Trump administration would seek plans and deals that benefited Americans first and not get duped into deals with other countries. “There is no global anthem, no global currency,” he said. “We pledge allegiance to one flag, and that flag is the American flag.”

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It’ll fail. You can’t ‘make’ growth.

Trump Will End Growth-Zapping Fiscal Austerity – McCulley (CNBC)

Economist Paul McCulley told CNBC on Thursday he’s had a “big ax to grind” with Washington for years over the need for more deficit spending, and it appears Republican Donald Trump may actually be the one to deliver. The stock market rally since Trump won the presidential election has been reflecting that notion, argued McCulley, who said he voted for Democrat Hillary Clinton. “The market is essentially celebrating the end of fiscal austerity. And it just happens to be a vehicle of Mr. Trump. But the end of fiscal austerity is the key economic issue.” “My big ax to grind in recent years — not months but years — is that we needed to have more fiscal policy expansion, because we’re in a liquidity trap,” said McCulley, former chief economist at Pimco. He said too much responsibility has fallen on the Federal Reserve for growing the economy.

“We needed some help with larger budget deficits.” “I’ve never had an issue with increasing the size of the budget deficit. I think it’s been too small. I have zero problem with increased public investment and funding it with deficits,” he said. “To the extent that Mr. Trump wants to do that, I think that is the right Keynesian policy.” McCulley was referring to the British economist John Maynard Keynes, who is often credited with the concept of deficit spending as a means of fiscal policy. “My biggest complaints for the person I voted for, Mrs. Clinton, is that she said, ‘I will not add a penny to the national debt.’ That was basically putting you in a straightjacket of fiscal austerity forever,” said McCulley, senior fellow in financial macroeconomics at Cornell Law School.

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Mundell: “..nations can’t sustain a fixed exchange rate, independent monetary policy, and open capital borders all at the same time..”

China’s Central Bank Is Facing a Major New Headache (BBG)

People’s Bank of China Governor Zhou Xiaochuan already has one policy headache with the currency falling to near an eight-year low. He could have an even bigger one next month. That’s when a $50,000 cap on how much foreign currency individuals are allowed to convert each year resets, potentially aggravating capital outflow pressures that are already on the rise. If just 1% of China’s almost 1.4 billion people max out those limits, that’s an outflow of about $700 billion – more than the estimated $620 billion that Bloomberg Intelligence estimates indicate has already flowed out in the first 10 months of this year. Middle class and wealthy Chinese have been converting money into other currencies to protect themselves from devaluation, exacerbating downward pressure on the yuan.

Outflows could intensify if Federal Reserve interest-rate hikes fuel further dollar appreciation. That leaves Zhou in a bind identified by Nobel-prize winning economist Robert Mundell as the “impossible trinity” – a principle that dictates nations can’t sustain a fixed exchange rate, independent monetary policy, and open capital borders all at the same time. “At a moment like this, you have to compare two evils and pick the less-worse one,” said George Wu, who worked as a PBOC monetary policy official for 12 years. “Capital free flow may have to be abandoned in order to maintain a relatively stable currency rate.” China is moving further away from balance among trinity variables, at least temporarily, and “it may take a while before the situation stabilizes” for the yuan and capital outflows, said Wu, who’s now chief economist at Huarong Securities in Beijing.

[..] rather than raise borrowing costs to try to make domestic returns more attractive – China has added new restrictions on the flow of money across its borders. They include a pause on some foreign acquisitions and bigger administrative hurdles to taking yuan overseas, people familiar with the steps have told Bloomberg News. China should cut intervention in foreign exchange markets while stepping up capital control, Yu Yongding, a former academic member of the PBOC’s monetary policy committee, said Friday at a conference in Beijing. Yuan internationalization shouldn’t be promoted too aggressively, said Yu, a senior research fellow at the Chinese Academy of Social Sciences.

About $1.5 trillion has exited the country since the beginning of 2015. While China still has the world’s largest foreign exchange stockpile, the hoard shrank in October to a five-year low of $3.12 trillion, PBOC data show. That means there’s less in the armory to battle depreciation if China’s famously frugal savers park more cash abroad. The outflow pressure rose in January as individuals socked away a record amount in domestic bank accounts denominated in other currencies. Household foreign deposits surged 8.1% to $97.4 billion, according to the central bank, for the biggest jump since it began tracking the data in 2011. Those holdings stood at $113.1 billion in October.

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The correct way to write this is: “Assets”.

Rural China Banks With $4 Trillion Assets Face Debt Test (BBG)

Bond investors are weighing rising risks that smaller Chinese banks will fail against growing signs the government will do anything to avoid a financial meltdown. A lender called Guiyang Rural Commercial Bank in the southwestern province of Guizhou sparked concern that risks among smaller lenders are spreading after its rating outlook was cut last month following a jump in overdue loans to 30% of the total. That compares with just 3% at the nation’s biggest lender. Short-term borrowing costs surged for the riskiest lenders including rural commercial banks, which hold 29 trillion yuan ($4.2 trillion) of assets, 13.4% of the total amount in China’s banking system.

Yet confidence in the government’s readiness to step in and offer support to struggling borrowers is rising as authorities allow a credit-fueled recovery of manufacturing activity, helping an official factory gauge match a post-2012 high last month. While 17 onshore public bonds defaulted in the first half of the year, there have since been only seven. The combination of government support and desperation for yield helps explain why Guiyang Rural was able to sell a junior bond at 4.7% last month, 1.7 %age points less than a similar offering last year. “Investors have yet to suffer losses from any bank capital securities, which adds to their confidence,” said He Xuanlai at Commerzbank.

“Smaller banks have a less diversified business profile and will likely get less support from the central government compared with bigger banks. Still, the base case is the government is still not ready to let any bank fail in a disorderly way.” That assumption has helped cut the extra yield investors demand to hold AA- rated five-year bank subordinated notes over AAA rated peers to a record low of 81 basis points, from 113 at the start of the year. There are some positive fundamentals. Rural banks are tied with the big five state-owned banks for the best Tier 1 capital ratio at 12%, according to an analysis by Natixis.

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And Germany says what?

Obama Set To Block Chinese Takeover Of German Semiconductor Supplier (BBG)

U.S. President Barack Obama is poised to block a Chinese company from buying Germany’s Aixtron, people familiar with the matter said, which would mark only the third time in more than a quarter century that the White House has rejected an investment by an overseas buyer as a national security risk. The president is expected Friday to uphold a recommendation by the Committee on Foreign Investment in the U.S. that the sale of the semiconductor-equipment supplier to China’s Grand Chip Investment should be stopped, according to the people, who asked not to be identified as the details aren’t public. Blocking the €670 million ($714 million) acquisition would mark the second time Obama has rejected a deal on national security grounds. The first was in 2012 when he stopped Chinese-owned Ralls Corp. from developing a wind farm near a Navy base in Oregon.

Before that, in 1990 then-president George H.W. Bush stopped a Chinese acquisition of MAMCO, an aircraft-parts maker. CFIUS reviews purchases of U.S. companies by foreign buyers and pays particular attention to purchases of technology, especially when it has defense applications. It has a say in the Aixtron deal because the company has a subsidiary in California and employs about 100 people in the U.S., where it generates about 20% of its sales. Aixtron technology can be used to produce light-emitting diodes, lasers, transistors, solar cells, among other products, and can have military applications in satellite communications and radar. Northrop Grumman, a major U.S. defense contractor, is among its customers, according to a Bloomberg supply chain analysis. “It will be extremely difficult for China’s state owned enterprises to do deals in the semiconductor industry looking forward,” said He Weiwen at the Center for China and Globalization.

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A No vote is also a vote against the ECB.

QE Infinity Eyed In Europe If Renzi Loses Crucial Italian Referendum (CNBC)

Dovish words from the ECB this week have fueled speculation of more accommodative monetary policy if Italians reject constitutional reforms this weekend, but one economist has told CNBC that it might not be that simple. “The market believes that we are basically in for QE infinity in Europe and that might be a stretch of the imagination,” said Elga Bartsch, Morgan Stanley’s global co-head of economics. While the Morgan Stanley economist acknowledged the rhetoric emanating from ECB President Mario Draghi this week arguably did imply there could be a so-called “Draghi put” in the case of a “no” vote in the referendum, she also posited that this view was somewhat simplistic.

“There was strong communication from him (Draghi) and a number of executive board members at the ECB, but at the same time, the views of the broader council and among the national central bank governors seem to be a little bit more mixed,” she explained. “For instance, the debate as to whether instead of extending by six months at €80 billion, just to do nine months of €60 billion doesn’t really want to go away,” Bartsch noted.

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“December 4 referendum fails >> M5S comes to power >> Italians vote to leave the euro currency >> European Union collapses.”

December 4 Could Trigger the “Most Violent Economic Shock in History” (IM)

The Five Star Movement (M5S) is Italy’s new populist political party. It’s anti-globalist, anti-euro, and vehemently anti-establishment. It doesn’t neatly fall into the left–right political paradigm. M5S has become the most popular political party in Italy. It blames the country’s chronic lack of growth on the euro currency. A large plurality of Italians agrees. M5S has promised to hold a vote to leave the euro and reinstate Italy’s old currency, the lira, as soon as it’s in power. That could be very soon. Given the chance, Italians probably would vote to return to the lira. If that happens, it would awaken a monetary volcano. The Financial Times recently put it this way: “An Italian exit from the single currency would trigger the total collapse of the eurozone within a very short period. It would probably lead to the most violent economic shock in history, dwarfing the Lehman Brothers bankruptcy in 2008 and the 1929 Wall Street crash.”

If the FT is even partially right, it means a stock market crash of historic proportions could be imminent. It could devastate anyone with a brokerage account. Here’s how it could all happen… On December 4, Italian Prime Minister Matteo Renzi’s current pro-EU government is holding a referendum on changing Italy’s constitution. In effect, a “Yes” vote is a vote of approval for Renzi’s government. A “No” vote is a chance for the average Italian to give the finger to EU bureaucrats in Brussels. Given the intense anger Italians feel right now, it’s very likely they’ll do just that. According to the latest polls, the “No” camp has 54% support and all of the momentum. Even prominent members of Renzi’s own party are defecting to the “No” side.

If the December 4 referendum fails, Renzi has promised to resign. Even if he doesn’t, the loss would politically castrate him. In all likelihood his government would collapse. (Italian governments have a short shelf life. There have been 63 since 1945. That’s almost a rate of a new government each year.) One way or another, M5S will come to power. It’s just a matter of when. If Renzi’s December 4 referendum fails—and it looks like it will—M5S will likely take over within months. Once it’s in power, M5S will hold a referendum on leaving the euro and returning to the lira. Italians will likely vote to leave. [..] December 4 referendum fails >> M5S comes to power >> Italians vote to leave the euro currency >> European Union collapses.

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Don’t be fooled: it’s all Putin, the one non-OPEC voice. And he’s playing the rest like so many fiddles.

How Putin, Khamenei And Saudi Prince Got OPEC Deal Done (R.)

[..] Heading into the meeting, the signs were not good. Oil markets went into reverse. Saudi Prince Mohammed had repeatedly demanded Iran participate in supply cuts. Saudi and Iranian OPEC negotiators had argued in circles in the run-up to the meeting. And, then, just a few days beforehand, Riyadh appeared back away from a deal, threatening to boost production if Iran failed to contribute cuts. But Putin established that the Saudis would shoulder the lion’s share of cuts, as long as Riyadh wasn’t seen to be making too large a concession to Iran. A deal was possible if Iran didn’t celebrate victory over the Saudis. A phone call between Putin and Iranian President Rouhani smoothed the way.

After the call, Rouhani and oil minister Bijan Zanganeh went to their supreme leader for approval, a source close to the Ayatollah said. “During the meeting, the leader Khamenei underlined the importance of sticking to Iran’s red line, which was not yielding to political pressures and not to accept any cut in Vienna,” the source said. “Zanganeh thoroughly explained his strategy … and got the leader’s approval. Also it was agreed that political lobbying was important, especially with Mr. Putin, and again the Leader approved it,” said the source. On Wednesday, the Saudis agreed to cut production heavily, taking “a big hit” in the words of energy minister Khalid al-Falih – while Iran was allowed to slightly boost output. Iran’s Zanganeh kept a low profile during the meeting, OPEC delegates said.

Zanganeh had already agreed the deal the night before, with Algeria helping mediate, and he was careful not to make a fuss about it. After the meeting, the usually combative Zanganeh avoided any comment that might be read as claiming victory over Riyadh. “We were firm,” he told state television. “The call between Rouhani and Putin played a major role … After the call, Russia backed the cut.”

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As you can see here, Putin even prepared for the cuts: all Russia needs to cut is that 2016 production surge. Which may have been untenable to begin with. And it catches out those who haven’t created a surge, but will have to cut anyway.

Russian Oil Output Near Post-Soviet Record as It Prepares to Cut (BBG)

Russia, the world’s largest energy exporter, held November output near a post-Soviet record , which is likely to remain a high-water mark in the near term after a pledge to cut production. Russian crude and condensate production averaged 11.21 million barrels a day in November, compared with a record 11.23 million barrels a day in October, according to the Energy Ministry’s CDU-TEK statistics unit. Russia promised to support a push by OPEC to reduce a global oil oversupply after the group agreed to cut production by 1.2 million barrels a day on Wednesday.

Energy Minister Alexander Novak pledged Russia would cut its own output by as much as 300,000 barrels a day, a stronger move than the previously preferred position of a freeze. Russia will make a gradual reduction over the first half of the year starting in January, Novak said Thursday. The reduction, supported by Russian oil producers, would be spread proportionally among companies, he said without providing further detail. Gazprom Neft and Novatek led Russian output growth in November compared with a year earlier, although both companies posted lower oil production than October, according to the data.

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“I bought a one-way ticket [..] Hopefully we can shut this down before Christmas.”

US Veterans Arrive At Pipeline Protest Camp In North Dakota (R.)

U.S. military veterans were arriving on Thursday at a camp to join thousands of activists braving snow and freezing temperatures to protest a pipeline project near a Native American reservation in North Dakota. However, other veterans in the state took exception to the efforts of the group organizing veterans to act as human shields for the protesters, saying the nature of the protests reflected poorly on the participants. Protesters have spent months rallying against plans to route the $3.8 billion Dakota Access Pipeline beneath a lake near the Standing Rock Sioux reservation, saying it poses a threat to water resources and sacred Native American sites.

State officials on Monday ordered activists to vacate the Oceti Sakowin camp, located on U.S. Army Corps of Engineers land near Cannon Ball, North Dakota, citing harsh weather conditions. Officials said on Wednesday however that they will not actively enforce the order. Matthew Crane, a 32-year-old Navy veteran who arrived three days ago, said the veterans joining the protest were “standing on the shoulders of Martin Luther King Jr and Gandhi” with the their plans to shield protesters. “I bought a one-way ticket,” he told Reuters as he worked to build a wooden shelter at the main camp. “Hopefully we can shut this down before Christmas.”

[..]Veterans Stand for Standing Rock, a contingent of more than 2,000 U.S. military veterans, intends to reach North Dakota by this weekend and form a human wall in front of police, protest organizers said on a Facebook page. The commissioner of the state’s Department of Veterans Affairs, who appeared at the West Fargo event, said he was worried about the involvement of individuals who have been in war situations. “We’re going to have veterans that we don’t know anything about coming to the state, war time veterans possibly with PTSD and other issues,” Lonnie Wangen told Reuters. “They’re going to be standing on the other side of concertina fence looking at our law enforcement and our (National) Guard, many of whom have served in war zones also,” he added. “We don’t want to see veterans facing down veterans.”

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“Thirty years ago there were 50,000 rivers in China; today there are less than 23,000.”

Joy As China Shelves Plans To Dam ‘Angry River’ (G.)

Environmentalists in China are celebrating after controversial plans to build a series of giant hydroelectric dams on the country’s last free-flowing river were shelved. Activists have spent more than a decade campaigning to protect the Nujiang, or “angry river”, from a cascade of dams, fearing they would displace tens of thousands of people and irreparably damage one of China’s most spectacular and bio-diverse regions. Since the start of this year, hopes had been building that Beijing would finally abandon plans to dam the 1,750-mile waterway, which snakes down from the Tibetan plateau through some of China’s most breathtaking scenery before entering Myanmar, Thailand and eventually flowing into the Andaman Sea.

On Friday, campaigners said that appears to have happened after China’s State Energy Administration published a policy roadmap for the next five years that contained no mention of building any hydroelectric dams on the Nu. “I am absolutely thrilled,” said Wang Yongchen, a Chinese conservationist and one of the most vocal opponents of the plans, which first surfaced in 2003. Wang, who has made 17 trips to the Nu region as part of her crusade to protect the river, said geologists, ecologists, sociologists and members of the public who had been part of the campaign could all take credit for halting the dams. “I think this is a triumph for Chinese civil society,” the Beijing-based activist said. Stephanie Jensen-Cormier, the China programme director for International Rivers, said environmentalists were “very happy and very excited” at what was a rare piece of good news for China’s notoriously stressed waterways.

“The state of rivers in China is so dismal. Thirty years ago there were 50,000 rivers in China; today there are less than 23,000. Rivers have completely disappeared. They have become polluted, they have become overused for agriculture and manufacturing,” she said. “So it is so exciting when a major river – which is a major river for Asia – is protected, at least where it flows in China.” Jensen-Cormier said the shelving of plans to dam the Nu – which is known as the Salween in Thailand and the Thanlwin in parts of Myanmar – represented “a great turning point for the efforts to preserve China’s rivers”. “It is a really good indication that China is starting to look at other ways of developing energy, and renewable energies especially, that mean they don’t have to sacrifice their remaining healthy river.”

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I don’t know, I think perhaps many people are born followers: “People are not born to be job seekers – they are entrepreneurs by nature..”

World’s Growing Inequality Is ‘Ticking Time Bomb’: Nobel Laureate Yunus (R.)

The widening gap between rich and poor around the world is a “ticking time bomb” threatening to explode into social and economic unrest if left unchecked, Nobel Peace laureate Muhammad Yunus said on Thursday. The banking and financial system has created a world of “the more money you have, the more I give you” while depriving the majority of the world’s population of wealth and an adequate standard of living, Yunus told the Thomson Reuters Foundation. “Wealth has become concentrated in just a few places in the world … It’s a ticking time bomb and a great danger to the world,” said the founder of the microfinance movement that provides small loans to people unable to access mainstream finance.

Yunus cited Donald Trump’s victory in the U.S. presidential election on Nov. 8 and Britain’s vote to leave the EU on June 23 as expressions of popular anger with ruling elites who have failed to stem the widening global wealth gap. A 2016 report by charity Oxfam showed that the wealth of the world’s richest 62 people has risen by 44% since 2010, with almost half of the super-rich living in the United States, while the wealth of the poorest 3.5 billion fell 41%. “This creates tension among people at the bottom (of the income ladder). They blame refugees and minorities – and unscrupulous politicians exploit this,” said Yunus [..]

To break free from an unequal financial system that disadvantages the poor, people should use their creative energy to become entrepreneurs themselves and spread wealth among a broader base of citizens, said Yunus. “People are not born to be job seekers – they are entrepreneurs by nature,” he said, adding that businesses that are focused more on doing social good than generating maximum profit can help to rectify economic and gender inequality. “If wealth comes to billions of people, this wealth will not come to the top one percent (of rich people), and it will not be easy to concentrate all the wealth in a few hands,” he said.

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It’s a little painful to see Hawking lose himself in a field of logic that is not his. He claims we should go to Mars, but then he says earth is our only planet. Isn’t it true that the time and energy dispensed in efforts to get to Mars might be better used in saving earth? Or are we going to claim we can do both?

This Is The Most Dangerous Time For Our Planet (Stephen Hawking)

As a theoretical physicist based in Cambridge, I have lived my life in an extraordinarily privileged bubble. Cambridge is an unusual town, centred around one of the world’s great universities. Within that town, the scientific community that I became part of in my 20s is even more rarefied. And within that scientific community, the small group of international theoretical physicists with whom I have spent my working life might sometimes be tempted to regard themselves as the pinnacle. In addition to this, with the celebrity that has come with my books, and the isolation imposed by my illness, I feel as though my ivory tower is getting taller. So the recent apparent rejection of the elites in both America and Britain is surely aimed at me, as much as anyone.

Whatever we might think about the decision by the British electorate to reject membership of the EU and by the American public to embrace Donald Trump as their next president, there is no doubt in the minds of commentators that this was a cry of anger by people who felt they had been abandoned by their leaders. It was, everyone seems to agree, the moment when the forgotten spoke, finding their voices to reject the advice and guidance of experts and the elite everywhere. I am no exception to this rule. I warned before the Brexit vote that it would damage scientific research in Britain, that a vote to leave would be a step backward, and the electorate – or at least a sufficiently significant proportion of it – took no more notice of me than any of the other political leaders, trade unionists, artists, scientists, businessmen and celebrities who all gave the same unheeded advice to the rest of the country. What matters now, far more than the choices made by these two electorates, is how the elites react.

Should we, in turn, reject these votes as outpourings of crude populism that fail to take account of the facts, and attempt to circumvent or circumscribe the choices that they represent? I would argue that this would be a terrible mistake. The concerns underlying these votes about the economic consequences of globalisation and accelerating technological change are absolutely understandable. The automation of factories has already decimated jobs in traditional manufacturing, and the rise of artificial intelligence is likely to extend this job destruction deep into the middle classes, with only the most caring, creative or supervisory roles remaining. This in turn will accelerate the already widening economic inequality around the world. The internet and the platforms that it makes possible allow very small groups of individuals to make enormous profits while employing very few people. This is inevitable, it is progress, but it is also socially destructive.

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Oct 252016
 
 October 25, 2016  Posted by at 9:26 am Finance Tagged with: , , , , , , , , , ,  Comments Off on Debt Rattle October 25 2016
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NPC Grief monument, Rock Creek cemetery, Washington DC 1915

The Eurozone Is Turning Into A Poverty Machine (Tel.)
Barclays Warns ‘Politics of Rage’ Will Slow Global Growth (BBG)
China Capital Outflows Highest Since Data Publishing Began In 2010 (BBG)
Credit Card Lending To US Subprime Borrowers Is Starting To Backfire (WSJ)
Bank of England Optimism Evaporates in Long-Term Debt (BBG)
The Deficit Is Too Small, Not Too Big (McCulley)
Welcome to the George Orwell Theme Park of Democracy (Jim Kunstler)
How Democrats Killed Their Populist Soul (Matt Stoller)
Hillary Clinton Is The Republican Party’s Last, Best Hope (Heat St.)
Clinton Ally Aided Campaign of FBI Official’s Wife (WSJ)
M5S Blasts Italian Constitutional Reform Proposed By PM Renzi (Amsa)
100 Million Canadians By 2100? Key Advisers Back Ambitious Goal (CP)
A 1912 News Article Ominously Forecasted Climate Change (Q.)
Refugee Camp On Lesbos Damaged In Riots As Rumors Fly (Kath.)
Ex-US Ambassador To Ukraine Geoffrey Pyatt Now Ambassador To Greece (Kath.)

 

 

Why does this truth have to come from the right wing press?

The Eurozone Is Turning Into A Poverty Machine (Tel.)

There are constant bank runs. The bond markets panic, and governments along its southern perimeter need bail-outs every few years. Unemployment has sky-rocketed and growth remains sluggish, no matter how many hundreds of billions of printed money the ECB throws at the economy. We are all tediously aware of how the euro-zone has been a financial disaster. But it is now starting to become clear that it is a social disaster as well. What often gets lost in the discussion of growth rates, bail-outs and banking harmonisation is that the eurozone is turning into a poverty machine. As its economy stagnates, millions of people are falling into genuine hardship. Whether it is measured on a relative or absolute basis, rates of poverty have soared across Europe, with the worst results found in the area covered by the single currency.

There could not be a more shocking indictment of the currency’s failure, or a more potent reminder that living standards will only improve once the euro is either radically reformed or taken apart. Eurostat, the statistical agency of the European Union, has published its latest findings on the numbers of people “at risk of poverty or social exclusion”, comparing 2008 and 2015. Across the 28 members, five countries saw really significant rises compared with the year of the financial crash. In Greece, 35.7pc of people now fall into that category, compared with 28.1pc back in 2008, a rise of 7.6 percentage points. Cyprus was up by 5.6 points, with 28.7pc of people now categorised as poor. Spain was up 4.8 points, Italy up 3.2 points and even Luxembourg, hardly known for being at risk of deprivation, up three points at 18.5pc.

It was not so bleak everywhere. In Poland, the poverty rate went down from 30.5pc to over 23pc. In Romania, Bulgaria, and Latvia, there were large falls compared to the 2008 figures – in Romania for example the percentage was down by seven points to 37pc. What was the difference between the countries where poverty went up dramatically, and those where it went down? You guessed it. The largest increases were all countries within the single currency. But the decreases were all in countries outside it. It gets worse. “At risk of poverty” is defined as living on less than 60pc of the national median income. But that median income has itself fallen over the last seven years, because most countries inside the eurozone have yet to recover from the crash. In Greece, the median income has dropped from €10,800 a year to €7,500 now.

[..] Why should Greece and Spain be doing so much worse than anywhere in Eastern Europe? Or why Italy should be doing so much worse than Britain, when the two countries were at broadly similar levels of wealth in the Nineties? (Indeed, the Italians actually overtook us for a while in GDP per capita.) Even a traditionally very successful economy such as the Netherlands, which has not been caught up in any kind of financial crisis, has seen big increases in both relative and absolute poverty. In fact, it is not very hard to work out what has happened. First, a dysfunctional currency system has choked off economic growth, driving unemployment up to previously unbelievable levels. After countries went bankrupt and had to be bailed out, the EU, along with the ECB and the IMF, imposed austerity packages that slashed welfare systems and cut pensions. It is not surprising poverty is increasing under those conditions.

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If you ask me, they’ve got it the wrong way around. If growth hadn’t slowed down, there’d be much less rage.

Barclays Warns ‘Politics of Rage’ Will Slow Global Growth (BBG)

Brexit, rising populism across Europe, the ascent of Donald Trump in America, and the backlash against income inequality everywhere. A slew of political and economic forces have nurtured a growing narrative that globalization is now on life support—a potential game-changer for global financial markets, which have staged a rapid expansion since the end of the Cold War thanks to unfettered cross-border flows. No more: Trade volumes have stalled while the “politics of rage” has taken root in advanced economies, driven by a collapse in the perceived legitimacy of political and economic institutions, a new report from Barclays warns.

The result, the bank says, is an oncoming protectionist lurch—restrictions on the free movement of goods, services, labor, and capital—combined with an erosion of support for supranational bodies, from the EU to the WTO. “Even mild de-globalization likely will slow the pace of trend global growth,” Marvin Barth, head of European FX strategy at Barclays, writes in the report. “A sense of economic and political disenfranchisement due to imperfect representation in national governments and delegation of sovereignty to supranational and intergovernmental organisations” has generated the backlash, he said. He cites as a major factor the collapse in support for centrist parties in advanced economies and adds that the role of income inequality may be overstated.

The report echoes Harvard University economist Dani Rodrik’s earlier contention that democracy, sovereignty, and globalization represent a “trilemma.” Expansion of cross-border trade links—and the attendant increase in the power of supranational authorities to adjudicate economic matters—is a direct threat to representative democracy, and vice-versa. The veto Monday of the EU’s free trade deal with Canada by the Belgian region of Wallonia—whose leader said the deadline to secure backing for the deal was “not compatible with the exercise of democratic rights”—is a sharp illustration of this trilemma.

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Breaking the dollar peg is a dangerous game, given the amount of debt denominated in USD. It can get expensive quite fast.

China Capital Outflows Highest Since Data Publishing Began In 2010 (BBG)

The offshore yuan traded near a record low as Chinese policy makers signaled they are willing to allow greater currency flexibility amid a slump in exports and an advance in the dollar. The exchange rate was at 6.7836 a dollar as of 1:01 p.m. in Hong Kong, after dropping to 6.7885, the weakest intraday level in data going back to 2010. In Shanghai, the currency was little changed at 6.7760, close to a six-year low and past the 6.75 year-end median forecast in a Bloomberg survey. The Chinese currency has come under increased pressure on signs that investors are taking more money out of the country. A gauge of the dollar rose to a seven-month high versus major currencies Monday as traders bet that the Federal Reserve may raise borrowing costs soon.

Unlike the yuan selloff earlier this year which sparked a global market rout, there’s no sense of panic yet as policy makers maintain a steady exchange rate against other currencies. “The central bank is tolerating more orderly depreciation of the yuan,” said Gao Qi, a Singapore-based foreign-exchange strategist at Scotiabank. “But it will step in to avoid market panic arising from a sharp yuan depreciation. The 6.8 level is critical in the near term.” [..] The onshore yuan has weakened 4.2% this year, the most in Asia. It has declined in all but two sessions this month as some analysts speculated that the central bank has reduced support following the yuan’s inclusion in the IMF’s basket of reserves on Oct. 1.

A net $44.7 billion worth of payments in the Chinese currency left the nation last month, according to data released by the State Administration of Foreign Exchange. That’s the most since the government started publishing the figures in 2010. [..] Chinese policy makers have downplayed the importance of the yuan-dollar exchange rate, saying they aim to keep the yuan steady against a broad basket of currencies. A Bloomberg gauge mimicking China Foreign Exchange Trade System’s yuan index against 13 major currencies has been little changed around 94 since August after falling more than 6 percent in the previous eight months.

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Imagine my surprise.

Credit Card Lending To US Subprime Borrowers Is Starting To Backfire (WSJ)

Credit-card lending to subprime borrowers is starting to backfire. Missed payments on credit cards that lenders issued recently are higher than on older cards, according to new data from credit bureau TransUnion. Nearly 3% of outstanding balances on credit cards issued in 2015 were at least 90 days behind on payments six months after they were originated. That compares with 2.2% for cards that were given out in 2014 and 1.5% for cards in 2013. The poorer performance on newer cards pushed up the 90-day or more delinquency rate for all credit cards to 1.53% on average nationwide in the third quarter. That’s the highest level since 2012.

The recent increase in subprime lending is one of the big contributors. Lenders ramped up subprime card lending in 2014 and have been doling out more of these cards recently. They issued just over 20 million credit cards to subprime borrowers in 2015, up some 20% from 2014 and up 56% from 2013, according to Equifax. Separately, missed payments in states with large oil or energy sectors continue to worsen. The share of card balances that were at least 90 days past due increased 12% in Oklahoma, 10% in Texas and 20% in Wyoming in the third quarter from a year prior, according to TransUnion.

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Really? They thought Carney could save the day?

Bank of England Optimism Evaporates in Long-Term Debt (BBG)

Long-term sterling bonds suggest investors are quickly losing confidence in the Bank of England’s ability to support debt markets through the U.K.’s departure from the EU. Holders have lost about 10% in as little as seven weeks on long-dated notes issued by Vodafone, British American Tobacco and WPP. The bond sales took place after the central bank announced plans in August to buy corporate debt, sparking investor optimism. The mood has since soured because of concerns about a so-called hard Brexit, sterling’s tumble and the outlook for inflation. “With the benefit of hindsight, August was the best time to issue,” said Srikanth Sankaran, head of European Credit and ABS strategy at Morgan Stanley. “The market was more focused on the Bank of England’s support rather than the longer-term Brexit risk.”

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McCulley used to be something big at PIMCO. He’s right, but it’s doubtful a change of course would be sufficient at this point. Austerity has killed a lot.

The Deficit Is Too Small, Not Too Big (McCulley)

[..] while Clinton gets my vote, her insistence at the final debate that her proposed fiscal program will not “add a penny” to the national debt is fouling my wonk serenity this morning. Every penny of new expenditure, she says, will be “paid for” with a new penny of tax revenue. Her deficit-neutral fiscal proposal is, I readily acknowledge, better than the status quo, as her proposed new spending would add 100 cents on the dollar to the nation’s aggregate demand, while her proposed tax increases would not subtract 100 cents on the dollar. Why? Because she proposes getting the new tax revenue from those with a low marginal propensity to spend, or alternatively, a high marginal propensity to save. To wit, from the not poor, including yes, the rich.

Thus, in simple Keynesian terms, there is some solace in her deficit-neutral fiscal package: It would be net stimulative to the economy, because it would – in technical terms – drive down the private sector’s savings rate. In less technical terms, it would take money from people who don’t live paycheck to paycheck, who would still spend the same, but just have less left over to save. And I have no problem with that. What sends me around the bend is the notion that the only way to boost aggregate demand is to drive down the private-sector savings rate, in the context of holding constant the public sector’s savings rate. But, you retort: The public sector, notably at the federal level, has a negative savings rate; it runs a deficit! Are you nuts?

No, I am not. Unless faced with an incipient inflation threat, born of an overheated economy, there is no reason whatsoever that the public sector should ever have a positive savings rate. What it should have is a positive, a bigly positive, investment rate. And in fact, a higher public investment rate and a lower public savings rate are exactly what our economy presently needs. Yes, a larger fiscal deficit. [..] investment drives aggregate demand, which begets aggregate production and thus, aggregate income, the fountain from which savings flow. Thus, if and when there is insufficient aggregate demand to foster full employment at a just income distribution, the underlying problem is a deficiency of investment, not savings. More investment is the solution, and investment is constrained not by a shortage of savings, but literally a deficiency of investment itself.

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“..the demonization of Russia – a way more idiotic exercise than the McCarthyite Cold War hysteria..”

Welcome to the George Orwell Theme Park of Democracy (Jim Kunstler)

If Trump loses, I will essay to guess that his followers’ next step will be some kind of violence. For the moment, pathetic as it is, Trump was their last best hope. I’m more comfortable about Hillary — though I won’t vote for her — because it will be salutary for the ruling establishment to unravel with her in charge of it. That way, the right people will be blamed for the mismanagement of our national affairs. This gang of elites needs to be circulated out of power the hard way, under the burden of their own obvious perfidy, with no one else to point their fingers at. Her election will sharpen awareness of the criminal conduct in our financial practices and the neglect of regulation that marked the eight years of Obama’s appointees at the Department of Justice and the SEC.

The “tell” in these late stages of the campaign has been the demonization of Russia – a way more idiotic exercise than the McCarthyite Cold War hysteria of the early 1950s, since there is no longer any ideological conflict between us and all the evidence indicates that the current state of bad relations is America’s fault, in particular our sponsorship of the state failure in Ukraine and our avid deployment of NATO forces in war games on Russia’s border. Hillary has had the full force of the foreign affairs establishment behind her in this war-drum-banging effort, yet they have not been able to produce any evidence, for instance, in their claim that Russia is behind the Wikileaks hack of Hillary’s email.

[..] The media has been on-board with all this. The New York Times especially has acted as the hired amplifier for the establishment lies – such a difference from the same newspaper’s role in the Vietnam War ruckus of yesteryear. Today (Monday) they ran an astounding editorial “explaining” the tactical necessity of Hillary’s dishonesty: “In politics, hypocrisy and doublespeak are tools,” The Times editorial board wrote. Oh, well, that’s reassuring. Welcome to the George Orwell Theme Park of Democracy.

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Absolute must read by Stoller, American history you didn’t know.

How Democrats Killed Their Populist Soul (Matt Stoller)

While not a household name today, Wright Patman was a legend in his time. His congressional career spanned 46 years, from 1929 to 1976. In that near-half-century of service, Patman would wage constant war against monopoly power. As a young man, at the height of the Depression, he challenged Herbert Hoover’s refusal to grant impoverished veterans’ accelerated war pensions. He successfully drove the immensely wealthy Treasury Secretary Andrew Mellon from office over the issue. Patman’s legislation to help veterans recoup their bonuses, the Bonus Bill—and the fight with Mellon over it—prompted a massive protest by World War I veterans in Washington, D.C., known as “the Bonus Army,” which helped shape the politics of the Depression.

In 1936, he authored the Robinson-Patman Act, a pricing and antitrust law that prohibited price discrimination and manipulation, and that finally constrained the A&P chain store—the Walmart of its day—from gobbling up the retail industry. He would go on to write the Bank Secrecy Act, which stops money-laundering; defend Glass-Steagall, which separates banks from securities dealers; write the Employment Act of 1946, which created the Council of Economic Advisors; and initiate the first investigation into the Nixon administration over Watergate.

Far from the longwinded octogenarian the Watergate Babies saw, Patman’s career reads as downright passionate, often marked by a vitality you might see today in an Elizabeth Warren—as when, for example, he asked Fed Chairman Arthur Burns, “Can you give me any reason why you should not be in the penitentiary?” Despite his lack of education, Patman had a savvy political and legal mind. In the late 1930s, the Federal Reserve Board refused to admit it was a government institution. So Patman convinced the District of Columbia’s government to threaten foreclosure of all Federal Reserve Board property; the Board quickly produced evidence that it was indeed part of the federal government.

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Kind of like a second chapter to Stoller’s piece above.

Hillary Clinton Is The Republican Party’s Last, Best Hope (Heat St.)

While Trump has pushed a populist, anti-free trade message, Hillary champions the large multinational corporations that create jobs for everyday Americans. As secretary of state, she worked tirelessly to advance the Trans-Pacific Partnership, the “gold standard” of trade agreements. As a candidate, she expertly silenced the gullible radicals supporting Bernie Sanders by pretending she won’t sign TPP into law as president. (She will.) Hillary’s disdain for left-wing agitators does not end there. She has also gone to bat for the heroes in America’s fracking industry, telling environmentalists to “get a life” in emails uncovered by Wikileaks. [..]

One of the greatest sources of frustration for Republicans during the Obama presidency has been his weak-sauce, isolationist foreign policy. In the absence of strong American leadership, the world has plunged into chaos. Trump shares Obama’s ideology of avoiding foreign entanglements, even going so far as to question the need for NATO as Putin runs amok unchecked. It is precisely at this moment that America needs the hawkish leadership of Hillary Clinton to defend American exceptionalism and reassert our hegemony on the world stage. Among her fellow neoconservative war hawks, Hillary is admired for her sterling record on foreign policy — from supporting the invasion of Iraq in 2002 to her valiant efforts as secretary of state to persuade Obama to stop being such a pushover on the world stage.

During the Arab Spring in 2011, Hillary impressed upon Obama the need for a U.S.-led “coalition of the willing” to help mold the future of the Middle East in the name of freedom. Muammar Gaddafi wound up dead in a ditch. Later, when the president sought input on Syria, Hillary recommended force and arming rebel groups. Obama’s failure to follow her advice led to the current migrant crisis and ongoing tragedy in Syria. Bashar al-Assad is still alive and well. Imagine our enemies cowering in the shade as President Hillary’s massive drone armada blocks out the sun en route to visit death upon the enemies of freedom. Slay Queen, indeed. Voters looking for a reliable pro-business, conservative hawk to undo eight years of Obama’s feckless progressivism and combat the cancer of Trumpism need look no further than Hillary Rodham Clinton. She is the GOP’s last, best hope.

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Incredible. Just incredible.

Clinton Ally Aided Campaign of FBI Official’s Wife (WSJ)

The political organization of Virginia Gov. Terry McAuliffe, an influential Democrat with longstanding ties to Bill and Hillary Clinton, gave nearly $500,000 to the election campaign of the wife of an official at the FBI who later helped oversee the investigation into Mrs. Clinton’s email use. Campaign finance records show Mr. McAuliffe’s political-action committee donated $467,500 to the 2015 state Senate campaign of Dr. Jill McCabe, who is married to Andrew McCabe, now the deputy director of the FBI. The Virginia Democratic Party, over which Mr. McAuliffe exerts considerable control, donated an additional $207,788 worth of support to Dr. McCabe’s campaign in the form of mailers, according to the records.

That adds up to slightly more than $675,000 to her candidacy from entities either directly under Mr. McAuliffe’s control or strongly influenced by him. The figure represents more than a third of all the campaign funds Dr. McCabe raised in the effort. Mr. McAuliffe and other state party leaders recruited Dr. McCabe to run, according to party officials. She lost the election to incumbent Republican Dick Black. [..] Dr. McCabe announced her candidacy in March 2015, the same month it was revealed that Mrs. Clinton had used a private server as secretary of state to send and receive government emails, a disclosure that prompted the FBI investigation. At the time the investigation was launched in July 2015, Mr. McCabe was running the FBI’s Washington, D.C., field office, which provided personnel and resources to the Clinton email probe.

That investigation examined whether Mrs. Clinton’s use of private email may have compromised national security by transmitting classified information in an insecure system. [..] At the end of July 2015, Mr. McCabe was promoted to FBI headquarters and assumed the No. 3 position at the agency. In February 2016, he became FBI Director James Comey’s second-in-command. As deputy director, Mr. McCabe was part of the executive leadership team overseeing the Clinton email investigation, though FBI officials say any final decisions on that probe were made by Mr. Comey, who served as a high-ranking Justice Department official in the administration of George W. Bush.

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“Di Maio was also ironic about the endorsement of the reform received by Renzi from President Obama during a recent visit to Washington. “Let’s say it is not the first time Obama has intervened concerning a referendum in another country, he supported ‘Remain’ in England and ‘Brexit’ won. Now he is backing the Yes vote and so the No front should be reassured..”

M5S Blasts Italian Constitutional Reform Proposed By PM Renzi (Amsa)

The anti-establishment Five Star Movement (M5S) will vote No in the December 4 referendum on Constitutional reform because the law “deprives us of democratic rights”, party bigwig and Deputy House Speaker Luigi Di Maio said on Monday. “In our opinion, the title of the law does not in any way reflect its content, in the same way that the title of the Good School law does not in any way reflect the content of that reform,” Di Maio told radio broadcaster Rtl 102.5. The M5S recently lost a legal challenge against the question in the consultative referendum, which echoes the wording of the title of the constitutional law, arguing it amounts to a “deceptive” advertisement for the government’s position in favour of a Yes vote.

On December 4, Italians will be called to answer ‘yes’ or ‘no’ on a question that reads: “Do you approve a constitutional law that concerns the scrapping of the bicameral system (of parliament), reducing the number of MPs, limiting the operating costs of public institutions, abolishing the National Council on Economy and Labour (CNEL), and amending Title V of the Constitution, Part II?”. The reform approved by parliament in April would turn the Senate into a leaner body of indirectly elected regional and local representatives with limited lawmaking powers. Critics of the reform, including M5S and a left-wing faction within Premier Matteo Renzi’s own Democratic Party (PD), say it will actually make procedures more complicated.

Di Maio was also ironic about the endorsement of the reform received by Renzi from US President Barack Obama during a recent visit to Washington. “Let’s say it is not the first time Obama has intervened concerning a referendum in another country, he supported ‘Remain’ in England and ‘Brexit’ won. Now he is backing the Yes vote and so the No front should be reassured,” he said.

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There is a reason why Canada is sparsely populated. Let’s not tell them. Don’t spoil the fun.

100 Million Canadians By 2100? Key Advisers Back Ambitious Goal (CP)

Imagine Canada with a population of 100 million — roughly triple its current size. For two of the most prominent voices inside the Trudeau government’s influential council of economic advisers, it’s much more than a passing fancy. It’s a target. The 14-member council was assembled by Finance Minister Bill Morneau to provide “bold” advice on how best to guide Canada’s struggling economy out of its slow-growth rut. One of their first recommendations, released last week, called for a gradual increase in permanent immigration to 450,000 people a year by 2021 — with a focus on top business talent and international students. That would be a 50% hike from the current level of about 300,000.

The council members — along with many others, including Economic Development Minister Navdeep Bains — argue that opening Canada’s doors to more newcomers is a crucial ingredient for expanding growth in the future. They say it’s particularly important as more and more of the country’s baby boomers enter their golden years, which eats away at the workforce. The conviction to bring in more immigrants is especially significant for at least two of the people around the advisory team’s table. Growth council chair Dominic Barton, the powerful global managing director of consulting firm McKinsey, and Mark Wiseman, a senior managing director for investment management giant BlackRock, are among the founders of a group dedicated to seeing the country responsibly expand its population as a way to help drive its economic potential.

The Century Initiative, a five-year-old effort by well-known Canadians, is focused on seeing the country of 36 million grow to 100 million by 2100. Without significant policy changes on immigration, the current demographic trajectory has Canada’s population on track to reach 53 million people by the end of the century, the group says on its website. That would place it outside the top 45 nations in population size, it says.

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It goes back quite a bit further.

A 1912 News Article Ominously Forecasted Climate Change (Q.)


Published Aug. 14, 1912. (The Rodney and Otamatea Times and Waitemata and Kaipara Gazette)

A short news clip from a New Zealand paper published in 1912 has gone viral as an example of an early news story to make the connection between burning fossil fuels and climate change. It wasn’t, however, the first article to suggest that our love for coal was wreaking destruction on our environment that would lead to climate change. The theory—now widely accepted as scientific reality—was mentioned in the news media as early as 1883, and was discussed in scientific circles much earlier than that. The French physicist Joseph Fourier had made the observation in 1824 that the composition of the atmosphere is likely to affect the climate. But Svante Arrhenius’s 1896 study titled, “On the influence of carbonic acid in the air upon the temperature on the ground” was the first to quantify how carbon dioxide (or anhydrous carbonic acid, by another name) affects global temperature.

Though the study does not explicitly say that the burning of fossil fuels would cause global warming, there were scientists before him who had made such a forecast. The earliest such mention that Quartz could find was in the journal Nature in December of 1882. The author HA Phillips writes: “According to Prof Tyndall’s research, hydrogen, marsh gas, and ethylene have the property to a very high degree of absorbing and radiating heat, and so much that a very small proportion, of say one thousandth part, had very great effect. From this we may conclude that the increasing pollution of the atmosphere will have a marked influence on the climate of the world.” Phillips was relying on the work of John Tyndall, who in the 1860s had shown how various gases in the atmosphere absorb heat from the sun in the form of infrared radiation.

Now we know that Phillips was wrong about a few scientific details: He ignored carbon dioxide from burning coal and focused more on the by-products of mining. Still, he was drawing the right conclusion about what our demand for fossil fuels might do to the climate. Newspapers around the world took those words published in a prestigious scientific journal quite seriously. In January 1883, the New York Times published a lengthy article based on Phillips’ letter to Nature, which said: “The writer who has partially discussed the subject in the columns of Nature has fixed upon 1900 as the date when the earth’s atmosphere will become entirely irrespirable. This is probably a misprint, for unless the consumption of cigarettes increases unlooked-for rapidly the atmosphere ought to remain respirable until 1910, or even 1912. At the latter date all mankind will have perished, and nothing except the hardier plants will be living on the surface of the earth.”

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The EU is a failure of historical proportions economically, politically and above all morally.

Refugee Camp On Lesbos Damaged In Riots As Rumors Fly (Kath.)

Migrants on Monday attacked the premises of the European Asylum Support Office (EASO) inside the Moria hot spot on the eastern Aegean island of Lesvos, completely destroying four container office units and damaging another two during a protest that was contained by riot police. Officials said the protesters, most of them men from Pakistan, threw rocks and burning blankets at the EASO facilities, allegedly frustrated at delays in processing their asylum applications. Riot police were called in to contain the riot. The blaze was put out by the fire service before it could cause further damage. There were no reports of injuries.

The violence at Moria prompted authorities on other migrant-hosting islands, including Chios, Samos, Kos and Leros, to beef up their security measures. Speaking on condition of anonymity, a local government official told Kathimerini that migrant riots were often triggered by rumors. “Refugees and migrants are told that if their facilities are destroyed they will have nowhere to stay and so they will be transferred to the mainland,” the source said.

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Victoria Nuland’s neocon and Kiev coup instigator buddy. Bad news for Greece. Wonder what the pressure on Tsipras has been.

Ex-US Ambassador To Ukraine Geoffrey Pyatt Now Ambassador To Greece (Kath.)

The official welcome ceremony for new US Ambassador to Greece Geoffrey R. Pyatt took place on the US 6th Fleet command and control ship USS Mount Whitney, in the port of Piraeus south of Athens, Monday. Earlier in the day, Pyatt presented Greek President Prokopis Pavlopoulos with his diplomatic credentials at the Presidential Mansion. The ceremony was attended by Foreign Minister Nikos Kotzias. Nominated by President Obama, Pyatt is widely regarded as an experienced diplomat. He previously served as US ambassador in Kiev and had to deal with the fallout of the Ukrainian crisis. His appointment comes at a key time for both Athens and Washington. Recent developments in the wider region have created challenges as well as opportunities for the two NATO allies. Obama is expected to visit Athens in November. Political and military officials have been exchanging visits ahead of the trip.

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 October 11, 2016  Posted by at 8:42 am Finance Tagged with: , , , , , , , , , ,  Comments Off on Debt Rattle October 11 2016
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NPC Grand Palace shoe shining parlor, Washington DC 1921

“How Do You Have Capitalism Without Any Cost Of Capital?” (BBG)
7 in 10 Americans Have Less Than $1,000 In Savings (MF)
After Becoming Debt Slaves, Millennials Get Blamed for Lousy Economy (WS)
S&P 500 Triangle Chart Pattern ‘Warns Of A Big Selloff’ (MW)
The Bank of Mom and Dad is Australia’s Fastest-Growing Housing Lender (BBG)
Goldman Warns China’s Outflows May Be Worse Than They Look (BBG)
‘Why Do They Hate Us So?’-A Western Scholar’s Reply to a Russian Student (SC)
Remainers, Brexit, Racism and a Self-Fulfilling Prophecy (Hannan)
Greece Gets Fresh Loan Payout as Euro Area Looks to Help on Debt (BBG)
Brazil Votes To Amend Constitution, Ban Spending Increases For 20 Years (BBG)
Global Clean Energy Investment Dropped 43% in Worst Quarter Since 2013 (BBG)
Russia’s Rosneft Boss Sechin Says No To OPEC Oil Cut/Freeze (R.)
Britain’s Nuclear Cover-Up (NYT)

 

 

Titans of finance gather and sulk.

“How Do You Have Capitalism Without Any Cost Of Capital?” (BBG)

Mary Callahan Erdoes, one of JPMorgan Chase’s most senior executives, summed up her industry’s mood like this: “There is no excitement,” she told throngs of bankers gathered in Washington. “There is a lot of handwringing.” Again and again, speakers at the Institute of International Finance’s three-day meeting in Washington, which wrapped up Saturday, bemoaned the inability of central banks to rev up economic growth, as well as the drag of tougher regulations and the looming impact of Brexit. Concerns over Deutsche Bank’s mounting legal costs deepened the gloom. Slow growth is leaving companies little reason to expand, fueling the public’s frustration and giving rise to extreme political views and nationalism, said Erdoes, 49, who runs JPMorgan’s asset-management operations.

Low interest rates – instead of better fiscal stimulus – are taking a toll on the entire system, she said. “We had a very smart economist at JPMorgan ask me the following question: How do you have capitalism without any cost of capital? And therein lies the problem.” [..] Goldman Sachs President Gary Cohn called the world’s central banks an “ineffective cartel,” as actions in Europe and Japan lead to negative rates and hamstring other policy makers. The outlook for low growth is long-term, he said. “I don’t see this changing,” Cohn said Friday. “We keep saying we’re getting closer to the end, but I don’t think we’re getting closer to the end.”

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I’m not sure how one writes an article like this and completely fails to mention that for millions of Americans, it’s not a matter of bad saving habits, but of spending everything on the basics.

7 in 10 Americans Have Less Than $1,000 In Savings (MF)

The U.S. is often referred to as the land of economic opportunity. Apparently, it’s also the land of consumption and “spend everything you’ve got.” We don’t have to look far for confirmation that Americans are generally poor savers. Every month the St. Louis Federal Reserve releases data on personal household savings rates. In July 2016, the personal savings rate was just 5.7%. Comparatively, personal savings rates in the U.S. 50 years ago were double where they are today, and nearly all developed countries have a higher personal savings rate than the United States. In other words, Americans are saving less of their income than they should be — the recommendation is to save between 10% and 15% of your annual income — and they’re being forced to do more with less in terms of investing.

However, new data emerged this week from personal-finance news website GoBankingRates that shows just how dire Americans’ savings habits really are. Last year, GoBankingRates surveyed more than 5,000 Americans only to uncover that 62% of them had less than $1,000 in savings. Last month GoBankingRates again posed the question to Americans of how much they had in their savings account, only this time it asked 7,052 people. The result? Nearly seven in 10 Americans (69%) had less than $1,000 in their savings account. Breaking the survey data down a bit further, we find that 34% of Americans don’t have a dime in their savings account, while another 35% have less than $1,000. Of the remaining survey-takers, 11% have between $1,000 and $4,999, 4% have between $5,000 and $9,999, and 15% have more than $10,000.

Furthermore, even though lower-income adults struggle with saving money more than middle- and upper-income folks, no income group did particularly well. Some 29% of adults earning more than $150,000 a year, and 44% making between $100,000 and $149,999, had less than $1,000 in savings. Comparatively, 73% of the lowest income adults (those earnings $24,999 or less annually) had less than $1,000 in their savings account. There was even minimal difference between multiple generations of Americans. From seniors aged 65 and up to young millennials aged 18 to 24, between 62% and 72% of Americans had less than $1,000 in a savings account.

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Great little piece by Wolf Richter.

After Becoming Debt Slaves, Millennials Get Blamed for Lousy Economy (WS)

Over the past few days, the Diamond Producers Association launched its first new ad campaign in five years after watching retail sales of diamond jewelry slow down, as Millennials built on the habit pioneered by prior generations of delaying or not even thinking about marriage, and thus not being sufficiently enthusiastic about buying diamond engagement rings. The campaign, according to Adweek, is designed to motivate Millennials “to commemorate their ‘real,’ honest relationships with diamonds, even if marriage isn’t part of the equation.” Mother New York, the agency behind the campaign, spent months interviewing millennials, according to Quartz, and learned that they associated diamonds with a “fairytale love story that wasn’t relevant to them.”

So the premium jewelry industry, seeing future profits at risk, needs to do something about that. A year ago, it was Wall Street – specifically Goldman Sachs – that did a lot of hand-wringing about millennials. “They don’t trust the stock market,” Goldman Sachs determined in a survey. Only 18% thought that the stock market was “the best way to save for the future.” It’s a big deal for Wall Street because millennials are now the largest US generation. There are 75 million of them. They’re supposed to be the future source of big bonuses. Wall Street needs to figure out how to get to their money. The older ones have seen the market soar, collapse, re-soar, re-collapse, re-soar…. They’ve seen the Fed’s gyrations to re-inflate stocks. They grew up with scandals and manipulations, high-frequency trading, dark pools, and spoofing.

They’ve seen hard-working people get wiped out and wealthy people get bailed out. Maybe they’d rather not mess with that infernal machine. And today, the Los Angeles Times added more fuel. “They’re known for bouncing around jobs, delaying marriage, and holing up in their parents’ basements,” it mused. Everyone wants to know why millennials don’t follow the script. Brick-and-mortar retailers have been complaining about them for years, with increasing intensity, and a slew of specialty chains have gone bankrupt, a true fiasco for the industry, even as online retailers are laughing all the way to the bank. “For starters, millennials are not big spenders, at least not in the traditional sense,” the Times said. Yet most of them spend every dime they earn, those that have decent jobs. But much of that spending goes toward their student-loan burden and housing.

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Trying to fit human behavior into triangles.

S&P 500 Triangle Chart Pattern ‘Warns Of A Big Selloff’ (MW)

The S&P 500 is moving fast toward an impending breakout that could be bad news for investors. “And it’s gonna be big, by all accounts,” said Carter Braxton Worth, a technical analyst at research firm Cornerstone Macro. The S&P 500 has been trading within a “symmetrical triangle” on a number of time scales, as the index traced out a pattern of rising lows and falling highs. Since the upper and lower boundary lines are narrowing to a point, it’s just a matter of time before the S&P 500 breaks above or below one of them. “It is a circumstance where buyers and sellers are matched off so evenly that purchases being made by those who like a particular security are in the same order of magnitude as the selling being done by those who dislike the security,” Worth wrote in a note to clients.

His research suggests that the resolution of these standoffs is usually “aggressive,” with the index moving past the declining or rising trendlines “in a meaningful way.” Many technicians believe triangles represent continuation patterns, or periods of pause in a bigger trend, which means they should eventually be resolved in the direction of the preceding trend. In the S&P 500’s case, that would mean a big rally is coming. But Worth said that based on his interpretation of the charts, the S&P 500’s triangle looks more like a reversal pattern. “We believe the current formation is a setup for a move lower,” Worth said.

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Hoping that just this once it’s different.

The Bank of Mom and Dad is Australia’s Fastest-Growing Housing Lender (BBG)

Beset by lending curbs and bubble-esque prices, first-time home buyers in Australia are turning to a rapidly growing source of finance: The Bank of Mom and Dad. More parents are taking advantage of record-low interest rates to refinance their properties and help their grown-up kids onto the housing ladder amid sky-rocketing house values. Digital Finance Analytics estimates the number of Aussies getting help from their parents has soared to more than half of first-home buyers from just 3% six years ago. Australia’s housing rally has favored baby-boomers and locked out youth, compounding an inter-generational shift of wealth.

As the number of bank loans to first-time buyers dwindles, the average slice of cash handed to them by parents has almost quadrupled in the past six years, DFA says. The downside: a market that the Reserve Bank of Australia is already wary of may get further inflated. First-time buyers are “being infected by the notion that property is about wealth building, rather than somewhere to live,” said Martin North, Principal at DFA. That “may be tested if interest rates rise later, or property prices fall from their current illogical stratospheric levels.” [..] The boom is turning some homes into cash dispensers. More than two thirds of owners that refinanced houses worth more than A$750,000 did so to extract capital for reasons including helping their kids. Near the start of 2010, the average helping hand from parents was about A$23,000; today, it’s more than A$80,000.

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“..they don’t have a strong willingness to hold the yuan due to depreciation expectations..” Does that rhyme with the SDR basket thing?

Goldman Warns China’s Outflows May Be Worse Than They Look (BBG)

China’s currency outflows may be bigger than they look, with Goldman Sachs warning that a rising amount of capital is exiting the country in yuan rather than in dollars. While the nation’s foreign-exchange reserves have stabilized and lenders’ net foreign-exchange purchases for clients have fallen close to a one-year low, official data show that $27.7 billion in yuan payments left China in August. That’s compared with a monthly average of $4.4 billion in the five years through 2014. Such large cross-border moves can’t be explained by market-driven factors and need to be taken into account when measuring currency outflows, according to MK Tang, Hong Kong-based senior China economist at Goldman Sachs.

Any sign of increased capital outflows could disturb a recent calm in China’s foreign-exchange market, adding to pressure from a potential Federal Reserve interest-rate increase and denting the yuan’s image as the world’s newest global reserve currency. The yuan fell to a six-year low on Monday, adding to outflow pressures. “There is some window guidance from the central bank that limits companies’ dollar conversion onshore, so they need to move the money overseas in yuan,” said Harrison Hu, chief Greater China economist at RBS in Singapore. “But they don’t have a strong willingness to hold the yuan due to depreciation expectations, so they sell it to offshore banks. This pressures the offshore yuan’s exchange rate.”

[..] Goldman Sachs started including yuan funds in its analysis of outflows in July, after noting that cross-border movement of the currency masked actual pressures. The bank estimates that 56% and 87% of outflows took place through the offshore yuan market in July and August, respectively.

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Do read the whole thing for a good history lesson.

‘Why Do They Hate Us So?’-A Western Scholar’s Reply to a Russian Student (SC)

In 2000 when Putin was elected president, he publically promoted security and economic cooperation with Europe and the United States. After 9/11, he offered real assistance to Washington. The United States accepted the Russian help, but continued its anti-Russian policies. Putin extended his hand to the west, but on the basis of five kopeks for five kopeks. This was a Soviet policy of the interwar years. It did not work then and it does not work now. In 2007 Putin spoke frankly at the Munich conference on Security Policy about overbearing US behaviour. The “colour revolutions” in Georgia and the Ukraine, for example, and the Anglo-American war of aggression against Iraq raised Russian concerns. US government officials did not appreciate Putin’s truth-telling which went against their standard narrative about «exceptionalist» America and altruistic foreign policies to promote «democracy».

Then in 2008 came the Georgian attack on South Ossetia and the successful Russian riposte which crushed the Georgian army. It’s been all down-hill since then. Libya, Syria, Ukraine, Yemen are all victims of US aggression or that of its vassals. The United States engineered and bankrolled a fascist coup d’état in Kiev and has attempted to do the same in Syria reverting to their “Afghan policy” of bankrolling, supplying and supporting a Wahhabi proxy war of aggression against Syria. Backing fascists on the one hand and Islamist terrorists on the other, the United States has plumbed the depths of malevolence. President Putin and Russian foreign minister Sergei Lavrov have made important concessions, to persuade the US government to avert catastrophe in the Middle East and Europe.

To no avail, five kopeks for five kopeks is not an offer the United States understands. Assymetrical advantages is what Washington expects. One cannot reproach the Russian government for trying to negotiate with the United States, but this policy has not worked in the Ukraine or Syria. Russian support of the legitimate government in Damascus has exposed the US-led war of aggression and exposed its strategy of supporting Al-Qaeda, Daesh, and their various Wahhabi iterations against the Syrian government. US Russophobia is redoubled by Putin’s exposure of American support for Islamist fundamentalists and by Russia’s successful, up to now, thwarting of US aggression. Who does Putin think he is? From my observations, I would reply that President Putin is a plain-spoken Russian statesman, with the support of the Russian people behind him.

For five kopeks against five kopeks, he will work with the United States and its vassals, no matter how malevolent they have been, if they adopt less destructive policies. Unfortunately, recent events suggest that the United States has no intention of doing so. After one hundred years of almost uninterrupted western hostility, no one should be under any illusions. So then, the question is “Why do they hate us so?” Because President Putin wants to build a strong, prosperous, independent Russian state in a multi-polar world. Because the Russian people cannot be bullied and will defend their country tenaciously. “Go tell all in foreign lands that Russia lives!» Prince Aleksandr Nevskii declared in the 13th century: «Those who come to us in peace will be welcome as a guest. But those who come to us sword in hand will die by the sword! On that Russia stands and forever will we stand!”

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Yeah, Daniel Hannan has lots of stuff wrong with him. But Britain must have this conversation regardless of that. I picked this piece up on Twitter, with this accompanying comment: “No aspect of Brexit is Remain voters’ fault in any way, or to any extent at all.” I don’t know if that was meant sarcastically, but I would certainly hope so. Without that conversation things can only get worse. Remainers must try harder to understand why Brexit happened. If nothing else, I would think they’re at least ‘guilty’ of not seeing it coming. And perhaps also of seeing Brexit as the problem, not a mere symptom.

Remainers, Brexit, Racism and a Self-Fulfilling Prophecy (Hannan)

Shortly after the EU referendum, several thousand young people marched through London demanding a rerun. I happened to be sitting next to three of them on a train as I travelled into the capital that morning. They evidently recognised me right away as an Evil Tory Leaver, but we were past Clapham Junction before one of them plucked up the courage to talk to me. “Are you Daniel Hannan? I just wanted to say that what you’ve done is terrible. We’re not a racist country. You’ve taken away our future.” “Is that so? Out of interest, can you tell me who the President of the European Commission is?” “No. What’s that got to do with it?” “Can you name a single European Commissioner, come to that? Do you know what our budget contribution will be this year? Or what the difference is between a Directive and a Regulation?”

She was affronted by the questions. So were her two friends with their “I [heart] EU” placards. They weren’t interested in details. For them, it was about values. Are you a decent, internationalist, compassionate person? Or are you a selfish bigot? Let’s leave aside the fact that no one would ever vote on any ballot paper for a “selfish bigot” option. Their determination to approach the issue in terms of character, rather than cost-benefit, explains why they were so upset – and why, even now, some Remain voters struggle to accept the outcome. In my experience, the 48% who voted Remain fall into two categories. There are those who were making a judgement as to where Britain’s best options lay. They could see that the is EU flawed.

They were well aware of the corruption, the lack of democracy, the slow growth. But they took the view that, on balance, the disruption of leaving would outweigh the gains. These people, by and large, now want to make a success of things, and are keen to maximise our opportunities. Then there were those like my companions on South West Trains, for whom the issue was not financial but somehow moral. For them, the EU wasn’t the grubby and self-interested body that exists in reality; rather, it was a symbol of something better and purer, an embodiment of the dream of peace among nations. They never heard, because they never wanted to hear, the democratic or economic arguments against membership. As far as they were concerned, the only possible reason for voting Leave was chauvinism.

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“Euro Area Looks to Help on Debt” sounds like the epitomy of cynicism. The Eurogroup withheld €1.7 billion, to Greece’s surprise, because it wanted to assess A) whether a June payment was fully used to pay off third parties, and B) whether the government had squeezed its people enough (reforms). The delay is convenient for Brussels because it also delays debt restructuring talks once again, for the umpteenth time. And without those talks, the IMF won’t commit. Rinse and repeat.

Greece Gets Fresh Loan Payout as Euro Area Looks to Help on Debt (BBG)

The euro area authorized a €1.1 billion payment to Greece and signaled a further €1.7 billion would follow this month, saying the region’s most indebted nation has made progress in overhauling its economy. The green light, given by euro-area finance ministers on Monday in Luxembourg, removes a hurdle on Greece’s path to debt relief on which Prime Minister Alexis Tsipras has staked part of his political future. The country had to fulfill 15 conditions on matters such as selling state assets and improving bank governance to get the first payout.

It “was unanimously decided that Greece had completed the 15 milestones, so we can proceed to the €1.1 billion disbursement,” Greek Finance Minister Euclid Tsakalotos told reporters after the meeting, saying the talks produced a “very good” outcome for his country. The delay in getting an endorsement for the remaining sum, which is tied to the clearing of arrears, is merely “technical,” he said. Greece, in its third bailout since 2010, is struggling to right an economy that is poised to undergo its eighth annual contraction in the past nine years. A second review of the country’s rescue program will pave the way for a possible restructuring of Greece’s debt, which the IMF says is a necessary condition for its future involvement.

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This feels like a military coup, a chapter straight out of the Shock Doctrine. Stocks go up because people’s lives go down.

Glenn Greenwald on Twitter: “Brazil’s lower House- in the face of negative growth- just voted to amend the Constitution to ban spending increases for 20 years..” “This extreme austerity in Brazil – enabled by impeachment- is being imposed in world’s 7th largest economy, 5th most populous country (200m). ”

Nomi Prins on Twitter: “Brazil’s coup was about advancing western speculative market access & squashing domestic population needs – for decades…bastards.”

Brazil Votes To Amend Constitution, Ban Spending Increases For 20 Years (BBG)

The Ibovespa rose to a two-year high and the real gained as commodities advanced and as expectations mounted that lawmakers will approve a bill to cap spending, a key measure in President Michel Temer’s plan to trim a budget deficit and rebuild confidence in Brazil. The benchmark equity index rose 0.9% and the currency climbed 0.5% Monday in Sao Paulo. [..] Brazilian stocks have gained 75% in dollar terms this year and the real has strengthened 24%, the best performances in the world, on bets that a new government would be able to pull the country out of its worst recession in a century.

Temer, who formally replaced impeached former President Dilma Rousseff in August, said the administration should have enough votes to drive through a budget bill Monday that’s seen as a vital first step toward his economic reforms. The proposal to amend the Constitution to set limits on government spending for as long as 20 years must be approved by at least three-fifths of both chambers of Congress. “The market is very optimistic over this legislation,” said Paulo Figueiredo, an economist at FN Capital in Petropolis, Brazil. “New bets on local assets depend a lot on the signals that will come from this vote.”

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Bubble?!

Global Clean Energy Investment Dropped 43% in Worst Quarter Since 2013 (BBG)

Global investment in clean energy fell to the lowest in more than three years as demand for new renewable energy sources slumped in China, Japan and Europe. Third-quarter spending was $42.4 billion, down 43% from the same period last year and the lowest since the $41.8 billion reported in the first quarter of 2013, Bloomberg New Energy Finance said in a report Monday. Financing for large solar and wind energy plants sank as governments cut incentives for clean energy and costs declined, said Michael Liebreich at the London-based research company. Total investment for this year is on track to be “well below” last year’s record of $348.5 billion, according to New Energy Finance.

The third-quarter numbers “are worryingly low even compared to the subdued trend we saw” in the first two quarters, Liebreich said in a statement. “Key markets such as China and Japan are pausing for a deep breath.” Part of the reason for the steep decline in the quarter was a slowdown following strong spending in the first half of the year on offshore wind. Investors poured $20.1 billion into European offshore wind farms in the first and second quarters, “a runaway record,” according to Abraham Louw, an analyst for energy economics with New Energy Finance. That was followed by a “summer lull,” with $2.4 billion in spending in the third quarter.

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So much for that.

Russia’s Rosneft Boss Sechin Says No To OPEC Oil Cut/Freeze (R.)

Igor Sechin, Russia’s most influential oil executive and the head of Kremlin energy champion Rosneft, said his company will not cut or freeze oil production as part of a possible agreement with OPEC. His comments underline how difficult it is for Russia to get its oil companies to freeze or cut output as part of a potential deal with OPEC designed to support oil prices. President Vladimir Putin told an energy congress on Monday that Russia was ready to join the proposed OPEC cap, but did not provide any details. “Why should we do it?” Sechin, known for his anti-OPEC position, told Reuters in Istanbul on Monday evening, when asked if Rosneft, which accounts for 40% of Russia’s total crude oil output, might cap its own output.

Sechin said he doubted that some OPEC countries, such as Iran, Saudi Arabia and Venezuela would cut their output either, saying that an increase in oil prices above $50 per barrel would make shale oil projects in the United States profitable. There have been several attempts in the past for Russia and OPEC to join forces to stabilize oil markets. Those efforts have never come to pass however. Oil prices surged on Monday after Putin’s comments amid hopes that a two-year price slide could be halted.

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Uglee!!!

Britain’s Nuclear Cover-Up (NYT)

Last month, the British government signed off on what might be the most controversial and least promising plan for a nuclear power station in a generation. Why did it do this? Because the project isn’t just about energy: It’s also a stealth initiative to bolster Britain’s nuclear deterrent. For years, the British government has been promoting a plan to build two so-called European Pressurized Reactors (EPR) at Hinkley Point C, in southwest England. It estimates that the facility will produce about 7% of the nation’s total electricity from 2025, the year it is expected to be completed. The EPR’s designer, Areva, claims that the reactor is reliable, efficient and so safe that it could withstand a collision with an airliner.

But the project is staggeringly expensive: It will cost more than $22 billion to build and bring online. And it isn’t clear that the EPR technology is viable. No working version of the reactor exists. The two EPR projects that are furthest along — one in Finland, the other in France — are many years behind schedule, have hemorrhaged billions of dollars and are beset by major safety issues. The first casting of certain components for the Hinkley Point C reactors left serious metallurgical flaws in the pressure vessel that holds the reactor core. In 2014, the Cambridge University nuclear engineer Tony Roulstone declared the EPR design “unconstructable.”

The lead builder of the EPR, the French utility company Electricité de France, faced a mutiny this year: Its unions fought the Hinkley Point project, fearing it might bring down the company. E.D.F.’s chief financial officer has resigned, arguing that it would put too much strain on the company’s balance sheet. But the British government continues to act as though it wants the Hinkley project to proceed at almost any price. In return for covering about one-third of the costs, the Chinese state-run company China General Nuclear Power Corporation will take about one-third ownership in the project. (A subsidiary of E.D.F. owns the rest.) The British government has also provisionally agreed to let China build a yet-untested Chinese-designed reactor in Bradwell-on-Sea, northeast of London, later.

[..] The British government has [..] guaranteed that investors in the Hinkley project will get $115 per megawatt-hour over 35 years. This is approximately twice the price of electricity today [..]. If the market price of electricity falls below that rate, a government company is contractually bound to cover the difference — with the extra cost passed on to consumers. Price forecasts have dropped since the deal was struck: This summer the government, revising estimates, said differential payments owed under the contract could reach nearly $37 billion. If the Hinkley plan seems outrageous, that’s because it only makes sense if one considers its connection to Britain’s military projects — especially Trident, a roving fleet of armed nuclear submarines, which is outdated and needs upgrading.

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Apr 152016
 
 April 15, 2016  Posted by at 9:34 am Finance Tagged with: , , , , , , , , , , ,  2 Responses »
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Gottscho-Schleisner Plaza buildings from Central Park, NY 1933

A Year After European Stocks Hit Record, Crash Angst Hits Traders (BBG)
The One Chart That Shows ECB Money Printing Is Failing (Ind.)
Oil Demand Falls Much Faster Than Supply (Berman)
Oil Producers Head For Doha Counting $315 Billion Cost Of Slump (BBG)
Soured Corporate Loans Surge at Biggest US Banks on Oil (BBG)
China’s Economy Faces Recovery Without Legs (WSJ)
China’s Giant Bonfire Of Debt Needs One Spark To Become An Inferno (MW)
Funny Numbers Show Money Leaving China (Balding)
China Is Set to Allow Banks to Swap Bad Loans for Equity in Borrowers (WSJ)
China’s Giant Steel Industry Just Churned Out Record Supply (BBG)
What Negative Interest Rates Mean for the World (WSJ)
Negative Rates: Danish Couple Gets Paid Interest on Their Mortgage (WSJ)
Deutsche Bank Settles Silver, Gold Price-Manipulation Suits (BBG)
IMF Says Greek Debt Numbers Don’t Add Up as EU Defends Its Plan (BBG)
UK and European Allies Plan To Deal ‘Hammer Blow’ To Tax Evasion (G.)
Spanish Industry Minister Resigns After Panama Papers Revelations (AFP)
Ten European Nations Want Military Planes For Refugee Deportations (AP)

Let that graph sink in.

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

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

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

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

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In case that wasn’t clear yet.

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

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

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

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

Oil Demand Falls Much Faster Than Supply (Berman)

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

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


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

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Any agreement willl exist on paper only.

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

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

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

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

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

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

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

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

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

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

China’s Economy Faces Recovery Without Legs (WSJ)

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

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

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

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

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

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

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

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

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

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

Funny Numbers Show Money Leaving China (Balding)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What Negative Interest Rates Mean for the World (WSJ)

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

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

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

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

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

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

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

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

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

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

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

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

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Watch derivatives.

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

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

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

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

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This discussion is sinking to Forrest Gump levels.

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

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

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

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

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

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

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

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

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

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Whackamole.

Spanish Industry Minister Resigns After Panama Papers Revelations (AFP)

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

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

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

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

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

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Feb 212016
 
 February 21, 2016  Posted by at 9:58 am Finance Tagged with: , , , , , , , , ,  Comments Off on Debt Rattle February 21 2016
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Wyland Stanley Boeing 314 flying boat Honolulu Clipper. 1939

BofA: ‘Shanghai Accord’, Massive Central Bank Intervention Imminent (ZH)
I Don’t Know What The Bulls Are Smoking: Stockman (CNBC)
China Lenders’ Foreign-Exchange Holdings Omitted From PBOC Data (BBG)
Sensitive Financial Data ‘Missing’ From PBOC Report On Capital Outflows (SCMP)
Xi Jinping Demands ‘Absolute Loyalty’ From Chinese State Media (AP)
The Only Thing Worse Than Oil? Investing in It (WSJ)
A Furious Turkey Says US Is “Acting Like An Enemy” (ZH)
TPP, Abe Set To Demolish Japan’s Small Scale Agriculture Model (FT)
EU-US TTIP Talks Seen By The French Threatening Small Farms (BBG)
Calais ‘Jungle’ Eviction Postponed Because Of Risk To Lone Children (G.)
Razor Wire Fence Fails To Keep Refugees, Migrants Out Of Hungary (BBC)
Despite Aegean Rescuers’ Best Efforts, Not All Migrants Are Saved (NPR)

Shanghai Accord to be like Plaza Accord, mass devaluation of the yuan, to “reset global monetary policy stability if only for a few more months”…

BofA: ‘Shanghai Accord’, Massive Central Bank Intervention Imminent (ZH)

Any time the relative performance of global financials to US Treasuries has stumbled as far as it has, as shown in the chart below, it has meant one thing – a major central bank intervention was imminent. At least that’s the interpretation of BofA’s Michael Hartnett, who shows that in order to provide the kick for the bounce in this all too important “deflationary leading indicator”, central banks engaged in major unorthodox easing episodes, whether QE1-3, or the ECB’s QE.

Why intervene now? Here are the problems according to Hartnett:
• Problem 1: US economy in “bad Goldilocks”, i.e. US economy not hot/strong enough to lift global GDP & EPS; but not cold/bad enough to induce global coordinated response
• Problem 2: global policy-maker rhetoric in recent days shows “coordinated innocence” not stimulus, all blaming global economy for weak domestic economies (“Overseas factors are to blame”…Japan PM Abe; “drag on U.S. economy from greater-than-expected-slowdown in China & other EM economies“…FOMC minutes; “increasing concerns about the prospects for the global economy”…ECB Draghi; “the change in China’s growth rate can be attributed in part to weak performance of the global economy”…PBoC)

Problem 2 is static, meant for media propaganda and jawboning; it can easily be removed once the global economy takes the next leg lower. Which incidentally would also resolve the gating factor of Problem 1 – as we have said for months, the Fed and its central bank peers need the political cover to launch more stimulus.

And in a reflexive world, where the “economy is the market”, this means just one thing – a big leg lower in stocks is the necessary and sufficient condition to once again push stocks higher, as policy failure is internalized, and global risk reprises from square 1. This is Bank of America’s summary, warning that unless a major policy intervention is enacted, the market will then sell off to the next support level, below the 1,812 which has proven so stable since August. Stabilization of “4C’s” (China, Commodities, Credit, Consumer) allowed SPX 1800 to hold/bounce to 1950-2000; weak policy stimulus in coming weeks could end rally/risk fresh declines to induce growth-boosting policy accord.

Here is a summary of the near-term events which stocks are betting on do not disappoint: G20 Shanghai (February 26-27); ECB (March 10), BoJ (March 15) & FOMC (March 16). And as documented previously, the one main near-term event Hartnett is focusing on is the Shanghai meeting next weekend. Recall: “We remain sellers into strength in coming weeks/months of risk assets at least until a coordinated and aggressive global policy response (e.g. Shanghai Accord) begins to reverse the deterioration in global profit expectations (currently heading sharply south – Chart 1) and credit conditions.”

In other words, Hartnett expects a “Shanghai Accord” to be unveiled next weekend, one where like the Plaza Accord three decades earlier, the Yuan will be massively depreciated, which ironically would halt all piecemeal Yuan devaluation on expectation of future devaluation (as it will have already happened), and reset global monetary policy stability if only for a few more months. Said otherwise, if next weekend the G-20 disappoints and unveils nothing, the next big leg down in the selloff will have arrived.

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“They should have the good graces to resign. They are lost. None of this is helping the economy..”

I Don’t Know What The Bulls Are Smoking: Stockman (CNBC)

Anyone who believes that the global economy isn’t crashing must be delirious, according to David Stockman. The former director of the Office of Management and Budget argues that a rapidly deteriorating economic environment is going to send stocks and oil prices spiraling even lower than they already have. “I think your traders are smoking something stronger than what I can legally buy here in Colorado,” Stockman said Thursday on CNBC’s “Futures Now.” The S&P 500 has fallen 6% year to date, and crude oil has plunged more than 17%. However, Stockman still sees a long way to go.

He expects the S&P 500 to drop to 1,300 before making any new highs, and sees oil falling below $20. Investors have been too optimistic about the U.S. economy because they are not factoring in global risk, said Stockman, who expects to see a recession by the end of the year. “Everywhere trade is drying up, shipping rates are at all-time lows,” he said. “There is a recession that’s going to engulf the entire world economy, including the United States.” Contributing to the turmoil is the ineptitude of central banks, he said. While Stockman doesn’t expect the Federal Reserve to adopt a negative interest rate policy, he said monetary policymakers have exhausted all other options.

“They should have the good graces to resign. They are lost. None of this is helping the economy,” he said. Add in the 2016 presidential election, and Stockman said the markets will find themselves in a situation similar to that of the global financial crisis. “The out-of-control election process will feed into and create an environment that we haven’t seen since the fall of 2008,” he said. Of course, this isn’t the first time Stockman has been bearish. For years, he has been predicting a crash worse than 2008. Stockman headed the White House OMB during President Ronald Reagan’s first term.

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Creative accounting 2.0. Don’t like what you see? Just stop reporting it. The US learned this trick a long time ago.

“..the slide in foreign-currency assets held by Chinese financial institutions “is typically much larger than the decline in foreign reserves..”

China Lenders’ Foreign-Exchange Holdings Omitted From PBOC Data (BBG)

China’s central bank omitted details of financial institutions’ foreign-exchange holdings from monthly data that sheds light on the scale of its intervention to support the yuan. The change took effect in its report for January, when the currency’s slide to a five-year low roiled global financial markets and prompted the People’s Bank of China to step up efforts to boost the exchange rate amid record capital outflows. While the authority announced a $99.47 billion slide in its foreign-exchange reserves for last month, less than December’s record $107.9 billion drop, the figure may not represent the true extent of dollar sales if state-owned lenders were also used to intervene. “Sometimes it’s the commercial banks that sell a lot of dollars when the PBOC wants to prop up the yuan,” said Zhou Hao at Commerzbank in Singapore.

When this happens, the slide in foreign-currency assets held by Chinese financial institutions “is typically much larger than the decline in foreign reserves,” he said. In September, the assets dropped by a record $117 billion – almost triple the $43.3 billion decline in the nation’s reserves – as large state banks sold borrowed dollars for yuan and used forward contracts with the central bank to hedge those positions. Historically, the numbers tend to be broadly in line with one another. China used intervention, verbal warnings and a tightening of capital controls in its bid to quell speculative attacks on the yuan in the offshore market last month. The measures, which caused overnight borrowing costs for the currency to surge to an unprecedented 66.82% in Hong Kong, enjoyed some success and the offshore exchange rate has strengthened 3.6% to 6.5244 a dollar since sinking to a five-year low on Jan. 7. The onshore rate gained 1.2% to 6.5201 in Shanghai.

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More detail on this creative outburst in China. Funny thing is, this will backfire. Analysts have other ways of getting the data, and they will do so now with a lot more scrutiny and suspicion.

Sensitive Financial Data ‘Missing’ From PBOC Report On Capital Outflows (SCMP)

Sensitive data is missing from a regular Chinese central bank report amid concerns about capital outflow as the economy slows and the yuan weakens. Financial analysts say the sudden lack of clear information makes it hard for markets to assess the scale of capital flows out of China as well as the central bank s foreign exchange operations in the banking system. Figures on the “position for forex purchase” are regularly published in the People’s Bank of China’s monthly report on the “Sources and Uses of Credit Funds of Financial Institutions”. The December reading in foreign currencies was US$250 billion. But the data was missing in the central bank s latest report. It seemed the information had been merged into the “other items” category, whose January figure was US$243.9 billion a surge from US$20.4 billion the previous month.

Another key item of potentially sensitive financial data was altered in the latest report. The central bank also regularly publishes data on the forex purchase position in renminbi, which covers all financial institutions including the central bank. The December reading was 26.6 trillion yuan (HK$31.7 trillion). But the January data gave information on forex purchases made only by the central bank, detailing the lower figure of 24.2 trillion yuan. China’s foreign exchange reserves shrank almost US$100 billion last month as the central bank sells dollars and buys renminbi to shore up the country s weakening currency. It followed a record US$108 billion drop in December. Optimism for the yuan has taken a hit from continuous capital outflows amid growing concern about China s economic outlook.

The central bank has been criticised for contributing to the panic through its poor communication with the market and its foreign counterparts. PBOC governor Zhou Xiaochuan last week told Caixin the central bank was “neither a god nor a magician”, though it was very willing to improve communication with the public. This is not the first time the PBOC has tweaked items in its financial reports, but the unannounced changes come at a sensitive time as Beijing tries to stabilise the yuan exchange rate. “Its non-transparent method has left the market unable to form a clear picture about capital flows,” said Liu Li-Gang, ANZ’s chief China economist in Hong Kong. “This will fuel more speculation that China is under great pressure from capital outflows. It will hurt the central bank’s credibility.”

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He can bully his own people, unlike foreign investors.

Xi Jinping Demands ‘Absolute Loyalty’ From Chinese State Media (AP)

The Chinese president, Xi Jinping, has made a rare and high-profile tour of the country’s top three state-run media outlets, telling editors and reporters they must pledge absolute loyalty to the Communist party and closely follow its leadership in “thought, politics and action”. His remarks are the latest sign of Beijing’s increasingly tight control over the media and Xi’s unceasing efforts to consolidate his power as head of the party. Xi overshadowed the propaganda chief, Liu Yunshan, who accompanied him on his visits to the newsrooms of the party newspaper People’s Daily, state-run news agency Xinhua, and state broadcaster China Central Television (CCTV). At CCTV, Xi was welcomed by a placard pledging loyalty. “The central television’s family name is the party,” the sign read, anticipating remarks made by Xi at a later meeting.

“The media run by the party and the government are the propaganda fronts and must have the party as their family name,” Xi told propaganda workers at the meeting, during which he demanded absolute loyalty from state media. “All the work by the party’s media must reflect the party’s will, safeguard the party’s authority, and safeguard the party’s unity,” he said. “They must love the party, protect the party, and closely align themselves with the party leadership in thought, politics and action.” Willy Lam, an expert on elite Chinese politics at the Chinese University of Hong Kong, said Xi is raising standards for state media by requiring they obey the will of the Communist party’s core leadership, which is increasingly defined by Xi himself in another sign of how he has accrued more personal authority than either of his last two predecessors.

“This is a very heavy-handed ideological campaign to drive home the point of total loyalty to the party core,” Lam said. “On one hand, Xi’s influence and power are now unchallenged, but on the other hand, there is a palpable degree of insecurity.” Lam said Xi faces lurking challenges not only from within different party factions but also from among a disaffected public, who are unhappy with the slowing economy and a recent stock market meltdown. Zhang Lifan, a Beijing-based independent historian and political observer, said the tour of state media further added to Xi’s burgeoning personality cult. “I am afraid we will see more personal deification in the media in the future,” Zhang said. “I think Xi is declaring his sovereignty over the state media to say who’s really in charge.”

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Gentlemen, count your losses.

The Only Thing Worse Than Oil? Investing in It (WSJ)

One of the few assets performing worse than oil is a set of products used to bet on it. The $3.86 billion United States Oil Fund LP, an exchange-traded fund that goes by the ticker USO, is down 22% so far this year, while the $575 million iPath S&P GSCI Crude Oil Total Return Index exchange-traded note, known as OIL, is down 26% in that period. In comparison, U.S. crude-oil futures for March delivery settled at $29.64 a barrel on Friday, down 20% this year. The poor returns illustrate the difficulty of making such bets, particularly on oil prices, which have confounded investors by continuing to sink in 2016. Even after oil’s fall over the past year, investors in products that track crude have something else dragging on returns: it’s more costly to make long-term bets.

A glut of oil has shifted the dynamics of the futures market, which reflects the cost of holding oil, and that has further weighed on the performance of some of the products in recent weeks. Many commodity-investment products hold or track the nearest-month futures and regularly rebalance into the following month’s contracts. If the nearer-term contract costs less than the further-dated one, a condition known as contango, the rotation involves getting rid of cheaper contracts to buy more expensive ones. The bigger the difference between the two, the more this so-called roll cost drags on performance. Crude has been in contango since mid-2014, but the differential has risen sharply recently. The difference in the settlement price between March and April oil futures contracts has more than doubled since the end of last year.

At Thursday’s settlement, it cost $2.16 more to buy a barrel of West Texas Intermediate oil for April delivery than oil for March delivery, compared with 96 cents at the end of 2015. The differential was as high as $2.62 on Feb. 11. If left unchanged at Thursday’s settlement prices, the difference between the two contracts implies a monthly loss of 7.02% simply from roll costs, according to FactSet. It “hurts returns,” said Alan Konn at Uhlmann Price Securities, a wealth-management firm in Chicago. The firm has investments tied to the Rogers International Commodity Index, which tracks a basket of 37 commodities. The index is down close to 6% this year and more than 29% over the past 12 months.

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A longer quote than usual for a Debt Rattle of Tyler Durden describing how convoluted the position of the US, EU and NATO is becoming because of their support for Erdogan. Then again, our main export these days is failed states. I added the graph (Who fights what in Syria) from another source.

A Furious Turkey Says US Is “Acting Like An Enemy” (ZH)

As you might have noticed, Turkish President Recep Tayyip Erdogan is about to lose his mind with the situation in Syria. To be sure, the effort to usurp the Bashar al-Assad government wasn’t exactly going as planned in the first place. Regime change always takes time, but the conflict in Syria was dragging into its fifth year by the time the Russians got directly involved and although it did indeed look as though the SAA was on the verge of defeat, the future of the rebellion was far from certain. But to whatever extent the rebels’ fate was up in the air before September 30, the cause was dealt a devastating blow when Moscow’s warplanes began flying sorties from Latakia and while Ankara and Riyadh were initially willing to sit on the sidelines and see how things played out, once Russia and Hezbollah encircled Aleppo, it was do or die time.

The supply lines to Turkey were cut and without a direct intervention by the rebels’ Sunni benefactors, Moscow and Hassan Nasrallah’s army would ultimately move in on Aleppo proper and that, as they say, would be that. The problem for Turkey, Saudi Arabia, and Qatar is optics. That is, everything anyone does in Syria has to be justified by an imaginary “war on terror.” Turkey can’t say it’s intervening to keep the rebels from being defeated by the Russians, and similarly, Saudi Arabia, Qatar, the US, France and everyone else needs to preserve the narrative and pretend as though this all doesn’t boil down to the West and the Sunnis versus the Russians and the Shiites. Here’s what we said earlier this month: somehow, Turkey and Saudi Arabia need to figure out how to spin an attack on the YPG and an effort to rescue the opposition at Aleppo as an anti-ISIS operation even though ISIS doesn’t have a large presence in the area.

Well it turns out that’s an impossible task and so, Turkey has resorted to Plan B: a possible false flag bombing and the old “blame the Kurds” strategy. The attack on military personnel in Ankara this week was claimed by The Kurdistan Freedom Hawks (an offshoot of the PKK) in retaliation for Turkey’s aggressive campaign in Cizre (as documented here), but Erdogan has taken the opportunity to remind the world that the PKK and the YPG are largely synonymous. That is, they’re both armed groups of non-state actors and if one is a terrorist organization, then so is the other. Erdogan’s anti-Kurd stance is complicated immeasurably by the fact that both the US and Russia support the YPG out of sheer necessity. The group has proven especially adept at battling ISIS and has secured most of the border with Turkey.

As we noted way back in August, it was inevitable that Washington and Ankara would come to blows over the YPG. After all, the US only secured access to Incirlik by acquiescing to Erdogan’s crackdown on the PKK, but some of the missions the US was flying from Turkey’s air base were in support of the YPG. The whole thing was absurd from the very beginning. Well now, Turkey is not only set to use the fight against the YPG as an excuse to intervene in Syria on behalf of the Sunni rebels battling to beat back the Russian and Iranian advance, but Ankara is also demanding that the US recognize the YPG as a terrorist group. If Washington refuses, “measure will be taken.” “If the Unites States is really Turkey’s friend and ally, then they should recognize the PYD — a Syrian branch of the PKK — as a terrorist organization.

If a friend acts as an enemy, then measures should be taken, and they will not be limited to the Incirlik Airbase, Turkey has significant capabilities,” Erdogan advisor Seref Malkoc told Bugun newspaper. So yeah. Turkey just threatened the US. It’s notable that Malkoc specifically said actions would go “beyond Incirlik,” because pulling access to the base would be the first thing any regional observers would expect from Ankara in the event of a spat with Washington. For Turkey to say that measures will go beyond that, opens the door for Erdogan to become openly hostile towards his NATO allies. “The only thing we expect from our U.S. ally is to support Turkey with no ifs or buts,” PM Ahmet Davutoglu told a news conferenceon Saturday. “If 28 Turkish lives have been claimed through a terrorist attack we can only expect them to say any threat against Turkey is a threat against them.”

In other words, Turkey is explicitly asking the US to support Ankara’s push to invade Syria and not only that, Erdogan wants Washington to sanction attacks on the YPG which the US has overtly armed, trained, and funded. “The disagreement over the YPG risks driving a wedge between the NATO allies at a critical point in Syria’s civil war,” Reuters wrote on Saturday. “On Friday, a State Department spokesman told reporters Washington would continue to support organizations in Syria that it could count on in the fight against Islamic State – an apparent reference to the YPG.”

Right. “Washington will continue to support organizations in Syria that it can count on in the fight against Islamic State.” So we suppose that means the US will support Russia. And Iran. And Hezbollah. But most certainly not Turkey, who is the biggest state sponsor of the Islamic State on the face of the planet.

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Japan ag works fine, so that should be destroyed.

TPP, Abe Set To Demolish Japan’s Small Scale Agriculture Model (FT)

It is a source of national angst: why is Japan — culinary superpower and undisputed champion of the Michelin guide — so terrible at exporting food? In 2014, Japan’s food exports were about $5bn. The Netherlands, a country with a fraction of Japan’s population, exported food worth $103bn — with all the delights of sushi, green tea and wagyu beef generating about the same export sales as Edam cheese. For the government of Prime Minister Shinzo Abe, a missed economic opportunity is now colliding with the political imperative to help Japan’s farmers survive the Trans-Pacific Partnership trade deal, which will slash tariffs on ultra-efficient farmers in the US and Australia. The government has set a goal of more than doubling agricultural exports to Y1trn from 2012 to 2020.

Despite an emerging market slowdown that is hurting Japan’s exports overall, this week trade minister Nobuteru Ishihara said there was a chance of hitting the target early. In yen terms, food exports surged by 24.3% to Y599bn last year, even as overall exports rose by a disappointing 3.5%. Masayoshi Honma, professor of agricultural economics at the University of Tokyo, said the reason for low exports is not complicated. “Japanese exports are so low because they’re expensive,” he says. “There’s a huge differential between the Japanese price and the overseas price.” Japan’s obsession with rice production, a longstanding focus on national self-sufficiency in food and the low productivity of its small-scale, highly-subsidised farms all contribute to high prices.

For years, the importance of rural votes to the ruling Liberal Democratic party meant agriculture was sacred, but as the farming population ages — the average farmer is now 70 — it is one area where Mr Abe has proved willing to grasp the nettle on reforms. One of the few measures his government hopes to pass before upper house elections this summer will permit corporate ownership of agricultural land. That is regarded as crucial to allowing more efficient, large-scale agriculture. Mr Honma is cautious about the Y1trn exports target. “It’s not really agricultural exports because it includes marine and processed products,” he says. Most of Japan’s existing agricultural exports are seafood caught by its vast fishing fleet.

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And the same goes for France.

EU-US TTIP Talks Seen By The French Threatening Small Farms (BBG)

For Bruno Dufayet, the latest round of trade talks between the European Union and the U.S. could sound the death knell for France’s small cattle farms. “For a beef farmer in Europe now, the biggest threat is massive imports of U.S. beef produced in feedlots,” said Dufayet, who notes that his 50 beef-cattle farm in south-central France is typical for the country. “The end could be nigh for this type of livestock farm in France.” French farmers and lawmakers fear free-trade talks with the U.S. will pit Europe’s small family operations against intensive American animal farming. Dufayet is a member of French meat lobby Interbev, which hosted senators and members of parliament at a meeting in Paris on Tuesday that finished over beef canapes and red Bordeaux wine.

European farmers would be unable to compete with a “massive opening” of the region’s markets to U.S. operations that handle thousands of animals at a time, the lobby said. The 12th round of negotiations on the Transatlantic Trade Investment Partnership, or TTIP, starts in Brussels on Feb. 22. The contents of any proposed deal are still to be discussed, and there will be no full liberalization for agricultural products, said Daniel Rosario, a spokesman for the EC. The trade concerns come as farmers across France, Europe’s largest agricultural producer, are protesting against plunging prices of everything from pork to milk. The EU needs to protect its family-owned livestock farms based on extensive grazing and beef should be excluded from the talks, Jean-Paul Denanot, a member of the European Parliament and a substitute member on its agriculture committee, said at the Interbev meeting.

“This is a face-off between systems that have nothing in common,” Jean-Pierre Fleury, who heads the beef working group at EU farm lobby Copa-Cogeca. In addition to differences in scale, the EU tracks animals from birth, while U.S. traceability only applies to livestock moving interstate and exempts beef cattle under 18 months. While the EU banned antibiotics as growth promoters in animal feed in 2006, many U.S. states still allow the routine use of the drugs to promote growth in cows, chickens and pigs. There’s also the argument of higher animal welfare standards in the EU than in the U.S., according to the U.S.-based Humane Society International.

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The French were ‘only’ some 300% off in their estimates. That tells you something about their priorities.

Calais ‘Jungle’ Eviction Postponed Because Of Risk To Lone Children (G.)

The forced eviction of thousands of migrants and refugees from the sprawling “Jungle” camp on the outskirts of Calais has been put on hold by the French authorities, the Observer has learned. French courts have postponed Tuesday’s planned eviction after a census conducted by the charity Help Refugees found that far more refugees were living in the area of the camp earmarked for demolition than French authorities had calculated. Researchers for the charity counted 3,455 people living in the southern stretch of the Jungle, which is scheduled to be destroyed. Of these, 445 were children and 315 were without their parents, the youngest was a 10-year-old Afghan boy. By contrast, French authorities had estimated between 800 and 1,000 people were living there.

The eviction has been placed on hold until a judge visits the camp on Tuesday morning to re-assess the situation, with the case being heard in Lille later that afternoon. Under the previous expulsion order, refugees had been ordered to remove their makeshift homes and possessions by 8pm on Tuesday, while camp shops, cafes, churches and mosques would be razed. Josie Naughton, co-founder of Help Refugees, said: “Hopefully it’s all going to be OK. The judge will decide yes or no, so we hope they show compassion. The figures highlight the brutality of destroying these homes before proper child protection schemes have been put in place. These children have post-traumatic stress, you can’t just put them on a bus, they are going to be in danger.”

George Gabriel of Citizens UK, a group involved in the growing campaign calling for children stranded in the jungle to be allowed into the UK said: “It’s great news that the French courts have put the breaks on the demolition of wide sections of the Jungle. Day after day we find more refugee children living in that terrible camp and risking their lives each night as they try to reach their families. “They have a full legal right to do so, and so for as long as the British and French governments refuse to properly implement the law, it’s vital those boys aren’t dispersed away from the legal advice they so badly need.” However Naughton warned that if the judge does decide that the eviction can go ahead as French authorities want, then the bulldozers would arrive at the Jungle on Wednesday morning.

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How long does it take to figure this out?

Razor Wire Fence Fails To Keep Migrants Out Of Hungary (BBC)

Police in Hungary say increasing numbers of migrants are breaching a razor wire fence built to stop them crossing the border from Serbia. In January, 550 people were caught getting through – up from 270 in December. More than 1,200 were caught in the first 20 days of February. Hungary caused controversy with the 4m barrier, completed in September. However, several other countries have since introduced tough border controls to stop the influx of migrants. The number of people crossing from Serbia dropped after Hungary built the fence along the 175km border with its neighbour last year. But police say migrants are now increasingly getting through, mostly by cutting through or climbing over the barrier. Most are from Pakistan, Iran and Morocco, who are no longer admitted through other routes.

It follows moves by Austria, Slovenia, and Balkan countries to limit the nationalities and the numbers of those being allowed through. More than a million people arrived in the EU in 2015, creating Europe’s worst refugee crisis since World War Two. The majority of migrants and refugees have headed for countries like Germany and Sweden via Hungary and Austria after crossing from Turkey to Greece. Many are fleeing the conflict in Syria. Far fewer migrants are entering Hungary than Austria but the sharply increasing trend of people breaching the border fence is alarming the authorities, reports the BBC’s Central Europe correspondent, Nick Thorpe.

More people crossed from Serbia into Hungary in the first 20 days of February than in the same period in 2015, before a fence was even contemplated, our correspondent adds. Once in Hungary, they face criminal charges or deportation. Meanwhile Interior Minister Sandor Pinter has renewed the closure of three railway crossings to Croatia, for fear that migrants and refugees will again start walking down the tracks into Hungary. On Friday Austria introduced a daily cap on the number of migrants and refugees allowed into the country. Just 80 asylum applications will be accepted each day at the country’s southern border, in a move condemned by critics as incompatible with European law.

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Oh God almighty… How do we sleep?

Despite Aegean Rescuers’ Best Efforts, Not All Migrants Are Saved (NPR)

It’s just before midnight on a February night when the crew of the Responder gets word from the Greek coast guard that a boat with migrants aboard is nearby. It’s in trouble somewhere in Greek territorial waters in the Aegean Sea. “There’s a light, a flash,” says Eugenio Miuccio, a 38-year-old Italian doctor, pointing to a flicker in the pitch-black sea. He and an Italian nurse, 27-year-old Roberto Pantaleo, pull on red life jackets as the ship heads toward the light. Iain Brown, a volunteer rescue diver from Scotland, is also ready. He’s listening, trying to make out people’s voices. “We can hear them screaming before we see them,” he says. “The boats they are in are so thin. We can hear them breaking up.” They’re ready to jump into a small speedboat piloted by Dominic “Mimmo” Vella, a 44-year-old father of three from Malta and a member of the Responder’s crew.

“If something happens and people fall in the water,” Vella says, “with the big boat, we cannot go near them, so we go with the small ones.” The Responder arrives where the migrant boat is supposed to be. But there is no boat, no people. Just empty sea. “False alarm,” Brown says. “We found nothing,” Vella says. “So we’re going to keep on patrolling.” The Responder, a 167-ft. search and rescue tug vessel has been patrolling these waters for the past two months. False alarms come with the territory, but the dangers for which the crew remains prepared are real. The boat is leased by a Malta-based nonprofit called the Migrant Offshore Aid Station (MOAS). An American businessman, Christopher Catrambone, and his Italian wife, Regina, started MOAS in early 2014 to help rescue asylum seekers crossing the Mediterranean between Libya and Italy.

Then, last September, 3-year-old Alan Kurdi washed up on a Turkish beach. The Syrian toddler had drowned trying to reach Greece with his family. The image of his lifeless body jolted the world’s empathy. Donations flooded into MOAS. The charity leased the Responder, hired a crew and recruited volunteers. The Responder arrived in the Aegean at the end of December. The two speedboats aboard are named after Alan and his 5-year-old brother, Galip, who also drowned in September. Brown, the diver, heard about MOAS on the news. He’s 51 and volunteers with the Coast Guard back home in Ayr, Scotland. “I couldn’t stand it anymore, sitting at home while kids were drowning here,” he says. “So I [took] time off and came here. I can help. I understand the sea.”

The Responder patrols a stretch of the Aegean Sea between Turkey and the tiny Greek islet of Agathonissi, just south of the larger island of Samos. The distance between Greece and Turkey is relatively short, as close as 8 miles here. But the sea can look deceptively calm to migrants. “They could leave from a sheltered bay,” says MOAS search and rescue operations officer John Hamilton, as he monitors a radar on deck. “Once they get out of this bay, they come across rough seas.” More than 400 people fleeing war and poverty have died or gone missing in the Mediterranean since the beginning of this year, according to the U.N. refugee agency. At least 311 have drowned in the Aegean, according to the International Organization for Migration. The Responder has been backing up the Greek coast guard in the southern Aegean Sea, and has rescued 739 people here so far. And since 2014, MOAS crews have rescued nearly 12,000 people.

But the crew can’t stop thinking about a boat that capsized on January 15. “That night, we got a call that there was a boat,” Vella says. “And when we arrived to where the boat was supposed to be, we didn’t find the boat. But we found the people. They were screaming.” As the boat sank, people hung onto its blue-and-white hull, moaning loudly for help. “It was so cold that night, so very cold,” Vella says. “I prayed there were no kids in the water.” Miuccio, the Italian doctor, did too. He worried about hypothermia. “Children and babies can only stay in such cold water for a few minutes,” he says. A diver jumped into the sea and swam to the people clinging to the hull. “Children? Children?” the diver screamed. “Babies?”

The first baby was a chubby-cheeked little boy, no more than 2-years-old. Miuccio, on the speedboat that night, remembers that the little boy’s face was blue and he was foaming at the mouth. He had no pulse. “I gave him CPR for 15 minutes,” he says. “But nothing worked.” Pantaleo, the nurse, tried to revive another little boy, also to no avail. A third child, a 4-year-old girl, was also found dead. Then two more children, a boy and a girl, arrived — unconscious but with a pulse. “They responded immediately [after] CPR,” Miuccio recalls. “They started crying, which is a good sign. We took off their wet clothes and immediately wrapped them in isothermal blankets.”

[..] The morning after the three children died in January, Mimmo Vella called his own kids back in Malta. He told them he loved them so much. He told them they were lucky to be safe at home. As MOAS begins yet another patrol, he calls them again. His youngest son’s tiny voice rises above the wind and the waves.

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Feb 192016
 
 February 19, 2016  Posted by at 8:36 am Finance Tagged with: , , , , , , , , ,  3 Responses »
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Richardson Hope for a New Life: Man passes baby through fence, Serbia/Hungary border 2015

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

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

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

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

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

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

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

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

Why Negative Interest Rates Spell Doom For Capitalism (Romano)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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I’ve suggested seppuku before.

Abenomics? How About Kurodanomics? (BBG)

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

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

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

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

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Can we talk about timing here, OECD?

OECD Calls for Urgent Increase in Government Spending (WSJ)

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

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

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

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

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

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Seems obvious.

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

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

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

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

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

Red Ink In China (Economist)

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

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

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

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

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

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

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

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

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

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

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How many times have we said this?!

You Cannot Print Your Way to Prosperity (Ron Paul)

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

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

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

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What happens when you make it all up.

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

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

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

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How the Anglo model of ownership obsession ritually murders itself.

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

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

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

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

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

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

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

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

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

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

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Not even the WSJ is fooled.

The Political War on Cash (WSJ)

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

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

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

So, presto, ban cash.

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

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

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

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

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

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

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

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

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

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

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Keep watching below.

Oil Gives Up Gains as Inventories Build (WSJ)

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

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

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Better come clean before you’re forced to?!

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

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

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

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

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

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

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

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

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Jan 142016
 
 January 14, 2016  Posted by at 9:34 am Finance Tagged with: , , , , , , , , , , ,  3 Responses »
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DPC Oyster luggers along Mississippi, New Orleans 1906

Asia Stocks Extend Losses, Japan’s Nikkei Falls 3.67% (CNBC)
Oil and US Stocks Tumble Over Fears For Global Economy (Guardian)
China Bear Market Looms as PBOC Fails to Stop Flight to Safety (BBG)
Q4 Will Be Worst US Earnings Season Since Third Quarter Of 2009 (ZH)
The Real Price of Oil Is Far Lower Than You Realize (BBG)
Crude At $10 Is Already A Reality For Canadian Oil-Sands Miners (BBG)
Tanker Rates Tumble As Last Pillar Of Strength In Oil Market Crashes (ZH)
Currency Swings Sap US Corporate Profits by Most in Four Years (BBG)
African Exports To China Fell By 40% In 2015 (BBC)
Money Leaving Emerging Markets Faster Than Ever Amid China Slump (BBG)
China Bond Yield Sinks To Record Low As Central Bank Injects $24 Billion (BBG)
China’s Better-Than-Expected Trade Numbers Raise Questions (WSJ)
Surging China-Hong Kong Trade Raises Doubts Over Recovery (BBG)
The Quiet Side of China’s Market Intervention (WSJ)
As China Dumps Treasuries, Other Buyers Expected To Step In (BBG)
Reporting Rule Adds $3 Trillion Of Leases To Balance Sheets Globally (FT)
EU Scientists In Bitter Row Over Safety Of Monsanto’s Round-Up (Guardian)
Thousands Of Farmer Suicides Prompt India Crop Insurance Scheme (Guardian)
Greece Said To Propose Return Trips For Illegal Migrants (AP)
Tighter Border Checks Leave Migrants Trapped In Greece (AP)
Refugee Influx To Greece Continues Unabated Through Winter (Reuters)
Europe Sees No Let Up in Refugee Crisis as January Arrivals Soar (BBG)

“In Japan, core machinery orders in November fell 14.4%..”

Asia Stocks Extend Losses, Japan’s Nikkei Falls 3.67% (CNBC)

[..] major Asian stock markets continued their downward slide, following a massive sell-off on Wall Street overnight, pressured by concerns over a global economic slowdown and low oil prices. After a late sell-off Wednesday afternoon, the Chinese markets opened in negative territory before trimming losses, with the Shanghai composite down some 1.05%, while the Shenzhen composite was flat. At market open, Shanghai was down 2.73% and Shenzhen saw losses of 3.37%. Hong Kong’s Hang Seng index was down 1.51%. Offering some sign of stability in a generally volatile market, the People’s Bank of China (PBOC) set Thursday’s yuan mid-point rate at 6.5616, compared with Wednesday’s fix of 6.5630. The dollar-yuan pair was nearly flat at 6.5777.

Japan’s Nikkei 225 erased all of Wednesday’s 2.88% gain and plunged 3.95%, weighed by commodities and machinery sectors, which were all down between 3 and 4%. Earlier, it fell as low as 4% before paring back some of the losses. South Korea’s Kospi traded down 1.45%. Down Under, the ASX 200 dropped 1.61%, with energy and financials sectors sharply down. All sectors were in the red except for gold, which saw an uptick of 3.71%. In Japan, core machinery orders in November fell 14.4% from the previous month, according to official data, down for the first time in three months. The data is regarded as an indicator of capital spending and fell more than market expectations for a 7.9% decline.

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Or is it just price discovery?

Oil and US Stocks Tumble Over Fears For Global Economy (Guardian)

US stocks fell heavily on Wednesday, with the Standard & Poor’s 500 falling 2.5% to take the index below 1,900 points for the first time since September, due to growing concerns about the falling oil price, which dipped below $30 a barrel for the first time in nearly 12 years. The S&P 500, which closed at 1,890 points, suffered its worst day since September and has fallen by 10% since its November peak taking it into “correction” territory, something that has not happened since August 2014. The Dow Jones industrial average dropped by 364 points, or 2.2%, to 16,151, and the Nasdaq composite dropped 159 points, or 3.4%, to 4,526. This deepened the New York stock exchange’s already worst start to a year on record.

Wednesday’s stock market declines were triggered by new figures showing US gasoline stockpiles had increased to record high, which caused Brent crude prices to fall as low as $29.96, their lowest level since April 2004, before settling at $30.31, a 1.8% fall. The oil price has fallen by 73% since a peak of $115 reached in the summer of 2014. Industry data showed that US gasoline inventories soared by 8.4m barrels and stocks of diesel and heating oil increased by more than 6m barrels – confirming the forecasts of many analysts that a huge oversupply of oil could keep prices low during most of 2016. Analysts said that growing fears of a weakening outlook for the global economy, made worse by falling oil prices, was behind the steep falls. Some oil analysts this week predicted that the price could fall as low as $10.

In recent days several analysts have warned that the global economy could suffer a repeat of the 2008 crash if the knock-on effects of a contraction in Chinese output pushes down commodity prices further and sparks panic selling on stock and bond markets. [..] Earlier in the day China’s stock market fell more than 2% after officials played down the significance of better-than-expected trade figures for December, saying exports could sink further before they find a floor.

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Looms?!

China Bear Market Looms as PBOC Fails to Stop Flight to Safety (BBG)

Chinese stocks headed for a bear market while government bond yields fell to a record as central bank cash injections and a stable yuan fixing failed to shore up confidence in the world’s second-largest economy. The Shanghai Composite Index sank as much as 2.8%, falling more than 20% from its December high and sinking below its closing low during the depths of a $5 trillion rout in August. Investors poured money into government bonds after the People’s Bank of China added the most cash through open-market operations since February 2015, sending the yield on 10-year notes down to 2.7%. While the central bank kept its yuan reference rate little changed for a fifth day, the currency dropped 0.5% in offshore trading and Hong Kong’s dollar declined to the weakest since March 2015.

The selloff is a setback for Chinese authorities, who have been intervening to support both stocks and the yuan after the worst start to a year for mainland markets in at least two decades. As policy makers in Beijing fight to prevent a vicious cycle of capital outflows and a weakening currency, the resulting financial-market volatility has undermined confidence in their ability to manage the deepest economic slowdown since 1990 “You can’t really find buyers in this environment,” said Ken Peng, a strategist at Citigroup Inc. in Hong Kong. “It’s a very, very fragile status quo China is trying to maintain.” The government faces a dilemma with the yuan, according to Samuel Chan at GF International.

On one hand, a weakening exchange rate would help boost exports and is arguably justified given declines in other emerging-market currencies against the dollar in recent months. The downside is that a depreciating yuan encourages capital outflows and makes it harder to keep domestic interest rates low. The monetary authority “doesn’t want the yuan to depreciate fast because it will push funds to leave China very quickly,” Chan said. The country saw capital outflows for 10 straight months through November, totaling $843 billion, according to an estimate from Bloomberg Intelligence. Foreign-exchange reserves, meanwhile, sank by a record $513 billion last year to $3.33 trillion, according to the central bank.

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Still sinking after all these years.

Q4 Will Be Worst US Earnings Season Since Third Quarter Of 2009 (ZH)

Couple of things: first of all, any discussion whether the US market is in a profit (or revenue) recession must stop: the US entered a profit recession in Q3 when it posted two consecutive quarters of earnings declines. This was one quarter after the top-line of the S&P dropped for two consecutive quarters, and as of this moment the US is poised to have 4 consecutive quarters with declining revenues as of the end of 2015. Furthermore, as we showed on September 21, when Q4 was still expected to be a far stronger quarter than it ended up being, in the very best case, the US would go for 7 whole quarters without absolute earnings growth (and even longer without top-line growth).

Then, as always happens, optimism about the current quarter was crushed as we entered the current quarter, and whereas on September 30, 2015, Q4 earnings growth was supposed to be just a fraction negative, or -0.6%, as we have crossed the quarter, the full abyss has revealed itself and according to the latest Factset consensus data as of January 8, the current Q4 EPS drop is now expected to be a whopping -5%. And just to shut up the “it’s all energy” crowd, of the 10 industries in the S&P, only 4 are now expected to post earnings growth and even their growth is rapidly sliding and could well go negative over the next few weeks. It gets even worse. According to Bloomberg, on a share-weighted basis, S&P 500 profits are expected to have dropped by 7.2% in 4Q, while revenues are expected to fall by 3.1%.

This would represent the worst U.S. earnings season since 3Q 2009, and a third straight quarter of negative profit growth. It’s no longer simply a recession: as noted above, the Q4 EPS drop follows declines of 3.1% in Q3 and 1.7% in Q2. it is… whatever comes next. As Bloomberg adds, the main driving forces behind drop in U.S. earnings are the rise in the dollar index (thanks Fed) and the drop in average WTI oil prices. However, since more than half of all industries are about to see an EPS decline, one can’t blame either one or the other. So while we know what to expect from Q4, a better question may be what is coming next, and according to the penguin brigade, this time will be different, and the hockey stick which was expected originally to take place in Q4 2015 and then Q1 2016 has been pushed back to Q4 2016, when by some miracle, EPS is now expected to grow by just about 15%.

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WTI/Brent prices are just a story.

The Real Price of Oil Is Far Lower Than You Realize (BBG)

While oil prices flashing across traders’ terminals are at the lowest in a decade, in real terms the collapse is even deeper. West Texas Intermediate futures, the U.S. benchmark, sank below $30 a barrel on Tuesday for the first time since 2003. Actual barrels of Saudi Arabian crude shipped to Asia are even cheaper, at $26 – the lowest since early 2002 once inflation is factored in and near levels seen before the turn of the millennium. Slumping oil prices are a critical signal that the boom in lending in China is “unwinding,” according to Adair Turner, chairman of the Institute for New Economic Thinking.

Slowing investment and construction in China, the world’s biggest energy user, is “sending an enormous deflationary impetus through to the world, and that is a significant part of what’s happening in this oil-price collapse,” Turner, former chairman of the U.K. Financial Services Authority, said. The nation’s economic expansion faltered last year to the slowest pace in a quarter of a century. “You see a big destruction in the income of the oil and commodity producers,” Turner said. “That is having a major effect on their expenditure across the world.” The benefit for consumers from historically low oil prices is being blunted by changes in fuel taxation and a reduction in subsidies, according to Paul Horsnell at Standard Chartered in London. “But it certainly shows that current prices are very low by any description,” he said.

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“..$8.35 on Tuesday, down from as much as $80 less than two years ago.”

Crude At $10 Is Already A Reality For Canadian Oil-Sands Miners (BBG)

Think oil in the $20s is bad? In Canada they’d be happy to sell it for $10. Canadian oil sands producers are feeling pain as bitumen – the thick, sticky substance at the center of the heated debate over TransCanada’s Keystone XL pipeline – hit a low of $8.35 on Tuesday, down from as much as $80 less than two years ago. Producers are all losing money at current prices, First Energy Capital’s Martin King said Tuesday at a conference in Calgary. Which doesn’t mean they’ll stop. Since most of the spending for bitumen extraction comes upfront, and thus is a sunk cost, production will continue and grow. Canada will need more pipeline capacity to transport bitumen out of Alberta by 2019, King said.

Bitumen is another victim of a global glut of petroleum, which has sunk U.S. benchmark prices into the $20s from more than $100 only 18 months ago. It’s cheaper than most other types of crude, because it has to be diluted with more-expensive lighter petroleum, and then transported thousands of miles from Alberta to refineries in the U.S. For much of the past decade, oil companies fought environmentalists to get the pipeline approved so they could blend more of the tar-like petroleum and feed it to an oil-starved world. TransCanada is mounting a $15 billion appeal against President Barack Obama’s rejection of Keystone XL crossing into the U.S. – while simultaneously planning natural gas pipelines from Alberta to Canada’s east coast to carry diluted bitumen. Environmentalists are hoping oil economics finish off what their pipeline protests started.

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Inventories are overflowing. How predictable.

Tanker Rates Tumble As Last Pillar Of Strength In Oil Market Crashes (ZH)

If there was one silver-lining in the oil complex, it was the demand for VLCCs (as huge floating storage facilities or as China scooped up ‘cheap’ oil to refill their reserves) which drove tanker rates to record highs. Now, as Bloomberg notes so eloquently, it appears the party is over! Daily rates for benchmark Saudi Arabia-Japan VLCC cargoes have crashed 53% year-to-date to $50,955 (as it appears China’s record crude imports have ceased). In fact the rate crashed 12% today for the 12th straight daily decline from over $100,000 just a month ago…

China imported a record amount of crude last year as oil’s lowest annual average price in more than a decade spurred stockpiling and boosted demand from independent refiners. China’s crude imports last month was equivalent to 7.85 million barrels a day, 6% higher than the previous record of 7.4 million in April, Bloomberg calculations show.

China has exploited a plunge in crude prices by easing rules to allow private refiners, known as teapots, to import crude and by boosting shipments to fill emergency stockpiles. The nation’s overseas purchases may rise to 370 million metric tons this year, surpassing estimated U.S. imports of about 363 million tons, according to Li Li, a research director with ICIS China, an industry researcher. But given the crash in tanker rates – and implicitly demand – that “boom” appears to be over.

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What neighbors can the US beggar?

Currency Swings Sap US Corporate Profits by Most in Four Years (BBG)

Volatility in the $5.3-trillion-a-day foreign exchange market is dragging down U.S. corporate earnings by the most since 2011, according to a report from FiREapps. Currency fluctuations eroded earnings for the average North American company by 12 cents per share in the third quarter, according to the Scottsdale, Arizona-based firm, which advises businesses and makes software to help reduce the effect of foreign-exchange swings. That’s the most in data going back at least four years, and is up from an average 3 cents per share in the second quarter. “This is the worst I’ve seen it,” FiREapps chief executive officer Wolfgang Koestersaid in a telephone interview. “Investors and analysts are taking a very close look at corporate results impacted by foreign exchange and recognize how material they are.”

A JPMorgan measure of currency volatility averaged 10.1 % during the third quarter, up from 6.3 % 12 months earlier. Last year, some of the biggest price swings came from unscheduled events, such as China’s August devaluation of the yuan, Switzerland’s decision to scrap its currency cap and plummeting commodity prices. Companies in North America lost at least $19.3 billion to foreign-exchange headwinds in the third quarter of 2015, FiREapps data showed. The losses grew by about 14 % from the second quarter. Of the 850 North American corporations that Fireapps analyzed, 353 cited the negative impact of currencies in their earnings, more than double the previous quarter. “That is the largest number of companies talking about currency impact that we’ve ever seen,” Koester said.

China’s yuan is garnering more attention from corporations amid concern that growth in the world’s second-largest economy is slowing, according to FiREapps. Yet North American firms remain most concerned about the effects of the euro, Brazilian real and Canadian dollar on their results. The currencies have fallen 8.3 %, 34 % and 16 % against the greenback over the past 12 months. The stronger U.S. dollar means higher, less-competitive prices for U.S. businesses seeking to sell their products overseas. Companies also take a hit when they account for revenue denominated in weaker overseas currencies, unless they hedged their exposure.

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That is a very big number.

African Exports To China Fell By 40% In 2015 (BBC)

African exports to China fell by almost 40% in 2015, China’s customs office says. China is Africa’s biggest single trading partner and its demand for African commodities has fuelled the continent’s recent economic growth. The decline in exports reflects the recent slowdown in China’s economy. This has, in turn, put African economies under pressure and in part accounts for the falling value of many African currencies. Presenting China’s trade figures for last year, customs spokesman Huang Songping told journalists that African exports to China totalled $67bn (£46.3bn), which was 38% down on the figure for 2014.

BBC Africa Business Report editor Matthew Davies says that as China’s economy heads for what many analysts say will be a hard landing, its need for African oil, metals and minerals has fallen rapidly, taking commodity prices lower. There is also less money coming from China to Africa, with direct investment from China into the continent falling by 40% in the first six months of 2015, he says. Meanwhile, Africa’s demand for Chinese goods is rising. In 2015 China sent $102bn worth of goods to the continent, an increase of 3.6%. Last year, South Africa hosted a China-Africa summit during which President Xi Jinping announced $60bn of aid and loans, symbolising the country’s growing role on the continent.

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And for now that’s still largely due to China.

Money Leaving Emerging Markets Faster Than Ever Amid China Slump (BBG)

Investors pulled more money from emerging markets in the three months through December than ever before as investors dumped riskier assets in China amid concern the country’s currency will weaken further, according to Capital Economics. Capital outflows from developing nations reached $270 billion last quarter, exceeding withdrawals during the financial crisis of 2008, led by an exodus from China as investors pulled a record $159 billion from the country just in December, Capital Economics’ economist William Jackson said in a report. Excluding outflows from the world’s second-largest economy, emerging markets would have seen inflows in the quarter, he said.

“This appears to reflect a growing skepticism in the markets that the People’s Bank can keep the renminbi steady,” Jackson said in the note, which was published Wednesday. “Given the fresh sell-off in EM financial markets and growing concerns about the level of the renminbi, it seems highly likely that total capital outflows will have increased” in January, he said. Investor skepticism increased last year as a surprise devaluation of China’s yuan roiled global markets and triggered a $5 trillion rout in the nation’s equity markets, casting doubt on the government’s ability to contain the selloff and support growth.

Chinese leaders have since then stepped up efforts to restrict capital outflows and prop up share prices despite pledges to give markets greater sway and allow money to flow freely across the nation’s borders within five years. The yuan traded in the mainland market declined 4.4% in 2015, the most since 1994. Outflows from emerging markets rose to a record $113 billion in December, Capital Economics said. Over 2015, investors pulled $770 billion from developing nations, compared with $230 billion a year earlier.

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“For local investors, there’s nothing to buy..”

China Bond Yield Sinks To Record Low As Central Bank Injects $24 Billion (BBG)

China’s government bonds advanced, pushing the 10-year yield to a record low, as the central bank stepped up cash injections and volatile stock and currency markets drove demand for safety. The offshore yuan traded in Hong Kong declined for the first time in six days on speculation a narrowing gap with the Shanghai rate will dissuade the People’s Bank of China from stepping into the market, while Chinese equities slid below the lowest levels of last year’s market selloff. “For local investors, there’s nothing to buy,” said Li Liuyang at Bank of Tokyo-Mitsubishi. “Equities are not performing well, so bonds become the natural investment target. The PBOC increased reverse repo offerings partly because it may be taking some preemptive measures before next month’s Lunar New Year holidays.”

The yield on debt due October 2025 fell as much as three basis points to 2.70%, the least for a benchmark 10-year note in ChinaBond data going back to September 2007. The previous low was 2.72% in January 2009, during the global financial crisis. The PBOC conducted 160 billion yuan ($24 billion) of seven-day reverse-repo agreements in its open-market operations on Thursday, up from 70 billion yuan a week ago. That’s the biggest one-day reverse repo offerings since February 2015, data compiled by Bloomberg show. The PBOC injected a net 40 billion yuan this week, taking its total additions to 230 billion yuan so far this month. “The PBOC wants to keep liquidity abundant onshore to bolster the economy,” said Nathan Chow at DBS Group. “It’s also trying to calm the currency market as the yuan declined significantly last week and caused high volatility. But in the long run, the yuan will depreciate as the fundamentals are still weak.”

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Fake invoices. It’s as simple as that.

China’s Better-Than-Expected Trade Numbers Raise Questions (WSJ)

China’s better-than-expected trade figures in December have sparked questions over whether trade flows have been inflated by investors evading capital controls and the extent of incentives being offered by government agencies to prop up exports. China reported Wednesday that exports in December declined 1.4% year on year. This was much better than the 8% drop expected by economists in a WSJ survey and compared with a 6.8% decline in November, allowing Beijing to end the trading year on a stronger note. Imports fell by 7.6% last month, better than the expected 11% decline, compared with an 8.7% drop in November. The December trade figures also were helped by favorable comparisons with year-earlier figures, economists said.

Of particular note was a 64.5% jump in China’s imports from Hong Kong, the strongest pace in three years, analysts said. This compared with a 6.2% decline for the January-November period. ”It really looks like capital flight,” said Oliver Barron with investment bank North Square Blue Oak. “This has artificially inflated the total import data.” China in recent months has struggled to adjust to massive capital outflows as Chinese investors seek better returns overseas. China saw its foreign exchange hoard drop 13.3% in 2015, or by $500 billion, to $3.3 trillion by the end of December. Under Beijing’s strict capital controls, consumers are only allowed to purchase $50,000 worth of U.S. dollars each calendar year. But manipulated foreign trade deals offer a way around tightening restrictions, say economists.

In an effort to stem the outflow, Beijing’s foreign exchange regulator announced stricter supervision starting January 1 to screen suspicious individual accounts and crack down on organized capital flight, according to an online statement. Bank customers also have reported more difficulty recently exchanging yuan into dollars, with some forced to wait four days to complete a transaction that normally takes one. And China has cracked down on illegal foreign-exchange networks, including a bust announced in November in Jinhua, a city of five million people in eastern Zhejiang province, allegedly involving eight gangs operating from over two dozen “criminal dens” that reportedly handled up to $64 billion in unauthorized transactions, according to state media and a detailed police report.

The official People’s Daily newspaper said 69 people had been criminally charged and another 203 people had been given administrative sanctions. ”Regulators have been trying really hard to close the loopholes,” said Steve Wang with Reorient Financial, adding that the market seems skeptical of Wednesday’s trade figures. The Shanghai Composite Index fell 2.4%. “I don’t think Hong Kong has been buying or selling any more from China. The December data is a huge question mark,” he added. An example of how a Chinese company might move capital abroad using trade deals would be to import 1 million widgets at $2 apiece from a Hong Kong partner or subsidiary company, paying the $2 million, analysts said. It then exports the same widgets at $1 apiece, receiving $1 million from the Hong Kong entity. The goods are back where they started, but $1 million has now moved offshore.

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“..the surprise gains may harken back to past instances of phony invoicing and other rules skirted to escape currency restrictions.”

Surging China-Hong Kong Trade Raises Doubts Over Recovery (BBG)

China exports to Hong Kong rose 10.8% from a year earlier for the biggest gain in more than a year, making the city the biggest destination for shipments last month and spurring renewed skepticism over data reliability and the broader recovery in the nation’s outbound trade. Exports to Hong Kong rose to $46 billion last month, according to General Administration of Customs data released Wednesday. That was the highest value in almost three years and the biggest amount for any December period in the last 10 years, customs data show. Imports from Hong Kong surged 65%, the most in three years, to $2.16 billion. Economists said the surprise gains may harken back to past instances of phony invoicing and other rules skirted to escape currency restrictions.

China’s government said in 2013 some data on trade with Hong Kong were inflated by arbitrage transactions intended to avoid rules, an acknowledgment that export and import figures were overstated. The increase in exports to Hong Kong and China’s imports from the city probably indicate “fake invoicing,” said Iris Pang at Natixis in Hong Kong. Invoicing of China trade should be larger in December because of the wider gap between the onshore yuan and the offshore yuan traded in Hong Kong, she said. China’s exports to the Special Administrative Region of more than 7 million people eclipsed the $35 billion tallies last month for both the U.S. and the EU, the data show. Exports to Brazil, Canada, Malaysia, Russia all dropped more than 10%.

The imports gain “points to potential renewed fake trade activities,” said Larry Hu at Macquarie. When the yuan rose in 2013, exports to Hong Kong were inflated artificially, he said, and “now it’s just the opposite.” China’s total exports rose 2.3% in yuan terms from a year earlier, the customs said, after a 3.7% drop in November. Imports extended declines to 14 months. The recovery in exports in December may prove to be a temporary one due to a seasonal increase at the end of the year, and it doesn’t represent a trend, a spokesman for customs said after the Wednesday briefing. A weak yuan will help exports, but that effect will gradually fade, the spokesman told reporters in Beijing. Morgan Stanley economists led by Zhang Yin in Hong Kong also said in a note Wednesday that the higher-than-expected trade growth may have been affected by currency arbitrage. Overall external demand remained weak, as shown by anemic export data reported by South Korea and Taiwan, he said.

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State firms buying/holding lousy paper.

The Quiet Side of China’s Market Intervention (WSJ)

As Chinese markets tanked last week, China Inc. appeared to be rallying to their support. At least 75 Chinese companies issued statements during the past week and a half, saying their biggest shareholders would be holding on to their stakes in order to protect investor interests. Officially, the companies were acting spontaneously. But privately, people close to Chinese regulators as well as some of the companies themselves said they were prompted to release the statements by exchange officials, who had called and asked them to issue expressions of support. In many cases, the statements contained similar or nearly identical language. The behind-the-scenes activity reflects the secretive, unofficial side to Chinese regulators’ attempts to bolster the country’s sagging stock markets.

The regulators’ varied arsenal includes tactics such as phone calls from exchange officials to big holders of shares, urging them not to sell, as well as pumping hundreds of billions of yuan into the markets through government-affiliated funds. The hand of the regulators was most apparent over the summer, when a 43% plunge in the Shanghai Composite Index over slightly more than two months was accompanied by dozens of declarations by brokerages and fund managers abjuring stock sales, as well as huge purchases of shares in bellwether Chinese stocks by a shadowy group of firms known as the “national team.” Brokers, company executives and people close to Chinese regulators say tactics have become more subtle during the current market downturn: The national team hasn’t been making the high-profile buys of half a year ago, and regulators have been less overt in their requests for cooperation.

An executive at one environmental technology firm listed on the Shenzhen exchange said that in July, the bourse sent a letter demanding the company release a statement saying its controlling shareholders wouldn’t unload stock. Last week, the exchange was more low key, he said, phoning up and urging the company to release another statement to set an example for other firms. But the flurry of companies declaring their support for the market in recent days shows that Chinese regulators still haven’t given up on behind-the-scenes efforts to guide the direction of stocks. “We issued the statement because the [Shenzhen] exchange encouraged listed firms to maintain shareholdings,” said an executive at LED device-maker Shenzhen Jufei who requested anonymity. “You can think of this as a concerted effort by listed firms to voluntarily stabilize the market.”

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The popularity of T-Bills is guaranteed.

As China Dumps Treasuries, Other Buyers Expected To Step In (BBG)

It might be easy to conclude China’s unprecedented retreat from Treasuries is bad news for America. After all, as the biggest overseas creditor to the U.S., China has bankrolled hundreds of billions of dollars in deficit spending, particularly since the financial crisis. And that voracious appetite for Treasuries in recent years has been key in keeping America’s funding costs in check, even as the market for U.S. government debt ballooned to a record $13.2 trillion. Yet for many debt investors, there’s little reason for alarm. While there’s no denying that China’s selling may dent demand for Treasuries in the near term, the fact the nation is raising hundreds of billions of dollars to support its flagging economy and stem capital flight is raising deeper questions about whether global growth itself is at risk.

That’s likely to bolster the haven appeal of U.S. debt over the long haul, State Street Corp. and BlackRock Inc. say. Any let up in Chinese demand is being met with record buying by domestic mutual funds, which has helped to contain U.S. borrowing costs. “You have China running down reserves and Treasuries are a big portion of reserves, but even with that we still think the weight of support” will boost demand for U.S. debt, said Lee Ferridge, the head of macro strategy for North America at State Street, which oversees $2.4 trillion. The question is “if China slows, where does growth come from. That’s what’s been worrying a lot of people coming into 2016.”

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And then the TBTFs will need rescue again?!

Reporting Rule Adds $3 Trillion Of Leases To Balance Sheets Globally (FT)

Companies around the world will be forced to add close to $3tn of leasing commitments to their balance sheets under new rules from US and international regulators — significantly increasing the debt that must be reported by airlines and retailers. A new financial reporting standard — the culmination of decades of debate over “off-balance sheet” financing — will affect more than one in two public companies globally. Worst hit will be retail, hotel and airline companies that lease property and planes over long periods but, under current accounting standards, do not have to include them in yearly reports of assets and liabilities. In these sectors, future payments of off-balance sheet leases equate to almost 30% of total assets on average, according to the International Accounting Standards Board, which collaborated with the US Financial Accounting Standards Board on the new rule.

Hans Hoogervorst, IASB chairman, said: “The new Standard will provide much-needed transparency on companies’ lease assets and liabilities, meaning that off-balance-sheet lease financing is no longer lurking in the shadows”. As a result of the accounting change, net debt reported by UK supermarket chain Tesco would increase from £8.6bn at the end of August to £17.6bn, estimated Richard Clarke, an analyst from Bernstein. However, while the new standard would make Tesco look more indebted, Mr Clarke added that the assets associated with the leases would also come on to the company’s balance sheet, so “the net effect would be neutral.” Investors warned that the new standards could affect some groups’ banking covenants and debt-based agreements with lenders, but said they would make it easier to compare companies that uses leases with those that prefer to borrow and buy.

Vincent Papa, director financial reporting policy at the Chartered Financial Analysts Institute, which has been pushing for these changes since the 1970s, said: “Putting obligations on balance sheets enables better risk assessment. It is a big improvement to financial reporting.” For some airlines, the value of off-balance- sheet leases can be more than the value of assets on the balance sheets, the IASB noted. It also pointed out that a number of retailers that had gone into liquidation had lease commitments that were many times their reported balance sheet debt. [..] In 2005, the SEC calculated that US companies had about $1.25 trillion of leasing commitments that were not included in assets or liabilities on balance sheets. Six years later, the Equipment Leasing and Finance Foundation in the US said that “Capitalising operating leases will add an estimated $2 trillion and 11% more reported debt to the balance sheets of US-based corporations…and could result in a permanent reduction of $96bn in equity of US companies. ”

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“..used so widely that its residues are commonly found in British bread.”

EU Scientists In Bitter Row Over Safety Of Monsanto’s Round-Up (Guardian)

A bitter row has broken out over the allegedly carcinogenic qualities of a widely-used weedkiller, ahead of an EU decision on whether to continue to allow its use. At issue is a call by the European Food and Safety Authority (Efsa) to disregard an opinion by the WHO’s International Agency for Research on Cancer (IARC) on the health effects of Glyphosate. Glyphosate was developed by Monsanto for use with its GM crops. The herbicide makes the company $5bn (£3.5bn) a year, and is used so widely that its residues are commonly found in British bread. But while an analysis by the IARC last year found it is probably carcinogenic to humans, Efsa decided last month that it probably was not. That paves the way for the herbicide to be relicensed by an EU working group later this year, potentially in the next few weeks.

Within days of Efsa’s announcement, 96 prominent scientists – including most of the IARC team – had fired off a letter to the EU health commissioner, Vytenis Andriukaitis, warning that the basis of Efsa’s research was “not credible because it is not supported by the evidence”. “Accordingly, we urge you and the European commission to disregard the flawed Efsa finding,” the scientists said. In a reply last month, which the Guardian has seen, Andriukaitis told the scientists that he found their diverging opinions on glyphosate “disconcerting”. But the European Parliament and EU ministers had agreed to give Efsa a pivotal role in assessing pesticide substances, he noted. “These are legal obligations,” the commissioner said. “I am not able to accommodate your request to simply disregard the Efsa conclusion.”

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What’s Monsanto’s role in this?

Thousands Of Farmer Suicides Prompt India Crop Insurance Scheme (Guardian)

India’s government has approved a $1.3bn insurance scheme for farmers to protect against crop failures, saying it was intended to put a halt to a spate of suicides. Two successive years of drought have battered the country’s already struggling rural heartland, with farmer suicides in rural areas regularly hitting the headlines. More than 300,000 farmers have killed themselves in India since 1995. Under the new scheme, farmers will pay premiums of as little as 1.5% of the value of their crops, allowing them to reclaim their full value in case of natural damage, the government said. “The scheme will be a protection shield against instances of farmer suicides because of crop failures or damage because of nature,” home minister Rajnath Singh said on Wednesday after the cabinet approved the scheme.

The Prime Minister Crop Insurance Scheme is also an attempt by Narendra Modi’s government to woo the country’s powerful farming community after being beaten in two recent state elections. “This scheme not just retains the best features of past policies but also rectifies all previous shortcomings… This is a historic day,” Modi said in a tweet. Previous crop insurance schemes have been criticised by the agricultural community as being too complex or for having caps that prevented them from recouping the full commercial value in the case of damage. Take-up of existing schemes by farmers is as low as 23%, the agriculture minister Radha Mohan Singh said, adding that he hoped to increase coverage to 50%. The heavily subsidised scheme will come into effect in April, a major crop-sowing season.

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Priorities.

Greece Said To Propose Return Trips For Illegal Migrants (AP)

A senior Greek official has said the government will ask Europe’s border protection agency Frontex to help set up a sea deportation route to send migrants who reach the country illegally back to Turkey. The official told AP the plan would involve chartering boats on Lesvos and other Greek islands to send back migrants who were not considered eligible for asylum in the EU. The official spoke on condition of anonymity because Athens hasn’t yet formally raised the issue with other European governments. More than 850,000 migrants and refugees reached Greece in 2015 on their route through the Balkans to central Europe. But the EU is seeking to toughen and better organize procedures for asylum placements, while Balkan countries outside the EU have also imposed stricter transit policies.

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NIMBY.

Tighter Border Checks Leave Migrants Trapped In Greece (AP)

As twilight falls outside the Hellenikon shelter – a former Olympic field hockey venue currently housing about 280 people – Iranian men play volleyball, a red line on the ground serving as a notional net. Inside, migrants are coming to terms with their bleak future. “I can’t go back to Somalia,” said English teacher Ali Heydar Aki, who hoped to settle in Europe and then bring his family. “I have sold half my house” to fund the trip. While it’s unclear exactly how many are stuck in Greece, a comparison of arrivals there and in FYROM since late November leaves about 38,000 people unaccounted for. Greek immigration minister Ioannis Mouzalas’ best guess is “a few thousand.” “But (that’s) a calculation based on experience, not something else,” he said.

Syed Mohammad Jamil, head of the Pakistani-Hellenic Cultural Society, says about 4,000 Pakistanis could be stuck in Greece, mostly still on the islands, and about as many Bangladeshis. “Every day we get … phone calls from people in tears asking for help,” he said. “We can’t help – send them where? Germany, Spain, Italy, England? We can’t.” All now face two legal options: To seek asylum in Greece – which has 25% unemployment and a crumbling welfare system – or volunteer for repatriation. Greek authorities have recorded an increase in both since FYROM tightened controls. Karim Benazza, a Moroccan hotel worker in his 20s, has signed up to go home on Jan. 18.

“This is all I do now, smoke and smoke, but no money, no food,” he said, lighting a cigarette outside the International Organization for Migration building. “There is nothing for us in Greece, and the Macedonian border is closed.” Daniel Esdras, IOM office head in Greece, sees a steep increase in voluntary repatriations, which the IOM organizes. About 800 people registered in December and 260 have been sent home. “It’s one thing to return in handcuffs … and quite another to go as a normal passenger with some money in your pocket, because we give them each €400,” Esdras said.

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5,700 children in 12 days.

Refugee Influx To Greece Continues Unabated Through Winter (Reuters)

More than 1,000 migrants and refugees arrived at Greece’s biggest port of Piraeus near Athens on Wednesday as the influx of people fleeing conflict zones for Europe continued unabated into the winter months. More than 1 million refugees and migrants braved the seas in 2015 seeking sanctuary in Europe, nearly five times more than in the previous year, according to the United Nations’ refugee agency. Most entered through Greece’s outlying islands. So far this year, 31% of arrivals to Europe have been children, said medical aid group Medecins Sans Frontieres, which has been treating arrivals to the Greek islands. About 5,700 children crossed the narrow but dangerous sea passage between Greece and Turkey in just 12 days aboard rickety, overcrowded boats, it said.

“I leave my home, my country [because] there was violence, it was not safe,” said 18-year-old Idris, who left his home and family behind in Afghanistan three months ago, traveling alone through Turkey and hoping to reach Germany to study. As others disembarked from the ferry on Wednesday, volunteers passed out hot tea and fruit to help them get through the next leg of their journey, an eight-hour bus ride from Athens to Greece’s northern border with Former Yugoslav Republic of Macedonia [FYROM]. The ferry picked up a total of 1,238 migrants and refugees from the Eastern Aegean islands of Lesvos and Chios. Among those was 25-year-old Salam, from the Syrian city of Homs, who said he had lived in a number of different cities before the fighting led him and his friends to flee. “[They killed] women and children and men,” said Salam, who also hopes to reach Germany. [It was] very very very bad in Syria.”

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How blind is this? “Work must also step up on “returning those who have no right to international protection.” There are people who have no right to protection? Who gets to decide?

Europe Sees No Let Up in Refugee Crisis as January Arrivals Soar (BBG)

The number of refugees entering Europe in the first 10 days of 2016 is already three times the level in all of January 2015, signaling no let up in the pressure facing the region’s leaders amid the biggest wave of migration since World War II. The number of migrants crossing the Mediterranean Sea to the European Union from Turkey, the Middle East and North Africa reached 18,384 through Jan. 10, according to the United Nations Refugee Agency. That compares with 5,550 in January last year. “This year, these weeks, the coming months must be dedicated to delivering clear results in terms of regaining controls of flows and of our borders,” EC Vice President Frans Timmermans told reporters in Brussels on Wednesday after discussing the latest situation with EU commissioners.

Turmoil in Syria and across the Arab world triggered an influx of more than 1 million people arriving in the EU last year. Faced with migration in such unprecedented numbers, governments have reintroduced internal border checks, tried – and failed – to share refugees between one another and have been forced to defend their policies amid anger at violence allegedly perpetrated by the recent arrivals.

The number of refugees entering the EU increased month-on-month from January 2015 until hitting a peak of 221,374 in October, according to the agency. The level fell back to 118,445 last month as bad weather deterred people from making the journey. Almost a third of those arriving are children. So far this year 49 people have either died or are missing having attempted to cross into Europe. EU countries need to work together to tackle the “root causes” of the refugee influx, Timmermans said. Work must also step up on “returning those who have no right to international protection.”

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Jan 132016
 
 January 13, 2016  Posted by at 9:01 am Finance Tagged with: , , , , , , , , , ,  Comments Off on Debt Rattle January 13 2016
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Jimmy King Bowie last photo on last birthday Jan 8 2016

Beware The Great 2016 Financial Crisis, Warns Albert Edwards (Guardian)
Chinese Exports Post First Annual Decline Since 2009 (WSJ)
China’s Hefty Trade Surplus Is Dwarfed by Outflows (WSJ)
China Predicts Painful Year In 2016 As Trade Slumps (Guardian)
Behind Chinese Yuan’s Tiny Drop, Indications of True Crisis Lurk (BBG)
Chinese Shipyards Vanish With Appetite for Consuming Iron Ore (BBG)
China’s Banks Could Be The Next Big Problem (MarketWatch)
Yuan Jolt May Prompt Looser Policies in Australia, Singapore (BBG)
In Rush to Exit Yuan, China Traders Buy Sinking Hong Kong Stocks (BBG)
OPEC Considering Emergency Meeting On Oil Prices (CNN)
Saudi Arabia Says It Remains Committed to Dollar Peg (WSJ)
Saudi Debt Risk on Par With Junk-Rated Portugal as Oil Slides (BBG)
What Market Turbulence Is Telling Us (Martin Wolf)
UK Industrial Output Plunges Most in Almost Three Years (BBG)
California Air Resources Board Rejects VW Engine Fix (BBG)
First Lady’s Box Should Be Empty At State Of The Union Speech (USA Today)
Population Growth In Africa: Grasping The Scale Of The Challenge (Guardian)
3.7 Million Brazilians Return To Poverty Due To Economic Crisis (Xinhua)
Smugglers Change Tactics As Refugee Flow To Greece Holds Steady (DW)

“Deflation is upon us and the central banks can’t see it.”

Beware The Great 2016 Financial Crisis, Warns Albert Edwards (Guardian)

The City of London’s most vocal “bear” has warned that the world is heading for a financial crisis as severe as the crash of 2008-09 that could prompt the collapse of the eurozone. Albert Edwards, strategist at the bank Société Générale, said the west was about to be hit by a wave of deflation from emerging market economies and that central banks were unaware of the disaster about to hit them. His comments came as analysts at RBS urged investors to “sell everything” ahead of an imminent stock market crash. “Developments in the global economy will push the US back into recession,” Edwards told an investment conference in London. “The financial crisis will reawaken. It will be every bit as bad as in 2008-09 and it will turn very ugly indeed.”

Fears of a second serious financial crisis within a decade have been heightened by the turbulence in markets since the start of the year. Share prices have fallen rapidly and a slump in the cost of oil has left Brent crude trading at barely above $30 a barrel. “Can it get any worse? Of course it can,” said Edwards, the most prominent of the stock market bears – the terms for analysts who think shares are overvalued and will fall in price. “Emerging market currencies are still in freefall. The US corporate sector is being crushed by the appreciation of the dollar.” The Soc Gen strategist said the US economy was in far worse shape than the Federal Reserve realised. “We have seen massive credit expansion in the US. This is not for real economic activity; it is borrowing to finance share buybacks.”

Edwards attacked what he said was the “incredible conceit” of central bankers, who had failed to learn the lessons of the housing bubble that led to the financial crisis and slump of 2008-09. “They didn’t understand the system then and they don’t understand how they are screwing up again. Deflation is upon us and the central banks can’t see it.” Edwards said the dollar had risen by as much as the Japanese yen had in the 1990s, an upwards move that pushed Japan into deflation and caused solvency problems for the Asian country’s banks. He added that a sign of the crisis to come was the collapse in demand for credit in China. “That happens when people lose confidence that policymakers know what they are doing. This is what is going to happen in Europe and the US.”

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Some confusion stems from counting trade in yuan vs dollars. But remember these are all still official Chinese numbers.

Chinese Exports Post First Annual Decline Since 2009 (WSJ)

Chinese exports declined for the year, marking their worst performance since 2009, as weak demand continued to weigh on the world’s second-largest economy. Exports, however, fell less than expected in December thanks to a favorable comparison with year-earlier figures. The improved monthly results don’t signal a major recovery this year despite a weaker yuan, economists said. “In the next few months, the comparative price effect will fade out and export growth will recover,” ING Group economist Tim Condon said. “But it’s not going to be as strong as in 2013 or 2014.” According to the General Administration of Customs, China’s exports fell 1.4% in December in dollar terms from a year earlier, after a drop of 6.8% in November.

This was a more modest decline than the 8.0% fall forecast by 15 economists surveyed by The WSJ In yuan terms, exports rose last month. Imports last month fell 7.6% from a year earlier, compared with an 8.7% decline in November. The country’s trade surplus widened to $60.1 billion in December from $54.1 billion in November. Last year’s weak Chinese exports and even weaker imports led to a record $594.5 billion annual trade surplus, compared with $382.5 billion in 2014, the agency said, as full-year exports fell 2.8% and imports fell 14.1%. Despite the decline in exports last year, the Asian giant managed to increase its share of global trade. “China’s declining exports in 2015 were mainly due to sluggish external demand on the back of slowing global economic recovery since the financial crisis,” Customs spokesman Huang Songping told reporters Wednesday.

“But China’s export performance is better than other major economies in the world.” Few economists see a huge export turnaround ahead, however, with exports no longer as important for China as they used to be. December’s improved outbound data may reflect a one-time boost as companies rushed to meet year-end orders. While business sentiment in Germany picked up recently, confidence surveys in the U.S. have weakened. And on the import side, domestic demand and global commodity prices remain weak. “Demand may not be a big driver,” said Standard Chartered Bank economist Ding Shuang.

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“..there was roughly $750 billion of capital outflow in 2015. No wonder the currency is under pressure.”

China’s Hefty Trade Surplus Is Dwarfed by Outflows (WSJ)

China’s fat trade surplus should be a source of comfort. But juxtaposed against falling reserves, it actually sends an alarming message about the degree of capital flight. The surplus swelled by 55% in 2015, to $595 billion, figures released Wednesday showed. This news isn’t as good as looks. For one, it doesn’t reflect a boom in exports, which for the full year actually fell by 2.8%. The surplus widened because imports fell even more, by 14.1%. Moreover, it raises a question: How did China manage to post a decline of $513 billion in foreign-exchange reserves last year? Since a trade surplus brings foreign currency into the country, and most exporters turn that currency over to the central bank, it should boost reserves by a corresponding amount. That reserves fell suggests fund outflows large enough to overwhelm even that trade surplus.

To get a full picture, more variables must be accounted for. Full-year data isn’t yet available for China’s foreign direct investment, overseas direct investment and services trade deficit. But based on numbers currently available, and adding the trade surplus, a rough estimate of total net inflows from trade and direct investment in 2015 comes to about $379 billion. This must be compared with the fall in reserves. In fairness, this decline was exaggerated by the stronger dollar, which makes China’s holdings in other currencies less valuable when they are reported in dollar terms. Taking these valuation effects into account, and based on estimates of the composition of its mostly secret portfolio, China may have sold a net $375 billion of reserves in 2015. Putting these two figures together, it appears that there was roughly $750 billion of capital outflow in 2015. No wonder the currency is under pressure.

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“It’s just a shame they had to go to such lengths to achieve this. The question is what asset class will be the next target for the speculators?”

China Predicts Painful Year In 2016 As Trade Slumps (Guardian)

Weak demand for Chinese goods will continue to hurt the country’s economy in 2016, according to officials, despite better than expected trade figures that helped shore up stock markets in Asia Pacific. China’s trade volume fell 7% in 2015 compared with the previous year, Chinese customs said on Wednesday, as slowing growth in the world’s second-largest economy and plunging commodity prices took their toll. Although imports slumped 13.2% and exports were down 1.8%, the numbers surprised the markets where economists had been forecasting a much weaker reading. Helped by further action from Beijing to stabilise the yuan and dampen fears of a devaluation, equity markets in the region initially bounced back after days of volatile trading.

The Shanghai Composite index was up slightly at 4am GMT while the Australian ASX/S&P200 index looked set to snap eight straight days of losses by surging more than 1%. In Japan, the Nikkei was up 2.4% and Hong Kong’s Hang Seng was also up more than 2%. However, customs spokesman Huang Songping warned at a news conference that China’s trade faced “many challenges” in 2016 due to weak external demand. One of the main reasons for China’s lower exports in 2015 was weak external demand, he added. The 5% fall in the value of the yuan since last August had helped support exports but the impact would begin to fade, he said. Earlier, the People’s Bank of China held the line on the yuan for a fourth straight session on Wednesday while putting the squeeze on offshore sellers of the currency.

The central bank has also used aggressive intervention to engineer a huge leap in yuan borrowing rates in Hong Kong, essentially making it prohibitively expensive to short the currency. The result has been to drag the offshore level of the yuan back toward the official level, closing a gap that had threatened to get out of control just a few days earlier. Confusion about China’s policy had stoked concerns Beijing might be losing its grip on economic policy, just as the country looks set to post its slowest growth in 25 years. Chris Weston at IG Markets in Melbourne welcomed a more stable day of trading but cautioned that Beijing may have delayed another outbreak of volatility by driving up funding costs in Hong Kong and making it impossible to short the yuan.

“What counts is the fact Chinese authorities have achieved their goal of converging the onshore and offshore yuan, with stability in the ‘fix’ and they have even seen a positive session in the equity markets,” he said. “It’s just a shame they had to go to such lengths to achieve this. The question is what asset class will be the next target for the speculators?”

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Objects in mirror are bigger than they appear.

Behind Chinese Yuan’s Tiny Drop, Indications of True Crisis Lurk (BBG)

The Chinese yuan’s 6% decline over the past five months is hardly anyone’s idea of a crisis. On average it comes out to a drop of less than 0.04% a day. But behind the scenes, Chinese policy makers are unleashing a torrent of measures to stabilize the currency and prevent it from tumbling. Added up, these efforts rival some of the biggest currency defenses seen in emerging markets over the past two decades. Here’s a quick look at the central bank’s most aggressive steps. Hong Kong has become a key focal part for policy makers. Over the last two days, they bought enough yuan there to push overnight borrowing costs for the currency to a record 67% on Tuesday from just 4% at the end of last week. These rates, designed to discourage speculators, are even higher than those at the peak of Russia’s defense of the ruble in 2014 and Brazil’s intervention in 1999.

In propping up the exchange rate, the People’s Bank of China also burnt through more than half a trillion of dollars in foreign reserves in the past 12 months, cutting them to $3.3 trillion. The draw-down was almost equivalent to the entire stockpile of Switzerland, the world’s fourth largest holder. Regulators also went to great lengths to tighten capital controls, cracking down on illegal money transfers and restricting lenders from conducting some cross-border transactions. Among its emerging-market peers, the yuan remains one of the top-performing currencies over the past year against the dollar, yet Chinese policy makers are acting with an increasing sense of urgency. At stake is the financial stability of the world’s No. 2 economy – disorderly depreciation could fuel more capital outflows, which already approached $1 trillion in the 12 months through November. “They are really trying to stop the panic,” said Lucy Qiu at UBS Wealth Management said.

By intervening in the Hong Kong market, the PBOC is forcing the offshore rate to converge toward the stronger onshore rate in an effort to anchor expectations among overseas investors. Officials also stressed that the aim is to keep the yuan basically stable against a basket of currencies, rather than pegging it against the rising dollar. Deterring speculators and attracting investors with off-the-chart rates can help contain a currency crisis, but it can also send an economy into a tailspin by cutting companies and consumers off from credit. That is unlikely to be the case in China. The yuan loan increase in Hong Kong would have less impact on the mainland’s economy, where the benchmark seven-day interbank rate remains stable at about 2.4%.

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Job losses will be a major China issue in 2016. Beijing will try and force companies to hire large groups of people, but that’s sure to backfire.

Chinese Shipyards Vanish With Appetite for Consuming Iron Ore (BBG)

The weakening yuan and China’s waning appetite for raw materials have come around to bite the country’s shipbuilders, raising the odds that more shipyards will soon be shuttered. About 140 yards in the world’s second-biggest shipbuilding nation have gone out of business since 2010, and more are expected to close in the next two years after only 69 won orders for vessels last year, JPMorgan analysts Sokje Lee and Minsung Lee wrote in a Jan. 6 report. That compares with 126 shipyards that fielded orders in 2014 and 147 in 2013. Total orders at Chinese shipyards tumbled 59% in the first 11 months of 2015, according to data released Dec. 15 by the China Association of the National Shipbuilding Industry.

Builders have sought government support as excess vessel capacity drives down shipping rates and prompts customers to cancel contracts. Zhoushan Wuzhou Ship Repairing & Building last month became the first state-owned shipbuilder to go bankrupt in a decade. “The chance of orders being canceled at Chinese yards is becoming greater and greater,” said Park Moo Hyun at Hana Daetoo Securities in Seoul. “While a weaker yuan could mean cheaper ship prices for customers, it still won’t be enough to lure back any buyers. Chinese shipbuilders won’t be able to revive even if you try breathing some life into them.” The Baltic Dry Index, which measures the cost of transporting raw materials, dropped 39% last year and hit a historical low Dec. 16.

Aggravating the situation is Chinese shipyards’ heavy reliance on bulk carriers, which are used to haul commodities from iron ore to coal and grain. Bulk ships accounted for 41.6% of Chinese shipyards’ $26.6 billion orderbook as of Dec. 1, according to Clarkson, the world’s largest shipbroker. That compares with a 3.5% share at South Korean shipyards, which have more exposure to the tankers and gas carriers that are among the few bright spots in a beleaguered shipping industry.

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How is Xi going to save his banks? Hard to see.

China’s Banks Could Be The Next Big Problem (MarketWatch)

While China’s equity turbulence appears to have temporarily paused, its main equity indices are now 15% lower since the start of the year, despite Beijing remaining committed to its policy of market intervention. In some ways the government’s hands are tied from last year’s stock buying as it now has a substantial position to protect. Added to this, the original reason the party could not let its bull market die remains due to the potential political fallout from losses after it effectively orchestrated the bubble. But in attempting to solve one problem, are policy makers just sowing the seeds of another? Attention is now turning to the collateral damage from official intervention to support stocks, in particular to the banks. Analysts are questioning the cost to China’s state-owned yet overseas-listed banks, which have once again been called up for national service.

The concern is that by acting as a buyer of last resort to prop up the stock market, this sets up China’s banks to be the next fault line in the economy. In a new report, rating agency Fitch warns of a clear conflict between banks struggling to manage state strategic roles and their profit goals. How much intervention has come this year is still unknown, but last July after the initial stock market rout 17 banks, including the big five, were reported to have lent $200 billion. There is also a pattern here. Last summer state-owned banks had to play another strategic role as they were strong-armed by the central government into a 3.2 trillion yuan debt-for-bond swap to help bail out local authorities. The list of troubled assets needing help is unlikely to end there. The central government has prioritized cleaning up struggling state-owned enterprises, which, according to SocGen, includes some 30% that are bankrupt with 23 trillion yuan in liabilities.

Given this accumulation of questionable assets at the behest of the state, investors might feel somewhat anxious in case there ultimately is a reckoning. While Fitch notes these initiatives will harm profits, it does at least expect the central government rather than non-sovereign shareholders will be the banks’ main source of funds if they do need additional capital. If investors suspected that they would be forced to repeat the scenario from the global financial crisis when Western banks raised fresh capital from shareholders with deeply discounted share issues, stock prices would be vulnerable to steep falls. Fitch’s sanguine assumption of the central government stepping in depends on how much capital China’s banks may need.

Analyst Charlene Chu at Autonomous Economics, estimates this figure could be as high as $7.7 trillion of new capital in the next three years. Such a figure would send the government debt-to-GDP ratio skyrocketing, which at around 22% is usually used to reaffirm China’s robust financial position. Another issue is that in China the overlap between corporates and the state can often make it difficult to get a true financial picture. For instance, hugely profitable state banks in recent years have by some estimates accounted for 50% of the net profits of all listed Chinese companies. This could mean if China’s banks had to recognize a substantial increase in bad debts, another wild card is the impact on the central government’s fiscal position through lost tax revenue.

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The yuan can shake the entire region.

Yuan Jolt May Prompt Looser Policies in Australia, Singapore (BBG)

The extreme jolt financial markets received this year from a weakening yuan is spurring speculation that central banks from Singapore to Australia will be forced to loosen policy. The Monetary Authority of Singapore may widen the band within which it guides the local dollar if the currencies of its major trading partners and competitors become “extremely volatile,” said Mirza Baig at BNP Paribas. Central banks in Australia, Taiwan and India are most likely to respond by cutting interest rates, said Mansoor Mohi-uddin at RBS. Weaker-than-estimated yuan fixings last week heightened concerns that China’s economic slowdown is accelerating and triggered a global market rout. About a year ago, foreign-exchange markets were hammered when Switzerland surrendered its three-year-old cap on the franc against the euro and nations from Canada to Singapore unexpectedly eased monetary policy.

“The depreciation of the RMB is clearly creating large financial shocks,” said Baig, who is based in Singapore. “One thing that we are considering – although this doesn’t enter into our forecast – is that the RMB becomes more of a free-floating, more volatile currency. Then local central banks are also likely to adopt a more laissez-faire kind of approach towards currency management.” China stepped up its defense of the yuan, buying the currency in Hong Kong on Tuesday, according to people familiar with the matter. Betting against the yuan will fail and calls for a large depreciation are “ridiculous” as policy makers are determined to ensure the currency’s stability, Han Jun, the deputy director of China’s office of the central leading group for financial and economic affairs, said Monday in New York. The State Bank of Vietnam has already moved this year to a more market-based methodology in setting a daily reference rate versus the dollar.

“They’re now forced to change their currency regime to make it more in tune with day-to-day fluctuations in markets,” Baig said. While BNP Paribas expects Singapore’s central bank to maintain its monetary policy, there is a risk that it may widen its band ”in response to elevated financial market volatility,” Baig said. The Monetary Authority of Singapore guides the local currency against an undisclosed basket and adjusts the pace of appreciation or depreciation by changing the slope, width and center of a band. It refrains from disclosing details of the basket, the band, and the pace of appreciation or depreciation. The yuan probably has the third-highest weighting in the basket, exceeded only by the U.S. dollar and Malaysian ringgit, Baig said. A JPMorgan gauge of currency volatility rose to 10.42% Monday, the most since September. “The more volatile and weaker yuan is set to be more of a risk to regional central banks’ outlooks than higher Fed interest rates this year,” RBS’s Mohi-uddin said.

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But just how low can the yuan go?

In Rush to Exit Yuan, China Traders Buy Sinking Hong Kong Stocks (BBG)

Chinese investors are so desperate to shift their money out of yuan-denominated assets that they’re piling into some of the world’s worst-performing stocks. Mainland buyers purchased Hong Kong shares through the Shanghai stock link for a 10th week last week, even as the Hang Seng Index tumbled 6.7%. Chinese traders held 112.5 billion yuan ($17.1 billion) of the city’s equities by Monday, the most since the bourse program started in 2014, and up by 23.7 billion yuan since late October. With the yuan weakening, investors are looking for a way out, according to Reorient. “By buying Hong Kong stocks, it’s like buying the Hong Kong dollar,” said Uwe Parpart, chief strategist at the brokerage. Mainland investors are expecting “further depreciation and when that’s the case it’s a good idea to get out. If you buy at a certain rate and then the yuan goes down, even when the stock market goes down, you may still be getting ahead in the game.”

Hong Kong and mainland markets are at the epicenter of a global stock slump fueled by concern about China’s sliding currency and economic management. The Hang Seng Index was down 9.2% this year through Monday, while a rout in Shanghai and Shenzhen wiped out more than $1.3 trillion in value. With forecasters expecting the yuan to weaken further against the dollar and restrictions on capital outflows whittling down investment options, the exchange link offers a government-sanctioned way for Chinese traders to own assets in a strengthening currency. “Channels for outflows from mainland China are currently limited,” said Cindy Chen at Citigroup. “I expect the flow to continue.”

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Result will be zero.

OPEC Considering Emergency Meeting On Oil Prices (CNN)

After watching the price of crude oil collapse by more than 65% to a 12-year low, there are signs that OPEC may have had enough. Nigeria’s top oil official and OPEC President Emmanuel Kachikwu said the cartel is considering an emergency meeting, perhaps as soon as next month. At issue is whether OPEC would agree to cut production, a move that could help stop the crude price freefall. “I expect to see one. … There’s a lot of energy currently around that,” he told CNN. “I think a … majority in terms of [OPEC] membership are beginning to feel that the time has come to … have a meeting and dialogue again once more without the sort of tension that we had in Vienna on this.” When OPEC last met in the Austrian capital in December, it was bitterly divided and refused to cut output.

The next ordinary meeting is scheduled for June 2. Led by Saudi Arabia, OPEC decided in 2014 to wage a price war with low cost producers in the U.S. and elsewhere in a bid to defend market share. Since then, oil companies have sacked hundreds of thousands of workers, and slashed investment budgets. But the global supply glut continues, thanks in part to China’s slowing economy, and prices have continued to tumble. A strong dollar, which makes oil more expensive around the world, has fueled the slump. Oil prices fell toward $30 a barrel early on Tuesday, having plunged by 16% in 2016 alone, but steadied later to trade little changed on the day. Many OPEC countries are still making money at these prices but others are losing – Nigeria’s production costs are estimated at about $31 a barrel, for example.

And all, including Saudi Arabia, are suffering a huge squeeze on government revenues. Kachikwu said most OPEC members were watching their economies “being shattered,” and something had to give. “We need to… see how we can balance the need to protect our market share with the need for the survival of the business itself, and survival of the countries.” An emergency meeting is no guarantee that OPEC will act to restrain supply, however Iran is eager to boost production this year as soon as Western sanctions are lifted – expected imminently – and it’s hard to see Saudi Arabia working with its big Mideast rival to support oil prices. Saudi Arabia broke off diplomatic relations with Iran last week after its embassy in Tehran was attacked. That attack followed Saudi Arabia’s execution of a prominent Shiite cleric.

Still, the OPEC president believes an agreement of some form is possible. “I think ultimately for the interest of everybody some policy change will happen,” Kachikwu said. “Now will the amount of barrels that you can take out because of that policy change necessarily make that much of a dramatic difference? Probably not, but the symbolism of the action is even more important than the volumes that are taken out of the market.”

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Lots of private debt in foreign currrencies. The confidence starts to look out of place…

Saudi Arabia Says It Remains Committed to Dollar Peg (WSJ)

Saudi Arabia will maintain the riyal’s peg to the U.S. dollar, the governor of the country’s central bank said Monday, while criticizing bets against the currency. In a statement posted on the website of Saudi Arabian Monetary Agency, as the central bank is known, governor Fahad al-Mubarak said speculation was driving volatility in the forward market for the Saudi riyal, but the country’s financial and economic fundamentals remained stable. “I would like to reiterate our official position that Saudi Arabian Monetary Agency will uphold its mandate of maintaining the peg, “ the governor said.

The riyal is fixed at roughly 3.75 to the dollar, but one-year forward contracts have hit multiyear highs in the past days—reflecting speculation on a weaker riyal—after the kingdom ran a record budget deficit of nearly $98 billion last year, forcing it to announce late last month spending and subsidy cuts for 2016 to cope with a fall in the global price of oil, the kingdom’s main revenue earner. A sharp fall in the price of oil since the middle of 2014 has put immense pressure on Saudi Arabia’s petrodollar-dependent economy, with some investors betting in recent months that the kingdom would let go of the nearly 30-year old peg as foreign-exchange reserves decline. These have fallen to $635.5 billion at the end of November, down 15% from a peak of $746 billion in August last year, according to the latest central bank data.

Analysts say the central bank has spent billions to maintain the currency peg; in the past, the has worked well for Saudi Arabia, giving it stability as it enjoyed a decade of high-price oil. But income from oil sales has slumped, adding strains to Saudi Arabia’s finances. Abandoning the peg would stretch those dollars as the riyal would weaken. Backing away from peg pledges isn’t unprecedented, however. Officials at the Swiss National Bank, for instance, publicly backed the franc’s link to the euro mere days before the bank stunned markets by abandoning it a year ago. Still, most analysts don’t see Saudi Arabia abandoning its peg in the near- to midterm, as repayment costs for households and corporates that have borrowed in foreign currencies will rise in local-currency terms. Consumer price inflation is likely to accelerate due to a rise in import prices, which the government can ill-afford after cutting subsidies.

And even if the peg were adjusted rather than abandoned, this would add uncertainty about future adjustments, and ultimately make it more vulnerable to speculative attacks. “The peg is a key policy anchor,” said Paul Gamble, senior director for sovereigns at Fitch Ratings. “There is a huge capacity to defend it and a strong political commitment to it.”

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… where confidence really stands.

Saudi Debt Risk on Par With Junk-Rated Portugal as Oil Slides (BBG)

Investors wanting to take out insurance on Saudi Arabia’s debt have to pay as much as they would for Portugal, a nation still saddled with a junk credit-rating five years after an international bailout. The cost of insuring the kingdom’s debt more than doubled in the past 12 months to a 190 basis points, or $190,000 annually to insure $10 million of the country’s debt for five years, the highest since April 2009. That’s almost identical to contracts linked to debt from Portugal, whose rating is seven levels below Saudi Arabia’s Aa3 investment grade at Moody’s Saudi Arabia’s finances are under pressure as it fights a war in Yemen at a time when crude prices are languishing at the lowest level in almost 12 years.

The country, which counts on energy exports for 70% of government revenue, sold domestic bonds for the first time since 2007 last year to help fund a budget deficit that may have been the widest since 1991. Net foreign assets dropped for 10 straight months through November, the longest streak since at least 2006, to $627 billion. “They have huge reserves and extremely low debt, but the question is, how long are oil prices going to stay at this level?” said Anthony Simond at Aberdeen Asset Management. Brent crude, a pricing benchmark for more than half the world’s oil, sank below $35 a barrel last week. It advanced 0.8% to $31.82 a barrel today, rebounding from the lowest level in almost 12 years. The Saudi government, which doesn’t have any outstanding international bonds, said it will choose from options including selling local and international debt and drawing from its reserves to finance an expected 2016 budget deficit of 326 billion riyals ($87 billion).

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“Global investors withdrew about $52bn from emerging market equity and bond funds in the third quarter of 2015..” Otherwise, Wolf gets lost in his own growth story.

What Market Turbulence Is Telling Us (Martin Wolf)

Bull markets, it is said, climb a wall of worry. There are certainly plenty of reasons to worry. But markets are no longer climbing, which indicates the bull market is dead. Since markets are already highly valued, that would not be surprising. Standard & Poor’s composite index of the US market has in effect marked time since June 2014. According to Robert Shiller’s cyclically adjusted price/earnings ratio, the US market has been significantly more highly valued than it is at present only during the disastrous bubbles that burst in 1929 and 2000. Professor Shiller’s well-known measure of value is not perfect. But it is a warning that stock market valuations are already generous and that a continued bull market might be dangerous. Still more important, a portfolio rebalancing is under way.

The most important shift is in the perceived economic and financial prospects for emerging economies. As a result, capital is now flowing out of emerging economies. These outflows are driving the strong dollar. Given that, the US Federal Reserve’s decision to tighten monetary policy looks like an important blunder. In its new Global Economic Prospects report, the World Bank brings out the extent of the disillusionment with (and within) emerging economies. It notes that half of the 20 largest developing country stock markets experienced falls of 20 per cent or more from their 2015 peaks. The currencies of commodity exporters (including Brazil, Indonesia, Malaysia, Russia, South Africa), and of big developing countries subject to rising political risks (including Brazil and Turkey), fell to multiyear lows both against the US dollar and in trade-weighted terms.

Global investors withdrew about $52bn from emerging market equity and bond funds in the third quarter of 2015. This was the largest quarterly outflow on record. Net short-term debt and bank outflows from China, combined with retrenchment in Russia, accounted for the bulk of this; but portfolio and short-term capital inflows dried up elsewhere in the third quarter of 2015. Net capital flows to emerging and frontier economies even fell to zero, the lowest level since the 2008-09 crisis. An important feature is not just the reduction in inflows but also the sheer size of outflows from affected economies.

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The ‘healthy’ British economy has become a mere narrative.

UK Industrial Output Plunges Most in Almost Three Years (BBG)

U.K. industrial production fell the most in almost three years in November as warmer-than-usual weather reduced energy demand. Output dropped 0.7% from the previous month, with electricity, gas and steam dropping 2.1%, the Office for National Statistics said in London on Tuesday. Economists had forecast no growth on the month. The data highlight the uncertain nature of U.K. growth, which remains dependent on domestic demand and services. After stagnating in October and falling in November, industrial production will have to rise 0.5% to avoid a contraction in the fourth quarter. The pound fell against the dollar after the data and was trading at $1.4486 as of 9:35 a.m. London time, down 0.4% from Monday. Manufacturing also delivered a lower-than-forecast performance in November, with output dropping 0.4% on the month.

On an annual basis, factory output fell 1.2%, a fifth consecutive decline. The data follow other reports of weakness in the manufacturing sector. A survey published by Markit this month showed growth cooled in December, suggesting it made little contribution to the economy in the fourth quarter. According to manufacturers’ organization EEF, companies are feeling increasingly pressured by issues such as the strength of the pound. It said on Monday that only 56% of manufacturers say the U.K. is a competitive location, compared with 70% a year ago. Bank of England officials will probably keep their key interest rate at a record-low 0.5% this week. Minutes of the meeting released Thursday may reveal their thinking on the fall in oil prices and worries about China’s economy.

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CARB is one organization you don’t want to do battle with.

California Air Resources Board Rejects VW Engine Fix (BBG)

Volkswagen’s work to overcome the emissions-cheating scandal was set back after the California Air Resources Board rejected its proposed engine fix, just a day before Chief Executive Officer Matthias Mueller meets regulators to discuss ways out of the crisis. California spurned the automaker’s December recommendation for how to fix 2-liter diesel engines as “incomplete.” VW said it will present a reworked plan to the U.S. Environmental Protection Agency at a meeting in Washington on Wednesday. Europe’s largest automaker is in the midst of complex technical talks with the California board and counterparts at the EPA about possible fixes for 480,000 diesel cars. The EPA said Tuesday it agreed that VW’s plan can’t be approved. Volkswagen set aside $7.3 billion in the third quarter to help pay for the crisis and has acknowledged this won’t be enough.

“The message from the regulators to VW couldn’t be more clear – you need to come up with a better plan,” said Frank O’Donnell, president of Clean Air Watch, a Washington environmental group. “VW has mistakenly thought it could resolve this on the cheap.” On its website, the state said it determined that there was “no easy and expeditious fix for the affected vehicles.” “Volkswagen made a decision to cheat on emissions tests and then tried to cover it up,” Mary Nichols, chairwoman of the state board, said in an e-mailed statement. “They need to make it right.” Volkswagen responded that it had asked California last month for an extension to submit additional information and data about the turbocharged direct injection, or TDI, diesel engines.

“Since then, Volkswagen has had constructive discussions with CARB, including last week when we discussed a framework to remediate the TDI emissions issue,” VW said in an e-mailed statement. The California board said it and the EPA will continue to evaluate VW’s technical proposals. The rejection closely followed a bumble by CEO Mueller on Sunday, the eve of the North American International Auto Show in Detroit. During an interview with National Public Radio, he appeared to dismiss the crisis by saying Europe’s largest automaker “didn’t lie” to regulators about what amounts to a “technical problem.” When the interview aired Monday morning, VW asked NPR for a do-over, where Mueller blamed a noisy atmosphere for his earlier comments. He apologized on behalf of the automaker, hewing more closely to comments he had made in a Detroit speech on Sunday night.

[..] Fixes prescribed for Europe haven’t translated into U.S. approval because of the tougher emissions standards in North America, which is why Volkswagen had begun cheating in the U.S. in the first place. In Europe, the company’s proposed fix on 8.5 million diesel engines was approved a month ago. For most vehicles in Europe, software upgrades will suffice, while others will get a tube with mesh on one end to regulate air flow. VW estimated that repair would take less than an hour to complete. Germany took the lead on signing off on the technical fix, which encompasses a range of engine sizes including the 2-liter variant now contested in the U.S. In the U.S., beyond developing an effective fix for each of the three types of non-compliant 4-cylinder engines, VW must document any adverse impacts on vehicles and consumers.

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If you have to look at USA TOday for some sanity….

First Lady’s Box Should Be Empty At State Of The Union Speech (USA Today)

The White House announced that there will be a seat left vacant in the gallery during Obama’s State of the Union Address “for the victims of gun violence who no longer have a voice.” This old stunt is part of Obama’s campaign for new federal restrictions on firearms ownership, but if he really wanted to provide a voice for those who’ve lost theirs, at least in part, due to his own administration’s policies, he’d have to empty all the seats in the gallery reserved for the first lady and her guests. While trumpeting the private death toll from guns, Obama on Tuesday night will likely ignore the 986 people killed by police in the United States last year according to The WaPo’s database. Many police departments are aggressive — if not reckless — in part because the Justice Department always provides cover for them at the Supreme Court.

Obama’s “Justice Department has supported police officers every time an excessive-force case has made its way” to a Supreme Court hearing, The New York Times noted last year. Attorney General Loretta Lynch recently said that federally-funded police agencies should not even be required to report the number of civilians they kill. To add a Euro flair to the evening, Obama could drape tri-color flags on a few empty seats to commemorate the 30 French medical staff, patients, and others slain last Oct. 3 when an American AC-130 gunship blasted their well-known hospital in Kunduz, Afghanistan. The U.S. military revised its story several times but admitted in November that the carnage was the result of “avoidable … human error.” Regrettably, that bureaucratic phrase lacks the power to resurrect victims.

No plans have been announced to designate a seat for Brian Terry, the U.S. Border Patrol agent killed in 2010. Guns found at the scene of Terry’s killing were linked to the Fast and Furious gunwalking operation masterminded by the Alcohol, Tobacco, Firearms and Explosives (ATF) agency. At least 150 Mexicans were also killed by guns illegally sent south of the border with ATF approval. The House of Representatives voted to hold then-attorney general Eric Holder in contempt for refusing to disclose Fast and Furious details, but Obama is not expected to dwell on this topic in his State of the Union address. On a more festive note, why not save some seats for a wedding party? Twelve Yemenis who were celebrating nuptials on Dec. 12, 2013, won’t be able to attend Obama’s speech because they were blown to bits by a U.S. drone strike.

The Yemeni government – which is heavily bankrolled by the U.S. government – paid more than a million dollars compensation to the survivors of innocent civilians killed and wounded in the attack. Four seats could be left vacant for the Americans killed in the 2012 attack in Benghazi, Libya – U.S. Ambassador Christopher Stevens, Foreign Service Officer Sean Smith, and CIA contractors Tyrone Woods and Glen Doherty. But any such recognition would rankle the presidential campaign of Hillary Clinton, who has worked tirelessly to sweep those corpses under the rug. It would also be appropriate to include a hat tip to the hundreds, likely thousands, of Libyans who have been killed in the civil war unleashed after the Obama administration bombed Libya to topple its ruler, Moammar Gadhafi.

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Welcome to Europe.

Population Growth In Africa: Grasping The Scale Of The Challenge (Guardian)

The last 100 years have seen an incredible increase in the planet’s population. Some parts of the world are now seeing smaller increments of growth, and some, such as Japan, Germany, and Spain, are actually experiencing population decreases. The continent of Africa, however, is not following this pattern. Now home to 1.2 billion (up from just 477 million in 1980), Africa is projected by the United Nations Population Division to see a slight acceleration of annual population growth in the immediate future. In the past year the population of the African continent grew by 30 million. By the year 2050, annual increases will exceed 42 million people per year and total population will have doubled to 2.4 billion, according to the UN. This comes to 3.5 million more people per month, or 80 additional people per minute.

At that point, African population growth would be able to re-fill an empty London five times a year. From any big-picture perspective, these population dynamics will have an influence on global demography in the 21st century. Of the 2.37 billion increase in population expected worldwide by 2050, Africa alone will contribute 54%. By 2100, Africa will contribute 82% of total growth: 3.2 billion of the overall increase of 3.8 billion people. Under some projections, Nigeria will add more people to the world’s population by 2050 than any other country. The dynamics at play are straightforward. Since the middle of the last century, improvements in public health have led to a inspiring decrease in infant and child mortality rates. Overall life expectancy has also risen.

The 12 million Africans born in 1955 could expect to live only until the age of 37. Encouragingly, the 42 million Africans born this year can expect to live to the age of 60. Meanwhile, another key demographic variable – the number of children the average African woman is likely to have in her lifetime, or total fertility rate – remains elevated compared to global rates. The total fertility rate of Africa is 88% higher than the world standard (2.5 children per woman globally, 4.7 children per woman in Africa). In Niger, where GDP per capita is less than $1 per day, the average number of children a woman is likely to have in her life is more than seven. Accordingly, the country’s current population of 20 million is projected to grow by 800,000 people over the next 12 months.

By mid-century, the population may have expanded to 72 million people and will still be growing by 800,000 people – every 18 weeks. By the year 2100, the country could have more than 209 million people and still be expanding rapidly. This projectionis based on an assumption that Niger’s fertility will gradually fall to 2.5 children over the course of the century. If fertility does not fall at all – and it has not budged in the last 60 years – the country’s population projection for 2100 veers towards 960 million people. As recently as 2004, the United Nations’ expected Africa to grow only to 2.2 billion people by 2100. That number now looks very out of date.

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Got to keep wondering what the Olympics will look like. An international podium for protests?

3.7 Million Brazilians Return To Poverty Due To Economic Crisis (Xinhua)

Around four million Brazilians have returned to poverty as a consequence of the country’s ongoing economic crisis, local media reported on Monday. The news daily Valor Economico cited data from a recent study carried out by Banco Bradesco, one of the largest private banks in Brazil, which found the crisis pushed around 3.7 million Brazilians back to poverty. The middle class dropped by two%age points to 54.6% during the period of January to November, 2015. Meanwhile, the number of those in the lower class increased to 35%, according to the report. The study also indicates a drop in salaries, with the middle class receiving a monthly income of $407 to $1630 US and that of the poorest stands at $233. Brazil is in the depth of a recession as it grapples with rising unemployment, stagnant growth and soaring inflation. Brazil’s Central Bank has changed its previous prediction for the country’s drop in GDP for 2016 from 2.95% to 2.99%.

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“Boat captains are now forcing refugees to jump out and swim ashore before steering the dinghies back to Turkey.”

“These people will travel around the whole world just to find an open door.”

Smugglers Change Tactics As Refugee Flow To Greece Holds Steady (DW)

Looking over pitch-black waters, Pothiti Kitromilidi smokes a cigarette with her eyes fixed on distant streetlights along the Turkish coast. Aside from the stars, little else is visible. It is Friday night, and Kitromilidi, a coordinator for the FEOX Rescue Team, is standing on the southeastern shore of Chios, a Greek island where asylum-seekers have been arriving under the cover of darkness ever since the Turkish Coast Guard increased its presence. Only a few refugees made the crossing in recent days, but Kitromilidi credits bad weather over the authorities, who she says “pretend to work during the week and take weekends off.” Now the seas are calm again and Kitromilidi’s expecting a long night out. She radios back and forth with team members spread out over the area on ATVs and Vespa scooters.

Everyone is waiting as Kitromilidi shines a light into the dark water below. “We don’t see them, we have to hear them,” she said. Then the call comes in: “Boat landed! Boat landed!” Kitromilidi jumps in her car and speeds to the arrival site where 45 Afghans are standing, dripping wet and shivering. The rescue team gets to work, providing dry clothes and emergency thermal blankets with help from a Norwegian humanitarian group, Drop in the Ocean, while Spanish doctors from Salvamento Maritimo Humanitario (SMH) attend to the injured. Amidst screaming children and aching bodies, the chaotic process seems almost streamlined: Wet clothes off, dry clothes on, plastic bags replace wet socks and everyone gets filed onto a bus while volunteers pick up any trash left behind in an impressive display of cross-organizational coordination.

Yet after months of refining their procedures, humanitarian workers in Chios continue facing new challenges as smugglers change tactics under new pressures from Turkey and the European Union. Whenever the flow seems to slow down, large backlogs of refugees arrive in short bursts of time, overwhelming humanitarian services. This past weekend, more than 3,000 people arrive in Chios alone. “The numbers have been stable since the fall and now we are thinking they will stay the same until March,” said Edith Chazelle, Camp management coordinator for the Norwegian Refugee Council. “We are all surprised they are still coming with the cold weather and the rough water.”

Rescue workers also noted most dinghies are no longer being abandoned on Greek beaches. Boat captains are now forcing refugees to jump out and swim ashore before steering the dinghies back to Turkey. On Friday night, FEOX volunteer Mihalis Mierousis swam out to save a baby that was tossed overboard. The infant was less than one year old and survived the ordeal, but Mierousis said the practice might be due to a shortage of dinghies. “Unfortunately, this is not unusual,” he said. “Many people get thrown into the water, and we have to save them this way.” Other rescue workers said smugglers are taking families hostage and forcing fathers to steer dinghies to Chios and back as ransom. Rumors abound.

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Oct 202015
 
 October 20, 2015  Posted by at 9:11 am Finance Tagged with: , , , , , , , , , ,  5 Responses »
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Hans Behm Windy City tourists at Monroe Street near State 1908

Another Quarter Of Remarkably Precise China GDP Growth Data (Reuters)
China’s Better-Than-Expected GDP Prompts Skepticism From Economists (WSJ)
Chinese Economists Have No Faith In 7% Growth ‘Target’ (Zero Hedge)
China’s Capital Outflows Top $500 Billion (FT)
China Heads For Record Crude Buying Year (Reuters)
Britain’s Love Affair With China Comes At A Price (AEP)
The Perfect Storm That Brought Britain’s Steel Industry To Its Knees (Telegraph)
Deutsche Bank, Credit Suisse Set to Scale Back Global Ambitions (Bloomberg)
Wal-Mart Puts The Squeeze On Suppliers To Share Its Pain (Reuters)
Brazil’s Corruption Crackdown Can’t Be Stopped (Bloomberg)
US Supreme Court May Weigh In on a Student Debt Battle (Bloomberg)
New Canada PM Justin Trudeau: Out of Father’s Shadow and Into Power (Bloomberg)
Farewell Fossil Fools – Harper And Abbott Both Dispatched (CS)
Death by Fracking (Chris Hedges)
Is There A War Crime In What The Dutch Safety Board Is Broadcasting? (Helmer)
Stranded in Cold Rain, a Logjam of Refugees in the Balkans (NY Times)
Without Safe Access To Asylum, Refugees Will Keep Risking Their Lives (Crawley)
Merkel In Turkey: Trade-Offs And Refugees (Boukalas)
Greek Coast Guard Rescues 2,561 Migrants Over The Weekend (AP)

Maybe Beijing is just very good at predicting.

Another Quarter Of Remarkably Precise China GDP Growth Data (Reuters)

China GDP releases are starting to look like near-perfect landings each and every time, in all kinds of weather conditions and visibility. Yet another quarter has just gone by – literally less than three weeks ago – and already statisticians have reported that growth slowed a tiny sliver from Beijing’s 2015 target of 7% recorded for the first half of the year. Now it’s 6.9%, slightly above the Reuters consensus forecast from 50 economists of 6.8%. It is difficult to understate just how precise such figures are in the grand scheme of economic data reporting. It is also difficult to ignore just how remarkable this stability is considering the Chinese authorities are trying to rebalance the entire economy away from reliance on exporting manufacturing goods toward domestic consumer spending.

And that worry about a Chinese growth slowdown was one of the main reasons cited by the U.S. Federal Reserve for holding off last month on its first rate rise in nearly a decade. That’s also not to mention that China growth concerns dominated the International Monetary Fund and World Bank’s latest meetings in Lima, Peru. In the past three years, Chinese GDP data as reported have only missed the Reuters Polls consensus three times, and on each occasion it was because the reported growth figure beat by just 0.1 percentage point. For the periods of Q4 2013 through to Q1 of this year, the reported figure was exactly on forecast.

Other large and important global economies are nowhere near as accurate. U.S. growth data have taken even the most pessimistic forecaster completely off guard on several occasions since the financial crisis, most recently in the first quarter of last year. The initial report for Q1 GDP this year also matched the lowest forecast. Initial U.S. growth data have only actually been reported exactly in line with expectations three times in the last half decade. It seems implausible that economists, who are often widely panned as a group for failing to predict economic turning points, are uncannily able to nail Chinese GDP within a few tiny slivers of a percentage point each and every time.

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Not much use trying to analyze something so obvious.

China’s Better-Than-Expected GDP Prompts Skepticism From Economists (WSJ)

Within minutes of China’s publishing its rosier-than-expected numbers, a wave of skepticism emanated from economists over the accuracy of the official 6.9% third-quarter growth figure. Economists’ doubts centered in part on the apparent disconnect between the headline figure and the underlying data. Both exports and imports declined during the third quarter, and industrial production was weaker than expected. Factories have seen 43 consecutive months of falling prices and—despite a flood of government infrastructure spending—fixed-asset investment decelerated in September. While retail sales and services have held up, and new lending data in September point to a pickup in demand, these factors haven’t been enough to offset the parade of negative data, economists said.

“When you look at the numbers, it’s not entirely easy to see how GDP growth held up so well,” said Société Générale CIB economist Klaus Baader. The weak reports leading up to Monday’s GDP release had strengthened the impression that China is increasingly under siege to reach its 2015 growth target of about 7%, which already would be its slowest pace in a quarter century. Economists say the world’s second-largest economy is far from collapsing, though a number of them say they believe actual growth is one or two percentage points below the official figure. China’s official growth statistics have long been viewed with skepticism. Although the methodology has improved exponentially since the days of the 1958-61 Great Leap Forward, when cadres were encouraged to inflate production statistics to please Chairman Mao, many say there is still a focus on reaching a predetermined number, even when underlying conditions change.

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Much better index, and Pettis explaining how China is both much worse and not all that bad (I disagree).

Chinese Economists Have No Faith In 7% Growth ‘Target’ (Zero Hedge)

Earlier today in “The Truth Behind China’s GDP Mirage: Economic Growth Slows To 1999 Levels”, we pointed out that Beijing may be habitually understating inflation for domestic output, which has the effect of making “real” GDP less “real” than nominal GDP. This is what we’ve called the “deficient deflator math” problem and it raises questions about whether China is netting out import prices when they calculate the deflator. If they’re not, then the NBS is likely overstating GDP during periods of rapidly declining commodities prices. If Beijing is indeed understating the deflator it’s not entirely clear that it’s their fault, as robust statistical systems take time to implement, especially across an economy the size of China’s.

That said, there are plenty of commentators who believe that the practice of overstating GDP is policy and exists with or without an understated deflator. Put simply: quite a few people think China is simply lying about its economic output. To be sure, there’s ample evidence to suggest that Beijing’s critics are right. After all, the Li Keqiang index doesn’t appear to be consistent with the numbers coming out of the NBS and the degree to which the data tracks the Communist party’s “target” is rather suspicious (and that’s putting it nicely).

In effect, everyone is perpetually in an awkward scenario when it comes to Chinese GDP data. Economists are forced to “predict” a number that they know is gamed and while that’s pretty much always the case across economies (just see “double adjusted” US GDP data for evidence), with China it’s arguably more blatant than it is anywhere else, and one could run up a pretty impressive track record simply by betting with Beijing’s “target.” It’s with all of this in mind that we bring you the following clip from University of Peking economist Michael Pettis, whose outlook is apparently far more dour than his compatriots:

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I can’t see how or why this would stop.

China’s Capital Outflows Top $500 Billion (FT)

Capital outflows from China topped $500bn in the first eight months of this year, according to new calculations by the US Treasury that highlight the shifting fortunes in the global economy. The outflows, which peaked at about $200bn during the market turmoil in August according to the estimates released on Monday, have also contributed to a shift by Washington in its assessment of the valuation of China’s currency, the renminbi. In its latest semi-annual report to Congress on the global economy, the US Treasury dropped its previous assessment that the renminbi was “significantly undervalued”. Instead, the Treasury said the Chinese currency was “below its appropriate medium-term valuation”. “Given economic uncertainties, volatile capital flows and prospects for slower growth in China, the near-term trajectory of the RMB is difficult to assess,” Treasury economists wrote.

“However, our judgment is that the RMB remains below its appropriate medium-term valuation.” The new language reflects the cautious welcome that the Obama administration has given to Beijing’s efforts in recent months to prop up the renminbi since China announced on August 11 that it would allow a greater role for the market in setting the currency’s exchange rate. It is also a sign of the recognition in Washington that even as it believes China’s currency should strengthen in the longer term, in the short term the renminbi is facing downward pressures because of several factors including what amount to historic outflows from China and other emerging economies. “Market factors are exerting downward pressure on the RMB at present, but these are likely to be transitory,” the Treasury said. Among those factors, Treasury economists wrote, was the unwinding of carry trades betting on the appreciation of the renminbi.

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Q: what will happen to prices when Chinese storage has filled up its teapots?

China Heads For Record Crude Buying Year (Reuters)

As China closes in on the US as the world’s biggest crude oil importer, demand from private refiners and stockpiling of cheap oil is expected to keep imports at record levels after a wobble in the third quarter. Despite slower growth in recent months – crude imports rose just 1.3% in September on a year earlier – buying for October-November delivery has picked up strongly, traders and analysts say. The purchases will ease concerns of a sharp slowdown in Chinese buying and support prices in coming months, analysts said. The increased buying has shown up in tanker movements and freight rates, said Energy Aspects analyst Virendra Chauhan, and analysts are upgrading earlier forecasts for second half growth. “Despite a slowing Chinese economy, crude imports remain robust on the back of accelerated stockpiling activities into operating and commercial storage,” said Wendy Yong, analyst at oil consultancy FGE.

Since July, China has also granted nearly 700,000 barrels per day (bpd) of crude import quotas to small refiners, known as “teapots”, or roughly 10% of China’s current total imports, as part of efforts to boost competition and attract private investment, creating a new source of demand. “The teapots are super-active,” said one oil trader, with many racing to fill their new quotas. And state-owned refiners are restocking after a third-quarter lull. Unipec, the trading arm of Asia’s top refiner Sinopec, bought 6 million barrels of North Sea Forties crude and 2.9 million barrels of Russian ESPO for loading this month, and it has also stepped up Angolan crude purchases for November. To accommodate the oil, new storage tanks on southern Hainan island have either been put to use or are due to be filled with crude from end-2015.

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Something to do with licking certain body parts.

Britain’s Love Affair With China Comes At A Price (AEP)

It is a sobering experience to travel through eastern China with a British passport. Again and again you run into historic sites that were burned, shelled or sacked by British forces in the 19th century. The incidents are described in unflattering detail on Mandarin placards for millions of Chinese national pilgrims, spiced with emotional accounts of the Opium Wars. The crown jewel of this destructive march was the Summer Palace of the Chinese emperors outside Beijing, looted of its Qing Dynasty treasures by Lord Elgin in 1860, and burned to ground. It was a reprisal for the murder of 18 envoys by the Chinese court, but the exact “casus belli” hardly matters anymore. The defilement lives on in the collective Chinese mind as a high crime against the nation, the ultimate symbol of humiliation by the West.

The Communist Party has carefully nurtured the grievance under its “patriotic education” drive. David Marsh, from the Official Monetary and Financial Institutions Forum, says Britain’s leaders are implicitly atoning for a colonial past by rolling out the red carpet this week for Chinese President Xi Jinping, and biting their tongue on human rights. They are acknowledging that British officialdom is in no fit position to lecture anybody in Beijing. The exact line between good manners and kowtowing is hard to define, but George Osborne came close to crossing it on his trade mission to China last month, earning plaudits from the state media for his “pragmatism” and deference. But as the Chancellor retorted, you have to take risks in foreign policy. Moral infantilism is for the backbenches. “China is what it is,” he said.

The proper question for David Cameron and Mr Osborne is whether they have accurately judged the diplomatic and commercial trade-off in breaking ranks with other Western allies and throwing open the most sensitive areas of the British economy to Chinese expansion, and whether they will reap much in return. The US Treasury was deeply irritated when the Chancellor defied Washington and signed up to the Asian Infrastructure Investment Bank (AIIB), China’s attempt to create an Asian rival to the Bretton Woods institutions controlled by the West. Mr Osborne was correct on the substance. Congress acted foolishly in trying to smother the AIIB in its infancy and stem the rise of China as a financial superpower. It was tantamount to treating the country as an enemy, an approach that soon becomes self-fulfilling.

The AIIB is exactly what is needed to recycle China’s trade surpluses back into the world economy, just as the US Marshall Plan recycled American surpluses in the 1950s. The problem is that Britain carelessly undercut a close ally, putting immediate mercantilist interests ahead of a core strategic relationship. Anglo-American ties are now at their lowest ebb for years, a risky state of affairs at a time when the UK faces a showdown with the European Union.

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Overinvestment.

The Perfect Storm That Brought Britain’s Steel Industry To Its Knees (Telegraph)

Britain’s steel industry is caught in a “perfect storm”, ravaged by global economics and politics, reducing an industry that once led the world to a mere bit player on the global stage. Just 12m tonnes of the metal that is a basic raw material for the modern world were produced in the UK in 2013, according to the World Steel Association, out of a global total of 1.65bn. In 1983 this figure was 15m tonnes out of a total 663bn. However, the number of people employed making the metal in Britain has dropped from 38,000 in 1994 to less than 18,000 today. While productivity improvements account for some of the decline, with worldwide demand more doubling than in a generation, there are other factors that are inflicting a much heavier toll on the industry. Globalisation is the main one, according to Chris Houlden at commodities analyst CRU.

“The issue facing UK steel has been developing since the financial crisis,” he says. “Demand for steel in Britain and the EU has fallen and not recovered and there’s persistent global overcapacity.” While things weren’t all sunshine and roses ahead of the crash – the sector faced the universal pressures to find efficiencies and savings – Britain’s steel industry could function successfully with the growing global economy gobbling up available output, led by China’s burgeoning growth. Today things are different. Beijing is pencilling in annual growth of about 7pc, half the rate seen in heady pre-crisis times as its economy industrialised, placing huge demand on the country’s steel mills to turn out the beams and sheets needed for machines and construction.

Thanks to heavy investment in its steel industry, China is now responsible for half of the world’s steel output – up from 10pc a decade ago – and is reluctant to let it go to waste. As a result, China’s mills are dumping excess output abroad, and the country’s overcapacity is estimated to be 250m tonnes a year. “China’s production is not abating,” says Peter Brennan, European editor at steel industry data provider Platts. “You might have thought they would cut capacity but in a country where industry is effectively government controlled, it’s not happened. In what’s arguably a more unstable society, the government has no intention of cutting masses of jobs.”

The sentiment is echoed by the International Steel Statistics Bureau. “It would take a major reversal of the slowdown in the Chinese economy to prevent them pushing steel abroad,” says ISSB commercial manager Steve Andrews. “That’s why they are looking externally. There’s not the political will to remove capacity. They have taken some of the old and highly polluting plants out as they look at improving air quality but a lot of their stuff is big and modern.” The result is cheap steel coming on to the market, pushing prices down. But it’s not just China that is dumping output. “China is not unique,” says Houlden. “There’s low to no growth in a lot of other major steel producers such as Brazil and Russia, so they are doing it, too. Japan, the world’s second largest producer, is also looking to export more steel.”

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All banks are in deep shit.

Deutsche Bank, Credit Suisse Set to Scale Back Global Ambitions (Bloomberg)

Europe’s last global banks are caving in to pressure from regulators and preparing to tell investors just how much their aspirations will shrink. “The European banks were too long holding onto the past and not realizing that this change is for good – it’s permanent,” said Oswald Gruebel, a former chief executive officer of both UBS and Credit Suisse. “The main reason for reducing global investment banking is that with the capital requirements which the regulators put on these banks, you cannot make any decent return.” Deutsche Bank announced sweeping management changes on Sunday, less than two weeks before co-CEO John Cryan will present his plans to scale back the trading empire built by his predecessor.

On Wednesday, Tidjane Thiam will probably reveal a strategy to prune Credit Suisse’s investment bank in favor of wealth management. Barclays, BNP Paribas and Standard Chartered are also trimming operations. Europe’s global lenders are struggling to adapt to rising capital requirements, record-low interest rates and shrinking opportunities for growth. Their retrenchment risks further squeezing lending to economies in the region and handing more business to U.S. competitors, which were quicker to raise capital levels and are benefiting from growth at home. “Everything that’s being done should have been done years ago,” said Barrington Pitt Miller at Janus Capital in Denver. “The European muddle-through scenario has been proven not to be a terribly good one.”

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Very predictable, and very blind too: “..Wal-Mart believes it can grow sales by 3 to 4% a year over the next three years..”

Wal-Mart Puts The Squeeze On Suppliers To Share Its Pain (Reuters)

Suppliers of everything from groceries to sports equipment are already being squeezed for price cuts and cost sharing by Wal-Mart. Now they are bracing for the pressure to ratchet up even more after a shock earnings warning from the retailer last week. The discount store behemoth has always had a reputation for demanding lower prices from vendors but Reuters has learned from interviews with suppliers and consultants, as well as reviewing some contracts, that even by its standards Wal-Mart has been turning up the heat on them this year. “The ground is shaking here,” said Cameron Smith, head of Cameron Smith & Associates, a major recruiting firm for suppliers located close to Wal-Mart’s headquarters in Bentonville, Arkansas. “Suppliers are going to have to help Wal-Mart get back on track.”

For the vendors, dealing with Wal-Mart has always been tough because of its size – despite recent troubles it still generates more than $340 billion of annual sales in the U.S. That accounts for more than 10% of the American retail market, excluding auto and restaurant sales, and the company increasingly sells a lot overseas too. To risk having brands kicked off Wal-Mart’s shelves because of a dispute over pricing can badly hurt a supplier. On Wednesday, Wal-Mart stunned Wall Street by forecasting that its earnings would decline by as much as 12% in its next fiscal year to January 2017 as it struggles to offset rising costs from increases in the wages of its hourly-paid staff, improvements in its stores, and investments to grow online sales.

This at a time when it faces relentless price competition from Amazon.com, dollar stores and regional supermarket chains. Keeping the prices it pays suppliers as low as it can is essential if it is to start to claw back some of this cost hit to its margins. Helped by investments to spruce up stores and boost worker pay, Wal-Mart believes it can grow sales by 3 to 4% a year over the next three years, or by as much as $60 billion, offering suppliers new opportunities to boost their own revenues.

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Here’s hoping.

Brazil’s Corruption Crackdown Can’t Be Stopped (Bloomberg)

In a continent of peacocks, Brazilian federal judge Sergio Moro makes an unlikely celebrity. Laconic and poker-faced, he has little time for the spotlight, and yet his name is emblazoned on t-shirts and protest banners, and splashed across social media. Why the fuss? Check out the 13th federal district court, where Moro has presided over the largest corruption investigation in the country’s history, sent muckety-mucks to jail and helped restore civic pride in a land where too often justice has been honored in the breach. So after the Brazilian Supreme Court ruled last month to take a high-profile defendant named by witnesses in the landmark Petrobras case away from the 13th district, worried citizens hit the streets. Is the so-called Operation Carwash investigation into looting at the state oil company in danger of getting derailed, as some claim?

Brazil’s white-collar crooks should be so lucky. True, the scope of the scam at Latin America’s biggest corporation might never have come to light had it not been for the 43-year-old judge, who specializes in money-laundering cases, and a dedicated cadre of prosecutors. From their base in Curitiba, a city in southern Brazil, investigators exposed what Prosecutor General Rodrigo Janot called a “complex criminal organization” bent on skimming money from padded supply contracts with Petrobras into political coffers. But getting to Curitiba took the collaboration of the best minds in public service, from the federal police to the Finance Ministry’s financial intelligence unit. That web of sleuths and wonks is the best assurance that the effort to shut down Brazil’s most brazen political crime ring will carry on, no matter who holds the gavel.

The probe began when federal police watching a gas station and one-time car wash (hence the name) in the nation’s capital uncovered a money-changing scheme to spirit gains overseas. The public prosecutor’s office took up the chase and, tapping into finance ministry data, followed the money trail to Petrobras. Janot took the investigation across the Atlantic, where Swiss prosecutors found evidence pointing to the head of Brazil’s lower house, as well as to corporate leaders. Some of Brazil’s biggest oil and construction executives are behind bars, and dozens of politicians are under investigation, including the head of the senate. And despite recently ruling to spin off parts of the investigation, the Supreme Court has consistently buttressed Moro’s authority in the past.

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“One in four borrowers is either delinquent or in default on his or her student loans.”

US Supreme Court May Weigh In on a Student Debt Battle (Bloomberg)

Mark Tetzlaff is a 57-year-old recovering alcoholic who has been convicted of victim intimidation and domestic abuse. He may also be the person with the best shot at upending the way U.S. courts treat student debt for bankrupt borrowers. Tetzlaff has spent three years battling lawyers for the Department of Education over the right to have his student loans canceled in bankruptcy. On Thursday, he appealed his case to the Supreme Court. If the nation’s highest court takes the case on, it will be one of the rare occasions when it has addressed the $1.3 trillion pile of student debt held by 41 million Americans. Tezlaff also got a new attorney after representing himself for most of his case. The lawyer, Douglas Hallward-Driemeier, successfully argued part of the landmark June case that made same-sex marriage a legal right in all 50 states.

Hallward-Driemeier and his team have asked the court to clarify 1970s-era rules that prevent borrowers from getting rid of education debt in bankruptcy, except in cases in which repaying it would constitute an “undue hardship.” Lawmakers never fully defined “undue hardship,” leaving it to the courts to define these special, and rare, circumstances in individual cases. Tetzlaff has said that the standard being applied to his case is unconstitutional. The Supreme Court may be tempted to consider the case partly because it would be able to resolve a split between federal courts in their interpretation of the law, according to court documents. Courts disagree mainly on which of two tests should be used to determine whether someone can erase his or her debt in bankruptcy.

The so-called Brunner test is used in most federal courts and was applied in Tetzlaff’s case. It is the strictest version of the standard because it requires debtors to prove that they have diligently tried to repay their loans, that making any payments would deprive them of a “minimal” standard of living, and that the hardship affecting them today will persist long into the future. Over the past two decades, lawyers arguing on behalf of the government have further pushed courts to take the most stringent view of each one of those components. Tezlaff’s legal team has said the Supreme Court should instead apply a less harsh alternative to the Brunner test, known as the “totality of the circumstances” test, which has been gaining ground in courts across the country.

[..] It would be hard to overstate the significance of this case for people struggling with student debt. Student loans are the largest source of consumer debt aside from mortgages. The total amount of outstanding student debt is expected to double to $2.5 trillion in the next decade. One in four borrowers is either delinquent or in default on his or her student loans.

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Surprisingly nice write-up of Trudeau for Bloomberg. I wish Justin well, but Canada’s in for very hard times.

New Canada PM Justin Trudeau: Out of Father’s Shadow and Into Power (Bloomberg)

As a young man, Justin Trudeau continually sought respite from his father’s long shadow. He debated in university as Jason Tremblay, boxed as Justin St. Clair and eventually settled on Canada’s west coast – as far in Canada as he could get from being Pierre Trudeau’s eldest and still be close to great skiing. Now 43, he has come full circle, reviving a moribund Liberal Party to a solid majority amid a new wave of the Trudeaumania that swept his father to power in 1968. In ousting Stephen Harper Monday, he becomes the country’s first inter-generational prime minister and gets to move back into his childhood home. Trudeau campaigned on a brand of optimism, transparency and youthful energy – while promising government activism to stimulate a weak economy and address middle class anxiety over income inequality and retirement security.

In contrast to the departing Harper, he will run deficits willingly, reduce Canada’s combat role against the Islamic State and get behind the Iran nuclear deal. He’ll also rule out the purchase of F-35 fighters in favor of more spending on the navy and join President Barrack Obama in Paris in pushing for aggressive action on climate change. He is, in many ways, the happy faced anti-Harper. Trudeau’s political role model is not so much his beloved “papa,” whose public persona over 15 years as prime minister mixed charisma and aloofness, but his maternal grandfather, Jimmy Sinclair, a consummate glad-handing, baby-kissing Scottish immigrant to Canada and Rhodes scholar.

It was no accident that Trudeau held his final campaign event Sunday night in the Vancouver constituency his grandfather represented from 1940 to 1958. “I’m not sure if love of campaigning has any kind of genetic component, but if it does, I can trace my passion for it straight back to grandpa,” he told an enthusiastic crowd on what was the birthday of both his father and his eldest son, eight-year-old Xavier James, named for Sinclair. “He loved knocking on doors, getting out, meeting with people, taking the time to really listen to what they had to say. It’s his style that I’ve adopted as my own.”

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“Both of them had a penchant for using precisely the same words to describe the country’s future as an “Energy Superpower”.

Farewell Fossil Fools – Harper And Abbott Both Dispatched (CS)

The prospects for the forthcoming global climate conference to be held in Paris later this year have received a significant diplomatic boost. The two developed world leaders most intent on undermining the conference – Australia’s Tony Abbott and Canada’s Stephen Harper – have been dispatched to the political wilderness. Based on early Canadian election vote counting Monday night, Harper’s Conservative Party look set to lose office, with the centrist Liberals having been declared the winner of 173 seats at the time of writing and projected to win 184 of the 338 lower house seats (according to Canada’s Globe and Mail), giving them the ability to rule in their own right. The Conservatives have suffered big losses, with latest counting giving them 92 seats with a projection of 102 seats.

Back in June 2014 when Abbott visited Harper in Canada, the two put on an act of professing concern for climate change while describing a policy that would actually limit carbon emissions as something that would “clobber the economy” in Abbott’s words while being “job killing” in Harper’s words. As Climate Spectator noted in Harper and Abbott: Two fossils fooling no one, what was plainly obvious was that both Harper and Abbott had confused the interests of the coal mining industry (in Abbott’s case) and tar sands (Harper) with the interests of their respective country as a whole.

A year on it appears the two of them had far too narrowly focussed and deeply flawed economic strategies. [..] Harper and Tony Abbott have followed eerily similar strategies. Both of them had a penchant for using precisely the same words to describe the country’s future as an “Energy Superpower”. Unfortunately for them the plummeting price of a barrel of oil and a tonne of coal left them both floundering without a coherent economic narrative for how to drive their respective nations’ future prosperity. They then both resorted in desperation to the bottom of the barrel trying to using fears of terrorism in an attempt to restore their popularity.

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“Resistance will be local. It will be militant. It will defy the rules imposed by the corporate state. It will turn its back on state and NGO environmental organizations. And it will not stop until corporate power is destroyed or we are destroyed.”

Death by Fracking (Chris Hedges)

The maniacal drive by the human species to extinguish itself includes a variety of lethal pursuits. One of the most efficient is fracking. One day, courtesy of corporations such as Halliburton, BP and ExxonMobil, a gallon of water will cost more than a gallon of gasoline. Fracking, which involves putting chemicals into potable water and then injecting millions of gallons of the solution into the earth at high pressure to extract oil and gas, has become one of the primary engines, along with the animal agriculture industry, for accelerating global warming and climate change. The Wall Street bankers and hedge fund managers who are profiting from this cycle of destruction will—once clean water is scarce and crop yields decline, once temperatures soar and cities disappear under the sea, once droughts and famines ripple across the globe, once mass migrations begin—surely profit from the next round of destruction.

Collective suicide is a good business, at least until it is complete. It is a pity most of us will not be around to see the power elite go down. [..] The activists are waging a war against a corporate state that is deaf and blind to the rights of its citizens and the imperative to protect the ecosystem. The corporate state, largely to pacify citizens being frog-marched to their own execution, passes environmental laws and regulations that, at best, slow the ongoing environmental destruction. Corporations, which routinely ignore even these tepid restrictions, largely write the laws and legislation designed to regulate their activity. They rewrite them or overturn them as the focus of their exploitation changes. They turn public hearings on local environmental issues into choreographed charades or shut them down if activists succeed in muscling their way into the room to demand a voice.

They dominate the national message through a pliable and bankrupt corporate media and slick public relations. Elected officials are little more than corporate employees, dependent on industry money to stay in office and, when they retire from “public service,” salivating for jobs in the industry. Environmental reform has become a joke on the public. And the Big Green environmental groups are complicit because they rely on donors, at times from the fossil fuel and animal agriculture industries; they are silent about the reality of corporate power, largely ineffectual, and part of the fiction of the democratic process. Resistance will be local. It will be militant. It will defy the rules imposed by the corporate state. It will turn its back on state and NGO environmental organizations. And it will not stop until corporate power is destroyed or we are destroyed.

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John Helmer has written a deep-digging and extensive series on the Dutch MH17 report (h/t Yves Smith). I’ve left the topic alone, because Holland was never in a position to write a neutral analysis. From the get-go it was made clear that Russia and the rebels were responsible, proof be damned, because that fitted the overall anti-Russia mood whipped up by US and EU. What’s perhaps most galling is that the question of intent has been taken off the table altogether: whoever shot down the plane, did they do it on purpose? In ignoring that question, the answer is implied, and analysis makes way for propaganda. Victims’ families be damned.

Is There A War Crime In What The Dutch Safety Board Is Broadcasting? (Helmer)

Tjibbe Joustra, chairman of the Dutch Safety Board, wants it to be very clear that Russia is criminally responsible for the destruction of Malaysian Airlines Flight MH17 on July 17, 2014; that a Russian-supplied ground-to-air missile, fired on Russian orders from territory under Russian control, exploded lethally to break up the MH17 aircraft in the air, killing everyone on board; and that Russian objections to these conclusions are no more than cover-up and dissimulation for the guilty. Joustra also wants to make sure that no direct evidence for what he says can be tested, not in the report which his agency issued last week; nor in the three Dutch government organs which prepared and analysed the evidence of the victims’ bodies, the aircraft remains, and the missile parts on contract to the Dutch Safety Board (DSB) – the Dutch National Aerospace Laboratory (NLR), the Netherlands Organization for Applied Scientific Research (TNO), and the Netherlands Forensic Institute (NFI).

So Joustra began broadcasting his version of what he says happened before the release of the DSB report. He then continued in an anteroom of the Gilze-Rijen airbase, where the DSB report was presented to the press; in a Dutch television studio; and on the pages of the Dutch newspapers. But when he and his spokesman were asked today for the evidence for what Joustra has been broadcasting, they insisted that if the evidence isn’t to be found in the DSB report, Joustra’s evidence cannot be released. So, if the evidence for Joustra’s claims cannot be found in the NLR, TMO and NFI reports either, what exactly is Joustra doing – is he telling the truth? Is he broadcasting propaganda? Is he lying? Is he covering up for a crime?

In the absence of the evidence required to substantiate what the DSB chairman is broadcasting, is the likelihood that Joustra is concealing who perpetrated the crime equal to the probability that he is telling the truth? And if there is such a chance that Joustra is concealing or covering up, is this evidence that Joustra may be committing a crime himself? In English law, that may be the crime of perverting the course of justice. In US law, it might be the crime of obstruction of justice. In German law, it might be the crime of Vortäuschung einer Straftat. By the standard of World War II, Joustra’s crime might be propagandizing for the losing side, that’s to say the enemy of the winning side.

When William Joyce, an Anglo-American broadcaster on German radio during the war and known as Lord Haw-Haw, was prosecuted in London in 1945, he was convicted of treason and hanged. The treason indictment said he “did aid and assist the enemies of the King by broadcasting to the King’s subjects propaganda on behalf of the King’s enemies.” The legality of this indictment and the conviction was upheld by the Court of Appeal and the House of Lords.

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They’re going to die like flies.

Stranded in Cold Rain, a Logjam of Refugees in the Balkans (NY Times)

After weeks of warnings about the dangers involved in Europe’s migrant influx, and fears about winter’s arrival, the worries of public officials and humanitarian groups were realized on Monday when thousands of asylum seekers, many of them families with small children, began to back up at crossings and were stranded in a chilly rain. The backups came just two days after Hungary closed its border with Croatia, and occurred as countries on the north end of the Balkan route tightened border controls while states to its south quarreled over how to manage the unabated human flow into Europe.

The logjam followed a month of relative stability across the Balkans and Central Europe, as countries unofficially worked together to create a safe and relatively quick route north and west by transporting asylum seekers by bus or train from one border to the next, where they could exit on their way toward Germany, Sweden and other desired destinations. The arrangement filled the void left by the European Union, which has talked, bickered and failed to come up with a common solution to the problem of accommodating hundreds of thousands of new arrivals, many fleeing war in Syria, Iraq and Afghanistan, or repression in places like Eritrea in northern Africa.

A recent effort to stem the flow of migrants by keeping them in Turkey, and preventing them from entering the European Union through Greece, faltered over the weekend, when little progress was reported in talks between Chancellor Angela Merkel of Germany and Turkish leaders. No other plans appear to be on the table, and the safety of the migrants has depended upon the cooperation of the countries along the route, many of them dubious about the migration from the start and resentful that Germany has encouraged it by agreeing to accommodate asylum seekers. That policy by the government of Ms. Merkel has created tensions in Germany, as well, where the weekend stabbing of the politician in charge of refugee affairs in Cologne heightened the polemics surrounding the influx.

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“I could get there and back for just €30. That’s because I’m British. I am not Syrian, Afghan, Palestinian, Iraqi, Somali or Eritrean.”

Without Safe Access To Asylum, Refugees Will Keep Risking Their Lives (Crawley)

I stood in the corner of a dusty cemetery on the Greek island of Lesvos and watched a mother bury her child. As the tiny body of a baby boy wrapped in a white sheet was lifted from the boot of a car, she fell to her knees and howled with pain. The child had slipped from her arms into the cold waters of the Aegean as she made the journey from Turkey to join her husband, who had already travelled to Germany to seek protection from the war that is ravaging their home country, Syria. Her baby should not have died. The journey from Turkey to Lesvos is short and safe. If I wanted to take a ferry trip from the port of Mytiline to Ayvalik on the Turkish coast, the trip would take around an hour. I could get there and back for just €30. That’s because I’m British. I am not Syrian, Afghan, Palestinian, Iraqi, Somali or Eritrean.

I am not required to put my life at risk by paying a smuggler hundreds or even thousands of euros to sit in the bottom of a motorised dingy with 30 or 40 other people to take the exact same journey. I do not need to close my eyes and pray that my children and I will make it to the other side without drowning. After a long summer of protracted negotiations about how to respond to the crisis in the Mediterranean region, this is what European asylum policy still looks like in practice. Although (most) EU member states have reluctantly agreed to redistribute 160,000 of those who have already arrived, there is still no legal route for refugees to enter Europe. And with no hope of a better life at home, thousands of people continue to make the illegal, expensive and potentially dangerous journey across the sea. They know the risks, but the water seems like a better option than the alternatives.

Although Turkey offers temporary protection to Syrian refugees, it is not a signatory to the 1967 Protocol which extends the protection available under the 1951 Refugee Convention to those coming from outside Europe. That means no guaranteed access to employment, education or even basic health care. Conditions for Syrian refugees in Turkey are well documented and known to be deteriorating. There is no prospect that things will improve, no hope for a better future. Those who are not from Syria get nothing. And so they come to Europe. Since the beginning of 2015, more than a quarter of a million people have arrived on Lesvos by sea, and still more are coming. More than 70,000 people arrived in September alone and, according to the International Organisation for Migration (IOM), the numbers are set to be even higher for October.

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Cattle trade.

Merkel In Turkey: Trade-Offs And Refugees (Boukalas)

The gilded thrones may have been the perfect expression of Turkish President Recep Tayyip Erdogan’s sultanic ambitions but they appeared to make his guest, Angela Merkel, somewhat uncomfortable judging by the customary photographs. Maybe the German chancellor was thinking that such a lavish setting was not appropriate for discussing the fate of thousands of people whose only surviving assets are their bodies, their children and whatever dollars or euros they have managed to save up to pay their traffickers. Maybe Merkel, as she sat in the kind of showy opulence that usually reveals something deeper, was thinking that she was being used by the Turkish president as a propaganda tool, that her presence in Istanbul just a few days before elections in Turkey was giving Erdogan a powerful boost.

Particularly at a time when the Turkish government is facing so many accusations: of waging war against the Kurds and brushing off every proposal for a peace settlement in a bid to appeal to those who want authoritarian rule; of racism and intolerance; of persecuting its political rivals; and of quashing free speech by cracking down on “unorthodox” journalists who don’t propagate the Erdogan narrative. Merkel cannot be unaware of all this, and even if her own advisers failed to brief her 100 Turkish university professors did in an open letter. Let us accept that on a mission during which she was not just representing Germany but the EU as a whole, Merkel decided to strike a concessionary tone for the sake of the issue at hand: the protection of the refugees, or, rather, the stemming of the flow of refugees.

The idea is that the refugee influx will abate not as a result of peace in Syria but by convincing Turkey to be more vigilant of its borders, to accept the creation of camps on its territory where refugees can be identified and documented and to grant passage to Europe to those who are deemed eligible for refugee status. It is a technical solution to a political problem; ergo, no solution at all. Turkey, naturally, did not just demand financial remuneration for its cooperation. It asked that its own people be given easier to access to Europe. And it got it. It asked that its European accession be speeded up even though it has fulfilled only a handful of the 40 criteria. And it was promised this would happen by the most powerful voice in Europe: the German one.

And what about the refugees? If only they had been the main topic of discussion at that meeting. Instead, they will keep drowning. And if the complex war in Syria continues unabated, even the winter will not prevent them from trying to get across.

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Most shocking: nobody’s shocked by dead babies anymore.

Greek Coast Guard Rescues 2,561 Migrants Over The Weekend (AP)

Greece’s coast guard says it has rescued 2,561 people in dozens of incidents in the eastern Aegean over the weekend as Europe’s refugee crisis continues unabated. The coast guard said Monday the rescues occurred in 69 operations from Friday morning until Monday morning near eight Aegean islands. The number doesn’t include those who make it ashore themselves from the nearby Turkish coast, often in overcrowded and unseaworthy vessels. On Sunday, the bodies of two women, a baby and a teenager were recovered near the remote island of KastelLorizo after their vessel overturned, while 12 others were rescued by a passing sailing boat. The deaths came a day after a 7-year-old boy died after falling into the water from a boat carrying 80 people who reached the island of Farmakonisi.

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