Jan 132016
 
 January 13, 2016  Posted by at 9:01 am Finance Tagged with: , , , , , , , , , ,  Comments Off on Debt Rattle January 13 2016


Jimmy King Bowie last photo on last birthday Jan 8 2016

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

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

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

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

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

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

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

Chinese Exports Post First Annual Decline Since 2009 (WSJ)

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

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

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

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

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

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

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

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

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

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

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

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

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

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Objects in mirror are bigger than they appear.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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The yuan can shake the entire region.

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

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

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

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

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But just how low can the yuan go?

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

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

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

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Result will be zero.

OPEC Considering Emergency Meeting On Oil Prices (CNN)

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

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

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

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

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

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

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

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

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

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

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… where confidence really stands.

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

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

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

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

What Market Turbulence Is Telling Us (Martin Wolf)

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

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

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

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

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

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

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

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

California Air Resources Board Rejects VW Engine Fix (BBG)

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

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

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

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

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

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

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

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

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

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

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Welcome to Europe.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Jan 122016
 
 January 12, 2016  Posted by at 9:43 am Finance Tagged with: , , , , , , , , ,  


V&APA Bowie age 16 in the Kon-Rads 1963

RBS Cries ‘Sell Everything’ As Deflationary Crisis Nears (AEP)
An ‘Extremely Normal And Realistic’ 26% S&P 500 Drop Is Taking Shape (MW)
Oil Down 20% Since Start Of Year, $10 Target Looms (Reuters)
Plunging Prices Could Force A Third Of US Oil Firms Into Bankruptcy (WSJ)
China Resorts To ‘Nuclear Strength’ Weapons To Defend The Yuan (Guardian)
Chinese Official: Bets Against Yuan Are ‘Ridiculous and Impossible’ (WSJ)
China Banks Feel The Heat Of Meltdown (FT)
China FX Reserve Sell-Off To Soon Move Beyond US Treasuries (Reuters)
Why China’s Market Illness Has Gotten More Contagious (WSJ)
China Rout Threatens to Spawn India Crisis (BBG)
EU Set To Weigh China’s Eligibility For Lower Import Tariffs (BBG)
South Africa’s Flash Crash Exposes Cracks in Currency Liquidity (BBG)
Saudi Arabia Plays Down Riyal Peg Fears (FT)
Banks’ Worst Fears Eased as Basel Soft-Pedals Capital Overhaul (BBG)
Canadian Stocks Fall in Longest Slump Since 2002 (BBG)
Discovery (Jim Kunstler)
It’s Time For Europe To Turn The Tables On Bullying Britain (Luyendijk)
Migrant Flows ‘Still Way Too High,’ EU Tells Turkey (AFP)
Mass Migration Into Europe Is Unstoppable (FT)

As things shape up the very way we always said they would, others claim ownership of the story.

“China has set off a major correction and it is going to snowball. Equities and credit have become very dangerous, and we have hardly even begun to retrace the ‘Goldlocks love-in’ of the last two years..”

RBS Cries ‘Sell Everything’ As Deflationary Crisis Nears (AEP)

RBS has advised clients to brace for a “cataclysmic year” and a global deflationary crisis, warning that major stock markets could fall by a fifth and oil may plummet to $16 a barrel. The bank’s credit team said markets are flashing stress alerts akin to the turbulent months before the Lehman crisis in 2008. “Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small,” it said in a client note. Andrew Roberts, the bank’s credit chief, said that global trade and loans are contracting, a nasty cocktail for corporate balance sheets and equity earnings. This is particularly ominous given that global debt ratios have reached record highs. “China has set off a major correction and it is going to snowball. Equities and credit have become very dangerous, and we have hardly even begun to retrace the ‘Goldlocks love-in’ of the last two years,” he said.

Mr Roberts expects Wall Street and European stocks to fall by 10pc to 20pc, with even an deeper slide for the FTSE 100 given its high weighting of energy and commodities companies. “London is vulnerable to a negative shock. All these people who are ‘long’ oil and mining companies thinking that the dividends are safe are going to discover that they’re not at all safe,” he said. Brent oil prices will continue to slide after breaking through a key technical level at $34.40, RBS claimed, with a “bear flag” and “Fibonacci” signals pointing to a floor of $16, a level last seen after the East Asia crisis in 1999. The bank said a paralysed OPEC seems incapable of responding to a deepening slowdown in Asia, now the swing region for global oil demand Morgan Stanley has also slashed its oil forecast, warning that Brent could fall to $20 if the US dollar keeps rising.

It argued that oil is intensely leveraged to any move in the dollar and is now playing second fiddle to currency effects. RBS forecast that yields on 10-year German Bunds would fall time to an all-time low of 0.16pc in a flight to safety, and may break zero as deflationary forces tighten their grip. The European Central Bank’s policy rate will fall to -0.7pc. US Treasuries will fall to rock-bottom levels in sympathy, hammering hedge funds that have shorted US bonds in a very crowded “reflation trade”. RBS first issued its grim warnings for the global economy in November but events have moved even faster than feared. It estimates that the US economy slowed to a growth rate of 0.5pc in the fourth quarter, and accuses the US Federal Reserve of “playing with fire” by raising rates into the teeth of the storm. “There has already been severe monetary tightening in the US from the rising dollar,” it said.

It is unusual for the Fed to tighten when the ISM manufacturing index is below the boom-bust line of 50. It is even more surprising to do so after nominal GDP growth has fallen to 3pc and has been trending down since early 2014. RBS said the epicentre of global stress is China, where debt-driven expansion has reached saturation. The country now faces a surge in capital flight and needs a “dramatically lower” currency. In their view, this next leg of the rolling global drama is likely to play out fast and furiously. “We are deeply sceptical of the consensus that the authorities can ‘buy time’ by their heavy intervention in cutting reserve ratio requirements (RRR), rate cuts and easing in fiscal policy,” it said.

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How about 50%? Standard & Poor’s 1500 index – a broad basket of large, mid and small company stocks – is already down -26.9% from its 52-week high.

An ‘Extremely Normal And Realistic’ 26% S&P 500 Drop Is Taking Shape (MW)

It’s been a brutal start to 2016 in the markets. But the way this chart is setting up, there’s a lot more pain on the way, according to J.C. Parets of the All Star Charts blog. “We’re down 9% from the all-time highs in the S&P 500 SPX, +0.09% and I see people acting like two-year-olds that just had their favorite toy taken away from them,” he said. “Why, because the market is down 9% from its highs last year after rallying over 220% over the prior 6 years? Please.” He goes on to explain how this recent spate of selling action isn’t unusual and how “things get absolutely destroyed all the time.” Like the British pound, energy, emerging markets and agricultural commodities, to name just a few.

“And these are real collapses in prices, not this 9% nonsense that people are getting all worked up about because it’s the S&P 500, or Apple or something that they’re too sensitive about,” Parets wrote in his blog post. He used the chart above to support his prediction that the S&P is headed toward the 1,570 level, which would be an “extremely normal and realistic” 26% correction from the top. Or another 20% from where it stands now. “This is a ‘sell rallies’ market, not a ‘buy the dip’ environment,” he added. That’s not to say there won’t be bounces. “Go look at a list of the best days in stock market history, they all come during massive selloffs,” Parets said. “I would expect this decline to be no different and the rallies we do get should be vicious.”

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And now Lybia comes on line…

Oil Down 20% Since Start Of Year, $10 Target Looms (Reuters)

Crude oil prices continued a relentless dive early on Tuesday, falling almost 20% since the beginning of the year as analysts scrambled to cut their 2016 oil price forecasts and traders bet on further price falls. U.S. crude West Texas Intermediate was trading at $30.66 per barrel at 0531 GMT on Tuesday, down 75 cents from the last settlement and about 20% lower than at the beginning of the year. Earlier it traded at $30.60, the lowest since December 2003. Brent crude futures fell 83 cents to $30.72 a barrel. Earlier they declined to $30.66, their lowest since April 2004. Brent has fallen nearly 20% in January and, like WTI, has declined on every day of trading so far this year.

Trading data showed that managed short positions in WTI crude contracts, which would profit from a further fall in prices, are at a record high, implying that many traders expect further falls. “It’s going to be a very interesting year in oil,” said Ric Spooner at CMC Markets in Sydney. “The lower the price goes, the faster in time we are likely to form a base and recover.” Analysts also adjusted to the early price rout in the year, with Barclays, Macquarie, Bank of America Merrill Lynch, Standard Chartered and Societe Generale all cutting their 2016 oil price forecasts on Monday. “A marked deterioration in oil market fundamentals in early 2016 has persuaded us to make some large downward adjustments to our oil price forecasts for 2016,” Barclays bank said.

“We now expect Brent and WTI to both average $37/barrel in 2016, down from our previous forecasts of $60 and $56, respectively,” it added. But it was Standard Chartered that took the most bearish view, stating that prices could drop as low as $10 a barrel. “Given that no fundamental relationship is currently driving the oil market toward any equilibrium, prices are being moved almost entirely by financial flows caused by fluctuations in other asset prices, including the USD and equity markets,” the bank said. “We think prices could fall as low as $10/bbl before most of the money managers in the market conceded that matters had gone too far,” it added.

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It’ll be epic.

Plunging Prices Could Force A Third Of US Oil Firms Into Bankruptcy (WSJ)

Crude-oil prices plunged more than 5% on Monday to trade near $30 a barrel, making the specter of bankruptcy ever more likely for a significant chunk of the U.S. oil industry. Three major investment banks – Morgan Stanley, Goldman Sachs and Citigroup – now expect the price of oil to crash through the $30 threshold and into $20 territory in short order as a result of China’s slowdown, the U.S. dollar’s appreciation and the fact that drillers from Houston to Riyadh won’t quit pumping despite the oil glut. As many as a third of American oil-and-gas producers could tip toward bankruptcy and restructuring by mid-2017, according to Wolfe Research.

Survival, for some, would be possible if oil rebounded to at least $50, according to analysts. More than 30 small companies that collectively owe in excess of $13 billion have already filed for bankruptcy protection so far during this downturn, according to law firm Haynes & Boone. Morgan Stanley issued a report this week describing an environment “worse than 1986” for energy prices and producers, referring to the last big oil bust that lasted for years. The current downturn is now deeper and longer than each of the five oil price crashes since 1970, said Martijn Rats, an analyst at the bank. Together, North American oil-and-gas producers are losing nearly $2 billion every week at current prices, according to a forthcoming report from AlixPartners, a consulting firm. “Many are going to have huge problems,” said Kim Brady at consultancy Solic Capital.

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“Its actions are comparable to steps taken by other central banks when they previously fought against international speculators, such as George Soros..”

China Resorts To ‘Nuclear Strength’ Weapons To Defend The Yuan (Guardian)

The Chinese authorities have resorted to “nuclear strength” weapons to deter an attack on the yuan by short sellers and convince sceptical investors that they are in control of the country’s spluttering financial system. China’s central bank fixed the currency firmer again on Tuesday but traders were not persuaded and the currency slipped in early trade despite what dealers called aggressive intervention to support the currency. The gap between the mainland yuan and its offshore counterpart had grown in recent days but suspected intervention by China’s state-owned banks brought them almost into line on Tuesday. The action sent the rate at which banks charge each other to borrow yuan in Hong Kong to a record high of 67% on Tuesday.

“The market suspects that the People’s Bank of China is possibly using major state banks to directly drain yuan liquidity in offshore markets,” said a dealer at an European bank in Shanghai. The dealer described the strength of the central bank’s actions as being of “nuclear-weapon” level strength. “Its actions are comparable to steps taken by other central banks when they previously fought against international speculators, such as George Soros,” he said. [..] Perceived mis-steps by China’s authorities have stoked concerns in global markets that Beijing might be losing its grip on economic policy, just as the country looks set to post its slowest growth in 25 years. Amid suspicions by some in the market that China wants the yuan to devalue in order to boost its ailing exporters, sources suggested there were moves afoot for China’s cabinet to take a bigger role in overseeing financial markets.

The state council has set up a working group to prepare for upgrading the cabinet’s financial department to bureau level, said a source close to the country’s leadership. Officials were doing their best to talk up the currency [..] The central bank’s chief economist Ma Jun said on Monday that the bank planned to keep the yuan basically stable against a basket of currencies, and fluctuations against the US dollar would increase. Han Jun, deputy director of the office of the Chinese Communist party’s leading group on financial and economic affairs, said a more substantial decline in the yuan was “ridiculous” and “impossible”.

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The louder their claims, the lower confidence goes.

Chinese Official: Bets Against Yuan Are ‘Ridiculous and Impossible’ (WSJ)

Wagers that the yuan will slump 10% or more against the dollar are “ridiculous and impossible,” a senior Chinese economic official said Monday, warning that China had a sufficient tool kit to defeat attacks on its currency. “Attempts to sell short the renminbi will not succeed,” said Han Jun, deputy director of the office of the Central Leading Group on Financial and Economic Affairs, at a briefing at the Chinese Consulate in New York. “The expectations of markets can be changed.” The comments are the latest demonstration of Chinese officials’ determination to defeat those betting that yuan declines will intensify. They echo comments such as ECB President Mario Draghi’s 2012 “whatever it takes” speech, made when European government bonds issued by weaker countries were under attack.

Yet analysts said China’s plan carries considerable risks, potentially creating tension with the government’s efforts to integrate itself into the global financial architecture. Currency-market interventions are costly and risk confusing investors by adding to volatility, some said. “These interventions work well only if they’re undertaken in the context of much broader reforms,” said Eswar Prasad, a former top China hand at the International Monetary Fund and now an economics professor at Cornell University. Bets against the yuan, or renminbi, have picked up in 2016, sending the currency to its lowest level in nearly five years against the dollar and widening the gap between the official Chinese yuan fixing and the so-called offshore market in Hong Kong, where the government is less involved.

On Monday, the yuan rose 0.3% against the dollar in China and rose 1.5% in the offshore market, to 6.5863 per dollar. In late New York trading, the yuan was up 0.4% to 6.5666 per dollar. The debate over the direction of the yuan has captivated Wall Street since last August, when China roiled financial markets by reducing the currency’s value against the dollar by 2% on Aug. 11, its largest single-day decline in two decades. Further yuan devaluation would threaten to exacerbate existing problems in the global economy, where sluggish demand for goods and services is tripping up growth. Many nations have sought to bolster flagging domestic growth by increasing exports, but a sharp decline in the yuan would likely undermine such efforts by making Chinese goods cheaper and more competitive abroad.

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“China’s banks could require up to $7.7 trillion of new capital and funding over the next three years…” But that’s just part of the story; it’s still based on very low amounts of bad loans -“barely 1% at the big lenders, and 1.8% at mid-tier banks this year-, and that doesn’t seem realistic. Fitch puts it at 21%(!).

China Banks Feel The Heat Of Meltdown (FT)

If the US or Europe had experienced the kind of equity market slump that China has suffered of late, its financial institutions would be quaking and leading the list of biggest fallers in Shanghai and Hong Kong trading. As it is, the big banks have seen their share prices tumble by about 10% over the past two or three weeks, far less than the 15% slump in the Shanghai Composite index. On the face of it, there may be good reason for that. Traditionally China’s large financial institutions are not big stock market players — retail investors make up the bulk of the market. In reality, the banks are the most exposed to China’s ills. They are directly bound up in the stock market turmoil and the government’s efforts to shore up sentiment against the flood of selling. Figures relating to the past week or so are not yet available.

But during a similar rout in early July last year, 17 banks — including the big five listed but partly state-owned groups — lent more than $200bn to facilitate broker purchases of shares and funds. Even without the seizure of their balance sheets to prop up the equity market, China’s banks are pretty troubled. Like banks in the west before the financial crisis, China’s lenders — with government encouragement — have inflated a vast credit bubble, funding the country’s ambitious companies and fast-expanding property market. Chinese banking assets now amount to more than $30tn. Over the past decade, credit growth has consistently topped 10% a year. (It peaked at close to 35% in 2009.) Even this year, it is expected to be double the 6-7% forecast rate of GDP growth.

Last August, JPMorgan estimated China’s non-financial industry private sector debt at 147%, half as much again as in 2007. The downturn in China’s fortunes — particularly across its heartland heavy industry — is already hitting the banks. Annual non-performing loan rates have been doubling annually since 2012. China Merchants Bank, China Everbright and ICBC are seen as among the most troubled. China bulls point to the still low level of NPLs — barely 1% at the big lenders, and 1.8% at mid-tier banks this year, according to analyst forecasts. As a gauge, NPLs in Greece have risen to between 30 and 40% amid that country’s crisis. But China experts at independent research house Autonomous suggest investors are underestimating a spiralling problem. Across the board, loan losses will rise by $845bn this year, Autonomous predicts. That, they think, will be enough to shrink profits by 6% at big banks.

[..] Investors in China’s banks may well recognise that the lenders cannot be compared with institutions that operate along western lines and will expect hazier disclosures and readier state interference. They are also likely to think that China will not allow its banks to fail. But if analysts, like those at Autonomous are to be believed, China’s banks could require up to $7.7tn of new capital and funding over the next three years.

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Exporting deflation.

China FX Reserve Sell-Off To Soon Move Beyond US Treasuries (Reuters)

The unwinding of China’s foreign exchange reserves could soon extend beyond U.S. Treasuries, with U.S. corporate and euro zone sovereign bonds among the assets most vulnerable to selling from Beijing, Bank of America Merrill Lynch said on Monday. China sold a record $510 billion of FX reserves last year to counter the damaging impact on an already decelerating economy from the surge of capital fleeing the country. The lion’s share of that came from $292 billion sales of U.S. Treasury debt, followed by $92 billion sales of U.S. stocks, $3 billion of U.S. agency bonds and $170 billion of non-U.S. assets, according to BAML estimates. China increased its U.S. corporate bond investments by $44 billion last year to $415 billion, BAML strategists estimated, adding that it won’t be long before investors turn their attention to other assets Beijing could potentially sell.

“In the next two months I would still say Treasuries. But if the pressure continues beyond that, it’s non-U.S. assets, and in the U.S. space it’s definitely corporates and agencies,” said Shyam Rajan, rates strategist at BAML in New York. Rajan and his colleagues estimate that China’s $3.33 trillion FX reserves comprise $1.15 trillion non-U.S. assets (mostly short-dated euro-denominated bonds), $415 billion U.S. corporate bonds, $212 billion in agencies, $266 billion stocks and $1.29 trillion of Treasuries. Selling across these bonds may not automatically trigger a sharp rise in their yields though, Rajan said, pointing to the experience of Treasuries in the latter part of last year when swap spreads moved below zero.

“The way to trade the reserve flow story is through relative value trades, such as the swap spread tightening in Treasuries. I would imagine it plays out the same way in other markets too,” Rajan said. Last year’s record unwind brought China’s total FX reserves to a three-year low of $3.33 trillion. Most analysts expect that to be depleted further this year. JP Morgan estimates that capital flight from China since the second quarter of 2014 has totaled $930 billion, while credit ratings agency Fitch on Monday put the figure at over $1 trillion. U.S. investment bank Morgan Stanley on Monday joined Goldman Sachs in lowering its forecast for the Chinese yuan, citing the ongoing flow of capital out of the country and need for a weaker currency to support the economy.

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Nothing much has changed, other than suspicions that Beijing can’t handle the downfall. But global exposure to China is still the same, it’s just been ridiculously downplayed.

Why China’s Market Illness Has Gotten More Contagious (WSJ)

The Shanghai stock market is undersized and isolated. Its market capitalization is less than one-quarter the size of New York’s. Just 37% of its shares are available to trade, and foreigners own only a tiny fraction. Yet the tide of selling by Chinese investors last week—along with an unexpectedly sharp move to weaken the yuan—rolled through stocks, commodities and currencies across the globe. The chain reaction heralds a new era for China, whose financial-market muscle has long been underdeveloped compared with its economic heft. On Monday, Chinese shares resumed their slide. The Shanghai Composite Index dropped 5.3%, leaving it down 15% in the new year. U.S. shares stumbled but covered their losses in the final hour of trading and closed up slightly.

Oil fell to a new 12-year low in the U.S., and currencies in countries like South Africa and Russia fell sharply. Until last year, few in global markets took their cue from Shanghai, which has a history of roller-coaster trading. In the summer of 2015, a sharp plunge in the Shanghai Composite, after a 60% rise earlier in the year, combined with a surprise yuan devaluation to trigger a global selloff. Attention soon faded, and Shanghai’s market ended the year up 9.4%. But last week’s meltdown again showed China’s market influence. And to many, it suggested an even more ominous possibility: that Beijing may be fumbling its management of China’s economy. That could have disastrous consequences for the prices of goods and commodities, and thus markets, around the world.

Today, China accounts for about 11% of world gross domestic product, 12% of the globe’s oil consumption and about half the demand for steel. It is the No. 1 trading partner for countries from South Korea and Australia to Brazil and soaks up exports worth more than 10% of GDP from Singapore and Taiwan. Despite tight controls over the currency and the banking system that wall off China from much of the global financial system, China’s huge presence in global trade means the country is more tightly tied to the rest of the world than ever. Its roaring growth has been a boon to Western stock markets like Germany’s, whose exchange is filled with manufacturers that sell machines and factory equipment there.

Now, China ties may be a liability. In Europe, whose companies get 10% of their revenue from the Asia-Pacific region, the pan-European Stoxx Europe 600 is down 7% in 2016 through Monday, and Germany’s DAX is down 8.5%. Europe is especially vulnerable to a China slowdown: Its own economic growth has been weak for years, and the Continent has been counting on exports to plug the gap. Nearly 10% of the exports from the 28-member EU go to China. The story isn’t the same everywhere, though. U.S. companies get only 5% of their revenue from Asia-Pacific. They also can rely on a more buoyant domestic economy. The S&P 500 was down 6% this year through Friday.

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And India is one of the first victims of the popping China Ponzi.

China Rout Threatens to Spawn India Crisis (BBG)

A deepening slowdown in China threatens to derail India’s economic growth, triggering financial market upheaval and a falling currency, Vishal Kampani, the nation’s top investment banker, said. “If China keeps getting hit like this, the yuan has to devalue, and we will see another crisis in India,” Kampani at JM Financial, the South Asian country’s top M&A adviser last year, said in a Jan. 8 interview. “I refuse to believe that India will stand out and will look very different.” Indian stocks and the rupee fell Monday, tracking declines in other emerging markets as volatility in China sapped risk appetite globally. China’s efforts to stabilize the yuan failed to halt equity losses, reviving concern about the Communist Party’s ability to manage an economy set to grow at its weakest pace since 1990. India’s benchmark S&P BSE Sensex Index fell 0.4% on Monday in Mumbai after dropping as much as 1.4% earlier.

The rupee weakened 0.2% to 66.7725 against the dollar as of 4:11 p.m. local time. A devaluation of the yuan could weaken the rupee, creating “huge problems” for Indian companies that have to pay back dollar loans, Kampani said. China is India’s largest trade partner and third-largest export market, so a slowdown there could prolong a record slump in the South Asian nation’s overseas shipments, which declined 12 straight months through November. A China-led rout in Indian markets also risks damping private investment, already hurt by credit lines choked by bad debt and a legislative gridlock that’s blocked economic bills. That would boost pressure on Prime Minister Narendra Modi to sustain public spending even at the risk of worsening Asia’s widest budget deficit. Modi has seen his economic agenda stall in parliament, disappointing investors who bet that his landslide win in 2014 would speed up reforms.

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In which the richer nations can once again overpower the poorer.

EU Set To Weigh China’s Eligibility For Lower Import Tariffs (BBG)

European Union policy makers are poised to kick off deliberations to determine whether EU industries ranging from steel to solar can keep relying on import tariffs to fend off aggressive Chinese competitors, the opening salvo in a political and economic battle due to last all year. The European Commission, the EU’s executive arm, will hold an initial debate Jan. 13 about whether the bloc should recognize China as a market economy starting in December. Such a step would make it more difficult for European manufacturers such as ArcelorMittal and Solarworld AG to win sufficiently high EU duties meant to counter alleged below-cost – or “dumped” – imports from China.

The talks will pit free-trade governments in northern Europe against more protectionist ones in the south, put Europe on a possible track that the U.S. is staying off and produce a political verdict on whether communist China has come of age economically 15 years after it joined the World Trade Organization. In addition to being a political prize for Beijing, market-economy status would be a business boost for China, whose growth has slumped to the weakest since 1990 and which suffered a 10% fall in stocks last week. “This is one of the hottest issues on the agenda,” Jo Leinen, a German MEP who chairs its delegation for relations with China, said by phone from Saarbruecken, Germany, on Jan. 7. “It’s a hot potato. The Chinese are pushing for market-economy status and interests are divided in Europe.”

The matter combines top-level political calculations with tricky economic and legal considerations. With the EU struggling to bolster economic growth and keep Greece in the euro area, leaders across Europe have courted China for investment in infrastructure and orders of goods such as Airbus planes. While it’s the EU’s No. 2 trade partner behind the U.S., China is grouped with the likes of Belarus, Kazakhstan and Mongolia in seeking market-economy designation by Europe and faces more European anti-dumping duties than any other country. The import levies cover billions of euros of Chinese exports such as stainless steel, solar panels, aluminum foil, bicycles, screws, paper, kitchenware and office-file fasteners, curbing competition for producers across the 28-nation EU. Market-economy status for China would signal more European trust in Beijing by ensuring the EU uses Chinese data for trade investigations affecting the country.

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Emerging markets will start collapsing outright, Brazil, South Africa, China and more.

South Africa’s Flash Crash Exposes Cracks in Currency Liquidity (BBG)

It took just 15 minutes on Monday morning for South Africa’s rand to plummet 9% in what traders said may be a prelude of the new normal in the global $5.3 trillion-a-day currency market. Such flash crashes will probably become more common in foreign-exchange trading as liquidity shrinks amid tighter regulation and reduced demand for emerging-market assets, according to Insight Investment and Citigroup.The rand slid to record lows versus the dollar and yen in Asian trading before recovering the bulk of the day’s losses almost as swiftly. “The rand isn’t alone in this,” said Paul Lambert at Insight Investment, a Bank of New York Mellon unit, which manages more than $582 billion.

“The rand is another reflection of the change in the liquidity environment in which we’re all operating. We’re learning that unless there are clients on the other side, banks are very unwilling to take risk onto their books.” Volatility in the rand versus the dollar surged toward the highest level in four years, while a measure of global currency price swings climbed to the most since October. The difference between prices at which traders are willing to buy and sell the rand, used as a gauge of liquidity, was about 1.5 times wider on average in the past six months than it was during the first half of 2015, according to data compiled by Bloomberg.

In a phenomenon that’s also hit U.S. stock markets in recent years, regulation is pushing banks to reduce their size and cut down on market making, making it more difficult to trade without prices moving adversely. A reduction in liquidity has contributed to similar price swings in fixed-income securities, including the $13 trillion U.S. government bond market. Bursts of volatility in currency markets and diminishing liquidity are another affliction for emerging economies such as South Africa, which seek to secure overseas investments amid slowing growth, a rout in commodities and domestic political challenges. Boosting international trade and capital inflows is made harder by currency turmoil as investors and banks become less willing to take on additional risk.

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A rock and an impossible place.

Saudi Arabia Plays Down Riyal Peg Fears (FT)

Saudi Arabia sought to cool talk about the future of its currency peg, saying movements in the forward market were the result of market “misperception” about the state of the kingdom’s economy. Oil price declines and rising tensions between Saudi Arabia and Iran have pushed up the cost of riyal-dollar forward prices and questioned the validity of the 30-year-old peg. In a statement, the governor of the Saudi Arabian Monetary Agency said it would “uphold its mandate” of maintaining the peg at SR3.75 to the dollar, “backed up by the full range of monetary policy instruments including its foreign exchange reserves”. The statement was prompted by forward market volatility, said governor Fahad al-Mubarak, which he attributed to “mispricing linked to market operators’ misperception about Saudi Arabia’s overall economic backdrop”.

Economic and financial indicators were stable, underpinned by its net creditor position and a sound and resilient banking system, Mr al-Mubarak said. Oil price woes are weighing on several commodity currencies, not least Russia’s rouble, which dropped more than 1% to a 13-month low. Further rouble declines would cut across the Central Bank of Russia’s strategy for resuming its easing cycle, said Rabobank’s Piotr Matys, and increased the risk of a prolonged recession. Oil’s impact on the Saudi kingdom would prompt markets to “worry more” about falling reserves and the exchange rate pegs of Saudi Arabia and other Gulf states, said Kamakshya Trivedi of Goldman Sachs in a note, “especially if attempts at fiscal adjustment are not credible or unsuccessful”.

Simon Quijano-Evans at Commerzbank acknowledged that Saudi Arabia had four years’ worth of reserves to cover budget and current account deficits. But he added that without a sustained upward oil price move, market speculation about the peg would increase. “History has shown us that if a policy peg is not economically viable, there really is little point in holding on as the intrinsic benefits from the set-up eventually become its principal vulnerabilities,” he said. Gulf bankers were unconcerned, saying the peg had survived worse financial backdrops. In the late 1990s, when oil prices were even lower, the finance ministry toiled under domestic debts totalling more than 100% of gross domestic product. Sama still has $627bn in foreign reserves, down 14% on last November, as the kingdom burns through its savings to fund the deficit and an expensive war in Yemen.

“Traders are forgetting about Saudi firepower,” said one senior Gulf banker. “This is a low-cost trade with a huge potential payout,” said another senior financier. “Those bearish oil may want to bet that pressure will become too great for Saudi. Possible, but not my scenario.”

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Nothing has changed, nothing at all. The bankers still write the rules that are supposed to keep them in check.

Banks’ Worst Fears Eased as Basel Soft-Pedals Capital Overhaul (BBG)

Global banking regulators pledged to refrain from further tightening capital requirements with new rules to be finalized in 2016, dispelling industry fears that triggered intense lobbying efforts over the past year. The Basel Committee on Banking Supervision doesn’t plan to raise capital requirements across the board in the remaining projects of its post-crisis bank rule overhaul, it said Jan. 11 after a meeting of its oversight body, chaired by ECB President Mario Draghi. The group, which includes the Bank of England and U.S. Federal Reserve, said it will assess the potential costs of any additional action. “The committee will conduct a quantitative impact assessment during the year,” the group said in a statement. “As a result of this assessment, the committee will focus on not significantly increasing overall capital requirements.”

Basel’s slate of rules for this year, including a review of trading risks that the committee endorsed on Jan. 10, have faced heavy criticism from bankers, who say onerous new capital charges would crimp their ability to lend. The overhaul of how banks value risky assets has led industry executives to warn a regulatory onslaught – sometimes referred to as Basel IV – is still ahead, even after the last decade of new rules designed to prevent another market meltdown. Karen Shaw Petrou at Federal Financial Analytics said the Basel’s latest statement is a response to bankers’ warnings. “Global regulators clearly hope to tamp down continuing talk of a ‘Basel IV’ rule, emphasizing in both action and statements that continuing changes are recalibrations, not hikes,” Petrou said in an e-mail.

Draghi said the agreements reached by the Basel committee and the upcoming agenda seek to provide greater clarity about the capital framework and, “a clear path for completing post-crisis reforms.” As part of this process, the regulator will hold a public consultation on removing internal-model approaches for some risks, such as the Advanced Measurement Approach for operational risk, as well as on “setting additional constraints on the use of internal model approaches for credit risk, in particular through the use of floors.” The committee also sounded a soft note on another lingering worry of bankers, the unweighted leverage ratio. It will keep the minimum amount of capital per total assets unchanged at 3%, when it becomes a binding requirement in 2018, it said. For the world’s biggest banks, there may be an add-on, it said, without elaborating.

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Canada has so much more to go.

Canadian Stocks Fall in Longest Slump Since 2002 (BBG)

Energy’s drag on Canadian stocks showed no signs of abating as the nation’s benchmark equity gauge slumped a ninth straight day, the longest losing streak since 2002. Canadian equities have lost 7.4% during this period with the Standard & Poor’s/TSX Composite Index failing to post a positive trading day in 2016. Crude futures in New York tumbled to a 12-year low. Analysts at Morgan Stanley projected Brent oil may slump to as low as $20 a barrel on strength in the dollar. Brent dropped 6.7% to $31.32 a barrel in London. Bank of America Corp. cut its average 2016 Brent forecast to $46 a barrel from $50. “Risk appetite will not return until we start to see crude carve out a bottom,” said David Rosenberg at Gluskin Sheff in a note to clients.

The S&P/TSX fell 1% to 12,319.25 at 4 p.m. in Toronto. The gauge capped a 20% plunge from its September 2014 record on Jan. 7, hitting a magnitude in declines commonly defined as a bear market. Canada was the second Group of 7 country to see its benchmark enter a bear market, after Germany’s DAX Index did in August. Energy producers sank 2.7%. The group, which accounts for about 20% of the broader index, was the worst-performing sector in the S&P/TSX last year.

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The demise of retail.

Discovery (Jim Kunstler)

It looks like 2016 will be the year that humanfolk learn that the stuff they value was not worth as much as they thought it was. It will be a harrowing process because a great many humans are abandoning ownership of things that are rapidly losing value — e.g. stocks on the Shanghai exchange — and stuffing whatever “money” they can recover into the US dollar, the assets and usufructs of which are also going through a very painful reality value adjustment. Of course this calls into question foremost exactly what money is, and the answer is: basically a narrative construct. In other words, a story explaining why we behave the way we do around certain things. Some parts of the story have a closer relationship with reality than other parts. The part about the US dollar has a rather weak connection.

When various authorities — the BLS, the Federal Reserve, The New York Times — state that the US economy is “strong,” we can translate that to mean giant companies listed on the stock exchanges are able to put up a Potemkin façade of soundness. For instance, Amazon.com. The company continues to seem like a good idea. And it reinforces that idea in the collective imagination by sending a lot of low-priced goods to your door, (all bought on credit cards), which rings your (nearly) instant gratification bell. This has prompted investors to gobble up Amazon stock. It’s well-established by now that the “brick-and-mortar” retail operations are majorly sucking wind. Meaning, fewer people are driving to the Target store and venues like it to buy stuff. Supposedly, they are buying stuff at Amazon instead.

What interests me in that story is the idea that every single object purchased these days has a UPS journey attached to it. Of course, people also drive to the Target store, though I doubt they leave the place with just one thing. That dynamic ought to call into question just how people are living in the USA, and the answer to that is: spread out all over the place in a suburban sprawl living arrangement that has poor prospects for being reformed or mitigated. Either you drive yourself to the Target store for a slow-cooker and a few other things, or Amazon has to send the brown truck to each and every house. Either way includes an insane amount of transport, and sooner or later both the brick-and-mortar chain store model and the Amazon home delivery model will fail.

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Joris is primarily funny here. But he wants to ‘reform’ the EU, and that’s a dead end. One point is good: EU’s finance center can’t be in a country outside of it. So the UK threat to leave would force banks and multinationals out of London.

It’s Time For Europe To Turn The Tables On Bullying Britain (Luyendijk)

So let us start talking now, out loud in Brussels as well as in Europe’s opinion pages and in national parliaments, about the offer we are going to make to the Scots, should they prefer Brussels to London in the event of Brexit. Let’s also discuss in which ways we are going to repatriate financial powers from London to the European mainland. It is strange enough that Europe’s financial centre lies outside the eurozone, but to have it outside the EU? That would be like placing Wall Street in Cuba. Clearly multinational corporations from China, Brazil or the US cannot have their European HQs outside the EU. So let’s have an EU summit about which European capitals these headquarters should ideally move to. Make sure the English can hear these discussions, and in the meantime keep an eye on how the value of commercial real estate in London plummets.

Or consider the UK-based Japanese car industry – would Greece, with its excellent port and shipping facilities, not be its ideal new home? Oh yes, and sooner or later, the 1.3 billion Indians will object again to not having a permanent seat on the UN security council when 55 million English do. Let’s work out what favours we want from India in exchange for our support. The best way for the EU to prevent Brexit is to start preparing for it, loudly. But this is not enough. European politicians and pundits must not be shy of cutting England down to size. This is the chief problem for those in England trying to make the EU case: they must acknowledge first how irrelevant and powerless their country has become. Except that is still a huge taboo. Seen from China or India, the difference between the UK and Belgium is a rounding error: 0.87% of world population versus 0.15%.

But this is not at all how Britain sees itself – consider the popular derogatory expression “a country the size of Belgium”. But alas, what a missed opportunity this referendum is. A child can see that the EU needs fundamental reform and just imagine for a moment that England had argued not for a better deal for Britain, but for all of us Europeans. How electrifying it would have been if Cameron had demanded an end to the insanely wasteful practice of moving the European parliament back and forth between Strasbourg and Brussels. If he had insisted on a comprehensive overhaul of the disastrous common agricultural policy, on the long overdue reduction in salaries and tax-free perks for Eurocrats, and on actual prosecution of corrupt officials. Instead he has set his sights on largely symbolic measures aimed at humiliating and excluding European migrants, safeguarding domestic interests versus those of the eurozone and, no surprises here, guarantees for London’s financial sector.

Ultimately, as far as the EU is concerned, the English are only in it for themselves. All the more reason, then, for Europeans to stop imploring them to stay in, and begin using their strength in the negotiations.

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These clowns actually believe they’re in control.

Migrant Flows ‘Still Way Too High,’ EU Tells Turkey (AFP)

The number of migrants crossing the Aegean Sea from Turkey to Greece is “still way too high”, a top EU official said Monday, a month and a half after a deal aimed to limit the flow. EU vice president Frans Timmermans said Turkey and Brussels had to speed work up on implementing the action plan, while Ankara reaffirmed it was looking at a measure to tempt more Syrians to stay in Turkey by granting them work permits. “The numbers are still way too high in Greece, between 2,000-3,000 people (arriving) every day. We cannot be satisfied at this stage,” Timmermans told reporters after talks with Turkey’s EU Affairs Minister Volkan Bozkir in Ankara. “The goal of this (action plan) is to stem the flow. 2,000-3.000 (arrivals) a day is not stemming the flow. But we are in this together and we will work on that,” he added.

Under the November 29 deal, EU leaders pledged €3 billion in aid for the more than 2.2 million Syrian refugees sheltering in Turkey, in exchange for Ankara acting to reduce the flow. Under pressure from voters at home, EU leaders want to reduce the numbers coming to the European Union after over one million migrants reached Europe in 2015. Yet there has so far been no sign of a significant reduction in the numbers of migrants from Syria, Afghanistan and other troubled states undertaking the perilous crossing in rubber boats from Turkey’s western coast to EU-member Greece. Turkish authorities on a single day last week found the bodies of at least 36 migrants, including several children, washed up on beaches and floating off its western coast after their boats sank.

In the latest tragedy Monday, two women and a five-year-old girl died when a boat carrying 16 Afghan migrants sank in bad weather off the Aegean coast, reports said. “I believe we need to speed our work to get some of the projects in place,” said Timmermans. “I also said to the minister that we need… to be very explicit on what elements of the action plan have already been implemented and where we still need work.” Bozkir said that Turkey was expending “intense efforts” on halting the migrant flow, saying the Turkish authorities were stopping 500 people every day. “We will try to reduce the pressure on illegal immigration by giving work permits to Syrians in Turkey,” he added.

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Dead on. Not a bright future. As long as the right wing keeps rising in the face of incompetence.

Mass Migration Into Europe Is Unstoppable (FT)

In the 18th and 19th centuries, Europeans populated the world. Now the world is populating Europe. Beyond the furore about the impact of the 1m-plus refugees who arrived in Germany in 2015 lie big demographic trends. The current migration crisis is driven by wars in the Middle East. But there are also larger forces at play that will ensure immigration into Europe remains a vexed issue long after the war in Syria is over. Europe is a wealthy, ageing continent whose population is stagnant. By contrast the populations of Africa, the Middle East and South Asia are younger, poorer and rising fast. At the height of the imperial age, in 1900, European countries represented about 25% of the world’s population. Today, the EU’s roughly 500m people account for about 7% of the world’s population. By contrast, there are now more than 1bn people in Africa and, according to the UN, there will be almost 2.5bn by 2050.

The population of Egypt has doubled since 1975 to more than 80m today. Nigeria’s population in 1960 was 50m. It is now more than 180m and likely to be more than 400m by 2050. The migration of Africans, Arabs and Asians to Europe represents the reversal of a historic trend. In the colonial era Europe practised a sort of demographic imperialism, with white Europeans emigrating to the four corners of the world. In North America and Australasia, indigenous populations were subdued and often killed — and whole continents were turned into offshoots of Europe. European countries also established colonies all over the world and settled them with immigrants, while at the same time several millions were forcibly migrated from Africa to the New World as slaves. When Europeans were populating the world, they often did so through “chain migration”.

A family member would settle in a new country like Argentina or the US; news and money would be sent home and, before long, others would follow. Now the chains go in the other direction: from Syria to Germany, from Morocco to the Netherlands, from Pakistan to Britain. But these days it is not a question of a letter home followed by a long sea voyage. In the era of Facebook and the smartphone, Europe feels close even if you are in Karachi or Lagos. Countries such as Britain, France and the Netherlands have become much more multiracial in the past 40 years. Governments that promise to restrict immigration, such as the current British administration, have found it very hard to deliver on their promises.

The EU position is that, while refugees can apply for asylum in Europe, illegal “economic migrants” must return home. But this policy is unlikely to stem the population flows for several reasons. First, the number of countries that are afflicted by war or state failure may actually increase; worries about the stability of Algeria are rising, for example. Second, most of those who are deemed “economic migrants” never actually leave Europe. In Germany only about 30% of rejected asylum seekers leave the country voluntarily or are deported. Third, once large immigrant populations are established, the right of “family reunion” will ensure a continued flow. So Europe is likely to remain an attractive and attainable destination for poor and ambitious people all over the world.

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Jan 202015
 
 January 20, 2015  Posted by at 10:44 am Finance Tagged with: , , , , , , , , , , ,  


DPC The steamer Cincinnati off Manhattan 1900

IMF Lowers Global Growth Forecast by Most in Three Years (Bloomberg)
Chinese Growth at 7.4% Is the Slowest Since 1990 (Bloomberg)
China’s $20 Trillion Headache Underscored by Stock Swings (Bloomberg)
Warning! Volatility May Await If ECB Launches QE (CNBC)
Draghi Weighs QE Compromise Showcasing Unity Shortfall (Bloomberg)
Endgame for Central Bankers (Steen Jakobsen)
Denmark Strikes Back at Speculators and Burnishes Peg Defenses (Bloomberg)
Denmark Should Cut Loose From Euro (Bloomberg)
Swiss Upending Polish Mortgages Unnerves Bank Bondholders (Bloomberg)
Iraq Back From The Brink With Largest Oil Output Since 1979 (CNBC)
Price Collapse Hits Scavengers Who Scrape the Bottom of Big Oil (Bloomberg)
The Keystone XL Pipeline (Energy Matters)
A Huge Credit Line Reset Looms Over Oil Drillers (Bloomberg)
Janjuah On 2015: Oil At $30; Bonds To Go Crazy (CNBC)
U.S. Won’t Intervene in Oil Market (Bloomberg)
Saudi Arabia Can Last Eight Years On Low Oil Prices (Guardian)
Europe ‘Faces Political Earthquakes’ (BBC)
If The Fed Has Nothing To Hide, It Has Nothing To Fear (Ron Paul)
A Solemn Pause (Jim Kunstler)
Whiplash! (Dmitry Orlov)
Why New Zealand Can Handle Europe, Oil Troubles (CNBC)
Bleak Future For Retirees As Savings Slashed (CNBC)
Disease Threat To Wild Bees from Commercial Bees (BBC)

All that’s wrong, put in just a few words: “We want to make sure that when there’s an announcement, that it’s as large as what the market’s expecting.” The ECB should do what’s good for people, not what markets expect. That’s insiduous.

IMF Lowers Global Growth Forecast by Most in Three Years (Bloomberg)

The IMF made the steepest cut to its global-growth outlook in three years, with diminished expectations almost everywhere except the U.S. more than offsetting the boost to expansion from lower oil prices. The world economy will grow 3.5% in 2015, down from the 3.8% pace projected in October, the IMF said in its quarterly global outlook released late Monday. The lender also cut its estimate for growth next year to 3.7%, compared with 4% in October. The weakness, along with prolonged below-target inflation, is challenging policy makers across Europe and Asia to come up with fresh ways to stimulate demand more than six years after the global financial crisis.

“The world economy is facing strong and complex cross currents,” Olivier Blanchard, the IMF’s chief economist, said in the text of remarks at a press briefing Tuesday in Beijing. “On the one hand, major economies are benefiting from the decline in the price of oil. On the other, in many parts of the world, lower long-run prospects adversely affect demand, resulting in a strong undertow.” The IMF cut its outlook for consumer-price gains in advanced economies almost in half to 1% for 2015. Developing economies will see inflation this year of 5.7%, a 0.1 percentage point markup from October’s projections, the fund said. The growth-forecast reduction was the biggest since January 2012, when the fund lowered its estimate for expansion that year to 3.3% from 4% amid forecasts of a recession in Europe.

The IMF marked down 2015 estimates for places including the euro area, Japan, China and Latin America. The deepest reductions were in places suffering from crises, such as Russia, or for oil exporters including Saudi Arabia. IMF Managing Director Christine Lagarde outlined the sobering outlook in her first speech of the year last week, saying that oil prices and U.S. growth “are not a cure for deep-seated weaknesses elsewhere.” The U.S. is the exception. The IMF upgraded its forecast for the world’s largest economy to 3.6% growth in 2015, up from 3.1% in October. Cheap oil, more moderate fiscal tightening and still-loose monetary policy will offset the effects of a gradual increase in interest rates and the curb on exports from a stronger dollar, the fund said.

In Europe, weaker investment will overshadow the benefits of low oil prices, a cheaper currency and the European Central Bank’s anticipated move to expand monetary stimulus by buying sovereign bonds, according to the IMF. The fund lowered its forecast for the 19-nation euro area to 1.2% this year, down from 1.3% in October. The ECB should go “all in” in its bond-buying program, Blanchard said on Bloomberg TV. “We want to make sure that when there’s an announcement, that it’s as large as what the market’s expecting.”

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Why anyone would believe numbers like these is beyond me.

Chinese Growth at 7.4% Is the Slowest Since 1990 (Bloomberg)

China’s stimulus efforts began kicking in late last year, boosting industrial production and retail sales, and helping full-year economic growth come close to the government’s target. Gross domestic product rose 7.3% in the three months through December from a year earlier, compared with the median estimate of 7.2% in a Bloomberg News survey. GDP expanded 7.4% in 2014, the slowest pace since 1990 and in line with the government’s target of about 7.5%. The yuan and local stocks advanced after the release. A soft landing for China would help a global economy contending with weakness that spurred the IMF’s steepest cut to its world growth outlook in three years.

China’s central bank cut interest rates for the first time in two years in November and has added liquidity in targeted steps to buoy demand. “The economy’s performance in 2014 stands out against the widespread hard-landing fears that prevailed early last year,” said Tim Condon at ING in Singapore. “That the authorities were able to sustain close-to-target growth and increase the tempo of economic reforms –- shadow banking, local government finances -– and sustain the property-cooling measures demonstrates the effectiveness of the targeted measures.” “Markets should breathe a sigh of relief as the economy enters 2015 in a better shape than had been expected,” said Dariusz Kowalczyk at Credit Agricole in Hong Kong.

“The data lowers the need for further stimulus, but there remains some room for easing as risks are skewed to the downside.” [..] Quarter-on-quarter, China’s performance was less robust, slowing to 1.5% growth in the three months through December from 1.9% in the third quarter. “Growth momentum eased in the fourth quarter from the previous three months due to property-related weakness,” said Wang Tao, chief China economist at UBS Group AG in Hong Kong. “Property starts deepened their decline, which also dragged down heavy industry and related investment. Property will continue to drag down growth this year.”

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China imitates the west: “Funds aren’t flowing into economic activities on the ground. Instead, people are adding leverage to speculate.”

China’s $20 Trillion Headache Underscored by Stock Swings (Bloomberg)

For China’s central bank, the 36% stock market rally through Jan. 16 spurred in part by a surprise November interest-rate cut is the latest reminder that it’s easier to unleash money than to guide it to the right places. Since Zhou Xiaochuan became People’s Bank of China governor in late 2002, the broad money supply base has expanded almost seven times to 122.8 trillion yuan ($20 trillion) while the economy has grown about five times. That translates to a M2/GDP ratio of about 200% versus about 70% in the U.S. That liquidity springs up like a jack-in-the-box, driving property prices, then shifting to stocks, before moving on to whatever may be next. Such sprees help explain the PBOC’s reluctance to cut banks’ required reserve ratios even as the economy slows. Instead, it’s trying targeted tools to guide money to preferred areas such as farming and small business.

“The central bank will continue to face structural challenges in 2015 and beyond,” said Shen Jianguang at Mizuho. “Funds aren’t flowing into economic activities on the ground. Instead, people are adding leverage to speculate.” China’s benchmark stock index plunged the most in six years on Monday in Shanghai, led by brokerages, after regulatory efforts to rein in record margin lending sparked concern that speculative traders will pull back from the world’s best-performing stock market in 2014. The move to control margin lending was to “pave the way for more monetary easing,” according to Zhu Haibin at JPMorgan in Hong Kong. The action was to stop future monetary easing from flowing into the stock market, Zhu said in an interview with Bloomberg Television today.

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“If we want to help governments that are in trouble let’s do it – but let the parliaments decide rather than this technocratic body, the ECB council.”

Warning! Volatility May Await If ECB Launches QE (CNBC)

One of Europe’s most influential economists has warned that the quantitative easing measures seen being unveiled by the ECB this week could create deep market volatility, akin to what was seen after the Swiss National Bank abandoned its currency peg. “There was so much capital flight in anticipation of the QE to Switzerland, that the Swiss central bank was unable to stem the tide, and there will be more effects of that sort,” the President of Germany’s Ifo Institute for Economic Research, Hans-Werner Sinn, told CNBC on Monday. This week, the ECB holds its two-day policy meeting and is widely seen unveiling a U.S. Federal Reserve-type government bond-purchasing program, known as quantitative easing or QE. Sinn, a fierce critic of QE, said the launch of such a program would bring more market volatility, of the kind seen on Thursday after the Swiss National Bank abandoned its euro/Swiss franc floor.

“He (ECB President Mario Draghi) will do it, and what will the markets do, they will happy to be able to sell the government bonds, which they consider as partly toxic and they will have a lot of cash. What will they do – they will buy real estate, there could be a revival of the real estate market but they will primarily try to take it abroad. And they have already begun doing that – what you see in Switzerland,” Sinn told CNBC. Sinn said that a ECB government bond-buying program would make markets “happy”, but that it was not the right way to go about bailing out the euro zone. “If we want to help governments that are in trouble let’s do it – but let the parliaments decide rather than this technocratic body, the ECB council. All these (QE) measures go way beyond monetary policy – these are bailout operations to help banks and states which are unable to cope with normal rates of interest,” Sinn told CNBC.

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What an incredible mess even before it’s been announced.

Draghi Weighs QE Compromise Showcasing Unity Shortfall (Bloomberg)

Mario Draghi is weighing how much a compromise on euro-area stimulus would reveal about the currency bloc’s fault lines. As the European Central Bank president and his Executive Board sit down today to formulate a bond-buying proposal to fend off deflation, one option is to ring-fence the risks by country. While that may win over some of Draghi’s opponents when the Governing Council meets on Jan. 22, it might also shine a spotlight on the lack of unity within the union. “An absence of risk-sharing could be taken as a bad signal by the market with respect to the singleness of monetary policy and could be self-defeating,” said Nick Matthews at Nomura. “However, it may prove to be a necessary compromise to make the design of QE more palatable for Governing Council members, and is preferable to having to limit the size of the program.”

Investors are banking on Draghi to announce quantitative easing at his press conference after the council meets, with economists in a Bloomberg survey estimating the package at €550 billion euros. What remains unclear is how far he’ll go to mollify critics who say unelected central-bank officials are transferring risk from weaker nations to stronger ones. The tension surfaced again yesterday at a conference in Dublin. Irish Finance Minister Michael Noonan said having national central banks buy government bonds would be “ineffective,” drawing a response from ECB Executive Board member Benoit Coeure.

“The discussion is how to design it in a way that works, in a way that makes sense,” Coeure said. “If this is a discussion about how best to pool sovereign risk in Europe, and how to make the pooling of sovereign risk take a step forward in an environment where the governments themselves have decided not to do it, then this is not the right discussion.” Klaas Knot, the Dutch central-bank governor, told Der Spiegel last week that “we have to avoid that decisions are taken through the back door of the ECB.”

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“Studies show that the business cycle was less volatile before the Federal Reserve was born. The presence of the Fed means that the implicit backing of the Fed allows excess leverage..”

Endgame for Central Bankers (Steen Jakobsen)

The SNB suddenly abandoning the CHF ceiling had wide consequences last week as we were all taken by surprise. The fact that it would and should happen eventually was not lost on the market, but the SNB was, as late as last weekend, talking tough and telling the market that the floor was an integral part of Swiss monetary policy. Then suddenly it was not. I fully understand the rationale for the move but, like most of the market, I remain extremely disappointed in the SNB’s communication and handling of the issue. But isn’t the bigger lesson or bigger question: Why is it that most people trust or bother to listen to central banks? Major centrals banks claim to be independent, but they are all ultimately under the control of politicians.

Many developed countries have tried to anchor an independent central bank to offset pressure from politicians and that’s well and good in principle until an economy or the effects of a monetary policy decision beginning spinning out of control. At zero bound for growth and for interest rates, politicians and central banks switch to survival mode, where rules are bent or even broken to fit an agenda of buying more time. Just look at the Eurozone crisis over the past eight years: every single criteria of the EU treaty has been violated, in spirit of not strictly according to the letter of the law, all for the overarching aim of “keeping the show on the road”. No, the conclusion has to be that are no independent central banks anywhere! There are some who pretend to be, but none operates in a political vacuum. That’s the reality of the moment.

I would not be surprised to find that the Swiss Government overruled the SNB last week and the interesting question for this week of course will be if the German government will overrule the Bundesbank on QE to save face for the Euro Zone? Likely…. The most intense focus for the last few years in central banking policy-making has been on “communication policy”, which boiled down to its essentials is merely an appeal to “believe us and act accordingly”, often without any real policy action. Look at the Federal Reserve’s forward guidance: They are constantly too optimistic on growth and inflation. Constantly. The joke being to get the proper GDP and inflation forecast you merely take the Fed’s own forecasts and deduct 100-150 bps from both growth and inflation targets and Voila! You have the best track record over time.

Studies show that the business cycle was less volatile before the Federal Reserve was born. The presence of the Fed means that the implicit backing of the Fed allows excess leverage (gearing), and this has resulted in bigger and bigger collapses in financial markets as each collapse triggers yet another central bank “put” that then enables the next bubble to inflate. And the trend of major crashes has been increasing in frequency: 1987 stock crash, 1992 ERM crisis, 1994 Mexico “Tequila crisis”, 1998 Asian crisis and Russian default, 2000 NASDAQ bubble, 2008 stock market crash, and now 2015 SNB, ECB QE, Russia and China, which will lead to what? I don’t know, but clearly the world of finance and the flow of money is increasing in velocity, meaning considerably more volatility.

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“Denmark’s three-decades-old peg is backed by the ECB, unlike the SNB’s former currency regime..” And that’s supposed to make us feel better?

Denmark Strikes Back at Speculators and Burnishes Peg Defenses (Bloomberg)

Denmark is trying to silence currency speculators as the government and central bank insist the Nordic country won’t follow Switzerland in severing its euro ties. “Circumstances significantly different from Denmark’s” were behind the Swiss National Bank’s decision, Danish Economy Minister Morten Oestergaard said in a phone interview. “Any comparison between Denmark and Switzerland is impossible.” The comments followed yesterday’s surprise decision by the Danish central bank to cut its deposit rate by 15 basis points to minus 0.2%, matching a record low last seen during the darkest hours of Europe’s debt crisis in 2012. Like the Swiss, the Danes lowered rates after interventions in the market proved insufficient.

Denmark will probably deliver another rate cut on Jan. 22 as krone “appreciation pressure prevails” with the European Central Bank set to present details of its bond-purchase program, Danske Bank reiterated today. Danske, Denmark’s biggest bank, says it’s been inundated by calls from offshore investors and several hedge funds seeking advice on how to profit from the latest developments in currency markets. SEB, Scandinavia’s largest currency trader, says it’s fielded similar calls. Their response has been to tell investors that Denmark’s three-decades-old peg is backed by the ECB, unlike the SNB’s former currency regime. Denmark has “a long-lasting and politically firmly anchored fixed-currency policy,” Oestergaard said. “This situation should not be overly dramatized.”

To underline the point, the central bank yesterday sought to reassure investors that its monetary policy arsenal is big enough should speculators try to test its resolve. “We have the necessary tools” to defend the peg,Karsten Biltoft, head of communications at the central bank, said by phone. Asked whether Denmark could ever consider abandoning its currency peg, he said, “Of course not.” Biltoft described as “somewhat off” any attempt to draw parallels between the Danish and Swiss currency pegs. “I don’t think you can make a comparison between the two cases,” he said. Yet the speculation is proving hard to put to rest. Defending Denmark’s euro peg “might be easier said than done in the current environment,” Ken Wattret at BNP Paribas, said. “The next test will of course be the upcoming ECB policy announcement on Thursday.” Given BNP’s estimate that the ECB will purchase €600 billion ($697 billion) in sovereign bonds, “further upward pressure on the DKK is likely,” he said.

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As if they have a choice.

Denmark Should Cut Loose From Euro (Bloomberg)

Europe’s currency war is picking up speed. On Monday, with the Danish krone appreciating against the euro, the Danish central bank sought to make the currency less attractive to safe-haven investors by cutting the deposit rate to -0.2% and the lending rate to 0.05%. After the Swiss National Bank abandoned its peg to the euro and cut interest rates, bankers and traders wondered which country would be the next to follow suit. No sooner had the franc zoomed upward than the Danish central bank prepared for an onslaught. Defending the krone’s peg to the euro could get a lot harder once the ECB begins its government bond-buying program, widely expected on Thursday. Yet maintaining the peg is an act of faith in Denmark.

The central bank should rethink its commitment. With a more flexible monetary policy, it could have done more to stimulate the economy since the global financial crisis, just as it could have prevented some of the overheating that took place in the years running up to the crisis. The krone has been pegged to the euro since 1999, and to the deutschemark before that. It’s allowed to fluctuate no more than 2.25% from 7.46038 to the euro. In practice, the central bank tries to keep the fluctuations within 0.5%. It also marches to the ECB’s monetary drum, including changing interest rates on the same day as ECB decisions, or in response to exceptional pressures on the euro-krone exchange rate. The peg was put in place to stabilize Danish monetary policy after a period of high inflation, which peaked at 12.3% in 1980.

It’s not clear that the peg is a good idea now. Unlike Sweden, which has a floating currency and until 2010 had a more sensible monetary policy, Denmark hasn’t fully recovered from the global economic crisis. Real gross domestic product per capita is still more than 7% below the pre-crisis peak. The desirability of the peg, however, is beyond debate in political and economic policy circles. When a prominent economist and former Danish government economic adviser was asked to compare the performance of the Danish economy with Sweden’s in December 2013, he was unable to name any area of economic policy where the Swedes did better. Monetary policy wasn’t mentioned at all; only structural reforms such as marginal tax rates and labor market policies were.

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Poland and especially Hungary have huge amounts of mortgages denominated in Swiss francs.

Swiss Upending Polish Mortgages Unnerves Bank Bondholders (Bloomberg)

Among the victims of last week’s shock surge in the Swiss franc are bond investors in Polish banks, which hold $35 billion in mortgages denominated in the currency. Yields on Eurobonds for lenders including Bank Polski and MBank jumped to five- and nine-month highs after the Swiss National Bank unexpectedly ditched its currency cap. The move sent the zloty tumbling against the franc on concern more Poles will fall behind on repaying franc-denominated home loans. JPMorgan said the nation’s banks may need to make additional provisions for non-performing mortgages in the currency, whose value is equivalent to 6.7% of gross domestic product.. While the zloty plunged 20% against the franc following the SNB action, Polish lenders have adequate capital to withstand a drop of more than twice that, the financial markets regulator said last week, citing results of October stress tests.

“This is clearly negative and increases the risks in the banking sector, which may or may not materialize,” Marta Jezewska-Wasilewska at Wood & Co., wrote in a research note Jan. 15. “Polish banks have managed to deal with the FX mortgage issue relatively well since 2008.” The yield on PKO’s 2019 euro-denominated bonds rose 40 basis points in the last three days to 1.56%, the highest since Aug. 22. The rate on similar-maturity MBank debt soared 83 basis points to 2.34% in the same period. The currency swing pushed banking stocks on the Warsaw Stock Exchange down by the most in more than three years, with Getin Noble Bank, owned by billionaire Leszek Czarnecki, leading declines after a 16% drop on Jan. 15. Getin’s Swiss-franc loans accounted for “slightly” above 20% of total loans at the end of last year, spokesman Wojciech Sury said in an e-mail last week. The bank sees no threat its liquidity levels will fall below the required minimum and is “ready for different scenarios,” he said.

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“They are not subject to an OPEC quota at the moment, and could flood the market”.

Iraq Back From The Brink With Largest Oil Output Since 1979 (CNBC)

In spite of still struggling to recover from the 2003 war and the continuing Islamic State (IS) insurgency, Iraq produced a record amount of oil last month, the country’s oil minister announced at the weekend. Unveiling production of 4 million barrels of crude per day in December, Adel Abdel Mehdi told reporters that the total was ” a historical figure, and the first time Iraq has achieved this.” Speaking at a joint press conference with his Turkish counterpart Taner Yildiz in Baghdad, the Iraqi minister added the production increase would “make up” for the recent slump in oil prices. Iraq, where lawmakers are now looking at a 2015 draft budget based on an average of $60 dollars a barrel, depends on crude exports to generate over 90% of government revenues. The barrel export count, if confirmed, also trumps estimates of 3.7 million b/d by the International Energy Agency (IEA) published last week.

The agency’s report also identified Iraq as the main driver behind a rise in OPEC supply in December by 80,000 b/d to 30.48 million b/d. Iraq has not pumped as much crude oil since 1979, when the previous record was set with 3.56 million b/d . The December total would make Iraq OPEC’s second largest producer, behind Saudi Arabia at around 7 million b/d and ahead of Iran, the United Arab Emirates and Kuwait which each produce 2.7 b/d. “It’s quite a significant increase, but in-line with all the investment that was done over the last 10 years,” Samir Kasmi at Dubai-based advisory firm CT&F, told CNBC. “They are not subject to an OPEC quota at the moment, and could flood the market”. Abdel Mehdi explained production in the region of Kirkuk, which was held by IS troops last year before being liberated in June, would reach 375,000 b/d for the first three months of 2015. Production would eventually rise to 600,000 b/d by April.

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10% of US production.

Price Collapse Hits Scavengers Who Scrape the Bottom of Big Oil (Bloomberg)

In the $1.6 trillion-a-year oil business, there are global titans like Exxon Mobil that wield more economic might than most of the nations on Earth, and scores of wildcatters scouring land and sea for the next treasure troves of crude. Then there are the strippers. For these canaries in the proverbial coal mine, the journey keeps going deeper and darker. Strippers are scavengers who make a living by resuscitating once-prolific oil fields to coax as little as a bathtub full of crude a day from each well. Collectively, the strippers operate almost half-a-million oil wells that produced more than 730,000 barrels a day in 2012, the most recent year for which figures were available.

That’s one of every 10 barrels produced in the U.S. – equivalent to the entire output of Qatar, or half the crude Shell, Europe’s largest energy company, pumps worldwide every day. With oil prices down 57% since June, these smallest of producers will be the first to succumb to the Great Oil Bust of 2015. “This is killing us,” said Todd Shulman, a University of Colorado-trained geologist who ran fracking crews in the Rocky Mountains before returning to Vandalia, Illinois, in 1984 to help run the family’s stripper well business. Stripper wells – an inglorious moniker for 2-inch-wide holes that produce trickles of crude with the aid of iconic pumping machines known as nodding donkeys – were a vital contributor to U.S. oil production long before the shale revolution.

Though a far cry from the booming shale gushers that have pushed American crude production to the highest in a generation, stripper wells are a defining image of the oil business, scattered throughout rural backwaters abandoned by the world’s oil titans decades ago. With the price of crude dipping so low, there’s no way Shulman will be able to drill a new well that regulators have already permitted. Nor is he even going to turn on a well finished last month that’s ready to start production. It would be foolhardy to harvest crude from wells that won’t pay for themselves, said Shulman, who scrapes remnants from old Texaco (CVX) and Shell fields 310 miles south of Chicago, in the heart of what had been a booming oil region in the 1930s. He’ll wait for prices to rebound.

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“The crude Keystone XL delivers will make no difference to US crude imports; it will simply displace crude imports from elsewhere.”

The Keystone XL Pipeline Makes No Difference (Energy Matters)

Lobbyists are mobilizing to advance it. Environmentalists are mobilizing to stop it. The newly-elected Republican House has already voted to approve it. So has the newly elected Republican Senate. Obama has threatened a veto. The media are having a field day. What’s so important about Keystone XL? Well nothing, really. Keystone XL is basically just another pipeline; a little longer and larger than most, but not unusually so, and it goes nowhere pipelines don’t already go. All it does is increase the capacity of the existing Keystone pipeline system, which has already transported over 550 million barrels of Canadian heavy crude from Alberta to the US. The crude Keystone XL delivers will make no difference to US crude imports; it will simply displace crude imports from elsewhere.

And if Keystone XL doesn’t get built the crude it would have carried will go somewhere else, meaning that no CO2 emissions would be saved by not building it. (Although building it probably would save CO2 emissions because much of the Canadian crude that now moves south on trucks and rail tankers would pass through Keystone instead.) So what’s all the fuss about? What’s happened, of course, is that Keystone XL has been blown totally out of proportion, to the point where it’s become a cause célèbre. But how it got to this point is something for the psychologists, sociologists and political scientists to argue about. Here we will confine ourselves to the facts.

First, the purpose of Keystone XL. Its purpose is simply to supply more Canadian heavy crude to US Gulf Coast refineries that are facing potential feedstock shortages because of declining heavy crude production from Mexico and Venezuela, their main historic suppliers. This is a perfectly reasonable business proposition. Canada is motivated to sell, the refineries are motivated to buy and both will profit from the transaction. (Scotland has the same motivation in wishing to sell its surplus wind power to England. The difference is that Canada can deliver a product the client wants when the client wants it.) Second, the Canada-US pipeline system. There’s a perception that Keystone XL will be the first pipeline to bring Canadian crude to the US, but as shown in Figure 1 a substantial network of oil pipelines linking the two countries already exists. (Keystone XL is the blue line running northwest of Steele City):

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“I call it a liquidity spiral. They’ll start burning right through cash.”

A Huge Credit Line Reset Looms Over Oil Drillers (Bloomberg)

Oil and gas companies have April circled on their calendars. That’s when their lenders will recalculate the value of properties that energy companies staked as loan collateral. With those assets in decline along with oil prices, banks are preparing to cut the amount they’re willing to lend, crimping the ability of U.S. drillers to keep production growing. “This could start a downward spiral for some of these companies because liquidity will dry up,” said Thomas Watters, managing director of oil and gas research for Standard & Poors in New York. “I call it a liquidity spiral. They’ll start burning right through cash.” More than 20 U.S. exploration and production companies have used at least 60% of their credit lines, according to Bloomberg analyst Spencer Cutter. The energy industry is facing a cash squeeze after U.S. oil prices fell 60% since June.

Drillers have already cut spending to conserve cash. If credit lines are cut, the most indebted producers will be left scrambling to raise money elsewhere. New loans will be expensive – if they’re available at all. The credit lines, which typically are reset each spring and fall based on the value of borrowers’ petroleum reserves, operate like credit cards. To pay them off, companies have in the past sold off assets or issued bonds. The value of oil properties has declined at the same time that the borrowing environment for energy companies has gotten worse. At least one junk-rated company, Breitburn, has gotten an early jump on discussions with its lender. Breitburn’s credit limit was raised to $2.5 billion from $1.6 billion on Nov. 19 as a result of the acquisition of another energy company.

About three months ago, Los Angeles-based Breitburn attempted to sell $400 million of bonds to pay down its $2.5 billion credit line, but canceled the offering as oil falling below $90 a barrel roiled credit markets. The credit line is 88% drawn, according to regulatory filings. With the high-yield energy market still “challenged,” Breitburn is considering tapping the loan market, Jim Jackson, the oil producers’ chief financial officer, said in a phone interview. If its credit line is reduced to below what’s already been borrowed, “we would have six months to close that gap,” he said. “We’re being very pro-active.” Last week, S&P said it might downgrade Breitburn’s credit rating over concerns the company would face cash shortfalls if it couldn’t replace money from a reduced credit line.

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“There is a point in time where disinflation turns into deflation and then you start worrying about that potential car crash..”

Janjuah On 2015: Oil At $30; Bonds To Go Crazy (CNBC)

If you thought 2014 was volatile, hold on to your hats this year as the price of oil could hit $30 a barrel and the bond markets will outperform, according to Bob Janjuah, a closely-watched strategist from Nomura Securities. He told CNBC on Monday that there was little chance of Saudi Arabia changing its decision not to cut oil production, despite the 60% fall in prices since June 2014, and the cost of a barrel could head even lower. “Oil can go up in the short-term but I think actually that there’s some political motivations at play here and Saudi Arabia is at risk of losing its position as the marginal price-setter and I don’t think they want to lose that position,” Janjuah, co-head of cross-asset allocation strategy at Nomura, told CNBC Monday.

“I think the Saudis will potentially carry on (with their policy of not cutting production) and production will remain high but my head target is $30 – $35 as where we could get to. Where prices are now, I think a twenty dollar move is more difficult but I think that’s the risk and out there,” he told CNBC Europe’s “Squawk Box.” Janjuah believed that Saudi Arabia – the leading member of OPEC – would be content to maintain that pressure on the U.S. along with other major oil producers such as Russia. While some economies could benefit from lower oil prices, such as major importer Europe, Janjuah warned about the U.S. whose energy industry has grown thanks to its “fracking” of shale oil.

“If you look at the U.S. economy, the bulk of capital expenditure and jobs growth has been in and around the shale and energy-related sectors so if crude is down around the $30-$35 mark for a significant period of time I think you’re going to see a default cycle in the U.S. energy sector.” “I think disinflation is the key theme (this year) so you have to like bonds,” Janjuah said. “There is a point in time where disinflation turns into deflation and then you start worrying about that potential car crash where we start to worry about growth and earnings and how that hits the equity trade.”

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Translation: frack on!

U.S. Won’t Intervene in Oil Market (Bloomberg)

The U.S. won’t intervene in the oil market amid falling crude prices, according to Amos Hochstein, the U.S. State Department’s energy envoy. The U.S. will let “the market” decide what happens, Hochstein said in an interview at a conference in Abu Dhabi yesterday. Hochstein is special envoy and coordinator for international affairs at the State Department’s Bureau of Energy Resources. “When people ask the question ‘what will the U.S. do?,’ it’s really the market that’s going to have to decide what happens,” Hochstein said. “This is about a global market that is addressing the supply-demand curve.” Asked what the U.S. could do about falling prices and instability in oil markets, he said: “We do have mechanisms to work with our partners around the world if something extreme happens, but that’s not where I think we are and I think the markets so far can adjust themselves.”

Oil prices have dropped 53% in the past year as growing production from the U.S., Russia and OPEC overwhelmed demand. The International Energy said last week that the effects on U.S. production are so far “marginal.” “One of the most remarkable aspects of this recent period has been the resilience of the American energy market,” Hochstein said. U.S. oil production growth has swelled to its fastest pace in more than three decades, driven by output from shale deposits. Cheaper oil prices won’t stop development of alternative energy sources, he said. “We have really switched paradigms here where renewable energy really can continue to grow, even when there are low oil prices,” he said. “That’s true globally.”

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Not politically, it can’t.

Saudi Arabia Can Last Eight Years On Low Oil Prices (Guardian)

A former adviser to Saudi Arabia has said the country can withstand eight years or more of low oil prices as tensions over the price slump simmered between the world’s biggest oil exporter and Iran. Mohammad al-Sabban told the BBC that Saudi Arabia was concerned about the falling oil price but its cash reserves and planned budget cuts meant it could cope with a long period of depressed prices. “Saudi Arabia can sustain these low oil prices for at least eight years. First, we have huge financial reserves of about 3tn Saudi riyals (£527bn). Second, Saudi Arabia is embarking now on rationalising its expenditure, trying to take all the fat out of the budget. I think [Saudi Arabia] is worried but we [have to] wait for the full medicine that we have prescribed for ourself to take its course.”

Without cuts in spending on infrastructure, sports stadiums and new cities, Saudi Arabia can withstand low oil prices for at least four years, said Sabban, a former adviser to the Saudi minister for petroleum. He also suggested that lower oil prices could have long-term benefits for Saudi Arabia. Saudi Arabia has refused to cut production despite a more than 50% fall in the price of oil since last summer. “To shorten the cycle, you need to allow prices to go as low as possible to see those marginal producers move out of the market on the one hand, and also if there is any increase in demand that will be welcomed.” His comments were a further signal that Saudi Arabia was prepared to use its financial strength to ride out depressed oil prices now piling pressure on other producers, including Iran, which also faces western sanctions over its nuclear programme.

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Thank you Brussels for bringing back extremism.

Europe ‘Faces Political Earthquakes’ (BBC)

Political earthquakes could be in store for Europe in 2015, according to research by the Economist Intelligence Unit for the BBC’s Democracy Day. It says the rising appeal of populist parties could see some winning elections and mainstream parties forced into previously unthinkable alliances. Europe’s “crisis of democracy” is a gap between elites and voters, EIU says. There is “a gaping hole at the heart of European politics where big ideas should be”, it adds. Low turnouts at the polls and sharp falls in the membership of traditional parties are key factors in the phenomenon. The United Kingdom – going to the polls in May – is “on the cusp of a potentially prolonged period of political instability”, according to the Economist researchers.

They say there is a much higher than usual chance that the election will produce an unstable government – predicting that the populist UK Independence Party (UKIP) will take votes from both the Conservatives and Labour. The fragmentation of voters’ preferences combined with Britain’s first-past-the-post electoral system will, the EIU says, make it increasingly difficult to form the kind of single-party governments with a parliamentary majority that have been the norm. But the most immediate political challenge – and test of how far the growing populism translates into success at the polls – is in Greece. A snap general election takes place there on 25 January, triggered by parliament’s failure to choose a new president in December. Opinion polls suggest that the far left, populist Syriza could emerge as the strongest party. If it did and was able to form a government, the EIU says this would send shock waves through the European Union and act as a catalyst for political upheaval elsewhere.

“The election of a Syriza government would be highly destabilising, both domestically and regionally. It would almost certainly trigger a crisis in the relationship between Greece and its international creditors, as debt write-offs form one of the core planks of its policy platform,” the EIU says. “With similar anti-establishment parties gaining ground rapidly in a number of other countries scheduled to hold elections in 2015, the spill-over effects from a further period of Greek turmoil could be significant.” Other examples of European elections with potential for unpredictable results cited by EIU include polls in Denmark, Finland, Spain, France, Sweden, Germany and Ireland. “There is a common denominator in these countries: the rise of populist parties,” the EIU says, “Anti-establishment sentiment has surged across the eurozone (and the larger EU) and the risk of political disruption and potential crises is high.”

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“The audit revealed that between 2007 and 2008 the Federal Reserve loaned over $16 trillion — more than four times the annual budget of the United States — to foreign central banks and politically-influential private companies.”

If The Fed Has Nothing To Hide, It Has Nothing To Fear (Ron Paul)

Since the creation of the Federal Reserve in 1913, the dollar has lost over 97% of its purchasing power, the US economy has been subjected to a series of painful Federal Reserve-created recessions and depressions, and government has grown to dangerous levels thanks to the Fed’s policy of monetizing the debt. Yet the Federal Reserve still operates under a congressionally-created shroud of secrecy. No wonder almost 75% of the American public supports legislation to audit the Federal Reserve. The new Senate leadership has pledged to finally hold a vote on the audit bill this year, but, despite overwhelming public support, passage of this legislation is by no means assured. The reason it may be difficult to pass this bill is that the 25% of Americans who oppose it represent some of the most powerful interests in American politics.

These interests are working behind the scenes to kill the bill or replace it with a meaningless “compromise.” This “compromise” may provide limited transparency, but it would still keep the American people from learning the full truth about the Fed’s conduct of monetary policy. Some opponents of the bill say an audit would somehow compromise the Fed’s independence. Those who make this claim cannot point to anything in the text of the bill giving Congress any new authority over the Fed’s conduct of monetary policy. More importantly, the idea that the Federal Reserve is somehow independent of political considerations is laughable. Economists often refer to the political business cycle, where the Fed adjusts its policies to help or hurt incumbent politicians.

Former Federal Reserve Chairman Arthur Burns exposed the truth behind the propaganda regarding Federal Reserve independence when he said, if the chairman didn’t do what the president wanted, the Federal Reserve “would lose its independence.” Perhaps the real reason the Fed opposes an audit can be found by looking at what has been revealed about the Fed’s operations in recent years. In 2010, as part of the Dodd-Frank bill, Congress authorized a one-time audit of the Federal Reserve’s activities during the financial crisis of 2008. The audit revealed that between 2007 and 2008 the Federal Reserve loaned over $16 trillion — more than four times the annual budget of the United States — to foreign central banks and politically-influential private companies.

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”Next time around, the federals are going to have to confiscate stuff, break promises, take away things, and rough some people up.”

A Solemn Pause (Jim Kunstler)

Events are moving faster than brains now. Isn’t it marvelous that gasoline at the pump is a buck cheaper than it was a year ago? A lot of short-sighted idiots are celebrating, unaware that the low oil price is destroying the capacity to deliver future oil at any price. The shale oil wells in North Dakota and Texas, the Tar Sand operations of Alberta, and the deep-water rigs here and abroad just don’t pencil-out economically at $45-a-barrel. So the shale oil wells that are up-and-running will produce for a year and there will be no new ones drilled when they peter out — which is at least 50% the first year and all gone after four years.

Anyway, the financial structure of the shale play was suicidal from the get-go. You finance the drilling and fracking with high-yield “junk bonds,” that is, money borrowed from “investors.” You drill like mad and you produce a lot of oil, but even at $105-a-barrel you can’t make profit, meaning you can’t really pay back the investors who loaned you all that money, a lot of it obtained via Too Big To Fail bank carry-trades, levered-up on ”margin,” which allowed said investors to pretend they were risking more money than they had. And then all those levered-up investments — i.e. bets — get hedged in a ghostly underworld of unregulated derivatives contracts that pretend to act as insurance against bad bets with funny money, but in reality can never pay out because the money is not there (and never was.) And then come the margin calls. Uh Oh….

In short, enjoy the $2.50-a-gallon fill-ups while you can, grasshoppers, because when the current crop of fast-depleting shale oil wells dries up, that will be all she wrote. When all those bonds held up on their skyhook derivative hedges go south, there will be no more financing available for the entire shale oil project. No more high-yield bonds will be issued because the previous issues defaulted. Very few new wells (if any) will be drilled. American oil production will not return to its secondary highs (after the 1970 all-time high) of 2014-15. The wish of American energy independence will be steaming over the horizon on the garbage barge of broken promises. And all, that, of course, is only one part of the story, because there is the social and political fallout to follow.

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“Production can only be maintained through relentless drilling, and that relentless drilling has now stopped.”

Whiplash! (Dmitry Orlov)

Over the course of 2014 the prices the world pays for crude oil have tumbled from over $125 per barrel to around $45 per barrel now, and could easily drop further before heading much higher before collapsing again before spiking again. You get the idea. In the end, the wild whipsawing of the oil market, and the even wilder whipsawing of financial markets, currencies and the rolling bankruptcies of energy companies, then the entities that financed them, then national defaults of the countries that backed these entities, will in due course cause industrial economies to collapse. And without a functioning industrial economy crude oil would be reclassified as toxic waste. But that is still two or three decades off in the future.

In the meantime, the much lower prices of oil have priced most of the producers of unconventional oil out of the market. Recall that conventional oil (the cheap-to-produce kind that comes gushing out of vertical wells drilled not too deep down into dry ground) peaked in 2005 and has been declining ever since. The production of unconventional oil, including offshore drilling, tar sands, hydrofracturing to produce shale oil and other expensive techniques, was lavishly financed in order to make up for the shortfall. But at the moment most unconventional oil costs more to produce than it can be sold for. This means that entire countries, including Venezuela’s heavy oil (which requires upgrading before it will flow), offshore production in the Gulf of Mexico (Mexico and US), Norway and Nigeria, Canadian tar sands and, of course, shale oil in the US.

All of these producers are now burning money as well as much of the oil they produce, and if the low oil prices persist, will be forced to shut down. An additional problem is the very high depletion rate of “fracked” shale oil wells in the US. Currently, the shale oil producers are pumping flat out and setting new production records, but the drilling rate is collapsing fast. Shale oil wells deplete very fast: flow rates go down by half in just a few months, and are negligible after a couple of years. Production can only be maintained through relentless drilling, and that relentless drilling has now stopped. Thus, we have just a few months of glut left. After that, the whole shale oil revolution, which some bobbleheads thought would refashion the US into a new Saudi Arabia, will be over.

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New Zealand PM does hollow propaganda.

Why New Zealand Can Handle Europe, Oil Troubles (CNBC)

New Zealand’s exports may face headwinds from the decline in oil price and strengthening of its currency against the euro, but the country’s prime minister told CNBC that the “Kiwi economy” is set to carry on booming. The New Zealand dollar has appreciated just over 8% against the euro since in the last three months as expectations have risen that the European Central Bank (ECB) will announce a full-blown quantitative easing program when it meets this Thursday. The kiwi dollar, as it is known, strengthened further to a record high against the euro on Friday after the Swiss National Bank made a surprise policy move to abandon its minimum exchange rate against the euro. New Zealand Prime Minister John Key told CNBC that a stronger currency would not hinder the economy, one that is currently outperforming many developed nations.

“Obviously it’s had an impact as it’s pushed up the kiwi-euro rate and that makes it a little bit more difficult for our exporters but overall our economy is still very strong. We think we’ll grow 3.25% every year for the next three years, so about ten% over the next three years so we’re still confident we can get there, even with a higher exchange rate.” In December, Statistics New Zealand said the economy was growing faster than expected and had accelerated in the third quarter. Gross domestic product increased 1% in the third quarter from the previous quarter, according to the statistics body. Key said that the New Zealand economy was being helped by economic activity in the U.S. and he brushed aside concerns over a slowdown in growth in Asia. Europe was another matter, however.

“The U.S. is much stronger than people think now, we see a lot of activity out of the U.S. both in terms of tourists coming and the buying activity. Asia is still quite strident and there is some concern that China is going to fall over but I don’t think that’s going to happen. It’s still Europe that’s got to deal with its fundamental issues.” New Zealand’s third-quarter growth was driven by its primary industries, including the dairy industry and oil and gas exploration and extraction, which grew by 5.8%. After dairy, meat and wood, oil is the fourth-largest export for New Zealand and, as such, the steep decline in global oil prices could hit the country’s economy. Indeed, exploration companies like New Zealand Oil and Gas, TEG Oil and Key Petroleum are all looking to defer projects in the region.

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Thank ZIRP.

Bleak Future For Retirees As Savings Slashed (CNBC)

Millions of workers around the world could enter retirement with savings diminished by a fifth or more after getting into debt or financial difficulty, HSBC warned in a new report. According to the bank, the impact of the global economic downturn could be felt for decades by the vast number of people who raided their retirement funds and accumulated debt during the financial crisis. In a study of 16,000 people into global retirement trends, HSBC found that two in five workers stopped or reduced their savings for retirement during the downturn that began in 2007. The situation is particularly bad in the U.K. and Canada, the bank warned, where retirement savings have been nearly halved as a result of debts or financial constraints.

“Despite the fact that close to 70% of people feel like they will run out of money or not have enough to live on day-to-day in retirement, 40% of people today are either not saving for retirement or significantly reduced their savings for retirement,” Michael Schweitzer, head of sales and distribution for group wealth management at HSBC, told CNBC on Monday. “And that is going to cause a shortfall for millions of people – as much as a fifth when they do get to retirement.” Even with a recovery in the global economy, which the International Monetary Fund expects to grow 3.8% this year from 3.3% in 2014, debt accumulated during the financial crisis will continue to weigh on workers’ ability to save, HSBC said. According to the study, this gloom is being felt across the globe, with almost a quarter of working-age people anticipating living standards in retirement to be worse than they are today.

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Did anyone realize this?: “Wild honey bees can no longer be found in England or Wales ..”

Disease Threat To Wild Bees from Commercial Bees (BBC)

The trade in bees used for honey or to pollinate crops could have a devastating impact on wild bees and other insects, say scientists. New measures are needed to stop diseases carried by commercial bees spilling over into the wild, says a University of Exeter team. Evidence suggests bees bred in captivity can carry diseases that could be a risk to native species. Bees are used commercially to pollinate crops such as peppers and oilseed rape. Species of bees used for this purpose, or in commercial hives, are known to suffer from parasite infections and more than 20 viruses. Many of these can also infect wild bumble bees, wasps, ants and hoverflies.

The study, published in the Journal of Applied Ecology, reviewed data from existing studies to look at the potential for diseases to jump from commercial bees to insects in the wild. “Our study highlights the importance of preventing the release of diseased commercial pollinators into the wild,” said lead researcher Dr Lena Wilfert. “The diseases carried by commercial species affect a wide range of wild pollinators but their spread can be avoided by improved monitoring and management practices. “Commercial honey beekeepers have a responsibility to protect ecologically and economically important wild pollinator communities from disease.”

Several diseases of honey bee colonies are known. They include a parasite called the Varroa mite and a virus that leads to deformed wings, which has also been found in wild bumble bees. Vanessa Amaral-Rogers of the charity, Buglife, said the results of the study showed an urgent need for changes in how the government regulates the importation of bees. “Wild honey bees can no longer be found in England or Wales, thought to have been wiped out by disease,” she told BBC News. “Now these studies show how diseases can be transmitted between managed honey bees and commercial bumble bees, and could have potentially drastic impacts on the rest of our wild pollinators. “

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 November 11, 2014  Posted by at 11:07 am Finance Tagged with: , , , , , , , , , ,  


Dorothea Lange Country filling station, Granville County, NC July 1939

Is ‘Too Big To Fail’ For Banks Really Coming To An End? (BBC)
Banks Poised to Settle With Derivatives Regulator in FX-Rigging Cases (BW)
Bond Swings Draw Scrutiny (WSJ)
China, Japan And An Ugly Currency War (Steen Jakobsen)
Subprime Credit Card Lending Swells (CNBC)
Why Iron Ore’s Meltdown Is Far From Over (CNBC)
It’s Time to Put Juncker on the Hot Seat (Spiegel Ed.)
The Ghosts of Juncker’s Past Come Back to Haunt Him (Spiegel)
The Return Of The US Dollar (El-Erian)
Fears Of German Recession As Moment Of Truth Looms (CNBC)
Russia Ends Dollar/Euro Currency Peg, Moves To Free Float (RT)
Police Use Department Wish List When Deciding Which Assets to Seize (NY Times)
Alleged Sarkozy Plot Rocks French Political Establishment (FT)
Nearly A Third Of Indian Cabinet Charged With Crimes (Reuters)
Energy Is Europe’s ‘Big Disadvantage’: Deutsche Bank Co-Ceo (CNBC)
Rich Nations Subsidize Fossil Fuel Industry By $88 Billion A Year (Guardian)
The Real Story Of US Coal: Inside The World’s Biggest Coalmine (Guardian)
Angry Canary Islanders Brace For An Unwanted Guest: The Oil Industry (Guardian)
Fukushima Radiation Found in Pacific Off California Coast (Bloomberg)
The Fate of the Turtle (James Howard Kunstler)

Make that a no.

Is ‘Too Big To Fail’ For Banks Really Coming To An End? (BBC)

Interviewing Alistair Darling in 2011, three years after the financial crisis during which he was chancellor, his most striking answer to me was not about the fear that Britain’s economic system was on the point of collapse. It wasn’t even his worry that ATMs up and down the country might simply stop functioning. Those answers were of course chilling. But they were symptoms of a wider disease. Mr Darling’s most striking answer was the “absolute astonishment” he felt when he asked Britain’s largest banks to account for the risks contained in their businesses – and they were unable to come up with a coherent answer. This total lack of knowledge – coupled with the hubris of profit-taking built on lax credit – went to the heart of the financial crisis. Regulators appeared similarly non-plussed.

Such was the global complexity and lack of governance in the international financial system, when it came to rescuing the banks from having to eat their own sick, the UK government – and many other governments around the world – initially had no idea how large the bill would be. And neither did the banks. The only funding avenues large enough to contain such unquantifiable risks were those provided by central banks and the taxpayer. The alternative was financial meltdown. The numbers turned out to be astronomical. A National Audit Office report in August this year suggested the value of the UK government’s total support for the financial system alone exceeded £1.1tn at its height. Many tens of billions of pounds worth of capital was directly injected into failing banks and building societies.

The rest of that dizzying £1.1tn was the total value of liability insurance – the government guaranteeing banks’ security as lender of last resort. Put simply, the taxpayer had become the guarantor of the global financial system and the banks that are the essential plumbing of that system. In direct capital the UK government (the taxpayer) ultimately had to find over £100bn. More than £66bn was used to rescue the Royal Bank of Scotland (still 80% owned by the government) and Lloyds Bank (still 25% owned by the government). Of that, the sale of two chunks of Lloyds since the last election in 2010 has raised the princely sum of £7.4bn.

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For rigging a $5.300.000.000.000 a day market, banks are fined $300.000.000. Remove a few zeroes and it’s like being fined $300 for rigging a $5.300.000 million market. Sounds profitable.

Banks Poised to Settle With Derivatives Regulator in FX-Rigging Cases (BW)

Banks suspected of rigging the $5.3 trillion-a-day currency market are preparing to reach settlements as early as this week with the main U.S. derivatives regulator, according to a person with knowledge of the cases. The Commodity Futures Trading Commission may levy fines of about $300 million against each firm, depending on the level of their involvement, said the person, who spoke on condition of anonymity because deals haven’t been announced. It’s unclear how many firms may settle with the CFTC as U.K. and U.S. bank regulators prepare to levy related penalties this week, the person said. There was no immediate response to an e-mailed request for comment from the CFTC after normal business hours. The New York Times reported late yesterday on the talks with the agency.

Investigations are under way on three continents as authorities probe allegations that dealers at the world’s biggest banks traded ahead of clients and colluded to rig benchmarks used by pension funds and money managers to determine what they pay for foreign currencies. The U.K. Financial Conduct Authority is poised to reach settlements as soon as this week with six banks, which together have set aside about $5.3 billion in recent weeks for legal matters including the currency investigations, people with knowledge of those talks have said. Barclays, Citigroup, HSBC, JPMorgan, Royal Bank of Scotland and UBSare in settlement talks with the FCA, people with knowledge of the situation have said.

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How many years is the investigation going to take?

Bond Swings Draw Scrutiny (WSJ)

The day’s trading was just hitting its stride in New York on the morning of Oct. 15 when bond investors, traders and strategists were stunned by an unusual move in the $12 trillion U.S. Treasury market playing out on their computer screens. The yield on the 10-year Treasury note took a sharp dive below 2% within minutes, and few could understand exactly why. Some dealers immediately pulled the plug on automated trading systems that provided price quotes to customers. Fund managers rushed to convene meetings. Many investors scrambled to pinpoint the reason behind the accelerating decline. “It starts moving faster and faster, and you can’t point to anything,” recalled Mark Cernicky, managing director at Principal Global Investors , which oversees $78 billion. Now, investors and regulators are burrowing into the causes of the plunge in yields to try to understand whether electronic trading and new regulations are fueling sudden price swings in a market that acts as a key benchmark for interest rates, investments and U.S. home loans.

At the time, bond-market analysts attributed the fall in yields to weak U.S. economic data, shaky European markets and hedge funds scrambling to cover wrong-way bets. But many investors felt that didn’t fully explain why the yield on the 10-year Treasury note tumbled to its biggest one-day decline since 2009. When yields fall, prices rise. Regulators and other experts are examining deep-seated shifts in trading since the financial crisis, which could help explain the unusual size of the move in a market many investors rely on for its relative stability. “What happened on Oct. 15 is the result of things that had been building for a while,” said Alex Roever, a strategist at J.P. Morgan Chase & Co. who follows the government-bond market. The Federal Reserve, Treasury and Commodity Futures Trading Commission are looking at that day’s trading activity, according to people familiar with the situation. One focus is the role of high-speed electronic trading in the bond market, although regulators haven’t yet drawn any conclusions, these people said.

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More trouble for Tokyo.

China, Japan And An Ugly Currency War (Steen Jakobsen)

There’s increasing risk we’ll soon see a “significant paradigm shift” from China in its attitude to the strength of its currency. So says Saxo Bank’s Chief Economist, Steen Jakobsen. He says we’re about to see a full-scale currency war, notably between China and Japan, two of the world’s greatest exporting countries. There are a number of important world meetings over the coming few weeks and the Chinese will be “very vocal”, says Steen, as it’s getting increasingly worried about its loss of growth momentum. The yuan has strengthened significantly in recent weeks while the yen has declined substantially. The country’s determined, he says, to refocus and maintain its export share of total growth.

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And Washington just sits by and lets it happen all over again.

Subprime Credit Card Lending Swells (CNBC)

Consumers with dinged credit are back in a borrowing mood, and lenders are more than happy to give them new credit cards, according to new data. Since the Great Recession ended five years ago, consumers have been gradually taking on more debt and lenders have been accommodating them, easing up on tighter standards. Much of the growth has been in so-called non-revolving credit, especially car loans, thanks to record low interest rates. But revolving credit—mainly in the form of credit cards—is picking up. And the biggest growth in new credit cards is coming from so-called subprime borrowers whose credit scores are less than 660, according to the latest Equifax data.

Through July of this year, banks handed out cards to 9.8 million subprime consumers, a six-year high and an increase of 43% from the same period last year. Another 7.8 million cards have been issued to subprime borrowers by retailers this year, up 13% from 2013 to an eight-year high. Lenders are also giving subprime borrowers higher credit limits. Bank-issued card limits jumped to $12.7 billion for the first seven months of the year—up 4% from the same period a year ago to a six-year high. Retailers lifted their card limits by 16% to $6.8 billion, an eight-year high. Part of the growth is the result of an easing of the tighter standards that followed the 2008 credit bust after the boom of the early-2000s. Now that banks have repaired the damage from billions of dollars in bad debts, they’re better able to take on more risk. A stronger job market is also putting more consumers in a borrowing mood, according to economists at Wells Fargo.

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Chinese fake numbers have distorted the market for years.

Why Iron Ore’s Meltdown Is Far From Over (CNBC)

Iron ore prices have dived an eye-watering 44% this year and there’s no respite ahead for the metal, according to Citi, which forecasts double-digit declines in 2015. The bank on Tuesday slashed its price forecasts for the metal to average $74 dollars per ton in the first quarter of next year, before moving down to $60 in the third quarter. It previously forecast $82 and $78, respectively. “We expect renewed supply growth to once again drive the market lower in 2015, combined with further demand weakness,” Ivan Szpakowski, analyst at Citi wrote in a report, noting that prices could briefly dip into the $50 range in the third quarter. The price of spot iron ore fell $75.50 this week, its lowest level since 2009, according to Reuters.

Price declines in the first half of this year were driven by rapid growth in export supply, which has slowed in the second half of the year. In recent months, deteriorating Chinese steel demand and deleveraging by traders and Chinese steel mills has dragged the metal. Iron ore is an important raw material for steel production. However, iron ore supply growth will return in the first half of next year, Citi said, as industry heavyweights Rio Tinto, BHP Billiton and Vale rev up expansions and Anglo American’s Minas-Rio iron ore project in Brazil ramps up. Meanwhile, demand out of China – the world’s biggest buyer of iron ore – will remain under pressure due subdued steel demand. Demand for steel is being compressed due to tighter credit conditions and an uncertain export outlook.

“Chinese manufacturing exports have improved in recent months, helping to boost steel demand for machinery, metal products, etc. However, with European growth having slowed such positive momentum is unlikely to continue,” Szpakowski said. ANZ also substantially downgraded its 2015 price forecast for iron ore this week. However, it was not quite as bearish as Citi. The bank, in a report published on Monday, said the metal will not breach $100 a ton again, forecasting prices to average $78 next year, 22% lower than its previous estimate. “Recent trip to China highlights that demand conditions are more challenging than we thought,” ANZ said.

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I bet he thinks he’s awfully smart.

The Ghosts of Juncker’s Past Come Back to Haunt Him (Spiegel)

Jean-Claude Juncker’s first public appearance as the new European Commission president was a symbolic one. Early this month, he traveled to Frankfurt to present former German Chancellor Helmut Kohl’s new book in the luxury hotel Villa Kennedy. Called “Aus Sorge um Europa” – “Out of Concern for Europe” – the book warns that the pursuit of national interests represents a danger to the European ideal. And Juncker is quick to endorse Kohl, a man he calls “a friend and role model.” “Kohl is right in deploring the fact that we are increasingly sliding down the slope toward reflexive regionalism and nationalism,” Juncker said. It is certainly not the first time Juncker has uttered such a sentence. Indeed, his delivery of the message has often been even more direct. “I’ve had it,” he erupted during an EU summit in December of 2012, for example. “80% of the time, only national interests are being presented. We can’t go on like this!”

Such sentiments have served Juncker well throughout his career and have helped transform the politician from tiny Luxembourg into a well-known defender of Europe. Now, though, at the apex of his European career, Juncker and his beloved European Union are facing a significant problem. And it is one that has led even advisors close to Juncker to wonder whether he may soon have to step down from his new position, despite having taken office only recently. Last week, several media outlets, including the Munich-based Süddeutsche Zeitung, published the most detailed accounts yet of the tricks used – and the eagerness brought to bear – by Luxembourg officials to help companies avoid paying taxes. The strategies were often developed together with company leaders and served to entice multinationals to set up shop in Luxembourg. The tiny country on Germany’s western border, for its part, benefited from tax revenues it wouldn’t otherwise have seen. It was, in short, a reciprocal relationship.

But it was also a relationship that was disadvantageous for Luxembourg’s EU partners – and for European cooperation itself. Many of the companies that set up shop in Luxembourg, after all, no longer paid taxes in their home countries where they produced or sold the lion’s share of their products.

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But with the Spiegel editorial board turning against him, how long can Jean-Claude last?

It’s Time to Put Juncker on the Hot Seat (Spiegel Ed.)

Can the European Commission be led by a man who transformed his own country into a tax oasis? [..] The European Union has a problem – and a serious one at that. On the surface, the issue is about the tax avoidance schemes in Luxembourg that were engineered during former Prime Minister Jean-Claude Juncker’s tenure. And about the billions of euros in revenues lost by other EU countries as a result. But the true problem in this affair actually runs a lot deeper. At issue is just how seriously we take the new European democracy that Juncker himself often touts. The criticism of Juncker came less than a week after he took office. Leaked tax documents released last Wednesday by the International Consortium of Investigative Journalists showed how large corporations have taken advantage of loose policies in Luxembourg to evade paying taxes. At a time of slow economic growth and tight national budgets, sensitivity has grown in large parts of the EU over countries that facilitate legal tax evasion.

Juncker is fond of pointing out proudly that he was Europe’s first “leading candidate,” and the first to be more-or-less directly elected as president of the European Commission. Across Europe, many celebrated it as the moment when more democracy came to the EU. Unfortunately, optimism blinded people to one salient fact: European politicians themselves never took this newfound democracy particularly seriously. In contrast to the United States, where getting to know the candidates is a matter of course, the EU never had any intent of truly introducing its leading politicians to the people. This has created a situation in which a person like Juncker can effectively lead two lives. One as an (honest) proponent of the EU and the other as a cunning former leader of an EU member state who promoted Luxembourg’s self-interest by blocking treaties that would have forced the country to adopt stricter tax policies.

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Mo talks his book.

The Return Of The US Dollar (El-Erian)

The US dollar is on the move. In the last four months alone, it has soared by more than 7% compared with a basket of more than a dozen global currencies, and by even more against the euro and the Japanese yen. This dollar rally, the result of genuine economic progress and divergent policy developments, could contribute to the “rebalancing” that has long eluded the world economy. But that outcome is far from guaranteed, especially given the related risks of financial instability. Two major factors are currently working in the dollar’s favour, particularly compared to the euro and the yen. First, the United States is consistently outperforming Europe and Japan in terms of economic growth and dynamism – and will likely continue to do so – owing not only to its economic flexibility and entrepreneurial energy, but also to its more decisive policy action since the start of the global financial crisis.

Second, after a period of alignment, the monetary policies of these three large and systemically important economies are diverging, taking the world economy from a multi-speed trajectory to a multi-track one. Indeed, whereas the US Federal Reserve terminated its large-scale securities purchases, known as “quantitative easing” (QE), last month, the Bank of Japan and the European Central Bank recently announced the expansion of their monetary-stimulus programs. In fact, ECB President Mario Draghi signalled a willingness to expand his institution’s balance sheet by a massive €1 trillion ($1.25 trillion). With higher US market interest rates attracting additional capital inflows and pushing the dollar even higher, the currency’s revaluation would appear to be just what the doctor ordered when it comes to catalysing a long-awaited global rebalancing – one that promotes stronger growth and mitigates deflation risk in Europe and Japan.

Specifically, an appreciating dollar improves the price competitiveness of European and Japanese companies in the US and other markets, while moderating some of the structural deflationary pressure in the lagging economies by causing import prices to rise. Yet the benefits of the dollar’s rally are far from guaranteed, for both economic and financial reasons. While the US economy is more resilient and agile than its developed counterparts, it is not yet robust enough to be able to adjust smoothly to a significant shift in external demand to other countries. There is also the risk that, given the role of the ECB and the Bank of Japan in shaping their currencies’ performance, such a shift could be characterized as a “currency war” in the US Congress, prompting a retaliatory policy response. Furthermore, sudden large currency moves tend to translate into financial-market instability.

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Not looking good.

Fears Of German Recession As Moment Of Truth Looms (CNBC)

Just days before Germany’s much anticipated third quarter gross domestic product (GDP) data is released, business leaders and policy makers warn that the euro zone’s largest economy has lost its competitiveness and is on the brink of a recession. The chair of the German Banking Association, Juergen Fitschen, told CNBC on Monday that it was “undeniable that we have slowed down recently.” “We cannot insulate ourselves against the factors that have contributed to the current state of affairs…But, also, [thereis a] slow recovery in some of our neighboring countries and also a lack o fdemand to finance infrastructure projects in Germany itself,” he said. Speaking to CNBC on the sidelines of a press conference held by the association, he said: “We have to remind ourselves that we have not spared continuing efforts to renew our competitiveness and that is something that applies obviously to our neighboring countries as well,” he continued.

Fitschen’s comments came amid other severe critiques of the German economy and outlook, just days before the release of the GDP data on Friday. Second quarter data in August showed data showed Germany’s economy had lost momentum, contracting for the first time in over a year. Quarter-on-quarter, GDP contracted 0.2%. If the economy contracts again in the third quarter, Germany will technically be in recession. The head of Germany’s influential Ifo economic research institute said that was a distinct possibility on Monday.Speaking to Reuters, Hans-Werner Sinn said that Germany was teetering on the brink of a recession due to weakness in major emerging trading partners. “It is going to be really close,” Sinn warned, saying that surveys by the Ifo institute pointed more towards a recession.

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Flipping the west the bird.

Russia Ends Dollar/Euro Currency Peg, Moves To Free Float (RT)

The Bank of Russia took another step towards a free float ruble by abolishing the dual currency soft peg, as well as automatic interventions. Before, the bank propped up the ruble when the exchange rate against the euro and dollar exceeded its boundaries. “Instead, we will intervene in the currency market at whichever moment and amount needed to decrease the speculative demand,” the bank’s chairwoman, Elvira Nabiullina, said in an interview with Rossiya 24 Monday. The move is edging towards a floating exchange rate, which the bank hopes to attain by 2015. “Effective starting November 10, 2014, the Bank of Russia abolished the acting exchange rate policy mechanism by cancelling the allowed range of the dual-currency basket ruble values (operational band) and regular interventions within and outside the borders of this band,” the bank said in a statement Monday.

“As a result of the decision the ruble exchange rate will be determined by market factors, which should promote efficiency of the monetary policy of the Bank of Russia and ensure price stability,” the central bank said. Foreign exchange intervention is still at the bank’s disposal, and is ready to use in the case of “threats to financial stability,” according to the statement. Propping up the ruble can cost the Central Bank of Russia billions of dollars per day, coming out of the country’s reserve fund. In October alone, the bank was forced to spend $30 billion to defend the weakening ruble. On November 5, the bank announced it had limited the reserves it is willing to spend to inflate the ruble to $350 million per day in order to slash speculation and volatility. The decision triggered a 3-day plunge for the Russian currency. On Monday, the ruble recovered slightly after Russian President Vladimir Putin assured speculative drops would cease in the near future.

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Welcome to the third world.

Police Use Department Wish List When Deciding Which Assets to Seize (NY Times)

The seminars offered police officers some useful tips on seizing property from suspected criminals. Don’t bother with jewelry (too hard to dispose of) and computers (“everybody’s got one already”), the experts counseled. Do go after flat screen TVs, cash and cars. Especially nice cars. In one seminar, captured on video in September, Harry S. Connelly Jr., the city attorney of Las Cruces, N.M., called them “little goodies.” And then Mr. Connelly described how officers in his jurisdiction could not wait to seize one man’s “exotic vehicle” outside a local bar. “A guy drives up in a 2008 Mercedes, brand new,” he explained. “Just so beautiful, I mean, the cops were undercover and they were just like ‘Ahhhh.’ And he gets out and he’s just reeking of alcohol. And it’s like, ‘Oh, my goodness, we can hardly wait.’ ”Mr. Connelly was talking about a practice known as civil asset forfeiture, which allows the government, without ever securing a conviction or even filing a criminal charge, to seize property suspected of having ties to crime.

The practice, expanded during the war on drugs in the 1980s, has become a staple of law enforcement agencies because it helps finance their work. It is difficult to tell how much has been seized by state and local law enforcement, but under a Justice Department program, the value of assets seized has ballooned to $4.3 billion in the 2012 fiscal year from $407 million in 2001. Much of that money is shared with local police forces. The practice of civil forfeiture has come under fire in recent months, amid a spate of negative press reports and growing outrage among civil rights advocates, libertarians and members of Congress who have raised serious questions about the fairness of the practice, which critics say runs roughshod over due process rights. In one oft-cited case, a Philadelphia couple’s home was seized after their son made $40 worth of drug sales on the porch.

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Politicians caught up in their own lies and denials. It shows you what France is made of. Marine Le Pen’s popularity doesn’t come out of nowhere.

Alleged Sarkozy Plot Rocks French Political Establishment (FT)

Leading figures from France’s two traditional parties have been enmeshed in a fresh political scandal involving former president Nicolas Sarkozy, complicating their attempts to halt voter defection to the far-right National Front. The latest “affair” to rock France’s political establishment involves the chief of staff of President François Hollande, who is already struggling with the lowest popularity ratings of any French leader since the second world war. It also touches François Fillon, a leading figure in the country’s centre-right UMP party and a former prime minister who has stated his determination to run for the presidency in 2017.

The scandal centres on a lunch in June during which Mr Fillon reportedly asked Jean-Pierre Jouyet, Mr Hollande’s chief of staff, to speed up judicial investigations into an alleged UMP cover-up of illegal overspending during the 2012 presidential re-election campaign of Mr Sarkozy, the UMP’s then candidate. “Hit him quickly,” Mr Fillon is alleged to have said to Mr Jouyet, referring to Mr Sarkozy. “If you don’t hit him quickly, you will see him come back.” Mr Sarkozy recently announced his return to French politics, and is campaigning to become head of his party in elections at the end of the month. The move is seen widely as the first step in a longer-term goal of competing for the presidency in 2017. Mr Fillon has vehemently denied the conversation about campaign financing with Mr Jouyet, which was first reported by two journalists at Le Monde, the French daily newspaper.

“I can only see in these incredible attacks an attempt at destabilisation and a plot,” Mr Fillon said on Sunday. He threatened the two Le Monde journalists with legal action and then turned his wrath on Mr Jouyet, accusing him of lying and threatening to take him to court. Mr Jouyet, a close personal friend of Mr Hollande but who also served in the previous centre-right government of Mr Sarkozy, on Sunday admitted he had discussed the alleged illegal overspending issue during the lunch with Mr Fillon – though stopped short of confirming Mr Fillon’s alleged request to speed up the judicial investigations against Mr Sarkozy. Mr Jouyet’s admission, reported by France’s AFP, came just a few days after he had told the news agency that the subject of the UMP campaign financing had not come up during the June lunch with Mr Fillon.

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Almost funny: “At least five people in the cabinet have been charged with serious offences such as rape and rioting. Finance Minister Arun Jaitley said any suggestions there were criminals in the cabinet were “completely baseless. “These are cases arising out of criminal accusations, not cases out of a crime .. ”

Nearly A Third Of Indian Cabinet Charged With Crimes (Reuters)

Attempted murder, waging war on the state, criminal intimidation and fraud are some of the charges on the rap sheets of ministers Indian Prime Minister Narendra Modi appointed to the cabinet on Sunday, jarring with his pledge to clean up politics. Seven of 21 new ministers face prosecution, taking the total in the 66-member cabinet to almost one third, a higher proportion than before the weekend expansion. At least five people in the cabinet have been charged with serious offences such as rape and rioting. Finance Minister Arun Jaitley said any suggestions there were criminals in the cabinet were “completely baseless. “These are cases arising out of criminal accusations, not cases out of a crime,” he told reporters on Monday, adding that Modi had personally vetted the new ministers. Ram Shankar Katheria, a lawmaker from Agra, was appointed junior education minister yet has been accused of more than 20 criminal offences including attempted murder and promoting religious or racial hostility.

The inclusion of such politicians does not sit easily with Modi’s election promise to root out corruption, and has led to criticism that he is failing to change the political culture in India where wealthy, tainted politicians sometimes find it easier to win votes. “It shows scant respect for the rule of law or public sentiment,” said Jagdeep Chhokar, co-founder of the Association for Democratic Reforms (ADR) which campaigns for better governance. “Including these people in the cabinet is a bad omen for our democracy.”Modi won the biggest parliamentary majority in three decades in May with a promise of graft-free governance after the previous government led by Congress party was mired in a series of damaging corruption scandals.

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” ..High energy prices and resistance to fracking are two key reasons why Europe’s economic recovery has lagged the U.S.”

Energy Is Europe’s ‘Big Disadvantage’: Deutsche Bank Co-Ceo (CNBC)

High energy prices and resistance to fracking are two key reasons why Europe’s economic recovery has lagged the U.S., the joint head of Germany’s largest bank by assets told CNBC. Jürgen Fitschen, co-chief executive of Deutsche Bank, said bureaucracy, education and productivity partially explained Europe’s difficulties, but laid much of the blame on the cost of energy in the region. “It is undeniable that Europe overall faces one very big disadvantage: that is cost of energy,” Fitschen, who is also head of the German Bankers Association, told CNBC in Frankfurt on Monday. “That (low energy prices) has been one of the factors that have stimulated the euphoria and the growth momentum in the States. That is something that cannot be replicated easily in Europe.”

Including taxes, domestic U.S. gas prices fell by 2.2% in 2013 on the previous year to 2.18 U.K. pence (3 U.S. cents) per kilowatt hour (kWh), according to the International Energy Agency. By comparison, Spanish domestic prices rose by 7.8% to 6.93 pence and British prices rose by 7.7% to 4.90 pence respectively. Fitschen said that the shale gas revolution helped explain why U.S. energy prices had fallen. The U.S. has embraced fracking—or hydraulic fracturing—for shale, which has helped lead a revival in some manufacturing industries and helped the country become less reliant on oil and gas imports. However, the process has met with far more opposition in Europe, due to environmental concerns relating to possible seismic tremors and a risk to water supplies.

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” .. an extraordinary “merry-go-round” of countries supporting each others’ companies. The US spends $1.4bn a year for exploration in Columbia, Nigeria and Russia, while Russia is subsidising exploration in Venezuela and China, which in turn supports companies exploring Canada, Brazil and Mexico. ”

Rich Nations Subsidize Fossil Fuel Industry By $88 Billion A Year (Guardian)

Rich countries are subsidising oil, gas and coal companies by about $88bn (£55.4bn) a year to explore for new reserves, despite evidence that most fossil fuels must be left in the ground if the world is to avoid dangerous climate change. The most detailed breakdown yet of global fossil fuel subsidies has found that the US government provided companies with $5.2bn for fossil fuel exploration in 2013, Australia spent $3.5bn, Russia $2.4bn and the UK $1.2bn. Most of the support was in the form of tax breaks for exploration in deep offshore fields. The public money went to major multinationals as well as smaller ones who specialise in exploratory work, according to British thinktank the Overseas Development Institute (ODI) and Washington-based analysts Oil Change International. Britain, says their report, proved to be one of the most generous countries. In the five year period to 2014 it gave tax breaks totalling over $4.5bn to French, US, Middle Eastern and north American companies to explore the North Sea for fast-declining oil and gas reserves.

A breakdown of that figure showed over $1.2bn of British money went to two French companies, GDF-Suez and Total, $450m went to five US companies including Chevron, and $992m to five British companies. Britain also spent public funds for foreign companies to explore in Azerbaijan, Brazil, Ghana, Guinea, India and Indonesia, as well as Russia, Uganda and Qatar, according to the report’s data, which is drawn from the OECD, government documents, company reports and institutions. The figures, published ahead of this week’s G20 summit in Brisbane, Australia, contains the first detailed breakdown of global fossil fuel exploration subsidies. It shows an extraordinary “merry-go-round” of countries supporting each others’ companies. The US spends $1.4bn a year for exploration in Columbia, Nigeria and Russia, while Russia is subsidising exploration in Venezuela and China, which in turn supports companies exploring Canada, Brazil and Mexico.

“The evidence points to a publicly financed bail-out for carbon-intensive companies, and support for uneconomic investments that could drive the planet far beyond the internationally agreed target of limiting global temperature increases to no more than 2C,” say the report’s authors. “This is real money which could be put into schools or hospitals. It is simply not economic to invest like this. This is the insanity of the situation. They are diverting investment from economic low-carbon alternatives such as solar, wind and hydro-power and they are undermining the prospects for an ambitious UN climate deal in 2015,” said Kevin Watkins, director of the ODI. [..] “The IPCC is quite clear about the need to leave the vast majority of already proven reserves in the ground, if we are to meet the 2C goal. The fact that despite this science, governments are spending billions of tax dollars each year to find more fossil fuels that we cannot ever afford to burn, reveals the extent of climate denial still ongoing within the G20,” said Oil Change International director Steve Kretzman.

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” .. It’s not for the United States. They want to sell it overseas, and I want to see that stopped.”

The Real Story Of US Coal: Inside The World’s Biggest Coalmine (Guardian)

In the world’s biggest coalmine, even a 400 tonne truck looks like a toy. Everything about the scale of Peabody Energy’s operations in the Powder River Basin of Wyoming is big and the mines are only going to get bigger – despite new warnings from the United Nations on the dangerous burning of fossil fuels, despite Barack Obama’s promises to fight climate change, and despite reports that coal is in its death throes. At the east pit of Peabody’s North Antelope Rochelle mine, the layer of coal takes up 60ft of a 250ft trough in the earth, and runs in an interrupted black stripe for 50 miles. With those vast, easy-to-reach deposits, Powder River has overtaken West Virginia and Kentucky as the big coalmining territory. The pro-coal Republicans’ takeover of Congress in the mid-term elections also favours Powder River.

“You’re looking at the world’s largest mine,” said Scott Durgin, senior vice-president for Peabody’s operations in the Powder River Basin, watching the giant machinery at work. “This is one of the biggest seams you will ever see. This particular shovel is one of the largest shovels you can buy, and that is the largest truck you can buy.” By Durgin’s rough estimate, the mine occupies 100 square miles of high treeless prairie, about the same size as Washington DC. It contains an estimated three billion tonnes of coal reserves. It would take Peabody 25 or 30 years to mine it all. But it’s still not big enough. On the conference room wall, a map of North Antelope Rochelle shows two big shaded areas containing an estimated one billion tonnes of coal. Peabody is preparing to acquire leasing rights when they come up in about 2022 or 2024. “You’ve got to think way ahead,” said Durgin.

In the fossil fuel jackpot that is Wyoming, it can be hard to see a future beyond coal. One of the few who can is LJ Turner, whose grandfather and father homesteaded on the high treeless plains nearly a century ago. Turner, who raises sheep and cattle, said his business had suffered in the 30 years of the mines’ explosive growth. Dust from the mines was aggravating pneumonia among his Red Angus calves. One year, he lost 25 calves, he said. “We are making a national sacrifice out of this region,” he said. “Peabody coal and other coal companies want to keep on mining, and mine this country out and leave it as a sacrifice and they want to do it for their bottom line. It’s not for the United States. They want to sell it overseas, and I want to see that stopped.”

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There’s a pattern here: ” .. the Madrid government contrived to have the plebiscite banned as unconstitutional”.

Angry Canary Islanders Brace For An Unwanted Guest: The Oil Industry (Guardian)

In most places the news that you’ve struck oil would be cause to crack open the champagne. But not in the Canary Islands where Spain’s biggest oil company Repsol is due to begin drilling off Lanzarote and Fuerteventura. “Our wealth is in our climate, our sky, our sea and the archipelago’s extraordinary biodiversity and landscape,” the Canary Islands president, Paulino Rivero, said. “Its value is that it’s natural and this is what attracts tourism. Oil is incompatible with tourism and a sustainable economy.” Rivero, a former primary school teacher, is on a crusade against oil and he is not alone. Protest marches have drawn as many as 200,000 of the islands’ 2 million inhabitants on to the streets. The regional government planned to consolidate public opinion with a referendum on 23 November. Voters were to be asked: “Do you believe the Canaries should exchange its environmental and tourism model for oil and gas exploration?”

As with the weekend’s scheduled referendum on Catalan independence, the Madrid government contrived to have the plebiscite banned as unconstitutional and Rivero has now commissioned a private poll he hopes will demonstrate the strength of public opinion. “The banning of the referendum reveals a huge weakness in the system,” said Rivero. “You have to listen to the people. There’s a serious discrepancy between what people here want and what the Spanish government wants. You are allowed to hold consultations under the Spanish constitution and what we wanted to do was completely legal. The problem we have is that some government departments have too close a relationship with Repsol.” Repsol is flush with cash after settling a long dispute with Argentina and is keen to develop what may be the country’s biggest oilfield after winning permission to drill in August. The company believes the fields may contain as much as 2.2bn barrels of oil and is investing €7.5bn to explore two sites about 40 miles (60km) east of Fuerteventura.

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Don’t worry be happy, nuke style.

Fukushima Radiation Found in Pacific Off California Coast (Bloomberg)

Oceanographers have detected isotopes linked to Japan’s wrecked Fukushima nuclear plant off California’s coast, though at levels far below those that could pose a measurable health risk. Volunteer ocean monitors collected the samples that tested positive for trace amounts of the isotope cesium-134 about 100 miles (160 kilometers) west of Eureka, California, the Massachusetts-based Woods Hole Oceanographic Institution said yesterday on its website. Tepco’s Fukushima Dai-Ichi plant, which released “unprecedented levels” of radioactivity during the March 2011 accident, was the only conceivable source of the detected isotopes, Woods Hole oceanographer Ken Buesseler said in the release.

Explosions during the accident, during which three reactors suffered meltdowns, sent a burst of radioactivity into the atmosphere, while water used to cool overheating fuel rods flowed into the ocean in the weeks after the disaster. Lower levels of radiation have continued to trickle into the ocean via contaminated groundwater. The radioactivity detected off the California coast was at levels deemed by international health agencies to be “far below where one might expect any measurable risk to human health or marine life,” according to Woods Hole. It’s also more than 1,000 times lower than acceptable limits in drinking water set by the U.S. Environmental Protection Agency, the organization said.

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” .. the background reality is too difficult to contemplate: an American living arrangement with no future.”

The Fate of the Turtle (James Howard Kunstler)

Anybody truly interested in government, and therefore politics, should be cognizant above all that ours have already entered systemic failure. The management of societal affairs is on an arc to become more inept and ineffectual, no matter how either of the current major parties pretends to control things. Instead of Big Brother, government in our time turns out to be Autistic Brother. It makes weird noises and flaps its appendages, but can barely tie its own shoelaces. The one thing it does exceedingly well is drain the remaining capital from endeavors that might contribute to the greater good. This includes intellectual capital, by the way, which, under better circumstances, might gird the political will to reform the sub-systems that civilized life depends on. These include: food production (industrial agri-business), commerce (the WalMart model), transportation (Happy Motoring), school (a matrix of rackets), medicine (ditto with the patient as hostage), and banking (a matrix of fraud and swindling).

All of these systems have something in common: they’ve exceeded their fragility threshold and crossed into the frontier of criticality. They have nowhere to go except failure. It would be nice if we could construct leaner and more local systems to replace these monsters, but there is too much vested interest in them. For instance, the voters slapped down virtually every major ballot proposition to invest in light rail and public transit around the country. The likely explanation is that they’ve bought the story that shale oil will allow them to drive to WalMart forever. That story is false, by the way. The politicos put it over because they believe the Wall Street fraudsters who are pimping a junk finance racket in shale oil for short-term, high-yield returns. The politicos want desperately to believe the story because the background reality is too difficult to contemplate: an American living arrangement with no future. The public, of course, is eager to believe the same story for the same reasons, but at some point they’ll flip and blame the story-tellers, and their wrath could truly wreck what remains of this polity. When it is really too late to fix any of these things, they’ll beg someone to tell them what to do, and the job-description for that position is ‘dictator’.

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