Mar 242015
 
 March 24, 2015  Posted by at 10:02 am Finance Tagged with: , , , , , , ,  


William Henry Jackson Tamasopo River Canyon, San Luis Potosi, Mexico 1890

About a month ago, Japan’s giant GPIF pension fund announced it had started doing in Q4 2014, what PM Abe had long asked it to: shift a large(r) portion of its investment portfolio from bonds to stocks. No more safe assets for the world’s largest pension fund, or a lot less at least, but risky ones. For Abe this promises the advantage of an economy that looks healthier than it actually is, while for the fund it means that the returns on its investments could be higher than if it stuck to safe assets. Not a word about the dangers, not a word about why pensions funds were, for about as long as they’ve been in existence, obliged by law to only hold AAA assets. This is from February 27:

Japan’s GPIF Buys More Stocks Than Expected In Q4; Slashes JGBs

Japan’s trillion-dollar public pension fund bought nearly $15 billion worth of domestic shares in the fourth quarter, more than expected, while slashing its Japanese government bond holdings as Prime Minister Shinzo Abe prods the nation to take more risks to spur economic growth. The bullishness toward Japanese equities by the Government Pension Investment Fund, the world’s biggest pension fund, boosted hopes in the Tokyo market that stocks have momentum to add to their 15-year highs.

GPIF said on Friday its holdings of domestic shares rose to 19.8% of its portfolio by the end of December from 17.79% at the end of September. Yen bonds fell to 43.13% from 48.39%. Adjusting for factors such as the Tokyo stock market’s rise of roughly 8% during the quarter, GPIF bought a net 1.7 trillion yen ($14 billion) of stocks in the period, reckons strategist Shingo Kumazawa at Daiwa Securities. GPIF’s investment changes are closely watched by markets, as a 1 percentage-point shift in the 137 trillion yen ($1.15 trillion) fund means a transfer of about $10 billion.

What economic growth can there be in shifting from safe assets to riskier ones? Isn’t economic growth in the end exclusively a measure of how productive an economy is? And isn’t simply shifting your money around between assets a clear and pure attempt to fake growth numbers? Moreover, doesn’t Abe himself indicate very clearly that there is risk involved here, that there is now a greater risk that pension money will have to take losses on its investments? Isn’t he simply stating out loud that he wants to turn the entire nation into a casino? And that without this additional risk there will and can be no economic growth?

It’s time for the Japanese to get seriously scared now. Like many other countries, Japan – and its political class – creates a false image of enduring prosperity by letting its central bank increasingly buy up ever more of its sovereign bonds. It’s a total sleight of hand, there is nothing left that’s real. There’s no there there. This is of course the same as what happens in Europe.

And it’s precisely because central banks buy up all these bonds, that their yields scrape the gutter. It’s a blueprint for killing off the last bit of actual functionality in an economy. All you have from there on in is fake, an artificial boosting of bond prices aimed at creating the appearance of a functioning economy, which can by definition only be a mirage. That it will temporarily boost stock prices in an equally artificial way only goes to confirm that.

But, evidently, artificially high stock prices carry a much greater risk than ones that are based on a free and functioning market and economy. So not only is there a shift from safe to risky assets, there’ s a double whammy in the fact that these large scale purchases boost stocks without having anything to do with the economic performance of the companies whose stocks are bought.

It may make Shinzo Abe look better for a fleeting moment, but for Japan’s pensioners it’s the worst option that is available.

And then last week, a group of smaller rising sun pension funds said they’d follow the example. The more the merrier….

Japan Public Pensions To Follow GPIF Into Stocks From JGBs

Three Japanese public pension funds with a combined $250 billion in assets will follow the mammoth Government Pension Investment Fund and shift more of their investments out of government bonds and into stocks. The three funds and the trillion-dollar Government Pension Investment Fund, the world’s biggest pension fund, will announce on Friday a common model portfolio in line with asset allocations recently decided by the GPIF, the people told Reuters. Assuming, as expected, the three smaller mutual-aid pensions adopt the portfolio, that would mean shifting some 3.58 trillion yen ($30 billion) into Japanese stocks, a Reuters calculation shows.

The GPIF in October slashed its targeted holdings of low-yielding government bonds and doubled its target for stocks, as part of Prime Minister Shinzo Abe’s plan to boost the economy and promote risk-taking. GPIF in October slashed its targeted holdings of low-yielding government bonds and doubled its target for stocks, as part of Prime Minister Shinzo Abe’s plan to jolt Japan out of two decades of deflation and fitful growth and promote risk-taking. The shift to riskier investments by the 137 trillion yen ($1.1 trillion) GPIF has helped drive Tokyo Stocks to 15-year highs this week because of the fund’s size and because it is seen as a bellwether for other big Japanese institutional investors. The new model portfolio, part of a government plan to consolidate Japan’s pension system in October, will match the new GPIF allocations of 35% in Japanese government bonds, 25% in domestic stocks, 15% in foreign bonds and 25% in foreign stocks, the sources said.

Half of Japan’s pension money will be in stocks, domestic and foreign. And what do you think that means if and when there’s a major stock market crash – which is historically inevitable?

Never give a government any say in either your central bank or your pension fund. That’s a very sound lesson that unfortunately everyone seems to have forgotten. At their own peril. Sure, they’re looking like geniuses right now: look, the Nikkei is at a 15-year high! But it’s what’s going to come after that counts. For who believes that this situation can last forever? Or who, for that matter, believes that this head fake will the driver for real economic growth?

Sure enough, now the rest of the region has to follow suit: every pension fund in the region becomes a daredevil. But we know, don’t we, what the rising greenback is about to do to emerging markets that have huge amounts of dollar-denominated debt in their vaults. One thing this won’t do is boost stock markets; it will instead put many companies into either very bad financial straits or outright bankruptcy. And then you will have their pension funds holding a lot of empty bags. From the point of view of major banks this is ideal: this is how they get there hands on everyone’s pension funds, which I once labeled the last remaining store of real wealth.

Pension Funds Shun Bonds Just as Southeast Asia Needs Them Most

The biggest state pension funds in Thailand and the Philippines are shifting money from bonds to stocks, which could push up the cost of government stimulus programs. The Social Security Office and Government Service Insurance System said they’re increasing holdings of shares, while the head of Indonesia’s BPJS Ketenagakerjaan said he sees the nation’s stock index rising 14% by year-end. Rupiah, baht and peso notes have lost money since the end of January, after handing investors respective returns of 13%, 9.9% and 6.6% last year, Bloomberg indexes show.

“There has been frustration among domestic institutional investors about the falling returns on bonds,” Win Phromphaet, Social Security Office’s head of investment in Bangkok, said in a March 19 interview. “Large investors including SSO must quickly expand our investments in other riskier assets.” Appetite for sovereign debt is cooling just as Southeast Asian governments speed up construction plans in response to slowing growth in China and stuttering recoveries in Europe and Japan.

If Thailand and the Philippines, and many other nations in the region, want to speed up their infrastructure projects, their central banks, too, will have to buy up the vast majority of their sovereign bonds. They too will have to fake it. It’s fatally contagious.

And then a few days ago this passed by on the radar. The world’s largest sovereign wealth fund (Norway’s) joins the club. This may seem completely normal to some, either because they don’t give it much thought or because they work in this sort of field (people adopt strange ways of thinking), but for me, it just raises bright red alerts.

Biggest Wealth Fund Targets Tokyo for Next Real Estate Purchase

Norway’s sovereign wealth fund is looking at Tokyo or Singapore for its first real estate investment in Asia as the investor expands globally. “That’s where we think we’ll start,” Karsten Kallevig, the chief investment officer of real estate at the Oslo-based fund, said in an interview after a speech in the Norwegian capital. “If we’re really successful there, then maybe we can add a third and a fourth and a fifth city at some point.” After in 2010 being allowed to expand into the property market, Norway’s $870 billion wealth fund has amassed about $18 billion in real estate holdings. It has snapped up properties in major cities such as New York, London and Paris, with a main focus on office properties. The fund is focusing on specific markets rather than sectors, Kallevig said.

“When we say Singapore and Tokyo, we mean the better parts” of those cities, he said. “My guess is office properties will be the main component, because that’s what’s for sale in those parts of town. There aren’t many shopping malls in the center of Tokyo or the center of Singapore.” Just as in earlier purchases in Europe and the U.S, the fund will also buy properties with partners, Kallevig said. The next trip in that area will probably be in the second quarter, he said. The property portfolio was 141 billion kroner ($17.5 billion), or 2.2% of the fund at the end of last year, compared to 1% at the end of 2013. Real estate returned 10.4% in 2014.

Kallevig has said he seeks to invest 1% of the fund in real estate each year until the 5% goal is met. The Government Pension Fund Global returned 7.6% in 2014, its smallest gain since 2011. The fund has warned it expects diminished returns amid record low, and even negative, yields in key government bond markets combined with slow growth in developed markets. Norway generates money for the fund from taxes on oil and gas, ownership of petroleum fields and dividends from its 67% stake in Statoil ASA. Norway is western Europe’s biggest oil and gas producer. The fund invests abroad to avoid stoking domestic inflation.

Hmm. “The fund invests abroad to avoid stoking domestic inflation.” Really? In today’s zero percent world? Sounds curious. It may have been a valid objective in the past, but not today. What this is really about is chasing yield, just as in the pension fund case. Still, that was not the first thought that came to mind when reading this. That was: If Tokyo real estate were such a great investment, wouldn’t you think that Japan’s own pension funds would be buying? They’re chasing yield like crazy, but they would miss out on their own real estate assets which Norway’s fund thinks are such a great asset?

All this is not just the financial world on steroids, which is bad enough when you talk about someone’s pension, it’s the wrong kind of steroids too. The lethal kind. But then, without steroids the entire economic facade would be exposed as the zombie it has become. It’s insane for pension funds to buy stocks on a wholesale scale, because that distorts an economy beyond the point of recognition, it screws with price discovery like just about nothing else can, and it puts the pensioners’ money in grave danger. It’s equally insane for Norway to buy up property halfway around the world which giant domestic investors leave by the wayside.

Investing your pension money, and your wealth fund, into your own economy is such a more solid and soundproof thing to do, it shouldn’t even be an item up for discussion. Taking that money out of the foundation of an economy, and shifting it either to assets abroad, or into the casino all stock markets must of necessity be in the end, means abandoning and undermining the future strength of your own economy for the sake of a bit more yield today. At home, you could create infrastructure and jobs and resilience with it. All that is gone when you move it either abroad or into a casino.

Still, nothing really functions anymore the way it should. And that’s how you wind up in situations such as these. Central banks monetize debt to such extents, you could swear there’s a race going on. They do this to hide from view the debts that are out there, and that if exposed would make everything look much bleaker than it looks with various QEs and other steroid-based stimuli. In doing this, central banks kill bond yields, which chases pension- and wealth funds out of safe assets. A surefire way to create short term gains and long term losses, if not disaster. For the masses, that is. No losses in store for the few. They get only gains.

Nov 052014
 
 November 5, 2014  Posted by at 2:34 pm Finance Tagged with: , , , , , , , , , , ,  


Mathew Brady Units of XX Army Corps, Army of Georgia on Pennsylvania Avenue, Washington DC May 24 1865

Ayn Rand vs Adam Smith: The Only Midterm Election That Counts (Paul B. Farrell)
Singer’s Elliott: U.S. Growth Optimism Unwarranted as Data ‘Cooked’ (Bloomberg)
This Stock Market Rally Is For Suckers (MarketWatch)
BOJ’s Kuroda Vows To Hit Price Goal, Stands Ready To Do More (Reuters)
US Will Benefit Most From Japan’s Pension Fund Reform (CNBC)
Draghi To Face Challenge On ECB Leadership Style (Reuters)
EU Cuts Growth Outlook as Inflation Seen Below ECB Forecast (Bloomberg)
Euro Area Limping Toward Deflation Fuels QE Calls as ECB Meets (Bloomberg)
ECB Needs Japanese Lessons (Bloomberg)
Look Out Below! Oil Is Not Done Falling (CNBC)
Oil Continues To Slide, With Brent At Lowest In Over Four Years (MarketWatch)
T. Boone Pickens: The Real Problem With Oil (CNBC)
Russia-Ukraine Crisis Shields EU Gas From Oil Price Rout (Bloomberg)
New Junk-Bond Derivatives Are Hot as Traders Get Creative (Bloomberg)
IMF Gave Richer Countries Wrong Austerity Advice: Internal Auditor (Reuters)
China Home Buyers Rushing Online to Finance Downpayments (Bloomberg)
25 Years Since The Wall Fell, Germany’s Best Days Are Behind It (MarketWatch)
A Crazy Idea About Italy (Jim O’Neill)
Signs, Wonders and QE Heroics (James Howard Kunstler)

To the extent there’s any actual choices to be made in these kinds of elections. Why waste your time?

Ayn Rand vs Adam Smith: The Only Midterm Election That Counts (Paul B. Farrell)

Forget who controls the Senate. There is one and only one election that matters, an election that will decide the global balance of power this century. Specific candidates on any other ballot are irrelevant. The one race will be decided by the only two real candidates that count. All other candidates, regardless of political party, are merely pawns, surrogates, proxies for the two real candidates in this grand battle. And the winner not only wins for their party,but also gets to promote their brand of capitalism. They win the future. Get it? The winner between these two key candidates gets more than domination of the American political system. These two candidates are in a battle to dominate the world, gain control of the world’s natural resources in a totally unrestricted free market—to drill with Russia in the Arctic Ocean, drill for oil on America’s public lands and national forests, to export domestic oil, to build pipelines, haul oil in rail tankers across state lines, to frack for oil under public rivers, risk fresh water supplies, and so much more.

Yes, the only two candidates in the only election that counts today and in every other election this century are: Adam Smith, a moral philosopher and father of American capitalism thanks to the publication of his classics on economics, “The Wealth of Nations,” and its companion “The Theory of Moral Sentiments.” Adam Smith’s opponent on the ballot is his archrival, Ayn Rand, author of several 20th century works on capitalism, including “Atlas Shrugged” and “The Fountainhead.” But remember: all other candidates, on every ballot, are just proxy votes for these two candidates who will decide the balance of power in the world and the survival of the planet. Yes, it’s that simple. These two icons face off in a brutal battle for the soul of capitalism and control of the collective conscience of America.

Read more …

Not a fan of the man, but he’s dead on here.

Singer’s Elliott: U.S. Growth Optimism Unwarranted as Data ‘Cooked’ (Bloomberg)

Paul Singer’s Elliott Management Corp. said optimism on U.S. growth is misguided as economic data understate inflation and overstate growth, and central bank policies of the past six years aren’t sustainable. The market turmoil in the first half of October may be a “coming attractions” for the next real crash that could turn into a “deep financial crisis” if investors lose confidence in the effectiveness of monetary stimulus, Elliott wrote in a third-quarter letter to investors, a copy of which was obtained by Bloomberg News. “Nobody can predict how long governments can get away with fake growth, fake money, fake jobs, fake financial stability, fake inflation numbers and fake income growth,” New York-based Elliott wrote. “When confidence is lost, that loss can be severe, sudden and simultaneous across a number of markets and sectors.” Six years of near-zero interest rates and three rounds of asset purchases by the Federal Reserve have fueled economic growth and helped U.S. stocks more than triple from their 2009 low when including dividends.

The stock market has rebounded 8.3% through yesterday from a six-month low on Oct. 15, fueled by better-than-forecast economic data and improving earnings reports. The 70-year-old Singer, one of the biggest backers of Republican politicians, reiterated criticism that monetary policies won’t create lasting growth. While the U.S. is doing better than the rest of the world, the acceleration in the second quarter only reversed a “terrible” first quarter and has yet to be sustained in the remainder of the year, Elliott wrote. “We do not think this optimism is warranted, and we think a lot of the data is cooked or misleading,” Elliott, which manages $25.4 billion and was founded by Singer in 1977, wrote. “A good deal of the economic and jobs growth since the crisis has been fake growth, with very little chance of being self-reinforcing and sustainable.” Elliott said that the reported growth numbers are too high because the official inflation number is understating actual inflation by as much as 1% a year.

That’s because economists focus on measures such as core inflation or make “hedonic adjustments” for improvements in the quality of consumer goods. Inflation is also distorted “by the increasing gap between the spending basket of the well-off and that of the middle class,” the firm said. “The inflation that has infected asset prices is not to be ignored just because the middle-class spending bucket is not rising in price at the same rates as high-end real estate, stocks, bonds, art and other things that benefit from” quantitative easing, Elliott wrote. The unemployment rate, at 5.9% in September, doesn’t reflect that the workforce participation rate is at a 35-year low, according to Elliott, and that full-time jobs have been replaced by part-time jobs, and high-paying jobs by relatively low-paying jobs. Real wages, the firm said, have been stagnant since the financial crisis.

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And it’s a very well executed set-up too.

This Stock Market Rally Is For Suckers (MarketWatch)

After last week’s remarkable U.S. stock market rally, a lot of investors are cheering. After all, the Dow made an all-time high, won back the lost 1,000 points, and ignored the 8% pullback. I hate to be a party-pooper, but this is not a time to celebrate, but rather to be cautious. What could go wrong? Let’s begin by analyzing last week’s hollow Halloween rally:

1. On Friday, Oct. 31, five stocks were primarily responsible for Dow’s advance. The previous day, Visa had accounted for around 123 points of the 221-point rally. Take away Visa and the rally was a lot less impressive.

2. Friday’s surge was prompted by the Bank of Japan, which promised more stimuli (I’m guessing they are on QE 35, but who’s counting?) Since March 2000, the Nikkei 225 has tumbled from 20,000 to 16,000, so maybe more stimuli from the BOJ is needed (just kidding).

3. On Friday, there were no plus-1000 ticks on the NYSE Tick, which tells you that the rally was another head-fake without institutional involvement. Typically, you will see at least four or five plus-1000 ticks on bullish days.

4. In addition, volume was low, especially for the last day of the month.

5. Moreover, the S&P 500 that day did not rise above its overnight high, which is generally a sign of domestic weakness. During the day, it did not take out the previous all-time high. If this were a true bull market, breadth, volume, and institutional presence would have been a lot stronger.

6. Only five out of 20 stocks led the transports. If this were a broad-based rally, more of the transports would have participated.

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You would expect falling oil prices to provide the Japanese, like Americans, with some very welcome, even necessary, financial breathing room. But PM Abe and BoJ’s Kuroda will have none of it. And no matter how you look at it, there’s something at best curious about a central bank that decides to throw ‘free money’ at an economy BECAUSE it sees falling resource prices, which would supposedly make money available already.

BOJ’s Kuroda Vows To Hit Price Goal, Stands Ready To Do More (Reuters)

Bank of Japan Governor Haruhiko Kuroda, who last week stunned global financial markets by expanding a massive monetary stimulus program, said the central bank is ready to do more to hit its 2% price goal and recharge a tottering economy. Kuroda stressed the BOJ is determined to do whatever it takes to hit the inflation target in two years and vanquish nearly two decades of grinding deflation. “There’s no change to our policy of trying to achieve 2% inflation at the earliest date possible, with a roughly two-year time horizon in mind,” the central bank chief said in a speech at a seminar on Wednesday. “There are no limits to our policy tools, including purchases of Japanese government bonds,” he said in response to a question from a private analyst after the speech. The BOJ shocked global financial markets last week by expanding its massive stimulus spending in a stark admission that economic growth and inflation have not picked up as much as expected after a sales tax hike in April.

Kuroda said while inflation expectations have been rising as a trend, the BOJ decided to ease to pre-empt risks that slumping oil prices will slow consumer inflation and delay progress in shaking off the public’s deflationary mind-set. “In order to completely overcome the chronic disease of deflation, you need to take all your medicine. Half-baked medical treatment will only worsen the symptoms,” he said. Kuroda repeated the BOJ’s projection that Japan will likely hit the bank’s price target sometime in the next fiscal year beginning in April 2015, supported by the expanded quantitative and qualitative easing (QQE) program. While he stressed that Japan’s economy continued to recover moderately, Kuroda said falling commodity prices could be risks to the outlook if they reflected weakness in global growth.

Read more …

See The Revenge Of A Government On Its People

US Will Benefit Most From Japan’s Pension Fund Reform (CNBC)

U.S. assets will be the biggest benefactor of the Japanese Government Investment Pension Fund’s (GPIF) decision to more than double its target allocation of foreign stocks to 25%, analysts say. The changes to the $1.1 trillion pension fund coincided with the Bank of Japan’s shocking decision to ramp up stimulus on Friday, which sent global equity markets soaring. “The shift for international equities going to 25% of pension fund holdings is fairly big news,” said Tobias Levkovich, chief equities strategist at Citigroup in a note published on Friday. “It establishes a new incremental buyer of shares and the U.S. should be a significant beneficiary,” he said. The overall contribution to non-Japanese stocks could approach $60 billion of new purchases, half of which could go to the U.S. by the end of 2015, said Citigroup’s Levkovich, noting that stocks on Wall Street should start to feel the benefit this year.

“Foreign investors typically buy large cap stocks which have greater index impact,” he said. “Thus, one cannot ignore the possibility that stock prices jump above our year-end 2014 S&P 500 target on this news.” Other analysts agree. “It’s pretty realistic [that the U.S. will receive most of the benefit] if you look at where the Japanese feel comfortable investing their money,” Uwe Parpart, managing director and head of research at Reorient Financial Markets told CNBC. “This is a pension fund making the investment they are not going to punt into small caps or anything of that sort they need large, liquid stocks that over decades have had a reliable return,” he said. But Parpart is not convinced the inflows would make a huge difference to stock market performance. “$30 billion sounds like a lot of money, but stretched over a period of time it’s not going to move markets,” he said. “But obviously it’s a nice shot in the arm.”

Furthermore, an increase in the pension fund’s international bond allocation to 15% from 11% should boost demand for Treasurys, driving further inflows into the U.S., analysts at HSBC said in a note published Tuesday. Meanwhile, the GPIF will reduce is domestic bond allocation to 35% from 60%. “The BoJ’s increase in asset purchases should be more than enough to cover the aggressive reduction in Japanese Government Bond (JGB) holdings planned by the GPIF, allowing JGB yields to stay pinned down,” said Andre de Silva, head of global emerging market rates research at HSBC. “Ultra-low JGB yields imply that the relative valuations for other core rates ie. U.S. Treasuries and other bond substitutes have been further enhanced,” he said. “Demand for yield-grabbing would intensify amongst Japanese investors, boosting overseas investments.”

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“… the Italian ECB chief has acted increasingly on his own or with just a handful of trusted aides, sidelining even key heads of department.” Hey, you wanted a Goldman guy, now sit on it!

Draghi To Face Challenge On ECB Leadership Style (Reuters)

National central bankers in the euro area plan to challenge European Central Bank chief Mario Draghi on Wednesday over what they see as his secretive management style and erratic communication and will urge him to act more collegially, ECB sources said. The bankers are particularly angered that Draghi effectively set a target for increasing the ECB’s balance sheet immediately after the policy-making governing council explicitly agreed not to make any figure public, the sources said. “This created exactly the expectations we wanted to avoid,” an ECB insider said. “Now everything we do is measured against the aim of increasing the balance sheet by a trillion (euros)… He created a rod for our own backs.” Irritation among national governors who hold a majority on the 24-member council could limit Draghi’s space for bolder policy action in the coming months as the bank faces crucial choices about whether to buy sovereign bonds to combat falling inflation and economic stagnation.

Some members intend to raise their concerns with Draghi at the governors’ traditional informal working dinner on Wednesday before their formal monthly rate-setting meeting on Thursday, the sources interviewed by Reuters said. Many people at the central bank, which manages a single currency for 18 European Union member states, welcomed Draghi’s greater informality when he took over from Jean-Claude Trichet of France in 2011. His efforts to keep meetings short, delegate and brainstorm more, were received as a breath of fresh air. However, as decisions to loosen monetary policy and resort to further unconventional measures have become more contentious, insiders say the Italian ECB chief has acted increasingly on his own or with just a handful of trusted aides, sidelining even key heads of department. “Mario is more secretive… and less collegial. The national governors sometimes feel kept in the dark, out of the loop,” said one veteran ECB insider. “Jean-Claude used to consult and communicate more,” another ECB source said. “He worked a lot to build consensus.”

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So what? Every forecast everywhere gets revised downwards all the time. It’s simply the way things work.

EU Cuts Growth Outlook as Inflation Seen Below ECB Forecast (Bloomberg)

The European Commission cut its growth forecasts for the euro area as the bloc’s largest economies struggle to put the ravages of the debt crisis behind them after two recessions in six years. Gross domestic product in the 18-nation region will rise by 0.8% this year and 1.1% in 2015, down from projections for 1.2 and 1.7% in May, the Brussels-based commission said today. It lowered its projections for Germany, Europe’s largest economy, and said inflation in the euro area will be even weaker than the European Central Bank predicts. “The legacy of the global financial and economic crisis lingers on,” said Marco Buti, the head of the commission’s economics department. “Slack in the EU economy remains large and is weighing on inflation, which is also being dragged down by tumbling energy and food prices.”

The bleaker outlook highlights the fledgling nature of the euro area’s recovery and the deflation threat that has compelled the ECB to take unprecedented stimulus measures. While unemployment is beginning to decline from a record high, core economies such as Germany and France are facing some of the growth challenges that afflicted the periphery at the start of the debt crisis. Today’s report forecasts inflation at 0.8% in 2015, less than half the ECB goal of just under 2%. That’s more pessimistic than the central bank’s own projection of 1.1%. The commission sees inflation quickening to 1.5% in 2016, compared with the ECB outlook for 1.4%.

European stocks declined for a second day and German, French and Italian bonds rose. The yield on the German 10-year bund fell 4 basis points to 0.81% at 11:17 a.m. London time. The Italian yield dropped 5 basis points to 2.37%. The Stoxx Europe 600 Index slipped 0.1%. The grim assessment for the euro region comes just days before the ECB Governing Council led by President Mario Draghi gathers in Frankfurt for its monthly policy meeting. The ECB has cut its benchmark rate to a record-low 0.05% and began buying covered bonds to boost inflation and rekindle growth. “Country-specific factors are contributing to the weaknesses of economic activity in the EU and the euro area in particular,” Jyrki Katainen, commission vice president for competitiveness, told reporters in Brussels. These include “deep-seated structural problems” and “public and private debt overhang,” he said.

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The never ending Bloomberg promo.

Euro Area Limping Toward Deflation Fuels QE Calls as ECB Meets (Bloomberg)

The euro area is edging closer to the moment that deflation risks become reality. Companies cut selling prices by the most since 2010 as they attempted to boost sales in the face of a flagging economy and slowing new orders, Markit Economics said today. This in turn is squeezing profit margins and reducing resources for hiring and investing, damping chances of an economic rebound, the London-based company said. The European Central Bank is pumping money into the banking system to fuel inflation that hasn’t met policy makers’ goal since early last year.

With a gauge of manufacturing and services activity pointing to sluggish growth at best, it is under pressure to add to long-term loans and already announced asset-purchase plans to prevent a spiral of price declines in the 18-nation currency bloc. “This month’s data make for grim reading, painting a picture of an economy that is limping along and more likely to take a turn for the worse than spring back into life,” said Chris Williamson, Markit’s chief economist. “The combined threat of economic stagnation and growing deflationary risks will add to pressure on the ECB to do more to stimulate demand in the euro area, strengthening calls for full-scale quantitative easing.”[..] While Markit said the data are in line with gross domestic product expanding 0.2% in the fourth quarter, new orders slowed to the weakest level in 15 months and employment declined for the first time in almost a year. That “suggests that the pace of growth may deteriorate in coming months,” said Williamson.

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Sometimes I wonder what the job requirements are for Bloomberg staff. Like now. Europe should do what Japan does? That highly successful role model?

ECB Needs Japanese Lessons (Bloomberg)

Economists like to warn about Japanification, the risk that a country will follow the desultory experience of Japan, which slumped into deflation in 1999 and for all intents never climbed out. As Europe slides closer to deflation, the European Central Bank should heed the historical experience and the current efforts by the Bank of Japan to resuscitate growth. The euro area is perilously close to deflation. The ECB target – consumer price inflation of just under 2% – grows more distant. The European Commission said yesterday it sees euro-area inflation running at just 0.8% in 2015, as it cut its prediction for the region’s growth this year to 0.8% from the 1.2% it anticipated in May. And yet, the ECB’s balance sheet has been shrinking as the BoJ’s has swollen.

The Bank of Japan announced last week that it’s boosting purchases of Japanese government bonds to a record annual amount of 80 trillion yen, or more than $700 billion. My colleague William Pesek points out that the Japanese central bank has now effectively cornered the domestic market in government debt, creating a bubble in the bond market. He’d prefer more economic reforms than increased quantitative easing. Europe would also benefit from more labor-market changes and fiscal stimulus. But neither the ECB nor the Bank of Japan has a mandate to overhaul fiscal policy or employment practices. In the absence of government action, central banks can only fill the void. The shock-and-awe that BoJ Governor Haruhiko Kuroda sprang on investors isn’t likely to be repeated at tomorrow’s ECB meeting, even though there is scant prospect that the central bank’s inflation target will be met anytime soon.

Two weeks into the covered-bond purchase program designed to flood cash into the economy, the ECB has purchased just 4.8 billion euros ($6 billion) so far. Draghi said earlier this week that the scope for buying asset-backed securities is “rather large,” yet I can’t find a single market participant who expects the plan to succeed in swelling the ECB balance sheet by enough to do the job – unless it repeats the government bond purchases it made between 2010 and 2012, and on a much grander scale:

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Huh? “What the Saudis are doing is business as usual. They change the price formula each month. The problem is there’s an implication that it’s business as usual in terms of production. The problem is if they continue to produce what they’ve been producing in the last two months, the market is headed for trouble”

Look Out Below! Oil Is Not Done Falling (CNBC)

Oil prices could have a hard time finding a floor after Saudi Arabia trimmed prices in the face of growing North American oil production. The market took the price cut this week as another sign the kingdom is willing to use pricing as a lever to preserve its market share, rather than cut production in what is now an oversupplied market. Even if it was not the intention, some traders took the Saudi move as a sign the kingdom would like falling prices to slow U.S. shale production. U.S. West Texas Intermediate fell sharply on Tuesday, dipping close to the psychologically key $75-a-barrel level, before closing at a three-year low of $77.19, off $1.59 per barrel. Brent fell along with it to $82.82 a barrel, the lowest settle since October 2010, after Saudi Arabia set a new price in the U.S. 45 cents lower than November’s level. “The managed money longs still outnumber shorts 3.5-to-1. If this isn’t a heavy exodus of the money manager longs, we could still have a significant drop, especially if all these factors that are driving us lower continue to weigh on the markets,” he said.

“The dollar strength and also fears of slowing economic conditions in Europe and China are still continuing to play a role.” There was initially a muted reaction to the Saudi announcement Tuesday as the market focused on dollar strength and other factors. “I don’t think the probability is we’re looking at a meltdown or collapse. If there was a global price war, it could go between $30 and $50 a barrel but more realistically, we’re within 10% of the bottom,” said Tom Kloza, senior oil analyst at Gasbuddy.com. “What the Saudis are doing is business as usual. They change the price formula each month. The problem is there’s an implication that it’s business as usual in terms of production. The problem is if they continue to produce what they’ve been producing in the last two months, the market is headed for trouble, and downward pressure will be more significant than upward pressure,” said Kloza.

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Nobody loves you when you’re down and out.

Oil Continues To Slide, With Brent At Lowest In Over Four Years (MarketWatch)

Crude-oil futures extended losses in Asian trade Wednesday, with the U.S. oil benchmark at its lowest in more than three years and Brent at its lowest in over four years. On the New York Mercantile Exchange, light, sweet crude futures for delivery in December traded at $76.81 a barrel, down $0.38 in the Globex electronic session. December Brent crude on London’s ICE Futures exchange fell $0.60 to $82.22 a barrel. Crude oil finished at a 3-year low on Tuesday. A steady stream of weak economic data from Europe is weighing on Brent crude oil prices, pushing it lower along with the drop in U.S. oil prices, analyst Tim Evans at Citi Futures said.

“The downward revision in the eurozone macroeconomic outlook and the further decline in prices were both more of a confirmation that a bearish trend remains than any stunning new development,” he said. Mr. Evans said a psychological limit of $80 a barrel may help limit the drop in Brent crude prices. Financial markets are looking to Thursday’s European Central Bank meeting for a boost. Meanwhile, oil markets are still pressured by a strong U.S. dollar, weak demand projections and oversupply concerns. “Yesterday’s support levels were shattered likely due to markets anticipating further cuts from other OPEC countries,” analyst Daniel Ang at Phillip Futures said. He pegged support for Brent crude at $82 a barrel and that for WTI at $75.84 a barrel.

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“Domestic oil companies need to stop drilling for oil … ” Why not tell the Saudis that? How about we discuss: The Real Problem With T. Boone Pickens instead?

T. Boone Pickens: The Real Problem With Oil (CNBC)

Many energy investors think there’s a powerful force working against them in the market. Investor T. Boone Pickens thinks they’re right, but the problem isn’t what they think. Pickens says that the big issue in the energy market isn’t OPEC or the strong dollar; he says it’s supply and he also says domestic drillers are to blame. “Domestic oil companies need to stop drilling for oil,” Pickens insisted on CNBC’s “Street Signs.” “We’ve overdrilled oil (in the U.S). Now we’ve gotten ourselves in a spot. We need to slow down.” In other words, the abundance of oil that’s now accessible in North America because of improved technology has generated a supply imbalance. However, Pickens does not expect that dynamic to last; ultimately he expects markets to balance out, with drillers reducing supply.

“Of course nobody wants to be the first to blink,” Pickens added. “But, when the domestic drillers start feeling real pain (from low prices), they will blink.” In fact, Pickens thinks the dynamics are shifting, already. Not only does he anticipate a reduction in domestic supply but he said markets are moving into a bullish time of year. “November and December are good months,” he said. Therefore, Pickens believes supply will decrease, at a time when demand increases. Given the potential catalysts, Pickens isn’t looking for oil to sit at historic lows for long. “I can see this lasting through year end. But in the first quarter of next year I think we hit the low and then I expect prices to recover.”

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‘Shields’? Curious choice of words.

Russia-Ukraine Crisis Shields EU Gas From Oil Price Rout (Bloomberg)

The risk of disruptions to Russian natural gas flows through Ukraine this winter is protecting European prices from the rout that sent oil to a four-year low. U.K. gas for next quarter fell 13% since mid-June, less than half the 29% plunge in Brent crude over that time. While Brent is typically the benchmark used to set the price on almost half the gas supply in Europe, the Russia-Ukraine conflict and demand fundamentals in the market are having a bigger impact on prices than the decline in oil. First-quarter supply interruptions are still possible as Ukraine may struggle to pay Russia the full $3.1 billion by year-end under an agreement brokered by the European Union last week for gas already consumed, according to Societe Generale SA.

Gazprom said it received the first tranche of payments today. The EU, which gets 15% of its fuel from Russia via Ukraine, sought to avoid repeats of 2006 and 2009, when supplies to the bloc were disrupted amid freezing weather. “Right now, gas prices in Europe are really linked to the Russian-Ukrainian crisis, so I don’t think the impact from oil is as big as it could be,” Edouard Neviaski, chief executive officer of GDF Suez Trading, a unit of France’s biggest utility, said in an interview in London. “Gas prices have gone down a little bit, but nothing of the same magnitude.”

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Whenever the financial world gets ‘creative’, things blow up and we pay.

New Junk-Bond Derivatives Are Hot as Traders Get Creative (Bloomberg)

When it gets tough to maneuver in the junk-bond market, traders can either give up or get creative. Many of them are opting for creativity these days. There’s been a surge in demand for a relatively new index of derivatives that aims to replicate the risk and return of high-yield bonds. As volatility soars to the most in more than a year, trading in a total-return swaps index reached a record $4 billion in September from almost nothing in May, according to data compiled by Morgan Stanley. The demand is in part coming from fund managers who are looking for ways to be agile as individual investors become more fickle, pulling money out and then putting it back in, said Sivan Mahadevan, a credit strategist at Morgan Stanley. For example, investors have yanked $24 billion from high-yield bond mutual funds this year, with sentiment turning particularly sour in the three months ended Sept. 30, data compiled by Wells Fargo show. Yet they poured $2.5 billion into the funds in the week ended Oct. 29.

Investors also face a harder environment to maneuver in. The volume of dollar-denominated junk bonds outstanding has swelled 81% since 2008, but the market’s structure hasn’t evolved much. It still consists of thousands of individual bonds governed by unique documents, traded much the way they were a decade ago. “Market fragmentation and liquidity constraints in a large part of the bond market make managing fund-flow volatility particularly challenging,” Mahadevan wrote in a report. The concern is that after six years of near-zero interest rates from the Federal Reserve and a largely one-way trade into bonds, a reversal of that demand will cause debt values to plunge as there won’t be many willing and available buyers on the other side. So it’s no wonder investors are turning to derivatives to quickly adjust their holdings in a market that policy makers have said looks like a bubble.

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Sure, Lagarde, why not simply make your own auditing office look like a bunch of inept fools?

IMF Gave Richer Countries Wrong Austerity Advice: Internal Auditor (Reuters)

The International Monetary Fund ignored its own research and pushed too early for richer countries to trim budgets after the global financial crisis, the IMF’s internal auditor said on Tuesday. The Washington-based multilateral lender, concerned about high debt levels and large fiscal deficits, urged countries like Germany, the United States and Japan to pursue austerity in 2010-11 before their economies had fully recovered from the crisis. At the same time, the IMF advocated loose monetary policies to sustain growth and boost demand in advanced economies, initially ignoring the possible spillover risks of such policies for emerging market countries, the Independent Evaluation Office, or IEO, said in a report that analyzed the IMF’s crisis response. “This policy mix was less than fully effective in promoting recovery and exacerbated adverse spillovers,” the IEO wrote. The IMF advises its 188 member countries on economic policy, and provides emergency financial assistance to its members on the condition they get their economies back on track.

The internal auditor said the IMF should have known that the combination of tight fiscal policy and expansionary monetary policy would be less effective in boosting growth after a crisis. Evidence showed that the private sector’s focus on reducing debt made it less susceptible to monetary stimulus. In 2012, the IMF finally admitted that it had underestimated how much budget cuts could hurt growth and recommended a slower pace for austerity policies. But its auditor said the IMF’s own research showed this relationship even before the crisis. IMF Managing Director Christine Lagarde said the IMF’s advice was reasonable, given the information and economic growth forecasts it had in 2010. “I strongly believe that advising economies with rapidly rising debt burdens to move toward measured consolidation was the right call to make,” Lagarde said in a statement.

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So much for the Chinese having no housing debt.

China Home Buyers Rushing Online to Finance Downpayments (Bloomberg)

Qian Kaishen and his wife almost gave up in August on buying a bigger home. As apartments at Shanghai Villa, a project they liked near the city’s Hongqiao Airport, started selling, the money they had saved for the deposit was tied up in a 5%-return investment. Then property agency E-House China Holdings Ltd. offered the couple a 280,000 yuan ($45,546) one-year bridge loan at zero interest. The loan came from online investors through E-House’s Internet finance website. It covered about half the down payment and was just enough to make up the shortfall. “Now we’re good both on our investment and home purchase plan,” Qian, 31, who works for a local logistics company, said by phone from Shanghai.

“We would’ve given up if it weren’t for the loan. I don’t like borrowing from my parents or relatives, especially because we have the money.” E-House is joining peer-to-peer lenders to finance down payments for buyers struggling to scrape together a deposit after home prices had tripled since 2000. Mortgage lending remains tight, even after the central bank eased its policy in September, as banks anticipate an extended property market decline because of a high supply of housing, according to Standard Chartered.Home prices in China are now equivalent to 40 years’ average income for a 100-square-meter (1,076-square-foot) apartment. That compares with 26 years’ median income in New York for an apartment of the same size. The average price of a typical 900-square-foot home in Singapore is 11 times the median household income, while that for a 50-square-meter flat in Hong Kong is 14 times, according to local official data.

In China, homebuyers need to pay a minimum down payment of 30% of the purchase price for a first home, and at least 60% for a second before they can take out a mortgage. The limits are the result of a four-year campaign to stem property speculation. Those restrictions have helped drive demand for the down payment loans. “The phenomenon emerged in the past year or two largely because of mortgage restrictions and high down-payment requirements,” said Zhang Haiqing, a Shanghai-based research director at Centaline Group, China’s biggest property agency. The central bank on Sept. 30 eased some mortgage rules to make it easier to purchase second properties in a bid to revive the market. “We can’t exclude the possibility that as the market recovers, more people will want to buy and some of them will still have to use this channel because they don’t have the money,” Zhang said.

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Every nation’s best days are behind it. That is, if you focus on economic growth. As they all do.

25 Years Since The Wall Fell, Germany’s Best Days Are Behind It (MarketWatch)

On Sunday, Nov. 9, it will be a quarter of a century since the Berlin Wall came down. The reunification that followed was a triumph for the German nation. The scars of World War Two were finally healed, and Germany became one of the richest and most successful countries in the world. Certainly compared to much of its history, there was never a better time to be a German. And yet, as that anniversary is rightly celebrated, it is possible that the next quarter century will not be nearly as good. In fact, Germany faces a series of daunting problems. Its population is about to shrink sharply, threatening its prosperity. Its export-driven economic model look increasingly dated, based on huge trade surpluses, and driving down real wages. Education is poor, there is little investment, and no signs that it can compete in new technologies the way it did in industries such as automobile and chemicals.

Worse, it is threatened by a belligerent Russia on one side, and a resentful, impoverished, resentful eurozone periphery on the other, which is likely to increasingly blame Germany for its economic troubles. The European Union, the linchpin of its security and foreign policy, is under huge pressure as a result of the eurozone crisis, which the German elite has terribly mismanaged. The chances are that the next quarter of a century will not be nearly as good for Germany as the last 25 years were. When David Hasselhoff — of Knight Rider fame, and for some mysterious reason a huge star in Germany — performed at the Berlin Wall on New Year’s Eve in 1989, he was presiding over a moment when two halves of a divided nation came together. There were plenty of doubts at the time, both about whether West Germany could cope with a bankrupt East, and about whether the rest of Europe could cope with a reunited Germany.

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Interesting views from ‘former’ Goldmanite O’Neill. Have Italy impose punitive taxes on the Germans.

A Crazy Idea About Italy (Jim O’Neill)

I’ve spent a good deal of my 35 years as an economic and financial analyst puzzling over Italy. Studying its economy was my first assignment in this business – as a matter of fact, Italy was the first foreign country I ever flew to. I’m just back from a vacation in Puglia and Basilicata. Over the decades, the question has never really changed: How can such a wonderful country find it such a perpetual struggle to succeed? All the while, Italy has pitted weak government against a remarkably adaptable private sector and a particular prowess in small-scale manufacturing. An optimist by nature, I’ve generally believed these strengths would prevail and Italy would prosper regardless. In the days before Europe’s economic and monetary union, though, it had one kind of flexibility it now lacks: a currency, which it could occasionally devalue. These periodic injections of stronger competitiveness were a great help to Fiat and other big exporters, and to smaller companies too. The rest of Europe had mixed feelings about this readiness to restore competitiveness through devaluation – meaning at their expense.

When discussions began about locking Europe’s exchange rates and moving to a single currency, opinions divided among the other partners, notably Germany and France, on what would be in their own best interests. Many German conservatives, including some at the Bundesbank, doubted Italy’s commitment to low inflation, which they wanted to enshrine as Europe’s chief monetary goal. On the other hand, leaving Italy outside the euro would leave their own competitiveness vulnerable to occasional lira devaluations. In the end, of course, the decision was made to bring Italy in. The fiscal rules that were adopted at the same time – including the promise to keep the budget deficit below 3 percent of gross domestic product — can be seen as an effort to force Italy to behave itself. Now and then I wondered if some saw them as a way to make it impossible for Italy to join at all. In any event, Italy found itself doubly hemmed in, with no currency to adjust and severely limited fiscal room for maneuver.

The results haven’t been good. It’s ironic that between 2007 and 2014 Italy has done better than most in keeping its cyclically adjusted deficit under control – yet its debt-to-GDP ratio has risen sharply. The reason is persistent lack of growth in nominal GDP, itself partly due to an overvalued currency and tight budgetary restraint. Italy is the euro area’s third-largest economy and its third-most populous country. Given this, the scale of its debts and everything we’ve learned about Europe’s priorities during the creation of the euro and since, I’ve always presumed that, in the end, Germany would do whatever was necessary to protect Italy from the kind of financial blow-up that hit Greece in 2010. Now I am starting to wonder.

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” .. the Potemkin stock market, a fragile, one-dimensional edifice concealing the post-industrial slum that the on-the-ground economy has become behind it.”

Signs, Wonders and QE Heroics (James Howard Kunstler)

“Holy smokes,” Janet Yellen must have barked last week when Japan stepped up to plug the liquidity hole left by the US Federal Reserve’s final taper trot to the zero finish line of Quantitative Easing 3. The gallant samurai Haruhiko Kuroda of Japan’s central bank announced that his grateful nation had accepted the gift of inflation from the generous American people, which will allow the island nation to fall on its wakizashi and exit the dream-world of industrial modernity it has struggled through for a scant 200 years.

Money-printing turns out to be the grift that keeps on giving. The US stock markets retraced all their October jitter lines, and bonds plumped up nicely in anticipation of hot so-called “money” wending its digital way from other lands to American banks. Euroland, too, accepted some gift inflation as its currency weakened. The world seems to have forgotten for a long moment that all this was rather the opposite of what America’s central bank has been purported to seek lo these several years of QE heroics — namely, a little domestic inflation of its own to simulate if not stimulate the holy grail of economic growth. Of course all that has gotten is the Potemkin stock market, a fragile, one-dimensional edifice concealing the post-industrial slum that the on-the-ground economy has become behind it.

Then, as if cued by some Satanic invocation, who marched onstage but the old Maestro himself, Alan Greenspan, Fed chief from 1987 to 2007, who had seen many a sign and wonder himself during that hectic tenure, and he just flat-out called QE a flop. He stuck a cherry on top by adding that the current Fed couldn’t possibly end its ZIRP policy, either. All of which rather left America’s central bank in a black box wrapped in an enigma, shrouded by a conundrum, off-gassing hydrogen sulfide like a roadkill ‘possum. Incidentally, Greenspan told everybody to go out and buy gold — which naturally sent the price of gold spiraling down through its previous bottom into the uncharted territory of worthlessness. Gold is now the most unloved substance in the history of trade, made even uglier by the overtures of Mr. Greenspan.

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Aug 172014
 
 August 17, 2014  Posted by at 3:37 pm Finance Tagged with: , , , ,  


Leslie Jones The Hindenburg over Boston Common 1936

If Americans were less prone to self-deceit, they would have long since realized that the American Dream is over, for good, and that continuing to chase it is the worst of the few remaining options they get to choose between.

They could then look at themselves in the mirror and see their future.

As things are, however, the future is creeping up on them in small, slow and silent steps, until one day it will simply be there, no longer deniable or avoidable, and it will find them woefully unprepared.

This is not true only for Americans, the entire formerly rich world will undergo the same transformation. But it will be very pronounced stateside.

It’s impossible to follow events in Ferguson, Missouri and not recognize that there are thousands of – potential – Fergusons in-waiting spread across the USA. You don’t have to be particularly clever to recognize the patterns.

Segregation by race – a.k.a. racism – has never left the country, even though the courage of true American heroes like Martin Luther King and Muhammad Ali changed many things for the better.

Segregation by race has always remained inevitably linked to segregation by wealth and income. As a hugely disproportionate number of black kids continue to be incarcerated under a prison system that locks away more citizens than in any other country.

You could be forgiven for thinking that America went looking for trouble. And is now finding it. Like so many things, that trouble doesn’t stand out or float to the top in times of plenty. But when those times are over, trouble is the only thing remaining.

As long as the illusion of the American Dream, and the illusion of economic growth, can be kept alive, people will be inclined to take a lot of things for granted. When their eyes open and these illusions are shattered, matters can turn on a dime.

Bloomberg provides some of the background to Ferguson and all those other American communities. What’s happening in Ferguson shouldn’t come as a surprise, what’s surprising is that it’s not much more widespread yet.

Ferguson Unrest Shows Poverty Grows Fastest in Suburbs

• “We’ve passed this tipping point and there are now more poor people in the suburbs than the cities,” said Elizabeth Kneebone, author of [a July 31 Brookings Institution report]. “In those communities, we see things like poorer health outcomes, failing schools and higher crime rates.”

• [..] the city – which has lost more than 40% of its white population since 2000 – [has] a mostly white city council and police force. [..] The St. Louis metropolitan area ranks as one of the most segregated in the U.S. Ferguson, once a majority white community that’s now about two-thirds black, highlights that dynamic.

• Coinciding with the decline in white population is a rapid rise in poverty since 2000 [..]

• “Looking at the neighborhood poverty rates, it’s striking how much has changed over a decade,” Kneebone said. “In Ferguson in 2000, none of the neighborhoods had hit that 20% poverty rate. By the end of the 2000s, almost every census tract met or exceeded that poverty rate.

• The poverty rate in Ferguson was 22% in 2012, the most recent available, up from 10.2% in 2000. Suburban locales from the outskirts of Atlanta to Colorado Springs have seen similar trends. The number of poor people living in impoverished U.S. suburbs has more than doubled since 2000, comparing to a 50% rise in cities. More than half of the 46 million Americans in poverty now live in suburbs ..

• “The median income is so low in Ferguson that people are really struggling, living from check to check, and they’re even behind checks,” state Senator Maria Chappelle-Nadal said.

• “For much of the latter half of the 20th century, it was a pattern of segregation by race, and that’s been displaced somewhat by a segregation by income, which is growing starker and starker in cities like St. Louis.”

While Americans have been – and still are – waiting for the recovery to come that the government and the media promise, their world is not standing still; it’s deteriorating at a fast pace. It just takes them a long time to notice, focused as they are on the illusions.

That is a dangerous dynamic in a country so loaded to the hilt with firearms. Something that the government, at all levels, has been acutely aware of for many years. The calls, in the wake of Ferguson, to de-militarize police forces, look somewhat less than timely or honest or genuine in that light.

The militarization of American police forces has been a very conscious choice by those who long since sensed a threat to their positions, their way of life, and their powers. Not everyone feels they can afford to stare blindly into illusions.

Another aspect of the demise of America as we once knew it, and one very much connected to Ferguson, because it’s economics that drives the whole machinery, is pensions. An amazing graph posted by Tyler Durden, along with some apt comments, explain.

Why The Fed Can’t, And Won’t, Let The Stock Market Crash

… it is not the 1% that would suffer the most should the S&P have a post-Lehman like 50%+ wipe out, which also means that the Federal Reserve’s only mandate of pushing asset prices to ever higher levels while pretending it does so to boost employment and keep inflation at 2% is no longer for the benefit of the uber-wealthy.

So why can’t, or rather won’t, the Fed let the bubble market collapse once again? Simple – as the following chart shows, the illusion of wealth is now most critical when preserving the myth of the welfare state: some 50% of all US pension fund assets are invested in stocks and only 20% in Treasurys.

This compares to less than 10% for Japan which also explains why for Abe, the only lifeline left is pushing pension funds out of their existing asset allocation sweet spot and forcing them to buy stocks.

What is known is that in a country like Germany between 2005 and 2012 the Pension funds asset rotation out of stocks and into bonds has been truly unprecedented, with stocks plummeting from 30%+ of total exposure to less than 5%! It also explains why Germany was, is and always will be leery of allowing the ECB to pursue asset bubble-inflating policies which would barely benefit pension funds on the equity side …

But back to the US: while the 1%’s paper fungible, market-driven wealth has been long converted into other hard asset formats, it is the paper gains for the future retirees that are on the chopping block should the S&P 500 “get it.”

As such, it is the fate of future retirement funds, and in fact, the very core of the US welfare state that is at stake should there be a massive market crash. In which case what happened in Ferguson will be a polite stroll in the park compared to the chaos that would ensue should another generation of Americans wake up with half or more of their paper wealth wiped out overnight.

… will the Fed be able to avoid a market crash? The answer of course is no. But we will give the podium to Fred Hickey, aka the High-Tech Strategist, who gives a very poetic summary of what the Fed’s endgame will look like:

The Fed hasn’t made the world a better place with its interventions. It has created moral hazard, encouraged the formation of asset bubbles that eventually pop (leaving economic messes), widened the wealth inequality gap to record levels, discouraged savings and investment, severely penalized retirees on fixed incomes, encouraged spending, funded massive government deficit spending by monetizing the debts, lengthened the recession and likely reduced the number of jobs that would have been created if the economy had been allowed to take its normal course.

What Durden forgets to mention is that, given the incredibly outsized exposure US pensions funds have built up to stocks, it’s no wonder the S&P 500 has been setting records.

Another issue he omits is while one may claim the Fed can’t let the stock market crash, it has no such control, if only since because of that same outsized exposure pension funds have to the S&P, they are set and certain to cause their own demise by moving out of stocks and back into bonds.

Recent developments in geopolitics are not a one-off incident. They are merely a first step in the real battle for oil and gas, equals energy, equals power. It’s not going to stop if Ukraine and Russia sign some deal, or if Shi’ites beat Sunnis or the other way around. Every party that sees an opening to increase their share of oil and gas will do so, and increasingly with blunt force. That’s the geopolitics which will be a part of the global – and financial – landscape for the rest of our lives.

That necessarily means that the Fed controlled quiet boom in stocks is over. Volatility is back to stay. And volatility doesn’t rhyme with pension funds. Risk and potential losses are too great to even consider. So the funds will have to move back into Treasurys. A move that will hurt both stocks AND bonds. And cause more volatility. Rinse and repeat.

It would be suicide for pension funds to stay where they are. It will also be suicidal to move. They’re hugely overexposed to a market that’s only seemingly under control. They purchased themselves into a bind.

Just like America developed itself into a bind. By building an infrastructure around its city cores that is increasingly, and rapidly, becoming an expansive layer of cemeteries for the hopes and dreams of large numbers of its citizens, where millions of poorly constructed and insulated overpaid homes play the part of so many underwater mausoleums.

There is still time to take another look in the mirror. To see what is actually there in your reflection, not what you would like there to be. And make your decisions based on what you see when you do. But that time is not measured in decades, perhaps not even years.

Why The Fed Can’t, And Won’t, Let The Stock Market Crash (Zero Hedge)

When it comes to the stock market, while the biggest, and according to many only, beneficiary of the Fed’s ZIRP/QE policies of the past 6 years has been the wealthiest 1%, the reality is that said top crust of US society no longer needs the S&P to continue its relentless, manipulated and centrally-planned levitation. Between a third Hamptons residence, a 5th Ferrari, and a 7th French villa, not to mention a few tons of gold, the super wealthy have long since booked their paper profits, and transferred their “wealth” out of the intangible and into actual, physical assets. Therefore it is not the 1% that would suffer the most should the S&P have a post-Lehman like 50%+ wipe out, which also means that the Federal Reserve’s only mandate of pushing asset prices to ever higher levels while pretending it does so to boost employment and keep inflation at 2% is no longer for the benefit of the uber-wealthy.

So why can’t, or rather won’t, the Fed let the bubble market collapse once again? Simple – as the following chart shows, the illusion of wealth is now most critical when preserving the myth of the welfare state: some 50% of all US pension fund assets are invested in stocks and only 20% in Treasurys. This compares to less than 10% for Japan which also explains why for Abe, the only lifeline left is pushing pension funds out of their existing asset allocation sweet spot and forcing them to buy stocks. Whether this gambit will work is unknown.

What, however, is known is that in a country like Germany between 2005 and 2012 the Pension funds asset rotation out of stocks and into bonds has been truly unprecedented, with stocks plummeting from 30%+ of total exposure to less than 5%! It also explains why Germany was, is and always will be leery of allowing the ECB to pursue asset bubble-inflating policies which would barely benefit pension funds on the equity side, while any rising inflation would crush the mark-to-market value of bond holdings. But back to the US: while the 1%’s paper fungible, market-driven wealth has been long converted into other hard asset formats, it is the paper gains for the future retirees that are on the chopping block should the S&P 500 “get it.” As such, it is the fate of future retirement funds, and in fact, the very core of the US welfare state that is at stake should there be a massive market crash.

Read more …

Ferguson Unrest Shows Poverty Grows Fastest in Suburbs (Bloomberg)

A week of violence and protests in a town outside St. Louis is highlighting how poverty is growing most quickly on the outskirts of America’s cities, as suburbs have become home to a majority of the nation’s poor. In Ferguson, Missouri, a community of 21,000 where the poverty rate doubled since 2000, the dynamic has bred animosity over racial segregation and economic inequality. Protests over the police killing of an unarmed black teenager on Aug. 9 have drawn international attention to the St. Louis suburb’s growing underclass. Such challenges aren’t unique to Ferguson, according to a Brookings Institution report July 31 that found the poor population growing twice as fast in U.S. suburbs as in city centers. From Miami to Denver, resurgent downtowns have blossomed even as their recession-weary outskirts struggle with soaring poverty in what amounts to a paradigm shift. “We’ve passed this tipping point and there are now more poor people in the suburbs than the cities,” said Elizabeth Kneebone, author of the report and a fellow at the Brookings Metropolitan Policy Program.

“In those communities, we see things like poorer health outcomes, failing schools and higher crime rates.” In predominantly black Ferguson, residents protesting the shooting death of 18-year-old Michael Brown also complain about the lack of jobs and a city government that doesn’t reflect the community’s diversity. Inhabitants of the city – which has lost more than 40% of its white population since 2000 – said they’ve long felt disenfranchised by a mostly white city council and police force. Missouri Governor Jay Nixon told reporters that Brown’s death was like “an old wound that had been hit again,” exposing underlying challenges. The St. Louis metropolitan area ranked as one of the most segregated in the U.S. in a 2011 study by Brown University. Ferguson, once a majority white community that’s now about two-thirds black, highlights that dynamic. Coinciding with the decline in white population is a rapid rise in poverty since 2000, a period that includes the 18-month recession that ended in June 2009.

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The 10.8 Trillion Failures Of The Federal Reserve (MarketWatch)

The conventional wisdom says the Federal Reserve is keeping interest rates so low that it doesn’t pay to play it safe, and that it’s encouraging investors to do all sorts of crazy things to earn a higher yield. Supposedly, the central bank is forcing investors pump up stocks, junk bonds, farm land and all the other bubbles you’ve been reading about. It’s a nice story, but the data show that U.S. investors are still conservative about where they put their money. Just how conservative are they? Data from the little-noticed financial accounts report show the American people have $10.8 trillion parked in cash, bank accounts and money-market funds that pay little or no interest. At the end of the first quarter, low-yielding assets totaled 84.5% of annual disposable personal income, the highest share in 23 years. Sure, people need to keep some money handy to pay their bills and some folks might have a few hundred or a few thousand in a rainy-day fund, but no one needs immediate access to the equivalent of 11 months of income.

In essence, there’s $10.8 trillion stuffed into mattresses. That $10.8 trillion hoard represents a failure of Fed policy. Since the Fed began quantitative easing in September 2012, U.S. households have socked away $1.17 trillion in their low-yield accounts. That means that 95% of the Fed’s $1.24 trillion QE3 ended up not in bubbly markets but in a safe and boring bank account. Since the recession began more than six years ago, the Fed has been trying to encourage people to put their money to work in the economy. That’s why the Fed has kept interest rates low and has been buying up trillions of dollars worth of relatively safe securities, hoping to push us to take on a little more risk. After all, an economy can’t really grow if no one’s willing to gamble on the future. But many of us don’t want to. We are still afraid, so we prefer to put a large part of our savings in assets that are guaranteed, like FDIC-insured bank accounts, or into money-market funds whose sponsor guarantees the return of the principle.

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Instability is dead certain. Fear makes no difference.

Fears of Renewed Instability as Fed Ends Stimulus (NY Times)

After a nearly uninterrupted five-year rally in stocks and bonds, some investors seem to be getting nervous. On July 31, the Dow Jones industrial average dropped 317 points, wiping out the year’s gains. Last week, junk bond funds experienced record withdrawals and junk bond interest rates spiked. Such gyrations may be healthy, a reminder that there are risks and that markets go down as well as up. But they could also be the harbinger of something more worrisome, which would be renewed financial instability as the Federal Reserve brings to an end its extraordinary easy money policy. The Federal Reserve has said it expects to raise interest rates in 2015 for the first time since the financial crisis. “There’s no real precedent for ending anything of this magnitude,” said Jeremy Stein, who left the Fed’s Board of Governors at the end of May to return to Harvard’s economics department, where I caught up with him last month on the day of the Dow’s big drop.

As the Fed feels its way, he said, investors may have to prepare for greater volatility. While at the Fed, Mr. Stein was viewed as the chief advocate for financial stability on the seven-member board, where he pondered the possible unintended consequences of the Fed’s stimulus policies. Mr. Stein said his differences with his fellow board members, and especially the chairwoman, Janet Yellen, had been exaggerated and were more a matter of nuance. “I certainly felt we were courting some risks” with the Fed’s last round of quantitative easing, he acknowledged. “But then again, given the level of the unemployment rate at the time, some risk-taking was warranted.” In April, in his last speech as a Fed board member, Mr. Stein warned that monetary policy should be “less aggressive” when credit risk premiums were extremely low, as they were then, and they’ve gotten even lower since.

“To be clear, we are not necessarily talking about once-in-a-generation financial crises here, with major financial institutions teetering on the brink of failure,” he said in a speech to the International Monetary Fund. “Nevertheless, the evidence suggests that even more modest capital market disruptions may have consequences that are large enough to warrant consideration when formulating monetary policy.”

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No spending=deflation.

The Depleted American Consumer Has Spoken: No “Escape Velocity” (Alhambra)

With retail sales this week bringing an “unexpected” shock to those forecasting a robust economic rebound (outside of inventory, anyway) in the US, further confirmation has been offered pretty much everywhere else. WalMart’s quarterly report was as it has been since the end of 2012 with continuing slow erosion. US same store comparables were flat, which is something of an achievement considering that overall environment. Despite yearly proclamations of recovery, hard dollar figures continue to demonstrate otherwise.

In other words, the actual results of the companies that are closest to American consumers confirm the bleak picture provided by the government estimates of retail sales. Beyond WalMart, Macy’s reported a “shocking” miss on both Q2 results and further guidance.

The earnings miss Wednesday by highly regarded Macy’s raised a red flag about what’s to come from the slew of retailers set to report profits. “As one of the top-performing and best-executing retailers in the industry, Macy’s second-quarter earnings miss is an ominous early marker for retail that could portend further disappointing results over the coming weeks,” said Ken Perkins, president of Retail Metrics. Macy’s earlier cut its full-year same-store sales forecast, saying a 3.3% rise in second-quarter sales would not make up for weakness in the first quarter, when harsh winter weather kept shoppers away.

That seems to be the theme developing everywhere outside of heavily revised headline GDP (but not the prior estimates of that measure nor its internals). The “bounce” in the second quarter was more of simply “less bad” than anything remotely resembling the narrative provided by most commentary derived from “economists.” It has been a universal theme in the retail industry that “second-quarter sales would not make up for weakness in the first quarter”, which all sounds suspiciously like something far worse than just an aberration of snow or GDP figuring. It is very striking as to how much this sentiment has shifted just in the past few weeks. After the GDP revisions and second quarter preliminary release, most commentary focused on the “surge” in activity and how that completely erased the lingering doubts after the shocking and unexpectedly wintry winter quarter. Such optimism has been encoded by previously unshakable beliefs in monetary command, to the point of oftentimes incongruent and incoherent analysis.

Included in this disappointment over the second quarter’s results is an almost earnest bitterness about the failure of promises to become realized. I can’t tell yet if it is a reawakening of some overdue skepticism and actual doubts about the efficacy of everything that has been guaranteed and offered by central planning intrusion, but reactions are far more subdued, the tone clearly shifted. While retailers still bank on back-to-school sales for a bit of a bounce, many had also hoped the spring and early summer would bring positive news after an extremely difficult winter. But so far, retail results for the quarter have generally been muted. Walmart executives said Thursday that American customers continued to be cautious, concerned about the cost of living and the country’s employment landscape.

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Has been for ages.

The GDP “Growth” Story Is Getting Tired (Alhambra)

There is little for me to say about the GDP figures from Europe, released this week to much shock and discomfort, as I am frankly tired of GDP and eagerly await the unhonored end of its continued mainstream “significance.” The largest problem with it is that its correlation with actual economic results has clearly broken down from whatever it had to begin with. It was designed as a measure of Keynesian understanding of economic function (governments add to the economy?), but for the most part during the post-war period there was at least stronger ties to the general ideas of economy. We are, however, in a new paradigm that has changed, structurally, almost every facet of economic function.

Yet, a positive number on a GDP report is still taken as a definitive sign that all is well, and any system with it is on the road to recovery and eventually true growth. Some of that is the embedded tendency (desire) for econometrics to extrapolate in a straight line, but it is equally if not more so the deficiency of trying to put a dollar (or euro) figure on the assumed value of everything produced and traded as if that were the ultimate aim of an economic system. In that case, what are we really measuring, the economy or the dollar (or euro)? From the Wall Street Journal:

Germany’s economy, long Europe’s growth engine, shrank for the first time in more than a year, a development economists largely attributed to a mild winter that boosted activity in the first quarter at the expense of the second. The bigger concerns, they say, are France and Italy, where respectable rates of growth aren’t even in sight. “The euro-zone recovery never really got going, and now it appears to be petering out,” said Simon Tilford, deputy director of the Centre for European Reform, a nonpartisan London think tank.

Setting aside how “at the expense of the second” might actually make sense in an economic context, the reason “it appears to be petering out” is simply that it was never there to begin with. Sure, some central bank centrally planned to redistribute some piece of finance from another piece, and believed that would create positive numbers for measuring the euro-value of traded entities, but no wealth has been created and it is quite likely the fact that such redistribution actually eroded further existing wealth. The persistence of such corrosion is the continually sinking of economic function, with generalized interruptions in that downward course mistaken for “recovery.”

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Perhaps.

QE Will Come To The Eurozone – And It Will Be A Failure (Schlichter)

The data was not really surprising and neither was the response from the commentariat. After a run of weak reports from Germany over recent months, last week’s release of GDP data for the eurozone confirmed that the economy had been flatlining in the second quarter. Predictably, this led to new calls for ECB action. “Europe now needs full-blown QE” diagnosed the leader writer of the Financial Times, and in its main report on page one the paper quoted Richard Barwell, European economist at Royal Bank of Scotland with “It’s time the ECB took control and we got the real deal, instead of the weaker measure unveiled in June.” I wonder if calls for more ‘stimulus’ are now simply knee-jerk reactions, mere Pavlovian reflexes imbued by five years of near relentless policy easing. Do these economists and leader writers still really think about their suggestions? If so, what do they think Europe’s ills are that easy money and cheap credit are going to cure them?

Is pumping ever more freshly printed money into the banking system really the answer to every economic problem? And has QE been a success where it has been pursued? The fact is that money has hardly been tight in years – at least not at the central bank level, at the core of the system. Granted, banks have not been falling over one another to extend new loans but that is surely not surprising given that they still lick their wounds from 2008. The ongoing “asset quality review” and tighter regulation are doing their bit, too, and if these are needed to make finance safer, as their proponents claim, then abandoning them for the sake of a quick – and ultimately short-lived – GDP rebound doesn’t seem advisable. The simple fact is that lenders are reluctant to lend and borrowers reluctant to borrow, and both may have good reasons for their reluctance.

Do we really think that Italian, French, and German companies have drawers full of exciting investment projects that would instantly be put to work if only rates were lower? I think it is a fairly safe bet that whatever investment project Siemens, BMW, Total and Fiat can be cajoled into via the lure of easy money will by now have been realized. The easy-money drug has a rapidly diminishing marginal return.

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And 3% is still an historic abberation.

Interest Rate Rises To 3% Might Be More Than UK Economy Can Bear (Observer)

All the anguish over interest rates – when they will rise and by how much – illustrates both the power and impotence of our central banks. They have power when governments fence themselves in with austerity, limiting the ability of ministers to aid the recovery and leaving central bankers the only ones able to get money flowing into the economy. But their spending does little more than offset austerity and the continuing failure of commercial banks to lend to households and businesses for anything other than the purchase of a prized property asset. As soon as they try to influence the economy in the other direction – say by raising rates – they are forced to back down. Bank of England governor Mark Carney says he is watching and waiting for the right time to raise rates. Why does he think they should go up? Central bankers worry that without a charge for borrowing, lenders cannot reward saving. They also fear that savers, in search of a higher return, will fall prey to the City’s snake-oil salesmen and invest in high-risk assets, causing another financial crash.

It may be laudable to reward saving and provide a decent return on safe assets, thereby discouraging risky behaviour, but the UK’s huge level of household indebtedness effectively rules out much higher base rates: at least not the postwar norm of 4%-5%. Carney agrees and has in so many words put a 3% ceiling on base rates, most likely for the rest of the decade, which must be a reasonable assumption when taking into account low wage growth, no-better-than-moderate business investment and stumbling exports alongside a predicted rise in household debt to 165% of GDP (from 140% in 2013) over the next five years. At least, 3% is a reasonable assumption until the recent experiences of smaller, supposedly less beleaguered, central banks are taken into account. Both Sweden and Norway have tried to rise rates to more “normal” levels only to find it killed high street spending and sent economic growth into reverse. Australia tried it too. Importantly for these central banks, which, like most, have a mandate to maintain inflation at or around 2%, price increases dropped near to zero.

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Soros shakes people’s nerves these days. WHat does he know that they don’t?

George Soros Loads Up On Bearish Market Bet (CNBC)

Soros Fund Management, the large family office that manages assets for billionaire George Soros, raised its protection against a U.S. stock market drop dramatically, sparking concerns that the powerful investment firm is expecting a big fall in equities. During the course of the second quarter, which ended June 30, Soros Fund Management’s position in puts—the right to sell at a certain price at an appointed time in the future—in a popular exchange-traded fund tracking the S&P 500 rose to 11.29 million shares, which appears to be a multiyear high for the investment manager. (During the first quarter, the size of that position was just 1.6 million puts, meaning that the second quarter marked a 606% increase.)

Based on some simple math, and assuming Soros still held the puts and that they were in the money (meaning they would generate gains if they were exercised today), the notional value of the bearish position is roughly $2.2 billion. Soros Fund Management also held calls—the rights to buy S&P ETF shares at an appointed time in the future—as well as outright shares of the ETF, but in much smaller amounts. A Soros spokesman could not immediately be reached for comment on the fund’s market outlook. But competing money managers said not to put too much weight into what is apparently a pessimistic view of U.S. stocks, given that Soros Fund Management may simply be looking for a hedge to counterbalance its many long stock positions.

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Japan’s Keynesian Demise: A Cautionary Tale For Our Times (Stockman)

I remember it well. That is, the fiscal rectitude of the old Japan. During early 1981 as the Reagan White House prepared its radical fiscal plan—-what Senate Majority Leader Howard Baker famously called a “riverboat gamble”—-we were visited by a high ranking delegation from the Japanese finance ministry (MOF). It is no overstatement to say that they were absolutely shocked by the administration’s plan to enact a sweeping 30% income tax cut and double the defense budget—while expecting that it would all balance out as a result of surging economic growth immediately and large domestic spending cuts down the road. The MOF men feared the worst—politely noting the possibility that there would be insufficient economic growth and spending cuts to pay for the Administration’s monumental tax reductions and defense build-up. Then the US would experience an outbreak of massive fiscal deficits—an unprecedented peacetime development that could roil the entire global financial system.

In that apprehension the MOF men turned out to be dead right, and not because they were especially clairvoyant. Back in those benighted times, fiscal rectitude was a widely shared commitment among government financial officials including Congressional Republicans and their conservative counterparts abroad and especially in Japan. Economic policy officials did not have to be hectored about deficits and the fact that there is no such thing as a fiscal free lunch. Indeed, notwithstanding a government led 30-year drive to rebuild their economy from the complete devastation of WWII, Japan’s public debt was only 50% of GDP as of 1980.

That was then. Today Japan’s public debt is 5X greater relative to the size of its economy and tips the scales at 250% of GDP. That is off-the-charts relative to all other large developed economies and has no parallel in previous history. In the interim, of course, Japan succumbed to the Keynesian stimulus disease, betting that after its thundering financial meltdown during the early 1990s it could borrow and print its way back to the prosperity it had known during the period of its post-war economic miracle.

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Debt solves all our problems.

Detroit to Sell Millions in New Debt to Settle Bankruptcy (Bloomberg)

Detroit plans to sell about $975 million in bonds for retirement costs and some creditor settlements as part of its bankruptcy restructuring plan awaiting approval by a federal judge. The Detroit City Council approved four issues yesterday, including $632 million of tax-limited general obligations that would pay 4% interest for the first 20 years and 6% for another 10 years, according to city documents. Detroit, the former capital of the U.S. auto industry, filed a record $18 billion municipal bankruptcy last year after decades of population decline. Michigan’s largest city has been negotiating with many of its biggest creditors, including unions, pension plans and some bondholders.

The $632 million in bonds would finance $450 million for retiree health care through a voluntary employee beneficiary association, agreed to by retirees. Another $34 million would pay claims by the city’s Downtown Development Authority. A sale of $288 million of unlimited-tax general obligation bonds would finance settlements with the city’s unlimited-tax debtholders who agreed to receive 74 cents on the dollar. Those bonds would be issued by the Michigan Finance Authority and backed by state aid to the city. A $55 million issue would finance a settlement with holders of limited-tax debt, who would receive 34% of their claims. The council also approved refinancing for $5.5 billion of the city’s water and sewer debt. The water system, which serves about 40% of the state’s population, has issued a tender offer to buy back a portion of the bonds in hopes of reducing costs and raising money for improvements.

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Iraq’s Largest Dam New Focus of Expanding U.S. Airstrikes (Bloomberg)

The U.S. targeted Sunni militants’ positions near Iraq’s largest dam in a sign of the expanding reach of airstrikes designed to push back the Islamic State. After a week of strikes confined to Erbil and Mount Sinjar, U.S. fighter jets and armed drones struck yesterday near Mosul, Iraq’s second largest city, to help wrest control of the dam seized by Islamic State forces earlier this month. The combination of Navy F-18 and Air Force F-16 fighters, along with the drones, marked the largest deployment of U.S. aircraft since the strikes began on Aug. 8, according to a U.S. defense official who spoke on condition of anonymity.

The strikes are part of a U.S. effort that President Barack Obama announced to halt the advance of the Sunni insurgency. Militants calling themselves the Islamic State have rampaged through OPEC’s No. 2 oil producer, seizing border posts, beheading foes and targeting dams whose destruction could flood areas near Baghdad and Mosul. The dam near Mosul is the most important asset the group captured since taking Nineveh province in June. The Islamic State also controls several oil and gas fields in western Iraq and eastern Syria, generating millions of dollars in daily revenue to help fund the caliphate it announced and strengthen its grip on territory it has seized. Zuhair al-Chalabi, head of the National Reconciliation Committee in Mosul, said in a phone interview that towns near the dam would need to be captured before Kurdish forces known as the peshmerga could attempt to retake the dam.

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After all the mud they threw on it?

Ukraine Officially Recognizes Russian Aid Convoy As Humanitarian (RT)

Ukraine Minister of Social Policy Lyudmila Denisova has signed an order officially recognizing the Russian convoy stuck at the border as humanitarian aid cargo of the International Committee of the Red Cross. “In accordance with Articles 4 and 5 of the Law of Ukraine ‘On Humanitarian Aid’ considering the initiative of the President of Ukraine Petro Poroshenko on receiving humanitarian aid within the framework of international humanitarian missions under the auspices of the International Committee of the Red Cross (ICRC) to recognize the cargo as humanitarian aid,” the document reads. The Russian aid shipment consists of 12 types of goods weighting 1856.3 tons according to an official letter from the Red Cross received by the Ukrainian ministry on Saturday, which complies with the cargo declared by Russia. “The recipient of humanitarian aid is the mission of the International Committee of the Red Cross in Ukraine. The cargo will be moved into Ukraine by the ICRC through the ‘Donetsk’ checkpoint,” Kiev cited the ICRC letter.

Kiev granted Russian cargo humanitarian aid status after the Red Cross sent a petition to Kiev to allow the Russian humanitarian aid to enter eastern Ukraine, after the Russian cargo was held at the Ukrainian border since August 14. “There remains one, of course, major challenge: we absolutely need security guarantees from all parties concerned before we can start moving,” Red Cross official Pascal Cuttat told the media on Saturday. It is still unknown when the convoy will be allowed to enter Ukrainian territory as the procedures of the cargo clearing customs have reportedly not yet been completed. There has also been no word from Kiev about the security of the humanitarian mission following Friday’s statement from Russia’s Foreign Ministry that Kiev forces might attempt to block the agreed route and disrupt the aid delivery to Lugansk.

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Obama and Putin should both sit in on these meetings, and not be allowed to leave before a solution is found.

Ukraine-Russia Talks Seek to Ease Crisis Amid Aid Accord (Bloomberg)

Foreign ministers from Ukraine and Russia will meet today in Berlin after officials agreed on a plan that would allow the Red Cross to accompany a Russian aid convoy stuck near the two countries’ border. Ukraine’s Pavlo Klimkin and Russia’s Sergei Lavrov will hold talks with their German and French counterparts to ease tensions after Ukraine officials said Aug. 15 that their troops had destroyed part of an armored convoy from Russia. Today’s meeting may be a first step toward a new peace summit, French President Francois Hollande’s office said in a statement. European leaders are pushing to halt the conflict that has fractured Ukraine since Russia annexed the Crimean peninsula in March, touching off a wave off sanctions that have hurt trade and threatened to send President Vladimir Putin’s economy into recession.

Finnish President Sauli Niinistoe conferred with Ukrainian President Petro Poroshenko in Kiev yesterday, and said he carried with him a message from Putin, with whom he had met the day before. “A quick resolution of the crisis remains unlikely,” Otilia Dhand, an analyst at Teneo Intelligence in London who specializes in eastern Europe, said by e-mail. “The new round of talks in Berlin might at best bring a slight detente and potentially avert a further escalation over the next days.” In the accord reached yesterday, Ukrainian officials agreed to accept humanitarian aid from Russia that will be delivered to the nation’s southeastern region under the supervision of the International Committee of the Red Cross. That area has been controlled by pro-Russian separatists.

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Good man.

Pope Francis Urges Affluent To Hear ‘Cry Of The Poor’ (Reuters)

Pope Francis on Saturday celebrated a huge open-air Mass in the center of Seoul, where he denounced the growing gap between the haves and have-nots, urging people in affluent societies to listen to “the cry of the poor” among them. The pope made his remarks in the homily of a Mass where he beatified 124 Korean martyrs who were killed in the 18th and 19th centuries for refusing to renounce Christianity. Beatification is the last step before sainthood in the Roman Catholic Church. In his homily before a crowd of hundreds of thousands, many of whom had waited for hours on a steamy morning, Francis said the martyrs’ courage and charity and their rejection of the rigid social structures of their day should be an inspiration for people today.

“Their example has much to say to us who live in societies where, alongside immense wealth, dire poverty is silently growing; where the cry of the poor is seldom heeded and where Christ continues to call out to us, asking us to love and serve him by tending to our brothers and sisters in need,” he said. It was a theme the pope has been repeating since he arrived in South Korea on Thursday for his first trip to Asia since his election in March 2013, and has been a lynchpin of the papacy of the first non-European pontiff in 1,300 years. Last year, in the first major written work of his papacy, Francis attacked unfettered capitalism as “a new tyranny”, urging global leaders to fight poverty and growing inequality.

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That’s a really scary graph.

California’s Record Heat Is Like Nothing You’ve Ever Seen .. Yet (Bloomberg)

If hot thermometers actually exploded like they do in cartoons, there would be a lot of mercury to clean up in California right now. The California heat this year is like nothing ever seen, with records that go back to 1895. The chart below shows average year-to-date temperatures in the state from January through July for each year. The orange line shows the trend rising 0.2 degrees Fahrenheit per decade. The sharp spike on the far right of the chart is the unbearable heat of 2014. That’s not just a new record; it’s a chart-busting 1.4 degrees higher than the previous record. It’s an exclamation point at the end of a long declarative sentence. The high temperatures have contributed to one of the worst droughts in California’s history. The water reserves in the state’s topsoil and subsoil are nearly depleted, and 70% of the state’s pastures are rated “very poor to poor,” according to the USDA.

By one measure, which takes into account both rainfall and heat, this is the worst drought ever. While the temperatures are extreme, they’re not entirely unexpected. The orange trend line above is consistent with rising temperatures across the globe. Average surface temperatures on Earth have warmed roughly 1.4 degrees Fahrenheit since 1880, according to NASA. The eastern half of the U.S. has had an unusually cool 2014, but it’s a lone exception compared to the rest of the planet. The International Panel on Climate Change, which includes more than 1,300 scientists, forecasts temperatures to rise 2.5 to 10 degrees Fahrenheit over the next century. That puts California’s record heat well within the range of what’s to come, turning this “hot weather” into, simply, “weather.”

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Could take years as well. A whole group of patinets in isolation escaped their hospital today in Liberia.

Curbing Ebola Spread in West Africa Could Take Six Months (Bloomberg)

It will take months to curb an Ebola outbreak in West Africa that probably involves far more cases than the 2,100 officially recorded by governments there, global health leaders said. “We are not talking weeks; we’re talking about months to get an upper hand on the epidemic,” Joanne Liu, international president of Doctors Without Borders, said yesterday at a news conference in Geneva. Liu, whose organization has almost 700 health workers in West Africa, said a turnaround should take six months and called for more help by global health groups against the outbreak. She said others need to “step up to the plate” in aiding the four countries battling the virus.

“It needs to happen now if we want to contain this epidemic,” Liu said. She said more health-care workers are needed to follow up on cases and educate the public about what the disease and the outbreak entails. “Some of our staff, they are not accepted in their village anymore,” Liu said. The outbreak “will only improve if we improve understanding of the disease. Everyone is living with fear.” Liu’s comments followed by a day a statement from the World Health Organization that their staff members “at the outbreak sites see evidence that the number of reported cases and deaths vastly underestimate the magnitude of the outbreak.”

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Fun!

New Plant Language Discovered (DIscovery)

People tend to be fixated upon the question of whether talking to your plants stimulates them to grow, but scientists have known for several decades that various plant species talk among themselves — not with words, but by releasing chemical signals into the air that warn other trees about impending insect attacks. Most of the nearly 50 studies on the subject have found evidence of plant communication. Add to that proof a study in the Aug. 15 issue of the journal Science by a Virginia Tech researcher, who has discovered that different plant species can share genetic information at the molecular level. Jim Westwood, a professor of plant pathology, physiology, and weed science at the university, found evidence of this new communication mode by investigating the relationship between dodder, a parasitic plant that oddly looks like strands of spaghetti, and the flowering plant Arabidopsis and tomato plants to which it attaches and sucks out nutrients with an appendage called a haustorium.

Several past studies have indicated that dodder use chemical cues to find their host plants. But Westwood has uncovered a genetic means of communication as well — an exchange of RNA, a substance that translates information in the DNA forming an organism’s genetic blueprint. He reports that many thousands of mRNA molecules were being exchanged between the parasite and host, creating this open dialogue between the species that allows them to freely communicate. “The discovery of this novel form of inter-organism communication shows that this is happening a lot more than any one has previously realized,” the scientist said in a Virginia Tech press release. “Now that we have found that they are sharing all this information, the next question is, ‘What exactly are they telling each other?’” One possibility: Dodder may be telling the host to lower its defenses and allow it to drain nutrients.

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Jun 112014
 
 June 11, 2014  Posted by at 1:51 pm Finance Tagged with: , ,  


Detroit Publishing Co. Japanese Rolling Balls, Coney Island, Cincinnati 1910

We’ve carried a lot of news on Japan’s deteriorating economic and financial situation so far this year (and before), but perhaps it’s now time to wonder how much longer until the rising sun comes apart at the seams. To date, the worst fears over a trend of deflationary pressures, diminishing wages and enormously bloated government debt were somewhat cooled by the assumption that the Japanese people were still avid savers, and so they would be able to withstand quite a bit of turmoil. But that may now have come to an end. And what happens after is very hard to tell, David Stockman calls it a financial no man’s land. What seems certain is that yields on government bonds will soar. Putting pressure on both government and households that will feel like suffocation. Japan has printed its way into survival for decades, and that escape route, the only one they had, looks to be blocked soon. Stockman:

How Japan Blew Its Savings Surplus: What A Keynesian Dystopia Looks Like

Financially speaking, Japan is fast becoming a Keynesian dystopia. Its entire economy is now hostage to a fiscal time bomb. Namely, government debt which already exceeds 240% of GDP and which is growing rapidly because even the recent traumatic increase in the sales tax from 5% to 8% does not come close to filling the fiscal gap. Moreover, even at today’s absurdly low and BOJ rigged bond rate of 0.6% nearly 25% of government revenue is absorbed by interest payments. Now comes the coup de grace. Japan’s savings rate has collapsed (see below) and its vaunted current account surplus is about ready to disappear.

This means Japan’s accounts with the rest of the world will cross-over into a “financial no man’s land”; it will be forced to steadily liquidate its overseas investments to pay its current bills—an investment surplus built up over the course of 50 years. But this will also reduce foreign earnings and thereby expand Japan’s growing deficit on current account. Accordingly, to finance its “twin deficits” it will have to attract massive amounts of foreign capital for decades to come—an imperative which will require a devastating rise in interest rates, perhaps as high as 4% according to one expert :

The yield on Japan’s benchmark 10-year government bond, now around 0.6%, could rise to 4% – a level unseen since March 1995 — should the current-account balance drop into deficit as public debt eclipses the nation’s savings, said Toshihiro Nagahama, chief economist at Dai-ichi Life Research Institute.

Needless to say, were the carry-cost of Japan’s towering fiscal debts to rise by even half that much it would be game over. Interest expense would absorb virtually 100% of current policy revenue, forcing the government to raise taxes over and over. One expert quoted in the Bloomberg article below says that a sales tax of 20% – nearly triple the recently enacted level – would be required to wrestle down the fiscal monster that would result from interest rate normalization.

Unless the government raises the sales tax to 20% or makes drastic reform on social welfare spending, this scenario is highly likely,” said Ogawa. “Higher interest rates will discourage domestic capital investment and spur the shift of production abroad, increasing the number of people unemployed.”

The above quote strongly hints why Keynesian dystopia is an apt description of what is emerging in Japan; and why that descriptor is also reflective of the financial horror show that is coming to our own financial neighborhood a decade or two down the road. As indicated above, the alternative to an economy killing 20% sales tax is “drastic reform of social welfare spending”. But the latter is not even a remote possibility. Japan’s population is both shrinking and also aging so rapidly that it’s fast on its way to become an archipelago of old age homes.

Here is what happened to the Japanese rate:

Japan savings rate as shown below has dropped from in excess of 20% during its 1970s and 1980s heyday as a mercantilist export power to only 3% today. When Japan’s retired population reaches nearly 40% of the total in the years ahead, this rate will obviously go negative as households liquidate savings in order to survive.

On May 14, the Wall Street Journal ran a piece by Eleanor Warnock that had an updated and slightly different chart, and that suggested savings in the fiscal year through March may have already been below zero:

Are Japanese Eating into Their Savings?

Once some of the world’s biggest savers, Japanese likely dipped into their savings and spent more than they made in the fiscal year through March, the first time Japan’s households have been in the red on an annual basis since World War II. Economists say that gross domestic product data due Thursday will suggest Japan’s household savings rate – the ratio of savings to disposable income – turned negative in the last fiscal year.

That’s because household spending likely jumped 2.4% on year in the period, according to forecasters, largely due to rush demand ahead of a sales-tax increase that took effect April 1. That would be the biggest rise in household spending in a fiscal year since 1996. Since disposable income remained flat, economists say, it was likely enough to help push the household saving rate into the red.

Teizo Taya, an economist and former member of the Bank of Japan policy board who estimates a negative savings rate of between 0.2 and 0.4% in the last fiscal year, says consumer spending might be strong enough to withstand the sales-tax hike. “If the decline continues, the current recovery may be able to continue even in the face of the tax hike,” Mr. Taya said. But there are sizeable risks as consumers become more spendthrift. One is that wages don’t rise concomitantly. That could leave Japanese saddled with debt and crush the newfound optimism.

“It’s not a very good thing for the household savings rate to fall in the red, as it’s a sign that consumers aren’t making enough,” said NLI Research Institute economist Taro Saito, who expects a negative savings rate of 0.4% in the just-ended fiscal year. Another risk for Japan, where public debt is more than three times annual national output, is that a negative savings rate leaves the economy more dependent on foreign financing. Japan boosters have long argued the country can sustain its large debt, the biggest among industrialized nations, because it can borrow from a large pool of domestic savings. Any change in that is a risk.

That last point there is the money quote: the government had been able to continue borrowing because Japanese savers bought its bonds. with a negative savings rate, it no longer can. And foreign investors won’t pick up the slack at an 0.6% rate. I’d also like to note that suggestions that an economy can recover because its people get poorer, don’t fly with me. That’s just economics mumbo jumbo. And we’re not done yet. Stockman continues:

What happened to Japan’s huge savings surplus? The government borrowed it! And wasted it on massive Keynesian stimulus projects that kept the LDP in power for decades but produced bridges and highways to nowhere that will be of no use to Japan’s retirement colony as it ages. And the adverse demographic tide is indeed powerful as shown by the curve below on Japan’s working age population. In a few short years what was a working age population that peaked at 88 million has dropped to 79 million; and it will plunge to below 50 million persons in the next two decades.

What the Keynesian witch-doctors who advised Japan to bury itself in fiscal stimulation after its financial crisis of 1989-1990 did not explain was how this inexorably shrinking working population could possibly shoulder the tax burden needed to carry Japan’s massive public debt. Yet there is no other way out of the Keynesian debt trap in which Japan is now impaled. As the current account, also shown below, continues to worsen, the need to import capital to fund the gap will drive interest rates sharply higher. The burden on Japan’s remaining taxpayers will become crushing.

I don’t find that Stockman’s arguments become stronger when his every second word is Keynesian, quite the contrary, but that’s his hobby horse right now. Not that he’s wrong, but we already got it, and this is not a game of pick your ideology; it’s much more. Stockman then has a pair of devastating and illuminating graphs:

… the graph below should be pasted on every US Congressman’s forehead. When the debt spiral goes too far – it becomes a devastating financial trap. And it cannot ultimately be solved with money printing because if carried to an extreme – even for the so-called reserve currency – it will destroy the monetary system entirely.

It should also never be forgotten that the drastic degeneration of Japan’s public finances happened in real time – within less than two decades after its leadership was bludgeoned into one fiscal spasm after the next by Keynesian officialdom in the US Treasury, the IMF, the OECD and elsewhere. And this is clearly a case of bad ideas imported from abroad. The generation of officials who lead Japan’s post-war miracle may have been hopelessly addicted to unsustainable models of mercantilist export promotion and currency pegging, but they were not believers in Keynesian borrow and spend.

It’s not just US Congressman who should look at the graphs above and below, it’s European leaders and Chinese party members too, and everyone else. You cannot fight too much debt with more debt. You can perhaps fight some that way, but not too much of it. And while nobody has the government debt that Japan has – as of yet -, how is any major country going to keep itself from going the exact same way if current trends hold?

And we’re still not done. Because Shinzo Abe’s hand is diving and delving deeper into the pockets of the world’s largest pension fund, and ordering it to sell off Japanese bonds into a market that really has just one buyer, the Bank of Japan. As if Abenomics wasn’t scary enough yet, or enough of a failure. This is the Wall Street Journal’s same Eleanor Warnock’s take:

Giant Japanese Fund Set to Invest More in Stocks, Foreign Bonds

Japan’s $1.26 trillion public pension fund will likely announce a boost to stock and foreign-bond investments in early autumn, the head of its investment committee said Tuesday, potentially sending tens of billions of dollars into new markets. A shuffle at the world’s largest pension fund would achieve one of Prime Minister Shinzo Abe’s objectives and could help invigorate Japan’s economy, which is beginning to emerge from a decadeslong era in which investors mostly avoided risk. [..]

She tries the positive spin approach, but does include a warning too:

The changes could raise uncertainty for tens of millions of Japanese who count on steady pension payouts in retirement. With its traditional focus on Japanese sovereign debt, the fund has performed relatively well in recent years despite extremely low debt yields, in part because the country’s deflationary environment was good for bonds. “The [Government Pension Investment Fund] shouldn’t be used as a tool for short-term-oriented intervention in asset markets. It’s not a piggy bank for short-term policy purposes. Each penny of the GPIF is pension money,” said Nobusuke Tamaki, a former fund official who now teaches at Otsuma Women’s University.

While David Stockman has no intention of taking any prisoners:

Japan Pension Fund Plans Masssive Bond Dump Into Dead Market (Stockman)

So this is how it works. Japan has the most massive public debt in the world relative to national income, but the implicit aim of Abenomics is to destroy the government bond market. After all, if inflation goes to 2% or higher, government bonds yielding 0.6% will experience thumbing losses. Even the robotic Japanese fund managers no longer want to hold the JGB—- as evidenced by another session when no future contracts on either the 10-year or 20-year bond changed hands. As Zero Hedge noted,

You know things have got a little too strange when the largest government bond market in the world saw no futures trades in the morning session last night.We may complain in the US of falling volumes but none, zero, zip, nada is about as low as it gets; and that is how many trades occurred in the 20Y futures contract in Japan (and 10Y cash bond market). This is not the first time as Mizuho warned in Nov 2013 that “to all intents and purposes, there is no JGB market.” And this lack of trading on a day when major macro data printed far worse than expected … well played Abe … you entirely broke your bond market.

In effect, the BOJ is the bond market—that is, the buyer of first, last and only resort. Yes, there are upwards of $12 trillion of Japanese government debt and other obligations outstanding. In normal times, a bond market that didn’t trade in the context of such a massive overhang would have produced sheer panic and bedlam among officialdom. But not in this Keynesian day and age. The implicit assumption is that the BOJ can ultimately buy all the bonds ever issued and the massive outpouring of new bonds yet to come.

After endless prodding by the Abe government, Japan’s pension system (GPIF) will now begin to massively dump hundreds of billion of JGBs. This is being done, of course, to stimulate the Japanese economy by putting pensioners in harm’s way. The cash to be derived from this program of bond dumping will used to purchase Japanese and international equities, along with real estate, private equity, hedge funds and other “alternative asset” classes. And who will buy negative return bonds to be dumped by the GPIF? Why, the BOJ. In Japan, all financial roads lead to the printing press.

Both Japan’s government and its central bank demonstrate in living color what the limits are for governments and central banks when it comes to manipulating economies and markets. And it would be a very good idea for all their peers worldwide to take note. And all of their underlings too. But I have a hunch we will need to see this through to its bitter end before that happens. When its economy crashed early 1990s Japan made one fatefully horrible decision: to not cleanse its banks of their debts, to do basically no defaults or restructuring. And this is the price they’re going to be paying for that decision: once there are no buyers for their cheap debt anymore, the fall will be deep, steep and fast. The rapidly ageing population will see their pension provisions plummet in value, and everyone will see taxes rise more than they can presently imagine just to keep a semblance of a government in place. If we keep up the same approach, in Europe and the US, our foreland too will be no man’s land and nowhere.

World Bank: ‘Time To Prepare For The Next Crisis’ (CNBC)

Bad weather in the U.S., the crisis in Ukraine, rebalancing in China and the anticipated rise in interest rates will hit global growth this year, according to the World Bank, which has urged countries to continue urgent reforms. The Washington-based organization, a United Nations agency which provides loans to developing countries, has downgraded its global growth estimates for this year to 2.8%, from a January forecast of 3.2%. “We are not totally out of the woods yet,” Kaushik Basu, the bank’s senior vice president and chief economist, said in a press release. “A gradual tightening of fiscal policy and structural reforms are desirable to restore fiscal space depleted by the 2008 financial crisis. In brief, now is the time to prepare for the next crisis.”

Developing countries singled out for special attention included Ghana, India, Kenya, Malaysia, and South Africa. The bank urged these countries to tighten fiscal policy and reinvigorate structural reforms. Growth for developing countries is now eyed at 4.8% this year, down from its January estimate of 5.3%, it said. China is expected to grow by 7.6% this year, it added, but said this would depend on the success of rebalancing efforts by its government and predicted wide “reverberations across Asia” if a feared hard landing occurred. “Growth rates in the developing world remain far too modest to create the kind of jobs we need to improve the lives of the poorest 40%,” President Jim Yong Kim said. “Countries need to move faster and invest more in domestic structural reforms to get broad-based economic growth to levels needed to end extreme poverty in our generation.”

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World Bank Cuts Global Growth Forecast After ‘Bumpy’ 2014 Start (Bloomberg)

The World Bank cut its global growth forecast amid weaker outlooks for the U.S., Russia and China, while calling on emerging markets to strengthen their economies before the Federal Reserve raises interest rates. The Washington-based lender predicts the world economy will expand 2.8% this year, compared with a January projection of 3.2%. The U.S. forecast was reduced to 2.1% from 2.8% while outlooks for Brazil, Russia, India and China were also lowered. The setbacks may be temporary: the 2015 estimate for world economic growth was unchanged at 3.4%.

“The global economy got off to a bumpy start this year buffeted by poor weather in the United States, financial market turbulence and the conflict in” Ukraine, the World Bank said in its Global Economic Prospects report yesterday. “Despite the early weakness, growth is expected to pick up speed as the year progresses.” Developed economies, where domestic demand is improving as fiscal pressure eases and labor markets recover, are providing the global expansion with momentum just as their developing counterparts fail to accelerate. The bank is projecting growth in China and Brazil will slow this year from 2013. In the report, the World Bank warned emerging markets that the next bout of financial unrest may catch them off guard, recommending smaller budget deficits, higher interest rates and measures to boost productivity.

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Stockman’s original title: ‘All Japanese Financial Roads Lead To The Printing Press: How The Government Pension Fund Plans A Masssive Bond Dump Into A Dead JGB Market’.

Japan Blew Its Savings Surplus To Enter Financial No Man’s Land (Stockman)

Financially speaking, Japan is fast becoming a Keynesian dystopia. Its entire economy is now hostage to a fiscal time bomb. Namely, government debt which already exceeds 240% of GDP and which is growing rapidly because even the recent traumatic increase in the sales tax from 5% to 8% does not come close to filling the fiscal gap. Moreover, even at today’s absurdly low and BOJ rigged bond rate of 0.6% nearly 25% of government revenue is absorbed by interest payments. Now comes the coup de grace. Japan’s savings rate has collapsed (see below) and its vaunted current account surplus is about ready to disappear.

This means Japan’s accounts with the rest of the world will cross-over into a “financial no man’s land”; it will be forced to steadily liquidate its overseas investments to pay its current bills—an investment surplus built up over the course of 50 years. But this will also reduce foreign earnings and thereby expand Japan’s growing deficit on current account. Accordingly, to finance its “twin deficits” it will have to attract massive amounts of foreign capital for decades to come—an imperative which will require a devastating rise in interest rates, perhaps as high as 4% according to one expert :

The yield on Japan’s benchmark 10-year government bond, now around 0.6%, could rise to 4% – a level unseen since March 1995 — should the current-account balance drop into deficit as public debt eclipses the nation’s savings, said Toshihiro Nagahama, chief economist at Dai-ichi Life Research Institute.

Needless to say, were the carry-cost of Japan’s towering fiscal debts to rise by even half that much it would be game over. Interest expense would absorb virtually 100% of current policy revenue, forcing the government to raise taxes over and over. One expert quoted in the Bloomberg article below says that a sales tax of 20% – nearly tripple the recently enacted level – would be required to wrestle down the fiscal monster that would result from interest rate normalization.

Unless the government raises the sales tax to 20% or makes drastic reform on social welfare spending, this scenario is highly likely,” said Ogawa. “Higher interest rates will discourage domestic capital investment and spur the shift of production abroad, increasing the number of people unemployed.”

The above quote strongly hints why Keynesian dystopia is an apt description of what is emerging in Japan; and why that descriptor is also reflective of the financial horror show that is coming to our own financial neighborhood a decade or two down the road. As indicated above, the alternative to an economy killing 20% sales tax is “drastic reform of social welfare spending”. But the latter is not even a remote possibility. Japan’s population is both shrinking and also aging so rapidly that its fast on its way to become an archipelago of old age homes. Japan savings rate has dropped from in excess of 20% during its 1970s and 1980s heyday as a mercantilist export power to only 3% today. When Japan’s retired population reaches nearly 40% of the total in the years ahead, this rate will obviously go negative as households liquidate savings in order to survive.

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Is Japan Turning to Voodoo Economics? (Bloomberg)

Sour grapes are in season in Tokyo as Shinzo Abe’s predecessor steps up and slams the prime minister’s tax plans. But beneath the bad feelings and twinge of regret, Yoshihiko Noda makes a very timely point when he accuses Abe of buying into Ronald Reagan’s debunked theories on trickle-down prosperity. “It’s a kind of voodoo economics,” Noda said of the “Abenomics” program that has thrust Japan back into the global spotlight. Noda made those comments, which are sure to irk Abe’s team, to my Bloomberg colleagues Chikako Mogi and Kyoko Shimodoi. The immediate context is Japan’s sales tax, which Noda’s short-lived 2011-2012 government agreed to raise in two steps to contain the world’s highest debt burden. In April, Abe’s government went ahead with the first hike to 8%, but there are questions about the second move to 10% next year.

If the hike doesn’t take place, Noda warned, that “would imply that Japan’s fiscal management strategy will collapse, and the market perception risks are huge.” But far more interesting is Noda’s critique of Abe’s corporate-tax plan. Yes, the nearly 36% levy is among the highest in the world and bringing it down could make Japan a more attractive investment destination. But, as Noda asks, won’t lowering corporate taxes make higher consumption taxes a wash? Absolutely, and the folks at Moody’s and Standard & Poor’s won’t be fooled by this fiscal bait-and-switch. The bigger question is Abe’s faith in the Reagan-era ideology of lowering corporate taxes and reducing levies on profits in order to boost growth, tax revenue and, by extension, living standards. In November 2012, Tokyo unleashed one of modern history’s greatest gestures of corporate welfare, driving the yen down 20%. Nineteen months on, have companies shared the wealth? Nope.

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Giant Japanese Fund Set to Invest More in Stocks, Foreign Bonds (WSJ)

Japan’s $1.26 trillion public pension fund will likely announce a boost to stock and foreign-bond investments in early autumn, the head of its investment committee said Tuesday, potentially sending tens of billions of dollars into new markets. A shuffle at the world’s largest pension fund would achieve one of Prime Minister Shinzo Abe’s objectives and could help invigorate Japan’s economy, which is beginning to emerge from a decadeslong era in which investors mostly avoided risk. “I personally think that we need to complete [the new portfolio] in September or October,” Yasuhiro Yonezawa, head of the Government Pension Investment Fund’s investment committee, said in an interview. “There’s no reason to be slow.” Mr. Yonezawa outlined a tentative plan for a portfolio shift that would raise the allotments of the fund’s assets to go into domestic stocks, foreign bonds and foreign stocks by five%age points in each category.

The aim is twofold: to boost returns to ensure Japanese retirees get the payouts they expect, and to stimulate risk-taking at home by funneling money into growing Japanese businesses. That is in tune with the prime minister’s pro-growth “Abenomics” policies. Since taking office in late 2012, Mr. Abe has exhorted the pension fund to rethink its long-standing conservative investment strategy. Currently, domestic stocks and foreign stocks are each targeted to get about 12% of the fund’s investment. Under the baseline scenario outlined by Mr. Yonezawa, those figures would rise to 17% each, while the portion allotted to foreign bonds would rise to 16% from 11%. Domestic bonds would fall to 40% from 60%, and the portfolio would likely include a new category for alternative investments in areas such as infrastructure, he said. [..]

The changes could raise uncertainty for tens of millions of Japanese who count on steady pension payouts in retirement. With its traditional focus on Japanese sovereign debt, the fund has performed relatively well in recent years despite extremely low debt yields, in part because the country’s deflationary environment was good for bonds. “The [Government Pension Investment Fund] shouldn’t be used as a tool for short-term-oriented intervention in asset markets. It’s not a piggy bank for short-term policy purposes. Each penny of the GPIF is pension money,” said Nobusuke Tamaki, a former fund official who now teaches at Otsuma Women’s University.

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Japan Pension Fund Plans Masssive Bond Dump Into Dead Market (Stockman)

So this is how it works. Japan has the most massive public debt in the world relative to national income, but the implicit aim of Abenomics is to destroy the government bond market. After all, if inflation goes to 2% or higher, government bonds yielding 0.6% will experience thumbing losses. Even the robotic Japanese fund managers no longer want to hold the JGB—- as evidenced by another session when no future contracts on either the 10-year or 20-year bond changed hands. As Zero Hedge noted,

You know things have got a little too strange when the largest government bond market in the world saw no futures trades in the morning session last night.We may complain in the US of falling volumes but none, zero, zip, nada is about as low as it gets; and that is how many trades occurred in the 20Y futures contract in Japan (and 10Y cash bond market). This is not the first time as Mizuho warned in Nov 2013 that “to all intents and purposes, there is no JGB market.” And this lack of trading on a day when major macro data printed far worse than expected… well played Abe… you entirely broke your bond market.

In effect, the BOJ is the bond market—that is, the buyer of first, last and only resort. Yes, there are upwards of $12 trillion of Japanese government debt and other obligations outstanding. In normal times, a bond market that didn’t trade in the context of such a massive overhang would have produced sheer panic and bedlam among officialdom. But not in this Keynesian day and age. The implicit assumption is that the BOJ can ultimately buy all the bonds ever issued and the massive outpouring of new bonds yet to come. Otherwise how can you explain the Wall Street Journal article posted below.

After endless prodding by the Abe government, Japan’s pension system (GPIF) will now begin to massively dump hundreds of billion of JGBs—so that it can reduce its bond holding from 60% of its $1.3 trillion portfolio to 40%. This is being done, of course, to stimulate the Japanese economy by putting pensioners in harm’s way. The cash to be derived from this program of bond dumping will used to purchase Japanese and international equities, along with real estate, private equity, hedge funds and other “alternative asset” classes. And who will buy negative return bonds to be dumped by the GPIF? Why, the BOJ. In Japan, all financial roads lead to the printing press.

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Not good. Faith based finance.

Americans Warming Up to Credit Card Debt Again (Financial Sense)

A few days back we posted this chart on Twitter that clearly indicates an increase in US consumer spending.

Consumer spending January to May

One of the questions discussed was “how is this increased spending financed?”. It’s a fair question, given the painfully slow wage growth in the US. On Friday we got our answer. US consumer credit outstanding spiked way above expectations. While the media focused on the jobs report, this was the key news item:

Consumer credit

Unlike in previous Fed reports that showed consumer credit growth driven by student loans and to a lesser extent auto finance, we saw something new this time around. The increase was caused by a jump in revolving credit. Americans are warming up to using plastic again.

Revolving credit

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Not that big a deal, China has hardly any reserves.

China’s Record Oil Hoarding Seen Keeping Crude Above $100 (Bloomberg)

China is hoarding crude at the fastest pace in at least a decade, shielding itself from supply disruptions and helping keep prices above $100 a barrel. The country imported a record volume in April as it emulates steps taken by the U.S. in the 1970s to create a strategic petroleum reserve, government data show. Chinese President Xi Jinping is building stockpiles as his nation clashes with Vietnam over resources in the South China Sea and faces potential risks to oil sales from Russia, Africa and the Middle East because of sanctions and violence. The purchases are helping drive oil prices higher, according to Barclays Plc, Citigroup Inc. and Nomura Holdings Inc. As China’s thirst for crude grows with the expansion of its emergency stockpiles and refining, the International Energy Agency estimates that the Asian nation is poised to surpass the U.S. as the world’s largest oil consumer by 2030.

“This panicked stockpiling is one of the ways that geopolitical tensions can actually tighten physical oil markets,” Seth Kleinman, a London-based analyst at Citigroup, said yesterday by e-mail. “This buying spree is partly driven by the infrastructure needs of China’s ongoing refinery expansion, but also reflects the rise in geopolitical tensions.” West Texas Intermediate crude, the U.S. benchmark, gained about 9% over the past year to $104.35 a barrel on the New York Mercantile Exchange, while Brent, the marker for more than half the world’s oil, climbed about 5% to $109.52 on the London-based ICE Futures Europe exchange. China bought more than 600,000 barrels a day of surplus crude from January to April, a record for that time of the year based on data compiled by Bloomberg from Chinese statistics tracked since 2004. The surplus supplies are calculated by subtracting refinery runs from the combined total of net imports and domestic production.

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UK must leave EU, and it will, so let’s get it done.

There Is Life After Europe, But Let Us Stop The Triumphalism (AEP)

My chief objection to the CER report is the implicit assumption that the EU would carry on as before after Britain left, as if nothing had happened. This is implausible. The EU is already in existential crisis. The Front National won the French elections with calls for an immediate restoration of the franc and a referendum on Frexit. The Franco-German axis that has held the project together for 50 years has broken down. By launching the euro before the EMU states were ready or able to withstand the rigours of monetary union, and then letting the North-South chasm widen each year, they have led the region into depression and mass unemployment. There is no way out of this under any of the policies being advanced.

The Fiscal Compact ensures that it will go on for another decade or more. This is an intolerable situation. Italy’s Matteo Renzi is already spoiling for a fight. It is far from clear what the EU will look like in 2017 when Britain holds its referendum (unless Labour wins). By then the global cycle of economic expansion might be over, with Europe back in another deep recession before it had ever really shaken off the last one. British withdrawal would not only puncture the EU Project’s aura of historic inevitability but would also change the internal chemistry of the Union. Germany would be placed in a position of hegemony that it does not want, and that would subvert EU cohesion.

It would make France’s subordination even harder to endure, and embolden the Souverainiste camp to look for other solutions. The pro-market states of northern and eastern Europe that tuck in behind Britain would lose their footing. The whole enterprise would become even more unstable at a time when it has already lost its charisma as a motivating idea for the European peoples. I reject the premise that the EU would be calling the political shots in such circumstances, or that Britain would necessarily be a supplicant pleading for terms. The residual EU would be in such crisis that it too would have to tread with extreme care, assuming it was able to come up any coherent terms at all.

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The new fad.

Drugs And Prostitution To Push UK Economy Up By 5% (Guardian)

Britain’s economy could be as much as £65bn bigger – almost 5% – when new GDP figures are published in September incorporating items such as prostitution and drug dealing under new statistical rules. The Office for National Statistics said its latest estimate was that GDP in 2009 was 4.6% higher than previously stated on the back of the planned improvements in measuring the size of the economy. The update will be part of a more inclusive approach to GDP that comes into force in September to comply with EU statistical rules and to “provide the best possible framework for analysing the UK economy and comparing it with those of other countries”. But economists said the change in the size of GDP in official figures, which is unlikely to change the pace of growth in the economy, meant little in reality.

“On paper the economy is £65bn bigger – which is massive. But it is purely an accounting treatment. These activities have always been there – particularly research and development activities – they just weren’t necessarily taken into account in GDP previously,” said Alan Clarke, an economist at Scotiabank. “In isolation, if the economy is 4.6% bigger and nothing else changed, the public finances would look much better – since we tend to look at borrowing relative to GDP or debt relative to GDP. That would be the equivalent of public finances alchemy but we know that the ONS is going to adjust the way it accounts for debt as well – and this is going to be revised higher – so there is no free lunch here.”

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People are scared of homes. Just wait till prices come down again.

The Fed-Induced Demise Of The American Dream (Zero Hedge)

Thanks to free and abundant credit to those at the front of the line, home prices have soared in the last few years as “smart” hedge fund managers have bought homes-to-rent in a yield-grab with both hands and feet. This – as we have noted numerous times – priced out the ‘real’ buyer; who this time, instead of being driven by a “fear of missing out”, would rather not play (only to be left holding the bag). Another unintended consequence courtesy of The Fed’s “main-street-helping” actions that has destroyed the American Dream for a declining middle class. Fewer Americans think it’s a good time to buy a home than at any time in the last 4 years… “recovery”! The trickle-down is not working… the middle-class is tapped out (and releveraging just to get by)… and the Fed’s key transmission mechanism to the masses (housing) has now been broken… let’s hope the market doesn’t drop ever again (or the economy).

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No way out. Stuck.

Fed Prepares to Keep Super-Sized Balance Sheet for Years to Come (Bloomberg)

Federal Reserve officials, concerned that selling bonds from their $4.3 trillion portfolio could crush the U.S. recovery, are preparing to keep their balance sheet close to record levels for years. Central bankers are stepping back from a three-year-old strategy for an exit from the unprecedented easing they deployed to battle the worst recession since the Great Depression. Minutes of their last meeting in April made no mention of asset sales. Officials worry that such sales would spark an abrupt increase in long-term interest rates, making it more expensive for consumers to buy goods on credit and companies to invest, according to James Bullard, president of the Federal Reserve Bank of St. Louis. That “is a widespread view in parts of the Fed, I think, and in financial markets,” Bullard said in an interview last week. While he disagrees with that perspective, it “won the day.”

The Fed is testing new tools that would allow it to keep a large balance sheet even after it raises short-term interest rates, a step policy makers anticipate taking next year. They would use these tools to drain excess reserves temporarily from the banking system. “It is pretty clear they are anticipating operating in a situation with a lot of reserves and a high balance sheet for a long time,” said former Fed governor Laurence Meyer, a co-founder of Macroeconomic Advisers LLC, a St. Louis-based forecasting firm. The strategy, which would make the Fed one of the biggest players in money markets, carries risks. In a time of crisis, investors could flock to safe short-term instruments created by the Fed, potentially starving the rest of the financial system of funding.

“The whole situation has created a lot of uncertainty,” said Karl Haeling, head of strategic debt distribution at Landesbank Baden-Wuerttemberg in New York. “The Fed is increasingly stepping into what had been a private-sector function.” The Fed’s asset purchases have expanded its balance sheet to 25% of gross domestic product from 6% at the start of 2007. Central banks from Japan to the U.K. also will have to develop strategies for operating with large portfolios. For example, the Bank of England’s is 24% of GDP, up from about 6% in 2007.

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China’s Rehypothecation Scandal In One Chart (Zero Hedge)

Remember how small Greece was and how it wasn’t relevant to US stocks… until suddenly it got close to breaking up the EU and the world’s markets slumped. Remember how small subprime was? Remember how Lehman was not a ‘big’ bank? We hear the same “why would that impact us?” chatter now about the China rehypothecation scandal and we suspect the outcome will be just as dramatic a “whocouldanode” moment for many. The problem, as this chart so simply explains, is “more warrants than the volume of the underlying physical commodities have been issued in the repo business” and that is a problem for every foreign bank that was tempted into China’s carry trade (which is “every” bank). Simply put – the collateral that I promised you on my loan… I also promised to between 10 and 30 other people… but we’re good right?

The “repo” business in commodities in China is similar to any other “repo” business in the financial markets. Generally speaking, the repo is a short-term FX funding vehicle, whereby a commodity owner first sells the commodity warrants issued by bonded warehouses (paired with an equal amount of short positions) to banks, then buys the package back from the banks in 3 to 6 months. It is a way for commodity traders/refiners to gain access to foreign banks’ balance sheets and improve liquidity efficiently. The Qingdao situation alleges the issuance and pledging of more warrants than the underlying physical commodity. Were this to have occurred, foreign banks may be exposed to asset write-offs due to potential collateral shortages and/or losses. As a result, some foreign banks may have reduced or suspended their commodities repo business in China, and could be undertaking further investigation as to whether to make any suspension permanent.

In a world where central banks have encouraged levered carry trades everywhere, a crack in the virtuous circle – such as we are seeing in China’s fractional-reserve commodity financing deal business – will rapidly lead to a sell first (unwind first), think later mentality.

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That Was Then, This is Now (Jim Kunstler)

A hundred years ago, Buffalo was widely regarded as the city of the future. The boon of electrification made it the Silicon Valley of its day. It was among the top ten US cities in population and wealth. It’s steel industry was second to Pittsburgh and for a while it was second to Detroit in cars. Now, nobody seems to know what Buffalo might become, if anything. It will be especially interesting when the suburban matrix around it enters its own inevitable cycle of abandonment. I’m convinced that the Great Lakes region will be at the center of an internally-focused North American economy when the hallucination of oil-powered globalism dissolves. Places like Buffalo, Cleveland, and Detroit will have a new life, but not at the scale of the twentieth century. On this bike tour the other day, I rode awhile beside a woman who spends all her spare time photographing industrial ruins.

She was serenely adamant that the world will never see anything like that era and its artifacts again. I tend to agree. We cannot grok the stupendous specialness of the past century, and certainly not the fact that it is bygone for good. When people use the term “post-industrial” these days, they don’t really mean it, and, more mysteriously, they don’t know that they don’t mean it. They expect complex, organized, high-powered industry to still be here, only in a new form. They almost always seem to imply (or so I infer) that we can remain “modern” by moving beyond the old smoke and clanking machinery into a nirvana of computer-printed reality. I doubt that we can maintain the complex supply chains of our dwindling material resources and run all those computer operations — even if we can still manage to get some electricity from Niagara Falls.

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It’ll get much much worse still.

China’s Environment Goes From Bad to Worse (BW)

Each year, China’s Ministry of Environmental Protection (MEP) releases a “state of the environment” report; it’s a rather grim annual ritual. For all the talk about China’s new “war on pollution” and money pouring into wind farms and river cleanup campaigns, the reality is that, according to most metrics, China’s environmental situation is getting worse, not better. Air pollution in China receives the most attention globally. Despite a recent stretch of fairly nice days in Beijing, according to the MEP’s report, in 2013 only three major Chinese cities met the government’s own standards for urban air quality. Water pollution—and water shortages—may be an even graver problem. The pollution level in several major rivers, including the Yangtze and its tributaries, has grown more severe since 2010.

Meanwhile 11% of the land in the Yangtze’s watershed and adjacent areas was watered by acid rain. 60% of groundwater-testing sites nation wide ranked as “poor” or “very poor” in water quality. Polluted irrigation water and deposition of evaporated heavy metals (mercury, for instance, vaporizes at high temperatures in coal-fired power plants) also taint cropland in China. According to a report released in April by the government, 16% of China’s total land area—and 19 of its agricultural land—is polluted. Heavy metals deposited in the soil can be absorbed by crops. Last May, the provincial government of Guangzhou revealed that 44% of rice samples it tested in local restaurants contained elevated levels of cadmium, which has been linked to the bone-weakening itai-itai disease in Japan.

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How sad is that?

Babies Pay for Detroit’s Fall With Mortality Rate Above Mexico (Bloomberg)

Detroit’s 60-year deterioration has taken a toll not just on business owners, investors and taxpayers. It’s meant misery for its most vulnerable: children and the women who bear them. While infant mortality fell for decades across the U.S., progress bypassed Detroit, which in 2012 saw a greater proportion of babies die before their first birthdays than any American city, a rate higher than in China, Mexico and Thailand. Pregnancy-related deaths helped put Michigan’s maternal mortality rate in the bottom fifth among states. One in three pregnancies in the city is terminated. Women are integral to the city’s recovery. While officials have drawn up plans to eliminate blight, curb crime and attract jobs, businesses and residents, they’re also struggling to save mothers and babies. The abortion patients awaiting ultrasounds at the Scotsdale Women’s Center and the premature infants hooked to heart monitors at Hutzel Women’s Hospital must be cared for before the bankrupt city can heal itself.

“Detroit is a bad place,” said Crystal Cook, 20, as she waited for an appointment at Scotsdale. Men in the city are “out of control. Most of them don’t have jobs, most of them couldn’t provide. Basically in Detroit, women have to do everything themselves.” The crisis transcends the personal, said Gilda Jacobs, a former state senator from suburban Huntington Woods who heads the Michigan League for Public Policy. “If you have families that are suffering, who aren’t going to work, who aren’t being trained for jobs, they’re never going to be taxpayers,” she said. “You need a holistic approach to improving a city. You need jobs, you need good infrastructure, you need transportation, you need good schools — and you need healthy human capital.” “We want every kid to get off to a healthy start,” said Mayor Mike Duggan, who ran the Detroit Medical Center before taking office in January. “There are lots of things we’ve got to fix, but this is one that’s important to me.”

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