Jun 042016
 
 June 4, 2016  Posted by at 11:29 am Finance Tagged with: , , , , , , , ,  


Walker Evans Street Scene, Vicksburg, Mississippi 1936

The Funniest BLS Jobs Report Ever (Quinn)
US Payrolls Huge Miss: Worst Since September 2010 (ZH)
This Financial Bubble Is 8 Times Bigger Than The 2008 Subprime Crisis (SM)
Lew Says China’s Overcapacity Skewing Markets (BBG)
UBS Tells Clients To Stick With Cash-Bleeding Hedge Funds (BBG)
Schroedinger’s Assets (Coppola)
Homes Should Be Lived In, Not Traded (G.)
EC Wants “Immunity” For EU Technocrats At Greek Privatization Fund (KTG)
Greek Banks Mulling Special NPL Vehicles (Kath.)
A Russian Warning (Dmitry Orlov et al)
20,000 Migrants Wait For Boats To Take Them To UK (DM)
At Least 117 Bodies Of Migrants Found After Boat Capsized Off Libya (AP)
Hundreds Rescued, At Least 9 Die In Shipwreck Off Crete (Kath.)

Is the narrative falling apart?

The Funniest BLS Jobs Report Ever (Quinn)

Only a captured government drone could put out a report showing only 38,000 new jobs created, with the working age population rising by 205,000, and have the balls to report the unemployment rate plunged from 5.0% to 4.7%, the lowest since August 2007. If you ever needed proof these worthless bureaucrats are nothing more than propaganda peddlers for the establishment, this report is it. The two previous months were revised significantly downward in the fine print of the press release. It is absolutely mind boggling that these government pond scum hacks can get away with reporting that 484,000 people who WERE unemployed last month are no longer unemployed this month.

Life is so fucking good in this country, they all just decided to kick back and leave the labor force. Maybe they all won the Powerball lottery. How many people do you know who can afford to just leave the workforce and live off their vast savings? In addition, 180,000 more Americans left the workforce, bringing the total to a record 94.7 million Americans not in the labor force. The corporate MSM will roll out the usual “experts” to blather about the retirement of Baby Boomers as the false narrative to deflect blame from Obama and his minions. The absolute absurdity of the data heaped upon the ignorant masses is clearly evident in the data over the last three months.

Here is government idiocracy at its finest:
• Number of working age Americans added since March – 406,000
• Number of employed Americans since March – NEGATIVE 290,000
• Number of Americans who have supposedly voluntarily left the workforce – 1,226,000
• Unemployment rate – FELL from 5.0% to 4.7%

Talk about perpetrating the BIG LIE. Goebbels and Bernays are smiling up from the fires of hell as their acolytes of propaganda have kicked it into hyper-drive. We only need the other 7.4 million “officially” unemployed Americans to leave the work force and we’ll have 0% unemployment. At the current pace we should be there by election time. I wonder if Cramer, Liesman, or any of the other CNBC mouthpieces for the establishment will point out that not one single full-time job has been added in 2016. There were 6,000 less full-time jobs in May than in January, while there are 572,000 more low paying, no benefits, part-time Obama service jobs. Sounds like a recovery to me.

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“..a massive surge in people not in the labor force..” We’re approaching negative employment.

US Payrolls Huge Miss: Worst Since September 2010 (ZH)

If anyone was “worried” about the Verizon strike taking away 35,000 jobs from the pro forma whisper number of 200,000 with consensus expecting 160,000 jobs, or worried about a rate hike by the Fed any time soon, you can sweep all worries away: moments ago the BLS reported that in May a paltry 38,000 jobs were added, a plunge from last month’s downward revised 123K (was 160K). The number was the lowest since September 2010! The household survey was just as bad, with only 26,000 jobs added in May, bringing the total to 151,030K. This happened as the number of unemployed tumbled from 7,920K to 7,436K driven by a massive surge in people not in the labor force which soared to a record 94,7 million, a monthly increase of over 600,000 workers.

As expected Verizon subtracted 35,000 workers however this was more than offset by a 36,000 drop in goods producing workers. Worse, there was no offsetting increase in temp workers (something we caution recently), and no growth in trade and transportation services. What is striking is that while the deteriorationg in mining employment continued (-10,000), and since reaching a peak in September 2014, mining has lost 207,000 jobs, for the first time the BLS acknowledged that the tech bubble has also burst, reporting that employment in information declined by 34,000 in May. The change in total nonfarm payroll employment for March was revised from +208,000 to +186,000, and the change for April was revised from +160,000 to +123,000.

With these revisions, employment gains in March and April combined were 59,000 less than previously reported. Over the past 3 months, job gains have averaged 116,000 per month. There is no way to spin this number as anything but atrocious.

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And growing..

This Financial Bubble Is 8 Times Bigger Than The 2008 Subprime Crisis (SM)

On July 1, 2005, the Chairman of then President George W. Bush’s Council of Economic Advisors told a reporter from CNBC that “We’ve never had a decline in house prices on a nationwide basis. So, what I think is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.” His name was Ben Bernanke. And within a year he would become Chairman of the Federal Reserve. Of course, we now know that he was dead wrong. The housing market crashed and dragged the US economy with it. And Bernanke spent his entire tenure as Fed chairman dealing with the consequences. One of the chief culprits of this debacle was the collapse of the sub-prime bubble.

Banks had spent years making sweetheart home loans to just about anyone who wanted to borrow, including high risk ‘sub-prime’ borrowers who were often insolvent and had little prospect of honoring the terms of the loan. When the bubble got into full swing, lending practices were so out of control that banks routinely offered no-money-down mortgages to subprime borrowers. The deals got even sweeter, with banks making 102% and even 105% loans. In other words, they would loan the entire purchase price of a home plus closing costs, and then kick in a little bit extra for the borrower to put in his/her pocket. So basically these subprime home buyers were getting paid to borrow money.

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They know this already, Jack.

Lew Says China’s Overcapacity Skewing Markets (BBG)

The U.S. will push China to reduce excess capacity in its economy at upcoming talks in Beijing, with Treasury Secretary Jacob J. Lew calling it an “area of central concern” Friday in Seoul. The issue bears watching when “excess capacity is distorting markets and important global commodities,” Lew said in remarks to reporters ahead of the U.S.-China Strategic and Economic Dialogue, scheduled for June 6-7 in Beijing. China Vice Premier Wang Yang, State Councilor Yang Jiechi and U.S. Secretary of State John Kerry will attend the meeting along with Lew. A senior Treasury official told reporters China has made a commitment to take serious action to reduce excess capacity in areas like steel and aluminum.

It’s a tough transition, especially as millions of workers would have to find new jobs. However, if the actions aren’t taken, excess capacity will continue to erode China’s economic growth prospects, said the official, who asked not to be identified. Chinese authorities are cutting excess capacity in industries including coal and steel while striving to keep growth above their 6.5% minimum target for this year. The economy has endured four years of factory-gate deflation, though forecasters expect that to turn around. Producer prices will improve in each of the next four quarters and turn positive in 2018, according to economists surveyed by Bloomberg in April.

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At what fee for UBS?

UBS Tells Clients To Stick With Cash-Bleeding Hedge Funds (BBG)

UBS is advising its wealthiest clients to stick with hedge funds even after the $2.9 trillion industry had its worst start to a year since 2008. While the days of “double-digit and triple-digit returns” for hedge funds are over, they still generate enough to satisfy yield-hungry clients who face negative interest rates, said Mark Haefele, global CIO of UBS Wealth Management. “Their performance in the first half hasn’t been impressive but they provide diversification,” he said in an interview with Bloomberg. “They still provide a better risk-reward or different risk-reward than other parts like sovereign bonds.”

UBS in April boosted its recommended allocation to hedge funds to 20% from 18%, saying the strategy will provide stability from volatile markets. The move comes as a net $15 billion was pulled from the global hedge-fund industry in the the first quarter and as some of world’s largest institutions including MetLife said they will scale back their holdings. Hedge funds may lose about a quarter of their assets in the next year as performance slumps Blackstone’s billionaire president, Tony James, predicted last week. The HFRI Fund Weighted Composite Index declined 0.6% in the first quarter, its worst start to a year since 2008.

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The number of non-dead assets is much higher than we let on.

Schroedinger’s Assets (Coppola)

In a new paper, Michael Woodford has reimagined the famous “Schroedinger’s Cat” thought experiment. I suspect this is unintentional. But that’s what happens when, in an understandable quest for simplicity, you create binary decisions in a complex probability-based structure. Schroedinger imagined a cat locked in a box in which there is a phial of poison. The probability of the cat being dead when the box is opened is less than 100% (since some cats are tough). So if p is the probability of the cat being dead, 1-p is the probability of it being alive. The problem is that until the box is opened, we do not know if the cat is alive or dead. In Schroedinger’s universe of probabilities, the cat is both “alive” and “dead” until the box is opened, when one of the possible outcomes is crystallised. Now for “cat”, read assets. In Woodford’s model, when there is no crisis, the probability of asset collapse is zero. But if there is a crisis, the probability of an asset collapse is greater than zero but less than 100%:

“The sequence of events, and the set of alternative states that may be reached, within each period is indicated in Figure 1. In subperiod 1, a financial market is open in which bankers issue short-term safe liabilities and acquire risky durables, and households decide on the cash balances to hold for use by the shopper. In subperiod 2, information is revealed about the possibility that the durable goods purchased by the banks will prove to be valueless. With probability p, the no crisis state is reached, in which it is known with certainty that the no collapse in the value of the assets will occur, but with probability 1-p, a crisis state is reached, in which it is understood to be possible (though not yet certain) that the assets will prove to be worthless. Finally, in subperiod 3, the value of the risky durables is learned.”

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Close to my heart, but very incomplete in its argumentation.

Homes Should Be Lived In, Not Traded (G.)

The problem is twofold: the move to viewing houses as assets, a predictable investment that lets you turn a profit and offers more return on the pound than a pension, means there’s an incentive for wealthy buyers to invest in bricks and mortar without bothering with tenants. But also, as long as our economy gets sucked into a south-east vortex, more people will head to the capital for work, as the rest of the country struggles. George Osborne’s northern powerhouse claims to address this imbalance, twinned with the excruciatingly named “Midlands engine”. But with the announcement that 250 jobs in the very department responsible for rolling out the northern powerhouse are moving from Sheffield to London, that commitment looks as weak as the efforts to give it a catchy moniker.

As long as jobs fail to materialise in post-industrial towns, empty terraces will multiply. Conservative politicians have long opined that people seeking work should “get on their bike”, without stopping to observe that many do: hence the brain drain from the north and Wales, and the exponential demand for housing in the south-east England. Houses should be lived in, most people would agree: so the government’s move to criminalise squatting is key to understanding the problem of empty houses. Contrary to scare stories, people don’t pop out for a pint of milk and find that squatters have moved in to their home. Squatters often took up residence in vacant buildings, and used the houses for their intended purpose: living in.

Prosecuting squatters reasserts people’s right to treat homes as assets, not shelter. When it comes to empty houses, it’s the inequality stupid. The inequality that means some can buy multiple houses, while others cannot rent one. That sees London swallowing up wealth, jobs and land value hikes, while parts of the country grow desolate. There shouldn’t be empty homes while some people sleep on the streets, but the fact that so many lie empty should worry us: many houses aren’t homes, they’re investment vehicles, and long term, they scupper all our chances of financial and social security.

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Selling off a country in peace.

EC Wants “Immunity” For EU Technocrats At Greek Privatization Fund (KTG)

The European Commission directly intervened in the work of the Greek Justice and demanded that EU technocrats working at the Greek Privatization Fund enjoy “immunity.” The EC intervenes two days after corruption prosecutors in Athens raised charges against 3 Greeks and 3 EU-nationals of the HRADF for selling public assets thus causing losses of several millions of euro to the state. On Friday, EC spokesman Margaritis Schinas told reporters in Brussels that EU experts working in Greece under the Greek program, should enjoy some kind of ‘guarantee’. “For us, satisfactory operating margins should be guaranteed for all European experts assisting Greece to improve its economy and find its way back to growth,” Schinas said.

At the same time, he stressed that “there is full respect to judicial procedures” currently under way against 6 members of the old Privatization Fund.but the invervention was clear. Schinas did not elaborate on the Eurogroup request referring to immunity for EU technocrats who will work for the new Greek Privatization Fund. The EC intervention came right after the corruption prosecutors raised charges against 6 members of the TAIPED for the sale of 28 public assets. Three of those members are Greeks, the other three from Italy, Spain and Slovakia appointed by the Eurogroup. The six have been investigated for the period 2013-2014 and have been called to testify before corruption investigator Costas Sargiotis.

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Yeah, let’s create some more creativity.

Greek Banks Mulling Special NPL Vehicles (Kath.)

Greece’s core banks are considering the creation of special purpose companies which will receive large portfolios of nonperforming loans and then be sold so that they stop burdening the lenders’ financial figures, as NPLs now exceed €100 billion in total. The ECB is asking bank managers to proceed with tackling this huge matter at a speedier pace and to make brave decisions for the drastic slashing of bad loans from their finances. In this context, one of the plans being examined concerns the special vehicles to be created with NPL portfolios and sold off not to third parties but to the existing stakeholders of the banks.

This creation of what would resemble a “bad bank” for each lender would serve to immediately lighten the credit sector’s financial reports, while the transfer of those vehicles to the existing stakeholders could offer them future benefits from the active management of those bad loans. Nowadays the biggest obstacle to the sale of NPLs to third parties is the great distance between buyers and sellers. The buyers of bad loans want to acquire such portfolios at exceptionally low prices, due to the country risk, the devaluation of assets owing to the protracted recession in Greece, the inefficient legal system etc. On the other hand, the sellers – i.e. the banks – are refusing to sell at such low prices as they appear certain that among the current NPL stock that reaches up to 55 percent of all loans there is a huge volume of debts that could revert to normality with the right management.

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They are not kidding.

A Russian Warning (Dmitry Orlov et al)

We, the undersigned, are Russians living and working in the USA. We have been watching with increasing anxiety as the current US and NATO policies have set us on an extremely dangerous collision course with the Russian Federation, as well as with China. Many respected, patriotic Americans, such as Paul Craig Roberts, Stephen Cohen, Philip Giraldi, Ray McGovern and many others have been issuing warnings of a looming a Third World War. But their voices have been all but lost among the din of a mass media that is full of deceptive and inaccurate stories that characterize the Russian economy as being in shambles and the Russian military as weak—all based on no evidence. But we—knowing both Russian history and the current state of Russian society and the Russian military, cannot swallow these lies. We now feel that it is our duty, as Russians living in the US, to warn the American people that they are being lied to, and to tell them the truth.

And the truth is simply this: If there is going to be a war with Russia, then the United States will most certainly be destroyed, and most of us will end up dead. Let us take a step back and put what is happening in a historical context. Russia has suffered a great deal at the hands of foreign invaders, losing 22 million people in World War II. Most of the dead were civilians, because the country was invaded, and the Russians have vowed to never let such a disaster happen again. Each time Russia had been invaded, she emerged victorious. In 1812 Nepoleon invaded Russia; in 1814 Russian cavalry rode into Paris. On June 22, 1941, Hitler’s Luftwaffe bombed Kiev; On May 8, 1945, Soviet troops rolled into Berlin.

But times have changed since then. If Hitler were to attack Russia today, he would be dead 20 to 30 minutes later, his bunker reduced to glowing rubble by a strike from a Kalibr supersonic cruise missile launched from a small Russian navy ship somewhere in the Baltic Sea. The operational abilities of the new Russian military have been most persuasively demonstrated during the recent action against ISIS, Al Nusra and other foreign-funded terrorist groups operating in Syria. A long time ago Russia had to respond to provocations by fighting land battles on her own territory, then launching a counter-invasion; but this is no longer necessary. Russia’s new weapons make retaliation instant, undetectable, unstoppable and perfectly lethal.

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Be afraid! There’s only 60 million of you!

20,000 Migrants Wait For Boats To Take Them To UK (DM)

A file lying in the drawer of the manager’s office at a small French seaside hotel provides intriguing clues about the gangsters who smuggle migrants across the Channel to Britain. It contains the passport details of four shadowy men who booked in for a night to pull off an audacious crime by trafficking 30 Pakistanis and Albanians by sea into the UK. Gangs of people smugglers now operate along all 450 miles of the north French coast — from Calais on the Belgian border to Cherbourg and beyond — as 20,000 migrants wait to get to England for a new life. During the past week they have used small fishing vessels, private yachts and speedboats to slip migrants onto England’s South Coast beaches under cover of darkness.

Early last Sunday, 18 migrants were rescued in Dymchurch, a coastal village in Kent, after their rubber dinghy began to sink offshore. The same morning, eight migrants were rescued by a lifeboat in Portsmouth harbour as they floated adrift in a fishing boat. The determination of migrants and the greed of traffickers has not been diminished by the French government’s demolition in March of the ‘Jungle’ migrant camp in Calais, an unhygienic shanty town of 4,000. The migrants simply moved on — initially 30 or so miles away to Dunkirk, where thousands live in a camp near the port, paying traffickers to cross the Channel, and then spreading further along the coast.

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How many boats and bodies sink that we never hear about?

At Least 117 Bodies Of Migrants Found After Boat Capsized Off Libya (AP)

More than 110 bodies were found along a Libyan beach after a smuggling boat of mostly African migrants sank, while a separate search-and-rescue operation across the Mediterranean saved 340 people Friday and recovered nine bodies. The developments were the latest deadly disasters for refugees and migrants seeking a better life in Europe, and they followed the drownings of more than 1,000 people since May 25 while attempting the long and perilous journey from North Africa to southern Europe. As traffickers take advantage of improving weather, officials say it is impossible to know how many unseaworthy boats are being launched — and how many never reach their destination. Naval operations in the southern Mediterranean, co-ordinated by Italy, have been stretched just responding to the disasters they do hear about.

At least 117 bodies — 75 women, six children and 36 men — washed up on a beach or were pulled from the water near the western Libyan city of Zwara Thursday and Friday, Mohammed al-Mosrati, a spokesman for Libya’s Red Crescent, told The Associated Press. All but a few were from African countries. The death toll was expected to rise. The children were aged between 7 and 10, said Bahaa al-Kwash, a top media official in the Red Crescent. “It is very painful, and the numbers are very high,” he said, adding that the dead were not wearing life jackets — something the organization had noticed about bodies recovered in recent weeks. “This is a cross-border network of smugglers and traffickers, and there is a need for an international effort to combat this phenomenon,” he said.

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Crete is a somewhat novel destination.

Hundreds Rescued, At Least 9 Die In Shipwreck Off Crete (Kath.)

Hundreds of migrants were rescued on Friday after a smuggling boat sank in international waters south of Crete, while the Hellenic Coast Guard recovered the bodies of at least nine drowned migrants. The 25-meter vessel capsized in the early hours of Friday morning under circumstances that remained unclear, leaving hundreds of migrants in the sea, some 70 nautical miles south of Crete. According to the International Organization for Migration, around 700 migrants had been aboard the vessel. Five ships – cargo and commercial vessels – had been near the scene and offered assistance, rescuing scores of migrants. The Hellenic Coast Guard sent two vessels while the navy dispatched two Super Puma helicopters to scour the area.

By late Friday, 340 migrants had been rescued and the bodies of nine migrants pulled out of the sea by rescue workers. Another vessel capsized off the coast of Libya on Friday, leading to a larger death toll, with more than 100 bodies found in the sea. Meanwhile authorities on the islands of the eastern Aegean expressed concern as tensions are rising at detention centers and frequently escalating into brawls. The influx of migrants to the islands, which had all but stopped in recent weeks, following a deal between the European Union and Ankara to return migrants to Turkey, appears to have picked up again, unnerving authorities. A group of 120 migrants arrived on Chios Friday and another 25 on Lesvos.

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Jan 112016
 
 January 11, 2016  Posted by at 9:29 am Finance Tagged with: , , , , , , , , ,  


Thin White Duke

David Bowie Dies Aged 69 (Reuters)
Chinese Stocks Down 5%, As Rout Ricochets In Asia (MarketWatch)
Chinese Stocks Extend Rout as Economic Growth Concerns Deepen (BBG)
Yuan Liquidity Extremely Tight, Interbank Rates Soar In Hong Kong (BBG)
London Hedge Fund Omni Sees 15% Yuan Drop, and More in a Crisis (BBG)
Australia Bet The House On Never-Ending Chinese Growth (Guardian)
India Concerned About Chinese Currency Devaluation (Reuters)
China PM: We’ll Let Market Forces Fix Overcapacity (Reuters)
Fed’s Williams: “We Got It Wrong” On Benefits Of Low Oil Prices (ZH)
Free Capital Flows Can Put Economies In A Bind (Münchau)
Pensions, Mutual Funds Turn Back to Cash (WSJ)
UK House Price To Crash As Global Asset Prices Unravel (Tel.)
The West Is Losing The Battle For The Heart Of Europe (Reuters)
Newly Elected Catalan President Vows Independence From Spain By 2017 (RT)
Dutch ‘No’ To Kiev-EU Accord Could Trip Continental Crisis: Juncker (AFP)
Britain Abandons Onshore Wind Just As New Technology Makes It Cheap (AEP)
400,000 Syrians Starving In Besieged Areas (AlJazeera)
World’s Poor Lose Out As Aid Is Diverted To The Refugee Crisis (Guardian)

Bowie’s secret: hard work.

David Bowie Dies Aged 69 From Cancer (Reuters)

David Bowie, a music legend who used daringly androgynous displays of sexuality and glittering costumes to frame legendary rock hits “Ziggy Stardust” and “Space Oddity”, has died of cancer. He was 69. “David Bowie died peacefully today surrounded by his family after a courageous 18-month battle with cancer,” read a statement on Bowie’s Facebook page dated Sunday. Born David Jones in the Brixton area of south London, Bowie took up the saxophone at 13. He shot to fame in Europe with 1969’s “Space Oddity”. But it was Bowie’s 1972 portrayal of a doomed bisexual alien rock star, Ziggy Stardust, that propelled him to global stardom. Bowie and Ziggy, wearing outrageous costumes, makeup and bright orange hair, took the rock world by storm.

Bowie said he was gay in an interview in the Melody Maker newspaper in 1972, coinciding with the launch of his androgynous persona, with red lightning bolt across his face and flamboyant clothes. He told Playboy four years later he was bisexual, but in the eighties he told Rolling Stone magazine that the declaration was “the biggest mistake I ever made”, and he was “always a closet heterosexual”. The excesses of a hedonistic life of the real rock star was taking its toll. In a reference to his prodigious appetite for cocaine, he said: “iI blew my nose one day in California,” he said. And half my brains came out. Something had to be done.”

Bowie kept a low profile after undergoing emergency heart surgery in 2004 but marked his 69th birthday on Friday with the release of a new album, “Blackstar”, with critics giving the thumbs up to the latest work in a long and innovative career. British Prime Minister David Cameron tweeted: “I grew up listening to and watching the pop genius David Bowie. He was a master of re-invention, who kept getting it right. A huge loss.” Steve Martin from Bowie’s publicity company Nasty Little Man confirmed the Facebook report was accurate. “It’s not a hoax,” he told Reuters.

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Close to circuit breaker again. Plunge protection.

Chinese Stocks Down 5%, As Rout Ricochets In Asia (MarketWatch)

China shares slid Monday, and losses in other regional markets deepened, as a rout that knocked trillions of dollars off global stocks last week ricochets back to Asia. The Shanghai Composite Index fell 5.3% to 3,018 and the smaller Shenzhen Composite Index was last down 3.5%. Shares in Hong Kong sank to their lowest in roughly 2.5 years. The Hang Seng Index was off 2.4% at 19,970, on track to close below 20,000 for the first time since June 2013. A gauge of Chinese firms listed in the city fell 3.5%. Australia s benchmark was down 1.3%, and South Korea’s Kospi fell 0.7%. Japan s market was closed for a national holiday. Worries about weakness in the Chinese yuan and how authorities convey their market expectations continue to unnerve investors.

Poorly telegraphed moves last week exacerbated volatility in China, and triggered selling that spread to the rest of the region, the U.S. and Europe. Concerns about China’s stalling economy, with the yuan weakening 1.5% against the U.S. dollar last week, has sparked selling in commodities and currencies of China s trading partners, and sent investors to assets perceived as safe. “There’s no reason for Chinese stock to move up for now”, said Jiwu Chen, CEO of VStone Asset Management. He said investors are closely watching for hints in coming days from officials on their outlook for shares and the yuan, noting that authorities have nudged the yuan stronger starting Friday.

Earlier Monday, China’s central bank fixed the yuan at 6.5833 against the U.S. dollar, guiding the currency stronger from its 6.5938 late Friday. It was the second day the bank guided the yuan stronger, after eight sessions of weaker guidance. The onshore yuan can trade up or down 2% from the fix. The onshore yuan, which trades freely, was last at 6.6727 to the U.S. dollar, compared with 6.6820 late Friday. It reached a five-year low of 6.7511 last Thursday. China’s central bank appears to have spent huge amounts of dollars to support the yuan amid decelerating economic growth and the onset of higher U.S. interest rates. The country’s foreign-exchange regulator said over the weekend that its reserves are relatively sufficient. Reserves dropped by $107.9 billion in December, the biggest monthly drop ever.

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“Policy makers have to be cautious in using intervention as they can’t rescue the market all the time.”

Chinese Stocks Extend Rout as Economic Growth Concerns Deepen (BBG)

Chinese stocks fell, extending last week’s plunge, as factory-gate price data fueled concern the economic slowdown is deepening. The Shanghai Composite Index slid 2.4% to 3,109.95 at the break, led by energy and material companies. The producer price index slumped 5.9% in December, extending declines to a record 46th month, data over the weekend showed. The Hang Seng China Enterprises Index tumbled 3.5% at noon, while the Hang Seng Index fell below the 20,000 level for the first time since 2013. “Pessimism is the dominant sentiment,” said William Wong at Shenwan Hongyuan Group in Hong Kong. “The PPI figure confirms the economy is mired in a slump. Market conditions will remain challenging given weak growth and volatility in external markets and the yuan’s depreciation pressure.”

Extreme market swings this year have revived concern over the Communist Party’s ability to manage an economy set to grow at the weakest pace since 1990. Policy makers removed new circuit breakers on Friday after blaming them for exacerbating declines that wiped out $1 trillion this year. [..] The offshore yuan erased early losses after China’s central bank kept the currency’s daily fixing stable for the second day in a row, calming markets after sparking turmoil last week. While state-controlled funds purchased Chinese stocks at least twice last week, according to people familiar with the matter, there was little evidence of intervention on Monday. “Sentiment is very poor,” said Castor Pang, head of research at Core Pacific Yamaichi Hong Kong. “I don’t see any clear signs of state buying in the mainland market. Policy makers have to be cautious in using intervention as they can’t rescue the market all the time.”

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Yuan shortage.

Yuan Liquidity Extremely Tight, Interbank Rates Soar In Hong Kong (BBG)

Interbank yuan lending rates in Hong Kong climbed to records across the board after suspected intervention by China’s central bank last week mopped up supplies of the currency in the offshore market. The city’s benchmark rates for loans ranging from one day to a year all set new highs, with the overnight and one-week surging by the most since the Treasury Markets Association started compiling the fixings in June 2013. The overnight Hong Kong Interbank Offered Rate surged 939 basis points to 13.4% on Monday, while the one-week rate jumped 417 basis points to 11.23%. The previous highs were 9.45% and 10.1%, respectively. “Yuan liquidity is extremely tight in Hong Kong,” said Becky Liu, senior rates strategist at Standard Chartered in the city.

“There was some suspected intervention by the People’s Bank of China last week, and the liquidity impact is starting to show today.” The offshore yuan rebounded from a five-year low last week amid speculation the central bank bought the currency, an action that drains funds from the money market. Measures restricting overseas lenders’ access to onshore liquidity – which make it more expensive to short the yuan in the city – have also curbed supply. The PBOC has said it wants to converge the yuan’s rates at home and abroad, a gap that raises questions about the currency’s market value and hampers China’s push for greater global usage as it prepares to enter the IMF’s reserves basket this October. The offshore yuan’s 1.7% decline last week pushed its discount to the Shanghai price to a record, prompting the IMF to say that it will discuss the widening spread with the authorities.

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What would make one think this is not a crisis?

London Hedge Fund Omni Sees 15% Yuan Drop, and More in a Crisis (BBG)

Omni Partners, the $965 million London hedge fund whose wagers against China helped it beat the industry last year, said the yuan may fall 15% in 2016, and even more if the nation has a credit crisis. The currency, which tumbled to a five-year low last week, would have to drop to 7 or 7.5 a dollar to meaningfully reverse its appreciation and be commensurate with the depreciation of other slowing emerging markets, Chris Morrison, head of strategy of Omni’s macro fund, said in a telephone interview. The yuan slumped 1.4% last week to around 6.59 in Shanghai. “While Chinese authorities have been intervening heavily in the dollar-yuan market, they cannot ultimately fight economic fundamentals,” Morrison said, adding that even the 7-7.5% forecast would be too conservative if China were to have a credit crisis.

“You’ll be talking about the kind of moves that Brazil and Turkey have seen, more like 50%, and that’s how you can create serious numbers like 8, 9 and 10 against the dollar.” The yuan’s biggest weekly loss since an Aug. 11 devaluation prompted banks including Goldman Sachs and ABN Amro Bank, which Bloomberg data show had the most-accurate forecasts for the yuan over the past year, to cut their estimates for the currency. The options market is also signaling that the yuan’s slide has plenty of room to run, with the contracts indicating there’s a 33% chance that the yuan will weaken beyond 7 a dollar, data compiled by Bloomberg show.

The declining currency, a debt pile estimated at 280% of GDP and a volatile equity market are complicating Premier Li Keqiang’s efforts to boost an economy estimated to grow at the slowest pace in 25 years. While intervention stabilized the yuan for almost four months following an Aug. 11 devaluation, the action led to the first-ever annual decline in the foreign-exchange reserves as capital outflows increased. Policy makers also propped up shares in the midst of a $5 trillion rout last summer, including ordering stock purchases by state funds. While a weaker yuan would support China’s flagging export sector, it also boosts risks for the nation’s foreign-currency borrowers and heightens speculation that the slowdown in Asia’s biggest economy is deeper than official data suggest.

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A hard rain is gonna fall.

Australia Bet The House On Never-Ending Chinese Growth (Guardian)

Over the last couple of decades, China has undergone profound change and is often cited as an economic growth miracle. Day by day, however, the evidence becomes increasingly clear the probability of a severe economic and financial downturn in China is on the cards. This is not good news at all for Australia. The country is heavily exposed, as China comprises Australia’s top export market, at 33%, more than double the second (Japan at 15%). A considerable proportion of Australia’s current and future economic prospects depend heavily on China’s current strategy of building its way out of poverty while sustaining strong real GDP growth.

To date, China has successfully pulled hundreds of millions of its people out of poverty and into the middle class through mass provision of infrastructure and expansion of housing markets, alongside a powerful export operation which the global economy has relied upon since the 1990s for cheap imports. Though last week’s volatile falls on the Chinese stock markets alongside a weakening yuan sent shockwaves through the global markets, Australia’s exposure lies much deeper within the Chinese economy. The miracle is starting to look more and more fallible as it slumps under heavy corporate debts and an over-construction spree which shall never again be replicated in our lifetimes or that of our children.

As of the second quarter of 2015, China’s household sector debt was a moderate 38% of GDP but its booming private non-financial business sector debt was 163%. Added together, it gives a total of 201% and its climbing rapidly. This may well be a conservative figure, given it is widely acknowledged the central government has overstated GDP growth. Australia, though it frequently features high on lists of the world’s most desirable locations, currently has the world’s second most indebted household sector, at 122% of GDP, soon to overtake Denmark in first place. Combined with private non-financial business sector debt, Australia has a staggering total of 203%, vastly larger than public debts at all levels of government.

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There’ll be alot of this.

India Concerned About Chinese Currency Devaluation (Reuters)

India on Friday called the slide in China’s yuan a “worrying” development for its flagging exports and said it was discussing possible measures to deal with a likely surge in imports from its northern neighbour. Trade Minister Nirmala Sitharaman said the yuan’s fall would worsen India’s trade deficit with China. While the government would not rush into any action, it had discussed likely steps it could take to counter an expected flood of cheap steel imports with domestic producers and the finance ministry, she said. The comments came a day after China allowed the biggest fall in the yuan in five months, pressuring regional currencies and sending global stock markets tumbling as investors feared it would trigger competitive devaluations.

“My deficit with China will widen,” she told reporters. India’s trade deficit with China stood at about $27 billion between April-September last year compared with nearly $49 billion in the fiscal year ending in March 2015. India steel companies such as JSW Ltd have asked the government to set a minimum import price to stop cheap imports undercutting them. A similar measure was adopted in 1999. “We have done ground work but are not rushing into it,” Sitharaman said when asked if India would impose a minimum import price for steel.

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?? “..even during an enormous steel glut last year, China had to import certain high-quality steel products, such as the tips of ballpoint pens. ..”

China PM: We’ll Let Market Forces Fix Overcapacity (Reuters)

China will use market solutions to ease its overcapacity woes and will not use investment stimulus to expand demand, Premier Li Keqiang said during a recent visit to northern Shanxi province, according to state media. “We will let the market play a decisive role, we will let businesses compete against each other and let those unable to compete die out,” the state-run Beijing News quoted Li as saying. “At the same time, we need to prioritize new forms of economic development.” Li said the country needed to improve existing production facilities because even during an enormous steel glut last year, China had to import certain high-quality steel products, such as the tips of ballpoint pens.

China needed to set ceilings on steel and coal production volumes and government officials should use remote sensing equipment to check companies, the premier also said, according to the article, which was re-posted on the State Council’s website. During his visit to Chongqing earlier this month, President Xi Jinping said China would focus on reducing overcapacity and lowering corporate costs.

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As I said from the start. ZH did too. Seems such an easy thing to predict, because such a large part of our economies depend on jobs connected with oil.

Fed’s Williams: “We Got It Wrong” On Benefits Of Low Oil Prices (ZH)

In late 2014 and early 2015, we tried to warn anyone who cared to listen time and time and time again that crashing crude prices are unambiguously bad for the economy and the market, contrary to what every Keynesian hack, tenured economist, Larry Kudlow and, naturally, central banker repeated – like a broken – record day after day: that the glorious benefits of the “gas savings tax cut” would unveil themselves any minute now, and unleash a new golden ago economic prosperity and push the US economy into 3%+ growth. Indeed, it was less than a year ago, on January 30 2015, when St. Louis Fed president Jim Bullard told Bloomberg TV that the oil price drop is unambiguously positive for the US. It wasn’t, and the predicted spending surge never happened. However, while that outcome was not surprising at all, what we were shocked by is that on Friday, following a speech to the California Bankers Association in Santa Barbara, during the subsequent Q&A, San Fran Fed president John Williams actually admitted the truth.

The Fed got it wrong when it predicted a drop in oil prices would be a big boon for the economy. It turned out the world had changed; the US has a lot of jobs connected to the oil industry.

And there you have it: these are the people micromanaging not only the S&P500 but the US, and thus, the global economy – by implication they have to be the smartest people not only in the room, but in the world. As it turns out, they are about as clueless as it gets because the single biggest alleged positive driver of the US economy, as defined by the Fed, ended up being the single biggest drag to the economy, as a “doom and gloomish conspiracy blog” repeatedly said, and as the Fed subsequently admitted. At this point we would have been the first to give Williams, and the Fed, props for admitting what in retrospect amounts to an epic mistake, and perhaps cheer a Fed which has changed its mind as the facts changed… and then we listened a little further into the interview only to find that not only has the Fed not learned anything at all, but is now openly lying to justify its mistake. To wit:

I would argue that we are seeing [the benefits of lower oil]. We are seeing them where we would expect to see them: consumer spending has been growing faster than you would otherwise expect.

Actually John, no, you are not seeing consumer spending growing faster at all; you are seeing consumer spending collapse as a cursory 5 second check at your very own St. Louis Fed chart depository will reveal:

But the absolute cherry on top proving once and for all just how clueless the Fed remains despite its alleged epiphany, was Wiliams “conclusion” that consumers will finally change their behavior because having expected the gas drop to be temporary, now that gas prices have been low for “over a year” when responding to surveys, US consumers now expect oil to remain here, and as a result will splurge. So what Williams is saying is… short every energy company and prepare for mass defaults because oil will not rebound contrary to what the equity market is discounting. We can’t wait for Williams to explain in January 2017 how he was wrong – again – that a tsunami of energy defaults would be “unambiguously good” for the US economy.

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Capital controls, protectionism, we’ll see all this and more.

Free Capital Flows Can Put Economies In A Bind (Münchau)

When Margaret Thatcher took power in Britain in 1979, one of her first decisions as prime minister was to scrap capital controls. It was the beginning of a new era and not just for Britain. Free capital movement has since become one of the axioms of modern global capitalism. It is also one of the “four freedoms” of Europe’s single market (along with unencumbered movement of people, goods and services). We might now ask whether the removal of the policy instrument of capital controls may have contributed to a succession of financial crises. To answer that, it is instructive to revisit a debate of three decades ago, when many in Europe invested their hopes in a combination of free trade, free capital mobility, a fixed exchange rate and an independent monetary policy — four policies that the late Italian economist, Tommaso Padoa-Schioppa, called an “inconsistent quartet”.

What he meant was that the combination is logically impossible. If Britain, say, fixed its exchange rate to the Deutschmark, and if capital and goods could move freely across borders, the Bank of England would have to follow the policies of the Bundesbank. In the early 1990s, Britain put this to the test, joining the single European market and pegging its currency to Germany’s. The music soon stopped; after less than two years in the exchange-rate mechanism, sterling went back to a floating exchange rate. Other European countries took a different course, sacrificing monetary independence and creating a common currency. Both choices were internally consistent. What has changed since then is the rising importance of cross-border finance. Many emerging markets do not have a sufficiently strong financial infrastructure of their own.

Companies and individuals thus take out loans from foreigners denominated in euros or dollars. Latin America is reliant on US finance, just as Hungary relies on Austrian banks. With the end of quantitative easing in the US and rising interest rates, money is draining out of dollar-based emerging markets. Theoretically, it is the job of a central bank to bring the ensuing havoc to an end, which standard economic theory suggests it should be able to do so long as it follows a domestic inflation target. But if large parts of the economy are funded by foreign money, its room for manoeuvre is limited — as the French economist Hélène Rey has explained. In the good times, Prof Rey finds, credit flows into emerging markets where it fuels local asset price bubbles. When, years later, liquidity dries up and the hot money returns to safe havens in North America and Europe, the country is left in a mess.

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Unease.

Pensions, Mutual Funds Turn Back to Cash (WSJ)

U.S. public pension plans and mutual funds are sheltering more of their holdings in cash than they have in years, a sign of growing stress in financial markets. The ultradefensive stance reflects investors’ skittishness about global economic growth and uncertain prospects for further gains in assets. Pension funds have the added need to cut more checks as Americans retire in greater numbers, while mutual funds want cash to cover the risk that investors spooked by volatile markets will pull out more of their money. Large public retirement systems and open-end U.S. mutual funds have yanked nearly $200 billion from the market since mid-2014, according to a Wall Street Journal analysis of the most recent data available from Wilshire Trust Universe, Morningstar and the federal government.

That leaves pension funds with the highest cash levels as a percentage of assets since 2004. For mutual funds, the percentage of assets held in cash was the highest for the end of any quarter since at least 2007. The data run through Sept. 30, but many money managers say they remain very conservative. Pension consultants say some fund managers are considering socking even more of their assets into cash as they wait for the markets to calm down. “Some clients are asking us, ‘Would we be crazy to put 10% or 15% of our assets into cash?’,” said Michael A. Moran Goldman Sachs. Public pensions and mutual funds collectively manage $16 trillion, close to the value of U.S. gross domestic product, so even small shifts in their holdings can ripple through the trading world.

The movement of longer-term money to the sidelines has left the market increasingly in the hands of investors such as hedge funds, high-speed traders and exchange-traded funds that buy and sell more frequently, potentially leaving it more vulnerable to sharp swings, according to some money managers. [..] Managers of some pension plans and mutual funds said they limited their losses last year by moving more of their holdings into cash. Returns on cash-like securities were basically zero in 2015, while the Dow Jones Industrial Average fell 2.2% and the S&P 500 declined 0.7%. New York City’s $162 billion retirement system has more than tripled its cash holdings since mid-2014 to cut the plan’s interest-rate exposure. As a result, New York City’s allocations to plain vanilla stocks and fixed-income securities have fallen.

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“In the US following the December rate rise the cost of mortgages has soared by 50pc. ”

UK House Price To Crash As Global Asset Prices Unravel (Tel.)

House prices have broken free from reality and defied gravity for far too long, but they are an asset like anything else, and there are six clear reasons a nasty correction looms in the coming year . Asset prices around the world soared as central bankers embarked on the greatest money printing experiment in history. While much of that money flowed into the stock market, a great deal also found its way into house prices. What we are now witnessing on trading screens around the world is the unwinding of the era of monetary excess, and house prices will not escape the fallout. The end of easy money began when the US stopped its third QE programme in October 2014. That date marks the point the US balance sheet, or amount of money in the system, stopped rising, having soared from $800m in 2008 to more than $4 trillion.

Without an ever-increasing supply of money the world economy is now slowing sharply. The first assets to be impacted by the downturn were commodities. The price of things such as oil are set daily in one of the largest and most highly traded markets across the world and as a result it is highly sensitive to any changes in demand and supply. Admittedly there are also supply-side factors impacting the oil price, but the weak demand from a slump is still a major factor. The next asset to fall was share prices. There was a delay of about 12 months because even though shares are also traded daily, their value depends on the profits of the company, and the impact of the commodity collapse took about a year to feed through. There is a delayed effect on property prices because the market is so inefficient.

Transactions can take up to three months to complete and the property itself may have to languish on the market for even longer. The prices are also dictated by estate agents, who have an interest in inflating them to raise fees. The number of transactions is also still about 40pc below that of 2006 and 2007, which allows prices to stray from the fundamentals for a longer period. It is true that Britain is suffering from a housing shortage, which drove UK house prices to a record high of an average of £208,286 in December, but like all asset prices they are on borrowed time. The fundamentals of demand and supply in UK housing will undergo a huge shift in the year ahead. A large portion of the demand for UK housing will fall away as the benefits of buy-to-let have effectively been killed off in recent budgets.

George Osborne slapped a huge tax increase on buy-to-let in the summer Budget, which will take effect from 2017 onwards. The removal of mortgage interest relief was the first stage and was followed by hiking stamp duty four months later in the November review. This could prove a double whammy on the housing market, turning potential buyers into sellers, and flooding the market with additional supply. A survey of landlords suggested 200,000 plan to exit the sector. The rapid growth of buy-to-let during the past decade looks set to be slammed into reverse.

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Implosion.

The West Is Losing The Battle For The Heart Of Europe (Reuters)

A little over a quarter of a century ago, Europe celebrated the healing of the schism that Communism enforced on it since World War Two, and which produced great tribunes of freedom. Lech Walesa, the Polish shipyard electrician, climbed over his yard wall in Gdansk to join and then lead a strike in 1980 – lighting the fuse to ignite, 10 years and a period of confinement later, a revolution that couldn’t be squashed. He was elected president in 1990. Vaclav Havel, the Czech writer and dissident who served years in prison for his opposition to the Communist government, emerged as the natural leader of the democrats who articulated the frustration of the country. He was elected president of the still-united Czechoslovakia in 1989.

Jozsef Antall, a descendant of the Hungarian nobility who opposed both the Hungarian fascists and communists, was imprisoned for helping lead the 1956 revolt against the Soviet Union. And he was foremost in the negotiations to end Communist rule in the late 1980s. He survived to be elected prime minister in 1990. These men were inspirations to their fellow citizens, heroes to the wider democratic world and were thought to be the advance guard of people who would grow and prosper in a Europe eschewing every kind of authoritarianism. Havel could say, with perfect certainty, that the Communists in power had developed in Czechs “a profound distrust of all generalizations, ideological platitudes, clichés, slogans, intellectual stereotypes… we are now largely immune to all hypnotic enticements, even of the traditionally persuasive national or nationalistic variety.”

It isn’t like that now. Poland, largest and most successful of the Central European states has, in the governing Law and Justice Party, a group of politicians driving hard to remold the institutions of the state so that their power withstands all challenge. The government has sought to pack the constitutional court with a majority of its supporters; extended the powers of the intelligence services and put a supporter at their head; and signed into law a measure which puts broadcasting under direct state control.

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Democracy under scrutiny.

Newly Elected Catalan President Vows Independence From Spain By 2017 (RT)

The Catalan parliament has sworn in Carles Puigdemont as the president of Catalonia. He will lead the region in its push towards independence from Spain by 2017. “We begin an extremely important process, unparalleled in our recent history, to create the Catalonia that we want, to collectively build a new country,” Puigdemont told the Catalan parliament, vowing to continue with his predecessor Artur Mas’ initiative to pull the region into independence. Puigdemont’s candidacy was backed by 70 lawmakers while 63 voted against, with two abstentions. The parliament has been in deadlock since Spain’s ruling party won most of the seats in September elections but failed to obtain a majority.

The Catalan parties had to agree on a new leader before Monday to avoid holding new regional elections. In a “last minute change”, Catalonia’s former president Artus Mas agreed to step down on Saturday and not seek reelection as pro-independence ‘Together for Yes’ coalition representative. The new candidate was backed by the anti-capitalist Popular Unity Candidacy (CUP) party, whose 10 seats has allowed them to secure a majority in the 135-seat chamber. The Catalan 18-month roadmap to independence suggests the approval of its own constitution and the building of necessary institutions, such as a central bank, judicial system and army.

Meanwhile Spanish Prime Minister Mariano Rajoy reiterated on Sunday that he would block any Catalan move towards independence to “defend the sovereignty” and “preserve democracy and all over Spain.” Catalonia has a population of 7.5 million people and represents nearly a fifth of Spain’s economic output. The local population has been dissatisfied with their taxes being used by Madrid to support poorer areas of the country.

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Shut up! Show some respect for democracy.

Dutch ‘No’ To Kiev-EU Accord Could Trip Continental Crisis: Juncker (AFP)

European Commission chief Jean-Claude Juncker urged Dutch voters Saturday not to oppose an EU cooperation deal with Ukraine, saying such a move “could open the doors to a continental crisis”. A citizens’ campaign in the Netherlands spearheaded by three strongly eurosceptic groups garnered more than 300,000 votes needed to trigger a non-binding referendum on the deal, three months from now. Observers said the vote, set for April 6, pointed more towards broader euroscepticism among the Dutch than actual opposition to the trade deal with Kiev, which fosters deeper cooperation with Brussels. A Dutch ‘no’ “could open the doors to a continental crisis,” Juncker told the authoritative NRC daily newspaper in an interview published on Saturday.

“Let’s not change the referendum into a vote about Europe,” Juncker urged Dutch voters, adding: “I sincerely hope that (the Dutch) won’t vote no for reasons that have nothing to do with the treaty itself.” Should Dutch voters oppose the deal, Russia “stood to benefit most,” he said. The 2014 association agreement provisionally came into effect on January 1 and nudges the former Soviet bloc nation towards eventual EU membership. On a visit to the Netherlands in November, Ukranian President Petro Poroshenko hailed the deal as the start of a new era for the Ukraine. Dutch Prime Minister Mark Rutte has said his government was bound by law to hold the referendum, and would afterwards assess the results to see if any change in policy was merited.

Although the results are not binding on Rutte’s Liberal-Labour coalition, the referendum is likely to be closely watched as eurosceptic parties – including that of far-right politician Geert Wilders – rise in the Dutch polls ahead of elections due in 2017. Russia has been incensed by the EU’s move to bring Ukraine closer to the European fold.

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Ambrose won’t let go of his techno dreams.

Britain Abandons Onshore Wind Just As New Technology Makes It Cheap (AEP)

The world’s biggest producer of wind turbines has accused Britain of obstructing use of new technology that can slash costs, preventing the wind industry from offering one of the cheapest forms of energy without subsidies. Anders Runevad, CEO of Vestas, said his company’s wind turbines can compete onshore against any other source of energy in the UK without need for state support, but only if the Government sweeps away impediments to a free market. While he stopped short of rebuking the Conservatives for kowtowing to ‘Nimbyism’, the wind industry is angry that ministers are changing the rules in an erratic fashion and imposing guidelines that effectively freeze development of onshore wind. “We can compete in a market-based system in onshore wind and we are happy to take on the challenge, so long as we are able to use our latest technology,” he told the Daily Telegraph.

“The UK has a tip-height restriction of 125 meters and this is cumbersome. Our new generation is well above that,” he said. Vestas is the UK’s market leader in onshore wind. Its latest models top 140 meters, towering over St Paul’s Cathedral. They capture more of the wind current and have bigger rotors that radically change the economics of wind power. “Over the last twenty years costs have come down by 80pc. They have come down by 50pc in the US since 2009,” said Mr Runevad. Half of all new turbines in Sweden are between 170 and 200 meters, while the latest projects in Germany average 165 meters. “Such limits mean the UK is being left behind in international markets,” said a ‘taskforce report’ by RenewableUK. The new technology has complex electronics, feeding ‘smart data’ from sensors back to a central computer system.

They have better gear boxes and hi-tech blades that raise yield and lower noise. The industry has learned the art of siting turbines, and controlling turbulence and sheer. Economies of scale have done the rest. This is why average purchase prices for wind power in the US have fallen to the once unthinkable level of 2.35 cents per kilowatt/hour (KWh), according to the US energy Department. At this level wind competes toe-to-toe with coal or gas, even without a carbon tax, an increasingly likely prospect in the 2020s following the COP21 climate deal in Paris. American Electric Power in Oklahoma tripled its demand for local wind power last year simply because the bids came in so low. “We estimate that onshore wind is either the cheapest or close to being the cheapest source of energy in most regions globally,” said Bank of America in a report last month.

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This is where EU, Turkey wish to send people back into.

400,000 Syrians Starving In Besieged Areas (AlJazeera)

As aid agencies prepare to deliver food to Madaya, on the outskirts of Damascus, and two other besieged towns in Idlib province, an estimated 400,000 people are living under siege in 15 areas across Syria, according to the UN. A deal struck on Saturday permits the delivery of food to Madaya, currently surrounded by forces loyal to Syrian President Bashar al-Assad, and the villages of Foua and Kefraya in Idlib, both of which are hemmed in by rebel fighters. Due to a siege imposed by the Syrian government and the Lebanese Hezbollah group, an estimated 42,000 people in Madaya have little to no access to food, resulting in the deaths of at least 23 people by starvation so far, according to the charity Doctors Without Borders (MSF).

Reports of widespread malnutrition have emerged, some of them suggesting that Madaya residents are resorting to eating grass and insects for survival. In Kefraya and Foua, about 12,500 people are cut off from access to aid supplies by rebel groups, including al-Nusra Front. On December 26, Syrian government forces set up a checkpoint and sealed off the final road to Moadamiyah, a rebel-controlled town on the outskirts of Damascus, demanding that opposition groups lay down their arms and surrender. The Moadamiyah Media Office, run by pro-opposition activists, estimates that 45,000 civilians are stuck in the area for more than two weeks. The organisation said on Saturday that a siege that started in April 2013 and lasted a year, resulted in the deaths of 16 local residents due to a lack of food and medicine. It said the current one has killed one local resident so far this year: an eight-month-old boy who died from malnutrition on January 10.

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As we enter another crisis ourselves, we will need to become more generous. Or face chaos.

World’s Poor Lose Out As Aid Is Diverted To The Refugee Crisis (Guardian)

Sweden is one of the most generous countries in the world when it comes to international aid. Along with other Scandinavian countries, it has given bounteously to less fortunate nations for many years. With a population of under 10 million, it also takes more than its fair share of asylum seekers – an estimated 190,000 last year, with a further 100,000 to 170,000 expected to arrive in 2016. This is proving to be an expensive business. The Swedish migration agency says the cost of assimilating such a large number of asylum seekers will be €6.4bn (£4.4bn) this year – and a debate is raging about whether the aid budget should be raided to help meet the bill. In 2015, 25% of the aid budget was spent on refugees. One proposal is to raise that figure to 60%.

Other countries are responding in similar fashion. Italy raised its aid spending in 2015, but the extra money was mostly spent domestically on those who successfully made the dangerous voyage across the Mediterranean from north Africa. Final figures for development assistance collated by the OECD show that global aid spending rose to a record level of $137.2bn (£94bn) in 2014 – an increase of 1.2% on the previous year. But the money is not going to those countries that are in the greatest need. Spending on the least developed countries (LDCs) fell by almost 5% and as a share of the total fell below 30% for the first time since 2005. Donor countries are increasingly dipping into their aid budgets to deal with the migration crisis or diverting money that would previously have gone to sub-Saharan Africa to countries that are deemed to be fragile, such as Egypt, Pakistan and Syria, but are not classified as LDCs.

What’s more, the trend is likely to have continued and accelerated in 2015, a year that saw far more people arriving in Europe from north Africa and the Middle East. Italy was already spending 61% of its aid budget on refugees in 2014. For Greece, the other country on the front line, the figure was 46%. It is hardly surprising that the governments in Rome and Athens have responded in this way. Both have had austerity measures foisted upon them and are seeking to make ends meet as best they can. The fact is, though, that the entire development assistance system is creaking under the strain at a time when demands for aid are increasing.

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Nov 192015
 
 November 19, 2015  Posted by at 11:28 am Finance Tagged with: , , , , , , , , ,  


Robert Capa Anti-fascist militia women at Barcelona street barricade 1936

Looking through a bunch of numbers and graphs dealing with China recently, it occurred to us that perhaps we, and most others with us, may need to recalibrate our focus on what to emphasize amongst everything we read and hear, if we’re looking to interpret what’s happening in and with the country’s economy.

It was only fair -perhaps even inevitable- that oil would be the first major commodity to dive off a cliff, because oil drives the entire global economy, both as a source of fuel -energy- and as raw material. Oil makes the world go round.

But still, the price of oil was merely a lagging indicator of underlying trends and events. Oil prices didn‘t start their plunge until sometime in 2014. On June 19, 2014, Brent was $115. Less than seven months later, on January 9, it was $50.

Severe as that was, China’s troubles started much earlier. Which lends credence to the idea that it was those troubles that brought down the price of oil in the first place, and people were slow to catch up. And it’s only now other commodities are plummeting that they, albeit very reluctantly, start to see a shimmer of ‘the light’.

Here are Brent oil prices (WTI follows the trend closely):

They happen to coincide quite strongly with the fall in Chinese imports, which perhaps makes it tempting to correlate the two one-on-one:

But this correlation doesn’t hold up. And that we can see when we look at a number everyone seems to largely overlook, at their own peril, producer prices:

About which Bloomberg had this to say:

China Deflation Pressures Persist As Producer Prices Fall 44th Month

China’s consumer inflation waned in October while factory-gate deflation extended a record streak of negative readings [..] The producer-price index fell 5.9%, its 44th straight monthly decline. [..] Overseas shipments dropped 6.9% in October in dollar terms while weaker demand for coal, iron and other commodities from declining heavy industries helped push imports down 18.8%, leaving a record trade surplus of $61.6 billion.

44 months is a long time. And March 2012 is a long time ago. Oil was about at its highest since right before the 2008 crisis took the bottom out. And if you look closer, you can see that producer prices started ‘losing it’ even earlier, around July 2011.

Something was happening there that should have warranted more scrutiny. That it didn’t might have a lot to do with this:

China’s debt-to-GDP ratio has risen by nearly 50% in the past four years.

The producer price index seems to indicate that trouble started over 4 years ago. China dug itself way deeper into debt since then. It already did that before as well (especially since 2008), but the additional debt apparently couldn’t be made productive anymore. And that’s an understatement.

Now, if you want to talk correlation, compare the producer price graph above with Bloomberg’s global commodities index:

World commodities markets, like the entire global economy, were propped up by China overinvestment ever since 2008. Commodities have been falling since early 2011, after rising some 60% in the wake of the crisis. And after the 2011 peak, they’ve dropped all the way down to levels not seen since 1999. And they keep on falling: steel, zinc, copper, aluminum, you name it, they’re all setting new lows almost at a daily basis.

Moreover, if we look at how fast China imports are falling, and we realize how much of those imports involve (raw material) commodities, we can’t escape the conclusion that here we’re looking at not a lagging, but a predictive indicator. What China doesn’t purchase in raw materials today, it can’t churn out as finished products tomorrow.

Not as exports, and not as products to be used domestically. Neither spell good news for the Chinese economy; indeed, the rot seems to come from both sides, inside and out. And no matter how much Beijing points to the ‘service’ economy it claims to be switching towards, with all the debt that is now deflating, and the plummeting marginal productivity of new debt, most of it looks like wishful thinking.

And that is not the whole story either. Closely linked to the sinking marginal productivity, there is overleveraged overcapacity and oversupply. It’s like the proverbial huge ocean liner that’s hard to turn around.

There are for instance lots of new coal plants in the pipeline:

China Coal Bubble: 155 Coal-Fired Power Plants To Be Added To Overcapacity

China has given the green light to more than 150 coal power plants so far this year despite falling coal consumption, flatlining production and existing overcapacity. [..] in the first nine months of 2015 China’s central and provincial governments issued environmental approvals to 155 coal-fired power plants — that’s 4 per week. The numbers associated with this prospective new fleet of plants are suitably astronomical. Should they all go ahead they would have a capacity of 123GW, more than twice Germany’s entire coal fleet; their carbon emissions would be around 560 million tonnes a year, roughly equal to the annual energy emissions of Brazil; they would produce more particle pollution than all the cars in Beijing, Shanghai, Tianjin and Chongqing put together [..]

And new car plants too:

China’s Demand For Cars Has Slowed. Overcapacity Is The New Normal.

For much of the past decade, China’s auto industry seemed to be a perpetual growth machine. Annual vehicle sales on the mainland surged to 23 million units in 2014 from about 5 million in 2004. [..] No more. Automakers in China have gone from adding extra factory shifts six years ago to running some plants at half-pace today—even as they continue to spend billions of dollars to bring online even more plants that were started during the good times.

The construction spree has added about 17 million units of annual production capacity since 2009, compared with an increase of 10.6 million units in annual sales [..] New Chinese factories are forecast to add a further 10% in capacity in 2016—despite projections that sales will continue to be challenged. [..] “The players tend to build more capacity in hopes of maintaining, or hopefully, gain market share. Overcapacity is here to stay.”

These are mere examples. Similar developments are undoubtedly taking place in many other sectors of the Chinese economy (how about construction?!). China has for example started dumping its overproduction of steel and aluminum on world markets, which makes the rest of the world, let’s say, skittish. The US is levying a 236% import tax on -some- China steel. The UK sees its remaining steel industry vanish. All US aluminum smelters are at risk of closure in 2016.

The flipside, the inevitable hangover, that China will wake up to sooner rather than later, is the debt that its real growth, and then it’s fantasy growth, has been based on. We already dealt extensively with the difference between ‘official’ and real growth numbers, let’s leave that topic alone this time around.

Though we can throw this in. Goldman Sachs recently said that even if the official Beijing growth numbers were right -which nobody believes anymore- ”Chinese credit growth is still running at roughly double the rate of GDP growth”. And even if credit growth may appear to be slowing a little, though we’d have to know the shadow banking numbers to gauge that (and we don’t), that hangover is still looming large:

China Bad Loans Estimated At 20% Or Higher vs Official 1.5%

[..] While the analysts interviewed for this story differ in their approaches to calculating likely levels of soured credit, their conclusion is the same: The official 1.5% bad-loan estimate is way too low.

Charlene Chu [..] and her colleagues at Autonomous Research in Hong Kong take a top-down approach. They estimate how much money is being wasted after the nation began getting smaller and smaller economic returns on its credit from 2008. Their assessment is informed by data from economies such as Japan that have gone though similar debt explosions. While traditional bank loans are not Chu’s prime focus – she looks at the wider picture, including shadow banking – she says her work suggests that nonperforming loans may be at 20% to 21%, or even higher.

The Bank for International Settlements cautioned in September that China’s credit to gross domestic product ratio indicates an increasing risk of a banking crisis in coming years. “A financial crisis is by no means preordained, but if losses don’t manifest in financial sector losses, they will do so via slowing growth and deflation, as they did in Japan,” said Chu. “China is confronting a massive debt problem, the scale of which the world has never seen.”

Looking at the producer price graph, we see that the downfall started at least 44 months ago, and that 52 months is just as good an assumption. And we know that debt rose 50% or more since the downfall started. That does put things in a different perspective, doesn’t it? (Probably) the majority of pundits and experts will still insist on a soft landing at worst.

But for those who don’t, please consider the overwhelming amount of deflationary forces that is being unleashed on the world as all that debt goes sour. As the part of that debt that was leveraged vanishes into thin air.

It’s ironic to see that it’s at this very point in time that the IMF (Christine Lagarde seems eager to take responsibility) seeks to include the yuan in its SDR basket. Xi Jinping’s power over the exchange rate can only be diminished by such a move, and we’re not at all sure he realizes to what extent that is true. Chinese politics are built on hubris, and that goes only so far when you free float but don’t deliver.

To summarize, do you remember what you were doing -and thinking- in mid-2011 and/or early 2012? Because that’s when this whole process started. Not this year, and not last year.

China’s producers couldn’t get the prices they wanted anymore, as early as 4 years ago, and that’s where deflationary forces came in. No matter how much extra credit/debt was injected into the money supply, the spending side started to stutter. It never recovered.

Nov 132015
 
 November 13, 2015  Posted by at 10:08 am Finance Tagged with: , , , , , , , , , ,  


DPC Youngstown, Ohio. Steel mill and Mahoning River 1902

Fresh Wave Of Selling Engulfs Oil And Metals Markets (FT)
Fed Officials Lay Case For December Liftoff (Reuters)
China Banks’ Troubled Loans Hit $628 Billion – More Than Sweden GDP (Bloomberg)
China’s Demand For Cars Has Slowed. Overcapacity Is The New Normal. (Bloomberg)
China Apparent Steel Consumption Falls 5.7% From January-October (Reuters)
China Speeds Up Fiscal Spending in October to Support Growth (Bloomberg)
China Panics, Sends Fiscal Spending Sky-High As Credit Creation Tumbles (ZH)
China Learns What Pushing on a String Feels Like (WSJ)
Oil Slumps 4%, Nears New Six-Year Low (Reuters)
OPEC Says Oil-Inventory Glut Is Biggest in at Least a Decade (Bloomberg)
IEA Says Record 3 Billion-Barrel Oil Stocks May Weaken Prices (Bloomberg)
Number of First-Time US Home Buyers Falls to Lowest in Three Decades (WSJ)
Striking Greeks Take To Tension-Filled Streets In Austerity Protest (Reuters)
Europe’s Top Banks Are Cutting Losses Throughout Latin America (Bloomberg)
Collapsing Greenland Glacier Could Raise Sea Levels By Half A Meter (Guardian)
EU Leaders Race To Secure €3 Billion Migrant Deal With Turkey (Guardian)
PM Trudeau Says Canada To Settle 25,000 Syrian Refugees In Next 7 Weeks (G&M)

This has so much more downside to it.

Fresh Wave Of Selling Engulfs Oil And Metals Markets (FT)

A renewed sell-off in oil and metals has shaken investors as fears grow that falling demand for commodities is signalling a sharper slowdown in China’s resource-hungry economy. Copper, considered a barometer for global economic growth because of its wide range of industrial uses, fell to a six-year low below $5,000 a tonne on Thursday. Oil, which has tanked almost 20% since a shortlived rally in October, dropped to under $45 a barrel on Thursday, less than half the level it traded at for much of this decade. The Bloomberg Commodity Index, a broad basket of 22 commodity futures widely followed by institutional investors, has fallen to its lowest level since the financial crisis.

Commodity prices have become a barometer for the health of China’s economy, whose rapid industrialisation over the past 10 years has been the engine of global growth. While markets already endured a commodity sell-off in August, traders and analysts say the drop is more worrying this time as it appears to be driven by concerns about demand rather than a glut of supply. “Whether it was power cable production [in China] or air conditioner data … activity in October continued to show deep contraction”, said Nicholas Snowdon, analyst at Standard Chartered. The slowdown is particularly concerning as many analysts and investors had expected an easing in Chinese credit conditions to stoke a modest increase in consumption in the fourth quarter.

Goldman Sachs said this week that recent data pointed to shrinking demand in China’s “old economy” as Beijing tries to manage a transition to more consumer-led growth. By some measures commodity prices are back where they were before China started on its path to urbanisation more than a decade ago. Other leading commodity indices are back at levels last seen in 2001, while shares in Anglo American fell to their lowest since the company s UK listing in 1999 on Thursday. A stronger US dollar has also weighed on raw material prices. “There are signs that oil demand growth is slowing down significantly relative to earlier this year”, said Pierre Andurand, one of the top performing energy hedge fund managers last year. “World GDP growth will keep on being revised down”.

Read more …

Forward narrativeance.

Fed Officials Lay Case For December Liftoff (Reuters)

U.S. Federal Reserve officials lined up behind a likely December interest rate hike with one key central banker saying the risk of waiting too long was now roughly in balance with the risk of moving too soon to normalize rates after seven years near zero. Other Fed policymakers argued that inflation should rebound, allowing the Fed to soon lift rates from near zero though probably proceed gradually after that. In New York, William Dudley said: “I see the risks right now of moving too quickly versus moving too slowly as nearly balanced.” Dudley, who as president of the New York Fed has a permanent vote on the Fed’s policy-setting committee, said the decision still required the central bank to “think carefully” because of the risk that the United States is facing chronically slower growth and low inflation that would justify continued low rates.

But his assessment of “nearly balanced” risks represents a subtle shift in the thinking of a Fed member who has been hesitant to commit to a rate hike, but now sees evidence accumulating in favor of one. For much of Janet Yellen’s tenure as Fed chair, policymakers at the core of the committee, and Yellen herself, have said they would rather delay a rate hike and battle inflation than hike too soon and brake the recovery. But Dudley said the current 5% unemployment rate “could fall to an unsustainably low level” that threatens inflation, while seven years of near-zero rates “may be distorting financial markets.” “I don’t favor waiting until I sort of see the whites in inflation’s eyes,” he said about monetary policy timing. Going sooner and more slowly, he said at the Economic Club of New York, may now be best for the Fed’s “risk management.”

In Washington, Fed Vice Chair Stanley Fischer said inflation should rebound next year to about 1.5%, from 1.3% now, as pressures related to the strong dollar and low energy prices fade. The second-in-command also noted that the Fed could move next month to raise rates, which could be taken as yet another signal the central bank is less willing to let low inflation further delay policy tightening. “While the dollar’s appreciation and foreign weakness have been a sizable shock, the U.S. economy appears to be weathering them reasonably well,” Fischer told a conference of researchers and market participants at the Fed Board.

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I’d like to know what bad loans are at in the shadow banking sector.

China Banks’ Troubled Loans Hit $628 Billion – More Than Sweden GDP (Bloomberg)

Chinese banks’ troubled loans swelled to almost 4 trillion yuan ($628 billion) by the end of September, more than the gross domestic product of Sweden, according to figures released by the industry regulator. Banks’ profit growth slumped to 2% in the first nine months from 13% a year earlier, according to data released on Thursday night by the China Banking Regulatory Commission. The numbers come as a debt crisis at China Shanshui Cement Group Ltd. prompts lenders including China Construction Bank Corp. and China Merchants Bank Co. to demand immediate repayments and as weakness in October credit growth shows the risk of a deeper economic slowdown. While the official data shows non-performing loans at 1.59% of outstanding credit, or 1.2 trillion yuan, that rises to 5.4%, or 3.99 trillion yuan, if “special mention” loans, where repayment is at risk, are also included.

The amount of bad debt piling up in China is at the center of a debate about whether the country will continue as a locomotive of global growth or sink into decades of stagnation like Japan after its credit bubble burst. “Evergreening,” which is when banks roll over debt that hasn’t been repaid on time, may contribute to the official bad-loan numbers being understated. The Bank for International Settlements cautioned in September that China’s credit to gross domestic product ratio indicated an increasing risk of a banking crisis in coming years. Bad-loan provisions, shrinking lending margins and weakness in demand for credit are eroding banks’ profits just as financial deregulation boosts competition. Ramped-up stimulus, with the central bank cutting interest rates six times in a year, failed to prevent the nation’s broadest measure of new credit slumping to the lowest in 15 months in October.

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“New Chinese factories are forecast to add a further 10% in capacity in 2016—despite projections that sales will continue to be challenged.”

China’s Demand For Cars Has Slowed. Overcapacity Is The New Normal. (Bloomberg)

For much of the past decade, China’s auto industry seemed to be a perpetual growth machine. Annual vehicle sales on the mainland surged to 23 million units in 2014 from about 5 million in 2004. That provided a welcome bounce to Western carmakers such as Volkswagen and General Motors and fueled the rapid expansion of locally based manufacturers including BYD and Great Wall Motor. Best of all, those new Chinese buyers weren’t as price-sensitive as those in many mature markets, allowing fat profit margins along with the fast growth. No more. Automakers in China have gone from adding extra factory shifts six years ago to running some plants at half-pace today—even as they continue to spend billions of dollars to bring online even more plants that were started during the good times.

The construction spree has added about 17 million units of annual production capacity since 2009, compared with an increase of 10.6 million units in annual sales, according to estimates by Bloomberg Intelligence. New Chinese factories are forecast to add a further 10% in capacity in 2016—despite projections that sales will continue to be challenged. “The Chinese market is hypercompetitive, so many automakers are afraid of losing market share,” says Steve Man, a Hong Kong-based analyst with Bloomberg Intelligence. “The players tend to build more capacity in hopes of maintaining, or hopefully, gain market share. Overcapacity is here to stay.” The carmaking binge in China has its roots in the aftermath of the global financial crisis, when China unleashed a stimulus program that bolstered auto sales.

That provided a lifeline for U.S. and European carmakers, then struggling with a collapse in consumer demand in their home markets. Passenger vehicle sales in China increased 53% in 2009 and 33% in 2010 after the stimulus policy was put in place. But the flood of cars led to worsening traffic gridlock and air pollution that triggered restrictions on vehicle registrations in major cities including Beijing and Shanghai. Worse, the combination of too many new factories and slowing demand has dragged down the industry’s average plant utilization rate, a measure of profitability and efficiency. The industrywide average plunged from more than 100% six years ago (the result of adding work hours or shifts) to about 70% today, leaving it below the 80% level generally considered healthy. Some local carmakers are averaging about 50% utilization, according to the China Passenger Car Association.

Read more …

We should use ‘apparent’ for all Chinese offcial data.

China Apparent Steel Consumption Falls 5.7% From January-October (Reuters)

Apparent steel consumption in China, the world’s biggest producer and consumer, fell 5.7% to 590.47 million tonnes in the first 10 months of the year, the China Iron and Steel Association (CISA) said on Friday. The figure was disclosed by CISA vice-secretary general Wang Yingsheng at a conference. China’s massive steel industry has been hit by weakening demand and a huge 400 million tonne per annum capacity surplus that has sapped prices. Producers have relied on export markets to offset the decline in domestic demand, but crude steel output still declined 2.2% in the first 10 months of the year, according to official data.

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“Fiscal spending jumped 36.1% from a year earlier..”

China Speeds Up Fiscal Spending in October to Support Growth (Bloomberg)

China’s government spending surged four times the pace of revenue growth in October, highlighting policy makers’ determination to meet this years’ growth target as a manufacturing and property investment slowdown weigh on the economy. Fiscal spending jumped 36.1% from a year earlier to 1.35 trillion yuan ($210 billion), while fiscal revenue rose 8.7% to 1.44 trillion yuan, the Finance Ministry said Thursday. In the first ten months of the year, spending advanced 18.1% and revenue increased 7.7%. China is turning to increased fiscal outlays as monetary easing, a relaxation on local government financing, and an expansion of policy banks’ capacity to lend, struggle to stabilize growth in the nation’s waning economic engines.

Meantime, government revenue has been strained as companies face overcapacity, factory-gate deflation and the slowest annual economic growth in a quarter century. “With downward economic pressure and structural tax and fee cuts, fiscal revenue will face considerable difficulties in the next two months,” the Ministry of Finance said in the statement. “As revenue growth slows, fiscal expenditure has clearly been expedited to ensure that all key spending is completed.” The stepped-up stimulus effort had taken the fiscal-deficit-to-gross-domestic-product ratio to a six-year high by the end of September, according to an October report by Morgan Stanley analysts led by Sun Junwei in Hong Kong.

“The central government has been taking the lead in fiscal easing to support growth” as local governments’ off budget spending through financing vehicles have slowed, the analysts wrote. The country plans to raise the quota for regional authorities to swap high-yielding debt for municipal bonds by as much as 25%, according to people familiar with the matter. The quota of the bond-swap program will be increased to as much as 3.8 trillion yuan to 4 trillion yuan for 2015, according to the people, who asked not to be identified because the move hasn’t been made public. Increases have been made throughout the year from an originally announced 1 trillion yuan.

Read more …

“..companies don’t need to invest and they’re already straining under mountainous debt loads they can’t service.”

China Panics, Sends Fiscal Spending Sky-High As Credit Creation Tumbles (ZH)

Earlier this week, MNI suggested that according to discussions with bank personnel in China, data on lending for October was likely to come in exceptionally weak. That would mark a reversal from September when the credit impulse looked particularly strong and the numbers topped estimates handily. “One source familiar with the data said new loans by the Big Four state-owned commercial banks in October plunged to a level that hasn’t been seen for many years,” MNI reported. Given that, and given what we know about rising NPLs and a lack of demand for credit as the country copes with a troubling excess capacity problem, none of the above should come as a surprise. Well, the numbers are out and sure enough, they disappointed to the downside. RMB new loans came at just CNY514bn in October – consensus was far higher at CNY800bn. That was down 6.3% Y/Y. Total social financing fell 29% Y/Y to CNY447 billion, down sharply from September’s CNY1.3 trillion print.

As noted above, this is likely attributable to three factors. First, banks’ NPLs are far higher than the official numbers, as Beijing’s insistence on forcing banks to roll souring debt and the suspicion that nearly 40% of credit is either carried off the books or classified in such a way that it doesn’t make it into the headline print. Underscoring this is the rising number of defaults China has seen this year. Obviously, you’re going to be reluctant to lend if you know that under the hood, things are going south in a hurry. Here’s Credit Suisse’s Tao Dong, who spoke to Bloomberg: “Banks are still unwilling to lend. This is quite weak, even stripping out the seasonality. The rebound in bank lending, boosted by the PBOC’s injection to the policy banks, has been short lived.” Second, it’s not clear that demand for loans will be particularly robust for the foreseeable future. The country has an overcapacity problem. In short, companies don’t need to invest and they’re already straining under mountainous debt loads they can’t service.

Here’s Alicia Garcia Herrero, chief Asia Pacific economist at Natixis: “The reason is simple: too much leverage.” With those two things in mind, consider thirdly that this comes against the backdrop of lackluster economic growth. As Goldman points out, “China is likely to continue to slow credit growth over the medium to long term given credit growth is still running at roughly double the rate of GDP growth.” In short, it’s not clear why anyone should expect these numbers to rebound. Back to Bloomberg: “The “big miss for China’s credit growth in October rings alarm bells about the strength of the economy and significantly increases the chances of continued aggressive easing,” Bloomberg Intelligence economist Tom Orlik wrote in a note. “It lends support to the idea that a combination of falling profits, the high cost of servicing existing borrowing and uncertainty about the outlook has significantly reduced firms’ incentives to borrow and invest. That’s similar to the problem that afflicted Japan during its lost decades.”

So if these kind of numbers continue to emanate from China, expect the calls for fiscal stimulus to get much louder. Indeed consider that fiscal spending soared 36% on the month (via Bloomberg again): “China’s government spending surged four times the pace of revenue growth in October, highlighting policy makers’ determination to meet this years’ growth target as a manufacturing and property investment slowdown weigh on the economy. Fiscal spending jumped 36.1% from a year earlier to 1.35 trillion yuan ($210 billion), while fiscal revenue rose 8.7% to 1.44 trillion yuan, the Finance Ministry said Thursday. In the first ten months of the year, spending advanced 18.1% and revenue increased 7.7%.”

Read more …

“Total credit outstanding was up just 12% from a year earlier, close to its slowest pace in over a decade.” That’s still twice as fast as even the official GDP growth number..

China Learns What Pushing on a String Feels Like (WSJ)

The People’s Bank of China has been easing policy for nearly a year, but the economy hasn’t bounced back. Capital outflows and a tapped out banking system are holding it back. Data out Thursday showed lending in October to be decidedly lackluster. Banks extended 513.6 billion yuan ($80.7 billion) of new loans, down 3.3% from a year earlier. Total social financing, a broader measure of credit that includes various kinds of shadow loans, was also weak. Total credit outstanding was up just 12% from a year earlier, close to its slowest pace in over a decade. This will be disappointing to the central bank, which has been bending over backward to stimulate credit. Since November last year, it has slashed benchmark interest rates six times and cut the required level of reserves, which frees up funds for lending, four times.

Demand for loans is weak, as companies see fewer opportunities for profitable investment in a slowing economy. What’s more, disinflationary pressures mean that real, inflation-adjusted lending rates have fallen by not much or none at all, depending on what price index is used. Banks are also hesitant to lend aggressively, says Credit Suisse economist Dong Tao, as they are already facing a buildup of nonperforming loans. In the third quarter, profit growth at the country’s eight biggest lenders was close to zero, due to rising provisions for bad loans. Capital outflows are also making the PBOC’s job harder. Figures out on Wednesday indicated that there was a massive $224 billion of investment outflows in the third quarter.

Facing this, the PBOC has been intervening to keep the currency from depreciating, selling off dollars and buying up yuan. Unfortunately this shrinks the domestic money supply, thus counteracting much of the PBOC’s easing measures. The alternative would be to let the currency depreciate. That would lead to more outflows in the near term, until the currency falls to a level that would bring money back in. But if the economy keeps stalling, pressure for depreciation may be too strong to resist. Investors who have seen the yuan stabilize since the botched August devaluation shouldn’t rest too easy. The outflow situation appeared to improve in October. The PBOC’s forex reserves unexpectedly ticked up for the month, suggesting it didn’t have to intervene as much in the currency markets.

But economists such as Daiwa’s Kevin Lai believe the central bank was merely intervening more stealthily, for example by borrowing dollars from forward markets instead of spending its reserves. Regardless, unless the Chinese economy surges back soon, outflow pressures are likely to intensify again, especially if the Federal Reserve raises interest rates as expected in December. That will make it even more difficult to stimulate growth in China. Fiscal policy, including more infrastructure stimulus, will likely be needed to supplement monetary easing. Otherwise, the PBOC will just keep pushing on a string.

Read more …

The $30 handle is not far away.

Oil Slumps 4%, Nears New Six-Year Low (Reuters)

Oil prices tumbled almost 4% on Thursday, accelerating a slump that threatens to test new six-and-a-half year lows, with traders unnerved by a persistent rise in U.S. stockpiles and a downbeat forecast for next year. Benchmark Brent crude fell below $45 a barrel for the first time since August, its sixth decline of a seven-day losing streak of more than $6 a barrel, or 12%, in a slump that will vex traders who thought the year’s lows had already passed. The latest decline was triggered by data showing that U.S. stockpiles were still rising rapidly toward the record highs reached in April, despite slowing U.S. shale production. Weekly U.S. data showed stocks rose by 4.2 million barrels, four times above market expectations.

In its monthly report, OPEC said its output dropped in October but at current levels it could still produce a daily surplus above 500,000 barrels by 2016. Brent futures settled down $1.75, or 3.8%, at $44.06 a barrel. The tumble of the past week has left Brent less than $2 away from its August lows and a new 6-1/2 year bottom. U.S. crude futures finished down $1.18, or 2.8%, at $41.75. Its low in August was $37.75. “We’re going to have a lot of oil on our hands with the builds we’re seeing, talk of rising tanker storage and the yawning discount between prompt and forward oil,” said Tariq Zahir at New York’s Tyche Capital Advisors.

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And everyone’s pumping.

OPEC Says Oil-Inventory Glut Is Biggest in at Least a Decade (Bloomberg)

Surplus oil inventories are at the highest level in at least a decade because of increased global production, according to OPEC. Stockpiles in developed economies are 210 million barrels higher than their five-year average, exceeding the glut that accumulated in early 2009 after the financial crisis, the organization said in a report. Slowing non-OPEC supply and rising demand for winter fuels could “help alleviate the current overhang,” enabling a recovery in prices, it said. The group’s own production slipped last month because of lower output in Iraq. “The build in global inventories is mainly the result of the increase in total supply outpacing growth in world oil demand,” OPEC’s research department said in its monthly market report. Oil prices have lost about 40% in the past year as several OPEC members pump near record levels to defend their market share against rivals such as the U.S. shale industry.

While inventories peaked in early 2009 before OPEC implemented record production cuts, this time the group has signaled it won’t pare supplies to balance global markets and U.S. output is buckling only gradually in response to the price rout. The current excess is bigger than the surplus of 180 million barrels to the five-year seasonal average that developed in the first quarter of 2009, according to the report. The 2009 glut was the only other occasion in the past 10 years when the oversupply has topped 150 million barrels, it said. “The massive stockpile overhang is one more indicator, along with the ongoing slump in prices, that Saudi Arabia’s oil strategy isn’t working so far,” said Seth Kleinman, head of energy strategy at Citigroup Inc. in London. “The physical oil market is falling apart just as we are hitting the winter, when it’s all supposed to be getting better.”

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The entire market is collapsing, but the IEA sees a positive: ““Brimming crude oil stocks” offer “an unprecedented buffer against geopolitical shocks or unexpected supply disruptions..”

IEA Says Record 3 Billion-Barrel Oil Stocks May Weaken Prices (Bloomberg)

Oil stockpiles have swollen to a record of almost 3 billion barrels because of strong production in OPEC and elsewhere, potentially deepening the rout in prices, according to the International Energy Agency. This “massive cushion has inflated” on record supplies from Iraq, Russia and Saudi Arabia, even as world fuel demand grows at the fastest pace in five years, the agency said. Still, the IEA predicts that supplies outside OPEC will decline next year by the most since 1992 as low crude prices take their toll on the U.S. shale oil industry. “Brimming crude oil stocks” offer “an unprecedented buffer against geopolitical shocks or unexpected supply disruptions,” the Paris-based agency said in its monthly market report. With supplies of winter fuels also plentiful, “oil-market bears may choose not to hibernate.”

Oil prices have lost about 40% in the past year as the OPEC defends its market share against rivals such as the U.S. shale industry, which is faltering only gradually despite the price collapse. Oil inventories are growing because supply growth still outpaces demand, the 12-member exporters group said in its monthly report Thursday. Total oil inventories in developed nations increased by 13.8 million barrels to about 3 billion in September, a month when they typically decline, according to the agency. The pace of gains slowed to 1.6 million barrels a day in the third quarter, from 2.3 million a day in the second, although growth remained “significantly above the historical average.” There are signs the some fuel-storage depots in the eastern hemisphere have been filled to capacity, it said.

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Excuse me? … “..younger households are forgoing the opportunity to accumulate wealth..”

Number of First-Time US Home Buyers Falls to Lowest in Three Decades (WSJ)

The share of U.S. homes sold to first-time buyers this year declined to its lowest level in almost three decades, raising concerns that young people are being left out of an otherwise strong housing-market recovery. First-time buyers fell to 32% of all purchasers in 2015 from 33% last year, the third straight annual decline and the lowest%age since 1987, according to a report released Thursday by the National Association of Realtors, a trade group. The historical average is 40%, according to the group, which has been recording such data since 1981. The housing market is on track for its strongest year for sales since 2007, but the dearth of younger buyers could pose long-term challenges, economists said.

Without them, current owners have difficulty trading up or selling their homes when they retire. If home prices continue to rise sharply it will become even more difficult for new buyers to enter the market. The median price of previously built homes sold in September was $221,900, up 6.1% from a year earlier, according to the NAR. The median price for a newly built home rose to $296,900 in September from $261,500 a year ago, according to the Commerce Department. “The short answer is they can’t afford it,” said Nela Richardson, chief economist at Redfin, a real-estate brokerage. By delaying homeownership, younger households are forgoing the opportunity to accumulate wealth, said Ms. Richardson.

Read more …

For now, they look stuck with nowhere to turn.

Striking Greeks Take To Tension-Filled Streets In Austerity Protest (Reuters)

Striking Greeks took to the streets on Thursday to protest austerity measures, setting Alexis Tsipras’ government its biggest domestic challenge since he was re-elected in September promising to cushion the impact of economic hardship. Flights were grounded, hospitals ran on skeleton staff, ships were docked at port and public offices stayed shut across the country in the first nationwide walkout called by Greece’s largest private and public sector unions in a year. As Greece’s foreign lenders prepared to meet in central Athens to review compliance with its latest bailout, thousands marched in protest at the relentless round of tax hikes and pension cutbacks that the rescue packages have entailed.

Tensions briefly boiled over in the city’s main Syntagma Square, where a Reuters witness saw riot police fired tear gas at dozens of black-clad youths who broke off from the march to hurl petrol bombs and stones and smash shop windows near parliament. Some bombs struck the frontage of the Greek central bank. Police sources said three people were detained before order was restored. Five years of austerity since the first bailout was signed in 2010 have sapped economic activity and left about a quarter of the population out of work. “My salary is not enough to cover even my basic needs. My students are starving,” said Dimitris Nomikos, 52, a protesting teacher told Reuters. “They are destroying the social security system … I don’t know if we will ever see our pensions.”

Read more …

Losses wherever you look.

Europe’s Top Banks Are Cutting Losses Throughout Latin America (Bloomberg)

European banks are on the retreat all across Latin America Societe Generale announced in February that it’s dismissing more than 1,000 workers while exiting the consumer-finance business in Brazil. In August, HSBC sold its unprofitable Brazilian unit, with more than 20,000 employees. Two months later, it was Deutsche Banks turn. The German lender said it’s closing offices in Argentina, Mexico, Chile, Peru and Uruguay and moving Brazilian trading activities elsewhere. Barclays is shrinking its operations in Brazil too. The exodus threatens to deepen Latin America’s turmoil, making it harder for companies and consumers to obtain financing. The region already is out of favor as sinking commodity prices drive it toward the worst recession since the late 1990s.

European banks, meanwhile, are looking to cull weak businesses as they struggle to generate profits and meet tougher capital requirements back home. “All large European banks are under great pressure from regulatory changes and low stock prices to change their business models,” Roy Smith, a finance professor at New York University’s Stern School of Business, said in an e-mail. “These changes have to be quite significant to make enough difference.” The exits are opening opportunities for local rivals and global banks from the U.S., Spain and Switzerland willing to wait out the economic slump. Latin America’s economy will probably contract 0.5% this year, squeezed by falling commodity prices and a slowdown in Brazil that’s predicted to be the longest since the Great Depression.

That would make it the first recession in the region since 2009 and the biggest since 1999. Demand for investment-banking services is tumbling, with fees plunging 45% this year through Oct. 15 to a 10-year low of $817 million, Dealogic said. “European banks have fairly weak profits right now and in some cases low capital levels,” Erin Davis, an analyst from Morningstar, said in an e-mail. That leaves “little wiggle room” to absorb losses or low profits from Latin America, even if they believe in its long-term potential, Davis said.

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“..from 2002 to 2014 the area of the glacier’s floating shelf shrank by a massive 95%..”

Collapsing Greenland Glacier Could Raise Sea Levels By Half A Meter (Guardian)

A major glacier in Greenland that holds enough water to raise global sea levels by half a metre has begun to crumble into the North Atlantic Ocean, scientists say. The huge Zachariae Isstrom glacier in northeast Greenland started to melt rapidly in 2012 and is now breaking up into large icebergs where the glacier meets the sea, monitoring has revealed. The calving of the glacier into chunks of floating ice will set in train a rise in sea levels that will continue for decades to come, the US team warns. “Even if we have some really cool years ahead, we think the glacier is now unstable,” said Jeremie Mouginot at the University of California, Irvine. “Now this has started, it will continue until it retreats to a ridge about 30km back which could stabilise it and perhaps slow that retreat down.”

Mouginot and his colleagues drew on 40 years of satellite data and aerial surveys to show that the enormous Zachariae Isstrom glacier began to recede three times faster from 2012, with its retreat speeding up by 125 metres per year every year until the most recent measurements in 2015. The same records revealed that from 2002 to 2014 the area of the glacier’s floating shelf shrank by a massive 95%, according to a report in the journal Science. The glacier has now become detached from a stabilising sill and is losing ice at a rate of 4.5bn tonnes a year. Eric Rignot, professor of Earth system science at the University of California, Irvine, said that the glacier was “being hit from above and below”, with rising air temperatures driving melting at the top of the glacier, and its underside being eroded away by ocean currents that are warmer now than in the past.

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Wow, really?! Foreigners controlling your borders?: “..a pact that would see Turkey patrolling the EU’s southern border with Greece..”

EU Leaders Race To Secure €3 Billion Migrant Deal With Turkey (Guardian)

The German chancellor, Angela Merkel, and other EU leaders are racing to clinch a €3bn (£2.4bn) deal with Turkey’s strongman president, Recep Tayyip Erdogan, to halt the mass influx of migrants and refugees into Europe. All 28 national EU leaders are expected to host Erdogan at a special summit in Brussels within weeks to expedite a pact that would see Turkey patrolling the EU’s southern border with Greece and stemming the flow of hundreds of thousands of refugees, mainly from Syria. In return, Ankara would get €3bn over two years and the EU would also probably agree to resettle hundreds of thousands of refugees in Europe directly from Turkey. No EU country, not even Germany, has committed to paying its share of the €3bn bill except Britain.

In what appears to be a unique event in David Cameron’s chequered history of relations with the EU, the prime minister, while in the Maltese capital of Valletta, offered €400m for the Turkey plan, the only financial pledge yet delivered. That figure is roughly in line with a breakdown of expected national contributions by the European commission and would make Britain the second biggest participant after Germany. The prospect of a breakthrough with Turkey is tantalising for Merkel, for whom the refugee crisis has posed the biggest problem in 10 years of power. This week her finance minister, Wolfgang Schaeuble, likened the arrival of almost 800,000 newcomers in Germany this year to an avalanche and appeared to blame the chancellor for the situation by stating that “careless skiers can trigger avalanches”.

Facing tumult within her governing coalition and her own party, Merkel looks like a leader seeking relief in a hurry. An emergency EU summit in Valletta heard from EU negotiators on Thursday that Erdogan was demanding two quick moves by the Europeans to pave the way for a deal – €3bn over two years and a full summit. Senior EU sources said the message from Ankara was that the price tag would rise if it was not accepted now. Merkel wasted no time in agreeing, witnesses to the closed-door summit exchanges said. She told her fellow EU leaders that she was ready to put money on the table and proposed 22 November as the summit date. She later said the date was not set because it had to be agreed with Ankara, but that it would be around the end of the month.

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It’s a start.

PM Trudeau Says Canada To Settle 25,000 Syrian Refugees In Next 7 Weeks (G&M)

Prime Minister Justin Trudeau will use his first international trip as an opportunity to show other nations there is an economic – as well as humanitarian – case for welcoming large numbers of Syrian refugees. Less than two weeks after being sworn in as Prime Minister, Mr. Trudeau will participate in a summit of G20 leaders hosted by Turkey, Syria’s northern neighbour that is currently home to more than two million refugees. Mr. Trudeau said he expects Canada’s plan to settle 25,000 Syrian refugees this year will have a greater impact in terms of setting an example to others. “I think one of the things that is most important right now is for a country like Canada to demonstrate how to make accepting large numbers of refugees not just a challenge or a problem, but an opportunity; an opportunity for communities across this country, an opportunity to create growth for the economy,” he said.

Mr. Trudeau is departing on a whirlwind of foreign travel that will test his political skills as he attempts to strike positive first impressions with the world’s most influential leaders. The Liberals are promoting the trips as a message that Canada will now play a more constructive role in international affairs. The Prime Minister said his focus at the G20 will be to encourage global growth through government investment rather than austerity. The G20 pledged last year in Brisbane, Australia, to boost economic growth by 2% partly by increased spending on infrastructure, a plan that is in line with Mr. Trudeau’s successful election platform. The global economy has since moved in the opposite direction. The IMF has lowered its global growth forecasts for this year and next.

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Nov 072015
 
 November 7, 2015  Posted by at 9:33 am Finance Tagged with: , , , , , , , , ,  Comments Off on Debt Rattle November 7 2015


Russell Lee Front of livery stable, East Side, New York City 1938

US Looks Set For December Interest Rate Rise After Jobs Boost (Guardian)
US Jobs Report: Workers Aged 25-54 Lose 35K Jobs, 55+ Gain 378K (Zero Hedge)
Peter Schiff: It’s Going To Be A ‘Horrible Christmas’ (CNBC)
US Consumer Credit Has Biggest Jump In History, Government-Funded (Bloomberg)
Primary Dealers Are Liquidating Corporate Bonds At An Unprecedented Pace (ZH)
Will China’s Consumers Step Up In 2016? (Bloomberg)
China’s Demand For Cars Has Slowed. Overcapacity Is The New Normal. (Bloomberg)
World’s Largest Steel Maker ArcelorMittal Loses $700 Million in Q3 (NY Times)
Berlin Accomplices: The German Government’s Role in the VW Scandal (Spiegel)
EU Asks Members To Investigate After VW Admits New Irregularities (Reuters)
VW Says Will Cover Extra CO2 And Fuel Usage Taxes Paid By EU Drivers (Guardian)
Goldman Sachs Dumps Stock Pledged By Valeant Chief (FT)
New Countdown For Greece: A Bank Bail-In Is Looming (Minenna)
UK Care Home Sector In ‘Meltdown’, Threatened By US Vulture Fund (Ind.)
US Congress Proposes A Chilling Resolution On Social Security (Simon Black)
Germany Imposes Surprise Curbs On Syrian Refugees (Guardian)
Germany Receives Nearly Half Of All Syrian Asylum Applicants (Guardian)
Sweden Feels The Refugee Strain (Bloomberg)
Sweden Tells Refugees ‘Stay in Germany’ as Ikea Runs Out of Beds (Bloomberg)
Greek Coast Guard: Five More Migrants Found Dead (Kath.)

We -should- know better than to trust US jobs reports.

US Looks Set For December Interest Rate Rise After Jobs Boost (Guardian)

The US appears to be on course for its first interest rate rise in almost a decade next month after higher than expected job creation pushed the unemployment rate down to 5%. Non-farm payrolls – employment in all sectors barring agriculture – increased by 271,000 in October, according to official figures published on Friday, compared with 142,000 the previous month and above the 185,000 that economists polled by Reuters had expected. In September, the US Federal Reserve signalled that, barring a deterioration in the US economic recovery, it would raise rates from 0.25% at its December meeting. Janet Yellen, the head of the Federal Reserve, repeated her forecast a few days ago.

Analysts said the prospect of a rate rise was now almost certain, especially after figures from the US labor department also showed wages increased at a healthy 0.4% month on month. The dollar jumped by more than 1% to a seven-month high and benchmark US bond yields rose to their highest in five years as traders priced in a 72% chance of a move next month. Stock market futures on New York exchanges slipped as it became clearer that a long period of cheap borrowing costs was coming to an end. The rise in pay took the wage inflation rate to 2.5% year on year, the best annual wages boost since 2009, when it was falling in the aftermath of the financial crisis.

Growth in jobs occurred in industries including professional and business services, healthcare, retail, food services and construction, according to Tanweer Akram, a senior economist at Voya Investment Management. Rob Carnell, an analyst at ING Financial Markets, said: “While this does not guarantee a December rate hike from the Fed at this stage [there is one more labour report before the December 16 meeting], we feel that we would need to see a catastrophically bad November labour report for the Fed to sit on their hands again.”

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And there we go again: it’s all a sleight of hand.

US Jobs Report: Workers Aged 25-54 Lose 35K Jobs, 55+ Gain 378K (Zero Hedge)

After several months of weak and deteriorating payrolls prints, perhaps the biggest tell today’s job number would surprise massively to the upside came yesterday from Goldman, which as we noted earlier, just yesterday hiked its forecast from 175K to 190K. And while as Brown Brothers said after the reported that it is “difficult to find the cloud in the silver lining” one clear cloud emerges when looking just a little deeper below the surface. That cloud emerges when looking at the age breakdown of the October job gains as released by the BLS’ Household Survey. What it shows is that while total jobs soared, that was certainly not the case in the most important for wage growth purposes age group, those aged 25-54.

As the chart below shows, in October the age group that accounted for virtually all total job gains was workers aged 55 and over. They added some 378K jobs in the past month, representing virtually the entire increase in payrolls. And more troubling: workers aged 25-54 actually declined by 35,000, with males in this age group tumbling by 119,000! Little wonder then why there is no wage growth as employers continue hiring mostly those toward the twilight of their careers: the workers who have little leverage to demand wage hikes now and in the future, something employers are well aware of. The next chart shows the break down the cumulative job gains since December 2007 and while workers aged 55 and older have gained over 7.5 million jobs in the past 8 years, workers aged 55 and under, have lost a cumulative total of 4.6 million jobs.

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Schiff always see some right signs, and then always finds it hard to interpret them.

Peter Schiff: It’s Going To Be A ‘Horrible Christmas’ (CNBC)

The Grinch has nothing on Peter Schiff. On CNBC’s “Futures Now” Thursday, the contrarian investor said that while Americans are wrapping presents this holiday season, they should instead brace themselves for “a horrible Christmas” and possible recession. “I expect [job] layoffs to start picking up by the end of the year,” Schiff said, pointing to retailers as the first victim. “Retailers have overestimated the ability of their customers to buy their products. Americans are broke. They are loaded up with debt,” he said. “We’re teetering on the edge of an official recession,” and “the labor market is softening.” For Schiff, there is no one else to blame but the Federal Reserve.

As he sees it, the central bank’s easy money policies have created a bubble so big that any prick could send the U.S. economy spiraling out of control. And that makes the possibility of hiking interest rates slim to none. “The Fed has to talk about raising rates to pretend the whole recovery is real, but they can’t actually raise them,” said the CEO of Euro Pacific Capital. “[Fed Chair Janet Yellen] can’t admit that she can’t raise them because then she’s admitting the whole recovery is a sham and that the policy was a failure.” According to Schiff, the recent rally in the dollar is “the biggest bubble that the Fed has ever inflated” and “it’s the only thing keeping the economy afloat.”

The greenback hit a three-month high this week after Yellen said a December rate hike was a “live” possibility. “[The inflated dollar] is keeping the cost of living from rising rapidly and it’s keeping interest rates artificially low. It’s allowing the Fed to pretend everything is great,” Schiff said. “Eventually the bottom is going to drop out of the dollar and we are going to have to deal with reality,” he added. “That reality is we are staring at a financial crisis much worse than the one we saw in 2008.”

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It’s all still built on debt, and increasingly so. The more ‘confident’ the consumer, the more willing (s)he’s to put her neck in a noose.

US Consumer Credit Has Biggest Jump In History, Government-Funded (Bloomberg)

Borrowing by American households rose at a faster pace in September on increased lending for auto purchases and bigger credit-card balances. The $28.9 billion jump in total credit followed a $16 billion gain in the previous month, Federal Reserve figures showed Friday. Non-revolving debt, which includes funding for college tuition and auto purchases, rose $22.2 billion, the most since July 2011. Borrowing probably remained elevated in October in the wake of the strongest back-to-back months of motor vehicle sales in 15 years. Having made progress in restoring their balance sheets after the last recession, some households are more willing to finance purchases as the labor market continues to improve.

The median forecast of 31 economists surveyed by Bloomberg called for an $18 billion increase in credit, with estimates ranging from gains of $10 billion to $26 billion. The Fed’s consumer credit report doesn’t track debt secured by real estate, such as home equity lines of credit and home mortgages. The pickup in non-revolving credit in September followed a $12 billion increase the previous month. Revolving debt rose $6.7 billion, the biggest gain in three months, after a $4 billion advance, the data showed.

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The biggest threat to US markets?

Primary Dealers Are Liquidating Corporate Bonds At An Unprecedented Pace (ZH)

By now it is common knowledge that over the past two years the primary source of stock buying have been corporations themselves (recall Goldman’s admission that “buybacks have been the largest source of overall US equity demand in recent years”) with two consecutive years of near record stock repurchases. However, now that a December rate hike appears practically certain following the “pristine” October jobs report, suddenly the question is whether the recent strong flows into bond funds will continue, and generously fund ongoing repurchase activity. The latest fund flow report from BofA puts this into perspective

“The increase in interest rates is starting to impact US mutual fund and ETF flows. Hence, the inflow into the all fixed income category declined to +$0.96bn this past week (ending on October 4th) from a +$2.80bn inflow the week before… Outflows from government funds accelerated further to -$2.43bn this past week from -$1.73bn and -$1.00bn in the prior two weeks, respectively.”

But more concerning for corporations than even fund flows, which will surely see even bigger outflows now that both yields are spreads are set to blow out making debt issuance far less attractive to corporations whose cash flows continue to deteriorate, is what the NY Fed reported as activity by Primary Dealer, i.e., the most connected, “smartest people in the room” who indirectly execute the Fed’s actions in the public markets, in the most recent week. As the charts below show, the Primary Dealers aren’t waiting for the December announcement to express how they feel about their holdings of both Investment Grade and Junk Bond (mostly in the longer, 5-10Y, 10Y+ maturity buckets where duration risk is highest). Indeed, as of the week ended October 28, Primary Dealer corporate holdings tumbled across both IG and HY, plunging to the lowest level in years in what can only be called a rapid liquidation of all duration risk.

Investment Grade Bonds:

And Junk Bonds:

Why would dealers be liquidating their corporate bond portfolios at such a fast pace? For junk, the obvious answer is that with ongoing concerns around rising leverage, not to mention yields being dragged higher by the ongoing pain in the energy sector, this may be merely a proactive move ahead of even more selling. But for IG the answer is less clear, and the selling likely suggests fears that any December rate hike will see spreads blow out even further, and as a result dealers are cutting their exposure ahead of December.

Whatever the answer keep a close eye on this series: if Dealer net positions turn negative it will mean that the corporate buyback door is about to slam shut in a hurry as others begin imitating the ‘smartest and most connected traders in the room’, depriving corporations of their biggest source of stock buyback “dry powder.” In fact, taken to its extreme, if companies suddenly find it problematic to raise capital using debt, we may soon enter that phase of the corporate cycle best known by a spike in equity issuance, whose impact on stock price is just the opposite to that of buybacks.

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Not a chance. They’re scared to bits.

Will China’s Consumers Step Up In 2016? (Bloomberg)

)China’s practice of laying out five-year economic plans is a legacy of its Maoist past. And so, as the Communist Party has done since the 1950s, officials met in Beijing in October to hash out the plan to take the world’s second-biggest but now struggling economy from 2016 to 2020. Policymakers have two big goals. In 2016 they’ll continue to feature the consumer as the star of a hoped-for economic resurgence. They’ll also try to ensure by any means necessary that gross domestic product doesn’t slow rapidly, even if that involves injecting more credit into overleveraged, declining industries. China will target “medium-high economic growth,” the Party said in an Oct. 29 communiqué after meeting to discuss the new five-year plan.

Those two goals—fostering a consumer economy and giving GDP a short-term boost—are contradictory. Developing a consumption-driven economy means accepting growth below the 7%+ annual rise of recent years, which was achieved in part by state-run banks and local government finance companies giving enterprises cheap credit to build often unneeded factories and real estate developments. For many economists, it’s a no-brainer to switch to this slower-growing but more sustainable model, one that relies on a strong service sector and robust household consumption. The dramatic growth of the last 35 years has brought serious industrial overcapacity, a polluted environment, and declining productivity even as the workforce shrinks.

In October, days after the announcement that GDP rose in the third quarter at a rate of 6.9% from a year earlier, the slowest pace since 2009, the central bank cut rates for the sixth time in a year. It also lowered the amount of funds banks must hold in reserve, allowing them to make more loans. Economic planners have loosened curbs on borrowing by local officials and stepped up approvals of railway and costly environmental projects. Says Andrew Polk, senior economist at the Conference Board China Center for Economics and Business in Beijing: “Cutting interest rates and adding fiscal spending are temporary salves to much bigger problems. The leadership has very little power to stop the slide in growth into next year.”

In the first quarter of 2015, for the first time, service industries—including jobs from lawyers to tourist guides—made up a bit more than half of GDP. The service economy grew 8.4% in the first nine months; manufacturing, only 6%. “The answer to the question of whether China’s economy is sinking or swimming lies in its service sector,” wrote Capital Economics’ Mark Williams and Chang Liu in an Oct. 29 note. Service companies employ more people than manufacturers to generate the same amount of GDP. Not only are service workers more numerous, they’re also often better paid than factory hands. More Chinese with more money in their pockets should nurture consumption. To date, that’s been hard to engineer, with households socking away about 30% of disposable income, one of the world’s highest savings rates. Household consumption makes up only a little more than one-third of GDP. (In the U.S., consumption is almost 70% of the economy.)

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Overcapacity is China’s 2016 key word.

China’s Demand For Cars Has Slowed. Overcapacity Is The New Normal. (Bloomberg)

For much of the past decade, China’s auto industry seemed to be a perpetual growth machine. Annual vehicle sales on the mainland surged to 23 million units in 2014 from about 5 million in 2004. That provided a welcome bounce to Western carmakers such as Volkswagen and General Motors and fueled the rapid expansion of locally based manufacturers including BYD and Great Wall Motor. Best of all, those new Chinese buyers weren’t as price-sensitive as those in many mature markets, allowing fat profit margins along with the fast growth. No more. Automakers in China have gone from adding extra factory shifts six years ago to running some plants at half-pace today—even as they continue to spend billions of dollars to bring online even more plants that were started during the good times.

The construction spree has added about 17 million units of annual production capacity since 2009, compared with an increase of 10.6 million units in annual sales, according to estimates by Bloomberg Intelligence. New Chinese factories are forecast to add a further 10% in capacity in 2016—despite projections that sales will continue to be challenged. “The Chinese market is hypercompetitive, so many automakers are afraid of losing market share,” says Steve Man, a Hong Kong-based analyst with Bloomberg Intelligence. “The players tend to build more capacity in hopes of maintaining, or hopefully, gain market share. Overcapacity is here to stay.” The carmaking binge in China has its roots in the aftermath of the global financial crisis, when China unleashed a stimulus program that bolstered auto sales.

That provided a lifeline for U.S. and European carmakers, then struggling with a collapse in consumer demand in their home markets. Passenger vehicle sales in China increased 53% in 2009 and 33% in 2010 after the stimulus policy was put in place. But the flood of cars led to worsening traffic gridlock and air pollution that triggered restrictions on vehicle registrations in major cities including Beijing and Shanghai. Worse, the combination of too many new factories and slowing demand has dragged down the industry’s average plant utilization rate, a measure of profitability and efficiency. The industrywide average plunged from more than 100% six years ago (the result of adding work hours or shifts) to about 70% today, leaving it below the 80% level generally considered healthy. Some local carmakers are averaging about 50% utilization, according to the China Passenger Car Association.

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And this is what China’s overcapacity leads to.

World’s Largest Steel Maker ArcelorMittal Loses $700 Million in Q3 (NY Times)

ArcelorMittal, the world’s largest steel maker, on Friday reported a $700 million loss for the third quarter, blaming falling prices and competition from Chinese exports. In a news release, the company said that customers were hesitating to buy its products and that “unsustainably low export prices from China,” which produces far more steel than any other country, had hurt its bottom line. Lakshmi N. Mittal, the company’s chief executive, said in an interview on Friday that steel demand in the company’s main markets, Europe and North America, was healthy, but that low-cost Chinese steel was depressing prices. “The Chinese are dumping in our core markets,” Mr. Mittal said. “The question is how long the Chinese will continue to export below their cost.”

The company’s loss for the period compared with a $22 million profit for last year’s third quarter. ArcelorMittal, which is based in Luxembourg, also sharply cut its projection for 2015 earnings before interest, taxes, depreciation and amortization — the main measure of a steel company’s finances. The new estimate is $5.2 billion to $5.4 billion, down from the previous projection of $6 billion to $7 billion. On a call with reporters, Aditya Mittal, Mr. Mittal’s son and the company’s chief financial officer, said that a flood of low-price Chinese exports was the biggest challenge for ArcelorMittal in the European and North American markets. The company estimates that Chinese steel exports this year will reach 110 million metric tons, compared with 94 million tons last year and 63 million tons in 2013. ArcelorMittal produced 93 million metric tons of steel in 2014.

ArcelorMittal is one of several companies operating in the United States that have brought complaints against the dumping of Chinese steel. On Tuesday, the United States Commerce Department issued a preliminary ruling in those companies’ favor in one product category, saying it would impose tariffs of up to 236% on imports of corrosion-resistant steel from some Chinese companies, on the grounds that their products are subsidized by the government. “That clearly shows there is substance in the trade cases,” Lakshmi Mittal said.

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Berlin fails. Having VW investigate itself is crazy.

Berlin Accomplices: The German Government’s Role in the VW Scandal (Spiegel)

This week wasn’t just a bad one for the Volkswagen concern. The German government is also happy that it’s over. Berlin had painstakingly developed a damage control strategy in an effort to prevent the VW scandal from damaging the reputation of German industry as a whole. Top advisors to Foreign Minister Frank-Walter Steinmeier had even written a confidential letter to German diplomats around the world, providing guidelines for how they should go about defending “the Germany brand.” “The emissions scandal should be presented as a singular occurrence,” they wrote. “External communication” should focus “to the extent possible on preventing VW and the ‘Made in Germany’ brand from being connected.”

But then Monday arrived and the announcement by the Environmental Protection Agency in the United States that “VW has once again failed its obligation to comply with the law that protects clean air for all Americans.” In addition to the 11 million diesel vehicles whose emissions values were manipulated, additional models are also thought to have been outfitted with illegal software to cheat on emissions compliance tests, including the popular SUV Cayenne. That vehicle is manufactured by Porsche, the company that VW’s new CEO, Matthias Müller, used to lead before being hired to replace Martin Winterkorn, who was ousted when the VW scandal first broke. Then Tuesday arrived, and along with it the admission from Müller that VW had deceived even more of its customers.

The fuel consumption claims for more than 800,000 vehicles were manipulated, with the specified average mileage not even achievable in testing, much less in real-world conditions. The new scandal affects models carrying the company’s own environmental seal-of-excellence known as BlueMotion, a label reserved for “the most fuel efficient cars of their class,” as the company itself claims. It has now become clear that such claims are a fraudulent lie. And it shows that this scandal may continue to broaden before VW manages to get it under control.

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Short version: nothing is happening. This is how the EU ‘runs’.

EU Asks Members To Investigate After VW Admits New Irregularities (Reuters)

The European Commission has written to all 28 European Union member countries urging them to widen their investigations into potential breaches of vehicle emissions rules after Volkswagen (VOWG_p.DE) admitted it had understated carbon dioxide levels. Europe’s biggest motor manufacturer admitted in September it had rigged U.S. diesel emissions tests to mask the level of emissions of health-harming nitrogen oxides. In a growing scandal, the German company said on Tuesday it had also understated the fuel consumption – and so carbon dioxide emissions – of about 800,000 vehicles. In a letter seen by Reuters, the Commission said it was not aware of any irregularities concerning carbon dioxide values and was seeking the support of EU governments “to find out how and why this could happen”.

It said it had already contacted Germany’s Federal Motor Transport Authority (KBA), which is responsible for approving the conformity of new car types, and raised the issue with other national authorities at a meeting late on Thursday in Brussels. A Commission spokeswoman confirmed the letter, adding it asked national governments “to widen their investigations to establish potential breaches of EU law”. “Public trust is at stake. We need all the facts on the table and rigorous enforcement of existing legislation,” the spokeswoman said. With vehicle testing in the EU overseen by national authorities, the bloc’s executive body, the Commission, is reliant on each country to enforce rules.

This arrangement has come under fire from environmentalists because on-road tests have consistently shown vehicles emitting more pollutants than laboratory tests. Car manufacturers are a powerful lobby group in the EU, as a major source of jobs and exports. In an open letter on Friday, a group of leading investors urged the EU to toughen up testing of vehicle emissions to prevent a repeat of the VW scandal and the resulting hit to its shareholders. VW shares have plunged as much as a third in value since the crisis broke in September.

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Do note this by Mary Nichols, head of the California Air Resources Board: “The case is “the biggest direct breach of laws that I have ever uncovered … This is a serious issue, which will certainly lead to very high penalties..”

VW Says Will Cover Extra CO2 And Fuel Usage Taxes Paid By EU Drivers (Guardian)

Volkswagen has said it will foot the bill for extra taxes incurred by drivers after it admitted understating the carbon dioxide emissions of about 800,000 cars in Europe. In a letter to European Union finance ministers on Friday, seen by Reuters, Matthias Müller, the VW chief executive, asked member states to charge the carmaker rather than motorists for any additional taxes relating to fuel usage or CO2 emissions. The initial emissions scandal, which erupted in September when Volkswagen admitted it had rigged US diesel emissions tests, affecting 11m vehicles globally, deepened this week when VW said it had also understated the carbon dioxide emissions and fuel consumption of 800,000 vehicles in Europe. Analysts say VW, Europe’s biggest carmaker, could face a bill of up to €35bn for fines, lawsuits and vehicle refits.

To help meet some of the anticipated costs, VW has announced a €1bn programme of spending cuts. The head of VW’s works council said the announcement of the cuts had broken strict rules in Germany on consultation with workers and demanded immediate talks with company bosses. “Management is announcing savings measures unilaterally and without any foundation,” Bernd Osterloh said in an emailed statement. [..] Since the emissions revelations, VW has been criticised by lawmakers, regulators, investors and customers frustrated at the time it is taking to get to the bottom of a scandal that has wiped almost a third off the carmaker’s market value. Mary Nichols, the head of the California Air Resources Board, which is investigating VW in the US, told the German magazine WirtschaftsWoche: “Volkswagen is so far not handling the scandal correctly.

“Every additional gram of nitrogen oxide increases the health risks for our citizens. Volkswagen has not acknowledged that in any way or made any effort to really solve the problem.” The case is “the biggest direct breach of laws that I have ever uncovered … This is a serious issue, which will certainly lead to very high penalties,” Nichols added. The scandal has also piled pressure on European regulators, who have long been criticised by environmentalists on the grounds that on-road tests have consistently shown vehicles emitting more pollutants than official laboratory tests. In an open letter, a group of leading investors urged the EU to toughen up vehicle testing. But it faces a battle because carmakers have traditionally had a strong influence on policy in countries such as Germany, Europe’s biggest economy, where they are an important source of jobs and export income.

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Now everyone else must jump ship too.

Goldman Sachs Dumps Stock Pledged By Valeant Chief (FT)

Valeant said on Friday that Goldman Sachs had sold more than $100m-worth of shares in the struggling drugmaker, which had been pledged as collateral against a personal loan from the investment bank to the company’s chief executive. Goldman contacted Michael Pearson, Valeant’s chief executive, earlier this week and gave him 48 hours to pay off a $100m loan that he took out in 2013 after a precipitous decline in the company’s share price triggered a so-called margin call on the debt. After he failed to raise enough cash to pay off the loan, Goldman Sachs on Thursday morning dumped the entire block of just under 1.3m shares, held in Mr Pearson’s name, which were worth roughly $119.4m at the open of trading in New York on Thursday.

The sale of Mr Pearson’s pledged shares contributed to a rout in the company’s stock price on Thursday, during which its market value fell as much as 20%. Roughly 57m shares changed hands during the day, compared with a daily average of 4m over the past 12 months. The embarrassing announcement is the latest setback for Valeant and its high-profile hedge fund backers, who include Bill Ackman, Jeff Ubben and John Paulson. It comes after months of controversy surrounding the drugmaker’s reliance on high prices, aggressive sales techniques and debt-fuelled deal making. Goldman’s decision to terminate the loan to Mr Pearson underscores the impact of the rout in Valeant’s shares on his personal wealth. Mr Pearson owns roughly 9m shares, accounting for Goldman’s sale on Thursday. In August that stake was worth almost $2.4bn; as of Friday morning, the value had plummeted to $720m.

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The EU’s criminal folly: “In the questionable strategy of EU bureaucrats, an increase in foreclosures should boost the banks’ assets and in this way should help to reduce the financial demands on the ESM bailout fund.”

New Countdown For Greece: A Bank Bail-In Is Looming (Minenna)

The debt crisis may no longer be in the spotlight but the financial situation in Greece remains complex. Greek banks continue to survive at the edge of bankruptcy, kept afloat only by Emergency Liquidity Assistance (ELA) from the ECB and by still-enforced capital controls. After the August “agreement”, the Troika has promised the Greek government €25 billion for bank recapitalization, of which €10bn is in a Luxembourg account ready to be wired. The funds will be disbursed only if the government manages, before the 15th of November, to approve a long list of urgent reforms: the infamous list of the “48 points” that embraces tax increases, public spending cuts and the highly controversial pensions reform. It is obviously a tough task for the Tsipras government, even if September’s election victory gave him a solid mandate.

After a parliamentary marathon, it seems that the government has successfully passed some unpopular measures: the increase from 26% to 29% in income tax, the rise from 5% to 13% in the tax on luxury goods and the restoring of the tax on television advertisements. The process was not so smooth with the first steps in reforming pensions and slowdowns are on the horizon. Tsipras is also trying to gain time against the pressure of Brussels to modify the laws that still protect primary homeowners from foreclosure. According to some estimates, there are around 320,000 families in Greece that are not paying down their mortgages and obviously these bad loans are dead weights for the banking system. In the questionable strategy of EU bureaucrats, an increase in foreclosures should boost the banks’ assets and in this way should help to reduce the financial demands on the ESM bailout fund.

Anyway, the Greek government is still living for the day, and the Troika has noticed that only 19 of the mandatory 48 reforms have been approved so far. Brussels is unhappy with this situation and has sent a strong “signal” to the Tsipras government by delaying the last €2 billion tranche of loans. At end-October 2015, €13 billion has already been transferred to Greece; these cash inflows alone have allowed the government to guarantee payments of salaries and pensions and reduced the dangerous social tensions experienced in July. Moreover, part of these funds has been diverted to pay down the ECB and this could allow the QE programme to be extended to Greece as early as November. This would be an unexpected image success for Mr. Tsipras and would give breathing space to the banking system, where up to €15 billion of government bonds eligible for purchase by the ECB are still languishing.

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2016 looks to be a watershed year for British care in general.

UK Care Home Sector In ‘Meltdown’, Threatened By US Vulture Fund (Ind.)

The UK’s largest provider of care homes is preparing to sell scores of properties and slash its budget by millions to fend off an attack from a US vulture fund hoping to cash in on the UK elderly-care crisis. Four Seasons Health Care, which cares for thousands of residents, is facing a £500m-plus credit crunch after government spending cuts and financial engineering by City investors left it struggling to pay lenders. The little-known H/2 Capital Partners has been buying up the group’s debt in the hope that the current owners, Terra Firma, will cede control of the homes after finances were squeezed by local government funding cuts.

Martin Green, the chief executive of Care England, a trade group for elderly-care provision, said the Government needed to step in to stop speculative investors targeting the troubled industry. “If the Government does not fund the sector properly, people will come into it to make money rather than deliver care,” he warned. To stave off the hedge fund assault, Four Seasons is considering plans to make deep cuts to the money it spends refurbishing and developing care homes. [..] Unions are concerned that the funding crisis will force many elderly residents to move into NHS beds and have called on Chancellor George Osborne to deliver ringfenced funding to the social care sector in his spending review later this month.

“The sector is going through a slow-motion collapse and Four Seasons is part of that situation,” GMB national officer Justin Bowden said. “It’s in meltdown and there will be tens of thousands of our mums and dads who will have to be looked after.” The squeeze on funding has put Four Seasons’ owner Terra Firma in a bind as it tries to meet annual costs of about £110m a year. The buyout group, led by well-known dealmaker Guy Hands, bought Four Seasons in 2012 from Royal Bank of Scotland for £825m in a debt-fuelled takeover. Most of the takeover cash was borrowed using two loans sold on to investors – one worth £350m and the other £175m.

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The care disaster will spread across the western world. It will get ugly and deadly.

US Congress Proposes A Chilling Resolution On Social Security (Simon Black)

Officially, the US government is now $18.5 trillion in debt, and Social Security is the biggest financial sinkhole in America. Social Security’s various trust funds currently hold about $2.7 trillion in total assets; yet the government itself estimates the program’s liabilities to exceed $40 trillion. And Social Security’s second biggest trust fund, the Disability Insurance fund, will be fully depleted in a matter of weeks. The trustees who manage these massive funds on behalf of the current and future retirees of America are clearly concerned. In the 2015 report of the Social Security and Medicare Board of Trustees they state very plainly:

“Social Security as a whole as well as Medicare cannot sustain projected long-run program costs…”, and that the government should be “giving the public adequate time to prepare.” Wow. Now, we always hear politicians say that ‘Social Security is going to be just fine’. So this Board of Trustees must be a bunch of wackos. Who are these guys anyhow? The Treasury Secretary of the United States of America, as it turns out. Along with the Secretary of Health and Human Services. The Secretary of Labor. Etc. These are the folks who sign their name to the report saying that Social Security is going bust, and that Congress needs to give people time to prepare. And prepare they should.

The US Government Accountability Office recently released a report showing that tens of millions of Americans haven’t saved a penny for retirement; and roughly half of Baby Boomers have zero retirement savings. This means that there’s an overwhelming number of Americans pinning all of their retirement hopes on Social Security. Bad idea. In a recently proposed resolution, H. Res 488, Congress states point blank that Social Security “was never intended by Congress to be the sole source of retirement income for families.” Apparently they got the message from the Social Security Trustees and they want to start preparing people for the inevitable truth. This is no longer some wild conspiracy theory.

The Treasury Secretary is saying it. Congress is saying it. The numbers are screaming it: Social Security is going to fail. Ultimately this is a just another chapter in the same story– that government cannot be relied on to provide or produce, only to squander and fail. Sure, their intentions may be noble. But this level of serial incompetence can no longer be trusted, nor should we be foolish enough to believe that some new candidate can fix it. If you’re in your fifties and beyond, you’re probably going to be OK and at least get 10-15 years of benefits. If you’re in your 40s and below, you have to be 100% prepared to fend for yourself. Fortunately you have time to recover. Time to build. And time to learn.

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The chaos only deepens.

Germany Imposes Surprise Curbs On Syrian Refugees (Guardian)

Angela Merkel has performed an abrupt U-turn on her open-door policy towards people fleeing Syria’s civil war, with Berlin announcing that the hundreds of thousands of Syrians entering Germany would not be granted asylum or refugee status. Syrians would still be allowed to enter Germany, but only for one year and with “subsidiary protection” which limits their rights as refugees. Family members would be barred from joining them. Germany, along with Sweden and Austria, has been the most open to taking in newcomers over the last six months of the growing refugee crisis, with the numbers entering Germany dwarfing those arriving anywhere else.

However, the interior minister, Thomas de Maiziere, announced that Berlin was starting to fall into line with governments elsewhere in the European Union, who were either erecting barriers to the newcomers or acting as transit countries and limiting their own intake of refugees. “In this situation other countries are only guaranteeing a limited stay,” De Maiziere said. “We’ll now do the same with Syrians in the future. We’re telling them ‘you will get protection, but only so-called subsidiary protection that is limited to a period and without any family unification.’” The major policy shift followed a crisis meeting of Merkel’s cabinet and coalition partners on Thursday.

The chancellor won global plaudits in August when she suspended EU immigration rules to declare that any Syrians entering Germany would gain refugee status, though this stirred consternation among EU partners who were not forewarned of the move. Thursday’s meeting decided against setting up “transit zones” for the processing of refugees on Germany’s borders with Austria, but agreed on prompt deportation of people whose asylum claims had failed.

Until now Syrians, Iraqis and Eritreans entering Germany have been virtually guaranteed full refugee status, meaning the right to stay for at least three years, entitlement for family members to join them, and generous welfare benefits. Almost 40,000 Syrians were granted refugee status in Germany in August, according to the Berlin office responsible for the programme, with only 53 being given “subsidiary” status. That now appears to have ended abruptly. An interior ministry spokesman told the Frankfurter Allgemeine Zeitung: “The Federal Office for Migration and Refugees is instructed henceforth to grant Syrian civil war refugees only subsidiary protection.”

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What happens when you fail to prepare.

Germany Receives Nearly Half Of All Syrian Asylum Applicants (Guardian)

Germany has received nearly one in two of all asylum applications made by Syrians in EU member states this year. New figures released by the ministry of the interior on Thursday put the total number of asylum applications filed in Germany so far this year at 362,153, up 130% on January to October 2014. Nearly 104,000 of these applications were made by Syrians. This corresponds to about 47.5% of all requests for asylum submitted by Syrians in EU member states this year. Together with Germany, the countries that have received the most asylum applications from Syrians relative to their population sizes are Austria, Sweden and Hungary, with 1.3, 1.5, 2.7 and 4.7 applications per 1,000 people respectively. Europe’s next two biggest economies, France and Britain, on the other hand, have received only 0.03 and 0.02 applications from Syrians per 1,000 people respectively, according to Eurostat data.

Germany received 54,877 asylum applications in October alone, an increase of nearly 160% compared with the same month last year, according to the same figures. But the figure for formal asylum applications doesn’t reveal the full scale of the number of people Germany is absorbing. Filing the required paperwork takes time. The German interior ministry notes that the country registered 181,166 asylum seeker arrivals in October alone. Of these, 88,640 were from Syria, 31,051 from Afghanistan and 21,875 from Iraq. Between January and October, Germany registered the arrival of 758,473 asylum seekers, about a third of which (243,721) were from Syria. The country expects to receive more than a million asylum seekers this year. So far this year, 81,547 people have been granted refugee status in Germany, which represents just under 40% of all asylum decisions taken from January to October 2015.

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Sweden’s been a light in a very opaque darkness, but…

Sweden Feels The Refugee Strain (Bloomberg)

Sweden, which considers itself a humanitarian superpower, has long welcomed refugees, whether they be Jews escaping the Holocaust or victims of civil wars and natural disasters. Some 16% of its population is foreign-born, well above the U.S. figure of 13%. Since the 1990s the Scandinavian nation of 9.6 million has absorbed hundreds of thousands of migrants from the former Yugoslavia, the Middle East, and Africa. Still, Swedes have never experienced anything like the current influx. Some 360,000 refugees—mainly from Afghanistan, Iraq, and Syria—are expected to enter the country in 2015 and 2016, on top of the 75,000 who sought asylum last year. It’s as if North Carolina, which has about the same population as Sweden, sprouted a new city the size of Raleigh in three years.

In a sign that its hospitality may be wearing thin, the government announced on Oct. 23 that by next year it will end a policy of automatically granting permanent residency to most refugees. In the future, adults arriving without children will initially get only a temporary residence permit. The Swedish Migration Agency says that meeting refugees’ basic needs could cost the national government 60 billion kronor ($7 billion) in 2016. Local governments and private organizations will spend billions more. If the flow doesn’t subside, “in the long term our system will collapse,” said Foreign Affairs Minister Margot Wallström in an Oct. 30 interview with the daily Dagens Nyheter.

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And Germany says ‘Stay in Austria’, and we’re off to the races…

Sweden Tells Refugees ‘Stay in Germany’ as Ikea Runs Out of Beds (Bloomberg)

Europe’s refugee crisis is having such a major impact in Sweden that even Ikea is running out of beds. The Swedish furniture giant says its shops in Sweden and Germany are running short on mattresses and beds amid increased demand due to an unprecedented inflow of asylum seekers in the two countries. In Sweden, which along with Germany has been the most welcoming, the Migration agency had to let about 50 refugees sleep on the floor of its head office on Thursday night as it tries to find accommodation for the latest arrivals. “There are some shortages of bunk beds, mattresses and duvets” in some stores in Germany and Sweden, Josefin Thorell, an Ikea spokeswoman, said in an e-mailed response when asked whether the company had been affected by the biggest influx of migrants since World War II.

“If the situation persists we expect that it will be difficult to keep up and maintain sufficient supply,” Thorell said. Ikea has been supplying local authorities handling the refugee crisis. So far, 120,000 asylum seekers have arrived in Sweden this year and as many as 190,000 are expected to head to the country of 10 million people. Although Finance Minister Magdalena Andersson told reporters on Friday that the pressure on public finances “is not acute,” the Swedish government says it is no longer able to offer housing to new arrivals. “Those who come here may be met by the message that we can’t arrange housing for them,” Migration Minister Morgan Johansson told reporters. “Either you’ll have to arrange it yourself, or you have to go back to Germany or Denmark again.”

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Meanwhile, ….

Greek Coast Guard: Five More Migrants Found Dead (Kath.)

Greek authorities say the bodies of five more migrants have been found in the eastern Aegean Sea, which hundreds of thousands have crossed in frail boats this year seeking a better life in Europe. The coast guard said Friday that three men and a woman were found dead over the past two days in the sea off Lesvos. The eastern island is where most of the migrants head from the nearby Turkish coast, paying large sums to smugglers for a berth on overcrowded, unseaworthy vessels. The body of another man was found Thursday off the islet of Agathonissi. Well over half a million people have reached the Greek islands so far this year – a record number of arrivals – and the journey has proved fatal for hundreds.

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