Jun 152017
 
 June 15, 2017  Posted by at 9:59 am Finance Tagged with: , , , , , , , , , ,  7 Responses »
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Francisco de Goya Saturn Devouring His Son 1819–1823

 

Fed Raises Rates, Unveils Balance Sheet Cuts In Sign Of Confidence (R.)
The Fed Is Flying Blind (BBG)
Peak Economic Delusion Signals Coming Crisis (Smith)
When the Fed Tightens, It Leads to Financial “Events (Phoenix)
Senate Overwhelmingly Approves New Sanctions To “Punish” Russia (ZH)
What If The Russia Russia Russia Story Was Nothing? (HotAir)
Pentagon Agrees To Sell $12 Billion In F-15s To Qatar (ZH)
The Old Are Eating the Young (Satyajit Das)
Greek Economy Minister Calls Wolfgang Schäuble ‘Dishonest’ (R.)
Greece Is Germany’s ‘De Facto Colony’ (Pol.)
EU Officials Warn Athens Not To Take Debt Issue To Leaders’ Summit (K.)

 

 

It’s getting increasingly frustrating to try and find objective views of anything to do with Trump or Putin. And I don’t want to live in an echo chamber. So I left out Mueller’s Trump investigation.

Yellen is stuck. Next.

Fed Raises Rates, Unveils Balance Sheet Cuts In Sign Of Confidence (R.)

The Federal Reserve raised interest rates on Wednesday for the second time in three months and said it would begin cutting its holdings of bonds and other securities this year, signaling its confidence in a growing U.S. economy and strengthening job market. In lifting its benchmark lending rate by a quarter%age point to a target range of 1.00% to 1.25% and forecasting one more hike this year, the Fed seemed to largely brush off a recent run of mixed economic data. The U.S. central bank’s rate-setting committee said the economy had continued to strengthen, job gains remained solid and indicated it viewed a recent softness in inflation as largely transitory. The Fed also gave a first clear outline on its plan to reduce its $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities, most of which were purchased in the wake of the 2007-2009 financial crisis and recession.

It expects to begin the normalization of its balance sheet this year, gradually ramping up the pace. The plan, which would feature halting reinvestments of ever-larger amounts of maturing securities, did not specify the overall size of the reduction. “What I can tell you is that we anticipate reducing reserve balances and our overall balance sheet to levels appreciably below those seen in recent years but larger than before the financial crisis,” Fed Chair Janet Yellen said in a press conference following the release of the Fed’s policy statement. She added that the balance sheet normalization could be put into effect “relatively soon.” The initial cap for the reduction of the Fed’s Treasuries holdings would be set at $6 billion per month, increasing by $6 billion increments every three months over a 12-month period until it reached $30 billion per month.

For agency debt and mortgage-backed securities, the cap will be $4 billion per month initially, rising by $4 billion at quarterly intervals over a year until it reached $20 billion per month. [..] The Fed has now raised rates four times as part of a normalization of monetary policy that began in December 2015. The central bank had pushed rates to near zero in response to the financial crisis. Fed policymakers also released their latest set of quarterly economic forecasts, which showed only temporary concern about inflation and continued confidence about economic growth in the coming years. They forecast U.S. economic growth of 2.2% in 2017, an increase from the previous projection in March. Inflation was expected to be at 1.7% by the end of this year, down from the 1.9% previously forecast.

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The Fed’s been flying blind for well over 10 years.

The Fed Is Flying Blind (BBG)

The architects of U.S. monetary policy at the Federal Reserve should be happy. They’ve succeeded beyond their own expectations in bringing down the unemployment rate without triggering an outburst of inflation. Stock indexes are near record highs, and interest rates remain low. But those who set interest rates are in the awkward position of not understanding how things got so good—and are therefore confused about what to do next. “The Fed isn’t run by computers, it’s run by people,” says David Rosenberg, chief strategist at Gluskin Sheff. “Like all of us they have their flaws and their blind spots. On June 14, the Federal Open Market Committee voted as expected to raise the federal funds rate a quarter point, to a range of 1% to 1.25%. It said it expects inflation to rise to its 2% target “over the medium term.”

For Fed Chair Janet Yellen and company, the central mystery continues to be why inflation remains below 2% despite unemployment having dropped to just 4.3% in May. Even ex-convicts and high school dropouts are getting job offers one reason why many economists believe it’s inevitable that wages must rise. When you have a shortage of supply of something, its price will go up, says Gad Levanon, chief U.S. economist at the Conference Board, a business-supported research group. A tight job market, however, hasn’t translated into inflation. The Fed’s preferred measure of inflation, the personal consumption expenditures price index, rose just 1.7% in April from a year earlier. On June 14, as the Fed was meeting, the Bureau of Labor Statistics announced that the Consumer Price Index excluding food and energy rose just 0.1% in May, the third surprisingly low reading in three months.

Michael Feroli, chief U.S. economist at JPMorgan Chase., sympathizes with Yellen’s predicament. He said in an interview before the FOMC meeting that Yellen is relying out of necessity on the Phillips curve, which says that lower unemployment leads to higher inflation. “It’s kind of the best we’ve got” as a descriptor of the economy, he says. Still, Feroli couldn’t resist headlining his report on the puzzlingly low CPI number, “Captain Phillips goes overboard.” Some economists worry that the Fed rate increases will abruptly cool the economy by increasing the cost of borrowing via credit cards, auto loans, and student loans, as well as business loans. Rosenberg, who’s more bearish than most economists, points out that recessions occurred 10 of the last 13 times the Fed raised interest rates. He says the U.S. is due for a recession within the next 12 months.

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“The question is not “when” we will enter collapse; we are already in the midst of an economic collapse. ”

Peak Economic Delusion Signals Coming Crisis (Smith)

According to the Atlanta Fed, US GDP in the first quarter of 2017 has declined to 0.7% , going back to lows touched on in 2014 after the Fed reduced QE.

The US has lost 5 million manufacturing jobs since the year 2000, and this trend has accelerated in recent years. Manufacturing in the US only accounts for 8.48% of all jobs according to May statistics. 102 million working age Americans do not currently have a job. This includes the 95 million Americans not counted by the Bureau of Labor because they assume these people have been unemployed so long they “do not want to work”. Thousands of retail outlet stores, the primary engine of the American economy, are set to close in 2017. Sweeping bankruptcies and downsizing are ravaging the retail sector, and internet retailers are not taking up the slack despite highly publicized growth. In 2016, online retail sales only accounted for 8.1% of all retail sales.

Oil inventories continue to amass as US energy demand declines. Declining energy demand is a sure sign of overall economic decline. OPEC and other entities continue to argue that “too much supply” is the issue; an attempt to distract away from the reality of lower consumption and the falling wealth of consumers. Corporate earnings expectations continue their dismal path, suggesting that stock markets have been supported by central bank stimulus and blind investor faith in central bank intervention. The stimulus is now being cut off. How long before investor faith is finally lost?

It is unfortunate that so many people only track stocks when accounting for economic health. They have crippled themselves and their own observations, and actually condescend when confronted with counter-observations and data. They help globalists and international financiers by perpetuating false narratives; sometimes knowingly but often unconsciously. And, when the system does destabilize to the point that they actually realize it, they will blame all the wrong culprits for their pain and suffering. The question is not “when” we will enter collapse; we are already in the midst of an economic collapse. The real question is, when will the uneducated and the biased finally notice? I suspect the only thing that will shock them out of their stupor will be a swift stock market drop, since this is the only factor they seem to pay attention to. This will happen soon enough.

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That much is obvious.

When the Fed Tightens, It Leads to Financial “Events (Phoenix)

The Fed concludes its June meeting today. The Fed fund futures markets put the odds of the Fed hiking rates again at 99.6%. This would mark the third rate hike by the Fed during this cycle. Why would this matter? Because it indicates the Fed is embarked on a serious tightening cycle. One rate hike can be a fluke. Two rate hikes could even be just policy error. But three rate hikes means the Fed is determined.

As Bank of America noted in a recent research note, when the Fed becomes determined to tighten… it usually ends in an “event.” What would an “event” look like for today’s market? A Crash is coming…

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It’s a craze. It’s doing so much damage.

Senate Overwhelmingly Approves New Sanctions To “Punish” Russia (ZH)

The U.S. Senate on Wednesday approved new sanctions to punish Russia for “meddling” in the 2016 election. The bipartisan legislation, which passed with an overwhelming 97-2 vote, slaps new sanctions on Russia and restricts President Trump from easing them in the future without first receiving congressional approval. The only two senators to vote against the measure were Sens. Mike Lee (R-UT) and Rand Paul (R-KY), while Chris Van Hollen (D-Maryland) abstained. Known as the Crapo Amendment, after Mike Crapo (R-Idaho), chairman of the Senate Banking, Housing and Urban Affairs Committee, the measure was endorsed by Foreign Relations Committee Chairman Bob Corker (R-Tennessee) and ranking member Ben Cardin (D-Maryland). The deal was attached to an Iran sanctions bill that is expected to pass later this week.

While top Republican senators had initially wanted to give the White House space to try improving U.S.-Russia relations, but ultimately decided talks with Russia have been moving too slowly. The sanctions against Russia are “in response to the violation of the territorial integrity of the Ukraine and Crimea, its brazen cyber-attacks and interference in elections, and its continuing aggression in Syria,” according to the deal’s sponsors. The amendment also allows “broad new sanctions on key sectors of Russia’s economy, including mining, metals, shipping and railways” and authorizes “robust assistance to strengthen democratic institutions and counter disinformation across Central and Eastern European countries that are vulnerable to Russian aggression and interference.”

New sanctions would be imposed on “corrupt Russian actors” and those “involved in serious human rights abuses,” anyone supplying weapons to the Syrian government or working with Russian defense industry or intelligence, as well as “those conducting malicious cyber activity on behalf of the Russian government” and “those involved in corrupt privatization of state-owned assets.” The biggest neocon in Congress, John McCain, was delighted with the outcome: “We must take our own side in this fight. Not as Republicans, not as Democrats, but as Americans,” said Sen. John McCain (R-AZ) before the vote. “It’s time to respond to Russia’s attack on American democracy with strength, with resolve, with common purpose, and with action.” As AP adds, lawmakers took action against Russia in the absence of a forceful response from President Donald Trump.

While the president has sought to improve relations with Moscow and rejected the implication that Russian hacking of Democratic emails tipped the election his way, non-stop “anonymous sources” have repeatedly leaked “news” to the NYT and WaPo, suggesting Trump colluded with Russia and/or was being probed by the FBI. Following Comey’s testimony, which confirmed there is no “there” there, the media attacks against Trump have shifted, and now accuse the president of obstruction of justice and interference with the FBI’s investigation into Mike Flynn. Speaking earlier on Wednesday, Vladimir Putin’s spokesman Dmitry Peskov said told reporters the Kremlin will hold out with its reaction until the U.S. decides on new sanctions against Russia. “We wouldn’t like to enter this sanctions spiral again. But that’s not our choice.” Indeed, and with the US having made Russia’s choice for them, we now look for Moscow’s response.

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They’ll just keep digging until they find something, and then blow that up way out of proportion.

What If The Russia Russia Russia Story Was Nothing? (HotAir)

Everyone has been busily trying to parse the Jeff Sessions testimony since the Attorney General took the stand but there doesn’t seem to be a lot to work with. Allahpundit talked about the number of times that Sessions declined to answer certain questions about private conversations he had with the president, but that’s some fairly thin gruel to build a presidency-ending scandal out of. But the one question which seems to still be off limits for most of the MSM is the really ugly one: what if this turns out to be a dry hole? Much of the speculation swirling around this entire saga has been based on anonymous sources supposedly spilling secrets about Oval Office conversations or supposed Russians hiding behind the potted plants. With all of that smoke, there certainly must be a fire, right? But that depends whether the smoke is coming from an actual blaze or some reporting blazing up some prime wacky tobacky.

Having hearings was supposed to clear up many of these questions. Take for example the widely reported and frequently repeated assertion that the Attorney General had a third, unreported meeting with the Russians at the Mayflower. That’s been stated so often that it’s basically become an article of faith on CNN and MSNBC. But yesterday Sessions was asked about it and he simply said… no. There was no third meeting. And? What happens now? Unless the New York Times can produce some video or at least a credible witness who saw Session sneaking off into the cloak room with the Russian ambassador or one of his henchmen that’s pretty much a dead end. And that’s falling into a pattern with so many other aspects of the entire tapestry of accusations against the Trump administration, a group of allegedly nefarious traitors who were colluding with the Russians to cripple the American elections.

David French at National Review tackles what may eventually become the biggest question of all. What if that never happened and it was all a fictional tale assembled by the media? “While we certainly aren’t privy to all the relevant information or all the relevant testimony, nothing that James Comey said last week or that Jeff Sessions said today (much less any of the questions directed his way) contained so much as a meaningful hint that the Committee was on the verge of uncovering the political scandal of the century. Rather, the focus keeps shifting to much narrower questions regarding Trump’s decision to fire James Comey — questions that are important but far less historically consequential than any claim that a president or his attorney general are traitors to their country…

Truth is truth, and it’s important for responsible people to not just understand and respond to actual evidence — no matter where it leads — but also acknowledge its absence. And so far the absence of evidence points to Trump’s innocence of some of the worst allegations ever leveled against an American president or his senior team.”

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Pentagon wouldn’t mind a little war.

Pentagon Agrees To Sell $12 Billion In F-15s To Qatar (ZH)

Remember when Trump called on Qatar to stop funding terrorism, claiming credit for and endorsing the decision of Gulf nations to isolate their small neighbor (where the most important US airbase in the middle east is located),even as US Cabinet officials said their blockade is hurting the campaign against ISIS. You should: it took place just 5 days ago. “We had a decision to make,” Trump said, describing conversations with Saudi Arabia and other Gulf countries. “Do we take the easy road or do we finally take a hard but necessary action? We have to stop the funding of terrorism.” Also last week, Trump triumphantly announced on twitter that “during my recent trip to the Middle East I stated that there can no longer be funding of Radical Ideology. Leaders pointed to Qatar – look!”

Well, Qatar funding terrorism apparently is not a problem when it comes to Qatar funding the US military industrial complex, because just two weeks after Trump signed a record, $110 billion weapons deal with Saudi Arabia, moments ago Bloomberg reported that Qatar will also buy up to 36 F-15 jets from the Pentagon for $12 billion …. even as a political crisis in the Gulf leaves the Middle East nation isolated by its neighbors and criticized by President Donald Trump for supporting terrorism, according to three people with knowledge of the accord. According to the Pentagon, the sale will give Qatar a “state of the art” capability, not to mention the illusion that it can defend itself in a war with Saudi Arabia. If nothing else, Uncle Sam sure is an equal-opportunity arms dealer, and best of all, with the new fighter planes,

Qatar will be able to at least put on a token fight when Saudi Arabia invades in hopes of sending the price of oil surging now that every other “strategy” has failed. To be sure, the sale comes at an opportune time: just days after Qatar put its military on the highest state of alert, and scrambled its tanks. All 16 of them. Maybe the world’s wealthiest nation realized it’s time beef up its defensive capabilities? Qatar’s defense minister will meet with Pentagon chief Jim Mattis on Wednesday to seal the agreement, Bloomberg reported citing people who spoke on condition of anonymity because the sale hasn’t been announced. Last year, congress approved the sale of up to 72 F-15s in an agreement valued at as much as $21 billion but that deal took place before the recent political crisis in the region.

It is unclear what the Saudi reaction will be to the news that Trump is arming its latest nemesis. If our thesis that Riyadh is hoping for Qatar to escalate the nest leg of the conflict is correct, then the Saudis should be delighted.

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“..society as a partnership between those who are living, those who are dead, and those who are yet to be born.”

The Old Are Eating the Young (Satyajit Das)

Edmund Burke saw society as a partnership between those who are living, those who are dead, and those who are yet to be born. A failure to understand this relationship underlies a disturbing global tendency in recent decades, in which the appropriation of future wealth and resources for current consumption is increasingly disadvantaging future generations. Without a commitment to addressing this inequity, social tensions in many societies will rise sharply. entral to the issue is that the rapid rise in living standards and prosperity of the past 50 years has been largely based on rising debt levels, ignoring the costs of environmental damage and misallocation of scarce resources. A significant proportion of recent economic growth has relied on borrowed money – today standing at a dizzying 325% of global GDP.

Debt allows society to accelerate consumption, as borrowings are used to purchase something today against the promise of future repayment. Unfunded entitlements to social services, health care and pensions increase those liabilities. The bill for these commitments will soon become unsustainable, as demographic changes make it more difficult to meet. Degradation of the environment results in future costs, too: either rehabilitation expenses or irreversible changes that affect living standards or quality of life. Profligate use of mispriced non-renewable natural resources denies these commodities to future generations or increases their cost. The prevailing approach to dealing with these problems exacerbates generational tensions. The central strategy is “kicking the can down the road” or “extend and pretend,” avoiding crucial decisions that would reduce current living standards, eschewing necessary sacrifices, and deferring problems with associated costs into the future.

Rather than reducing high borrowing levels, policy makers use financial engineering, such as quantitative easing and ultra-low or negative interest rates, to maintain them, hoping that a return to growth and just the right amount of inflation will lead to a recovery and allow the debt to be reduced. Rather than acknowledging that the planet simply can’t support more than 10 billion people all aspiring to American or European lifestyles, they have made only limited efforts to reduce resource intensity. Even modest attempts to deal with environmental damage are resisted, as evidenced by the recent fracas over the Paris climate agreement. Short-term gains are pursued at the expense of costs which aren’t evident immediately but will emerge later.

This growing burden on future generations can be measured. Rising dependency ratios – or the number of retirees per employed worker – provide one useful metric. In 1970, in the U.S., there were 5.3 workers for every retired person. By 2010 this had fallen to 4.5, and it’s expected to decline to 2.6 by 2050. In Germany, the number of workers per retiree will decrease to 1.6 in 2050, down from 4.1 in 1970. In Japan, the oldest society to have ever existed, the ratio will decrease to 1.2 in 2050, from 8.5 in 1970. Even as spending commitments grow, in other words, there will be fewer and fewer productive adults around to fund them.

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Schäuble couldn’t care less.

Greek Economy Minister Calls Wolfgang Schäuble ‘Dishonest’ (R.)

Greek Economics Minister Dimitri Papadimitriou has accused German Finance Minister Wolfgang Schaeuble of being “dishonest” by blocking debt relief for Greece despite his acknowledgement that Athens has implemented significant reforms. Euro zone finance ministers and the IMF are expected to strike a compromise deal on Greece on Thursday, paving the way for new loans for Athens while leaving the contentious debt relief issue for later. Papadimitriou told German newspaper Die Welt in an interview published on Thursday that Schaeuble first had acknowledged that Greece had met the requirements, but then changed his mind. “I haven’t met Schaeuble yet and I don’t want to be impolite, but his behavior seems dishonest to me,” he added.

Papadimitriou said German resistance to debt relief for Greece raised questions about the very idea and structure of the euro zone. The success of right-wing populists in Europe also showed dissatisfaction with such European structures, he said. “Greece is being made a sacrificial lamb,” he said. Papadimitriou also warned Schaeuble against making decisions based purely on domestic politics, noting that Germany had also received debt relief when it was rebuilding after World War Two. Debt relief is needed to help Greece expand its economy, he said, noting that Athens was not asking for a debt cut, but rather lower interest rates or longer repayment schedules. Greek President Prokopis Pavlopoulos also called on the euro zone finance ministers to spell out concrete measures to reduce the Greek debt burden.

“Greece has fulfilled its commitments and adopted the required reforms. Now it is time for the Europeans to comply with their commitments on debt relief,” Pavlopoulos said in an interview with German business daily Handelsblatt. German opposition politicians also criticized Schaeuble by honing in on the fact that the IMF is likely to participate in the third bailout, but will only disburse any loans when debt measures have been clearly outlined. Gerhard Schick from the Greens party accused Schaeuble of a “lousy trick” with the IMF participation. Thomas Oppermann, senior member of the co-governing Social Democrats (SPD), told Bild newspaper: “Schaeuble must put his cards on the table ahead of the election and say what German taxpayers will have to expect.”

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“Europe stopped listening to Greece a long time ago.”

Greece Is Germany’s ‘De Facto Colony’ (Pol.)

Poor Alexis Tsipras. For days, the Greek leader has been working the phones, trying to secure the best possible terms for his country as it enters the last mile of its seemingly endless cycle of bailouts. So far, his efforts have won him more mockery than respect — especially in Germany. “He keeps calling the whole time, and the chancellor says again and again, ‘Alexis, this issue is for the finance ministers,’” German Finance Minister Wolfgang Schäuble told an audience here on Tuesday, referring to the Greek prime minister’s attempts to win over Angela Merkel to his cause. Eurozone finance ministers are set to decide at a meeting in Luxembourg on Thursday whether to release a more than €7 billion tranche of aid to Greece. No one doubts Athens will get the money. Schäuble all but committed to it on Tuesday.

But Tsipras wants something even more precious: debt relief. No serious economist believes Greece will ever crawl out from under its more than €300 billion debt without significant forgiveness from its creditors. That means convincing Germany, the country to which Greece owes the most. For much of Greece’s nearly decade-long depression, the country was hostage to its domestic politics. Now, it’s hostage to Germany’s. Berlin, which has long opposed outright debt relief, refuses to budge. With a general election in Germany set for late September, Merkel and Schäuble are unlikely to soften their position anytime soon. The Greek bailouts remain politically toxic in Germany, and any agreement involving debt forgiveness would be seen domestically as an admission the rescue effort had failed — and at the German taxpayers’ expense.

Over the years, Germany has quietly accepted more subtle forms of forgiveness, like extending maturities on Greece’s loans and reducing the interest burden. But a straightforward cut, as demanded by the International Monetary Fund, remains out of the question. At least until after the election. Unfortunately for Tsipras, he has very little say in the matter. One big reason he wants debt relief now is that it would allow the European Central Bank to include Greece in its bond-buying program, known as quantitative easing. That would go a long way toward boosting investor confidence in Greece’s stability. But Greece won’t be eligible for the program as long as its debt burden isn’t deemed sustainable. And with the ECB’s program set to be wound down soon, Greece may never benefit. Tsipras may yet try to resist a deal this week and take the matter to next week’s summit of European leaders in Brussels. That’s unlikely to make much difference. Truth is, Europe stopped listening to Greece a long time ago.

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More blackmail.

EU Officials Warn Athens Not To Take Debt Issue To Leaders’ Summit (K.)

As Finance Minister Euclid Tsakalotos braces for a Eurogroup meeting in Luxembourg on Thursday which all evidence suggests will not yield a satisfactory debt solution for Greece, European officials on Wednesday warned Athens against trying to broach the issue at an EU leaders’ summit next week. “If the matter is not resolved today, then it will be discussed at the next Eurogroup, where the agreement won’t be any better,” one source in Brussels told Kathimerini. Sources in Berlin, which has taken a hard line in the face of calls by the IMF for Greek debt relief, struck a similar tone, with one official noting that the matter falls squarely within the remit of the Eurogroup, “a message that has been made absolutely clear.”

“I don’t remember any Greek problem being solved at the EU leaders’ summit level,” another source representing Greece’s international creditors told Kathimerini, referring to previous efforts by Prime Minister Alexis Tsipras to broach issues relating to the country’s international bailouts with Angela Merkel and other EU leaders. A spokesman for Germany’s Finance Ministry, however, struck a positive tone, saying he was looking forward to agreeing on a “viable comprehensive package.” A proposal by French officials, that a solution to Greek debt relief be linked to the country’s growth rate, is expected to be discussed in Luxembourg on Thursday, though it is unlikely to be embraced in its entirety.

Meanwhile, Athens sounded a defiant note on Wednesday, with a high-ranking government official warning that if German Finance Minister Wolfgang Schaeuble does not budge from his positions to make way for a final agreement, then “there are others in higher positions than him that can give a solution.” “If there is no positive move, in the next few days or during the Eurogroup, from the German minister, then it looks like Angela Merkel will be forced to hold the hot potato,” a government official told the Athens News Agency on Wednesday.

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Apr 172017
 
 April 17, 2017  Posted by at 9:00 am Finance Tagged with: , , , , , , , ,  1 Response »
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Rembrandt The Descent from the Cross 1634

 

Mother of All Debt : Trump Reflation Fantasy Ends on Day 100 (Stockman)
Trump Gives Generals More Freedom In ISIS Fight (WSJ)
Who Are the Debt Slaves in this Rich Nation? (WS)
Time Has Come For Banks To Prepare For Interest Rate Rises – Bundesbank (CNBC)
World’s Biggest Aluminum Producer Faces Default (ZH)
China Home Sales Surge 18% In March Ahead Of Stepped-Up Curbs (BBG)
Tesla: Is There More To Elon Musk Than Cars? (WSJ)
Uber Confirms Horrendous Loss in 2016 (WS)
India ATMs Run Out Of Cash (ToI)
Erdogan Follows Slim Referendum Win by Warning Opponents (BBG)

 

 

April 28. There won’t be one big halt, it’ll come in incremental steps.

Mother of All Debt : Trump Reflation Fantasy Ends on Day 100 (Stockman)

In honor of the Donald’s “Mother of All Bomb” (MOAB) attack on the Hindu Kush mountains Thursday, let me introduce MOAD. I’m referring to the “Mother of All Debt” crises, of course. The opening round is coming when Washington goes into shutdown mode on April 28, which happens to be Day 100 of the Donald’s reign. In theory, this should be just a routine extension of the fiscal year (FY) 2017 continuing resolution (CR) by which Congress is funding the $1.1 trillion compartment of government which is appropriated annually. The remaining $3 trillion per year of entitlements and debt service is on automatic pilot, but the truth is Washington can’t agree on what to do about either component — except to keeping on borrowing to pay the bills. There is a problem with this long-running game of fiscal kick-the-can, however.

Namely, a 100 year-old statute requires Congress to raise the ceiling for treasury borrowing periodically, but the Imperial City has now reached the point in which there is absolutely no way forward to accomplish this. Moreover, that critical fact is ill-understood by Wall Street because it does not remotely recognize that all the debt ceiling increases since the public debt exploded after the 2008-09 crisis were an accident of the Obama presidency. That is, surrounded by Keynesian economic advisers and big spending Democratic politicians, he had no fear of the national debt at all and obviously even believed the more debt the better. And Obama was also able to bamboozle the establishment GOP leadership led by former Speaker Boehner into steering enough GOP votes to the “responsible” course of action.

Needless to say, Obama is gone, Boehner is gone and the 17-month debt ceiling “holiday” that they confected in October 2015 to ride Washington through the election is gone, too. What’s arrived is vicious partisan warfare, a new President who is clueless about the urgency of the debt crisis and a bloc of 50 or so Freedom Caucus Republicans who now rule Washington. And good for them! They genuinely fear and loathe the banana republic financial profligacy that prevails in the Imperial City, and would rip the flesh from Speaker Ryan’s face were he to go the Boehner route and try to assemble a “bipartisan” consensus for a condition-free increase in the debt ceiling.

What that means is a completely new ball game in the Imperial City that will absolutely dominate the agenda as far as the eye can see. That’s because the Freedom Caucus will insist that sweeping entitlement reforms and spending cuts accompany any debt ceiling increase. Even “moderate” Senator Rob Portman (Ohio) has legislation requiring that dollar for dollar deficit cuts accompany any increase in the debt ceiling. But if you think the GOP fractures and fissures generated by Obamacare replace and repeal were difficult, you haven’t seen nothin’ yet. There is absolutely no basis for GOP consensus on meaningful deficit cuts, meaning that MOAD will bring endless starts, stops, showdowns and shutdowns, as the U.S. Treasury recurringly exhausts its cash and short-term extensions of its borrowing authority.

In the meanwhile, everything else — health care reform, tax cuts, infrastructure — will become backed-up in an endless queue of legislative impossibilities. Accordingly, there will be no big tax cut in 2017 or even next year. For all practical purposes Uncle Sam is broke and his elected managers are paralyzed. The Treasury will be out of cash and up against a hard stop debt limit of $19.8 trillion in a matter of months. But long before that there will be a taste of the Shutdown Syndrome on April 28 owing to the accumulating number of “poison pill” “riders” to the CR.

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This is not good: “A senior administration official said Mr. Trump didn’t know about the weapon’s use until it had been dropped.”

Trump Gives Generals More Freedom In ISIS Fight (WSJ)

U.S. military commanders are stepping up their fight against Islamist extremism as President Donald Trump’s administration urges them to make more battlefield decisions on their own. As the White House works on a broad strategy, America’s top military commanders are implementing the vision articulated by Defense Secretary Jim Mattis: Decimate Islamic State’s Middle East strongholds and ensure that the militants don’t establish new beachheads in places such as Afghanistan. “There’s nothing formal, but it is beginning to take shape,” a senior U.S. defense official said Friday. “There is a sense among these commanders that they are able to do a bit more—and so they are.” While military commanders complained about White House micromanagement under former President Barack Obama, they are now being told they have more freedom to make decisions without consulting Mr. Trump.

Military commanders around the world are being encouraged to stretch the limits of their existing authorities when needed, but to think seriously about the consequences of their decisions. The more muscular military approach is expanding as the Trump administration debates a comprehensive new strategy to defeat Islamic State. Mr. Mattis has sketched out such a global plan, but the administration has yet to agree on it. While the political debate continues, the military is being encouraged to take more aggressive steps against Islamic extremists around the world. The firmer military stance has fueled growing concerns among State Department officials working on Middle East policy that the Trump administration is giving short shrift to the diplomatic tools the Obama administration favored.

Removing the carrot from the traditional carrot-and-stick approach, some State Department officials warn, could hamper the pursuit of long-term strategies needed to prevent volatile conflicts from reigniting once the shooting stops. The new approach was on display this week in Afghanistan, where Gen. John Nicholson, head of the U.S.-led coalition there, decided to use one of the military’s biggest nonnuclear bombs—a Massive Ordnance Air Blast bomb, or MOAB—to hit a remote Islamic State underground network of tunnels and caves. A senior administration official said Mr. Trump didn’t know about the weapon’s use until it had been dropped. Mr. Mattis “is telling them, ‘It’s not the same as it was, you don’t have to ask us before you drop a MOAB,’” the senior defense official said. “Technically there’s no piece of paper that says you have to ask the president to drop a MOAB. But last year this time, the way [things were] meant, ‘I’m going to drop a MOAB, better let the White House know.’”

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We are all of us in the gutter (but some of us are looking at the stars).

Who Are the Debt Slaves in this Rich Nation? (WS)

We constantly hear the factoids about “American households” that paint a picture of immense wealth – and therefore a lack of risk for consumer lenders during the next downturn. We hear: “This – the thing that happened in 2008 and 2009 – won’t happen again.” For example, total net worth (assets minus debt) of US households and non-profit organization (they’re lumped together) rose to an astronomical $92.8 trillion at the end of 2016, according to the Federal Reserve. This is up by nearly 70% in early 2009 when the Fed started its QE and zero-interest-rate programs. Inflating household wealth was one of the big priorities of the Fed during the Financial Crisis. It would crank up the economy. In an editorial in 2010, Fed Chair Ben Bernanke himself called this the “wealth effect.”

So with this colossal wealth of US households, what could go wrong during the next downturn? Here’s what could go wrong: About half of Americans do not have enough savings to pay for even a minor emergency expense. The Federal Reserve found that 46% of adults could not cover an emergency expense of $400, such as a broken windshield. They would either have to borrow the money or try to sell the couch or something. So nearly half of the adults in the US live from paycheck to paycheck. About 15% of American households have either zero or negative net wealth, according to the New York Fed. Negative net worth means they have more debt than in assets. And nearly 47 million Americans, or nearly 15% of the population, live below the poverty line, according to the Census Bureau.

So who benefited from the “wealth effect”? Those who had the most assets. At the very tippy-top: Warren Buffet. At the other end of the spectrum, in 2016, only 52% of households owned stocks directly or indirectly. The phenomenal stock market boom left 48% – usually those below the poverty line, those who cannot cover emergency expenses, those with zero or negative net worth, etc. etc. – in the dust.

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Germany is one of the precious few who might benefit from higher rates. But Germany seems to forget it is not an island.

Time Has Come For Banks To Prepare For Interest Rate Rises – Bundesbank (CNBC)

The time has come for financial institutions to prepare for an environment with rising interest rates, a Bundesbank board member told CNBC on Thursday. Many risk managers have focused on credit and liquidity risks, but they need to insert interest rate risks into the equation too, Andreas Dombret, an executive board member of the German Bundesbank, said. “Let’s face it, there are quite a number of risk managers who have never seen interest rates rise and who have never seen the interest rate risk and even thought about (it) and have concentrated on credit risk and have concentrated on liquidity risk, so it’s about time to prepare for a potential change,” Dombret said.

The former vice-chairman of Bank of America’s European global investment unit explained that the German central bank is taking interest rate rises “very seriously” and is “actively” working with German banks to ensure that changes to monetary policy will not disrupt them in any way. “Should there be sharp rises in interest rates that of course would be a challenge for any bank,” Dombret said. Members of the German central bank have been critical of the low interest rate environment in the euro zone, arguing this is hurting banks’ balance sheets. Earlier this month, Bundesbank President Jens Weidmann, called on the ECB to start tightening its monetary policy.

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Simple fraud.

World’s Biggest Aluminum Producer Faces Default (ZH)

While China Hongqiao Group may be best known for being the world’s largest aluminum producer, it has in recent months featured just as prominently among short-seller reports who have accused the company of being a fraud. As the WSJ’s Scott Patterson writes, questions about China Hongqiao’s finances first emerged in November, when an anonymous short seller wrote on a website called Hongqiao Exposed that the company’s profits are “too good to be true.” China Hongqiao in the March 31 statement called the report “untrue and unfounded.” A subsequent 46-page report on Feb. 28 by Emerson Analytics, a trading firm focused on Chinese stock-market fraud, disclosed more allegations of fraud involving the Chinese commodity giant.

Emerson accused China Hongqiao of “abnormally high” profits generated by underreporting production costs and disclosing electricity expenses—one of the biggest costs for aluminum producers—as much as 40% below their true cost. Emerson said it investigated Chinese electricity costs, spoke to former China Hongqiao employees and compared the company’s costs and profits with other comparable companies.

Additionally, China Hongqiao has been more profitable than some Chinese competitors. For instance, China Hongqiao earned an average operating profit margin of 27% in the past five years, compared with minus-1.7% for state-owned Aluminum Corp. of China , known as Chalco, and 5.9% for Alcoa, according to FactSet. “People were always skeptical about how they managed to be more profitable than their peers,” said Sandra Chow, a credit analyst at CreditSights. And while China Hongqiao denied the Emerson report’s allegations and said it hired an investigative agency to look into the firm and people behind the claims, things are starting to unravel rapidly for the Chinese megacap.

As Patterson reports, China Hongqiao – the world’s biggest aluminum producer – is in trouble, locked in a feud with its accountant over fraud allegations that have forced it to suspend trading of its shares and seek help from the central government in Beijing. Just like in the case of its cow dairy peer, the problems emerged to the surface following the bearish 3rd party reports. Just days after the Emerson Analytics note, on March 4 China Hongqiao sought assistance from a trade group, the Chinese Non-Ferrous Metals Industry Association, or CNIA, saying the short sellers’ claims of inflated profits were forcing the company’s accountant, Ernst & Young, “to adopt an extremely conservative and careful attitude.” One wonders just whose books E&Y had been reviewing until that point if it took an outside party to bring attention to potential fraud at one of its biggest Chinese clients.

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It’s really not that long ago when Chinese were reluctant to go into debt. But look now.

China Home Sales Surge 18% In March Ahead Of Stepped-Up Curbs (BBG)

The value of China’s home sales remained buoyant in March, though volume figures indicated that curbs in a number of cities may be slowing the recent buying frenzy. New home sales by value rose 18% to 1 trillion yuan ($145 billion) last month from a year earlier, according to Bloomberg calculations based on data released Monday by the National Bureau of Statistics. The increase compares with a 23% surge in the first two months of the year. But the value of sales partly reflected surging home prices. By volume, home sales grew only 11% in March to 130 million square meters, according to Bloomberg calculations, below the 24% growth in the first two months of 2017. “The curbs are showing their effects,” said Liu Feifan at Guotai Junan Securities in Shenzhen, who predicted that sales growth will continue to slow.

Policy makers are seeking to clear a glut of unsold homes in smaller urban centers, while pledging to enforce strict curbs in most first- and second-tier cities to prevent a housing bubble. In a month when at least 64 cities announced new or stricter property-buying restrictions, some of the growth in home sales reflected buyers flocking into the market fearing they’d be ruled ineligible for future purchases. Investment in real estate development gained 9.4% in March from a year earlier, up from 8.9% in the first two months, according to Bloomberg calculations. Strong property investment helped China’s fixed-asset investment excluding rural areas expand 9.2% in the first quarter, accelerating from 8.1% growth last year.

Some of the growth represented a “delayed effect” from an earlier property boom, and the rate is likely to decelerate soon, Zhou Hao at Commerzbank wrote in a note after the data release. Liu at Guotai Junan said the increasingly high leverage that Chinese households have taken on for home purchase is “not sustainable.” New medium and long-term loans to households, made up mostly of mortgages, picked up again last month to 450.3 billion yuan, according to official data last Friday.

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Tesla, Uber, same bubble. Giant losses with no future profits in sight. “Uber customers knew they were in a driverless car, by the way, because it had two drivers instead of one.”

Tesla: Is There More To Elon Musk Than Cars? (WSJ)

You probably have figured it out by now, but let me state it anyway. Ten years from now, if you’re reading this paper in a driverless car, it will be on a limited-access highway or a closed-off, experimental city circuit. You will not be thumbing through your text messages in a driverless car capable of carrying you anywhere, at all hours, in all weather conditions, over all kinds of roads. And even so, you will be expected to take over driving at a moment s notice. Ditto electric cars. If you own an electric car, you will be a member of a still-small minority. Electric-car owners will be people who own multiple cars or otherwise are willing to settle for a car with limited utility, suited for a daily commute but not a family trip or a long weekend. Even so, a new phenomenon will become apparent. After unexpected tie-ups on the interstate, tow trucks will routinely have to come and remove three or four Teslas that risked a long-distance trip and ran out of juice.

All this we offer as a discordant note amid the hype for electric cars and autonomous driving. Last week the market value of Tesla surpassed that of Ford and General Motors. Tesla is now the most valuable homegrown American car company, worth almost $US52 billion.Yet in the same week a reputable consultancy, Navigant Research, showed that Ford and GM lead all others, including Tesla and Google, in the autonomous car race. Shocking? Not really. These companies are making and selling cars, while the Silicon Valleyites have been mostly engaged in brand-building exercises based on public fascination with jazzy, futuristic auto technology. Google, the pioneer of self-driving hype, recently admitted it won’t build and sell a car after all. Google, though, still finds it pays to trundle its handful of robot cars on the exquisitely mapped streets of a few locales in perfect weather as obstacles to other motorists.

Apple reaped untold millions in free publicity based mainly on rumours and job postings for automotive engineers. Uber briefly suspended its own self-driving taxi experiment in three cities after an accident last month. Uber customers knew they were in a driverless car, by the way, because it had two drivers instead of one. The Wall Street Journal reported this week that Tesla’s triumph in the market-cap sweepstakes underscores the profound change occurring in the global automotive industry as Silicon Valley pursues a vision for transportation … that could up-end century-old competitors. Except that the stock prices of traditional car makers haven’t exactly been tanking. GM’s remains within yelling distance of its postbankruptcy high. Look at BMW, whose market cap Tesla nearly equals. Even if Tesla succeeds in its high-risk plan to ramp up annual production to 500,000 from 80,000 in a scant two years, it will sell a quarter as many luxury cars as BMW does, and has yet to show it can do so profitably.

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Case in point.

Uber Confirms Horrendous Loss in 2016 (WS)

On Good Friday, when markets were closed and when the entire financial world was tuned out, and when certainly no one was supposed to pay attention, Uber, the most highly valued – at $62.5 billion – and the most scandal plagued tech startup in the world, took the until now unprecedented step of disclosing its audited revenues and losses for the fourth quarter and for the full year of 2016. Rumors of ballooning losses for 2016 had been swirling since last summer. Bloomberg reported in August that Uber had lost “at least $1.2 billion” in the first half. In December, Uber’s loss in Q3 was said to “exceed $800 million,” according to Bloomberg, and its annual loss “may hit $3 billion.”

Others chimed in as some of Uber’s dozens of investors who’re getting its financial statements share them in dribs and drabs with the media. But on Friday, Uber itself disclosed that it lost $2.8 billion before interest, tax, depreciation, and employee stock options – the latter likely being a big chunk, as the earnings of publicly traded companies that award stock-based compensation, such as Twitter, regularly show. Translated into a net loss, including the expense for stock-based compensation? Dizzying. But Uber wisely didn’t disclose it. The Financial Times, which reported this disclosure, mused that Uber is “cementing its place as the most heavily-lossmaking private company in the history of Silicon Valley.”

In Q4 alone, it lost $991 million before interest, tax, depreciation, and stock-based compensation, up 5% from the losses in Q3 and nearly double its loss in Q1. However, as Uber has expanded at break-neck speed into more than 70 countries, stirring up numerous hornets’ nests of local and national laws and regulations, revenue soared over 200% from Q1 to reach $2.9 billion in Q4. For the whole year, revenue reached $6.5 billion. This is the image of its skyrocketing 2016 quarterly revenues and ballooning losses before interest, tax, depreciation, and stock-based compensation:

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In a country of over 1 billion people, failures look big.

India ATMs Run Out Of Cash (ToI)

Five months have passed since the demonetisation drive, but the people of Srikakulam, Vizianagaram and Visakhapatnam continue to face shortage of cash in banks and ATMs. Sources said more than 90% of the ATMs in the region do not have cash while in the plains and Agency areas running dry. “The last date for paying my daughter’s tuition fees at Visakha Valley School was April 10, but I could not pay due to unavailability of cash. Moreover, the school does not have any online payment system,” said a worried P Srinivasa Rao. Speaking to TOI, State Bank of India (SBI) deputy general manager Ajoy Kumar Pandit said the customers are losing confidence in them due to the crisis.

“Nearly 70% of our 648 ATMs in the three districts are out of cash. The rest will also become dry in the next few days as we do not have cash to refill the machines. We are helpless from our side,” he said. A banking source said the RBI has diverted most of the cash to north India due to the recent elections. This has affected the southern parts of the country. “The government’s intention is to encourage smart payment systems, but the infrastructure is not up to the mark,” the source said. Many ATMs have not been upgraded with the new software required for handling the new Rs 500 and Rs 2,000 denominations, the source added.

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The referendum has revealed the opposite of what Erdogan claims it has; namely, a dramatically divided Turkey. A powder keg. Recounts first? Is the judicial system still strong enough to order them? Changing a constitution with a 50% + 1 majority is questionable enough, since a constitution is supposed to be the result of many years of deliberation; in most places it would require 67% or even 75%. On top of that, this referendum was executed with many opposition politicians and many journalists behind bars. And even then only a very slim margin?!

Erdogan Follows Slim Referendum Win by Warning Opponents (BBG)

An emboldened Recep Tayyip Erdogan followed his win in a referendum that ratified the supremacy of his rule by taking aim at political opponents at home and abroad. At his victory speech late on Sunday, supporters chanted that he should bring back the death penalty – a move that would finish off Turkey’s bid to join the EU – and Erdogan warned opponents not to bother challenging the legitimacy of his win. He told them to prepare for the biggest overhaul of Turkey’s system of governance ever, one that will result in him having even fewer checks on his already considerable power. “Today, Turkey has made a historic decision,” he said. “We will change gears and continue along our course more quickly.” The lira surged as much as 2.5% against the dollar in early trading on Monday in Istanbul before gains moderated.

The success of a package of 18 changes to the constitution was narrow, with about 51.4% of Turks approving it. It came at the end of a divisive two-month campaign during which Erdogan accused opponents of the vote of supporting “terrorists” and denounced as Nazi-like the decision of some EU countries to bar his ministers from lobbying the diaspora. “The referendum campaign was dominated by strongly anti-Western rhetoric and repeated promises to bring back the death penalty,” said Inan Demir at Nomura in London. “One hopes that this rhetoric will be tempered now that the vote is over,” but recent steps by the Turkish government do “not bode well for the hoped-for moderation in international relations.”

“It looks like the best outcome for financial markets because it gives the mandate, but not a strong mandate,” said Ozgur Altug, the chief economist at BGC Partners in Istanbul, who predicts stocks in Istanbul will rally about 7%. While markets looked favorably on the result as a sign political turmoil in the majority Muslim nation of 80 million people may settle down and help jumpstart the economy, Turkey’s biggest political party alleged fraud, demanding a recount after election officials accepted ballots without official stamps.

The EU’s rapporteur on Turkey, Kati Piri, said given the “unfair election environment,” EU accession talks will be suspended if the constitution is passed in its current form. The European Commission, in a statement, said the constitutional amendments, and their implementation “will be assessed in light of Turkey’s obligations” as an accession candidate and as a member of the Council of Europe. “You saw how the West attacked. But despite this, the nation stood tall, didn’t get divided,” Erdogan told his supporters, while calling on Turks who opposed him to “stop tiring themselves out” and accept the course the country is headed on.

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Feb 022017
 
 February 2, 2017  Posted by at 11:01 am Finance Tagged with: , , , , , , , , , ,  2 Responses »
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Pablo Picasso The Bull state VII 1945

200 Years of US Immigration Data Put Trump’s Ban Into Context (Stat)
Australia PM Turnbull Denies Trump ‘Hang Up’ (Sky)
Will Donald Trump Reverse The War On Cash? (IM)
Problems ‘Resolved’ For German Dual Citizens Under Trump’s Travel Ban (Loc.)
German Current Account Surplus To Hit Record, World’s Largest In 2016 (R.)
Switzerland’s Record Surplus Raises Questions Amid Trump Trade Agenda (WSJ)
Dutch Will Count All Election Ballots By Hand To Thwart Hacking (AFP)
Renegotiating NAFTA Is A Good Idea – For Mexico (Coppola)
Trump Is Being Sabotaged by the Pentagon (PCR)
US Veterans: Dakota Pipeline Won’t Get Completed. Not On Our Watch (CNBC)
Turkish Air Force Jets Violate Greek Air Space 138 Times In One Day (IBT)

 

 

Wonderful graph even like this. Click the link to see the larger interactive one.

200 Years of US Immigration Data Put Trump’s Ban Into Context (Stat)

President Trump’s temporary ban on immigration from seven Muslim-majority nations — Iran, Iraq, Libya, Somalia, Syria, Sudan, and Yemen — is big news right now. And its effects are being felt widely throughout the worlds of science and medicine. Observing the fervid debate as someone who has recently had firsthand experience with the immigration system, I was interested in seeing as much of the larger immigration trends as government data permitted. In the interactive data visualization below, each country or region of last residence is represented by color, in a stream whose thickness represents the number of people arriving from that area in a given year. Immediately, two things stand out: boom and bust in the immigration rate (it’s easy to assume that it has always been increasing) and the new diversity of immigrants after World War II.

Immigration collapsed after the 1924 Immigration Act, which restricted entrants from Southern and Eastern Europe, severely limited African immigration, and prohibited it from East Asia, India, and the Arab world. The Immigration and Nationality Act of 1965, which removed national origins quotas imposed by the 1924 act, led to the diversity of the immigrant population that we see to this day. That diversity is reflected in the data visualization in the flowering of a completely new range of colors directly after the act was passed. Regardless of the political moves ahead, nearly 200 years of immigration suggests that no one leader or piece of legislation is capable of staunching the diverse flow of immigrants to the US.

The x axis displays years, the y axis displays the number of immigrants (in millions), and each country or region of last residence is represented by its own color and stream whose thickness represents the number of people from that area becoming legal permanent residents in a given year.

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Oz media say Turnbull stood his ground. Lots of ‘reports’ by people who were not present.

Australia PM Turnbull Denies Trump ‘Hang Up’ (Sky)

Donald Trump has blasted as ‘dumb’ a refugee deal between Australia and the United States, but Prime Minister Malcolm Turnbull is confident the president won’t backflip on their agreement. An explosive tweet from Mr Trump has once again cast doubt on the deal, in which the US would take refugees currently held on Manus Island and Nauru in return for Australia accepting refugees from Central America. ‘Do you believe it? The Obama Administration agreed to take thousands of illegal immigrants from Australia. Why? I will study this dumb deal!’ the US president tweeted on Thursday. Mr Turnbull said despite the president’s tweet, he had received multiple assurances from Mr Trump, his press secretary and the US embassy the deal would be progressed. ‘This is not a deal that he would’ve done or that he would regard as a good deal,’ Mr Turnbull told Fairfax radio. ‘But the question is, will he commit to honour the deal? And he has given that commitment.’

The prime minister wouldn’t tell Sydney radio Macquarie Radio whether Mr Trump had labelled the deal dumb or otherwise in their phone conversation on Sunday, but has denied reports the call ended abruptly or in anger. ‘I want to make one observation about it, the report the president hung up is not correct, the call ended courteously,’ he said. The US president reportedly told Mr Turnbull he was ‘going to get killed’ politically and accused Australia of seeking to export the ‘next Boston bombers’, according to senior US officials quoted by The Washington Post. Mr Turnbull said the deal with the former president was always for the Americans to use their own vetting processes and determine how many of the people on Nauru and Manus Island would be resettled. ‘It wasn’t a commitment to take everybody sight unseen,’ he said. ‘It is possible they could take a smaller number or a larger number – it will depend on the assessments.’

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That would be a no. The discussion is more about globalism than Trump or cash.

Will Donald Trump Reverse The War On Cash? (IM)

Jason Burack : It seems that globalism may be on the retreat. What’s your opinion about that, in light of Brexit, Donald Trump winning, and the Italian referendum failing?
Nick Giambruno : I think you’re right, Jason. Right now globalism is on the decline. But let’s define “globalism” before I explain why. This word gets thrown around a lot. But most people don’t really know what it means. It’s very simple. Globalism is the centralization of power into a couple of global institutions: the EU, the United Nations, the IMF, the World Bank, NAFTA, NATO, and so on. It’s really just a polite way of describing world government, or what George H.W. Bush termed the New World Order. I think globalism and the centralization of power is always a bad thing. People who value individual freedom and economic freedom… really, freedom in general, should oppose it. It’s an interesting moment in history. Those three things you just mentioned—Brexit, Trump, and the failure of the Italian referendum—are clear signs that globalism is losing steam. Whether it’s a sort of one step back, two steps forward thing or the ideology of globalism is really on its way out remains to be seen.

[..] Italy hasn’t had any real economic growth since it joined the euro in 1999. That’s pretty profound. The Italian economy is in the same place it was 17 years ago. A lot of that is because the euro makes Italy uncompetitive with countries like Germany. The next Italian government could be a coalition of anti-EU populist parties. If that happens, there’s an excellent chance Italy could leave the euro. Keep in mind that Italy is a core member of the euro. If it leaves, France would probably leave, too. And if that happens, the euro is finished.

Jason : Without the euro, what’s left holding the EU together?
Nick Giambruno : Almost nothing. The euro is the main glue. Without it, the whole EU could unravel. We’re still early in the process. But it doesn’t look good for the globalists and the Eurocrats. I think historians will look back at the failure of the December 4 Italian referendum as a crucial tipping point. With globalism failing, I’m not sure what happens next. No one does. We could see a rise of nationalism, which wouldn’t be a good thing. Or political power could diffuse even further, which would be a better outcome. Decentralization is good for individual and economic freedom.

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Canada, Australia, Germany, who’s next?

Problems ‘Resolved’ For German Dual Citizens Under Trump’s Travel Ban (Loc.)

American President Donald Trump’s travel ban initially looked to block more than 100,000 German dual citizens from entering the US, but now the two allies say they have found a solution. Acting commissioner of US Customs and Border Protection, Kevin McAleenan, said on Tuesday that travelers would be evaluated based on the passport they present rather than their dual citizen status, even if they have citizenship in one of the seven predominantly Muslim countries with temporary blocks. This was the first clarification about what the bans mean for people with dual citizenship, after US embassies, including Berlin’s, issued statements indicating that dual citizens were included in the bans.

The update on Tuesday means that people who are citizens of one of the seven countries as well as another country not named in the ban will be able to enter the US. EU migration commissioner Dimitris Avramopoulos explained that this applies to people with European citizenship. “[I am] glad that issue of EU dual nationals is resolved,” Avramopoulos wrote on Twitter. Trump’s executive order issued on Friday suspends all refugee admissions into the United States for 120 days, bars all Syrians indefinitely, and blocks citizens of seven mostly Muslim countries for 90 days. German politicians were concerned about what it would mean for the more than 130,000 dual citizens, including the Green party’s German-Iranian representative Omid Nouripour, who is the vice chair of a German-American parliamentary group.

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The victims of this German economic imperialism are not in the US, but in southern Europe.

German Current Account Surplus To Hit Record, World’s Largest In 2016 (R.)

Germany’s current account surplus is expected to have hit a new record of $297 billion in 2016, overtaking that of China again to become the world’s largest, the Munich-based Ifo economic institute said on Monday. This would be equivalent to 8.6% of total output, which means it would once again breach the European Commission’s recommended upper threshold of 6%. In 2015 the current account surplus stood at $271 billion. The European Commission and the United States have urged Germany to lift domestic demand and imports to help reduce global economic imbalances and fuel global growth, including within the euro zone. Germany rejects such criticism, saying it already lifted domestic demand by introducing a national minimum wage in 2015 and agreeing on a strong hike in pension entitlements in 2016. In addition, the government has increased state spending on roads, digital infrastructure and asylum seekers while sticking to its goal of keeping a balanced budget.

Asked about Ifo’s estimate, a spokeswoman for the economy ministry said the government views the surplus as high but the imbalance was not excessive. “The federal government shares the view of the European Commission that the German current account surplus has to be assessed as high – but it doesn’t represent an excessive imbalance,” spokeswoman Tanja Alemany Sanchez de Leon said. She added that Germany’s current account surplus with other euro zone countries halved to some 2% of GDP in 2015 from roughly 4% in 2007. “That shows there is a reduction of trade imbalances within the euro zone,” the spokeswoman said, adding that 44% of Germany’s current account surplus was due to business relations with the United States and Britain. Ifo estimated China’s current account surplus at $245 billion last year due to weaker exports. By contrast, the United States is predicted to have the world’s largest capital imports, with a deficit of $478 billion for 2016, Ifo said.

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But Switzerland doesn’t count.

Switzerland’s Record Surplus Raises Questions Amid Trump Trade Agenda (WSJ)

Switzerland’s exports to the U.S. surged last year to a record high, pushing the trade surplus higher and putting the Alpine export powerhouse in a potentially uncomfortable position amid rising protectionist sentiment in the U.S. The figures come alongside heightened attention brought by President Donald Trump to bilateral trade balances and the policies countries have pursued to weaken their currencies against the dollar to gain a competitive edge. Switzerland has largely escaped much focus in the U.S. and is unlikely to be in the new administration’s crosshairs now, given its relatively small size. Still, its swelling surplus, and the Swiss National Bank’s multiyear efforts to weaken the franc, could at a minimum raise questions as to why the U.S. may treat some countries like China and Mexico more harshly than others down the road when it comes to trade.

Switzerland’s overall trade surplus was 37.5 billion Swiss francs ($37.6 billion) last year, the country’s customs office said Thursday, up one billion francs from 2015 and an all-time high. Nearly half of that surplus—17.2 billion francs—came from the U.S., as Swiss exports there jumped 15% to 31.5 billion francs. Switzerland ran smaller trade surpluses with Japan and the Middle East, while it had trade deficits with Germany and China. “Looking forward if this is truly Donald Trump’s agenda to level the playing field, Switzerland has to be on that list,” said Peter Rosenstreich at Swissquote Bank. [..] Switzerland’s current account surplus was 9% of GDP in 2016, according to IMF estimates, well above the 3%-of-GDP level the Treasury considers material. Meanwhile, Switzerland has in recent years engaged in one-way interventions to weaken the franc, thereby making Swiss exports more competitive in world markets. The Swiss National Bank has for years said the franc was significantly overvalued.

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There we go. The fear of Russia goes a long way.

Dutch Will Count All Election Ballots By Hand To Thwart Hacking (AFP)

Dutch authorities will count by hand all the votes cast in next month’s general elections, ditching “vulnerable” computer software to thwart any cyber hacking bid, a senior minister has said. “I cannot rule out that state actors may try to benefit from influencing political decisions and public opinion in the Netherlands,” interior minister Ronald Plasterk said in a letter to parliament on Wednesday. On 15 March, the Netherlands kicks off a year of crucial elections in Europe which will be closely watched amid the rise of far-right and populist parties on the continent. Dutch officials are already on alert for signs of possible cyber hacking following allegations by US intelligence agencies that Russia may have meddled in November’s US presidential polls to help secure Donald Trump’s victory.

Plasterk told parliament that fears over “the vulnerabilities of the software” used by the country’s election committee “had raised questions about whether the upcoming elections could be manipulated”. He insisted in a letter to MPs that “no shadow of a doubt should hang over the results” of the parliamentary polls, which some analysts predict could result in a five-party coalition. Therefore the interior ministry and the election committee had decided “to calculate the results based on a manual count”. Plasterk told broadcaster RTL that possible external actors included Russia. “Now there are indications that Russians could be interested, for the following elections we must fall back on good old pen and paper,” he said.

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NAFTA increased immigration.

Renegotiating NAFTA Is A Good Idea – For Mexico (Coppola)

[..] perhaps there just aren’t that many jobs going across the border. Certainly not enough to occupy all the Mexicans looking for work. Yet we know significant numbers of jobs HAVE relocated to Mexico: employment in automobile manufacture, for example, has quadrupled since 1994. Clearly something is very wrong. The figures just don’t make sense. Jobs have gone from the U.S. to Mexico, but people continue to migrate from Mexico to the US in search of work, though the rate has slowed dramatically in recent years. In fact Mexico has become somewhat dependent on its migrants: it now receives more foreign currency from migrant remittances than it does from exports of crude oil. This is mainly because of falling oil prices and production since 2014. But it also reflects a distorted and unhealthy economic relationship between Mexico and the U.S.

The truth is that NAFTA has been a rotten deal, not for the U.S. but for Mexico. Firstly, NAFTA did not establish a level playing field for agricultural production. It ended tariffs, but not subsidies. Mexico opened its borders to American agricultural exports, particularly corn. But America continued to subsidize the production of corn: between 1995-2014, corn subsidies totaled nearly $95bn. Coupled with America’s higher productivity, the subsidies made it impossible for Mexican farmers to compete. Agricultural employment dropped 19% between 1994 and 2007, a loss of about 2 million jobs, mostly in family farms. There was a corresponding increase in seasonal work, as agricultural production shifted to fruit and vegetable production, so the unemployment figures perhaps did not rise as much as might have been expected.

But Americans mourning the loss of steady well-paid manufacturing jobs surely should be the first to appreciate that seasonal work is no substitute for steady family farm employment. Unsurprisingly, Mexicans headed for the border. Between 1994 and 2000, emigration to the U.S. rose by 79%, though it slowed somewhat due to recession and increased border security after the 9/11 attacks. Secondly, NAFTA has rendered the Mexican economy entirely dependent on the U.S. Over 80% of Mexico’s exports go to the U.S., and about half of its imports come from there. Mexico is deeply integrated in U.S. supply chains, particularly manufacturing production. The IMF observes that Mexican and American industrial production are co-integrated and follow a common cycle. Increases in American economic output are transmitted one-for-one to Mexican output.

[..] Mexico is thus highly sensitive to changes in US policy and unable to protect itself from U.S.-generated economic shocks: the 2008 financial crisis in the US caused a shock to trade which knocked 6% out of the Mexican economy in 2009, though it bounced back quickly. Any attempt by the U.S. to decouple itself from Mexico through trade tariffs and impediments to financial flows would be likely to have a dramatic impact on the Mexican economy. This toxic dependence is to a large extent caused by NAFTA. Indeed, we might say that it was NAFTA’s primary purpose. And it unquestionably benefits the U.S. more than Mexico. Any small supplier to a giant corporation could tell you that being completely dependent on a single buyer is not a good situation. Diversification is strength. This is true for countries as much as businesses. By discouraging diversification, NAFTA has done Mexico no favors.

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By NATO.

Trump Is Being Sabotaged by the Pentagon (PCR)

President Trump says he wants the US to have better relations with Russia and to halt military operations against Muslim countries. But he is being undermined by the Pentagon. The commander of US forces in Europe, General Ben Hodges, has lined up tanks on Poland’s border with Russia and fired salvos that the general says are a message to Russia, not a training exercise. How is Trump going to normalize relations with Russia when the commander of US forces in Europe is threatening Russia with words and deeds? The Pentagon has also sent armored vehicles to “moderate rebels” in Syria, according to Penagon spokesman Col. John Dorrian. Unable to prevent Russia and Syria from winning the war against ISIS, the Pentagon is busy at work derailing the peace negotiations.

The military/security complex is using its puppets-on-a-string in the House and Senate to generate renewed conflict with Iran and to continue threats against China. Clearly, Trump is not in control of the most important part of his agenda—peace with the thermo-nuclear powers and cessation of interference in the affairs of other countries. Trump cannot simultaneously make peace with Russia and make war on Iran and China. The Russian government is not stupid. It will not sell out China and Iran for a deal with the West. Iran is a buffer against jihadism spilling into Muslim populations in the Russian Federation. China is Russia’s most important military and economic strategic ally against a renewal of US hostility toward Russia by Trump’s successor, assuming Trump succeeds in reducing US/Russian tensions.

The neoconservatives with their agenda of US world hegemony and their alliance with the military-security complex will outlast the Trump administration. Moreover, China is rising, while the corrupt and dehumanized West is failing. A deal with the West is worth nothing. Countries that make deals with the West are exposed to financial and political exploitation. They become vassals. There are no exceptions. Russia’s desire to be part of the West is perplexing. Russia should build its security on relations with China and Asia, and let the West, desirous of participating in this success, come to Russia to ask for a deal. Why be a supplicant when you can be the decider?

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They mean business. So does the other side.

US Veterans: Dakota Pipeline Won’t Get Completed. Not On Our Watch (CNBC)

A group of U.S. military veterans has vowed to block completion of the hotly disputed Dakota Access pipeline, despite the secretary of the Army giving the project the green light. “We are committed to the people of Standing Rock, we are committed to nonviolence, and we will do everything within our power to ensure that the environment and human life are respected. That pipeline will not get completed. Not on our watch,” said Anthony Diggs, a spokesman for Veterans Stand. Diggs added that the group hopes to raise enough funds “to have a larger, solid boots-on-the-ground presence.” The secretary of the Army instructed the U.S. Army Corps of Engineers to grant Energy Transfer Partners the easement it needs to complete the final stretch of its $3.7 billion pipeline, Sen. John Hoeven and Rep. Kevin Cramer, both of North Dakota, said Tuesday.

President Donald Trump last week signed executive actions to advance construction for Dakota Access and another disputed pipeline. Veterans Stand has raised $37,000 since launching a GoFundMe campaign last week. Part of that money will go to “basic transport of supplies and personnel,” Diggs told CNBC. The Standing Rock Sioux tribe also on Tuesday vowed to mount a legal challenge claiming the Corps lacks the statutory authority to stop an environment review and issue the easement. The tribe opposes construction, saying the pipeline passes beneath a source for its drinking water and construction would disrupt sacred land. Their campaign has drawn thousands of protesters to camps near Cannon Ball, North Dakota, in recent months. To abandon the study “would amount to a wholly unexplained and arbitrary change based on the president’s personal views and, potentially, personal investments,” the tribe said in a statement.

It’s difficult to argue that the secretary of the Army lacks the authority to grant the easement, said Bruce Huber, an associate professor of law at the University of Notre Dame who specializes in environmental law. However, any halt to the environmental study will face a high burden proof, he said. That’s because the Army’s assistant secretary for civil works is on the record as saying other routes should be explored and an environmental study is the best way to do that. In December, the Corps denied the easement and said the best path forward would be to consider alternative routes for the project by conducting an environmental review with public input and analysis. “That’s an unclear bit of law there, whether the process can simply be terminated,” Huber said. “You can bet your bottom dollar it will be litigated.”

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Merkel’s in Turkey today. She better put a stop to this while she has the chance. She cannot risk war in the region.

Turkish Air Force Jets Violate Greek Air Space 138 Times In One Day (IBT)

Greece intercepted 138 incursions into its air space by Turkish air forces on Wednesday (1 February) amid mounting tensions between the neighbouring countries. The unusually high number of incursions took place over islands in the central and southern Aegean and were condemned by Greek Defence Minister Panos Kammenos as reckless. “We want peace, we are not looking for a fight or for trouble in the Aegean, but there won’t be an aircraft which will not be intercepted,” Reuters quoted him as saying. Long-time regional rivals – notably over Cyprus – Greece and Turkey almost went to war in 1996 over two islets, Imia and Kardak, situated west of Bodrum and north of Kos in the Aegean Sea. On Wednesday (Feb 1) Kammenos flew over the area and threw a wreath in the sea to commemorate the death of three Greek officers in a helicopter crash in the 1996 incident.

The gesture followed Turkish military chiefs paying respects on Sunday (Jan 29). During the incident, a Turkish admiral reportedly refused to sink Greek ships. This time however a senior Turkish politician warned Turkey would respond with force if Greece started “playing games” over the disputed islets. According to Hurriyet, Justice and Development (AKP) Izmir deputy Hüseyin Kocabıyık warned: “I am warning Greece: You were saved owing to a cowardly [Turkish] admiral in 1996. Do not play the Kardak game with us. We will shoot you!”. The two countries are also at loggerheads over an asylum claim by eight Turkish military officers accused of involvement in the attempted coup in July 2016. A Greek court has blocked the extradition of the men back to Turkey, with Supreme Court judge Giorgos Sakkas ruling on Thursday (26 January) that they would not receive a fair trial in their homeland.

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Oct 102016
 
 October 10, 2016  Posted by at 9:55 am Finance Tagged with: , , , , , , , , ,  2 Responses »
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Lewis Wickes Hine Newsies in St. Louis 1910

Bank of America Has A Recession Warning That’s Downright ‘Scary’ (CNBC)
The Truly Scary Clowns: Central Bankers (Forsyth)
Far From Stepping Back, Top Central Banks Are Set To Double Down (R.)
The World Bank and the IMF Won’t Admit Their Policies Are The Problem (G.)
China Must Wean Itself Off Debt Addiction To Avoid Financial Calamity-IMF (Tel.)
China Fixes Yuan at Six-Year Low Against the U.S. Dollar (WSJ)
Iceland, Where Bad Bankers Go to Jail, Finds Nine Guilty in Historic Case (CD)
Pound’s Pounding Helped U.K. Absorb Brexit Shock (WSJ)
A Mile-High House Of Cards (IM)
Oil Prices Fall Over Doubts That Non-OPEC Producers Will Cut Output (R.)
Pentagon Spent Half a Billion On Fake Al-Qaeda Propaganda Videos (Ind.)
Russia Says US Actions Threaten Its National Security (R.)

 

 

“.. if they follow the current trends they’re on, we’re going to hit a recession sometime in the second half of next year.”

Bank of America Has A Recession Warning That’s Downright ‘Scary’ (CNBC)

There’s a chilling trend in the market, and it could wreak havoc on your portfolio, a top market watcher said. “We are seven years into a full-fledged, all out, central bankers doing everything they can to stimulate demand,” Bank of America-Merrill Lynch’s head of U.S. equity and quantitative strategy Savita Subramanian recently warned on CNBC’s “Fast Money.” “We looked at all of these indicators that have been pretty good at forecasting recessions and we extrapolated that if they follow the current trends they’re on, we’re going to hit a recession sometime in the second half of next year.” The most unsettling thing is that this recession risk isn’t discounted into the market at these levels, according to Subramanian.

The S&P is 1.8% away from its intraday all-time high of 2,193.81, hit on August 15. Subramanian’s year-end 2016 S&P 500 price target is 2000, about seven% lower than where it’s trading today. And, if she’s right, it’s about to get a lot worse next year. “What scares me is the market been so fragile. So, remember what happened in January? We got a whiff of bad news and all of the sudden the market is at 1800,” she said—a move that augured poorly for the near-term. “I think that speaks to the reaction function of the market. There are a lot of itchy trigger fingers. There’s lot of violent trades that can really roil a fairly complacent environment.”

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Nice metaphor. Could be used for Trump and Hillary too.

The Truly Scary Clowns: Central Bankers (Forsyth)

At a Grant’s Interest Rate Observer conference last week, Jeffrey Gundlach, DoubleLine’s CEO, commented on the growing belief that interest rates will “never” rise. When it’s said that something can “never” happen, it’s about to happen, he argued. Zero or negative interest rates are doing more harm than good, he continued, with the long decline in the stock of Deutsche Bank being an example. You can’t help the economy by bankrupting the banks, he contended, which is the effect of shrinking their net interest earnings. For these and other reasons, Gundlach suggested, the lows in bond yields were seen in the post-Brexit plunge in the 10-year Treasury to 1.36%, a hair under the nadir of 1.38% touched in 2012. (Some data providers have slightly different numbers, but they’re as close as “damn it” is to swearing.)

The more important inference is that major trend changes are at hand. As described by Bank of America Merrill Lynch global investment strategists led by Michael Hartnett, we may be witnessing “peak liquidity.” That is, the era of excess liquidity from central banks is ending, which is consistent with shifts in ECB and BOJ policies, the U.K. Prime Minister May’s criticism of QE, and the likelihood of a Fed interest-rate hike in December. In addition, the BofA ML strategists also point to “peak inequality,” which would spur fiscal actions, such as greater spending and income redistribution. Finally, they see “peak globalization,” as populism counters the “disinflationary free movement of capital, trade and labor.”

The sum is “peak returns” from financial assets, the BofA ML team concludes. In that scenario, they recommend “Main Street over Wall Street” for 2017, including small-capitalization stocks and commodities, real assets (including collectibles and real estate) over financial ones, and banks over capital markets. In particular, they suggest a shift from bond proxies, including utilities, telecoms, real estate investment trusts, and low-volatility stocks. These sectors, it should be noted, had tough times last week. Investors who have tilted strongly toward these investments, which have benefited from historically low interest rates, have been laughing all the way to the bank. In the future, they may be spooked by those creepy clowns, otherwise known as less-friendly central bankers.

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What happens in one way streets and dead alleys.

Far From Stepping Back, Top Central Banks Are Set To Double Down (R.)

Central banks’ repeated warnings that there are limits to what they can do to bolster the sputtering world economy could suggest they are about to pull back and pass the baton to governments. But a steady flow of research and a new tone in the debate among policymakers and advisers points in a different direction: rather than retreat, central banks are preparing for the day they may need to do more, even at the risk of antagonizing politicians who argue they already have too much power. The shift can be seen in the acknowledgment by Federal Reserve policymakers that their massive $4 trillion balance sheet will not shrink anytime soon, or that asset buying may become a “recurrent” tool of future monetary policy.

It can be seen in the comments of Bank of England officials who talk of crisis-fighting tools as now semi-permanent fixtures, or in the Bank of Japan developing a new monetary policy framework, in this case targeting long-term market interest rates. Driving those developments is an emerging consensus among policymakers who now acknowledge that the global financial crisis has led to a fundamental shift toward low inflation, tepid growth, lagging productivity and interest rates stuck near zero. “We could be stuck in a new longer-run equilibrium characterized by sluggish growth and recurrent reliance on unconventional monetary policy,” Fed Vice Chair Stanley Fischer said last week.

For years, Federal reserve and other policymakers have discounted such a scenario, arguing that temporary factors were slowing the recovery and plotting a return to conventional pre-crisis policies. Over the past months, though, that optimism has given way to an admission that such a return is increasingly elusive. Interest rates are set to stay low far longer than thought only a year ago and jumbo balance sheets accumulated through crisis-era asset purchases are now cast as a possibly permanent tool. At the annual Jackson Hole Fed conference in August the discussion had shifted from the mechanics and timing of “normalization,” to how and whether to expand the central bank footprint yet again.

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They don’t talk to people telling them that.

The World Bank and the IMF Won’t Admit Their Policies Are The Problem (G.)

The World Bank, IMF and WTO can sense that they are sitting on the edge of a volcano that could blow at any time. They fear, rightly, that a second big crash within a decade would create a backlash leading to protectionism and the rise of dark political forces that would be difficult, if not impossible, to control. That there are ingredients for a fresh crisis became apparent at various stages last week. According to the IMF, global debt has risen to a record level of $152tn – more than double global GDP – at a time when activity is sluggish. Collapsing commodity prices and weak demand from the west has meant that growth in sub-Saharan Africa is running at half the level of population increases. Companies in the emerging world loaded up on debt during the commodity boom and are vulnerable to rising US interest rates and any softening of the world economy. China is the most egregious example of debt being used to boost activity artificially.

The argument that rising debt is fine, because on the other side of ledger is an asset increasing in value, is specious. The only reason the assets are rising in price is because investors are taking on more debt to buy them. At some point, the asset bubble bursts, leaving borrowers with a major problem. This was the lesson of the sub-prime crisis and it is remarkable that memories are so short. The next big one could come from anywhere and it is good that the World Bank and IMF are aware of the risks. Even so, there was an air of unreality about the discussions in Washington last week. The reason was simple: there was not the slightest hint from the IMF or World Bank that the policies they advocated during the heyday of the so-called Washington consensus – austerity, privatisation and financial liberalisation – have contributed to weak and unequal growth, with all the political discontent that this has caused.

Even worse, Lagarde and Kim seemed oblivious to the fact that the Washington consensus approach is alive and well within their organisations. The IMF’s remedy for Greece and Portugal during the eurozone crisis has been straight out of the structural adjustment playbook: reduce public spending, cut salaries and benefits, insist that state-owned enterprises return to the private sector, reduce minimum wages and restrict collective bargaining. Between them, the IMF and the European authorities are turning Greece into a developing country. It would be fascinating to see what sort of response Lagarde would get if she tried talking about inclusive growth to homeless people huddled on the streets of Athens.

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The IMF will pressure China now it’s in the basket. New meaning to ‘basket case’.

China Must Wean Itself Off Debt Addiction To Avoid Financial Calamity-IMF (Tel.)

China is edging towards “financial calamity” and must wean itself off its debt addiction and reform if it is to avoid a crisis, the IMF has warned. Markus Rodlauer, deputy director of the IMF’s Asia-Pacific department, said the world’s second largest economy was approaching a tipping point where its rapidly growing financial sector and surge in shadow credit could undermine the state’s ability to contain the fallout from a crash. “The level of financial and corporate debt and the complexity of the financial system and rapid growth in shadow banking is on an unsustainable path,” he said. “While still manageable in its size given the size of the public assets under public control, the trend is dangerous and if it’s not corrected it will lead to a correction.

“The longer it lasts … the more serious the disturbance and the disruption might be. [The reaction could range] from a mild growth slowdown, to a sharp slowdown in growth to potentially a financial crisis.” Data show credit and financial sector leverage in China has continued to rise much faster than economic growth. The IMF’s latest World Economic Outlook said debt in China was rising at a “dangerous pace”, while its Financial Stability Report showed small Chinese banks were heavily exposed to shadow credit as a share of capital buffers, with exposure reaching nearly 600pc at some banks. Mr Rodlauer, who served as the IMF’s China’s mission chief for five years, said stronger trade ties and financial linkages between China and other countries meant the impact of a hard landing on the global economy could also be huge.

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Been in the SDR basket for 10 days, and already there’s this.

China Fixes Yuan at Six-Year Low Against the US Dollar (WSJ)

The Chinese yuan was guided toward a six-year low against the U.S. dollar on Monday, as the country’s markets returned after a weeklong holiday. In onshore trading, the currency was on track for its biggest one-day loss against the U.S. dollar since the Brexit in June. The yuan entered the basket of currencies backing the IMF’s special drawing rights, an international reserve currency, on Oct. 1. The PBOC set its daily reference rate for the yuan at 6.7008 against the U.S. dollar, a depreciation of 0.3% from its last fixing of 6.6778 on Sept. 30, before the National Day holiday. Monday’s fixing was the weakest level for the currency since September 2010.

Onshore, where the yuan is allowed to trade within 2% of the PBOC’s central reference point, the currency traded 0.5% weaker at 6.7032 in early trade. Offshore, the yuan traded 0.1% weaker at 6.7106. Many markets in Asia, including the largest offshore-yuan trading center in Hong Kong, are closed for a holiday Monday. The past week was characterized by volatility in foreign-exchange markets, including a flash crash in the British pound that saw it lose more than 6% shortly after 7 a.m. Hong Kong time Friday before recovering later in the trading day. The U.S. dollar, which accounts for about a quarter of the value of the basket of currencies the yuan tracks, has strengthened during the period.

The U.S. dollar index, which tracks its strength against a basket of six currencies, is up 1.1% so far this month. The weakness in the yuan fix reflects data released during the past week, including a faster-than-expected drawdown of $18.79 billion in China’s foreign-currency reserves during September, said Alex Wijaya, senior sales trader at CMC Markets. “For the past year, the Chinese government has been intervening in the currency and this has depleted some of its foreign-exchange reserves, and this could be one of the main contributions to the weakness in the yuan,” he said. “The U.S. dollar has been strengthening as well.”

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Unlike the rest of the western world, Iceland had no austerity, but it did introduce capital controls and it did go after bankers.

Iceland, Where Bad Bankers Go to Jail, Finds Nine Guilty in Historic Case (CD)

Iceland, which became a gold standard for corporate accountability in the wake of its 2008-2011 financial crisis, has found nine bankers guilty for market manipulation in one of the biggest cases of its kind in the country’s history. The verdict from Iceland’s Supreme Court, issued Thursday, overturns a June 2015 decision by the Reykjavik District Court, which found seven of the nine defendants guilty and acquitted two. No punishment has been handed down yet, although sentencing is set to come. The defendants worked at the major international firm Kaupthing Bank until it was taken over by the Icelandic government during the crash.

The bank’s former director Hreidar Mar Sigurdsson, who had been sentenced to five and a half years in 2013 in a separate Kaupthing case, had his punishment extended by six months in response to the verdict. The acquittals were overturned for former Kaupthing credit representative Björk Poraninsdottir and former Kaupthing Luxembourg CEO Magnuse Gudmondson, although no penalties have been meted out for them. According to the Iceland Monitor, the decision found that “[b]y fully financing share purchases with no other surety than the shares themselves, the bankers were accused of giving a false and misleading impression of demand for Kaupthing shares by means of deception and pretense.”

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“..suffering Brexit’s pain through the currency may be more comfortable than through higher unemployment or other ills..”

Pound’s Pounding Helped UK Absorb Brexit Shock (WSJ)

When the U.K. voted to leave the European Union in June, the pound took its worst beating in half a century. Many economists saw that as a good thing. Despite the shock of Brexit, more than three months later there are few tangible signs of economic distress in Britain: Employment is steady. The stock market has held up. Government bonds are strong. Houses are still being bought and sold. Consumers are still consuming. Credit, say economists, goes in large part to the decline of the British pound, which has acted as a giant shock absorber against Brexit. It fell 11% against the dollar in two trading days after the vote, and after another sudden slump last week is now down 16%. Seen from abroad, British people are one-sixth poorer and their economy is one-sixth smaller.

In the past week, figures from the IMF suggest, Britain has slid from the world’s fifth-largest economy to sixth, behind its millennium-old rival France. But suffering Brexit’s pain through the currency may be more comfortable than through higher unemployment or other ills—a luxury that wasn’t available to eurozone countries during the currency bloc’s debt crisis. Over the longer term, economic wisdom holds that a weaker currency will boost a nation’s sales abroad, so what the economy loses in the form of lower consumption—because consumers are poorer—will be recovered through higher exports. “It is important that you have a live release valve like this,” said Tim Haywood, an investment director at GAM Holding.

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Italy pre-referendum.

A Mile-High House Of Cards (IM)

According to Webster’s Dictionary, an economic depression is “a period of time in which there is little economic activity and many people do not have jobs.” Italy has had virtually no productive growth since it joined the euro in 1999. Today, the Italian economy (real GDP per person) is smaller than it was at the turn of the century. That’s almost two decades of economic stagnation. The economy today is 10% smaller than it was before its peak prior to the 2008 financial crisis. More than 25% of Italy’s industry has been lost since then. Unemployment is around 12%. Youth unemployment is around 36%. And these are only the official government statistics, which almost certainly understate the true numbers.

The IMF predicts it will take at least until 2025 for the Italian economy to return to its 2008 peak. Since nobody can accurately predict what’s going to happen next year, let alone nine years from now, the IMF is basically saying it has no idea how or when the Italian economy could ever recover. The mass media and establishment economists don’t dare call it a depression. But a depression it is. Italy’s populist Five Star Movement—or M5S, as it’s known by its Italian acronym—is now the country’s most popular political party. M5S blames Italy’s economic malaise squarely on the euro. I’d say a large plurality of Italians agree, and they have a point. They claim that, under the euro, Italian industry and exports have become uncompetitive. M5S believes a return to the lira could be the remedy.

Prior to joining the euro, Italy would regularly post large trade surpluses with Germany. Since joining, it has posted large trade deficits. Because of Italy’s structural economic problems, it should have a significantly weaker currency. But since Italy is wrapped in the euro straightjacket, it gets monetary conditions that are far too tight than appropriate for the country. [..] The Italian economy is made up of many small and medium-sized businesses. Those businesses have taken out loans from Italian banks. But as the economy is in a depression, many of those loans have gone bad or will go bad. This has created a crisis in the Italian banking system. It took years to build up, but now the situation is coming to a head. The Italian banking system is insolvent, and now everyone knows it. Shares of Italian banks have plummeted more than 50% so far this year.

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No need to doubt: rest assured it’s not going to happen.

Oil Prices Fall Over Doubts That Non-OPEC Producers Will Cut Output (R.)

Oil prices fell on Monday over doubts that an OPEC-led plan to cut output would rein in a global oversupply that has dogged markets for over two years. Brent crude futures were trading at $51.53 per barrel at 0511 GMT, down 40 cents or 0.77%, from their last settlement. WTI futures were down 44 cents or 0.88%, at $49.37 a barrel. OPEC plans to agree on an output cut by the time it meets in late November. The targeted range is to cut production to a range of 32.50 million barrels per day (bpd) to 33.0 million bpd. OPEC’s current output stands at a record 33.6 million bpd. To achieve such an agreement among its members, some of which like Saudi Arabia and Iran are political rivals, OPEC officials are embarking on a flurry of meetings in the next six weeks, starting in Istanbul this week.

However, analysts cautioned about too high expectations about the Istanbul talks this week. “A meeting between OPEC and non-OPEC producers (namely Russia) will add to oil headlines this week. Don’t expect a firm agreement from Russia, but headlines about cooperation are likely,” Morgan Stanley said on Monday. “It’s also worth noting that Iraq and Iran oil ministers will not be in attendance,” the U.S. bank added. Even if a deal is reached, analysts are unconvinced it would result in much higher prices, as doubts run high over the feasibility of a cut among rivaling members, a Reuters poll showed on Friday. Pouring cold water on expectations, OPEC’s second biggest producer Iraq said over the weekend that it wants to raise output further in 2017.

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“The CDs were encoded to open the videos on RealPlayer software that connects to the Internet when it runs. It would issue an IP address that could then be tracked by US intelligence. ”

Pentagon Spent Half a Billion On Fake Al-Qaeda Propaganda Videos (Ind.)

A former contractor for a UK-based public relations firm says that the Pentagon paid more than half a billion dollars for the production and dissemination of fake Al-Qaeda videos that portrayed the insurgent group in a negative light. The Bureau of Investigative Journalism reported that the PR firm, Bell Pottinger, worked alongside top US military officials at Camp Victory in Baghdad at the height of the Iraq War. The agency was tasked with crafting TV segments in the style of unbiased Arabic news reports, videos of Al-Qaeda bombings that appeared to be filmed by insurgents, and anti-insurgent commercials – and those who watched the videos could be tracked by US forces.

The report of Bell Pottinger’s involvement in the video hearkens back to more than 10 years ago, when the Washington-based PR firm Lincoln Group was revealed to have produced print news stories and placed them in Iraqi newspapers. According to the Los Angeles Times, who obtained the 2005 documents, the stories were intended to tout the US-led efforts in Iraq and denounce insurgent groups. Bell Pottinger was first tasked by the interim Iraqi government in 2004 to promote democratic elections. They received $540m between May 2007 and December 2011, but could have earned as much as $120m from the US in 2006. Lord Tim Bell, a former Bell Pottinger chairman, confirmed the existence of the contract with the Sunday Times.

The Pentagon also confirmed that the agency was contracted under the Information Operations Task Force, but insisted that all material distributed was “truthful”. However, former video editor Martin Wells, who worked on the IOTF contract with Bell Pottinger, said they were given very specific instructions on how to produce the fake Al-Qaeda propaganda films. “We need to make this style of video and we’ve got to use Al-Qaeda’s footage,” Mr Wells told the Bureau, recalling the instructions he received. “We need it to be 10 minutes long, and it needs to be in this file format, and we need to encode it in this manner.” According to Mr Wells’ account, US Marines would then take CDs containing the videos while on patrol, then plant them at sites during raids. “If they’re raiding a house and they’re going to make a mess of it looking for stuff anyway, they’d just drop an odd CD there,” he said.

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Russis will not back down.

Russia Says US Actions Threaten Its National Security (R.)

Russian Foreign Minister Sergei Lavrov said on Sunday he had detected increasing U.S. hostility towards Moscow and complained about what he said was a series of aggressive U.S. steps that threatened Russia’s national security. In an interview with Russian state TV likely to worsen already poor relations with Washington, Lavrov made it clear he blamed the Obama administration for what he described as a sharp deterioration in U.S.-Russia ties. “We have witnessed a fundamental change of circumstances when it comes to the aggressive Russophobia that now lies at the heart of U.S. policy towards Russia,” Lavrov told Russian state TV’s First Channel. “It’s not just a rhetorical Russophobia, but aggressive steps that really hurt our national interests and pose a threat to our security.”

With relations between Moscow and Washington strained over issues from Syria to Ukraine, Lavrov reeled off a long list of Russian grievances against the United States which he said helped contribute to an atmosphere of mistrust that was in some ways more dangerous and unpredictable than the Cold War. He complained that NATO had been steadily moving military infrastructure closer to Russia’s borders and lashed out at Western sanctions imposed over Moscow’s role in the Ukraine crisis. He also said he had heard that some policy makers in Washington were suggesting that President Barack Obama sanction the carpet bombing of the Syrian government’s military air fields to ground its air force. “This is a very dangerous game given that Russia, being in Syria at the invitation of the legitimate government of this country and having two bases there, has got air defense systems there to protect its assets,” said Lavrov.

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