May 112017
 
 May 11, 2017  Posted by at 8:49 am Finance Tagged with: , , , , , , , , , , , ,  2 Responses »
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Paul Almasy Les Halles, Paris 1950

 

Trump and Lavrov Meeting Round-Up (TASS)
$9 Trillion Question: What Happens When Central Banks Stop Buying Bonds? (WSJ)
Draghi Stays Calm on Stimulus as Dutch MPs Warn of Risks With Tulip (BBG)
It’s Not Just The VIX – Low Volatility Is Everywhere (R.)
Six Canadian Banks Cut by Moody’s on Consumers’ Debt Burden (BBG)
China Holds Giant Meeting On Spending Billions To Reshape The World (CNBC)
‘Stagnant’ Buyer Demand Puts The Brakes On UK Housing Market (G.)
UK Labour Party’s Plan To Nationalise Rail, Mail And Energy Firms (G.)
Panic! Like It’s 1837 (DB)
Italy Financial Regulator Threatens EU with Return to “National Currency” (DQ)
Greek Capital Controls To Stay Till At Least End Of 2018 (K.)
Greek PM Tsipras Heralds ‘Landmark’ Plan For Healthcare (K.)
Turkish Coast Guard Publishes Maps Claiming Half Of The Aegean Sea (KTG)
Libya Intercepts Almost 500 Migrants After Sea Duel (AFP)
Where Have All The Insects Gone? (Sciencemag )

 

 

The presence of a TASS reporter when Lavrov visited the White House was critized in the US media. Here’s what he wrote.

Trump and Lavrov Meeting Round-Up (TASS)

Before meeting with Donald Trump, Sergey Lavrov held talks with the US top diplomat Rex Tillerson. Lavrov’s talks with the US president lasted for about 40 minutes behind closed doors. Moscow and Washington can and should solve global issues together, Lavrov said following his meetings with US Secretary of State Rex Tillerson and US President Donald Trump. “I had a bilateral meeting with Rex Tillerson, then the two of us were received by President Trump,” the Russian top diplomat said. “We discussed, first and foremost, our cooperation on the international stage.” “At present, our dialogue is not as politicized as it used to be during Obama’s presidency. The Trump administration, including the president himself and the secretary of state, are people of action who are willing to negotiate,” the Russian top diplomat pointed out.

Lavrov said agreement reached with Tillerson to continue using diplomatic channel to discuss Russian-US relations. According to Lavrov, the current state of bilateral relations is no cause for joy. “The reason why our relations deteriorated to this state is no secret,” the Russian top diplomat added. “Unfortunately, the previous (US) administration did everything possible to undermine the basis of our relations so now we have to start from a very low level.” “President Trump has clarified his interest in building mutually beneficial and practical relations, as well as in solving issues,” Lavrov pointed out. “This is very important,” he said. Lavrov believes Syria has areas where US might contribute to operation of de-escalation zones. “We are ready for this cooperation and today have discussed in detail the steps and mechanisms which we can manage together,” Lavrov said.

“We have confirmed our interest in the US’ most active role in those issues,” Lavrov said. “I imagine the Americans are interested in this too.” “We proceed from the fact they will take up the initiative,” he added. “We have thoroughly discussed the Syrian issue, particularly the ideas related to setting up de-escalation zones,” the Russian top diplomat said. “We share an understanding that this should become a common step aimed at putting an end to violence across Syria,” he added.

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One word: mayhem.

$9 Trillion Question: What Happens When Central Banks Stop Buying Bonds? (WSJ)

Central banks have been the world’s biggest buyers of government bonds, but may soon stop—a tidal shift for global markets. Yet investors can’t agree on what that shift will mean. Part of the problem is that there is little agreement about how the massive stimulus policies, known as quantitative easing or QE, affected bonds in the first place. That makes it especially hard to assess what happens when the tide changes. Many expect bond yields could rise and shares fall, some see little effect at all, while others suggest it is riskier investments, such as corporate bonds or Italian government debt, that will bear the brunt. But recently, yields on European high-yield corporate bonds hit their lowest since before the financial crisis, in one potential sign that the threat of tapering has yet to affect markets.

When the unwinding begins money managers may not be positioned for it, and markets could move swiftly. In the summer of 2013, investors suddenly got spooked about the Federal Reserve withdrawing stimulus, leading to a swift bond sell off that sent yields on the 10-year Treasury up by more than 1%age point. By buying bonds after the 2008 financial crisis, central banks across the developed world sought to push yields lower and drive money into riskier assets, reducing borrowing costs for businesses. “If it’s unclear what benefits we’ve had in the buying, it’s unclear what will happen in the selling,” said Tim Courtney, chief investment officer at Exencial Wealth Advisors.

Recent data showed that the ECBholds total assets of $4.5 trillion, more than any other central bank ever. The Fed and the Bank of Japan each have $4.4 trillion, although the BOJ isn’t expected to wind down QE soon. With the world economy finally recovering, investors believe that holdings at the Fed and ECB have peaked. U.S. officials are discussing how to wind down their portfolio, which they have kept constant since 2014. The ECB’s purchases of government and corporate debt are now more likely to be tapered later in the year, analysts say, after pro-business candidate Emmanuel Macron’s victory in the French presidential election Sunday.

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Dutch politicians either don’t care about their European Union peer Greece, or they don’t know about it. Neither is a good option. They are doing so well over the backs of the Greeks they want Draghi to enact policies that will make them even richer, and the Greeks even more miserable. Oh, and of course “The euro is irrevocable” only until it isn’t.

Draghi Stays Calm on Stimulus as Dutch MPs Warn of Risks With Tulip (BBG)

Mario Draghi kept his cool in the Netherlands – at least on monetary policy. Repeatedly pressed by Dutch lawmakers to say when he’ll start winding down euro-area monetary stimulus, the Ecb president replied that it’s still too soon to consider, despite a “firming, broad-based upswing” in the economy. “Is it time to exit? Or is it time to start thinking about exit or not? The assessment of the Governing council is that this time hasn’t come yet.” His reward was a gift of a plastic tulip in a reminder of a past European financial crisis. Draghi’s voluntary appearance at the hearing on Wednesday put him front and center in one of the nations most critical of the ECB’s ultra-loose policies, which are seen by opponents as overstepping the institution’s mandate, burdening savers and pension providers, and stoking asset bubbles.

Legislators did appear occasionally to get under his skin. The tension rose when he was quizzed multiple times him on the possibility that a government will one day have to restructure its debt, while on the topic of a nation leaving the currency bloc – as Greece came close to doing in 2015 – Draghi’s response was blunt. “The euro is irrevocable. This is the Treaty. I will not speculate on something that has no basis.” The intense questioning underscored the gap between relatively rosy economic data and the discontent among individuals who can’t see the fruits of the ECB’s €2.3 trillion bond-buying program and minus 0.4% deposit rate. It’s a challenge for Draghi, who reiterated his concern that underlying inflation remains feeble and falling unemployment has yet to boost wage growth. The region is far from healing the scars of a double-dip recession that wiped out 9 million jobs and helped the rise of anti-euro populists such as Marine Le Pen, who lost this month’s French presidential election but still managed to pick up more than a third of the vote.

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The silence before.

It’s Not Just The VIX – Low Volatility Is Everywhere (R.)

The current slump in expectations of market volatility is not just a stock market phenomenon – it is the lowest it’s been for years across fixed income, currency and commodity markets around the world. It shows little sign of reversing, which means market players are essentially not expecting much in the way of shocks or sharp movements any time soon. It’s an environment in which asset prices can continue rising and bond spreads narrow further. The improving global economy, robust corporate profitability, ample central bank stimulus even as U.S. interest rates are rising, and some fading political risk from elections have all contributed to create a backdrop of relative calm.

There is little evidence of investors hedging – or seeking to protect themselves – from adverse conditions. It is most notably seen in the VIX index of implied volatility on the U.S. S&P 500 stock index, the so-called “fear index”. But implied volatility across the G10 major currencies is its lowest in three years, and U.S. Treasury market volatility its lowest in 18 months and close to record lows. The VIX, meanwhile, has dipped to lows not seen since December 2006, is posting its lowest closing levels since 1993, and is on a record run of closes below 11. By comparison, it was at almost 90 at the height of the financial crisis. Not much current “fear”, then.

Implied volatility is an options market measure of investors’ expectation of how much a certain asset or market will rise or fall over a given period of time in the future. It and actual volatility can quickly become entwined in a spiral lower because investors are less inclined to pay up for “put” options – effectively a bet on prices falling – when the market is rising. If a shock does come the cost of these “puts” would shoot higher as investors scramble to buy them. Surging volatility is invariably associated with steep market drawdowns. According to Deutsche Bank’s Torsten Slok, an investor betting a year ago that the VIX would fall – shorting the index – would have gained around 160% today. Conversely, an investor buying the VIX a year ago assuming it would rise would have lost 75%.

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What’s that rumbling sound in the distance?

Six Canadian Banks Cut by Moody’s on Consumers’ Debt Burden (BBG)

Six of Canada’s largest banks had credit ratings downgraded by Moody’s Investors Service on concern that over-indebted consumers and high housing prices have left lenders vulnerable to potential losses on assets. Toronto-Dominion Bank, Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada and Royal Bank of Canada had their long-term debt and deposit ratings lowered one level, Moody’s said Wednesday in a statement. It also cut its counterparty risk assessment for the firms, excluding Toronto-Dominion. “Expanding levels of private-sector debt could weaken asset quality in the future,” David Beattie, a Moody’s senior vice president, said in the statement.

“Continued growth in Canadian consumer debt and elevated housing prices leaves consumers, and Canadian banks, more vulnerable to downside risks facing the Canadian economy than in the past.” A run on deposits at alternative mortgage lender Home Capital has sparked concern over a broader slowdown in the nation’s real estate market, at a time when Canadians are taking on higher levels of household debt. The firm’s struggles have taken a toll on Canada’s biggest financial institutions, which have seen stocks slide on concern about contagion. In its statement, Moody’s pointed to ballooning private-sector debt that amounted to 185% of Canada’s GDP at the end of last year. House prices have climbed despite efforts by policy makers, it said. And business credit has grown as well.

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Straight from the Monopoly printing press.

China Holds Giant Meeting On Spending Billions To Reshape The World (CNBC)

[..] the most populous nation on the planet wants to increase its influence by digging further into its pockets — flush with cash after decades of rapid growth — to splash out with its “One Belt, One Road” policy. President Xi Jinping first announced the policy in 2013; it was later named one of China’s three major national strategies, and morphed into an entire chapter in the current five-year plan, to run through 2020. [..] The plan aims to connect Asia, Europe, the Middle East and Africa with a vast logistics and transport network, using roads, ports, railway tracks, pipelines, airports, transnational electric grids and even fiber optic lines. The scheme involves 65 countries, which together account for one-third of global GDP and 60% of the world’s population, or 4.5 billion people, according to Oxford Economics.

This is part of China’s push to increase global clout — building modern infrastructure can attract more investment and trade along the “One Belt, One Road” route. It could be beneficial for western China, which is less developed, as it links up with neighboring countries. And in the long run, it will help China shore up access to energy resources. The policy could boost the domestic economy with demand abroad, and might also soak up some of the overcapacity in China’s heavy industry, but analysts say these are fringe benefits. Experts say China has an opportunity to step into a global leadership role, one that the U.S. previously filled and may now be abandoning, especially after President Donald Trump pulled out of a major trade deal, the Trans-Pacific Partnership.

It’s clear China wants to wield greater influence — Xi’s speech in January at the World Economic Forum in Davos touted the benefits of globalization, and called for international cooperation. And an article by Premier Li Keqiang published shortly after also called for economic openness. But despite all the talk of global connectivity, skeptics highlight that China still restricts foreign investment, censorship continues to be an issue and concerns remain over human rights. [..] In 2015, the China Development Bank said it had reserved $890 billion for more than 900 projects. The Export-Import Bank of China announced early last year that it had started financing over 1,000 projects. The China-led Asian Infrastructure Investment Bank is also providing financing.

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The British should be happy for housing prices returning to more normal levels.

‘Stagnant’ Buyer Demand Puts The Brakes On UK Housing Market (G.)

The UK housing market is continuing to slow down, with falling property sales, “stagnant” buyer demand and general election uncertainty all adding up to one of the most downbeat reports issued by surveyors since the financial crash. In its latest monthly snapshot of the market, the Royal Institution of Chartered Surveyors (Rics) said momentum was “continuing to ebb,” with no sign of change in the near future. Its report is the latest in a series of recent surveys suggesting that the slowdown is getting worse as household budgets continue to be squeezed and affordability pressures bite. It comes days after the Halifax said house prices fell by 0.1% in April, which meant they were nearly £3,000 below their December 2016 peak. Nationwide reported a bigger decline in April – it said prices fell by 0.4%, following a 0.3% drop in March.

Some parts of London appear to have been hit particularly hard, with estate agents and developers resorting to offering free cars and other incentives to try to tempt buyers. Rics said its members had reported that sales were slipping slightly following months of flat transactions. A lack of choice for would-be buyers across the UK appears to be one of the major factors putting a dampener on sales: the latest report said there was “an acute shortage of stock,” with the typical number of properties on estate agents’ books hovering close to record lows. New instructions continue to drop, which could make the situation worse: the flow of fresh listings to agents remained negative for the 14th month in a row at a national level, said Rics, though it added that the situation had apparently improved slightly in London.

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How dead is the left? Nice contest.

UK Labour Party’s Plan To Nationalise Rail, Mail And Energy Firms (G.)

Jeremy Corbyn will lay out plans to take parts of Britain’s energy industry back into public ownership alongside the railways and the Royal Mail in a radical manifesto that promises an annual injection of £6bn for the NHS and £1.6bn for social care. A draft version of the document, drawn up by the leadership team and seen by the Guardian, pledges the phased abolition of tuition fees, a dramatic boost in finance for childcare, a review of sweeping cuts to universal credit and a promise to scrap the bedroom tax. Party sources said Corbyn wants to promise a “transformational programme” with a package covering the NHS, education, housing and jobs as well as industrial intervention and sweeping nationalisation. But critics said the policies represented a shift back to the 1970s with the Conservatives describing it as a “total shambles” and a plan to “unleash chaos on Britain”.

Corbyn’s leaked blueprint, which is likely to trigger a fierce debate of Labour’s national executive committee and shadow cabinet at the so-called Clause V meeting at noon on Thursday, also includes:
• Ordering councils to build 100,000 new council homes a year under a new Department for Housing.
• An immediate “emergency price cap” on energy bills to ensure that the average duel fuel household energy bill remains below £1,000 a year.
• Stopping planned increases to the pension age beyond 66.
• “Fair rules and reasonable management” on immigration with 1,000 extra border guards, alongside a promise not to “fan the flames of fear” but to recognise the benefits that migrants bring.

On the question of foreign policy, an area on which Corbyn has campaigned for decades, the draft document said it will be “guided by the values of peace, universal rights and international law”. However, Labour, which is facing Tory pressure over the question of national security, does include a commitment to spend 2% of GDP on defence. The draft manifesto, which will only be finalised after it is agreed on Thursday, also makes clear that the party supports the renewal of Trident, despite Corbyn’s longstanding opposition to nuclear weapons.

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Cycles.

Panic! Like It’s 1837 (DB)

180 years ago today, everyone panicked. On May 10, 1837, New York banks finally realized that the easy money they were lending was unsustainable, and demanded payment in “specie,” or hard money like gold and silver coin. They had previously been accepting paper currency that for every $5 was backed by only $1 in silver or gold. Things culminated to that point after years of borrowing the paper currency to expand west, buy land, and build infrastructure. As silver came in from Mexico, banks lent out five times the amount of their deposits–fractional reserve banking. At the same time, the value of silver was falling because its supply was increasing in America. Great Britain, which had been lending much of the money, was less interested in silver because they could pay for trade with China in opium.

So even though Britain had a year earlier begun demanding payment in specie, the abundant silver in America did not hold the same weight, so to speak, it had previously. Now, reflect on this for a second. The USA was depending on loans from a country that they had successfully revolted and seceded from fewer than 50 years earlier. Britain had also provoked The War of 1812 just 25 years earlier when they wouldn’t stop attacking American ships. But somehow it still seemed like a good idea to depend on British banks to form the foundation of American development. So at the same time when American banks had to backstep their risky practices, Britain also just so happened to need 25% less cotton, which was the foundation of the American economy. This only exacerbated the trade deficit.

But still, despite whether or not Britain’s actions were nefarious, the whole situation would have been remarkably cushioned if fractional reserve banking had not been used. Because of this “easy money,” land was bought at enormous rates on credit, but credit that was not backed by actual value–only 1/5 of the actual value existed of what was being lent! President Andrew Jackson was not entirely without blame either. When he deconstructed the federal bank, he deposited the money into state banks, and encouraged them to go ahead and lend, lend, lend! Of course, when the time came for the banks to return the deposits, the money was gone. So when this massive real estate bubble burst in 1837, it caused a panic and ensuing recession that lasted until 1844. Does any of this sound familiar to you?

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The moment the ECB is allowed to buy Greek bonds again is also the moment it decides to quit its bond-buying program.

Italy Financial Regulator Threatens EU with Return to “National Currency” (DQ)

Despite trillions of euros worth of QE, Italy has continued to suffer a 30% loss in competitiveness compared to Germany during the last two decades. And now Italy must begin to prepare itself for the biggest nightmare of all: the gradual tightening of the ECB’s monetary policy. “Inflation is gradually returning to the area of the 2% target, while in the United States a monetary tightening is taking place,” Vegas said. The German government is exerting mounting pressure on the ECB to begin tapering QE before elections in September. So, too, is the Netherlands whose parliament today treated ECB President Mario Draghi to a rare grilling. The MPs ended the session by presenting Draghi with a departing gift of a solar-powered tulip, to remind him of the country’s infamous mid-17th century asset price bubble and financial crisis.

For the moment Draghi and his ECB cohorts refuse to yield, but with the ECB’s balance sheet just hitting 38.7% of Eurozone GDP, 15 %age points higher than the Fed’s, they may ultimately have little choice in the matter. As Vegas points out, for Italy (and countries like it), that will mean having to face a whole new situation, “in which it will no longer be possible to count on the external support of monetary leverage.” This is likely to be a major problem for a country that has grown so dependent on that external support. According to the Bank for International Settlements, in 2016, international banks in particular those in Germany reduced their exposure to Italy by 15%, or over $100 billion, half of it in the last quarter of the year. ECB intervention helped plug the shortfall, at least for a while.

But the ECB has already reduced its monthly purchases of European sovereign debt instruments, from €80 billion to just over €60 billion. As the appetite for Italian government debt falls, the yields on Italian bonds will rise. The only market participants seemingly still willing and able (for now) to increase their purchase of Italian debt are Italian banks. In his address, Vegas proposed introducing a safeguard threshold of €100,000 for the banks’ bondholders, many of whom are ordinary Italian citizens, with combined holdings worth some €200 billion, who were told by the banks that their bonds were a secure investment. Not any more. “The management of crises may require timely intervention that is not compatible with the mechanisms in Frankfurt and Brussels,” Vegas added.

To get his point across, he issued a barely veiled threat in Frankfurt and Brussels’ direction — that of Italy’s exit from the Eurozone, a prospect that should not be altogether discounted given the recent growth of anti-euro sentiment and rising political instability in Italy. So he threatened: “Merely the announcement of a return to a national currency would provoke an immediate outflow of capital that would seriously jeopardize Italy’s ability to refinance the world’s third biggest public debt.”

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In other words: any positive numbers you may read about Greek GDP are false.

Greek Capital Controls To Stay Till At Least End Of 2018 (K.)

Greece will spend at least three-and-a-half years under the restrictions of capital controls as their abolition is not expected to come any earlier than the end of 2018, according to a competent credit sector source. The next step in terms of their easing will come after the completion of the bailout review and the disbursement of the funding tranche, provided banks see some recovery in deposits. Sources say that the planning provides primarily for helping enterprises by increasing the limit on international transactions concerning product imports or the acquisition of raw materials. Almost two years after the capital controls were imposed, by next Tuesday, according to the agreement with the creditors, the Bank of Greece and the Finance Ministry have to present a road map for the easing of restrictions.

The road map is already being prepared and according to sources it will not contain any dates for the easing of controls but rather will record the conditions necessary for each step to come. Kathimerini understands that the conditions will be the following: the return of deposits, the reduction of nonperforming loans, the state’s access to money markets, the country’s inclusion in the ECB’s QE program, and the settlement of the national debt. “Ideally, by end-2018 we will be able to speak of an end to the controls. In any case, the restrictions on deposits will be the last to be lifted,” notes a senior banking source, referring to the cash withdrawal limit that currently stands at €840 per 14 days. The Hellenic Bank Association’s Executive Committee will meet on Wednesday to discuss proposals for the gradual easing of restrictions.

The bankers’ proposals will constitute an updated version of those tabled in November 2016; they will likely include the introduction of a monthly limit of 2,000 euros for cash withdrawals and an increase in the withdrawal limit for funds originating from abroad from 30% to 60%. The drop in deposits over the first quarter of the year will make it harder for such proposals to be implemented for the time being.

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Saving the healthcare system from Troika-induced collapse is a good idea. Not sure this is the way.

Greek PM Tsipras Heralds ‘Landmark’ Plan For Healthcare (K.)

Speaking of an “institutional intervention of landmark significance,” Prime Minister Alexis Tsipras heralded on Wednesday the creation of a new primary healthcare system to be based on local health centers staffed with general practitioners. The aim is to set up 239 such centers by the end of the year, employing 3,000 family doctors and nursing staff, Tsipras said in a speech at a health center in Thessaloniki. The first 60 of those centers are to start operating by the summer, the premier said, noting that poorer areas will be prioritized. “If you were to ask me what I want to be left behind after the years of governance by SYRIZA and ANEL,” he said, referring to junior coalition partner Independent Greeks, “I would say a very essential landmark health sector reform with the creation of primary healthcare.”

Tsipras also took the opportunity to lash out at the political opposition, accusing previous governments of having a plan for “the passive privatization of the health sector.” As for the national federation of Greek hospital workers (POEDIN), which has railed against the current government for cutbacks in the health sector, Tsipras hit back, calling it “a trade union that has secured privileges.” The prime minister added that his government remained determined to fight corruption in the health sector, referring to alleged scandals embroiling the Hellenic Center for Disease Control and Prevention (KEELPNO) and the Swiss pharmaceuticals firm Novartis. “Everything will come to light,” he said.

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Erdogan’s at the White House today, or is that tomorrow?!

Turkish Coast Guard Publishes Maps Claiming Half Of The Aegean Sea (KTG)

The Turkish Coast Guard published alleged official maps and documents claiming half of the Aegean Sea belong to Turkey. In this sense, Ankara claims to won dozens of Greek islands, the entire eastern Aegean from the island of Samothraki in the North to Kastelorizo in the South. The maps and claims have been uploaded on the website of the Turkish Coast Guard in the context of a 60-page report about the activities of the TCG in 2016. On page 7 and 13 of the report, the maps allegedly show Turkey’s Search And Rescue responsibility area. The maps show half of the Aegean Sea and also a very good part of the Black Sea, where Turkey’s SAR area coincides with the Turkish Exclusive Economic Zone (EEZ). Turkey did not signed the convention in order to not be obliged to recognize the Greek EEZ.

The United Nations Convention on the Law of the Sea (UNCLOS), also called the Law of the Sea Convention or the Law of the Sea treaty, is the international agreement that resulted from the third United Nations Conference on the Law of the Sea (UNCLOS III), which took place between 1973 and 1982. The Law of the Sea Convention defines the rights and responsibilities of nations with respect to their use of the world’s oceans, establishing guidelines for businesses, the environment, and the management of marine natural resources. The most significant issues covered were setting limits, navigation, archipelagic status and transit regimes, exclusive economic zones (EEZs), continental shelf jurisdiction, deep seabed mining, the exploitation regime, protection of the marine environment, scientific research, and settlement of disputes. Turkey started to claim areas in the Aegean Sea after 1997 when a Turkish ship sank near the Greek islet of Imia and Ankara sent SAR vessels.

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Sea Watch seems to go a bit far.

Libya Intercepts Almost 500 Migrants After Sea Duel (AFP)

Libya’s coastguard on Wednesday intercepted a wooden boat packed with almost 500 migrants after duelling with a German rescue ship and coming under fire from traffickers, the navy said. The migrants, who were bound for Italy, were picked up off the western city of Sabratha, said navy spokesman Ayoub Qassem. The German non-governmental organisation “Sea-Watch tried to disrupt the coastguard operation… inside Libyan waters and wanted to take the migrants, on the pretext that Libya wasn’t safe,” Qassem told AFP. Sea-Watch posted a video on Twitter of what it said was a Libyan coastguard vessel narrowly cutting across the bow of its ship.

“This EU-funded Libyan patrol vessel almost crashed (into) our civil rescue ship,” read the caption. Qassem also said the coastguard had come under fire from people traffickers, without reporting any casualties. The 493 migrants included 277 from Morocco and many from Bangladesh, said Qassem, and 20 women and a child were aboard the boat. All were taken to a naval base in Tripoli. There were also migrants from Syria, Tunisia, Egypt, Sudan, Pakistan, Chad, Mali and Nigeria, he added. According to international organisations, between 800,000 and one million people, mostly from sub-Saharan Africa, are currently in Libya hoping to make the perilous Mediterranean crossing to Europe.

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No insects, no bats, no birds, etc etc.

Where Have All The Insects Gone? (Sciencemag )

Entomologists call it the windshield phenomenon. “If you talk to people, they have a gut feeling. They remember how insects used to smash on your windscreen,” says Wolfgang Wägele, director of the Leibniz Institute for Animal Biodiversity in Bonn, Germany. Today, drivers spend less time scraping and scrubbing. “I’m a very data-driven person,” says Scott Black, executive director of the Xerces Society for Invertebrate Conservation in Portland, Oregon. “But it is a visceral reaction when you realize you don’t see that mess anymore.” Some people argue that cars today are more aerodynamic and therefore less deadly to insects. But Black says his pride and joy as a teenager in Nebraska was his 1969 Ford Mustang Mach 1—with some pretty sleek lines. “I used to have to wash my car all the time. It was always covered with insects.”

Lately, Martin Sorg, an entomologist here, has seen the opposite: “I drive a Land Rover, with the aerodynamics of a refrigerator, and these days it stays clean.” Though observations about splattered bugs aren’t scientific, few reliable data exist on the fate of important insect species. Scientists have tracked alarming declines in domesticated honey bees, monarch butterflies, and lightning bugs. But few have paid attention to the moths, hover flies, beetles, and countless other insects that buzz and flitter through the warm months. “We have a pretty good track record of ignoring most noncharismatic species,” which most insects are, says Joe Nocera, an ecologist at the University of New Brunswick in Canada. Of the scant records that do exist, many come from amateur naturalists, whether butterfly collectors or bird watchers.

Now, a new set of long-term data is coming to light, this time from a dedicated group of mostly amateur entomologists who have tracked insect abundance at more than 100 nature reserves in western Europe since the 1980s. Over that time the group, the Krefeld Entomological Society, has seen the yearly insect catches fluctuate, as expected. But in 2013 they spotted something alarming. When they returned to one of their earliest trapping sites from 1989, the total mass of their catch had fallen by nearly 80%. Perhaps it was a particularly bad year, they thought, so they set up the traps again in 2014. The numbers were just as low. Through more direct comparisons, the group—which had preserved thousands of samples over 3 decades—found dramatic declines across more than a dozen other sites.

Such losses reverberate up the food chain. “If you’re an insect-eating bird living in that area, four-fifths of your food is gone in the last quarter-century, which is staggering,” says Dave Goulson, an ecologist at the University of Sussex in the United Kingdom, who is working with the Krefeld group to analyze and publish some of the data. “One almost hopes that it’s not representative—that it’s some strange artifact.”

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Feb 092016
 
 February 9, 2016  Posted by at 9:53 am Finance Tagged with: , , , , , , , , , ,  10 Responses »
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Arthur Rothstein Going to church to pray for rain., Grassy Butte, North Dakota Jul 1936

‘Panic Situation’ As Asia Stocks Tumble Amid Fears Of New Global Recession (G.)
Global Bond Rally Near ‘Panic’ Level With Japan Yield Below Zero (BBG)
Japan’s 10-Year Yield Falls Below Zero for the First Time (BBG)
US Bank Stocks And Bonds Clobbered By Recession Worry (Reuters)
Investors Dump Stocks, Seek Safe Havens As Bank Fears Flare (Reuters)
Banks Bonds Are “The Epicenter Of Growth Concerns Globally” (BBG)
Goldman Sachs Sees Near-Zero Risk Of UK Recession Despite Market Tantrum (AEP)
Chesapeake Energy Plunges On Bankruptcy Fears (Forbes)
150 Oil And Gas Companies “At Risk Of Bankruptcy” As Prices Fall (BBG)
US Oil Industry Woes Grow As Storage Levels Hit ‘Critical Level’ (MW)
Jim Rogers: “The Market Knows It’s Over” (SHTF)
Can Hobbit Tourism Save New Zealand’s Troubled Dairy Farmers? (BBG)
Turkey’s Erdogan Threatened To Flood Europe With Migrants (Reuters)
35 Refugees Die Off Turkish Coast (Guardian)

Panic.

‘Panic Situation’ As Asia Stocks Tumble Amid Fears Of New Global Recession (G.)

Japan’s Nikkei index plummeted more than 950 points on Tuesday, its biggest intraday loss since May 2013, and the yen briefly soared to a 14-month high against the US dollar, as continued fears over the health of the global economy saw a continuation of the previous day’s selloff in Europe and the US. The Nikkei dived 5.1% to 16,132.25 in morning trading and extended losses into the afternoon, while Australia’s S&P/ASX 200 fell 2.6% to 4,946.70. Markets were also down in the Philippines, Indonesia, Thailand and New Zealand. The MSCI’s index of Asia-Pacific shares outside Japan fell 1% and might have fallen further had several Asian markets not been closed.

Markets in China, Hong Kong, Taiwan and South Korea were closed for Lunar New Year holidays. Most markets in the region will re-open from Wednesday, with Chinese markets returning next week. The volatility affecting global markets last month appears set to continue amid concern about Chinese economic growth, falling oil prices and speculation that the US federal reserve could change course with interest rates. “The combination of concerns that the United States could be heading toward a recession and the global stock sell-off is curbing risk appetite and is sending investors to the safe-haven yen,” Takuya Takahashi at Daiwa Securities told Kyodo News.

After hovering around the 117-yen line on Monday, the Japanese currency briefly rose to the upper 114 zone to its strongest level against the dollar since November 2014. Investors regard the yen as a “save haven” currency when global markets are hit by the kind of turmoil witnessed in recent weeks. The yen is expected to make further gains – a trend that eats into the repatriated profits of Japanese auto and other exporters. Three-month dollar/yen implied volatility – which indicates how much currency movement is expected in the months ahead – reached 12.137% its highest since September 2013. Responding to the yen’s rise, Japan’s finance minister, Taro Aso, told reporters: “It is clear that recent moves in the market have been rough. We will continue to carefully monitor developments in the currency market.”

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And more panic.

Global Bond Rally Near ‘Panic’ Level With Japan Yield Below Zero (BBG)

Sovereign bonds surged, sending the Japanese benchmark 10-year yield below zero for the first time, as investors seeking the safest assets gorged on government debt. Treasury yields dropped to a one-year low in the rush to refuge from a worldwide stock rout. Traders pared the odds the Federal Reserve will raise interest rates this year to 30%, before Chair Janet Yellen begins her two-day testimony to Congress on Wednesday. The yield on the Bank of America Merrill Lynch World Sovereign Bond Index tumbled to 1.29%, the least in data that go back to 2005. “It’s almost like a panic,” said Hideo Shimomura, the chief fund investor in Tokyo at Mitsubishi UFJ Kokusai Asset Management. “The flight to quality is exaggerated.”

The benchmark 10-year Treasury yield tumbled six basis points to 1.69% as of 2:31 p.m. in Tokyo, according to Bloomberg Bond Trader data. The price of the 2.25% security due in November 2025 rose 17/32, or $5.31 per $1,000 face amount, to 105. Japan’s 10-year yield fell to minus 0.01%, an unprecedented low for such a maturity in a Group-of-Seven economy. Australia’s dropped to 2.38%, a level not seen since April. Investors rushed to bonds as the MSCI Asia Pacific Index of stocks slid 2.8% and Japan’s Topix Index plunged 5.7%. “It’s hard to find a reason to short Treasuries,” said Tomohisa Fujiki at BNP Paribas in Tokyo, referring to bets that a security will fall. Turmoil “is now affecting equity markets in developed countries as well — and commodities and emerging markets have not stabilized yet.” BNP is one of the 22 primary dealers that underwrite the U.S. debt.

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BoJ buys them all anyway.

Japan’s 10-Year Yield Falls Below Zero for the First Time (BBG)

The yield on Japan’s benchmark 10-year government bonds fell below zero for the first time, an unprecedented level for a Group-of-Seven economy, as global financial turmoil and the Bank of Japan’s adoption of negative interest rates drive demand for the notes. The 10-year yield has tumbled from 0.22% before the BOJ surprised markets with the decision on Jan. 29 to introduce a minus 0.1% rate on some of the reserves financial institutions park at the central bank. It fell 7 1/2 basis points to a record minus 0.035% as of 3:05 p.m. in Tokyo. Japanese bonds are also climbing as sovereign securities rally worldwide. Global stocks have dropped 10% this year on concern growth is slowing in China, and as slumping oil prices undermine policy makers efforts to revive inflation.

About 29% of the outstanding debt in the Bloomberg Global Sovereign Bond index was yielding less than zero as of 5 p.m. in New York on Monday. Swiss 3% notes due in 2018 were offering the lowest yield in the index, according to data compiled by Bloomberg. “It was just a matter of time before 10-year yields went negative, so it wasn’t a surprise,” said Yusuke Ikawa at UBS. Five-year yields dropped seven basis points to minus 0.25%, while two-year yields slid five basis points to minus 0.245%. Both were record lows. A basis point is 0.01 percentage point. The expected price volatility for Japanese debt over a 60-day period soared to 3.13% on Monday, the highest level since June, according to data compiled by Bloomberg.

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Banks across the globe are under fire.

US Bank Stocks And Bonds Clobbered By Recession Worry (Reuters)

U.S. bank stocks and bonds took a pounding on Monday as recession fears compounded concern about their exposure to the energy sector and expectations that global interest rates are unlikely to rise quickly. The S&P 500 financial index, already the worst performing sector this year, fell 2.6% and now stands more than 20% from its July 2015 high, confirming the sector is in the grip of a bear market. Shares of Morgan Stanley slid 6.9% in their largest one-day drop since November 2012, while rival Goldman Sachs fell 4.6%. Both stocks closed at their lowest since the spring of 2013. Meanwhile, bonds issued by U.S. banks extended their decline, with the yield premium demanded by investors to hold these securities, rather than safer U.S. Treasury debt, climbing to the highest in three-and-a-half years, according to BofA Fixed Income Index data.

“Investors’ attitudes seem to be worsening relative to the likelihood of a global recession. I think that’s what financials are reflecting – that their net interest margins are going to be further compressed under collapsing (sovereign) bond yields,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia. Yields on sovereign bonds from so-called safe-haven issuers such as the United States, Germany and Japan have tumbled recently as investors increasingly doubt central banks in these countries will be able to raise interest rates any time soon. The U.S. Federal Reserve late last year pulled off its first rate increase in nearly a decade, but interest rate futures markets now assign just a 1-in-4 chance of another one this year. And the Bank of Japan last month cut rates into negative territory for some bank reserves.

Monday’s drop in U.S. bank stocks follows concern over stress in the financial sector in Europe, where the cost of insuring the European financial sector’s senior debt against default climbed to its highest level since late 2013. Credit default swaps on several U.S. banks have followed suit. The cost for a five-year CDS contract on Morgan Stanley debt, for instance, has rocketed by more than 27% since last Thursday and now stands at its highest since October 2013, data from Markit shows. Citigroup’s CDS, likewise, is at the highest since June 2013.

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“Japanese Finance Minister Taro Aso felt moved enough to warn the yen’s rise was “rough”..”

Investors Dump Stocks, Seek Safe Havens As Bank Fears Flare (Reuters)

Asian share markets were scorched on Tuesday as stability concerns put a torch to European bank stocks and sent investors stampeding to only the safest of safe-haven assets. As fear overwhelmed greed, yields on longer-term Japanese bonds fell below zero for the first time, the yen surged to a 15-month peak and gold reached its most precious since June. Japanese Finance Minister Taro Aso felt moved enough to warn the yen’s rise was “rough”, something of an understatement as the Nikkei nosedived 5.4%. MSCI’s broadest index of Asia-Pacific shares outside Japan fell 1.2%, with Australian shares hitting 2-1/2-year closing low, and would have been lower if not for holidays in many centres.

Spread-betters see another weak session in European shares, where German DAX is seen falling 0.7% and Britain’s FTSE 0.5%. S&P 500 e-mini futures fell more than 1% at one point. “Sentiment towards risk assets remained extremely bearish and price action reflected a market that may be capitulating,” said Jo Masters, a senior economist at ANZ. All of which magnified the stakes for U.S. Federal Reserve Chair Janet Yellen’s testimony this week. “She needs to come across as optimistic without being too hawkish and cautious without being negative,” said Masters. “Hawkishness or dovishness could easily exacerbate the current sell-off, tightening financial conditions further.”

Wall Street pared losses but still ended deep in the red. The Dow lost 1.1%, while the S&P 500 fell 1.42% and the Nasdaq 1.82%. The rout began in Europe on Monday, when the FTSEurofirst 300 index shed 3.4% to its lowest since late 2013, led by a near 6% dive in the banking sector. Deutsche Bank alone sank 9.5% as concerns mounted about its ability to maintain bond payments. Late Monday, the German bank said it has “sufficient” reserves to make due payments this year on AT1 securities. The cost of insuring bank debt against default also climbed to its highest since late 2013. Borrowing costs in Spain, Portugal and Italy jumped as investors demanded a fatter risk premium over safer German paper, where two-year yields hit record lows at minus 52 basis points.

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“..additional Tier 1 bonds..” Sounds solid?!

Banks Bonds Are “The Epicenter Of Growth Concerns Globally” (BBG)

Last year’s sure thing in credit markets is quickly becoming this year’s nightmare for bond investors. The riskiest European bank debt generated returns of about 8% last year, according to BofAML index data, beating every type of credit investment globally. In less than six weeks this year, those gains have been all but wiped out, even after interest payments. Investors are increasingly concerned that weak earnings and a global market rout will make it harder for banks to pay the interest on at least some of these securities, or to buy them back as soon as investors had hoped. The bonds allow banks to skip interest payments without defaulting, and they turn into equity in times of stress. Deutsche Bank may struggle to pay the interest on these securities next year, a report from independent research firm CreditSights earlier on Monday said. The bank took the unusual step of saying that it has enough capacity to pay coupons for the next two years.

“The worries about these bonds represent real fears that the European banking system may be weaker and more vulnerable to slowing growth than a lot of people originally thought,” said Gary Herbert at Brandywine Global Investment Management. “It’s the epicenter of growth concerns globally. And it doesn’t look pretty,” he added. Money managers’ concerns are spreading even to safer bank bonds, underscoring how investors are running away from risk across a broad range of assets now, from stocks to commodities to corporate bonds. The cost of protecting against defaults on safer U.S. and European financial debt known as senior unsecured notes has jumped to the highest level since 2013. European banks are looking less solid since their last earnings reports.

Deutsche Bank for example last month posted its first full-year loss since 2008, and its shares have plunged. Credit Suisse’s shares plunged to their lowest level since 1991 after the Swiss bank posted its biggest quarterly loss since the crisis. Banks have issued about €91 billion of the riskiest notes, called additional Tier 1 bonds, since April 2013. The problem is the securities are untested and if a troubled bank fails to redeem them at the first opportunity or halts coupon payments investors may jump ship, sparking a wider selloff in corporate credit markets. “It’s the first thing that gets cut from portfolios,” said David Butler, a portfolio manager at Rogge Global Partners, which oversees about $35 billion of assets. “When the wider credit market turns, it leaves investors exposed.”

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Feel better now? “For those “brave enough to defy Mr Market’s gloomy prognosis”, this may be an ideal time to jump back into the stock market, said Mr Hatzius.”

Goldman Sachs Sees Near-Zero Risk Of UK Recession Despite Market Tantrum (AEP)

Britain is extremely unlikely to face an economic recession over the next two years and is on safer ground than any other major country in the developed world, according to a new crisis-study by Goldman Sachs. The US investment bank said the global stock market rout and the credit tremors this year are sending off false signals, insisting that underlying indicators of economic health show little sign of a sudden rupture in Europe, the US or across the OECD bloc of rich states. An array of “alarm” indicators – based on the experience of 20 countries since 1970 – suggest that the current business cycle is still in full swing and far from exhaustion, even if risks have been ratcheting up over recent months. Credit ratios are high but they have not been spiking higher in most OECD states, and there is still plenty of slack left in the economy.

This allows central banks to take their time before having to slam on the brakes – the time-honoured cause of recessions. Jan Hatzius, Goldman’s chief US economist, cited a string of episodes where markets were gripped by fear and emotion yet the storm passed without doing much damage. These included the 1987 stock market crash, the 1994 bond rout, Mexico’s Tequila crisis, the failure of the giant hedge fund Long-Term Capital Management and the Asian crisis in 1998, the corporate credit squeeze from 2002-2003 at the onset of the Iraq War and the eurozone sovereign debt crisis. “In each case, at least some financial markets were priced for significant recession risk, if not an outright slump,” he said. Yet Goldman cautioned that it would be a “grave error” to ignore the latest market tantrum altogether.

The US Federal Reserve was able to slash interest rates and flush the international financial system with liquidity to weather the 1987 and 1998 storms, something that would be much harder to pull off today. Mounting worry over China – and its linkages through the commodity nexus – has put everybody’s nerves on edge this time. “Financial markets now signal a high probability of another recession. High-yield spreads are at levels almost never seen outside of recessions,” said Mr Hatzius. “The message from the equity market is less clear-cut, but there are only a few non-recessionary instances over the past three decades in which the S&P 500 (index of US equities) performed as poorly as it did over the past year,” he said. That said, Britain appears rock-solid under the Goldman Sachs model with a mere 3pc risk of losing its footing over the next eight quarters, followed by Sweden, Denmark and South Korea.

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“Basically they’re maxxing out their credit cards before the banks can cut them off.”

Chesapeake Energy Plunges On Bankruptcy Fears (Forbes)

Shares in Chesapeake Energy were halted in mid-morning trading after selling off more than 50% to new lows on a report from Debtwire that the company had hired restructuring specialists Kirkland & Ellis . Seeking to stem the panic, Chesapeake issued a statement saying it “has no plans to pursue bankruptcy” and that Kirkland & Ellis had been one the company’s law firms since 2010. Chesapeake also reportedly hired restructuring specialists Evercore Partners back in December. After trading resumed, shares recovered some of their ground, jumping from $1.50 to $2.25, though still off 27% on the day so far. At these levels, all of Chesapeake’s equity could be had for $1.4 billion. Shares traded above $30 in 2014, and north of $60 in 2008, when natural gas prices hit record highs.

Naturally, holders of Chesapeake debt are shooting first and asking questions later. Its nearest-term bond matures March 15; it traded as high as 95 cents on the dollar late last week, but plunged this morning to 73.75 cents. After the announcement the bonds recovered above 80 cents, according to FINRA data. Investors are concerned that Chesapeake will be unwilling or unable to roll the debt. According to a report this morning from Troubled Company Reporter, some of Chesapeake’s longer dated issues are trading below 30 cents. Chesapeake has been looking for options to improve liquidity. Late last year amended its $4 billion bank revolver, changing it from an unsecured line to secured. It also did a distressed-debt-exchange offer, taking in $3.8 billion in notes in exchange for $2.4 billion in second-lien debt. It recently canceled dividend payments on its preferred stock.

A big problem for Chesapeake and many other exploration and production companies: their oil and gas hedges are rolling off, meaning that the little protection they used to have against low commodity prices is evaporating. As billionaire natural gas trader John Arnold tweeted this morning: “The wave of E&P bankruptcies starts now. CHK alone has nearly $1 billion less in hedging gains in ’16 than ’15 at today’s prices.” I talked to a well-placed banker over the weekend who says restructuring advisors at shops like Lazard and Kirkland & Ellis had been advising his clients to begin drawing down any cash remaining on their bank revolvers in order to maximize liquidity to get them through the next few months. Basically they’re maxxing out their credit cards before the banks can cut them off. That’s exactly what Linn Energy said last week that it had done; with more than $4 billion in credit facilities maxxed. Shares in LINE fell 50% on Friday and are off another 24% today. Linn’s debt is trading below 20 cents.

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“We need to close that gap. And the way that that will happen is the rest of those bankruptcies will go forward.”

150 Oil And Gas Companies “At Risk Of Bankruptcy” As Prices Fall (BBG)

About 150 oil and gas companies tracked by energy consultant IHS Inc. may go bust as a supply glut pressures prices and punishes revenues. The number of companies at risk is more than twice the 60 producers that have already filed for bankruptcy, Bob Fryklund, chief upstream analyst at IHS, said in an interview. A further shake out would help stimulate deals that have been on hold because buyers and sellers have disagreed on asset values, he said. Oil has collapsed about 70% over the past two years as U.S. shale producers boosted output and OPEC flooded the market with crude to drive out higher-cost suppliers. More bankruptcies would be one signal that energy prices have reached a bottom and would help kick off deals for the $230 billion worth of oil and gas assets currently up for sale, according to Fryklund.

“Nobody is buying because there is a mismatch between expectations,” Fryklund said in an interview in Tokyo. “We need to close that gap. And the way that that will happen is the rest of those bankruptcies will go forward.” Companies that plan to make investments are likely to wait for prices to gain for six months because they want to be confident in a recovery, according to Fryklund. “It usually happens as we begin to come back up on price,” he said. “There is always a little lag on timing.” The global oil surplus that fueled crude’s decline to a 12-year low will shift to a deficit as output falls and a new bull market begins before the year is out, Goldman Sachs said in January.

U.S. production will drop by 620,000 barrels a day, or about 7%, from the first quarter to the fourth, according to the Energy Information Administration. Low prices are also spurring greater efficiency, according to IHS. Operating costs on a per barrel basis declined about 35% last year in North America and have dropped about 20% globally, according to the consultant. Crude output from North Dakota rose through most of last year and some producers in the Permian Basin in western Texas can break-even drilling oil at $35 a barrel, he said.

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88% full is about as full as it can get. Tanks at Cushing are used for blending too. Can’t do that if they get even fuller.

US Oil Industry Woes Grow As Storage Levels Hit ‘Critical Level’ (MW)

The storage tanks at Cushing, Okla., the delivery point for the New York Mercantile Exchange crude contract, are edging closer to their limits, raising a new set of problems for an industry that has already suffered from a 70% drop in prices in the past year and a half. Cushing, which represents about 13% of the nation’s oil storage, has a working capacity of about 73.014 million barrels of crude oil, according to data from Sept. 2015, the latest available from the EIA. As of the week ended Jan. 29, there was 64.174 million barrels of oil in storage at Cushing, so it is at about 88% full. “Where inventories count the most—at the Nymex terminal complex in Cushing, Oklahoma—storage is already at a critical level,” said Stephen Schork, in The Schork Report published Monday.

“Approximately 6 out of 7 barrels available storage capacity at the Nymex hub are now full.” The report highlighted an article from Reuters that discussed delays in crude deliveries from storage tanks at Cushing because there wasn’t enough room to drain existing tanks to blend oil to meet West Texas Intermediate crude specifications. Cushing serves as a blending station, where crude oil from the midcontinent is mixed to the specific grades required by different refineries, according to StateImpact Oklahoma. “We soon might be in a situation that we have so much oil, that we don’t have enough of the right kind of oil,” Schork said.

But that’s not the only problem. Richard Hastings, macro strategist at Seaport Global Securities, said building more tanks would take time and there would be questions over how the cost of tanks would be shared across the supply chain. Meanwhile, the market is dealing with a “constant high volume” of crude oil coming from the floating storage at the Gulf Coast, the Canadian crudes coming by rail to the U.S. and domestic production, said Hastings. “If the volumes get too high, then the intermediate delivery steps—moving large volumes from tanks to pipelines—could be difficult if the local hub’s pipeline capacity is constrained,” he said.

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“..no matter how much P.R. or whitewashing they use, the market knows this is over and we’re not going to play this game anymore.”

Jim Rogers: “The Market Knows It’s Over” (SHTF)

Back in the 1970’s as recession gripped the world for a decade, stocks stagnated and commodities crashed, investor Jim Rogers made a fortune. His understanding of markets, capital flows and timing is legendary. As crisis struck in late 2008, he did it again, often recommending gold and silver to those looking for wealth preservation strategies – move that would have paid of multi-fold when precious metals hit all time highs in 2011. He warned that the crash would lead to massive job losses, dependence on government bailouts, and unprecedented central bank printing on a global scale. Now, Rogers says that investors around the world are realizing that the jig is up. Stocks are over bloated and central banks will have little choice but to take action again. But this time, says Rogers in his latest interview with CrushTheStreet.com, there will be no stopping it and people all over the world are going to feel the pain, including in China and the United States.

We’re all going to suffer… I can think of very few places that won’t suffer. But most people are going to suffer the next time around. Central banks will panic. They will do whatever they can to save the markets. It’s artificial… it won’t work… there comes a time when no matter how much money you have, the market has more money. [..] I don’t know if they’ll even call it QE (Quantitative Easing) in the future… who knows what they’ll call it to disguise it… they’re going to try whatever they can… printing more money or lowering interest rates or buying more assets… but unfortunately, no matter how much P.R. or whitewashing they use, the market knows this is over and we’re not going to play this game anymore.

The entire world is about to get hammered and the average person on the street is the one who will pay the price, as is usually the case. We can expect more losses in markets, more losses in jobs and more losses to freedom as governments and central banks point the finger at everyone but themselves.

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If that’s your sole alternative…

Can Hobbit Tourism Save New Zealand’s Troubled Dairy Farmers? (BBG)

New Zealand farmer Ian Diprose used to count on the dairy industry for most of his income. Today, he relies on tourism. As plunging milk prices push dairy farms into the red and hurt rural businesses, Diprose and wife Joy are making more money accommodating tourists than other farmers’ cows. That’s because their grazing property in Waikato, New Zealand’s dairying heartland, is about 16 kilometers (10 miles) from Hobbiton, a life-sized imitation of Bilbo Baggins’ Shire created for Peter Jackson’s Lord of the Rings and Hobbit movies. “A lot of the people who come through here are Hobbiton-crazy,” said Diprose, 73, whose De Preaux Lodge in Matamata offers bed, breakfast, a home-cooked meal and an authentic New Zealand farm experience for NZ$175 ($120) a night. “In our little town, we have something like 30 cafes or places to eat because of the tourists coming through.”

The Diproses started offering accommodation five years ago as a hobby to augment income from agisting cattle. Today, it’s their main business. Four out of five dairy farmers in New Zealand, the world’s biggest dairy exporter, will operate at a loss this season as the global slump in milk prices enters its third year, according to the central bank. That’s curbing farmers’ spending and damping economic growth, even as a tourism boom helps to soften the blow. “I’ve reduced my grazing prices to one of my customers quite drastically because she’s a young farmer and I know she’s struggling,” said Diprose, who has two sons dairying. “The impact it’s having on them is crippling. The financial situation of the dairy farmers, I weigh that up every day in my heart.” As farmers tighten their belts, demand for fertilizer to veterinary services has fallen, and retailers in rural towns are feeling the pinch.

At Giltrap AgriZone, which sells hay balers and tractors at three outlets around Waikato, sales are down 30% from a year ago, said Managing Director Andrew Giltrap. “We’re on a roller coaster and we just have to ride it out,” he said. New Zealand, once known as the country with 10 times more sheep than people, has stepped up investment in dairy farming in the past decade. The nation now boasts 5 million cows, more than its 4.5 million human population, while sheep numbers have declined 26% since 2006 to 29.5 million. The strategy made sense when milk prices surged to a record in 2007 and neared that peak again in 2013. Since then, a global oversupply and waning demand for milk powder from a slumping China have seen prices crash. With plunging oil prices now sapping milk purchases by Russia and other energy-producing nations, dairy prices are approaching the 12-year low they hit in August.

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But they’ll let him, want to bet? Europe’s rudderless. He has a demand or two in Syria as well.

Turkey’s Erdogan Threatened To Flood Europe With Migrants (Reuters)

Turkish President Tayyip Erdogan threatened in November to flood Europe with migrants if EU leaders did not offer him a better deal to help manage the Middle East refugee crisis, a Greek news website said on Monday. Publishing what it said were minutes of a tense meeting last November, the euro2day.gr financial news website revealed deep mutual irritation and distrust in talks between Erdogan and the EU’s two top officials, Jean-Claude Juncker and Donald Tusk. The EU officials were trying to enlist Ankara’s help in stemming an influx of Syrian refugees and migrants into Europe. Over a million arrived last year, most crossing the narrow sea gap between Turkey and islands belonging to EU member Greece.

Tusk’s European Council and Juncker’s European Commission declined to confirm or deny the authenticity of the document, and Erdogan’s office in Ankara had no immediate comment. The account of the meeting, in English, was produced in facsimile on the website. It does not state when or where the meeting took place, but it appears to have been on Nov. 16 in Antalya, Turkey, where the three met after a G20 summit there. “We can open the doors to Greece and Bulgaria anytime and we can put the refugees on buses … So how will you deal with refugees if you don’t get a deal? Kill the refugees?” Erdogan was quoted in the text as telling the EU officials. It also quoted him as demanding €6 billion over two years. When Juncker made clear only half that amount was on offer, he said Turkey didn’t need the EU’s money anyway.

The EU eventually agreed a €3 billion fund to improve conditions for refugees in Turkey, revive Ankara’s long-stalled accession talks and accelerate visa-free travel for Turks in exchange for Ankara curbing the numbers of migrants pouring into neighboring Greece. In heated exchanges, Erdogan often interrupted Juncker and Tusk, the purported minutes show, accusing the EU of deceiving Turkey and Juncker personally of being disrespectful to him.The Turkish leader was also quoted as telling Juncker, a former prime minister of tiny Luxembourg, to show more respect to the 80-million-strong Turkey. “Luxembourg is just like a little town in Turkey,” he was quoted as saying.The tense dialogue highlighted the depth of mutual suspicion at a time when the EU is banking on Turkish help to alleviate its worst migration crisis since World War Two.

The EU says the flow of people from Turkey, which hosts more than 2.5 million Syrian refugees, has not decreased in any significant way since the bloc’s joint summit with Ankara in November, when they had agreed the fund for refugees there.The report prompted a member of the European Parliament from the Greek centrist party To Potami to ask the European Commission to confirm the purported talks.”If the relevant dialogues between the EU officials and the Turkish President are true, it seems that there are aspects of the deal between Ankara and the EU which were concealed on purpose,” Miltos Kyrkos said in the question he submitted to the Commission. “We want immediately an answer on whether these revelations are true and where the Commission’s legitimacy to negotiate, using Turkey’s accession course as a trump card, is coming from,” Kyrkos said.

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Sweet Jesus.

35 Refugees Die Off Turkish Coast (Guardian)

At least 35 people have died after two boats carrying refugees sank off Turkey’s Aegean coast, according to reports. The Turkish coastguard said 24 drowned when a boat capsized in the Bay of Edremit, near the Greek island of Lesbos, while the Dogan news agency reported that the bodies of 11 people were found after a separate accident further south, near the Aegean resort of Dikili. The deaths came as Angela Merkel, the German chancellor, met the Turkish prime minister, Ahmet Davutoglu, for more talks on reducing the influx of refugees to Europe.

Turkey is central to Merkel s diplomatic efforts to reduce the flow. Germany saw an unprecedented 1.1 million asylum seekers arrive last year, many of them fleeing conflicts in Syria, Iraq and Afghanistan. In her weekly video message on Saturday, Merkel said European Union countries agree that the bloc needs to protect its external borders better, and that that is why she is seeking a solution with Turkey. She added that, if Europe wants to prevent smuggling, “we must be prepared to take in quotas of refugees legally and bear our part of the task”. “I don t think Europe can keep itself completely out of this”, Merkel said.

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Nov 042015
 
 November 4, 2015  Posted by at 10:51 am Finance Tagged with: , , , , , , , , , , ,  1 Response »
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Lesvos town hall mourns the dead Nov 4 2015

China’s Slump Might Be Much Worse Than We Thought (Bloomberg)
China Burns Much More Coal Than Reported (NY Times)
Investors Are Way More Scared of China Than of Janet Yellen (Bloomberg)
Corporate Debt in China: Above Cruising Altitude (CEW)
A 127-Year-Old US Industry Collapses Under China’s Weight (Bloomberg)
Xi Says China Needs at Least 6.5% Growth in Next Five Years (Bloomberg)
China’s Xi Says 6.5% Annual Growth Enough To Meet Goals: Xinhua (AFP)
China’s Money Exodus (Bloomberg)
Standard Chartered’s Bad Loans Reveal Cracks in Asian Economies (Bloomberg)
VW Admission Suggests Cheats Went Much Further Than Diesel Emissions (Guardian)
VW Emissions Issues Spread to Gasoline Cars (Bloomberg)
VW Says Fuel Usage Understated On Some Models; Porsche Warns (Reuters)
Hugh Hendry: “Today We Would Advise You That You Don’t Panic!” (Zero Hedge)
Hugh Hendry Says “Don’t Panic”; Paul Singer Says You May Want To (Zero Hedge)
Europe’s Biggest Banks Are Cutting 30,000 Jobs, More To Come (Bloomberg)
Wall Street/Washington Revolving Door More Dangerous Than Ever: Prins (Yahoo)
Gathering Financial Storm Just One Effect Of Corporate Power Unbound (Monbiot)
Merkel Warns Of Balkans Military Conflicts Amid Migrant Influx (AFP)
European Union States Have Relocated Just 116 Refugees Out Of 160,000 (Guardian)
Greek Coast Guard Says 5 Refugees Die In Boat Accident Tuesday Night (AP)

As I’ve said a thousand times now.

China’s Slump Might Be Much Worse Than We Thought (Bloomberg)

The unreliability of Chinese official economic data has become almost a cliche. A few years before he became China’s premier, Li Keqiang said that the country’s numbers were “man-made” and “for reference only.” If the top economic policy maker of a country says that the numbers aren’t reliable … well, you believe him. But how unreliable? [..] Economic number-fudging is a cheap way to prevent jittery investors from making a stampede for the exits. Of course, knowing this, a number of people have tried to estimate China’s true growth rate. Tom Orlik, Bloomberg’s chief Asia economist, recently rounded up a number of independent figures, and collected them in the following chart:

The numbers range from Lombard Street’s pessimistic figure of a bit more than 3% to Bloomberg Intelligence’s optimistic number of just under 7%. In other words, there is a wide band of uncertainty here. But I would like to suggest a scenario even more pessimistic than the lowest of the numbers above. After reading reports by Peking University professor Chris Balding on the state of China’s financial sector, I think there’s a possibility that China’s growth is lower even than 3%. Chinese electricity usage is growing at more like 1%. Rail freight traffic, though volatile, has suffered some dizzying drops in recent months. These are traditional proxies for heavy industry output. That they are barely growing, if at all, implies that much of Chinese industry has ground to a halt.

China bulls, of course, will argue that the country is merely in the middle of a transition from industry to services, and from wasteful power usage to greater efficiency. That is probably true. But the speed of the transition would have to be incredible to make up for the precipitate drop in industrial activity. Why would China’s service sector and energy efficiency suddenly skyrocket immediately following the bursting of a major stock bubble? One reason is government spending. A stealth stimulus is underway. But another big part of the equation is the financial sector, which has logged stunning growth in recent months despite the stock crash. Why are Chinese financial services growing? Loan growth alone will not do the trick – banks need to be paid in order to log revenue. Or do they? Chris Balding reports:

“[S]ome Chinese researchers…compared the loan payments made by firms to the amount owed to banks…[Their findings imply] that Chinese firms are paying only half the financial costs they should be paying…The amount of revenue that banks are recording from loans is nearly four times the cost firms are associating with those loans…[B]ank revenue [has been] outpacing firm financial cost growth by a factor of almost four.” In other words, the amount of loan payments Chinese banks say they are receiving is a whole lot more than the amount Chinese borrowers say they are paying. If Balding’s numbers are to be believed – and of course, they are only one glimpse into a murky financial system – a large portion of the recent growth surge of China’s financial services sector may simply be fake.

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Rounding error: “.. the new figures add about 600 million tons to China’s coal consumption in 2012 — an amount equivalent to more than 70% of the total coal used annually by the United States.”

China Burns Much More Coal Than Reported (NY Times)

China, the world’s leading emitter of greenhouse gases from coal, is burning far more annually than previously thought, according to new government data. The finding could vastly complicate the already difficult efforts to limit global warming. Even for a country of China’s size and opacity, the scale of the correction is immense. China has been consuming as much as 17% more coal each year than reported, according to the new government figures. By some initial estimates, that could translate to almost a billion more tons of carbon dioxide released into the atmosphere annually in recent years, more than all of Germany emits from fossil fuels. Officials from around the world will have to come to grips with the new figures when they gather in Paris this month to negotiate an international framework for curtailing greenhouse-gas pollution.

The data also pose a challenge for scientists who are trying to reduce China’s smog, which often bathes whole regions in acrid, unhealthy haze. The Chinese government has promised to halt the growth of its emissions of carbon dioxide, the main greenhouse pollutant from coal and other fossil fuels, by 2030. The new data suggest that the task of meeting that deadline by reducing China’s dependence on coal will be more daunting and urgent than expected, said Yang Fuqiang, a former energy official in China who now advises the Natural Resources Defense Council. “This will have a big impact, because China has been burning so much more coal than we believed,” Mr. Yang said. “It turns out that it was an even bigger emitter than we imagined.

This helps to explain why China’s air quality is so poor, and that will make it easier to get national leaders to take this seriously.” The adjusted data, which appeared recently in an energy statistics yearbook published without fanfare by China’s statistical agency, show that coal consumption has been underestimated since 2000, and particularly in recent years. The revisions were based on a census of the economy in 2013 that exposed gaps in data collection, especially from small companies and factories. Illustrating the scale of the revision, the new figures add about 600 million tons to China’s coal consumption in 2012 — an amount equivalent to more than 70% of the total coal used annually by the United States.

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“..concern over growth in China and the rest of the developing world coincided with a rise in the share of investors who think deflation is a larger risk to the markets than inflation.”

Investors Are Way More Scared of China Than of Janet Yellen (Bloomberg)

China—not the prospect of the first rate hike from the Federal Reserve in almost a decade—is what keeps investors up at night. Barclays surveyed 651 of its clients around the world to glean their biggest fears, as well as their thoughts on commodities, yields, currencies, and other questions about the market outlook. “Only 7% sees Fed normalization as the main risk for markets over the next 12 months, compared with 36% whose main worry is China,” said Guillermo Felices, head of European asset allocation. The share of investors who judged softness in China and other developing economies to be the biggest risk to markets spiked in the third quarter, the period in which Beijing unexpectedly moved to devalue the yuan. The elevation in concern over growth in China and the rest of the developing world coincided with a rise in the share of investors who think deflation is a larger risk to the markets than inflation.

China’s devaluation sparked similar moves from other nations that had pegged their currencies to the greenback. All else being equal, this process engenders a stronger U.S. dollar and weaker commodity prices, thereby exerting downward pressure on headline inflation rates. As such, investors’ reactions to the Fed’s Oct. 28 statement, which resulted in an increase in the implied odds of a December rate hike, may not fully be reflected in its results. Nonetheless, roughly 40% of those surveyed indicated that they expected the Fed to initiate its tightening phase before the year was out. A plurality of respondents think liftoff will be a negative for risk assets, though only for a short period. “Indeed, the risk of Fed policy withdrawal is at a two-year low, suggesting complacency about the threat of higher rates,” warned Felices.

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Pon Zi.

Corporate Debt in China: Above Cruising Altitude (CEW)

By far the most worrying debt in China is held by the corporate sector. Total borrowing by the nonfinancial sector shows that the total debt-to-GDP ratio has reached 240% of GDP as of the first quarter of 2015. The corporate debt-to-GDP ratio was 160% of GDP, or $16.7 trillion as of the first quarter of 2015, and total corporate liabilities up to 200% of GDP when including corporate debt securities (bonds). For some perspective, the corporate debt-to-GDP ratio in the United States is 70%, less than half that of China’s. China’s economy has seen some cyclical scares this year (think stock market and currency), but high corporate debt is a structural issue, potentially leading to a period of slower expansion of credit in an effort to reduce the debt-to-GDP ratio weighing on rapid growth.

Corporate debt has risen faster than expected. As noted in an earlier blog post, in 2013, Standard & Poor’s predicted that China’s corporate debt would be between 136 and 150% of GDP by 2017. This year Standard & Poor’s said China’s corporate debt has already reached 160% of GDP, a figure in line with data from the Bank of International Settlements. Yu Yongding, a senior fellow at the Chinese Academy of Social Sciences (CASS), has calculated that without any fundamental change in the current situation, the corporate debt-to-GDP ratio will reach 200% by 2020. Increased borrowing by state-owned enterprises (SOEs) has contributed significantly to this rise, and SOEs account for around half of all the corporate debt in China. But problematically, SOEs have a much lower return on assets than private firms, as low as one-third.

Which begs the question: If a large SOE is unable to pay its interest payments, what will the government do? Will it take control of the debt, and will the debt therefore be counted as government rather than corporate debt? This would do nothing to the overall credit-to-GDP ratio but may cause moral hazard. Besides corporate debt from bank loans, China has seen dramatic growth of the corporate bond market. Overall this growth is seen as a positive move, as it means the firms are either refinancing old loans with bonds at lower yields or simply expanding their balance sheets using the bond market rather than bank loans. Also helpful is that the majority of corporate bonds in China are in renminbi, protecting them from foreign exchange fluctuations. The IMF reports that total bond issuance in China in 2014 was over $600 billion.

Real estate, construction, mining, and energy production have been leading the increase in leverage. These cyclical sectors loaded up on credit after the 2008 financial crisis and have some of the most highly leveraged firms in China. The rise in corporate debt in China is one of the most pressing issues for future growth. A drop in corporate revenue could prompt a number of defaults, lowering overall economic growth and reducing revenue further—a vicious cycle. Potential headwinds include normalizing interest rates in the United States, decreasing capital efficiency, disinflation, or a property market slowdown. Moreover, banks lend about half of their loans to corporations, so a rise in corporate defaults could have broader banking implications, including liquidity concerns and nonperforming loans.

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“If prices don’t recover, the researcher predicts almost all U.S. smelting plants will close by next year..”

A 127-Year-Old US Industry Collapses Under China’s Weight (Bloomberg)

Alcoa’s latest aluminum-making cutback is signaling the end of the iconic American industry. For 127 years, the New York-based company has been churning out the lightweight metal used in everything from beverage cans to airplanes, once making it a symbol of U.S. industrial might. Now, with prices languishing near six-year lows, it’s wiping out almost a third of domestic operating capacity, Harbor Intelligence estimates. If prices don’t recover, the researcher predicts almost all U.S. smelting plants will close by next year. While that’s a big deal for the U.S. industry and the people it employs, it doesn’t mean much for global supplies. Alcoa’s decision to eliminate 503,000 metric tons of smelting capacity accounts for about 31% of the U.S. total for primary aluminum, but less than 1% of the global total, according to Harbor.

For more than a decade, output has been moving to where it’s cheaper to produce: Russia, the Middle East and China. A global glut has driven prices down by 27% in the past year, rendering American operations unprofitable and accelerating the pace of the industry’s demise. “You’ve seen a fair clip of closures in the U.S., that is just unfortunate, but a development that’s very difficult to change,” Michael Widmer at Bank of America said. “It means you’ll just have to purchase from somewhere else.” That’s exactly what Jay Armstrong, the president of Trialco is doing. The company, which turns aluminum into finished manufactured products, now buys about 80% of the supplies it turns into car wheels from overseas. That’s up from 40% five years ago, he said. “It’s not the kind of business where we’re going to pay more and buy all American,” Armstrong said in a telephone interview. “It’s too competitive a business to do that.”

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Not.Going.To.Happen. So what then?

Xi Says China Needs at Least 6.5% Growth in Next Five Years (Bloomberg)

China’s president signaled policy makers will accept slower growth, but not much slower, as details of a blueprint set to define his term as leader were released Tuesday. Annual growth should be no less than 6.5% in the next five years to realize the goal to double 2010 gross domestic product and per capita income by 2020, President Xi Jinping said Tuesday, according to the official Xinhua News Agency. The 13th five-year plan, details of which were announced Tuesday, is the first to confront an era of sub-7% economic growth since Deng Xiaoping opened the nation to the outside world in the late 1970s. “Policy makers still want to maintain a high growth pace, while the policy expectation is tuned slightly lower,” said Tao Dong at Credit Suisse in Hong Kong.

“The stance of policy makers is to gradually transform to a ’new normal.’ But to maintain the peoples’ confidence, the bar is set relatively high.” China will seek to increase the yuan’s convertibility in an orderly manner by 2020 and change the way it manages currency policy, according to the Communist Party’s plan. Authorities will opt for a “negative list” foreign-exchange system – an approach that lets companies do anything that’s not specifically banned – and open the finance industry as it promotes the yuan’s inclusion in the International Monetary Fund’s Special Drawing Rights basket, Xinhua reported. The proposals coincide with heightened anxiety over China’s economic outlook following a stock market slump and a surprise yuan devaluation in August that roiled global markets.

China will target medium- to high-speed growth during the period, and officials pledged to reduce the income gap, further open up to overseas investment and boost consumption, according to the draft. Officials said they will accelerate financial system reform and promote transparent and healthy capital markets while also overhauling stock and bond sales. They’ll continue reforms of the fiscal and tax systems and transfer some state capital to pension funds. [..] Xi’s growth baseline matches guidance provided by Premier Li Keqiang, who said Sunday that China needs average growth of more than 6.5% in the next five years to meet the goal of achieving a “moderately prosperous” society by 2020. Xi and Li are managing the priorities of both reforming the economy and keeping short-term growth fast enough so that structural changes don’t cause a hard landing.

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“..Xinhua cited Xi as saying that annual growth should be no less than 6.5% in the next five years to achieve the Communist Party’s aim of doubling GDP per capita from 2010 by the end of the decade..”

China’s Xi Says 6.5% Annual Growth Enough To Meet Goals: Xinhua (AFP)

Growth of only 6.5% a year in 2016-2020 will be enough for China to meet its wealth goals, President Xi Jinping said on Tuesday according to the official news agency Xinhua. The report came as the ruling Communist party issued guidelines for the next five-year plan for the world’s second-largest economy, whose slowing growth has alarmed investors worldwide. The first documents released by the leadership conclave did not include a numerical growth target. But Xinhua cited Xi as saying that annual growth should be no less than 6.5% in the next five years to achieve the Communist Party’s aim of doubling GDP per capita from 2010 by the end of the decade. It said he made the remarks in a speech, without giving direct quotes. The doubling target is part of achieving what China’s ruling party calls a “moderately prosperous society” in time for the 100th anniversary of its foundation.

The comments are the clearest indication yet that Beijing will reduce its target growth rate from the current “around 7%”, after expansion slowed last quarter to its lowest in six years. Some economists say that the current figure is unattainable going forwards, and that trying to do so risks derailing painful but necessary markets reforms. The country has faced economic turbulence in recent months as it attempts to transition its economy from years of super-charged growth to a more modest pace it has dubbed the “new normal”. Botched stock market interventions and a sudden currency devaluation have rattled confidence in the country’s leadership, which has staked its legitimacy on maintaining an aura of economic infallibility.

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“..during the three weeks in August after China devalued its currency, Goldman Sachs calculated that another $200 billion may have left.”

China’s Money Exodus (Bloomberg)

The ranks of China’s wealthy continue to surge. As their economy shows signs of weakness at home, they’re sending money overseas at unprecedented levels to seek safer investments — often in violation of currency controls meant to keep money inside China. This flood of cash is being felt around the world, driving up real estate prices in Sydney, New York, Hong Kong and Vancouver. The Chinese spent almost $30 billion on U.S. homes in the year ending last March, making them the biggest foreign buyers of real estate. Their average purchase price: about $832,000. Same trend in Sydney, where Chinese investors snap up a quarter of new homes and are forecast to double their spending by the end of the decade. In Vancouver, the Chinese have helped real estate prices double in the past 10 years.

In Hong Kong, housing prices are up 60% since 2010. In total, UBS Group estimated that $324 billion moved out last year. While this year’s numbers aren’t yet in, during the three weeks in August after China devalued its currency, Goldman Sachs calculated that another $200 billion may have left. So how do these volumes of cash get out when Chinese are limited by rules that allow them to convert only $50,000 per person a year? The methods include China’s underground banks, transfers using Hong Kong money changers, carrying cash over borders and pooling the quotas of family and friends – a practice known as “smurfing.” The transfers exist in a gray area of cross-border legality: What’s perfectly legitimate in another country can contravene the law in China.

“It’s not legal for people to use secret channels to move money abroad, because this is smuggling,” says Xi Junyang, a finance professor at Shanghai University of Finance & Economics. “But the government has kept a laissez-faire attitude until recently.” Now, policy makers are starting to take the outflow seriously. While it’s not about to run out of money, China has intensified a crackdown on underground banks that illegally channel cash abroad. It’s also trying to capture officials suspected of fleeing overseas with government funds. Longer term, China has pledged to remove its currency controls and make the yuan fully convertible by 2020.

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There’s so much more of this in the pipeline.

Standard Chartered’s Bad Loans Reveal Cracks in Asian Economies (Bloomberg)

As China’s growth sputters, the troubles at Standard Chartered are another bad omen for what were once Asian economic darlings. The bank, which generates most of its income in the region, had gambled on success in emerging markets such as India, which instead saddled the lender with delinquent loans. As a result, the company which opened its offices in Mumbai under Queen Victoria is now axing 15,000 jobs and is asking investors for $5.1 billion. “Standard Chartered are Asian specialists and are in all the main markets in the region, so in looking at them you can get a good sense for credit direction and lending appetite,” said Mark Holman at TwentyFour Asset Management. For now, Asia still has fewer corporate debt defaults than other developing countries, but rising leverage from India to Indonesia point to the risk of further nonpayments.

More stringent conditions from banks like Standard Chartered are slowing loan growth in the region, exposing more fissures in the corporate credit market. “The picture that emerges is that Asian credit cycles are far more advanced than those in Europe and loan losses and impairment charges are mounting,” Holman said. Like other developing nations, Asian companies took advantage of low interest rates overseas to go on a borrowing binge. The move is backfiring as slower economic growth makes it more difficult to pay back the obligations. Fitch Ratings warned on Nov. 2 that 11% of India’s loans will fall into the category of “stressed assets” in the fiscal year ending in March 2016 and only improve “marginally” the next year. In China, Sinosteel, a state-owned steelmaker, missed an interest payment last month, becoming the latest firm that teeters on the verge of default.

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It’s still only about money: “VW said it estimated the “economic risks” of the latest discovery at €2 billion..”

VW Admission Suggests Cheats Went Much Further Than Diesel Emissions (Guardian)

The crisis at Volkswagen has deepened after the carmaker found “irregularities” in the carbon dioxide levels emitted by 800,000 of its cars. An internal investigation into the diesel emissions scandal has discovered that CO2 and fuel consumption were also “set too low during the CO2 certification process”, the company admitted on Tuesday night. The dramatic admission raises the prospect that VW not only cheated on diesel emissions tests but CO2 and fuel consumption too. VW said it estimated the “economic risks” of the latest discovery at €2bn (£1.42bn). The company said the “majority” of cars involved have a diesel engine, which implies that petrol cars are involved in the scandal for the first time.

Matthias Müller, chief executive of VW, said: “From the very start I have pushed hard for the relentless and comprehensive clarification of events. We will stop at nothing and nobody. This is a painful process, but it is our only alternative. For us, the only thing that counts is the truth. That is the basis for the fundamental realignment that Volkswagen needs.” VW said it will now work with the authorities to clarify what took place during the CO2 tests and “ensure the correct CO2 classification for the vehicles affected”. Müller added: “The board of management of Volkswagen AG deeply regrets this situation and wishes to underscore its determination to systematically continue along the present path of clarification and transparency.”

VW has already admitted fitting a defeat device to 11m vehicles worldwide that allowed them to cheat tests for emissions of nitrogen oxides. The carmaker has put aside €6.7bn to meet the cost of recalling the 11m vehicles, but also faces the threat of fines and legal action from shareholders and customers. The company has hired the accountancy firm Deloitte and the law firm Jones Day to investigate who fitted the device into its vehicles. It is understood that the carmaker believes a group of between 10 and 20 employees were at the heart of the scandal.

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“VW is leaving us all speechless..”

VW Emissions Issues Spread to Gasoline Cars (Bloomberg)

Volkswagen said it found faulty emissions readings for the first time in gasoline-powered vehicles, widening a scandal that so far had centered on diesel engines. Separately, the company’s Porsche unit said it’s halting North American sales of a model criticized by U.S. regulators. Volkswagen said an internal probe showed 800,000 cars had “unexplained inconsistencies” concerning their carbon-dioxide output. Previously, the automaker estimated it would need to recall 11 million vehicles worldwide — more than Volkswagen sold last year. It was unclear how much overlap there was between the two tallies. The company said the new finding could add at least €2 billion to the €6.7 billion already set aside for fixes to the affected vehicles but not litigation, fines or customer compensation.

The crisis that emerged after Volkswagen admitted in September to cheating U.S. pollution tests for years with illegal software has shaved more than one-third of the company’s stock price and led to a leadership change. Today’s revelation adds to the pressure on Volkswagen’s new chief executive officer, Matthias Mueller, who replaced Martin Winterkorn and was previously head of Porsche. Volkswagen’s supervisory board said it will meet soon to discuss further measures and consequences. “VW is leaving us all speechless,” said Arndt Ellinghorst, a London-based analyst with Evercore ISI. [..] The 3.0-liter diesel motors targeted on Monday by a U.S. Environmental Protect Agency probe aren’t part of the latest finding. The company rejected allegations that its cheating on diesel-emissions tests included Porsche and other high-end vehicles.

The EPA said its new investigation centers on the Porsche Cayenne and VW Touareg sport utility vehicles and as well as larger sedans and the Q5 SUV from Audi. But then late Tuesday, Porsche’s North American division said it would voluntarily discontinue sales of diesel-powered Cayennes from model years 2014 to 2016 until further notice. The Atlanta-based unit’s statement reiterated that the EPA notice was unexpected and that owners can operate their vehicles normally. “We are working intensively to resolve this matter as soon as possible,” Porsche said in the statement.

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Porsche is worried about ‘its results’. It should rethink that one.

VW Says Fuel Usage Understated On Some Models; Porsche Warns (Reuters)

Volkswagen on Tuesday said it had understated the fuel consumption of 800,000 cars sold in Europe, while majority stakeholder Porsche Automobil Holding warned that VW’s latest findings could further weigh on its results. The latest revelation about fuel economy and carbon dioxide emissions, which Germany’s largest automaker said represented a roughly €2 billion economic risk, deepened the crisis at VW. The scandal initially centered on software on up to 11 million diesel vehicles worldwide that VW admitted vastly understated their actual emissions of smog-causing pollutant nitrogen oxide. U.S. environmental regulators said on Monday that similar “defeat devices” were installed on larger 3.0 liter engines used in luxury sport utility vehicles from Porsche and Audi, although VW has denied those allegations.

Porsche’s North American unit said it was discontinuing sales of Porsche Cayenne diesel sport utility vehicles until further notice, citing the allegations. The latest findings that VW understated fuel consumption and carbon dioxide emissions, areas which U.S. regulators have yet to address, were disclosed as VW continues a broad review of its handling of all pollution-related issues. While the findings mostly apply to smaller diesel engines, one gasoline-powered engine is also affected. “VW is leaving us all speechless,” said Arndt Ellinghorst of banking advisory firm Evercore ISI. “It seems to us that this is another issue triggered by VW’s internal investigation and potentially related to Europe.” The carmaker said it would immediately start talking to “responsible authorities” about what to do about the latest findings.

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Will Hugh be the greater fool?

Hugh Hendry: “Today We Would Advise You That You Don’t Panic!” (Zero Hedge)

In his latest letter, he valiantly trudges on down the path of bullish abandon and tries to convince if not so much others as himself why continuing his desertion of the bearish camp he did two years ago is the right thing to do, and how in the aftermath of the VIX explosion in August, he “learned to stop worrying and love the bomb.” Key highlights:

… it is ironic that we are perhaps best known for advising “that you panic”. However, if you are anxious at the wrong time it can prove very painful. Today, we would advise that you don’t panic!

… by withdrawing the “Greenspan put” and using their asset purchase schemes to eviscerate any notion of value, the authorities have paradoxically created a safer yet more paranoid market.

… first it was Europe, then the high yield credit space with the vulnerabilities of the shale oil issuers, and then it was back to Greece and then the mother of them all, China, with its falling property and stock prices seemingly knocking economic growth and making a sizeable devaluation inevitable. And yet nada… the weeping prophets have failed to force a crisis after one hell of a go.

… perhaps we are being premature and the cards are about to fall. Or perhaps there simply are no dead bodies in the system and the global economy has proven itself much more resilient to shocks. We certainly believe that if we had been forewarned two years ago that the dollar would rise versus selected EM currencies by 50% and that important commodities such as oil and iron ore would fall by 50% we would never have been able to predict just how orderly things have turned out at both the company and sovereign level. The turmoil it seems has remained contained within financial markets in a very curious way.

… perhaps it’s time to stop worrying and love the bomb?

Actually at last check, practically all the “bears” predicted exactly what happened: trapped by their own policies, central banks would have no choice than to unleash another onslaught of easing. This is precisely what happened when first the ECB previewed its QE2, then the PBOC cut rates, then Sweden boosted QE, then the BOJ said it would “not hesitate” to act (and would have done so had other central banks not pushed the Yen lower thanks to its carry trade status). The real question, Hugh, is how much time did the latest doubling down by the world’s central banks buy? We should know the answer in 2-4 months.

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“What policymakers will do, in all likelihood, is hope and pray, and when that fails, they will likely double down on monetary extremism. ”

Hugh Hendry Says “Don’t Panic”; Paul Singer Says You May Want To (Zero Hedge)

Businesspeople in today’s world are either concerned, actively sweating or oblivious to the rumblings and dangers around them. We recommend that both investors and businesspeople be highly alert to the implications of populism, the increasing concentration of power into the hands of unaccountable elites and the dissipation of the rule-of-law protections of liberty. It is very odd and dangerous that governments, satisfied with policies which, by raising asset prices (stocks, bonds, real estate, high-end art), are seemingly designed to make the rich richer, nevertheless simultaneously excoriate inequality as the cause of slow growth and societal disquiet. It is also strange that policymakers are not concerned by the obvious failure of monetary extremism to achieve the predicted levels of growth, or by the risks that may exist either in the continuation of the monetary experiment or in its ultimate unwinding.

Policymakers who are sticking with the failed policy mix have invented creative explanations for why growth has been so bad for such a long a period of time. The most prevalent (and tautological) of these explanations is “secular stagnation,” a theory that the developed world simply cannot grow faster due to ageing populations, growth-destructive technologies and competition from cheap labor around the world. We disagree with this theory, and assert that it can be examined for validity only after a full range of first-line “fiscal” policies (as we have defined them) has been put firmly and comprehensively in place. In contrast to the “secular stagnationistas,” we believe that there is a great deal of low-hanging fruit (that is, far higher rates of growth in incomes, jobs and national wealth) to be had from simple changes in leadership and policies.

The question of the day is: What will be the policy response of the developed world toward the currently deteriorating (at least in EMs and China) conditions, and the policy response if the deterioration spreads to Europe and the U.S.? If we know anything about the policy decision-making landscape in developed countries, it is that policymakers are all on super-keen-alert for signs of deflation (which they basically equate with credit collapse — a false and misleading connection, but that is a topic for another day). They will not remain passive in the face of a renewed global recession and/or financial crisis. So what will they do next, and how will it affect global markets? We can be reasonably certain that policymakers will not leap into action on the fiscal measures that we have described as the front-line policies needed to meaningfully quicken economic growth. Try to imagine more flexible and business-friendly tax, regulatory and labor policies being enacted by current political leadership in the U.S., Europe and Japan.

Sorry, our imaginations — never inert — just can’t get there. What policymakers will do, in all likelihood, is hope and pray, and when that fails, they will likely double down on monetary extremism. This landscape is essentially baked, unless you think that sometime in the near future the global economy will turn higher, either on its own or in anticipation of such policy measures in the future. To many policymakers today, jawboning seems like a magic button, since markets often create the desired result in anticipation of possible future actions. Consequently, governments may be able to get a particular outcome without requiring the central bankers to actually take any action.

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This is nothing yet. Wait till next year’s pring cleaning.

Europe’s Biggest Banks Are Cutting 30,000 Jobs, More To Come (Bloomberg)

Standard Chartered became the third European bank in less than two weeks to announce sweeping job cuts, bringing the total planned reductions to more than 30,000, or almost one in seven positions. The London-based firm said Tuesday it will eliminate 15,000 jobs, or 17% of its workforce, as soaring bad loans in emerging markets hurt earnings. Deutsche Bank last week announced plans for 11,000 job cuts, while Credit Suisse said it would trim as many as 5,600 employees. The three firms, which all named new chief executive officers this year, are undertaking the deepest overhauls since the financial crisis as stricter capital rules erode profitability. Standard Chartered and Credit Suisse will tap shareholders for funds, while Deutsche Bank scrapped its dividend for this year and next to conserve capital.

“It’s just further evidence that Europe’s banks didn’t adapt quickly enough to the post-crisis world and are now playing catch up,” said Christopher Wheeler at Atlantic Equities in London. More bloodletting may be on the way. UniCredit is considering as many as 12,000 job cuts as it seeks to improve profit and capital levels, people with knowledge of the discussions said last week. The numbers, which are still under review, increased from 10,000 a month ago and may change depending on the outcome of asset sales. The largest Italian bank reports earnings next week. Including jobs lost through asset sales, John Cryan, Deutsche Bank’s co-CEO since July, intends to eliminate 26,000 employees, or a quarter of the workforce, by 2018. Tidjane Thiam, Credit Suisse’s new CEO, will shed jobs in the U.S., U.K. and Switzerland.

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“..the big six banks in this country control 97% of all trading assets in the U.S. and 93% of all derivatives.”

Wall Street/Washington Revolving Door More Dangerous Than Ever: Prins (Yahoo)

What are the consequences of regulators leaving government work to join the financial services industry, and vice versa? Nomi Prins, a Senior Fellow at Demos, chronicles the problems of the revolving door between Washington and Wall Street in her latest book “All the Presidents’ Bankers.” “The difference is that now people know each other less in their personal lives before they make those transitions,” she says. “Now it’s a little more like ‘I know you from the industry of Wall Street and Washington’ as opposed to ‘We hung out and our dads smoked cigars together.’ Prins notes that there was more personal accountability in the relationships between Wall Street and Washington during the mid-20th century.

She points out that before the crash of 1929, the Morgan bank (predecessor of J.P. Morgan) had strong connections with Presidents Coolidge and Hoover. Yet, a shift in the relationships occurred during the Great Depression. “There was this accountability moment where the bankers that ascended to run these banks, to run Chase, to run Citibank & they wanted economic stability throughout the country,” she says. “They actually thought [stability] was important for confidence in the banking system & people would actually keep their money there and trust that they had a future with this bank, so the relationships with individuals and corporations and countries all mattered.” Prins says that the modern-day deterioration of the bank-customer relationship is a direct result of the growing size and risk profiles of bank behemoths.

“The banks are so big right now [and] they have access to so much of apercentage of the deposits of individuals, she says. “The leverage is so much higher on the back of those deposits, the bailouts that have happened for numerous reasons in the past 25 years have all been an indication that is okay to take more reckless bets.” And while the idea of banks being “too big to fail” caused widespread Main Street anger towards Wall Street, Prins believes the policy of government bailouts will continue post-Financial Crisis as banking has become more concentrated. She noted that the big six banks (J.P. Morgan, Citi, Bank of America, Goldman Sachs, Morgan Stanley, Wells Fargo) in this country control 97% of all trading assets in the U.S. and 93% of all derivatives.

Prins also added that the anti-banking rhetoric of many U.S. Presidents (remember President Obama’s Wall Street “fat cats”?) has a long history, but one that is at odds with actual policy. It goes all the way back to Woodrow Wilson and the creation of the Federal Reserve, she said. “In practice Woodrow Wilson was behind the creation of the Fed, which we know now has substantiated a lot of Wall Street losses, has a $4.5 trillion book. It’s the largest hedge fund in the world right now…But [Dodd Frank] hasn’t fundamentally changed the concentration of power. The revolving door…influences the risk inherent to what’s going on on Wall Street. It hasn’t made the economy more stable with respect to the banking industry, which is an industry that infiltrates every aspect of our individual and political lives.

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“..to force nations to accept new financial products and services, to approve the privatisation of public services and to reduce the standards of care and provision.”

Gathering Financial Storm Just One Effect Of Corporate Power Unbound (Monbiot)

What have governments learned from the financial crisis? I could write a column spelling it out. Or I could do the same job with one word: nothing. Actually, that’s too generous. The lessons learned are counter-lessons, anti-knowledge, new policies that could scarcely be better designed to ensure the crisis recurs, this time with added momentum and fewer remedies. And the financial crisis is just one of the multiple crises – in tax collection, public spending, public health and, above all, ecology – that the same counter-lessons accelerate. Step back a pace and you see that all these crises arise from the same cause. Players with huge power and global reach are released from democratic restraint. This happens because of a fundamental corruption at the core of politics.

In almost every nation the interests of economic elites tend to weigh more heavily with governments than do those of the electorate. Banks, corporations and landowners wield an unaccountable power, which works with a nod and a wink within the political class. Global governance is beginning to look like a never-ending Bilderberg meeting. As a paper by the law professor Joel Bakan in the Cornell International Law Journal argues, two dire shifts have been happening simultaneously. On one hand governments have been removing laws that restrict banks and corporations, arguing that globalisation makes states weak and effective legislation impossible. Instead, they say, we should trust those who wield economic power to regulate themselves.

On the other hand, the same governments devise draconian new laws to reinforce elite power. Corporations are given the rights of legal persons. Their property rights are enhanced. Those who protest against them are subject to policing and surveillance – the kind that’s more appropriate to dictatorships than democracies. Oh, state power still exists all right – when it’s wanted. Many of you will have heard of the Trans-Pacific Partnership and the proposed Transatlantic Trade and Investment Partnership (TTIP). These are supposed to be trade treaties, but they have little to do with trade, and much to do with power. Theyenhance the power of corporations while reducing the power of parliaments and the rule of law. They could scarcely be better designed to exacerbate and universalise our multiple crises – financial, social and environmental.

But something even worse is coming, the result of negotiations conducted, once more, in secret: a Trade in Services Agreement (TiSA), covering North America, the EU, Japan, Australia and many other nations. Only through WikiLeaks do we have any idea of what is being planned. It could be used to force nations to accept new financial products and services, to approve the privatisation of public services and to reduce the standards of care and provision. It looks like the greatest international assault on democracy devised in the past two decades. Which is saying quite a lot.

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Damn right. Damn late too.

Merkel Warns Of Balkans Military Conflicts Amid Migrant Influx (AFP)

German Chancellor Angela Merkel warned that fighting could break out in the Balkans, along the main route of migrants trying to reach Europe, if Germany closed its border with Austria, in remarks published Tuesday. Amid ever-louder calls for Merkel to undertake drastic action to stem the tide of people entering her country, she again rejected the appeals, noting that tensions were already running high between the Western Balkans countries. With an eye to deep rifts exposed after Hungary closed its frontier with Serbia and Croatia, Merkel said blocking the border with Austria to refugees and migrants would be reckless. “It will lead to a backlash,” Merkel was quoted in media reports as saying late Monday in an address to members of her conservative Christian Democratic Union (CDU) in the western city of Darmstadt.

“I do not want military conflicts to become necessary there again,” Merkel added, referring to the Balkans. She said disputes in a region already ravaged by war in the 1990s could quickly escalate, touching off a cycle of violence “no one wants.” Germany has become the main destination for people fleeing war and poverty in the Middle East, Africa and Asia via the Balkans, with up to one million people expected this year. The EU vowed last month to help set up 100,000 places in reception centres in Greece and along the migrant route through the Balkans as part of a 17-point action plan devised with the countries most affected by the crisis. But just as Merkel attempts to convince European partners to share out the burden more fairly, she has faced a revolt from within her own conservative alliance against the welcome she has extended to people escaping violence and persecution.

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Must take this out of the hands of the EU. All it is is a facade for sociopaths to hide behind.

European Union States Have Relocated Just 116 Refugees Out Of 160,000 (Guardian)

EU member states have so far relocated only 116 refugees of the 160,000 they are committed to relocating over the next two years, according to new figures. EU members states agreed in September to relocate 160,000 people in “clear need of international protection” through a scheme set up to relocate Syrian, Eritrean, and Iraqi refugees from the most affected EU states – such as Italy and Greece – to other EU member states. So far 116 people have been relocated, and only 1,418 places have been made available by 14 member states, according to data released on Tuesday by the European Commission. A total of 86 asylum seekers have been relocated from Italy, and 30 asylum seekers will travel from Athens to Luxembourg on Wednesday.

Denmark, Ireland and the UK have an opt-out from the scheme, but Britain is the only member state that has said it will not contribute to the relocation. The EU’s emergency relocation mechanism is only one facet of the broader refugee crisis. Syria, Iraq and Eritrea account for the majority of those crossing the Mediterranean. According to the UNHCR, more than one in two are fleeing from Syria. While 6% of those arriving via the Mediterranean are originally from Iraq, and 5% from Eritrea. Not all those seeking asylum remain or travel via Italy or Greece. About 770,000 asylum applications were lodged across the EU in the first nine months of 2015, compared to 625,920 in all of 2014 and 431,090 in 2013. This has contributed to a backlog of applications.

At the end of last year there were just under 490,000 pending applications across EU member states. In July of this year, the figure stood at 632,000. The backlog is not showing signs of receding any time soon: for every asylum decision made there are 1.8 new applications. Approximately 240,000 applications were processed between January and June this year. Over the same six months, 432,345 applications were filed. However, the European Commission data also reveals that beyond the logistical challenges, a “large number of member states has yet to meet financial commitments” and “too few member states” have responded to calls to help Serbia, Slovenia and Croatia; among the most used routes by asylum seekers, with essential resources such as beds and blankets.

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What happened to numb the rich west the way it did?

Greek Coast Guard Says 5 Refugees Die In Boat Accident Tuesday Night (AP)

Greece’s coast guard says the total number of people rescued from a boat carrying people from Turkey to the nearby Greek island of Lesvos has increased to 65, while a total of five bodies were recovered from the water. The coast guard said Wednesday that the bodies were those of three children and two men. There were no further missing people reported. The migrant boat ran into trouble north of Lesvos Tuesday night. The coast guard says a total of 457 people were rescued between Tuesday morning and Wednesday morning in 13 separate incidents. More than 600,000 people have arrived in Greece so far this year, with most arriving on Lesbos. From there, they make their way to the Greek mainland on ferries and then head overland to more prosperous EU countries in the north. Thousands of migrants are stranded on Lesvos due to a ferry strike that began Monday.

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Oct 122015
 
 October 12, 2015  Posted by at 9:02 am Finance Tagged with: , , , , , , , , , ,  4 Responses »
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Dorothea Lange Country filling station, Granville County, NC July 1939

The Golden Age Of Central Banks Is At An End – Time To Tax And Spend? (Guardian)
QE Causes Deflation, Not Inflation (Josh Brown)
Western Economies Still Too Weak To Handle Fed Rate Rise, Says China (Guardian)
The World Still Needs A Way To Stop Hot Money Scalding Us All (Guardian)
Glencore Shares Halted Pending Statement On Proposed Asset Sales (Bloomberg)
Commodity Contagion Sparks Second Credit Crisis As Investors Panic (Telegraph)
Japan Inc. Sounds Alarm On Consumer Spending (Reuters)
World Cannot Spend Its Way Out Of A Slump, Warns OECD Chief (Telegraph)
Growing Government Debt Will Test Euro-Zone Solidarity (Paul)
EU Bank Chief ‘Could Recall Volkswagen Loans’ (BBC)
UK Government Emissions Tester Paid £80 Million By Car Firms (Telegraph)
Volkswagen’s Home City Enveloped In Fear, Anger And Disbelief (FT)
The Russians Are Fleeing London’s Stock Market (Bloomberg)
Soaring London House Prices Sucking Cash Out Of Economy (Guardian)
Australia Housing Bust Now The Greatest Recession Risk (SMH)
Don’t Let The Nobel Prize Fool You. Economics Is Not A Science (Joris Luyendijk)
The Tragic Ending To Obama’s Bay Of Pigs: CIA Hands Over Syria To Russia (ZH)
EU Must Stop ‘Racist Criteria’ In Refugee Relocation – Greece (Reuters)

“The world is one recession away from a period of stagnation and prolonged deflation in which the challenge would be to avoid a re-run of the Great Depression of the 1930s.”

The Golden Age Of Central Banks Is At An End – Time To Tax And Spend? (Guardian)

Turn those machines back on. So demands the unscrupulous banker, Mortimer Duke, when he finds he and his brother Randolph have been ruined by their speculative scam in the film Trading Places. Having lost all his money betting wrongly on orange juice futures, Mortimer demands that trading be restarted so that he can win it back. It’s not known whether Christine Lagarde is a secret fan of John Landis movies. As a French citizen, François Truffaut might be more her taste. There is, though, more than a hint of Trading Places about the advice being handed out by Lagarde’s IMF to global policymakers. To Europe and Japan, the message is to print some more money. Keep those machines turned on, in other words.

To the US and the UK, there was a warning that raising interest – something central banks in both countries are contemplating – could have nasty spillover effects around the rest of the world. Think long and hard before turning those machines off because you may have to turn them back on again before very long, Lagarde is saying, because the big risk to the global economy is not that six years of unprecedented stimulus has caused inflation but that the recovery is faltering. These are indeed weird times. Share prices are rising and so is the cost of crude oil, but the sense in financial markets is that the next crisis is just around the corner. The world is one recession away from a period of stagnation and prolonged deflation in which the challenge would be to avoid a re-run of the Great Depression of the 1930s.

That fate was avoided in 2008-09 by strong and co-ordinated policy action: deep cuts in interest rates, printing money, tax cuts, higher public spending, wage subsidies and selective support for strategically important industries. But what would policymakers do in the event of a fresh crisis? Would they double down on measures that have already been found wanting or go for something more radical? Ideas are already being floated, such as negative interest rates that would penalise people for holding cash, or the creation of money by central banks that would either be handed straight to consumers or used to finance public infrastructure, also known as “people’s QE”.

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Time people understood this. “QE is deflationary because it shrinks net interest margins for banks via depressing treasury bond yields. It also enriches the already wealthy via asset price inflation but they do not raise their consumption in response..”

QE Causes Deflation, Not Inflation (Josh Brown)

Why were the inflation hawks so wrong about quantitative easing? Why didn’t all the money printing lead to commodity prices skyrocketing? One answer is that, while bank reserves were boosted, lending didn’t take off and there was no uptick in the velocity of money the speed at which capital zooms through the economy and turns over. Absent velocity of money, QE could be looked at as either ineffective or actually causing a deflationary environment, where capital is hoarded and everyone is too petrified to risk it on productive endeavors. Christopher Wood (CLSA) explains further in his new GREED & fear note:

To GREED & fear the best way to illustrate that quantitative easing is not working is the continuing decline in velocity and the resulting lack of a credit multiplier since the unorthodox monetary regime was introduced. In America, Japan and the Eurozone velocity has continued to decline since the financial crisis in 2008. Thus, US, Japan and Eurozone money velocity, measured as the nominal GDP to M2 ratio, has declined from 1.94x, 0.7x and 1.29x respectively in 1Q98 to 1.5x, 0.55x and 1.05x in 2Q15 (see Figure 3).

Indeed, US money velocity is now at a six-decade low. This is why those who have predicted a surge in inflation in recent years caused by the Fed printing money have so far been proven wrong. For inflation, as defined by conventional economists like Bernanke in the narrow sense of consumer prices and the like, will not pick up unless the turnover of money increases. This is the problem with the narrow form of mechanical monetarism associated with the likes of American economist Milton Friedman.

Wood goes on to make the point that QE is deflationary because it shrinks net interest margins for banks via depressing treasury bond yields. It also enriches the already wealthy via asset price inflation but they do not raise their consumption in response, because how much more shit can they possibly buy? Finally, it leads to a preference of share buybacks vs investment spending because the payback from financial engineering is so much easier and more immediate.

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And China too.

Western Economies Still Too Weak To Handle Fed Rate Rise, Says China (Guardian)

The slow recovery of western economies means the US Federal Reserve should not raise interest rates yet, according to the Chinese finance minister. Speaking on the sidelines of the annual meeting of the World Bank and International Monetary Fund in Lima, Lou Jiwei said developed economies were to blame for the global economic malaise because their slow recoveries were not creating enough demand. “The United States isn’t at the point of raising interest rates yet and under its global responsibilities it can’t raise rates,” Lou said in an interview published in the China Business News on Monday. The minister said the US “should assume global responsibilities” because of the dollar’s status as a global currency.

Lou’s comments were published hours after Fed vice-chairman Stanley Fischer said policymakers were likely to raise interest rates this year, but that that was “an expectation, not a commitment”. Asked about the global economic situation, Lou said the problem was not with developing countries. “Rather, it is the continued weak recovery of developed countries” that’s hindering the global economy, he said. “Developed countries should now have faster recoveries to give developing countries some external demand.” Lou welcomed the structural reforms in Europe as a positive development, but said geopolitics and the Syrian refugee crisis would have an impact on its economy. He described the slowdown in China’s economy as a healthy process, but said policy makers needed to manage it carefully.

“The slowing of China’s economic growth is a healthy process, but it is a sensitive period. The Chinese government must make accurate adjustments, keeping the economy within a predictable space while continuing to promote internal structural reforms,” he said.

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Stop issuing it?!

The World Still Needs A Way To Stop Hot Money Scalding Us All (Guardian)

Bill Gross, America’s “bond king”, who made his fortune betting on IOUs from companies and governments, is suing his erstwhile employer for $200m, we learned last week. He says his colleagues were driven by greed and “a lust for power”. His chutzpah was a timely reminder of the vast sums won and lost in the world of globalised capital, but also of the power that still lies in the hands of men (they are mostly men) like Gross, who sit atop a system that remains largely untamed despite the lessons of the past seven years. To those caught up in it, America’s sub-prime crash and its aftermath felt like a unique – and uniquely dreadful – chain of events, a financial and human disaster on an unprecedented scale. Yet it was just the latest in a series of periodic convulsions in modern capitalism, from the east Asia crisis to the Argentine default, to Greece’s humiliation at the hands of its creditors.

The first tremors of the next earthquake could be sensed by the central bankers and finance ministers gathered in Lima for the IMF’s annual meetings this weekend. Many were fretting about the knock-on effects of the downturn in emerging economies – led by China. Take a step back, though, and both the emerging market slowdown and the boom that preceded it are just the latest symptom of the ongoing malaise afflicting the global financial system. Seven years on from the Lehman collapse in September 2008, there has been some re-regulation – the Bank of England will soon announce details of the Vickers reforms, which will make banks split their retail arms from the riskier parts of their business – but many elements of the financial architecture remain unchallenged.

Capital swills unchecked around the world; governments feel compelled to prioritise the whims of international investors such as Gross – who tend to have a neoliberal bent – over the needs of domestic businesses; and credit ratings agencies remain all-powerful, despite their dismal record. The theory behind free-flowing capital is that it allows the world’s savings to find the most profitable opportunities – even far from home – and provides the impetus for investment and entrepreneurialism, aids economic development and boosts growth. Yet as Unctad, the UN’s trade and development arm, detailed in its annual report last week, the reality is very different. Capital flows are often driven more by the global financial weather than by the investment prospects in emerging economies; they can be disproportionately large; and they can change abruptly with the market mood, overwhelming domestic efforts to promote stable development.

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Not a good sign: “The company is seeking to raise more than $1 billion by selling future production of gold and silver”

Glencore Shares Halted Pending Statement On Proposed Asset Sales (Bloomberg)

Glencore, which has flagged divestments as part of a plan to cut debt by about $10 billion after commodity prices plunged, halted trading in Hong Kong Monday pending an announcement on proposed asset sales in Australia and Chile. The Swiss trader and miner said last month it’s planning to raise about $2 billion from the sale of stakes in its agricultural assets and precious metals streaming transactions. While the company didn’t identify specific assets in the statement requesting the trading halt, it has copper operations in Chile and coal, zinc and copper mines in Australia. The potential sales are part of the debt-cutting program that Glencore CEO Ivan Glasenberg announced in early September. The plan includes selling $2.5 billion of new stock, asset sales, spending cuts and suspending the dividend. Taken together, the measures aim to reduce debt from $30 billion nearer to $20 billion.

The company is seeking to raise more than $1 billion by selling future production of gold and silver, two people familiar with the situation said Oct. 1. The company produced 35 million ounces of silver last year and 955,000 ounces of gold from mines in South America, Australia and Kazakhstan. Investors including Qatar Holding, the direct investment arm of the Gulf state’s sovereign wealth fund, have expressed an interest in buying a minority stake in Glencore’s agriculture business, according to three people familiar with the conversations. Citigroup, one of the banks hired to run the sale alongside Credit Suisse, said earlier this month that the whole business could be worth as much as $10.5 billion. The company has also announced cuts to copper and zinc output in an effort to support metal markets.

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“Without the oxygen of cheap debt, commodity trading houses are finished. Each trade in oil or iron ore might generate only 1pc to 2pc in margin – but this greatly increases when magnified by debt. The only limit on profits is then how much you can borrow. Greed drives returns. ”

Commodity Contagion Sparks Second Credit Crisis As Investors Panic (Telegraph)

The collapse in commodity prices has sparked a second credit crisis as investors dump high-yield bonds, shattering the fragile confidence necessary to support global markets. Those calling it a Lehman moment forget their history. Current events have chilling similarities to the Bear Stearns collapse and mark the start of a new crisis, not the end. The world of commodity trading has been thrown into chaos as the cost of borrowing to fund operations soars. Glencore has become the poster child for the sector’s woes as its shares have more than halved in value during the past six months. More worrying has been the impact on the group’s credit profile. Glencore’s US bonds due for repayment in 2022 have collapsed to around 82 cents in the dollar. Only four months earlier, they had been stable at around 100 cents, implying that those who lent money would get it back plus interest.

Now for every dollar lent to Glencore, banks face losses, and as the price of bonds falls the yield has risen to 7.4pc. Without the oxygen of cheap debt, commodity trading houses are finished. Each trade in oil or iron ore might generate only 1pc to 2pc in margin – but this greatly increases when magnified by debt. The only limit on profits is then how much you can borrow. Greed drives returns. Glencore is a profitable business when it can borrow at around 4pc, but if it has to refinance at 7pc to 10pc those slim profit margins evaporate. The fear of those holding Glencore debt can be seen in the soaring price for the insurance against a default, or credit default swaps (CDS). Glencore five-year CDS has soared to 625, from about 280 just a month ago. A rule of thumb is that a CDS above 400 means a serious risk of a default, or about a 25pc chance in the next five years.

Glencore has taken drastic action to reduce its $50bn debts, or $30bn if all its stocks of metals are deducted, which it reported at the end of September. A $2.5bn equity raising has been completed, the dividend has been axed and assets sold as part of a $10bn debt reduction plan. However, if borrowing costs remain where they are, the game may already be over. If Glencore itself were to fold, it would be a huge problem with its $221bn in annual revenues, but when combined with the other commodity trading houses, Trafigura, Vitol and Noble, the fallout would be disastrous. Trafigura is not listed but its debt is publicly traded and the bonds have collapsed to 86 cents in the dollar, or a yield of 8.9pc. Noble, the Singapore trading house, has also seen its shares collapse as commodity prices slump. First-half profits from Noble’s metals trading have fallen 98pc to just $3m. This has been offset by strong results in oil trading, but the problems remain.

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Deflation.

Japan Inc. Sounds Alarm On Consumer Spending (Reuters)

Do not believe in official statistics, Japanese retailers seem to be saying, as they cut earnings forecasts and warn of lackluster consumer spending, a key growth engine for Japan at a time when exports and factory output are stalling. If you go by the larger-than-expected 2.9% gain in household spending in August – the first year-on-year rise in three months – then consumption looks like it is finally alive and well again, after a sales tax hike last year stifled the economy. But profits of retailers suggest the spending data, which has a small sample size, has not captured the full picture. Restrained household consumption raises the stakes for a central bank policy meeting on Oct. 30, and for the government’s plan to flesh out new economic policies before the year-end.

“Consumer spending has ground to a halt,” said Noritoshi Murata, president of Seven & i Holdings (3382.T). “There are a lot of concerns about the global economy and not many positives for consumption. Weak spending could continue into the second half of the fiscal year.” Seven & i, which operates Japan’s ubiquitous 7-Eleven convenience stores, on Oct. 8 trimmed its full-year profit forecast by 1.6% to 367 billion yen ($3.05 billion) and cut its revenue forecast by 3.9% to 6.15 trillion yen, triggering a fall in its shares in Tokyo. The main problem is wages are not rising fast enough to keep pace with rising food prices, and consumers are starting to cut back on other goods. Real wages, adjusted for inflation, rose 0.5% in July from a year earlier. That was the first gain in 27 months.

But wage growth subsequently slowed to 0.2% in August, and summer bonuses fell from last year, government data shows. Another problem is more and more workers are getting stuck in jobs with low pay. Part-time and irregular workers comprised a record 37.4% of the workforce last year, according to the National Tax Bureau. Irregular workers earn on average less than half of what regular full-time workers earn, tax data show. The third problem is the government plans to raise the nationwide sales tax again, to 10% in 2017 from 8%, and households are already changing their behavior.

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Structural changes for the OECD means opening stores on Sundays. It doesn’t get more clueless.

World Cannot Spend Its Way Out Of A Slump, Warns OECD Chief (Telegraph)

Countries that try to spend their way out of crisis risk becoming stuck in a permanent malaise, according to the head of the Organisation for Economic Co-operation and Development (OECD). Angel Gurria said central banks were running out of firepower to boost economies in the event of another sharp slowdown, while governments had limited space to ramp up spending. The secretary general said structural reforms and more international co-operation were badly needed in a world of deteriorating growth. “Countries that say: I’ll spend my way out of this third slump. I say: no you won’t, because you’ve already done that, and you ran out of space,” Mr Gurria said on the sidelines of the IMF’s annual meeting in Lima, Peru.

“Now countries are trying to reduce the deficit and debt because that’s a sign of vulnerability and the rating agencies are breathing down their neck – they’ve already downgraded Brazil and France. “We don’t have room to inflate our way out of this one. So we go back to the same issue: it’s structural, structural, structural.” The OECD has been working with countries such as Greece to liberalise product markets, which deal with competitiveness issues and labour laws. Mr Gurria, who has urged countries for years to implement structural reforms, said he was frustrated at the lack of progress: “If you listen to the conversations we have on opening on Sundays you wouldn’t believe it. Or the debates we have about [the] 35 hour [working week]. These are the real issues.

“The people, the trade unions, they all have a stake and their arguments are strong. But where countries have room is to make structural changes, and central banks can help by continuing to ease. “[With quantitative easing] there is a question of whether we’re entering a territory of diminishing returns. Of course we must use it, but there’s not a lot of room left.” Mr Gurria conceded that the benefits of reform were gradual. “Germany modified its labour laws 12 years ago, and it’s reaping the benefits brilliantly and gallantly because of much better performance during the crsis. Spain did it three years ago, and they’re reaping the benefits now. Italy did it last month, and it will take a couple of years.”

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France as the black shhep. But Germany’s recent woes should not be underestimated.

Growing Government Debt Will Test Euro-Zone Solidarity (Paul)

The German chancellor and the French president stood side by side last Wednesday to address the European Parliament. But beneath that show of solidarity lies a story of two diverging economies at the heart of the euro zone. At the time the euro was born, Germany’s economy – bearing close to $2 trillion in reunification costs – looked not too dissimilar to France’s. Today, however, the gap between the two countries is the widest since the reunification. Not only is the debt-to-gross-domestic-product ratio of France and Germany the widest in 20 years, but – more importantly in a currency union without a federal state – the latter has a huge and increasing current surplus, while the former is in deficit.

This is not surprising. Germany, while benefiting greatly from the opened markets of its fixed exchange rate partners, undertook a series of reforms to improve its economic position. France was not only unable to reform but indulged in the 35-hour workweek. If we were still living under the European Monetary System that predated the euro, France would simply have had to devalue, as it did many times before the euro. Under the euro, helped by its trade surplus, Germany kept a tighter budget, while the French state kept spending an ever-higher percentage of its GDP in repeated attempts to support its faltering economy. As a result, its debt is now close to the symbolic 100% of GDP level, not accounting for unfunded pension liabilities, and the rating agencies have stripped it of its AAA rating and continue to downgrade it. The European Commission, in its last assessment, speaks of France facing “high sustainability risk” in the medium term.

This is not just a French problem though; it’s a euro-zone one. According to Eurostat, in the first quarter of 2015, the euro-zone debt-to-GDP ratio was 92.9% — the highest it has been since the creation of the euro. Never has the zone been so far away from its own Maastricht fiscal sustainability criteria. Huge differences between countries exist, but the only country of the original 12 euro-zone members still respecting the debt and deficit levels is tiny Luxembourg. What does this say for the future of the euro?

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More billions to slide out of VW coffers.

EU Bank Chief ‘Could Recall Volkswagen Loans’ (BBC)

The European Investment Bank (EIB) could recall loans it gave to Volkswagen, its president told a German newspaper. Werner Hoyer told Sueddeutsche Zeitung that the EIB gave loans to the German carmaker for things like the development of low emissions engines. He said they could be recalled in the wake of VW’s emissions cheating. The paper reported that about €1.8bn of those loans are still outstanding. Mr Hoyer is quoted as saying that the EIB had granted loans worth around €4.6bn to Volkswagen since 1990. “The EIB could have taken a hit [from the emissions scandal] because we have to fulfil certain climate targets with our loans,” the Sueddeutsche Zeitung quoted Mr Hoyer as saying. Mr Hoyer was attending the IMFs meeting in Lima, Peru. He added that the EIB would conduct “very thorough investigations” into what VW used the funds for.

Mr Hoyer told reporters that if he found that the loans were used for purposes other than intended, the EU bank would have to “ask ourselves whether we have to demand loans back”. He also said he was “very disappointed” by Volkswagen, adding the EIB’s relationship with the carmaker would be damaged by the scandal. Volkswagen admitted that about 11 million of its vehicles had been fitted with a “defeat device” – a piece of software that duped tests into showing that VW engines emitted fewer emissions than they really did. Mr Hoyer’s comments come days after VW’s US chief Michael Horn faced a Congress panel to answer questions about the scandal, which has prompted several countries to launch their own investigations into the carmaker. On Monday, VW’s UK managing director Paul Willis is due to appear before members of parliament at an informal hearing.

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TEXT

UK Government Emissions Tester Paid £80 Million By Car Firms (Telegraph)

The state agency that carries out emissions tests on new vehicles has been paid more than £80 million by car companies over the last decade, The Daily Telegraph can disclose. The Vehicle Certification Agency, whose chief will appear on Monday before a Commons committee looking at the Volkswagen scandal, has reported a year-on-year rise in profits, receiving almost £13 million in 2014/15 alone. Campaigners claim Europe’s national certification agencies are competing so fiercely for business it is not in their interests to catch out car-makers. Samples of new cars must undergo checks by approval agencies to ensure they meet European performance standards. Once a car has been type-approved by the manufacturer s chosen national agency, it can be sold anywhere in Europe.

“Car makers are able to go type-approval shopping around Europe to get the best deals for them”, said Greg Archer, of campaign group Transport & Environment. “No one is checking that type approval authorities are doing an impartial or good job and this needs to change”, he added. Last month Volkswagen admitted that it had systematically installed software in VW and Audi diesels since 2009 to deceive regulators who were measuring their exhaust fumes. Since 2005 the VCA -an executive agency of the Department for Transport- has received a total of £84million from “product certification/type-approval services”, according to a Greenpeace investigation. It said the VCA’s outgoing CEO Paul Markwick, interim chief executive Paul Higgs and chief operating officer John Bragg had held senior positions with major car manufacturers.

MPs on the Commons select committee on transport will question Volkswagen bosses, Transport Secretary Patrick McLoughlin and the VCA’s acting chief, Mr Higgs, over the emissions violations. A Department for Transport spokesman said the VCA charged car-makers in order to cover its operating costs and to provide value for taxpayers. He added: “Whilst the VCA charges the industry for its services, its governance framework is set by government.” It claimed there was “a conflict of interest” . A Greenpeace spokesman said: The Government s testing regime failed the public. The question is why? “Our evidence suggests it’s not actually in the VCA’s interests to catch out the car-makers. Their business model -and it has become a business- is to attract manufacturers to test their cars with them. It’s a conflict of interest.”

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They’re right to be scared.

Volkswagen’s Home City Enveloped In Fear, Anger And Disbelief (FT)

Few cities are as dependent on one company as Wolfsburg. Situated 200km west of Berlin, it is home not just to the world’s biggest factory and Volkswagen’s headquarters, it also has a VW Arena where Champions League football is played, a VW bank, and even a VW butcher that makes award-winning curried sausage. “VW is God here,” says a Turkish baker on the main shopping street of Porschestrasse. But news of VW’s diesel emissions scandal has hit the city hard, sparking anger and dismay as well as worries of the financial and employment consequences for both the carmaker and Wolfsburg. Some are even invoking the decline of another motor city Detroit in the US.

“I am worried. It’s not good for Wolfsburg. Detroit stands as a negative example for what can happen: the city has collapsed. The same here is also thinkable,” says Uwe Bendorf, who was born and raised in Wolfsburg and now works at a health insurer. VW’s sprawling factory employs about 72,000 in a city with just 120,000 inhabitants. Over an area of more than 6 sq km, three times the size of the principality of Monaco, the plant churns out 840,000 cars a year, including the VW Golf, Tiguan and Touran models. Among workers, the scandal dominates rather like the chimney stacks of the factory’s power station tower over Wolfsburg.

“It was shock. Then anger. How could they be so stupid?” says one worker, describing his emotions on hearing last month that VW had admitted to large scale cheating in tests on its diesel vehicles for harmful emissions of nitrogen oxides. Another worker says: “Everyone is worried. Will we get our bonus still? Will there be job cuts? There is so much uncertainty.” Outside the factory gates, few are keen to be seen speaking to the media. But this is a city in which VW is omnipresent, and a VW worker never far away.

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“Total equity sales by Russian companies this year are set to be about 30 times lower than the 2007 peak..”

The Russians Are Fleeing London’s Stock Market (Bloomberg)

Russian expansionism is going into reverse, at least on the London stock market. Three of Russia’s major commodity-related companies are already preparing to withdraw their listings after the bursting of the raw-materials boom and a slump in share sales by the nation’s companies from more than $30 billion in 2007 to below $1 billion this year. Eurasia Drilling, the country’s largest oil driller, said last week its owners and managers offered to buy shareholders out and take the company private. That follows a move by potash miner Uralkali PJSC to buy back a major part of its free float, saying in August it may delist shares in London as a result. Billionaire Suleiman Kerimov’s family also plans to take Polyus Gold private.

More may follow as their owners’ interest in using foreign shares as a route to expansion wanes in tandem with overseas investors’ appetite for raw-material and emerging-market stocks, said Kirill Chuyko at BCS Financial Group in Moscow. “Each company has a specific reason, but the common one is that investors’ appetite for commodities-related stocks, especially from the emerging markets, is exhausted,” Chuyko said. “At the same time, the owners see that the companies’ valuations don’t reflect their hopes and wishes, while maintaining the listing requires some effort and expenditure.” Total equity sales by Russian companies this year are set to be about 30 times lower than the 2007 peak, when global commodity prices were about 90% higher than current levels.

A gauge of worldwide emerging-market stocks has declined 14% in the past year. Russia has been among the hardest-hit emerging economies as prices of oil and gas, making up half of the national budget, collapsed since last year. The economy shrank 4.6% in the second quarter from a year earlier. That’s a reversal from when oil prices and growth were high and local companies talked up expanding overseas. Polyus planned to merge with a global rival to become one of the world’s top three gold miners, billionaire Mikhail Prokhorov, who controlled the company at the time, said in December 2010. The producer, which redomiciled to the U.K. in 2012 as part of the plan, never achieved his goal.

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How on earth has this not been obvious for years now?

Soaring London House Prices Sucking Cash Out Of Economy (Guardian)

Soaring London house prices are costing the economy more than £1bn a year and preventing the creation of thousands of jobs, as individuals plough money into buying and renting instead of spending their cash elsewhere, a report has claimed. London’s housing market recovered quickly from the financial downturn of 2008-2009 and in recent years rents and house prices have rocketed. House prices are more than 46% above their pre-crisis peak, at an average of £525,000 according to the Office for National Statistics, while rents in the private sector have risen by a third over the past decade. The report, by business group London First and consultancy CEBR, found that workers in many sectors were now priced out of the capital, while companies were being forced to pay more to attract staff and help them meet living expenses.

The report said there was a knock-on effect on consumer spending, with money being spent on expensive mortgages and rents rather than other goods. It said as much as £2.7bn could have been spent elsewhere in 2015 if housing costs had kept in line with inflation over the past decade. This additional spending could have supported almost 11,000 more jobs, and meant a boost to the economy of more than £1bn this year. Workers in shops, cafés and restaurants, and those performing administrative office roles would have to pay their entire pre-tax salary to rent an average private home in London, the report found, while social workers, librarians, and teachers faced rents equivalent to more than half their salaries.

It said only the best-paid workers, including company directors and those working in financial services, earned enough to rent in central London “affordably”; that is paying less than one-third of their salaries on housing. “The housing crisis is making it difficult to attract and retain staff in retail, care and sales occupations,” it said. “Even if they spend a limited amount on other goods and services, they are effectively priced out of living independently in the capital. They need to co-habit with partners, friends or family, or be eligible for social housing in the capital.” To compensate for high housing costs, employees expected higher salaries, which meant firms were paying an average of £1,720 a year more to workers than they would have had accommodation costs risen only in line with inflation since 2005. This meant an extra wage bill for firms of £5bn this year, and the figure was set to grow to £6.1bn by 2020.

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No worries, mate, there’ll be loud denials right up to the end.

Australia Housing Bust Now The Greatest Recession Risk (SMH)

House prices are set for a 7.5% decline from March next year, with the resulting slowdown in housing lending and construction activity set to hit the broader economy, according to a range of investment banks. “Our economics team are forecasting quarter-on-quarter house prices to fall from the March 2016 quarter before beginning to recover from June 2017,” said Macquarie Research in a briefing note entitled: “Australian Banks: What goes up, must come down”. Macquarie said there would be a “7.5% reduction from peak to trough”. Another economist says heavy household debt and softening house prices pose a greater recession risk to the Australian economy than the slowdown in China.

Bank of America Merrill Lynch Australian economist Alex Joiner says high historic indebtedness, coupled with the chance of a downturn in house-building and prices, could further crimp consumer spending and property investment once the Reserve Bank of Australia was forced to tackle inflation by lifting interest rates. He said while the chance of a “hard landing” in the Chinese economy – on which Australia depends heavily for exports and inward investment – was small, a sharp decline in demand for housing in overheated markets such as Melbourne and Sydney was more probable and would drag the broader economy with it. “We are not forecasting collapse or the bursting of any perceived bubble,” Mr Joiner wrote in a note.

“That said, it is not difficult to envisage a more hard landing scenario in the property market. “This would clearly have a greater negative macro-economic impact channelled through households and the residential construction cycle,” he said. His fears are based on current household indebtedness measures, which have soared to the highest ever. These include the dwelling price-to-income ratio, currently at “never before observed” levels of five and a half times, and a household debt-to-gross-domestic-product ratio, which is at a “record high” 133.6%.

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I know Joris has read at least some of the many articles I wrote on the topic. Wonder what he took away from that.

Don’t Let The Nobel Prize Fool You. Economics Is Not A Science (Joris Luyendijk)

Business as usual. That will be the implicit message when the Sveriges Riksbank announces this year’s winner of the “Prize in Economic Sciences in Memory of Alfred Nobel”, to give it its full title. Seven years ago this autumn, practically the entire mainstream economics profession was caught off guard by the global financial crash and the “worst panic since the 1930s” that followed. And yet on Monday the glorification of economics as a scientific field on a par with physics, chemistry and medicine will continue. The problem is not so much that there is a Nobel prize in economics, but that there are no equivalent prizes in psychology, sociology, anthropology. Economics, this seems to say, is not a social science but an exact one, like physics or chemistry – a distinction that not only encourages hubris among economists but also changes the way we think about the economy.

A Nobel prize in economics implies that the human world operates much like the physical world: that it can be described and understood in neutral terms, and that it lends itself to modelling, like chemical reactions or the movement of the stars. It creates the impression that economists are not in the business of constructing inherently imperfect theories, but of discovering timeless truths. To illustrate just how dangerous that kind of belief can be, one only need to consider the fate of Long-Term Capital Management, a hedge fund set up by, among others, the economists Myron Scholes and Robert Merton in 1994. With their work on derivatives, Scholes and Merton seemed to have hit on a formula that yielded a safe but lucrative trading strategy. In 1997 they were awarded the Nobel prize.

A year later, Long-Term Capital Management lost $4.6bn in less than four months; a bailout was required to avert the threat to the global financial system. Markets, it seemed, didn’t always behave like scientific models. In the decade that followed, the same over-confidence in the power and wisdom of financial models bred a disastrous culture of complacency, ending in the 2008 crash. Why should bankers ask themselves if a lucrative new complex financial product is safe when the models tell them it is? Why give regulators real power when models can do their work for them?

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Excellent overview by Tyler Durden.

The Tragic Ending To Obama’s Bay Of Pigs: CIA Hands Over Syria To Russia (ZH)

One week ago, when summarizing the current state of play in Syria, we said that for Obama, “this is shaping up to be the most spectacular US foreign policy debacle since Vietnam.” Yesterday, in tacit confirmation of this assessment, the Obama administration threw in the towel on one of the most contentious programs it has implemented in “fighting ISIS”, when the Defense Department announced it was abandoning the goal of a U.S.-trained Syrian force. But this, so far, partial admission of failure only takes care of one part of Obama’s problem: there is the question of the “other” rebels supported by the US, those who are not part of the officially-disclosed public program with the fake goal of fighting ISIS; we are talking, of course, about the nearly 10,000 CIA-supported “other rebels”, or technically mercenaries, whose only task is to take down Assad.

The same “rebels” whose fate the AP profiles today when it writes that the CIA began a covert operation in 2013 to arm, fund and train a moderate opposition to Assad. Over that time, the CIA has trained an estimated 10,000 fighters, although the number still fighting with so-called moderate forces is unclear.

The effort was separate from the one run by the military, which trained militants willing to promise to take on IS exclusively. That program was widely considered a failure, and on Friday, the Defense Department announced it was abandoning the goal of a U.S.-trained Syrian force, instead opting to equip established groups to fight IS.

It is this effort, too, that in the span of just one month Vladimir Putin has managed to render utterly useless, as it is officially “off the books” and thus the US can’t formally support these thousands of “rebel-fighters” whose only real task was to repeat the “success” of Ukraine and overthrow Syria’s legitimate president: something which runs counter to the US image of a dignified democracy not still resorting to 1960s tactics of government overthrow. That, and coupled with Russia and Iran set to take strategic control of Syria in the coming months, the US simply has no toehold any more in the critical mid-eastern nation. And so another sad chapter in the CIA’s book of failed government overthrows comes to a close, leaving the “rebels” that the CIA had supported for years, to fend for themselves. From AP:

CIA-backed rebels in Syria, who had begun to put serious pressure on President Bashar Assad’s forces, are now under Russian bombardment with little prospect of rescue by their American patrons, U.S. officials say. Over the past week, Russia has directed parts of its air campaign against U.S.-funded groups and other moderate opposition in a concerted effort to weaken them, the officials say. The Obama administration has few options to defend those it had secretly armed and trained.

The Russians “know their targets, and they have a sophisticated capacity to understand the battlefield situation,” said Rep. Mike Pompeo, R-Kan., who serves on the House Intelligence Committee and was careful not to confirm a classified program. “They are bombing in locations that are not connected to the Islamic State” group.

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Seems racism is the only way they can barely keep their distribution plans alive.

EU Must Stop ‘Racist Criteria’ In Refugee Relocation – Greece (Reuters)

The EU must stop countries picking and choosing which refugees they accept in its relocation programme, otherwise it will turn into a shameful “human market”, Greece’s new migration minister said. The EU has approved a plan to share out 160,000 refugees, mostly Syrians and Eritreans, across its 28 states in order to tackle the continent’s worst refugee crisis since World War Two. The first 19 Eritrean asylum seekers were transferred from Italy to Sweden on Friday. Some countries, such as Slovakia and Cyprus, have expressed a preference for Christian refugees and Hungary has said the influx of large numbers of Muslim migrants threatens Europe’s “Christian values”. Migration Minister Yannis Mouzalas said that Greece was having trouble finding refugees to send to certain countries because the receiving nations had set what he called “racist criteria”.

He declined to name the states concerned. “Views such as ‘we want 10 Christians’, or ’75 Muslims’, or ‘we want them tall, blonde, with blue eyes and three children,’ are insulting to the personality and freedom of refugees,” Mouzalas told Reuters. “Europe must be categorically against that.” An EU official said a group of Syrian refugees was due to be relocated from Greece to Luxembourg under the EU scheme around Oct. 18, the first to be officially reassigned from Greece. A gynaecologist and founding member of the Greek branch of aid agency Doctors of the World, Mouzalas urged the EU to enforce strict quotas “otherwise it will turn into a human market and Europe hasn’t got the right to do that”. The refugees are generally not allowed to select the country to which they are assigned.

Greece has seen a record of about 400,000 refugees and migrants – mainly from Syria, Afghanistan and Iraq – arrive on its shores this year from nearby Turkey, hoping to reach wealthier northern Europe. Those who can afford it move on quickly to other countries, sometimes on tour buses taking them straight from the main port of Piraeus, near Athens, to the Macedonian border. But several thousand, mostly Afghans, have ended up trapped in Greece for lack of money. European authorities are reluctant to treat Afghans systematically as refugees, and a result, they are shut out of the relocation process. “It’s absurd to think that Afghans are coming to find better work. There is a long-lasting war, you aren’t safe anywhere, that’s the reality,” Mouzalas said.

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Oct 042015
 
 October 4, 2015  Posted by at 9:52 am Finance Tagged with: , , , , , , , ,  1 Response »
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Russell Lee Photo booth at fiesta, Taos, New Mexico Jul 1940

Markets Are Back At Panic Levels, Says Credit Suisse (MarketWatch)
Post-QE “S&P Should Be Trading At Half Of Its Value”: Deutsche Bank (ZH)
Oil Slump Plays Havoc With The Junk-Bond Market (MarketWatch)
Oil Bulls Lose Faith in Recovery as Russia Adds to Global Glut (Bloomberg)
Economists Can’t Find the Silver Lining in US Jobs Report (Bloomberg)
US Hedge Funds Brace For Worst Year Since Financial Crisis (Reuters)
US System Designed To Prevent Financial Crisis ‘Likely To Fail’ (MarketWatch)
Fed’s Fischer Says Financial Stability Toolkit May Need To Grow (Reuters)
IMF’s Mass Debt Relief Call For Greece Set To Be Rejected By Europe (Telegraph)
New Greek Debt Framework Not So Flattering For Italy, Spain, Portugal (WSJ)
‘Bubbles Are All Over The Place’: Ron Paul (RT)
History Isn’t A Guide When Market Is Playing By A New Set Of Rules (Ind.)
The Failure Of Central Banking: The French Revolution Case Study (Lebowitz)
UK Car Emissions Test Body Receives 70% Of Cash From Motor Industry (Observer)
The Record US Military Budget. Spiralling Growth of America’s War Economy (Davies)
153,000 Refugees Arrived In Greece In September Alone (UNHCR)
280,000 Refugees Arrived In Germany In September (AFP)

They can’t let go: “..panic equals buying opportunities..”

Markets Are Back At Panic Levels, Says Credit Suisse (MarketWatch)

If it feels like you’re reliving the market jitters of the Great Recession and eurozone crisis, it’s probably because you are. During this week, global risk appetite dropped to “panic” levels for the first time since January 2012, according to Credit Suisse’s Global Risk Appetite Index. That was back when investors feared a breakup of the euro bloc, grappled with unsustainably high sovereign borrowing costs and freaking out about the spillover from Greece. Before that, the index reached panic state around the onset of the 2008 financial crisis, after the Sept. 11, 2001 attacks on the U.S., during the dotcom bubble and after Black Monday in 1987. Get the picture?

This time, Credit Suisse’s Global Risk Appetite Index slipped into panic territory just as global equity markets were wrapping up their worst quarter in four years. That came as investors feared a sharp slowdown in China’s economy and a collapse in commodity prices. “Global growth is not a strong supportive factor for risky assets right now,” said the analyst team led by the bank’s chief economist, James Sweeney. “Weak Chinese growth has had very negative effects on general emerging market performance and commodity prices. And a strong dollar has caused many exporters around the world to see declining trade revenues, even if actual activity has not fallen off a cliff,” they added. Indeed, the U.S. economy may not even have grown 1% in the third quarter, according to the Atlanta Fed’s GDPNow tracker.

But here’s for the good news: panic equals buying opportunities. The Credit Suisse analysts said panic usually is an overreaction to short-term events, providing a chance to buy risky assets at a cheaper price. There’s a caveat for the current panic state, however. Because of the murky global growth outlook, investors should only use this as a short-term opportunity, rather than going in for the long haul, the analysts said. “If panic persists, it could alter the global growth outlook for the worse. Ongoing panic and weak global growth would likely influence Fed behavior. But history suggests rebounds often occur when they are least expected,” they said. “That’s why we see the current panic as a tactical opportunity, even if it does not point to a lasting boom in risky assets.”

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Define ‘value’.

Post-QE “S&P Should Be Trading At Half Of Its Value”: Deutsche Bank (ZH)

[..] “Since 2013, stocks rallied while disinflationary pressures were reinforced by a strong USD, low commodity prices and a decline in global demand. If pre-2013 coordination between the two is taken as a reference, then based on current stock prices breakevens should trade about 1.5% wider. This means the Fed should be hiking because inflation is above target. Alternatively, given the current level of inflation, S&P should be trading at half of its value.”

Wait, the S&P should be trading at 900… or even less? Yes, according to the following Deutsche Bank chart:

Only one question remains: which breaks first – do inflation expectations surge higher, soaring by some 150 bps to justify equity valuations, or do equities crash?

“Is reconciliation likely – and, if so, in which direction? Are we returning to the pre-crisis world, or we are in a completely new regime?”

The answer will come from none other than the Fed and by now, even Janet Yellen knows that one word out of place, one signal to the market that the QE-inflation trade will converge with stocks crashing instead of inflation rising (which, unless the Fed launched QE4, NIRP of even helicopter money now appears inevitable), and some $10 trillion in market cap could evaporate overnight. Is it any wonder that Yellen is exhibiting “health issues” during her speeches: the realization that the fate of the biggest stock market bubble lies on your shoulders would make anyone “dehydrated.” In retrospect, Ben Bernanke knew exactly what he was doing when he got out of Dodge just as the endgame was set to begin.

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The last few sources of funding dry up.

Oil Slump Plays Havoc With The Junk-Bond Market (MarketWatch)

Low oil prices continued to wreak havoc in the U.S. high-yield bond market in September, and the outlook remains grim, reports from two major rating firms showed Friday. Moody’s said its Liquidity Stress Index, a measure of stress in the high-yield bond market, deteriorated in the month, weighed down once again by a wave of downgrades in the energy sector. The index rose to 5.8% in September from 5.1% in August, placing it at its highest level since October of 2010. The index measures the number of companies that carry Moody’s lowest liquidity rating of SGL-4. The index rises when more issuers are placed in that category, and it falls when liquidity improves.

The U.S. high-yield market is dominated by energy companies, many of them highly leveraged shale producers that had ramped up production while oil prices were soaring. Many are now struggling as the low oil price hammers profits just as debt service costs rise. Crude has lost roughly 59% of its value in the past year, falling from a high close to $107 a barrel in 2014 to about $44 on Friday. Reflecting the pressure on risky borrowers, the energy Liquidity Stress subindex shot up to 16.9% in September from 12.7% in August, its highest level since it reached 19.2% in July of 2009. “The LSI’s rise warns that more companies are becoming dependent on increasingly fickle capital markets to alleviate liquidity pressures, and this is putting upward pressure on defaults,” Moody’s said in a report.

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Pumping at full capacity is the only lifeline left.

Oil Bulls Lose Faith in Recovery as Russia Adds to Global Glut (Bloomberg)

Hedge funds trimmed bullish oil bets for the first time in six weeks, losing faith in a swift recovery as Russia boosted output to the highest since the Soviet Union collapsed. Speculators reduced their net-long position in West Texas Intermediate crude by 9.1% in the week ended Sept. 29, according to data from the Commodity Futures Trading Commission. Longs dropped from a 12-week high while shorts increased. U.S. crude output is down 514,000 barrels a day from a four-decade high reached in June, Energy Information Administration data show. The number of rigs targeting oil in the U.S. dropped to a five year low, Baker Hughes said Oct. 2. WTI traded in the tightest range since June last month as China’s slowing economy and the highest Russian output in two decades signaled the global glut will linger.

“The U.S. producers are the only ones doing their part to reduce the global glut,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund, said by phone. “Other countries, such as Russia, are pumping at full tilt. The cutbacks by shale producers here aren’t going to have much impact, especially given the slowing global economy.” WTI decreased 1.3% in the report week to $45.23 a barrel on the New York Mercantile Exchange. It settled at $45.54 Friday. U.S. crude stockpiles, already about 100 million barrels above the five-year average, may swell further. Stockpiles have climbed during October in eight of the last 10 years as refiners slow operations to perform seasonal maintenance.

Russian oil output rose to a post-Soviet record last month as producers took advantage of the weak ruble to push ahead with drilling. The nation’s production of crude and condensate climbed to 10.74 million barrels a day, 1% more than a year earlier and topping a record set in June, according to data from the Energy Ministry’s CDU-TEK unit.

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Give ’em a few days…

Economists Can’t Find the Silver Lining in US Jobs Report (Bloomberg)

When the U.S. jobs report is released each month, there’s typically enough nuance to offer something for everyone — the good and the bad. Today proved to be a feast for the bears. “When you look through all the details of the data, there just isn’t anything good to hang your hat on,” said Thomas Simons at Jefferies in New York. “It’s been years since we’ve seen such an unambiguously bad report. Silver linings were tough to come by in the September jobs data. Payrolls came in at a much-weaker-than-forecast 142,000, while August and July figures were revised down. Wage growth was nonexistent for the month, with average hourly earnings actually falling by a penny on average.

The softness in manufacturing endured, with factory payrolls falling by 9,000 when they were expected to show no change. With dollar appreciation and sluggish overseas growth providing headwinds, it was the biggest back-to-back decline since 2010. Even service industries, which make up the lion’s share of the economy and are more shielded from global weakness, seem to have shifted into a lower gear. Payroll growth there has slowed for four straight months, the longest such streak since 2001. “While it’s always important not to overreact to one single data release, we’ll make an exception in this case,” Paul Ashworth at Capital Economics in Toronto, wrote in a note to clients. “Aside from manufacturing, the slowdown in employment gains is most notable in business services and education and health, which are not the sectors most prone to cyclical swings.”

Even a small positive in today’s report — a sharp decline in the ranks of the underemployed — must be taken with a grain of salt, economists said. The ranks of people working part-time for economic reasons fell by the most since January 2014, which is generally a good sign. However, the number of full-time employees dropped as well. Meanwhile the labor force participation rate decreased to the lowest level since October 1977. At best, the data are murky. “It’s weak through and through,” Simons said. Because such thoroughly disappointing reports are so rare, “we probably won’t see it again next time around.”

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Numbered days?!

US Hedge Funds Brace For Worst Year Since Financial Crisis (Reuters)

U.S. hedge funds are bracing for their worst year since the 2008 financial crisis after a dramatic sell-off in healthcare and biotechnology stocks triggered double-digit losses for some prominent players last month. September’s sucker punch in the biotech sector, on top of a grim August when global markets tumbled due to fears about slowing growth in China, have pushed many hedge fund managers deep into the red. “These are some of the worst numbers we have seen since the crisis,” said Sam Abbas, whose Symmetric IO tracks hedge fund managers’ returns. The average hedge fund lost 19% in 2008 when the credit crunch hit. Since then, hedge funds have had only one down year, when they lost 5.25% in 2011, data from Hedge Fund Research show.

While the biotech sector held up relatively well during the initial market sell-off in August, it cratered in September. “It was the last remaining bastion of alpha and a sector where many hedge funds were hiding. Now it has succumbed,” said Peter Rup at Artemis Wealth Advisors, which invests in hedge funds. Rup said he was expecting some big negative surprises as more hedge funds send September returns to clients. Some of America’s most prominent hedge funds have seen their returns crumble. David Einhorn’s Greenlight Capital, now off 17%, is on track to post its first losses since 2008. And William Ackman’s Pershing Square Capital Management, which has a big bet on Valeant, told investors on Thursday that its Pershing Square Holdings portfolio is now off 12.6% for the year, a big reversal of fortune after 2014’s 40% gain. “Hedge funds are reeling from a relentless rout that has all but killed a year’s worth of alpha in a matter of two weeks,” Stanley Altshuller at research firm Novus wrote in a report.

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So.. more bailouts.

US System Designed To Prevent Financial Crisis ‘Likely To Fail’ (MarketWatch)

The current U.S.regulatory structure designed to prevent another financial crisis is “Balkanized,” a “mess” and likely to fail when needed, experts said. “The current U.S. institutional set-up is likely to fail in a crisis, and will be doing less to prevent a crisis than it should be,” said Adam Posen, president of the Peterson Institute for International Economics, at a two-day conference on financial stability sponsored by the Boston Federal Reserve. Posen said that U.S. regulators, including the Fed, don’t have the tools or the mandates from Congress that they need. Posen was especially critical of the umbrella group of regulators, the Financial Stability Oversight Council, that was set up by Dodd Frank to identify and deal with financial stability risks.

He said FSOC is chaired by the Secretary of Treasury, who is the most political member of the group. “To me, the FSOC is a mess,” Posen said. Mervyn King, the former head of the Bank of England, agreed that the U.S. institutional structure was a problem. He said U.S. regulators had a knack of working well together in a crisis, whatever the institutional structure. “It is before the crisis that the U.S. set-up is to be questioned,” King said. Well before the financial crisis, the U.S. and the Bank of England had a war game to discuss a possible cross-border bank failure, King said. The U.K. regulators had three key participants, while the U.S. had a “mass choir,” he said. Former Fed vice chairman Donald Kohn agreed: “broader and deeper structural deficiencies exist in the U.S. regulatory system for macroprudential regulation.”

Kohn said there is a widespread perception in Washington that the Fed is responsible for financial stability, but said in reality the Fed must work in a “Balkanized” regulatory system. He agreed that FSOC “cannot remedy the underlying flaws of financial regulation in the U.S.” During the conference, regulators and experts echoed concerns with the regulatory structure. Fed Vice Chairman Stanley Fischer said the Fed needed new tools targeted at the real estate sector to prevent another bubble. Boston Fed President Eric Rosengren suggested that Congress needed to give the U.S. central bank a third mandate to foster financial stability.

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Central banks’ toolkits should be abolished, not expanded. They create only mayhem.

Fed’s Fischer Says Financial Stability Toolkit May Need To Grow (Reuters)

The U.S.’s set of tools to limit asset bubbles is neither large nor “battle tested,” Federal Reserve vice chair Stanley Fischer said on Friday in a call for regulators to step up research on how to improve financial stability. Fischer said that compared to other countries the complexity of the U.S. financial system and the diverse number of regulators may make it difficult to develop or deploy so-called “macroprudential” tools – policies that could be used to selectively cool overheated financial markets. As head of the Bank of Israel, Fischer put such tools to work, for example, by hiking loan to value ratios on home mortgages to slow a run-up in real estate values. He has said the U.S. should examine that and other policies before new financial risks emerge, though he acknowledged they may be tough to implement.

“I remain concerned that the U.S. macroprudential toolkit is not large and not yet battle tested,” Fischer said, and it may be difficult to expand because so many agencies have control over different parts of the financial system. In addition, he said, targeting policies at one sector, such as home mortgages, could simply push that sort of lending to less regulated companies. There is concern that the Dodd-Frank regulations put in place after the crisis are already doing that, helping expand the influence of “shadow” banks not covered by the same rules as commercial lenders. Some of those regulations have a macroprudential character, such as the stress testing of banks and the possible imposition of “countercyclical” capital buffers that could require the largest banks to hold more in reserve if markets overheat.

Ultimately Fischer said it may be left to monetary policy to bear responsibility for financial stability. “The limited macroprudential toolkit…leads me to conclude that there may be times when adjustments to monetary policy should be discussed as a means to curb risks to financial stability,” Fischer said. Even though the interest rate is a blunt tool, requiring a potential tradeoff of higher unemployment if it was hiked to control an asset bubble, “we need to consider the potential role of monetary policy in fostering financial stability,” he said. That could include using narrower policy tools, like bank reserve requirements, and not just the interest rate alone, he said.

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And then Greece can jump back into crisis mode. No relief till 2017/18.

IMF’s Mass Debt Relief Call For Greece Set To Be Rejected By Europe (Telegraph)

The IMF is still poised to pull out of Greece’s third international rescue in five years over the sensitive issue of debt relief. The fund is pushing for a restructuring of at least €100bn of Greece’s €320bn debt pile, according to a report in Germany’s Rheinische Post. Such bold measures to extend maturities and reduce interest payments are set to be rejected by its European partners, who are unwilling to impose massive lossess on their taxpayers. The head of Greece’s largest creditor – Klaus Regling of the European Stability Mechanism – told the Financial Times that such radical restructuring was “unnecessary”. Debt relief is also not due to be discussed when eurozone finance ministers gather to meet for talks on Monday, said EU officials.

This intransigence could now see the IMF withdraw its involvement when its programme ends in March 2016. In debt sustainability analysis carried out by body, it has suggested Greece may need a full moratorium on payments for 30 years to finally end its reliance on international rescues. The reports came after a former IMF watchdog urged the world’s “lender of last resort” to be more critical of its involvement in many bail-out countries for the sake of the institution’s credibility. “Few reports probe more fundamental questions – either about alternative policy strategies or the broader rationale for IMF engagement,” said a report from David Goldsbrough, a former deputy director of IMF’s Independent Evaluation Office (IEO). The IMF has come under fire for failing in its duty of care towards Greece by pushing self-defeating austerity measures on the battered economy.

The Washington-based fund has previously admitted it should have eased up on the spending cuts and tax hikes, pushed for an earlier debt restructuring and paid more “attention” to the political costs of its punishing policies during its five-year involvement in Greece. Accounts from 2010 show the IMF was railroaded into a Greek rescue programme on the insistence of European authorities, vetoing the objections of its own board members from the developing world. The IMF is prevented from lending to bankrupt nations by its own rules. But it deployed an “exceptional circumstances” justification to provide part of a €110bn loan package to Athens five years ago. Greece has since become the first ever developed nation to default on the IMF in its 70-year history.

Despite privately urging haircuts for private sector creditors in 2010, the IMF was ignored for fear of triggering a “Lehman” moment in Europe, by then European Central Bank chief Jean-Claude Trichet. Greece later underwent the biggest debt restructuring in history in 2012. The findings of the fund’s research division have largely discredited the notion that harsh austerity will bring debtor nations back to health. However, this stance has been at odds with its negotiators during Greece’s new bail-out talks where officials have continued to demand deep pension reforms and spending cuts for Greece. Diplomatic cables between Greece’s ambassador to Washington have since revealed the White House pressed the fund to make vocal calls for mass debt relief to keep Greece in the eurozone during fraught negotiations in the summer.

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All it takes is a straw.

New Greek Debt Framework Not So Flattering For Italy, Spain, Portugal (WSJ)

When eurozone governments decided to throw Greece another financial lifeline this summer, they also embraced a new way of assessing whether the country will ever be able to repay its debts. But that framework isn’t so flattering for three other highly indebted euro countries. Italy, Portugal and Spain all have gross financing needs—the money a country has to raise to cover its deficit and roll over maturing debt—above 15% of gross domestic product in the coming years. That’s the maximum level the IMF said is manageable for Greece in its preliminary debt-sustainability analysis released this summer. By contrast, Cyprus and Ireland, two other euro countries that were bailed out in recent years, remain below the 15% threshold.

The question of when a country’s debt can be considered sustainable has been central to bailout discussions between the eurozone and the IMF for years. And the answer has been changing regularly—especially in the case of Greece. In the spring of 2012, the International Monetary Fund signed off on a second multibillion bailout, only after a steep writedown on its government bonds promised to bring Greek debt below 120% of gross domestic product by 2020. That, the IMF said at the time, was necessary to make the country’s debt “sustainable in the medium term.” It didn’t take long for that prediction to become outdated. By November 2012 it became clear that the 120% by 2020 was now out of reach. To keep the IMF on board, eurozone governments promised to ensure Greece’s debt would be “substantially lower than 110%” of gross domestic product by 2022.

Fast forward to 2015 and months of back and forth between Greece’s left-wing anti-austerity government and the rest of the eurozone. By the end of June, the IMF was once again ringing the alarm bells over Greek debt. The bigger deficits, lower growth and fewer privatizations expected under the Syriza-led government “render the debt dynamics unsustainable,” the fund warned. In its analysis released in on July 2, three days before Greeks overwhelmingly voted “no” in a referendum on a new bailout deal, the IMF said that Greece’s debt was going to remain at 149.9% in 2020. Even if debt sustainability was going to be judged by gross financing needs rather than the debt-to-GDP ratio, it was still unlikely that Athens would ever be able to regain its financial independence without substantial debt relief, the IMF warned. It was in this report that the IMF first official mentioned 15% as the adequate threshold for determining Greece’s debt sustainability.

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“..everything is a mistake and everything is going to be volatile…”

‘Bubbles Are All Over The Place’: Ron Paul (RT)

The US economy is set to grow 0.9% in the third quarter after a bigger-than-expected widening of the trade gap for goods in August, according to the Atlanta Federal Reserve’s GDPNow. This appeared to be a much slower rate from the regional Fed bank’s prior estimate of 1.8% last week, the Atlanta Fed noted. “It’s just the beginning of a downturn, nothing’s really happened yet,” Paul said. “Everything is misdirected because of the price of money. There are bubbles every place. You have a stock market bubble, you have still bubblemaking in housing when you see houses selling for $500 million, and you have a bubble in student loans.”

“The bubbles are all over the place. This is the problem. I don’t see an easy way out. I think the markets are going to go down a lot more when you realize how serious this is. Actually we are doing better than the rest of the world but we’re in for trouble too because the world has never had a situation like this where a whole world endorsed a paper currency and had pyramiding of debt around the world by the reserve currency which is the dollar. “It’s the biggest bubble ever, so it’s going to big the biggest crash ever, but it remains to be seen exactly when that’s going to hit. The source of the trouble is the Federal Reserve System, which simply cannot work in a real market economy, Dr Paul said.

“In a true free market economy you have to have people work, use what they need to live on and then save money, and that dictates interest rates and tells businessmen what they should do. Well, that isn’t the way it works any more. The so-called capital comes from the Fed and they create it out of thin air. So everything is a mistake and everything is going to be volatile. You can do this for a while when the country is very very wealthy, and a currency is very very strong.” “But eventually people mistrust the government. They don’t pay interest, they have a huge amount of principal to pay, and corporations are deeply in debt, they borrow a lot of money practically for free and they buy up their stocks. It’s a mess. It’s artificial. It has nothing to do with freedom, has nothing to do with free markets, and the sooner we realize this, the sooner we’ll get rid of central economic planning and especially look into the serious problems we get from the Federal Reserve System.”

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Only a few now the new rules.

History Isn’t A Guide When Market Is Playing By A New Set Of Rules (Ind.)

[..] an unstable global economy is nothing new. David Buik, a City of London veteran and a commentator for the stockbroker Panmure Gordon, has a theory – and it’s one echoed by many who have seen trading evolve over the years. “I think we forget that 40% of trades are programme trades,” Buik explains. “The number of what I call ‘numeric geeks’ that now work in the markets would never have considered being in the markets 50 years ago. “You’ve got a totally different person. He’s incredibly bright and he works out programmes that decide when it’s time to buy and sell. When you’ve got that kind of influence [on the market] you get that level of volatility.” Automated trading has changed the way the stock market works beyond all recognition.

Instead of holding a stock for years, months or days, as was the norm in years gone by, shares can now be owned for a matter of milliseconds. For example, a programme could be created to buy a stock when it reaches £10 and sell it at £10.0001. It might not sound like a big gain, but do it many thousands of times and it can make a tidy profit. High-frequency trading of this nature is also to blame for the “flash crashes” that have happened in recent years. So-called “stop-losses” can be put on trades, meaning that when a share price falls below a level determined by the investor, it is automatically sold, limiting their loss. For investors, it can mean the difference between a small loss and a catastrophic one – as plenty of those Glencore backers would attest to.

But inevitably, automatic stop-loss sales drag share prices down and trigger more selling, causing a dangerous domino effect as investors are automatically bailed out. The stock market is being played or manipulated by financial whiz kids – all completely legally, of course – but it is not what the market was intended for – investing in a company for the benefit of the backer and the recipient. The result is that the market has become increasingly detached from the real world and not a fair reflection of what most see as an improving outlook for the global economy. America, the world’s largest economy, is on the up and an interest rate rise is still expected this year. Yet the US stock market does not reflect that, with its benchmark Dow Jones average falling 8% in the third quarter.

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Great history.

The Failure Of Central Banking: The French Revolution Case Study (Lebowitz)

During the 1700’s France accumulated significant debts under the reigns of King Louis XV and King Louis XVI. The combination of wars, significant financial support of America in the Revolutionary War, and lavish government spending were key drivers of the deficit. Through the latter part of the century, numerous financial reforms were enacted to stem the problem, but none were successful. On a few occasions, politicians supporting fiscal austerity resigned or were fired because belt tightening was not popular and the King certainly didn’t want a revolution on his hands. For example, in 1776 newly anointed Finance Minister Jacques Necker believed France was much better off by taking large loans from other countries instead of increasing taxes as his recently fired predecessor argued.

Necker was ultimately replaced 7 years later when it was discovered France had heavy debt loads, unsustainable deficits, and no means to pay it back. By the late 1780’s, the gravity of France’s fiscal deficit was becoming severe. Widespread concerns helped the General Assembly introduce spending cuts and tax increases. They were somewhat effective but the deficit was very slow to decrease. The problem, however, was the citizens were tired of the economic stagnation that resulted from belt tightening. The medicine of austerity was working but the leaders didn’t have the patience to rule over a stagnant economy for much longer. The following quote from White sums up the situation well:

“Statesmanlike measures, careful watching and wise management would, doubtless, have ere long led to a return of confidence, a reappearance of money and a resumption of business; but these involved patience and self?denial, and, thus far in human history, these are the rarest products of political wisdom. Few nations have ever been able to exercise these virtues; and France was not then one of these few”.

By 1789, commoners, politicians and royalty alike continuously voiced their impatience with the weak economy. This led to the notion that printing money could revive the economy. The idea gained popularity and was widely discussed in public meetings, informal clubs and even the National Assembly. In early 1790, detailed discussions within the Assembly on money printing became more frequent. Within a few short months, chatter and rumor of printing money snowballed into a plan. The quickly evolving proposal was to confiscate church land, which represented more than a quarter of France’s acreage to “back” newly printed Assignats (the word assignat is derived from the Latin word assignatum – something appointed or assigned).

This was a stark departure from the silver and gold backed Livre, the currency of France at the time. Assembly debate was lively, with strong opinions on both sides of the issue. Those against it understood that printing fiat money failed miserably many times in the past. In fact, the John Law/Mississippi bubble crisis of 1720 was caused by an over issue of paper money. That crisis caused, in White’s words, “the most frightful catastrophe France had then experienced”. History was on the side of those opposed to the new plan.

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Cosy.

UK Car Emissions Test Body Receives 70% Of Cash From Motor Industry (Observer)

The body examining the practices of the car industry following the Volkswagen emissions scandal has been accused of a major conflict of interest after it emerged that nearly three quarters of its funding comes from the companies it is investigating. According to its latest annual report, the Vehicle Certification Agency receives 69.91% of its income from car manufacturers, who pay it to certify that their vehicles are meeting emissions and safety standards. The transport secretary, Patrick McLoughlin, said last month that the VCA, which also receives government funding, would be responsible for re-running tests on a variety of makes of diesel cars and investigating their real-world emissions.

The announcement followed the revelation from the US EPA last month that Volkswagen had installed illegal software to cheat emission tests, allowing its diesel cars to produce up to 40 times more pollution than is permitted. However, the apparent conflict of interest raised by VCA’s funding has prompted lawyers to demand a truly independent investigation into the industry, and will raise fresh concerns over the government’s handling of the issue of air pollution. Last week the Observer revealed how the government has been seeking to block EU legislation that would force member states to carry out surprise checks on car emissions. It has also been accused of ignoring a supreme court ruling that the government needed to urgently draw up significant plans to tackle the air pollution problem, which has been in breach of EU limits for years and is linked to thousands of premature deaths each year.

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Last days of the empire.

The Record US Military Budget. Spiralling Growth of America’s War Economy (Davies)

To listen to the Republican candidates’ debate last week, one would think that President Obama had slashed the U.S. military budget and left our country defenseless. Nothing could be farther off the mark. There are real weaknesses in Obama’s foreign policy, but a lack of funding for weapons and war is not one of them. President Obama has in fact been responsible for the largest U.S. military budget since the Second World War, as is well documented in the U.S. Department of Defense’s annual “Green Book.”

The table below compares average annual Pentagon budgets under every president since Truman, using “constant dollar” figures from the FY2016 Green Book. I’ll use these same inflation-adjusted figures throughout this article, to make sure I’m always comparing “apples to apples”. These figures do not include additional military-related spending by the VA, CIA, Homeland Security, Energy, Justice or State Departments, nor interest payments on past military spending, which combine to raise the true cost of U.S. militarism to about $1.3 trillion per year, or one thirteenth of the U.S. economy.

The U.S. military receives more generous funding than the rest of the 10 largest militaries in the world combined (China, Saudi Arabia, Russia, U.K., France, Japan, India, Germany & South Korea). And yet, despite the chaos and violence of the past 15 years, the Republican candidates seem oblivious to the dangers of one country wielding such massive and disproportionate military power. On the Democratic side, even Senator Bernie Sanders has not said how much he would cut military spending. But Sanders regularly votes against the authorization bills for these record military budgets, condemning this wholesale diversion of resources from real human needs and insisting that war should be a “last resort”.

Sanders’ votes to attack Yugoslavia in 1999 and Afghanistan in 2001, while the UN Charter prohibits such unilateral uses of force, do raise troubling questions about exactly what he means by a “last resort.” As his aide Jeremy Brecher asked Sanders in his resignation letter over his Yugoslavia vote, “Is there a moral limit to the military violence that you are willing to participate in or support? Where does that limit lie? And when that limit has been reached, what action will you take?” Many Americans are eager to hear Sanders flesh out a coherent commitment to peace and disarmament to match his commitment to economic justice. When President Obama took office, Congressman Barney Frank immediately called for a 25% cut in military spending.

Instead, the new president obtained an $80 billion supplemental to the FY2009 budget to fund his escalation of the war in Afghanistan, and his first full military budget (FY2010) was $761 billion, within $3.4 billion of the $764.3 billion post-WWII record set by President Bush in FY2008. The Sustainable Defense Task Force, commissioned by Congressman Frank and bipartisan Members of Congress in 2010, called for $960 billion in cuts from the projected military budget over the next 10 years. Jill Stein of the Green Party and Rocky Anderson of the Justice Partycalled for a 50% cut in U.S. military spending in their 2012 presidential campaigns. That seems radical at first glance, but a 50% cut in the FY2012 budget would only have been a 13% cut from what President Clinton spent in FY1998.

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They will not stop coming.

153,000 Refugees Arrived In Greece In September Alone (UNHCR)

The UN refugee agency said on Friday that refugee and migrant arrivals in Greece are expected to hit the 400,000 mark soon, despite adverse weather conditions. Greece remains by far the largest single entry point for new sea arrivals in the Mediterranean, followed by Italy with 131,000 arrivals so far in 2015. With the new figures from Greece, the total number of refugees and migrants crossing the Mediterranean this year is nearly 530,000. In September, 168,000 people crossed the Mediterranean, the highest monthly figure ever recorded and almost five times the number in September 2014.

UNHCR spokesman Adrian Edwards told journalists in Geneva that the continuing high rate of arrivals underlines the need for a fast implementation of Europe’s relocation programme, jointly with the establishment of robust facilities to receive, assist, register and screen all people arriving by sea. “These are steps needed for stabilizing the crisis,” he said. As of this morning, a total of 396,500 people have entered Greece by sea since the beginning of the year, more than 153,000 of them in September alone. The nine-month 2015 total compares to 43,500 such arrivals in Greece in all of 2014. Ninety-seven% are from the world’s top 10 refugee-producing countries, led by Syria (70%), Afghanistan (18%) and Iraq (4%).

“There was a noticeable drop in sea arrivals this week, along with the change in the weather,” Edwards said, adding that on Sept. 25, for example, there were some 6,600 arrivals. The next day, it dropped to around 2,200. “From an average of around 5,000 arrivals per day recently, it has fallen to some 3,300 over the past six days with just 1,500 yesterday. Nevertheless, any improvement in the weather is likely to bring another surge in sea arrivals.”

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Refugees in Berlin face 50-day waits just to register. The system is broken.

280,000 Refugees Arrived In Germany In September (AFP)

A record 270,000 to 280,000 refugees arrived in Germany in September, more than the total for 2014, said the interior minister of the southern state of Bavaria Wednesday. “According to current figures… we have to assume that in September 2015 between 270,000 and 280,000 refugees came to Germany,” said Joachim Herrmann. Europe’s biggest economy recorded around 200,000 migrant arrivals for the whole of 2014. The sudden surge this year has left local authorities scrambling to register as well as provide lodgings, food and basic care for the new arrivals. Herrmann highlighted the pressure on the state government of Bavaria – the key gateway for migrants arriving through the western Balkans and Hungary.

“My fellow interior ministers confirm, without exception, that pretty soon we’ll hit our limits in terms of accommodation,” he said. “It’s crucial to immediately reduce the migrant pressure on Germany’s borders,” he said. As Germany expects up to one million refugees this year, Chancellor Angela Merkel’s generosity towards migrants has sparked discord within her coalition. Merkel’s allies, the conservative CSU party governing Bavaria, have been particularly vocal in criticising the policy and warning that resources are overstretched. Berlin is now stepping up action to deter economic migrants from trying to obtain asylum in the country, in a bid to free up resources to deal with applicants from war-torn countries like Syria.

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Aug 252015
 
 August 25, 2015  Posted by at 9:29 am Finance Tagged with: , , , , , , , ,  5 Responses »
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Dorothea Lange Play street for children. Sixth Street and Avenue C, NYC June 1936

China Stocks Plunge 7.63% As Selloff Picks Up Again (MarketWatch)
China Stocks Extend Biggest Plunge Since 1996 on Support Doubts (Bloomberg)
China Crash: You Can’t Keep Accelerating Forever (Steve Keen)
The Gravity of China’s Great Fall (Economist)
China’s Market Leninism Turns Dangerous For The World (AEP)
China Central Bank Injects $23.4 Billion as Yuan Intervention Drains Funds (BBG)
Imploding Chinese Stock Market Does Not Bode Well For World Economy (Forbes)
The Next Shoe To Drop In China? The Banks (MarketWatch)
China Stock Market Panic Shows What Happens When Stimulants Wear Off (Guardian)
China Launches Crackdown On ‘Underground Banks’ Amid Capital Flight Fears (SCMP)
How Greece Outflanked Germany And Won Generous Debt Relief (MarketWatch)
Varoufakis: Greek Deal Was A Coup d’État (EurActiv)
US Short Sellers Betting On Canadian Housing Crash (National Post)
Tropical Forests Totalling Size Of India At Risk Of Being Cleared (Guardian)

That’s a lot of POOF! by now. Makes one wonder what has EU exchanges feeling so happy today.

China Stocks Plunge 7.63% As Selloff Picks Up Again (MarketWatch)

Chinese stocks tumbled Tuesday, bringing two-day losses to more than 15%, while other markets in Asia started to turn negative again after a bounce in earlier trading. Shares in Shanghai finished down 7.63% and fell as much as 8.2% in the afternoon. China’s main index breached the 3,000 level for the first time since December 2014. That follows a drop of 8.5% drop on Monday, the worst single-day loss in more than eight years. Shares in Hong Kong were down 0.7%, and the Nikkei closed 4% lower. Both benchmarks had risen as high as 2.9% and 1.6%, respectively, earlier in the day. The lack of support from Beijing for the market continued to spook investors.

“The market feels like it’s self-imploding because it’s used to a lot of hand holding,” said Steve Wang brokerage Reorient Group. Instead, regulators “are taking a wait and see approach… they intervened a lot in the past” and it didn’t work. In its latest effort to counter intensifying capital outflows from a weakening economy and a tumbling stock market, China’s central bank on Tuesday injected more cash into the financial system. The People’s Bank of China offered 150 billion yuan ($23.40 billion) of seven-day reverse repurchase agreements, a form of short-term loan to commercial lenders, as part of a routine money market operation. The bank injected a net 150 billion yuan into the financial system last week, marking its biggest pump priming exercise since the early February.

But the move fell short of expectations for larger measures, such as a cut to bank’s reserve requirements which could free up hundreds of billions of yuan for loans. Some analysts have said that even a cut in reserve ratio requirements of banks won’t be enough to rescue the market. “The intensity of the global stock rout demands something more substantial from both the monetary and fiscal side,” said Bernard Aw at Singapore based brokerage IG. “There are doubts whether China can cope with the persistent capital outflows, and domestic equity meltdown, given that it has already put in some heavy-hitting measures, and funded over $400 billion to a state agency to buy stocks,” said he added.

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It was fun to see how Bloomberg et al were forced to change their upbeat headlines throughout the Asia trading day.

China Stocks Extend Biggest Plunge Since 1996 on Support Doubts (Bloomberg)

Chinese shares slumped, extending the steepest four-day rout since 1996, on concern the government is paring back market support. The Shanghai Composite Index tumbled 4.3% to 3,071.06 at the midday break, taking its decline since Aug. 19 to 19%. About 14 stocks fell for each that rose on Tuesday. Stocks slumped even as equities rallied around Asia. Speculation around the government’s intentions has escalated since Aug. 14, after China’s securities regulator signaled authorities will pare back the campaign to prop up share prices as volatility falls. The China Securities Regulatory Commission made no attempt to reassure investors after Monday’s plunge, unlike a month ago when officials issued two statements shortly after an 8.5% drop.

“It’s panic selling and an issue of confidence,” said Wei Wei at Huaxi Securities in Shanghai. “The government won’t step in to rescue the market again as it’s a global sell-off and it’s spreading everywhere now. It’s not going to work this time.” The CSI 300 Index dropped 3.9%, led by technology, industrial and material companies. The Hang Seng Index advanced 1.6% after a gauge of price momentum dropped to the lowest since the October 1987 stock-market crash. The Hang Seng China Enterprises Index rose 0.5% from its lowest level since March 2014. Unprecedented government intervention has failed to stop a more than $4.5 trillion rout since June 12 amid concern the slowdown in the world’s second-largest economy is deepening. Officials have armed a state agency with more than $400 billion to purchase stocks, banned selling by major shareholders and told state-owned companies to buy equities.

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“This was the fastest growth in credit in any country, EVER. It dwarfs both Japan’s Bubble Economy and the USA’s combination of the DotCom and Subprime Bubbles.”

China Crash: You Can’t Keep Accelerating Forever (Steve Keen)

As I noted in last week’s post “Is This The Great Crash Of China?”, the previous crash of China’s stock market in 2007 lacked the two essential pre-requisites for a genuine crisis: private debt was only about 100% of GDP, and it had been relatively constant for the previous decade. This bust however is the real deal, because unlike the 2007-08 crash, the essential ingredients of excessive private debt and excessive growth in that debt are well and truly in place. China’s resilience against credit crises came to an end in 2009, when in a response to government directives, Chinese banks began lending to anyone with a pulse.

The growth in private debt rocketed from 17% per year at the beginning of 2009 (versus nominal GDP growth of 8% at the same time) to 37% per year by the beginning of 2010 (nominal GDP growth peaked six months later at 20% per year). By the beginning of this year, private debt had hit 180% of GDP and had grown by over 80% of GDP in the previous seven years. This was the fastest growth in credit in any country, EVER. It dwarfs both Japan’s Bubble Economy and the USA’s combination of the DotCom and Subprime Bubbles. China’s bubble drove private debt up by as much in 5 years as Japan managed in over 17 years, and more than the USA’s debt rose in the entire Clinton-Bush debt bubble from 1993 until 2010 (see Figure 1).

Figure 1: China’s credit bubble grew as much in 5 years as Japan’s did in 18

Since last week’s post, the crash in the Shanghai stock market has gone into overdrive. Shares fell 8.5% today, bringing the fall in the index to 20% in the last 5 days and 37% since the market peaked on June 12th. This is the downside of the credit bubble that China used to sidestep the Global Financial Crisis in 2008. It kept the wheels of the Chinese economy spinning when they had threatened to seize up in 2008, but it set China up for the fall it is now experiencing—and this fall is not going to be limited to the Shanghai Index.

Much of the 80%+ of GDP borrowed since 2009 went into property speculation by developers, which in turn fuelled much of the apparent growth of the Chinese economy. One key peculiarity about China’s economy—and there are many—is that much of its growth has come from the expansion of industries established by local governments (“State Owned Enterprises” or SOEs). Those factories have been funded partly by local governments selling property to developers (who then on-sold it to property speculators for a profit while house prices were rising), and partly by SOE borrowing. The income from those factories in turn underwrote the capacity of those speculators to finance their “investments”, and it contributed to China’s recent illusory 7% real growth rate.

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China’s a vortex.

The Gravity of China’s Great Fall (Economist)

Asian markets are once again driving traders batty. A mammoth plunge in China’s stockmarkets on Monday, August 24th, touched off a wild day on global markets: in which Japanese and European stocks plummeted (as did American shares, before staging a remarkable turnaround) prompting commentators to liken the situation to previous crises from the Wall Street crash of 1929 to the Asian financial crisis of 1997. Asian share prices have had a brutal summer. China deserves much of the blame. Its own market has crashed (falling by almost 40% from its peak, and losing all the ground gained in 2015) amid worries about the pace of China’s economic slowdown. Slackening Chinese demand for goods and commodities would represent a big blow to its Asian neighbours.

The region has also been squeezed by a reversal of capital flows back toward the rich world, which has been accelerating as America’s Federal Reserve moves closer to interest rate increases. The currencies of Asia’s large economies have been falling as a result: Malaysia’s ringgit is down by 19% since May 1st, for example, while the Indonesian rupiah has dropped 8%. Despite those declines, which boost export competitiveness in those economies, export growth has slowed dramatically. There will probably be more market wobbles ahead.

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Ambrose called this one spectacularly wrong mere days ago. Whole other tone now.

China’s Market Leninism Turns Dangerous For The World (AEP)

The world financial system is at a dangerous juncture. Markets no longer believe that China’s Communist leaders are in full control of the country’s $27 trillion debt bubble, or know how to manage fast-moving events beyond their ken. This sudden loss of confidence in the anchor economy of East Asia has struck before the West is fully back on its feet after its own debacle seven years ago. Interest rates are still near zero in the US, the eurozone, Britain and Japan. Fiscal deficits are at unsafe levels. Debt is 30 percentage points of GDP higher than it was at the onset of the Lehman crisis. The safety buffers are largely exhausted. “This could be the early stage of a very serious situation,” said Larry Summers, the former US Treasury Secretary.

He compared it to the two spasms of the Asian crisis in the summer of 1997 and again in August 1998. Ominously, he also compared it to the “heart attack” of August 2007, when credit markets seized up on both sides of the Atlantic and three-month US Treasury yields plummeted to zero. That proved to be a false alarm, but it was an early warning of the accumulating stress that would bring down Western finance a year later. Full-blown contagion is now ripping through the international system. The main equity indexes in Europe and the US have all sliced through key levels of technical support. Once the S&P 500 index on Wall Street broke below its 200-day and 50-week moving averages last week, it was extremely vulnerable to any bad news. This came last Friday with yet more grim manufacturing data from China.

JP Morgan says the Caixin PMI indicator that so alarmed markets is skewed to the weakest segment of the Chinese economy and overstates the trouble, but such subtleties are lost in a panic. It turned into a global rout after the Shanghai composite index crashed 8.5pc on China’s “Black Monday”, pulverizing its July lows after the central bank (PBOC) – oddly passive – refused to come to the rescue as expected with a cut in the reserve requirement ratio for banks. Beijing’s botched efforts to prop up the country’s stock markets have collapsed. An estimated $300bn of state-orchestrated buying achieved nothing, overwhelmed by an avalanche of selling by investors forced to cover margin debt.

Professor Christopher Balding from Peking University wrote on FT Alphaville that China is lurching from one incoherent policy to another, shedding credibility and its aura of omnipotence at every stage. “There is a very real risk that Beijing is losing control of the story,” he said. The speed with which this episode has now engulfed US markets – trading at 50pc above their historic average on the long-term Shiller price/earnings ratio, and primed for trouble – suggests that events could all too easily metastasize into a self-perpetuating crisis of confidence. The Dow may have rebounded after a record 1,090-point drop at the opening bell, but such tremors cannot be ignored. “Circuit-breakers are needed, given how quickly markets have moved. Crises are highly non-linear events and ruling them out isn’t wise,” said Manoj Pradhan from Morgan Stanley.

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Whatever they do won’t be enough.

China Central Bank Injects $23.4 Billion as Yuan Intervention Drains Funds (BBG)

China’s central bank added the most funds to the financial system in open-market operations in six months as currency-market intervention to prop up the yuan strained the supply of cash. The People’s Bank of China auctioned 150 billion yuan ($23.4 billion) of seven-day reverse-repurchase agreements, according to a statement on its website. That compares with 120 billion yuan maturing Tuesday, leaving a net injection of 30 billion yuan. The PBOC also sold 60 billion yuan of three-month treasury deposits on behalf of the Ministry of Finance at 3%, according to a trader who bid at the auction. “Banks have become more reluctant to lend and we expect the PBOC to offer liquidity support,” said Liu Dongliang at China Merchants Bank.

“The amount was smaller than expected.” Major banks have been seen selling dollars toward the close of onshore trading in Shanghai on most days since a surprise yuan devaluation on Aug. 11. The intervention removes funds from the financial system and risks driving borrowing costs higher unless the monetary authority releases additional cash. China’s foreign-exchange reserves will drop by some $40 billion a month for the rest of this year, according to the median of 28 estimates in a Bloomberg survey. The monetary authority injected a net 150 billion yuan last week using reverse-repurchase agreements. It also added 110 billion yuan via its Medium-term Lending Facility.

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No lack of people who’d deny this.

Imploding Chinese Stock Market Does Not Bode Well For World Economy (Forbes)

The China hard landing aficionados (all five of them) may have something to celebrate with the implosion of Chinese equities, but the world economy does not. On Monday, investors woke up to yet another rout in both Chinese markets. The Deutsche X-Trackers A-Shares (ASHR) exchange traded fund was down 16% in the first half hour of trading on the NYSE and the iShares FTSE China (FXI) was down by 9%. This is capitulation at its best. Everyone is seeing who can scream “fire” the loudest. “When investors look at their trading dashboard this morning, they do not have just one factor which making them anxious about riskier assets…it is a combination of factors which reminds them that the sell-off in the markets is becoming very serious and similar to that of 2008, especially with regards to China,” says Naeem Aslam at AvaTrade International in Edinburgh.

Besides the massive stock market correction underway in China, the fundamentals of the economy are not what they used to be. While many businessmen on the ground in China say no one is in panic mode yet, momentum is clearly not in the their favor. This impacts the world, whether we like it or not. China is the world’s No. 2 economy and one of the world’s biggest consumers of raw materials, as in oil and soybeans. And when they consume less, prices decline, and when prices decline, it means less money for Iowa farmers, lower profits for big agribusiness like Bunge and — though many won’t cry over this — a weaker ruble and worsening recession in Russia.

In fact, on Monday morning the Russian ruble cracked 71 to 1, its weakest free-float level ever against the dollar. The weakening of emerging market currencies against the dollar is spreading suggesting that worries about emerging markets are deepening as investors think China demand is suddenly falling off a cliff. All BRIC currencies, including South Africa, have weakened substantially today. The trend is likely to continue, Barclays Capital analyst Guillermo Felices says.

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It’s about their links to shadow banks, to a large extent.

The Next Shoe To Drop In China? The Banks (MarketWatch)

To many investors, the problem with China is a suspicion that things could be much worse than is officially being let on. My own experience with a Bank of China ATM at the Hong Kong-Shenzhen border last Friday certainly got me thinking — just how bad is China’s liquidity crunch? The problem was the ATM menu options had been limited to funds balance, transfer and deposit but none for withdrawal. And it did not appear personal, as all three cash machines were the same, refusing locals and foreigners alike. This might be dismissed as merely anecdotal but it comes in the same week that global markets have zeroed in on Chinese capital flight risks and authorities have been scrambling to inject liquidity into the banking system.

In the past week the central bank made three interventions to boost liquidity, totaling some 350 billion yuan. Despite this interbank rates have remain elevated and reports suggest the People’s Bank of China’s next move will be to cut bank-reserve ratios to free up potentially another 678 billion yuan for lending. Turning off the cash withdrawal functions of ATMs at the border is certainly one way to stem capital leakage, albeit a rather draconian and clumsy one. While it is also unlikely, it is not unreasonable to be wary of unexpected policy moves coming out of Beijing. After all, few would have predicted measures, such as mass share suspensions and the banning of large shareholders from selling equities, that have been announced in recent weeks to support domestic stock prices.

Any signs that the fault line in China’s highly leveraged economy is spreading to its financial system, brings with it another layer of potential systematic risk. This always looked a possibility when authorities used the banking system and public funds to support equity markets. [..] Analysts warn that it is futile for the government to try to support both currency and assets markets. According to Stuart Allsopp at BMI Research, Beijing will increasingly have to choose between propping up the equity market and defending the currency from further downside pressure. As the veil of government support for both markets has been pierced and gives way to market forces, he says lower equity prices and continued weakness in the yuan look inevitable.

The PBOC now has to balance drawing down its foreign-exchange reserves to prevent aggressive weakness in the yuan, and the extent to which it can reduce liquidity from the domestic financial system. BMI expects the rate of growth of domestic money supply will have to slow sharply in order to firm up the value of the yuan, in the process weighing heavily on domestic asset prices.

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Cold turkey.

China Stock Market Panic Shows What Happens When Stimulants Wear Off (Guardian)

Financial markets have gone cold turkey. For the past seven years, they have been given regular doses of strong and dangerous narcotics. The threat that the drugs will no longer be available has resulted in severe withdrawal symptoms. Unlike in 2007, the crash could be seen coming. Wall Street and the City were taken completely by surprise by the subprime crisis, but have had plenty of warning that something nasty might be brewing in China. Anybody caught unawares really hasn’t been paying attention. But this is about more than China. Financial markets in the west have been booming for the past six years at a time when the real economy has been struggling. Recovery from the last recession has been patchy and weak by historical standards, but that has not prevented a bull market in equities.

The reason for this is simple: the markets have been pumped full of stimulants in the form of quantitative easing, the money creation programmes adopted by central banks as a response to the last crisis. On the day that QE was launched in the UK, 9 March 2009, the FTSE 100 stood at 3542 points. Its recent peak on 27 April this year was 7103 points, a gain of 100.5%. There is a similar correlation between the three rounds of QE in the US and the performance of the S&P 500, which was up more than 200% during the same period. But there were always doubts about what might happen when central banks decided it was time to remove some of the stimulus they have been providing for the past seven years. Now we know.

The Federal Reserve and the Bank of England halted their QE programmes and started to muse publicly about the timing of the first increase in interest rates. At that point, financial markets merely needed a trigger for a big selloff. China has provided that, because the world’s second biggest economy has shown distinct signs of slowing. What was inevitably dubbed “Black Monday” began in east Asia where there was disappointment that Beijing did not provide fresh support for shares in Shanghai overnight. Having been accused of acting like quacks dispensing dodgy remedies on previous stock market rescue missions, China’s leaders decided they would tough it out. Big mistake. The stimulus junkies needed a fix and when they didn’t get one they had a bad dose of the shakes.

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Finding the bad guys.

China Launches Crackdown On ‘Underground Banks’ Amid Capital Flight Fears (SCMP)

Police in China have launched a two-month crackdown against “underground banks” amid concerns about cash flowing in and out of the country illegally and fuelling speculation in the country’s volatile stock markets. The campaign will focus on illegal financing in shares markets, plus funding for terrorism and banking connected to corrupt officials, state media reported.It will last until late November. Meng Qingfeng, a vice minister of public security who oversees the country’s manhunt for economic fugitives overseas and headed last month’s crackdown on “malicious short-selling” in China’s stock markets, said underground banking had undermined the country’s economic security and the order of the financial market, the state-run news agency Xinhua reported.

The ministry will also despatch special taskforces to areas where underground banking activity is particularly severe. Meng said that since April the police, the central bank and the State Administration of Foreign Exchange have cracked down on a number of illegal fund transfers through underground banks and offshore companies. Some 66 underground banks handling assets of about 430 billion yuan (HK$520 billion) have been discovered. More than 160 suspects have been arrested. Some of the crackdowns took place in Guangdong, Liaoning and Zhejiang provinces, Xinhua said, plus in Shanghai and the Xinjiang region.

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Nice contrarian view.

How Greece Outflanked Germany And Won Generous Debt Relief (MarketWatch)

Alexis Tsipras, who is likely to continue as Greek prime minister after precipitating a general election for next month, arrived in power in January attempting to resolve an “impossible trinity”: relaxing the economic squeeze, rescheduling Greece’s unpayable debts, and keeping the country in the euro. Satisfactorily achieving all three aims appeared unachievable — and it was. Yet Tsipras appears to have achieved greater success than Angela Merkel, his main European sparring partner. The German chancellor, too, promised her electorate three unrealizable goals. However, frightened of being made a scapegoat worldwide for ejecting Greece from the euro, she seems to have caved in to international pressure even more than Tsipras.

The debt rescheduling under way for Greece, partly prompted by the IMF’s accurate labelling of Greek debts as unsustainable, appears reminiscent of the relief that West Germany gained from a “troika” of international lenders (France, the U.K. and the U.S.) at the 1953 London debt conference. At a time when global economic storm clouds are darkening, Greek voters may well thank Tsipras for shifting much of the country’s borrowings on to concessionary terms. The big question is whether, once the full generosity of Greek debt relief becomes widely known, other large-scale debtors around the world — ranging from indebted Chinese local authorities to borrowers from Italy, Portugal and Spain — will demand similar concessions from creditors.

The new €86 billion low-cost Greek bailout will probably not be fully redeemed until 2075 — a similar extension of loan repayments that was granted to West Germany in 1953, with some long-standing borrowings not repaid until 57 years later, in 2010. Further effective Greek debt reductions will occur in the autumn as part of a deal to keep the IMF as a direct underwriter of Greek debt. Germany’s insistence on bringing in the IMF is politically expedient yet economically contradictory. Greece’s biggest creditor believes the only way to make its lending domestically palatable is to keep on board another lender (the IMF), which will do so only if Germany asks its taxpayers to shoulder fresh burdens through stretching out loan repayments and lowering interest costs.

Merkel’s promises to German voters have had a Tsipras-like quality: maintain the unity of euro members, avoid full-scale Greek debt restructuring, and keep euro economic policies in line with German-style orthodoxy. Both Merkel and Tspiras have resolved their individual “trilemmas” by attempting to keep their respective electorates in the dark about the extent to which they have diluted their principles.

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Sorry, Yanis, can’t have a political union, can’t have a banking union.

Varoufakis: Greek Deal Was A Coup d’État (EurActiv)

Ignoring the will of the people by pursuing unpopular austerity policies plays into the hands of Europe’s extreme right, say Yanis Varoufakis and Arnaud Montebourg. “Fakis, Fakis,” the militant socialists chanted in Frangy-en-Bresse, in France, on Sunday (23 August). The annual “Fête de la Rose”, a gathering regularly attended by France’s former finance minister Arnaud Montebourg, has taken place since 1972. Once the scourge of the Eurogroup, the rock star economist Yanis Varoufakis was visibly delighted to be in the village of Frangy (dubbed Frangis in his honour), despite the rain, and to launch a fresh attack on European leaders and the current Greek government.

“What happened on 12 July was a real coup d’état and a defeat for all Europeans,” the former finance minister said, referring to Greece’s acceptance of the harsh conditions attached to the latest aid package. A package that also cost him his job as the country’s minister of finance. Similarly, Arnaud Montebourg lost his job as French Minister of the Economy exactly one year ago, after openly criticising the French government’s austerity policies at the 2014 Fête de la Rose. “I do not believe the September elections can lead to an alliance that will create the conditions for an economic policy that works for Greece,” Yanis Varoufakis warned. He said he was “torn” by the splitting of the Syriza party, although he was not officially a party member.

25 Syriza MPs announced on Friday that they would form a new party, following the resignation of the Prime Minister, Alexis Tsipras, who hopes the elections will give him a larger majority and a stronger mandate to enact his plans. The two ex-ministers strived to highlight the dangers of continued austerity in Greece. “Without political union, the Economic and Monetary Union (EMU) is a big mistake. Now that we have it, we must repair it. What we need today is a real common investment policy, and a real banking union,” the Greek economist said. Yanis Varoufakis told EurActiv that the emergence of an allied European left, in opposition to the current system, was a possibility.

“I believe that an alliance of Europeans from across the political spectrum, who share one radical idea, the idea of democracy, is possible,” he joked. “For 20 years, the principle of democracy has been trampled on in Europe. But it remains a common idea. If we want to make the transition to a democratic Europe, we need to empower the citizens, rather than the current cartel of lobbies.” This view was shared by his host. Arnaud Montebourg said, “Power is held by an oligarchy in Europe.”

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And every other property market that’s bubbling.

US Short Sellers Betting On Canadian Housing Crash (National Post)

Large Wall Street investors who made billions when the U.S. housing market collapsed in 2008 are now betting real estate values in Vancouver and other Canadian cities will crash, financial insiders say. The hedge fund investors, known as short sellers, are betting against what they believe is a housing bubble in Vancouver, Toronto, Calgary and other Canadian cities. They believe Canadians hold too much mortgage debt, and that Canadian banks, mortgage insurers and “subprime” private lenders will lose money on unpaid loans when property prices fall. “The cross currents are beyond crazy in Vancouver — it’s a mix of money laundering, speculation, low interest rates,” said Marc Cohodes, once called Wall Street’s highest-profile short-seller by The New York Times.

“A house is something you live in, but in Vancouver you guys are trading them like the penny stocks on Howe Street.” He says Vancouver real estate has reached peak insanity, and any number of factors could trigger a collapse. Local real estate professionals predicted the U.S. investors are likely to lose their shirts betting against Vancouver property, which they described as a special market thriving on international demand. But one Canadian housing analyst who advises U.S. clients, including Cohodes, said major investors are currently “building positions” against Canadian housing targets. They are forecasting a raise in historically low U.S. interest rates this fall will spill financial stress into Canada. “All of the big global macro funds that were involved in betting against the U.S. in 2007 and 2008 and 2009, they’ve all studied Canadian housing for a few years,” said the Canadian analyst.

“I know a number of them are shorting Canadian housing. It looks like an accident waiting to happen.” This is although housing markets in Vancouver and Toronto have continued to rocket higher since international short-sellers started circling in 2013. Short sellers use complex financial arrangements to make rapid profits when publicly traded stocks fall in value. In this case, they are betting against businesses connected to property and household debt. They are also betting against the Canadian dollar, because they believe it will decline significantly in a housing bust. Most of these traders are employed by secretive New York investment funds that shy away from publicity, partly because they want to disguise how they lay their bets.

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We won’t stop until it’s all gone.

Tropical Forests Totalling Size Of India At Risk Of Being Cleared (Guardian)

Tropical forests covering an area nearly the size of India are set to be destroyed in the next 35 years, a faster rate of deforestation than previously thought, a study warned on Monday. The Washington-based Center for Global Development, using satellite imagery and data from 100 countries, predicted 289m hectares (714m acres) of tropical forests would be felled by 2050, with dangerous implications for accelerating climate change, the study said. If current trends continued tropical deforestation would add 169bn tonnes of carbon dioxide into the atmosphere by 2050, the equivalent of running 44,000 coal-fired power plants for a year, the study’s lead author told the Thomson Reuters Foundation.

“Reducing tropical deforestation is a cheap way to fight climate change,” said environmental economist Jonah Busch. He recommended taxing carbon emissions to push countries to protect their forests. UN climate change experts have estimated the world can burn no more than 1tn tonnes of carbon in order to keep global temperature rises below two degrees – the maximum possible increase to avert catastrophic climate change. If trends continued the amount of carbon burned as a result of clearing tropical forests was equal to roughly one-sixth of the entire global carbon dioxide allotment, Busch said. “The biggest driver of tropical deforestation by far is industrial agriculture to produce globally traded commodities including soy and palm oil.” The study predicted the rate of deforestation would climb through 2020 and 2030 and accelerate around the year 2040 if changes were not made.

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Apr 302015
 
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Unknown Medical supply boat Planter, General Hospital wharf on the Appomattox, City Point, VA 1865

Negative Interest Rates Set Up World For Biggest Mass Default Ever (Warner)
German Bunds Are Tanking After Big Investors Say to Get Out (Bloomberg)
The Real Financial Crisis That Is Looming: Consumer Spending (STA)
US Economy Grinds To A Halt In First Quarter 2015 (Bloomberg)
Fed Stays Vague on Rate-Hike Timing, but Sees Slower Growth as Blip (Hilsenrath)
Ignore The ‘Whiff Of Panic’ As US Economy Stalls (AEP)
Fed, White House Fail To Mention The D-Word (MarketWatch)
Firebrand Greek Minister Risks Fresh Schism With Europe (Telegraph)
Greece Close To Minimum Agreement Deal With Creditors: Deputy PM (Guardian)
Reinforced Greek Finance Team Heads To Brussels For Talks (Kathimerini)
Transactions Over €70 On Larger Greek Islands To Be Plastic Only (Kathimerini)
Majority of Financial Pros Now Say Greece Is Headed for Euro Exit (Bloomberg)
Bank Of Japan Keeps Policy Steady In 8-1 Vote (CNBC)
New Zealand Rockstar Economy All Smoke And Noise (NZ Herald)
It’s Now Impossible For Most Poor Australian Families To Find A Home (Guardian)
Who is to Blame for the Tragedy in Yemen? (Viktor Mikhin)
Going Rogue: 15 Ways to Detach From the System (Tess Pennington)
The Last 3 Bornean Rhinos Are in Race against Extinction (Scientific American)
Heaviest Element Yet Known To Science is Discovered: Governmentium (Not PC)

“Both Keynesian and monetary economics seem to be in some kind of end game. What comes next is anyone’s guess.”

Negative Interest Rates Set Up World For Biggest Mass Default Ever (Warner)

Here’s an astonishing statistic; more than 30pc of all government debt in the eurozone – around €2 trillion of securities in total – is trading on a negative interest rate. With the advent of ECB QE, what began four months ago when 10-year Swiss yields turned negative for the first time has snowballed into a veritable avalanche of negative rates across European government bond markets. In the hunt for apparently “safe assets”, investors have thrown caution to the wind, and collectively determined to pay governments for the privilege of lending to them. On a country by country basis, the statistics are even more startling. According to investment bank Jefferies, some 70pc of all German bunds now trade on a negative yield. In France, it’s 50pc, and even in Spain, which was widely thought insolvent only a few years ago, it’s 17pc.

Not only has this never happened before on such a scale, but it marks a scarcely believable turnaround on the situation at the height of the eurozone crisis just a little while back, when some European bond markets traded on yields that reflected the very real possibility of default. Yet far from being a welcome sign of returning economic confidence, this almost surreal state of affairs actually signals the very reverse. How did we get here, and what does it mean for the future? Whichever way you come at it, the answer to this second question is not good, not good at all. What makes today’s negative interest rate environment so worrying is this; to the extent that demand is growing at all in the world economy, it seems again to be almost entirely dependent on rising levels of debt.

[..] The flip side of the cheap money story is soaring asset prices. The bond market bubble is just the half of it; since most other assets are priced relative to bonds, just about everything else has been going up as well. Eventually, there will be a massive correction, in which creditors will suffer sickening losses. Nobody can tell you when that moment will arrive. We live in an “extend and pretend” world in which economies pathetically fight between themselves for any scraps of demand. One burst of money printing is met by another in an ultimately futile, zero-sum game of competitive currency devaluation.

As if on cue, along comes another soft patch in Britain’s economic recovery, with first-quarter growth quite a bit weaker than expected. Like a constantly receding horizon, the point at which UK interest rates begin to rise is pushed ever further into the future. It’s like waiting for Godot. When Bank Rate was first cut to 0.5pc in response to the financial crisis, markets expected rates to start rising again in a year. Six years later, Bank Rate is still at 0.5pc and markets still expect them to rise in a year. In Europe it’s not for four years. Both Keynesian and monetary economics seem to be in some kind of end game. What comes next is anyone’s guess.

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More negative interest ‘unintended crap’.

German Bunds Are Tanking After Big Investors Say to Get Out (Bloomberg)

Investors gave the clearest sign yet they’re losing patience with the record-low yields on euro-area government bonds in a selloff that spared no market. Yields on Germany’s bunds surged the most in two years as traders shunned an auction of the nation’s debt. Bond titan Jeffrey Gundlach of DoubleLine Capital egged on the declines, saying he’s considering making an amplified bet against the securities. His comments echoed Janus Capital’s Bill Gross, who once managed the world’s largest bond fund. He said bunds were the “short of a lifetime.”

The bond slump reflects growing angst among investors after the ECB’s €1.1 trillion quantitative-easing program sent yields to unprecedented lows from Germany to Spain. Emerging signs of inflation in the 19-nation economy are also hurting demand. “These are influential voices that offer a contrarian view when the German bond market appears to be at an extreme level, so there’s definitely going to be an impact on the market,” said Salman Ahmed, a global strategist at Lombard Odier Investments Managers in London.

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“The problem for the Federal Reserve is in an economy that is roughly 70% based on consumption, when the vast majority of American’s are living paycheck-to-paycheck…”

The Real Financial Crisis That Is Looming: Consumer Spending (STA)

It is important to remember that the total population in the US is currently around 320 million. In other words, more than 1:3 individuals in the United States is currently being supported by some form of government assistance. This is at a time when roughly 70 cents of every tax dollar is absorbed by government welfare programs and interest service on $18 Trillion in debt. Here is the problem with all of this. Despite Central Bank’s best efforts globally to stoke economic growth by pushing asset prices higher, the effect is nearly entirely mitigated when only a very small percentage of the population actually benefit from rising asset prices. The problem for the Federal Reserve is in an economy that is roughly 70% based on consumption, when the vast majority of American’s are living paycheck-to-paycheck, the aggregate end demand is not sufficient to push economic growth higher.

While monetary policies increased the wealth of those that already have wealth, the Fed has been misguided in believing that the “trickle down” effect would be enough to stimulate the entire economy. It hasn’t. The sad reality is that these policies have only acted as a transfer of wealth from the middle class to the wealthy and created one of the largest “wealth gaps” in human history. The real problem for the economy, wage growth and the future of the economy is clearly seen in the employment-to-population ratio of 16-54-year-olds. This is the group that SHOULD be working and saving for their retirement years. With 54% of this prime working age-group sitting outside of the labor force, it is not surprising that in a recent poll 78% of women in the U.S. want a “man with a J.O.B.”

The current economic expansion is already pushing one of the longest post-WWII expansions on record which has been supported by repeated artificial interventions rather than stable organic economic growth. While the financial markets have soared higher in recent years, it has bypassed a large portion of Americans NOT because they were afraid to invest, but because they have NO CAPITAL to invest with. The real crisis that is to come will be during the next economic recession. While the decline in asset prices, which are normally associated with recessions, will have the majority of its impact at the upper end of the income scale, it will be the job losses through the economy that will further damage and already ill-equipped population in their prime saving and retirement years.

With consumers again heavily leveraged with sub-prime auto loans, mortgages, and student debt, the reduction in employment will further damage what remains of personal savings and consumption ability. That downturn will increase the strain on an already burdened government welfare system as an insufficient number of individuals paying into the scheme is being absorbed by a swelling pool of aging baby-boomers.

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“Spending on nonresidential structures, including office buildings and factories, dropped 23.1%..”

US Economy Grinds To A Halt In First Quarter 2015 (Bloomberg)

The world’s largest economy sputtered to a near-halt in the first quarter, choked by a slump in U.S. business investment and exports that dimmed hopes for a meaningful short-term rebound. GDP rose at a 0.2% annualized rate after advancing 2.2% the prior quarter, Commerce Department data showed Wednesday in Washington. After their meeting, Federal Reserve policy makers said some of the headwinds holding back the U.S. will probably fade and give way to “moderate” growth. While the economy is likely to bounce back from the temporary restraints of harsh winter weather and delays at West Coast ports, the harm caused by the plunge in fuel prices and stronger dollar may be longer-lasting.

“There’s not a whole lot of momentum heading into the second quarter,” said Mike Feroli, chief U.S. economist at JPMorgan. “We expect the economy to be better, but some of the details in this report are cautionary.” Stocks fell as investors weighed the timing for a possible Fed rate increase. The Standard & Poor’s 500 Index declined 0.4% to 2,106.85 at the close in New York. The median forecast of 86 economists surveyed by Bloomberg projected GDP would rise 1%. Forecasts ranged from little change to a 1.5% gain. It was the weakest performance since the first three months of last year, when bad weather also damped growth.

Corporate fixed investment decreased at a 2.5% annualized pace in the first quarter, the biggest decline since the end of 2009. Spending on nonresidential structures, including office buildings and factories, dropped 23.1%, the most in four years. The decline reflected weakness in petroleum exploration as oil companies slashed budgets on the heels of plunging crude prices. Spending on wells and mines fell at a 48.7% annualized rate in the first three months of the year, the biggest drop since the second quarter of 2009, when the economy was still in the recession. Halliburton, the world’s second-biggest provider of oilfield services, has said it expects to reduce capital spending by 15% this year and accelerated the pace of job cuts ahead of its takeover of Baker Hughes.

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From the Fed bullhorn himself. It’s a matter of redefining terms. Apparently winter, though there is one every year, is now a ‘transitory factor’.

Fed Stays Vague on Rate-Hike Timing, but Sees Slower Growth as Blip (Hilsenrath)

Federal Reserve officials attributed the economy’s sharp first-quarter slowdown to transitory factors, in effect signaling an increase in short-term interest rates remains on the table for the months ahead although the timing has become more uncertain. The Fed now needs time to make sure its expectation of a rebound proves correct after a spate of soft economic data. That means the chances for a rate increase by midyear have diminished, a point underscored by the Fed’s statement released Wednesday after a two-day policy meeting. “Economic growth slowed during the winter months, in part reflecting transitory factors,” the Fed said.

The Fed also said that although growth and employment had slowed officials expected a return to a modest pace of growth and job market improvement, “with appropriate policy accommodation.” The gathering concluded a few hours after the Commerce Department reported the U.S. economy grew at a 0.2% annual rate in the first quarter. It was the worst performance in a year, pocked with evidence of a slowing trade sector and anemic business investment. The report also showed annual consumer price inflation slowed in the first quarter. For now, the Fed isn’t signaling any shift in its policy stance. It repeated it would keep its benchmark short-term interest rate, the federal funds rate, near zero, where it has been since December 2008.

Officials in March opened the door to rate increases later this year, by removing from the policy statement assurances rates would stay low. The statement said, as it did in March, that the Fed would raise rates when officials become reasonably confident that inflation is moving toward the Fed’s 2% objective and as long as the job market continues to improve. Officials sought to acknowledge the recent economic downshift in their policy statement, while keeping their options open. The pace of job gains moderated, the Fed statement said, and measures of labor-market slack were little changed. Business investment softened and exports declined.

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Ambrose and his opinionsm always fun. But do heed this: “Once you strip out a surge in inventories – often a pre-recession warning – the economy contracted sharply.”

Ignore The ‘Whiff Of Panic’ As US Economy Stalls (AEP)

The US economy has suddenly stalled. A blizzard of shockingly weak figures raise the awful possibility that America’s six-year growth cycle since the Great Recession has already rolled over, with unsettling implications for the world. Worse yet, this apparent exhaustion is taking hold even before the Federal Reserve has begun to raise interest rates or to drain any of its $3.7 trillion of quantitative easing and balance-sheet expansion. Former US Treasury Secretary Larry Summers warned in Davos earlier this year that the Fed typically needs to cut rates by three or four percentage points to combat each cyclical downturn. It is currently at zero. “Are we anywhere near the point when we have 3pc or 4pc running room to cut rates? This is why I am worried,” he said.

“Nobody over the last 50 years, not the IMF, not the US Treasury, has predicted any of the recessions a year in advance, never,” he said. We should not ignore his warnings lightly, yet for once I am an optimist, clinging to the belief that the US will recover from the strange “air pocket” of early 2015. A siege of snow and ice across the North East over the late winter – for the second year in a row, and some say evidence of a drastically slowing Gulf Stream – has obscured the picture. The first flash of data is often wrong, in any case. Yet the latest GDP figures are indisputably atrocious. “It is hard to put lipstick on that pig: This is unequivocally a very weak report,” said Harm Badholz from UniCredit. The slump in the annual growth rate to 0.2pc in the first quarter does not convey the full horror of it.

Once you strip out a surge in inventories – often a pre-recession warning – the economy contracted sharply. Investment in business buildings and factories fell 23pc. “A whiff of panic is in the air,” said the Economic Cycle Research Institute. The putatitve post-winter rebound keeps disappointing. Citigroup’s economic surprise index has tumbled to deeply negative levels. The Conference Board’s index of consumer confidence fell from 101.4 to 95.2 in April. The Fed has clearly been caught off-guard. Bill Dudley, the New York Fed chief, said as recently as last week that the growth rate had probably dipped to around 1.5pc in first quarter but would soon climb back to its two-year trend path of 2.7pc.

It is by now clear that the 15pc surge in the dollar’s trade-weighted index since June – one of the two most dramatic dollar spikes of the post-war era – has done more damage than expected. It has tightened monetary policy through the exchange rate before the Fed has even pulled the trigger. Exports fell 7.3pc in the first quarter, further evidence that the rotating devaluations carried out by one economic bloc after another are doing little more than stealing demand from others in a beggar-thy-neighbour world of quasi-depression.

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“..you won’t find any direct mentions of the strength of the greenback.”

Fed, White House Fail To Mention The D-Word (MarketWatch)

There’s a word that both the Federal Reserve and the White House didn’t mention Wednesday that has played havoc with the U.S. economy this year – the dollar. Search the text of the Federal Open Market Committee’s statement, or the statement put out by the White House after the disappointing first-quarter gross domestic product report, and you won’t find any direct mentions of the strength of the greenback. Part of that is down to politics and the mantra that only the Treasury speaks about the dollar. Because, without mentioning the dollar, the Fed pretty well describes what has happened.

“Inflation continued to run below the Committee’s longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports,” the Fed said. That doesn’t sound like much, but look carefully at the back part of that sentence — the reference to “decreasing prices of non-energy imports.” That’s another way to say that consumers and businesses can buy more stuff and services from abroad for less. And, why is that? Because the dollar is up 26% against the euro over the last 52 weeks, and about 17% vs. a broader set of currencies as measured by the WSJ dollar index. The White House allusion to the dollar is even more subtle.

Written by Jason Furman, the chairman of the Council of Economic Advisers, the White House statement does note that volumes of U.S. exports are sensitive to foreign GDP growth. This weak growth has of course helped the dollar to rise. Furman has previously been on the record about the dollar being a headwind for U.S. growth. Whether the new tone is a result of pressure internally from colleagues at Treasury or more a political shift isn’t clear. Either way, both the Fed and the White House are finding it hard to ignore the biggest elephant in the room.

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They’re going to get homesick for Varoufakis soon.

Firebrand Greek Minister Risks Fresh Schism With Europe (Telegraph)

Hopes that a revamped Greek bail-out team would finally break a two-month deadlock with creditors took a fresh blow on Wednesday, as the Leftist government’s firebrand energy minister pledged “no surrender” to international lenders. Highlighting a deep schism within the ruling party over Greece’s future in the single currency, Panagiotis Lafazanis said there could be “no compromise” with creditor powers, who were seeking “subordination and surrender” from his government. “Our government will not bow down, neither will it surrender,” wrote Mr Lafazanis in a Greek newspaper. “Syriza will not accept an agreement that would be incompatible to its radical commitments.” A popular figurehead of the party’s radical Left Platform, Mr Lafazanis attacked the Troika for “water-boarding” the Greek economy, choking its people into submission.

“If our ‘partners’ and the IMF believe that they will blackmail us using the refusal of financing as a weapon, and that they will terrorise the Greek people forever using the ‘bogeyman’ of default and of a national currency, they are woefully deluded.” The energy minister, who has ties with Moscow, has been one of the fiercest critics of the Troika’s plans to undercut Athens’ promises to address Greece’s “humanitarian crisis” through raising wages and pensions for the poorest. He added the country could gradually get on its feet after a euro exit, but warned monetary union would be “subjected to a grave and mortal wound” should Greece be forced out.

The intervention comes amid hope that Athens was edging closer to agreeing the basis for its reforms-for-cash programme, after a two-month hiatus that has pushed the country towards insolvency. A newly established Greek bail-out team, headed by Oxford-educated minister Euclid Tsakalotos, was due to present a draft reform list to officials in Brussels on Wednesday. The appointment of the softly-spoken Marxist economist came after Brussels had grown increasingly exasperated by the stalling tactics of finance minister, Mr Varoufakis. But insisting he was still at the forefront of talks, the “rock-star” former academic said he remained “in charge of the negotiations with the eurogroup”.

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“[the new head of] the Greek negotiating team in the debt talks said Greece had to keep to its “red lines” on reforms and that any “areas of compromise” should be within the “political plan” of the radical government.”

Greece Close To Minimum Agreement Deal With Creditors: Deputy PM (Guardian)

Greece could seal a deal with its creditors in early May, its deputy prime minister said on Wednesday, as the country prepared a new list of reforms and the ECB provided more support to its beleaguered banks. But Yannis Dragasakis warned it was likely to be only a “minimum agreement” to unlock the delayed funds Greece needed to avoid default. He said: “Now we are going to a minimum agreement with actions that can be taken immediately. But [in the long-term] not just any solution will suffice. The solution has to be viable. After the interim agreement a long discussion about the debt, primary surpluses, investment and growth will follow.”

A eurozone official told Reuters time was running out to reach a deal about releasing the emergency funds, which amount to €7.2bn, since the country needed to begin negotiating a third bailout agreement before the current programme runs out at the end of June. Otherwise it faced the prospect of default or having to leave the eurozone. He said: “We are not talking about weeks any more, we are talking about days.” If the latest Greek proposals were approved, eurozone finance ministers could endorse the deal at their next meeting on 11 May. Greece’s creditors are demanding economic reforms in exchange for more bailout cash. But the impasse could still prove difficult to break, since the new reforms were not expected to offer any major new concessions even though previous plans had been rejected.

Due to be presented to the Greek parliament this week, they are said to include measures to clamp down on corruption and tax evasion, as well as tax and public administration reforms and a delay in plans to raise the minimum wage. But the Syriza-led government will continue resisting significant changes to pensions or reforms of the labour market. Euclid Tsakalotos, the Oxford-educated economics professor who now heads the Greek negotiating team in the debt talks, said Greece had to keep to its “red lines” on reforms and that any “areas of compromise” should be within the “political plan” of the radical government, which was elected on an anti-austerity ticket.

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“Energy Minister Panayiotis Lafazanis cast doubt on whether Greece and its lenders could reach an “honorable compromise.” Alternate Minister for Social Security Dimitris Stratoulis said there was no way the government would accept “painful compromises.”

Reinforced Greek Finance Team Heads To Brussels For Talks (Kathimerini)

A reinforced Greek team is to resume tough negotiations with representatives of the country’s international creditors in Brussels on Thursday, with some new proposals from the Greek side expected to be discussed, in a bid to make some progress toward a deal. According to a senior Finance Ministry official, the Greek delegation to Brussels involves 18 people, ranging from government negotiators to technocrats expected to provide eurozone officials with some of the accounting data they have struggled to obtain to date. The talks are expected to continue until Sunday as time is running short for Greece to conclude an agreement with its creditors before state cash reserves run out.

Meanwhile in Athens, the Cabinet is on Thursday set to discuss the proposed provisions of a multi-bill being drafted by a new “political negotiating team” and which is expected to recommend changes to Greece’s public sector and tax administration but not to tackle key areas of contention such as pensions and the labor market. A government official indicated that the government’s “red lines” would remain in place, noting however that the provisions have not been “written in stone.” The thorny issues of pension and labor sector reforms, along with privatizations and the size of this year’s primary surplus target, are expected to dominate talks in Brussels, however, as creditors are keen for progress in some of these areas. Greek officials are hoping that an extraordinary Eurogroup could be called before the one scheduled to take place on May 11.

A eurozone official told Kathimerini that an agreement at the May 11 meeting was unlikely while stressing that Greece has “days, not weeks” to conclude a pending review. A possible scenario, he said, is that eurozone officials could issue a positive statement. This might encourage the ECB to allow Greek banks to increase their exposure to T-bills. While Deputy Prime Minister Yiannis Dragasakis insisted that an agreement with lenders could be reached at the beginning of May, other SYRIZA ministers appeared more skeptical on Wednesday. In an op-ed published in Crash magazine, Energy Minister Panayiotis Lafazanis cast doubt on whether Greece and its lenders could reach an “honorable compromise.” Alternate Minister for Social Security Dimitris Stratoulis said there was no way the government would accept “painful compromises.”

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The tourist sector, especially on the islands, is one of the main tax evaders.

Transactions Over €70 On Larger Greek Islands To Be Plastic Only (Kathimerini)

A draft plan by the government to increase state revenues, which is to be submitted to the Brussels Group on Thursday, includes increasing the luxury tax by 30%, imposing an accommodation levy on hotels with three stars or more, and the obligatory use of credit or debit cards for transactions of €70 euros or more on islands that have more than 3,000 inhabitants. The latter measure will apply to the islands of Rhodes, Lesvos, Chios, Kos, Samos, Syros, Naxos, Santorini, Limnos, Kalymnos, Thasos, Myconos, Paros, Andros, Tinos, Icaria, Leros, Karpathos, Skiathos, Skopelos, Milos, Patmos and Symi.

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Given the track record of Bloomberg’s economists team, I guess this means there won’t be a Grexit.

Majority of Financial Pros Now Say Greece Is Headed for Euro Exit (Bloomberg)

Greece, mired in a protracted financial crisis and at loggerheads with its bailout stewards, will leave the euro, according to the majority of investors, analysts, and traders in a Bloomberg survey. 52 % of the respondents in the Bloomberg Markets Global Poll believe the cash-strapped country will leave the 19-nation bloc at some point, compared with 43% who see Greece remaining in the euro for the foreseeable future. In answer to the same question in mid-January, just 31% of poll respondents predicted a Greek exit and 61% had the country staying in. The downbeat assessment of Greece’s prospects, more than five years after the country’s first bailout, comes as the country stands on the edge of a financial abyss.

Prime Minister Alexis Tsipras has so far failed to squeeze a loan payment out of his country’s institutional creditors as he sticks to his pledge to dial back austerity, while the nation’s banks stay on ECB life support. “The banking sector is Greece’s Achilles heel, and if the ECB decides to stop funding, then the situation will be even more fragile than it is at the moment,” said Diego Iscaro, a senior economist at research company IHS Global Insight in London. “That could trigger an exit—eventually.” Having lost access to capital markets and being ineligible for the ECB’s regular financing operations, Greece’s banks are reliant on the ECB-approved Bank of Greece Emergency Liquidity Assistance.

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Out of options.

Bank Of Japan Keeps Policy Steady In 8-1 Vote (CNBC)

The Bank of Japan (BOJ) kept policy steady in an 8-1 vote Thursday, maintaining its massive easing program of purchasing 80 trillion yen ($670 billion) worth of assets annually. The BOJ is ignoring signs its efforts to boost inflation toward a 2% target are stalling, Marcel Thieliant, a Japan economist at Capital Economics, said in a note. He had forecast the central bank would step up easing at this meeting. “The bank obviously considers the slowdown in inflation since the autumn to be a temporary phenomenon, blaming it mostly on the plunge in energy prices. In our view, there is more to it than that,” he said.

“The economic recovery is stalling, wages are barely rising, and inflation excluding food and energy is near zero, too.” Analysts had broadly expected the BOJ would leave its easing program intact, but the Nikkei business daily had reported the central bank could lower its median inflation estimate for fiscal 2015 from the current 1% in its semiannual report. The new figure will likely fall somewhere between 0.5-1%, the report said.

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Not a country with an overly elevated general IQ. It fits right in with the rest of the ‘developed’ world.

New Zealand Rockstar Economy All Smoke And Noise (NZ Herald)

With our currency effectively at parity with the Australian dollar and house prices booming everything must be great in the “rockstar” New Zealand economy, right? I’m not so sure. Let’s look at the economic growth achieved in 2014. Headline real GDP growth was a very impressive 3.5%. However, population growth was 1.6% so per capita GDP growth was only about 1.8%. Commodity prices – in particular dairy – had a big run up in 2014 resulting in a positive impact of around $5 billion to nominal GDP. Working out the contribution to real GDP growth is difficult, but if we assume about half of this fed through directly into GDP, then that accounts for about 0.9% of growth. Likewise the Christchurch rebuild got into full swing and probably added a further 0.6%.

So real GDP growth per capita, excluding the one-off effects of surging commodity prices and the Christchurch rebuild, was about 0.3%. Not quite so flash. The big problem is that the quality of our GDP growth has been low. GDP growth per capita is a much better measure of increased prosperity than simple GDP growth because it adjusts for the growth in our population. New citizens place demands on our social and physical infrastructure and the costs of those demands need to be met from the overall economic pie. Given that the media and most economists tend to focus on overall GDP growth, it’s no wonder politicians are hooked on the drug that is immigration: it’s an easy way to boost perceived GDP growth, despite significant cost to our infrastructure.

Those costs tend to be hidden in the short term; pressure on housing, demand for social services and further congestion on motorway and transport systems already at breaking point. Given we are a small, open economy, we need to be smart about what we do. The world is finely balanced at the moment: global growth is tepid and China’s growth in particular is slowing rapidly which may cause serious problems. Government debt levels globally are at record highs, Europe is a mess and Australia is facing real economic challenges as unemployment threatens to rise to 7% by the year’s end. I sense that as a nation we lack a plan and there is a real absence of leadership at both a local and a national level. We need to ask: What sort of economy do we want and how do we achieve it?

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As the rising housing market allows for politicians to hide from sight their failures, the economy spins out of tilt.

It’s Now Impossible For Most Poor Australian Families To Find A Home (Guardian)

A review of housing rental affordability released on Thursday shows that for most people on low incomes, finding an affordable place to rent is impossible. Anglicare Australia’s annual snapshot of rental affordability shows that while there has been a slight increase in affordability for low income households, for the vast majority of those living on benefits – such as Newstart or on the minimum wage – the cost of renting causes significant financial hardship. When we talk about housing affordability the most common discussion is about the cost of buying a house. And yet for 30% of people, while buying a house may be an ambition, the more immediate housing affordability issue is affording to pay rent rather than the mortgage.

For the past five years Anglicare Australia has conducted a national survey of properties to provide a “snapshot of rental affordability”. Rather than survey households, the snapshot looks at the marketplace by examining the cost of renting properties nationwide. This year it involved a survey of some 65,614 properties. The report considers the affordability of these properties for households on different government benefits such as single people on Newstart, those on the single parenting payment, the disability support pension, as well as those on the minimum wage. It considers an affordable property one in which the rent takes up “less than 30% of the household’s income.” This accords with the general view of a household being in “housing stress” if “housing costs are greater than 30% of disposable income and that household’s income is in the bottom 40% of the income distribution.”

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How many guesses did you need?

Who is to Blame for the Tragedy in Yemen? (Viktor Mikhin)

Artificially created by the West and their minion – Saudi Arabia, the Yemen crisis is unfolding according to their pre-planned scenario. Instead of helping the fraternal Yemen in the peaceful settlement of internal disputes, Riyadh has followed the lead of the US and begun to use military means to establish its dictatorship. At first, as planned, the first phase of the plan was carried out, i.e. the bombing of peaceful cities, towns and villages from planes of the so-called Arab coalition, when pilots developed combat experience launching bomb strikes in the absence of any air defense. During this phase, the United States actively helped the Saudis with intelligence, logistics and organization of military air sorties.

But even in such circumstances, Saudi pilots did not particularly trouble themselves over launching attacks on actual militant targets of Houthis, but prefered to bomb major cities such as Sana’a, Aden and many others. “The air raids in which our valiant falcons participated along with our brothers from the countries of the coalition eliminated all threats to the security of the kingdom and neighboring countries by destroying heavy weapons and ballistic weapons, which Houthi groups and forces under the control of Ali Abdullah Saleh had taken over,” reads a statement quoted by state media in Saudi Arabia. However, the fact is that these bombings by “glorious falcons” harmed mostly civilians; women, the elderly and children. According to WHO, as a result of the armed conflict, 944 civilians had been killed and another 3,487 wounded in Yemen from March 19 to April 17, 2015.

Then, according to the plan developed by the Pentagon, Saudi troops began entering the Yemen territory. The coalition of Arab countries announced the launch on the night of April 21 to 22 of a new operation in Yemen called “Restoration of Hope”. According to Saudi media, the goal of the operation is to restore the political process and fight against terrorism, and combat Houthi military activity. The official representative of the coalition command, Brigadier General Ahmed Asiri, said that its forces will continue the naval blockade of Yemen in order to prevent the supply of arms to the rebels. “If necessary, we will again resort to force. Under the new operation, we will do everything to stop all maneuvers by the Houthis,” said Ahmed Asiri.

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“Developing personal dependence is no easy feat and requires resolute will power to continue on this long and rambling path.”

Going Rogue: 15 Ways to Detach From the System (Tess Pennington)

It is much too complicated to get into how the “system” was created. That said, the purpose is to enslave through debt and to create an interdependence that will force you and your family to never truly find the freedom you are seeking. It manipulates and convinces you to continue purchasing as a sort of status symbol to make you think you are living the good life; while all along, it has enslaved you further. Wonder why we have all of these holidays where you have to buy gifts? The system needs to be fed and forces you into further enslavement. If you don’t buy into this facilitated spending spree, you are socially shamed. Collectively speaking, the contribution from our easy lifestyle and comfort level has created rampant complacency and a population of dependent, self-entitled mediocres.

We no longer count on our sound judgement, capabilities and resources. The system keeps everything in working order so we don’t have to depend on ourselves, and furthermore, don’t want to. I realize that many of the readers here do not fall into this collectivism, as you see through the ideological facade and know that the system is fragile and can crumble. Breaking away from the system is the only way to avoid the destruction of when it comes crumbling down. When you don’t feed into the manipulation tactics of the system, or enslave yourself to debt, and possess the necessary skills to sustain yourself and your family when large-scale or personal emergencies arise, you will be far better off than those who were dependent on the system. Those who lived during the Great Depression grew up in a time when self-reliance was bred into them and were able to deal with the blow of an economic depression much easier. Which side of this would you want to be on?

Those who had the patience to learn the necessary skills, ended up surviving more favorably compared to others who went through the trying times of the Depression. Now is the time to get your hands dirty, to practice a new mindset, skills, make mistakes and keep learning. Developing personal dependence is no easy feat and requires resolute will power to continue on this long and rambling path. To achieve this you have to begin to break away from the confines of the system. You don’t have to run off to the woods to be the lone wolf. Simply by asking yourself, “Will your choices and the way you spend your time lead to more independence down the road, or will it lead to greater dependence?”, will help you gain a greater perspective into being self-reliant. As well, consider ignoring the convenient system altogether. This will help you to detach yourself from complacency and stretch your abilities and your mindset.

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Say hello and wave goodbye.

The Last 3 Bornean Rhinos Are in Race against Extinction (Scientific American)

s there any hope of saving the Bornean rhinoceros (Dicerorhinus sumatrensis harrissoni) from extinction? Sadly, the chances of that happening seem to grow slimmer and slimmer. Experts once estimated that the rapidly disappearing forests of Sabah, Malaysia, could have hidden up to 10 Bornean rhinos—a subspecies of the critically endangered Sumatran rhino, of which fewer than 100 remain scattered around Borneo, Sumatra and mainland Malaysia. But this month Sabah’s environmental minister reported some devastating news: It appears that there are no more wild rhinos in the state. There are, however, three Bornean rhinos in captivity in Sabah, all at the Borneo Rhino Sanctuary in Tabin Wildlife Reserve. One of them, a female named Iman, was captured from the wild a little over a year ago after she fell into a pit trap.

When she was rescued, Iman was proclaimed the species’s “newest hope for survival.” Sanctuary veterinarians even suspected she was pregnant at the time. That didn’t turn out to be true. Ultrasound tests conducted soon after Iman’s arrival at the sanctuary revealed that the mass in her uterus wasn’t a fetus. It was a vast collection of tumors that would make it impossible for her to ever get pregnant naturally. A male named Tam and another female, Puntung, also live at the sanctuary. According to WWF Malaysia, Puntung is also incapable of breeding because she has “severe reproductive tract pathology, possibly due to having gone unbred in the wild for a long time.”

So all hope is lost, right? Well, not so fast. Both Iman and Puntung are still producing immature eggs called oocytes. It might be possible to combine those oocytes with Tam’s sperm to produce embryos in the lab, which could then be implanted back into one of the two females or a rhino of another species. Late last month the Malaysian government pledged about $27,700 toward financing artificial insemination techniques for the task. That’s just a fraction of the money the Borneo Rhino Alliance says it needs for the task, but it’s a start.

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Not bad at all!

Heaviest Element Yet Known To Science is Discovered: Governmentium (Not PC)

News from the Scientific World: New Element Discovered 

Victoria University of Wellington researchers have discovered the heaviest element yet known to science. The new element, Governmentium (symbol=Gv), has one neutron, 25 assistant neutrons, 88 deputy neutrons and 198 assistant deputy neutrons, giving it an atomic mass of 312.  These 312 particles are held together by forces called morons, which are surrounded by vast quantities of lepton-like particles called pillocks. Since Governmentium has no electrons, it is inert. However, it can be detected, because it impedes every reaction with which it comes into contact. 

A tiny amount of Governmentium can cause a reaction that would normally take less than a second, to take from 4 days to 4 years to complete. Governmentium has a normal half-life of 1 to 3 years (in NZ). It does not decay, but instead undergoes a re-organisation in which a portion of the assistant neutrons and deputy neutrons exchange places. In fact, Governmentium’s mass will actually increase over time, since each reorganisation will cause more morons to become neutrons, forming isodopes. 

This characteristic of moron promotion leads some scientists to believe that Governmentium is formed whenever morons reach a critical concentration. This hypothetical quantity is referred to as a critical morass. When catalysed with money, Governmentium becomes Administratium (symbol=Ad), an element that radiates just as much energy as Governmentium, since it has half as many pillocks but twice as many morons.

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