Jul 262017
 
 July 26, 2017  Posted by at 9:24 am Finance Tagged with: , , , , , , , , ,  4 Responses »
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Jackson Pollock Greyed Rainbow 1953

 

The Rise And Fall Of The Property-Owning Democracy (FCFT)
Case-Shiller Home Prices Disappoint But Hit New Record High (ZH)
Australian Housing Affordability the Worst in 130 Years (Soos/David)
There Are More ‘Zombie’ Companies In Europe Now Than Pre-Lehman (CNBC)
Netherlands and UK Are Biggest Channels For Corporate Tax Avoidance (G.)
US Sanctions Have Taken A Big Bite Out Of Russia’s Economy (CNBC)
The Value of Everything (Jim Kunstler)
Bolivia’s President Declares ‘Total Independence’ from World Bank and IMF (AHT)
Germany Fails To Honour Its Part Of The Greek Bailout Deal (Bilbo)
Insolvent Greece Goes To Market 2.0 (Varoufakis)
Nine Out Of 10 People Call For ‘Plastic-Free Aisle’ In Supermarkets (Ind.)
Sperm Counts In The West Plunge By 60% In 40 Years (Ind.)

 

 

The article is somewhat confusing to me, bear of little brain and unpopular in China. But it’s good to make the point that bubbles spark poverty.

The Rise And Fall Of The Property-Owning Democracy (FCFT)

Sometime in the late 1980s, a friend who was on the libertarian right of the Conservative Party explained the idea of the property-owning democracy to me. The point, he said, was to detach the respectable working class from their poorer neighbours, encourage them to identify with the middle-class and thereby turn them into Tories. It worked for a while. Middle earners had been doing relatively well since the 1970s and home ownership was within the reach of many once mortgages became more readily available. Helped along by cheap council house sales, home ownership rose. In recent years, though, things have started shifting back the other way. The property-owning democracy is now looking like a one-off event rather than the ongoing process it was meant to be. Property analyst Neal Hudson pointed out that, as a proportion of all tenure, home ownership peaked in 2003 but mortgage ownership peaked in 1996. As older property owners paid off their housing debts, they were not being replaced at the same rate by new mortgagors.

[..] As the Resolution Foundation comments: The typical mortgagor AHC income is now twice that of the typical social renter, and over the past decade this income has grown by 17% compared to just 4% growth for the typical private renter. Even more than was the case before the financial crisis, the living standards split between those who own their own home and those who do not has become a key divide. While the proportion of households owning their own homes has fallen generally, that decline has been sharper among those on low to middle incomes. (Defined by the Resolution Foundation as working-age households with someone in work but with less than the median household income.) In the mid 1990s, over half of those on low to middle incomes were mortgagors. Now that has fallen to a third. Over the same period, private renting among this group rose.

Last week’s report on poverty and inequality by the Institute for Fiscal Studies notes that most of those in poverty (defined as income less than 60% of the median) are now from households where someone is in work. “[R]elative poverty among children and working-age adults has increased and, over the past 20 years or so, has increasingly become an in-work phenomenon due to declines in worklessness, low earnings growth and widening earnings inequality.”

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What bubble?

Case-Shiller Home Prices Disappoint But Hit New Record High (ZH)

Great news ‘Murica – your house has never been worth more than it was in May (according to Case-Shiller’s national home price index). On the slightly less silver-lining side of the equation, April’s 0.28% gain in price was revised to 0.18% MoM drop and May’s proint disappointed at just 0.1% rise MoM. The 20-city property values index increased 5.7% y/y (est. 5.8%). All cities in the index showed year-over-year gains, led by a 13.3% advance in Seattle, an 8.9% increase in Portland and a 7.9% gain in Denver.

After seasonal adjustment, Seattle had the biggest month-over-month increase, at 0.9%, while New York posted a 0.6% decline. “Home prices continue to climb and outpace both inflation and wages,” David Blitzer, chairman of the S&P index committee, said in a statement. “The small supply of homes for sale, at only about four months’ worth, is one cause of rising prices. New home construction, higher than during the recession but still low, is another factor in rising prices.”

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Just keep paying the piper.

Australian Housing Affordability the Worst in 130 Years (Soos/David)

The astronomical bubble in Australian housing prices has generated plenty of commentary regarding the current lack of affordability. This state of affairs clearly concerns aspiring home buyers everywhere, and Sydney and Melbourne in particular. First home buyers (FHBs) face almost insurmountable odds: the highest price to income and deposit to income ratios, the lowest savings rates, runaway dwelling prices, weak wage growth, including a political and economic establishment hell-bent on ensuring land prices keep on inflating no matter the wider cost to the economy. The legion of vested interests – basically 99% of commentators – choose to contend housing is actually more affordable today than back in the days of high mortgage interest rates, especially when rates peaked at 17% in 1989.

This is demonstrated by the standard mortgage payment to household income formula shown above, assuming 80% loan to value ratio (LVR). Their contention is bogus, however, because the metric is a static one, displaying mortgage payments to income at a particular point in time. The peak in 1989, for instance, is very high if, and only if, prices, interest rates and incomes remain constant over the life of the mortgage. Yet, these variables change by the next period. So, a more dynamic approach is required to assess housing affordability. The correct method was advocated by Glenn Stevens in 1997, Guy Debelle in 2004 and other economists like Dean Baker, who identified the US housing bubble and predicted the Global Financial Crisis in 2002. The important factor to consider is the effect wage inflation has upon mortgage payments.

While high mortgage interest rates result in large mortgage payments relative to income, this only occurs in the early years of the mortgage as high wage growth inflates away the burden. In contrast, borrowers facing high housing prices with low interest rates and poor wage growth face a greater burden across the life of the mortgage due to greater payments to income. This housing affordability analysis is applied to long-term annual data between 1880 and 2016, anchored to the median house price at an LVR of 80% at the start of each decade thereon. While data on mortgage interest rates and wage growth for the years after 2016 cannot be known, they are assumed to hold still at the present rates: 5.4% for the mortgage interest rate and 1.4% for wages. The following chart illustrates the outcome of applying this method, demonstrating the proportion of aggregate mortgage payments to household income over the 25 years of the mortgage. The results are overpowering.

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Well, that’s what Draghi’s QE guarantees.

There Are More ‘Zombie’ Companies In Europe Now Than Pre-Lehman (CNBC)

The ECB needs to beware of raising interest rates too quickly as there are a significant number of “zombie firms” in Europe that have become too dependent on cheap credit, according to analysis by the Bank of America Merrill Lynch. Barnaby Martin, head of European Credit Strategy at BofA Merrill Lynch, said businesses in Europe which have benefited from the ECB’s corporate bond purchase program would struggle once the bank raises interest rates, expected sometime in 2018. “The worst kept secret in the market is Mario Draghi is going to be tapering monetary policy next year and yet last week he was super, super dovish so I think that we’ve forgotten that monetary policy in Europe is on its way out,” he told CNBC on Tuesday, adding “there’s clearly political pressure for him to move away from this extraordinary era.”

“So the question becomes ‘can we handle a rapid rise in interest rates?’,” he said. ECB stimulus measures as part of its quantitative easing program designed to boost the European economy currently amount to €60 billion ($69.9 billion) a month. Some of this money goes into purchasing corporate bonds. While these purchases have enabled companies to continue to operate and invest, aiding a recovery in the European economy, the bank’s purchases have been credited for keeping ailing companies alive, hence the name “zombies.” The ECB started purchasing corporate bonds in June 2016 as part of its “corporate sector purchase program” (CSPP) and, as of June 7, 2017, its CSPP holdings stood at €92 billion, the bank said.

In a note examining “The rise of the Zombies” BofA Merrill Lynch’s credit strategists Martin, Ionnis Angelakis and Souhair Asba noted that 9% of non-financial companies in Europe (by market cap of Stoxx 600) are zombies, with “very weak interest coverage metrics.” “Note that this is still quite a high number: It was around 6% pre-Lehman, and fell to 5% in late 2013 after the peripheral crisis had faded,” they said. “The plethora of monetary support in Europe over the last 5 years has allowed companies with weak profitability to continue to refinance their debt and stave off defaults.” The analyst team also noted that bond issuance had been concentrated in “the hands of a few.” “Year-to-date, the top 20 bonds issuers have accounted for 40% of supply. In 2015 and 2016, the number was closer to 25%. The result has been that “superfirms” have been quietly building across the credit market,” they noted.

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“The Netherlands says they won’t let the UK be an offshore tax haven. That’s because they don’t want them taking their business.”

Netherlands and UK Are Biggest Channels For Corporate Tax Avoidance (G.)

Almost 40% of corporate investments channelled away from authorities and into tax havens travel through the UK or the Netherlands, according to a study of the ownership structures of 98m firms. The two EU states are way ahead of the rest of the world in terms of being a preferred option for corporations who want to exploit tax havens to protect their investments. The Netherlands was a conduit for 23% of corporate investments that ended in a tax haven, a team of researchers at the University of Amsterdam concluded. The UK accounted for 14%, ahead of Switzerland (6%), Singapore (2%) and Ireland (1%). Every year multinationals avoid paying £38bn-£158bn in taxes in the EU using tax havens. In the US, tax evasion by multinational corporations via offshore jurisdictions is estimated to be at least $130bn (£99bn) a year.

The researchers reported that there were 24 so-called “sink” offshore financial centres where foreign capital was ultimately stored, safe from the tax authorities. Of those, 18 are said to have a current or past dependence to the UK, such as the Cayman Islands, Bermuda, the British Virgin Islands and Jersey. The tax havens used correlated heavily to which conduit country was chosen by the multinational’s accountants. The UK is a major conduit for investments going to European countries and former members of the British Empire, such as Hong Kong, Jersey, Guernsey or Bermuda, reflecting the historical links and tax treaties enjoyed by firms setting up in Britain. The Netherlands is a principal conduit for investment ending in Cyprus and Bermuda, among others. Switzerland is used as a conduit to Jersey. Ireland is the route for Japanese and American companies to Luxembourg.

[..] Dr Eelke Heemskerk, who led the research, said that the work showed the importance of developed countries cleaning up their financial sectors. He said: “In the context of Brexit, where you have the UK threatening, unless they get a deal, to change their model to be attractive to companies who want to protect themselves from taxes, well, they are already doing it. “The Netherlands says they won’t let the UK be an offshore tax haven. That’s because they don’t want them taking their business.”

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Russia’s getting an invaluable lesson in self-suffciency. There’s nothing like it.

US Sanctions Have Taken A Big Bite Out Of Russia’s Economy (CNBC)

Congress moved Tuesday to step up sanctions on a shrinking Russian economy that is already struggling under the weight of low oil prices, high inflation and a battered currency that has sent capital fleeing. In response to Moscow’s interference in the 2016 U.S. presidential election, the House voted overwhelmingly to tighten existing economic sanctions imposed in 2014 following the Russian invasion of Crimea. Among other things, the measures freeze assets and prohibit transactions with specific Russian companies and individuals, restrict financial transactions with Russian firms, and ban certain exports that are used in oil and gas exploration or have possible military uses.

Those 2014 U.S. sanctions were paired with related measures imposed by the European Union, which placed restrictions on business with Russia’s financial, defense and energy sectors. Today, Russia’s economy is still feeling the harsh impact of those measures, which coincided with a crash in global oil prices that cut deeply into revenues from the country’s main export. The loss of oil revenues – a drop of as much as 60%, according to a 2017 Congressional Research Service report — helped spark a collapse in Russia’s currency, the ruble, sending the prices of Russian consumer goods soaring. The Russian economy has also been hurt by a wave of capital flight out of the country, as individual Russians sought to move money offshore and convert their shrinking rubles to dollars and euros to protect their wealth. That money flow slowed in 2014 as U.S. and European sanctions took hold.

Though U.S. sanctions have put pressure on the Russian economy, the impact on American business has been limited because Russia makes up less than 1% of U.S. exports. Only six U.S states count Russia as a significant market for goods and services. Washington, the most reliant, sells roughly 1% of its total exports to Russia, consisting mostly of machinery and farm products. That’s half the level before the 2014 sanctions took effect. European nations, which export greater volumes to Russia than the U.S., imposed their own set of sanctions response to the Crimean annexation.

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“The floundering non-elite masses have not learned the harsh lesson of our time that the virtual is not an adequate substitute for the authentic..”

The Value of Everything (Jim Kunstler)

We are looking more and more like France on the eve of its revolution in 1789. Our classes are distributed differently, but the inequity is just as sharp. America’s “aristocracy,” once based strictly on bank accounts, acts increasingly hereditary as the vapid offspring and relations of “stars” (in politics, showbiz, business, and the arts) assert their prerogatives to fame, power, and riches — think the voters didn’t grok the sinister import of Hillary’s “it’s my turn” message? What’s especially striking in similarity to the court of the Bourbons is the utter cluelessness of America’s entitled power elite to the agony of the moiling masses below them and mainly away from the coastal cities. Just about everything meaningful has been taken away from them, even though many of the material trappings of existence remain: a roof, stuff that resembles food, cars, and screens of various sizes.

But the places they are supposed to call home are either wrecked — the original small towns and cities of America — or replaced by new “developments” so devoid of artistry, history, thought, care, and charm that they don’t add up to communities, and are so obviously unworthy of affection, that the very idea of “home” becomes a cruel joke. These places were bad enough in the 1960s and 70s, when the people who lived in them at least were able to report to paying jobs assembling products and managing their distribution. Now those people don’t have that to give a little meaning to their existence, or cover the costs of it. Public space was never designed into the automobile suburbs, and the sad remnants of it were replaced by ersatz substitutes, like the now-dying malls. Everything else of a public and human associational nature has been shoved into some kind of computerized box with a screen on it.

The floundering non-elite masses have not learned the harsh lesson of our time that the virtual is not an adequate substitute for the authentic, while the elites who create all this vicious crap spend millions to consort face-to-face in the Hamptons and Martha’s Vineyard telling each other how wonderful they are for providing all the artificial social programming and glitzy hardware for their paying customers. The effect of this dynamic relationship so far has been powerfully soporific. You can deprive people of a true home for a while, and give them virtual friends on TV to project their emotions onto, and arrange to give them cars via some financing scam or other to keep them moving mindlessly around an utterly desecrated landscape under the false impression that they’re going somewhere — but we’re now at the point where ordinary people can’t even carry the costs of keeping themselves hostage to these degrading conditions.

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The kind of independence that tends to be bad for a man’s health.

Bolivia’s President Declares ‘Total Independence’ from World Bank and IMF (AHT)

Bolivia’s President Evo Morales has been highlighting his government’s independence from international money lending organizations and their detrimental impact the nation, the Telesur TV reported. “A day like today in 1944 ended Bretton Woods Economic Conference (USA), in which the IMF and WB were established,” Morales tweeted. “These organizations dictated the economic fate of Bolivia and the world. Today we can say that we have total independence of them.” Morales has said Bolivia’s past dependence on the agencies was so great that the IMF had an office in government headquarters and even participated in their meetings. Bolivia is now in the process of becoming a member of the Southern Common Market, Mercosur and Morales attended the group’s summit in Argentina last week.

Bolivia’s popular uprising known as the The Cochabamba Water War in 2000 against United States-based Bechtel Corporation over water privatization and the associated World Bank policies shed light on some of the debt issues facing the region. Some of Bolivia’s largest resistance struggles in the last 60 years have targeted the economic policies carried out by the IMF and the World Bank. Most of the protests focused on opposing privatization policies and austerity measures, including cuts to public services, privatization decrees, wage reductions, as well the weakening of labor rights. Since 2006, a year after Morales came to power, social spending on health, education, and poverty programs has increased by over 45%.

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A tour de force by Bill Mitchell. Germany’s profiting so much off of Greece’s despair that it can hide its own economic pitholes with it.

Germany Fails To Honour Its Part Of The Greek Bailout Deal (Bilbo)

Effectively the “German Federal Government – through KfW” is providing funds to Greece as part of the bailout. On May 20, 2014, the KfW issued a further press statement – Institution for Growth in Greece (IfG) – which further details the way in which German government bailout support is channeled through the KfW. For example, in relation to the “three planned IfG sub-funds … The Hellenic Republic and KfW — on behalf of the German Federal Government — will each contribute EUR 100 million in funding debt to this sub-fund.” Clear enough. The Süddeutsche Zeitung article says that since 2010, these loans granted to Greece through the KfW have generated 393 million euros of interest income net of refinancing costs [..] A handy sum. And what is more – the profits generated have not been transferred to the Greek government.

Further gains were made on the Greek bailouts via the ECB’s Securities Market Program (SMP), which has generated German gains of around $€952 million, through ECB distributions of the profits to the Member State central banks. A similar story appeared in the English-version of the Handelsbatt next day (July 12, 2017) – Germany Profits From Greek Debt Crisis. It essentially sourced the Süddeutsche Zeitung and made the story more accessible (repeating it in English). It says that: “The German government has long been accused by critics of profiting from Greece’s debt crisis. Now there are some new numbers to back it up: Loans and bonds purchased in support of Greece over nearly a decade have resulted in profits of €1.34 billion for Germany’s finance ministry.”

The issue became public because the Greens parliamentary representatives have challenged the morality of the German government’s decision not to redistribute the profits and the role played by the KfW. The Greens representative was reported as saying that: “The profits from collecting interest must be paid out to Greece … Wolfgang Schäuble cannot use the Greek profits to clean up Germany’s federal budget …” It has long been claimed that “Greece’s crisis has helped” Schäuble keep the German fiscal balance in surplus. The KfW have been part of that. We knew back in 2015 that the KfW was helping the Finance Ministry generate fiscal surpluses.

On March 5, 2015, the German daily newspaper Rheinische Post published a report – So geht es den Griechen wirklich – presented a summary of a 40-page document that the German Finance Ministry had provided in response to a demand for information from the Linksfraktion (German Left Party Die Linke). The Finance Ministry document conceded that: “Between 2010 to 2014, the KfW has paid out around 360 million euro in revenues to the German government and in the coming years the federal government is expecting around 20 million euro per year on interest revenues.”

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The Greek economy is worse than ever, but now people trust it?

Insolvent Greece Goes To Market 2.0 (Varoufakis)

Why do I refuse to be impressed by the news of Greece’s return to the markets? “It is because the Greek state and the Greek banks remain deeply insolvent. And, their return to the money markets is a harbinger of the next terrible phase of Greece’s crisis, rather than a cause for celebration”. The above was my answer in a BBC interview on 9th April… 2014! It is also the only answer that fits today’s announcement of Greece’s new bond issue. Indeed, why script a new article, when that old post offers a most helpful response to the question: “What should the world think of Greece’s new bond issue?”

The only thing I need to add to these circa 2014 posts is this: The Tsipras government today is simply rolling over precisely the same bond that the Samaras-Venizelos-Stournaras government issued in 2014 – the subject matter of my criticism above. This is a remarkable U-turn by Mr Tsipras and his ministers. In 2014 they had sided entirely with my criticism of the then government’s argument that Greece’s return to the markets, with the issue of that one bond, was a sign the country was achieving escape velocity from the gravitational pull of its debt-deflationary crisis. Now, they are not only parroting the same arguments as Samaras-Venizelos-Stournaras but they are, lo and behold, rolling over the same bond! I rest my case.

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It’s not that hard.

Nine Out Of 10 People Call For ‘Plastic-Free Aisle’ In Supermarkets (Ind.)

Nine out of 10 people want supermarkets to introduce a “plastic-free aisle”, according to a new poll amid rising concern about pollution. The survey – of 2,000 British adults by Populus – was commissioned by campaign group A Plastic Planet, which said it was clear that the public wanted an alternative to “goods laden with plastic packaging”. Evidence of the synthetic substance’s harmful effects on the natural world is growing. Since 1950, humans have produced 8.3 billion tons of the stuff, with 6.3 billion tons being sent to landfill sites or simply being dumped in what scientists described as an “uncontrolled experiment” on the planet. Plastic, which acts like a magnet for toxic chemicals in the environment, breaks down into tiny pieces that are capable of passing through animals’ gut walls and into their body tissue.

The UN warned in a report last year that “the presence of microplastic in foodstuffs could potentially increase direct exposure of plastic-associated chemicals to humans and may present an attributable risk to human health”. A third of seabirds in the North Sea were also found to be suffering “widespread breeding failure”, largely because of plastic waste. The new poll found 91% of people supported aisles free from plastic packaging and 81% said they were concerned “about the amount of plastic packaging that is thrown away in the UK”. Sian Sutherland, a co-founder of A Plastic Planet, said: “It’s becoming increasingly clear that the Great British public wants a fresh alternative to goods laden with plastic packaging. Too much of our plastic waste ends up in oceans and landfill.

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Am I a bad person for thinking that maybe this isn’t such a bad thing? Who wants more of us?

I like the term “semen parameters”. Name for a band. Double billing with Pussy Riot.

Sperm Counts In The West Plunge By 60% In 40 Years (Ind.)

Sperm counts have plunged by nearly 60% in just 40 years among men living in the West, according to a major review of scientific studies that suggests the modern world is causing serious damage to men’s health. Pesticides, hormone-disrupting chemicals, diet, stress, smoking and obesity have all been “plausibly associated” with the problem, which is associated with a range of other illnesses such as testicular cancer and a generally increased mortality rate. The researchers who carried out the review said the rate of decline had showed no sign of “levelling off” in recent years. The same trend was not seen in other parts of the world such as South America, Africa and Asia, although the scientists said fewer studies had been carried out there.

One expert commenting on the study said it was the “most comprehensive to date”, and described the figures as “shocking” and a “wake-up call” for urgent research into the reasons driving the fall. Writing in the journal Human Reproduction Update, the researchers – from Israel, the US, Denmark, Brazil and Spain – said total sperm count had fallen by 59.3% between 1971 and 2011 in Europe, North America, Australia and New Zealand. Sperm concentration fell by 52.4%. “Sperm count and other semen parameters have been plausibly associated with multiple environmental influences, including endocrine disrupting chemicals, pesticides, heat and lifestyle factors, including diet, stress, smoking and body-mass index,” the paper said. “Therefore, sperm count may sensitively reflect the impacts of the modern environment on male health throughout the life course.”

Read more …

Jul 202017
 
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Margaret Bourke-White Breadline, Kentucky 1937

 

Trump Ends CIA Arms Support For Anti-Assad Syria Rebels (R.)
Did the City of London Just Press the Panic Button on Brexit?
Single Payer Is The Only Real Answer, Says Medicare Architect (IC)
Deutsche Bank Expects Subpoenas Over Trump-Russia Investigation (G.)
Asia’s Coal-Fired Power Boom ‘Bankrolled By Foreign Governments And Banks’ (G.)
When Does a Home Become a Prison? (FAFC)
Saudi-Led Bloc Drops List Of Demands For Qatar (BBC)
Toronto Man Builds Park Stairs For $550, Irking City After $65,000 Estimate (CTV)
US-Style Mega Farms Invade The World (G.)
Australia Was Colonized By Humans 20,000 Years Before Europe (Ind.)
Child Refugees Denied Care Amid Suicide And Abuse In Greek Camps (Ind.)
UK Has Not Taken In Any Child Refugees Under Dubs Scheme This Year (G.)
The World Has Made More Than 9 Billion Tons of Plastic (CNBC)
World’s Plastic Waste Could Bury Manhattan 2 Miles Deep (AP)

 

 

The CIA will not like this. The press just can’t mention Putin enough. But a good decision.

Trump Ends CIA Arms Support For Anti-Assad Syria Rebels (R.)

The Trump administration has decided to halt the CIA’s covert program to equip and train certain rebel groups fighting the government of Syrian President Bashar al-Assad, two U.S. officials said, a move sought by Assad ally Russia. The U.S. decision, said one of the officials, is part of an effort by the administration to improve relations with Russia, which along with Iranian-supported groups has largely succeeded in preserving Assad’s government in the six-year-civil war. The CIA program began in 2013 as part of efforts by the administration of then-President Barack Obama to overthrow Assad, but produced little success, said the officials, both of whom are familiar with the program and spoke on the condition of anonymity.

The decision was made with National Security Adviser H.R. McMaster and CIA Director Mike Pompeo after they consulted with lower ranking officials and before Trump’s July 7 meeting with Russian President Vladimir Putin at the G-20 summit in Germany. It was not part of U.S.-Russian negotiations on a ceasefire in southwestern Syria, the two officials said. One of the officials said the United States was not making a major concession, given Assad’s grip on power, although not on all of Syria, “but it’s a signal to Putin that the administration wants to improve ties to Russia.” A downside of the CIA program, one of the officials said, is that some armed and trained rebels defected to Islamic State and other radical groups, and some members of the previous administration favored abandoning the program.

Before assuming office in January, Trump suggested he could end support for Free Syrian Army groups and give priority to the fight against Islamic State. A separate effort by the U.S. military effort to train, arm and support other Syrian rebel groups with air strikes and other actions will continue, the officials said.

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The real Macron.

Did the City of London Just Press the Panic Button on Brexit?

Oh the irony: EU capitals are trying to attract the very institutions that caused some of the worst financial scandals of the last ten years.

In a sign of growing desperation, the City of London Corporation, the enigmatic city within the city that serves as the ultimate bastion of privilege in the UK, is now trying to appeal to brute populist sentiment to defend its position as the world’s most important financial center. In a memo to the British Treasury, MPs, and financial institutions, the City’s Brexit envoy to the EU, Jeremy Browne, bemoaned that the French are pushing for the most damaging Brexit possible, even if France doesn’t directly benefit. The memo was duly leaked to one of the UK’s most anti-EU newspapers, The Daily Mail: “Browne’s recent meeting at the Banque de France was the worst he had had “anywhere in the EU”. The French, he said, “are crystal clear about their objectives: the weakening of Britain and the ongoing degradation of the City of London” and plotting to “actively disrupt and destroy” the UK’s financial sector when Britain leaves the EU.

France isn’t the only country aggressively trying to poach business from the City of London; so too are Germany, Spain, Luxembourg, the Netherlands and even Italy. But France differs from the rest in one key aspect, says Browne: it “sees Britain and the City of London as adversaries, not partners.” The recent election as president of Emmanuel Macron, a former investment banker at Rothschild & Cie Banque, has merely intensified this dynamic. Paris has promised to unfurl the red carpet for the City of London’s highest paid bankers by offering low tax rates and bank-friendly legislation, including scrapping a proposed financial transaction tax, while also seeking to grow as a clearing center. Clearing is a huge business for the City of London. The U.K. is estimated to handle 75% of all euro-denominated derivatives transactions, equivalent to around €930 billion of trades per day.

It’s also home to roughly 90% of US dollar domestic interest-rate swaps. The world’s largest clearinghouse for interest rate swaps, LCH, is based there and is majority-owned by London Stock Exchange Group Plc. LCH functions as a middle man collecting collateral and standing between derivatives and swaps traders to prevent a default from spiraling out of control. As Bloomberg reports, the role of clearing houses like LCH in global finance has become far more entrenched since the 2008 Financial Crisis and the inexorable expansion of derivatives trading. For years the French government, together with the European Central Bank, has wanted a piece of the action. Ironically, it was the European Court of Justice (ECJ) — the same court whose jurisdiction the UK government is now determined to elude — that, in 2015, stopped that from happening on the grounds that the ECB cannot discriminate against an EU member. But if the UK leaves the EU, and thus the ECJ’s jurisdiction, that ruling will no longer be applicable.

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They had the money but not the interest in the idea,” he lamented, “instead spending a year developing a complex bill that was DOA on [Capitol] Hill.”

Single Payer Is The Only Real Answer, Says Medicare Architect (IC)

Thanks to a pair of defections from more GOP senators late yesterday, the Republican plan to repeal and replace or simply repeal the Affordable Care Act is dead — for now. But the health care status quo is far from popular, with 57% of Americans telling Gallup pollsters in March that they “personally worry” a “great deal” about health care costs. Many health care activists are now pushing to adopt what is called a “single payer” health care system, where one public health insurance program would cover everyone. The U.S. currently has one federal program like that: Medicare. Expanding it polls very well. One of the activists pushing for such an expansion is Max Fine, someone who is intimately familiar with the program — because he helped create it.

Fine is the last surviving member of President Kennedy’s Medicare Task Force, and he was also President Johnson’s designated debunker against the health insurance industry. Fine, now 91, wrote to The Intercept recently to explain that Medicare was never intended to cover only the elderly population, and that expanding it to everyone was a goal that its architects long campaigned for. “Three years after the enactment of Medicare, in Dec. 1968, a Committee of 100 leading Americans was formed to campaign for single payer National Heath Insurance. The campaign leaders were UAW pres. Walter Reuther, Dr. Michael DeBakey, Nat. Urban League Pres Whitney Young and Mary Lasker, a leader in the formation and funding of NIH,” he wrote.

”The NY Times and other newspapers gave front page play to the announcement of the campaign for ‘Medicare for All’ but the Committee gained even more attention when, shortly before xmas, pres-elect Nixon, emerging from his doctor’s office in San Diego, denounced us as socialists who were trying to create a problem when none existed.” Fine noted that this movement towards single payer has “risen and fallen over the years,” reaching a high point in the early 70s when former Democratic Massachusetts Sen. Ted Kennedy’s bill covering all Americans with government health insurance had 36 co-sponsors. But the Democratic Party decided to go a different direction, turning instead to private insurance to cover Americans.

Fine said he met with former First Lady Hillary Clinton’s health care task force in the early 1990’s, and advised them to incrementally expand Medicare, starting first with children and then lowering the age for the elderly. “They had the money but not the interest in the idea,” he lamented, “instead spending a year developing a complex bill that was DOA on [Capitol] Hill.”

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Deutsche already did a review and reported nothing suspicious. Does that make them suspect?

Deutsche Bank Expects Subpoenas Over Trump-Russia Investigation (G.)

Executives inside Deutsche Bank, Donald Trump’s personal bankers, are expecting that the bank will soon be receiving subpoenas or other requests for information from Robert Mueller, the special counsel who is investigating possible collusion between the Kremlin and the Trump campaign. A person close to the matter who spoke to the Guardian on the condition of anonymity said that Mueller’s team and the bank have already established informal contact in connection to the federal investigation. Deutsche’s relationship with Trump and questions about hundreds of millions in loans have dogged the German bank and the White House for months. They have also been the subject of intense scrutiny among some Democrats on Capitol Hill, who have demanded the bank turn over detailed information about the president’s accounts.

The requests for information from Maxine Waters, the top Democrat on the House financial services committee, have focused on whether any Russian entities may have provided financial guarantees for the loans that were made to the president or his immediate family members. The Guardian reported in February that the bank launched a review of Trump’s account earlier this year in order to gauge whether there were any suspicious connections to Russia and did not discover anything suspicious. Ivanka Trump, the president’s daughter and adviser in the White House; her husband, Jared Kushner, who is also a presidential adviser; and Kushner’s mother, Seryl Stadtmauer, are all clients of Deutsche Bank.

US media outlets have reported that Mueller’s investigation into possible Russian collusion with the Trump campaign will include a close examination of the president’s finances and businesses. While Deutsche Bank did engage in banking transactions with Russian banks as late as 2005, including some loan activity, a person familiar with the matter said the activity was not related to Trump’s accounts or his family.

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What a surprise. The same ones that signed on to the Paris Accord, by any chance?

Asia’s Coal-Fired Power Boom ‘Bankrolled By Foreign Governments And Banks’ (G.)

The much-discussed boom in coal-fired power in south-east Asia is being bankrolled by foreign governments and banks, with the vast majority of projects apparently too risky for the private sector. Environmental analysts at activist group Market Forces examined 22 deals involving 13.1 gigawatts of coal-fired power in Indonesia and found that 91% of the projects had the backing of foreign governments through export credit agencies or development banks. Export credit agencies, which provide subsidised loans to overseas projects to assist export industries in their home countries, were involved in 64% of the deals and provided 45% of the total lending. The majority of the money was coming from Japan and China, with the Japan Bank for International Cooperation (JBIC) involved in five deals and the Export-Import Bank of China (Cexim) involved in seven deals.

All the deals closed between January 2010 and March 2017. The China Development Bank was the biggest development bank lending to the projects, imparting $3bn, with a further $300,000 in development funds coming from Korea’s Korea Development Bank. The lending comes despite the world’s biggest development bank – the World Bank – warning last year that plans to build more coal-fired power plants in Asia would be a “disaster for the planet” and overwhelm the deal forged at Paris to fight climate change. “Right now, several key countries supporting the Paris climate change agreement are actively undermining it by trying to expand the polluting coal-power sector in other countries,” said Julien Vincent, executive director of Market Forces.

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The upside down logic of the First American Financial Corporation. They need people to buy and sell, or their business is dead. Your home is a prison if you don’t sell it. But the supply shortage illusion is really gone, guys.

When Does a Home Become a Prison? (FAFC)

In most markets, the seller, or supplier, makes their decision about adding supply to the market independent of the buyer, or source of demand, and their decision to buy. In the housing market, the seller and the buyer are, in many cases, actually the same economic actor. In order to buy a new home, you have to sell the home you already own. So, in a market with rising prices and strong demand, what’s preventing existing homeowners from putting their homes on the market? The housing market has experienced a long-run decline in mortgage rates from a high of 18% for the 30-year, fixed-rate mortgage in 1981 to a low of almost 3% in 2012. Today, five years later, mortgage rates remain just a stone’s throw away from that historic low point.

This long-run decline in rates encouraged existing homeowners to both move more often and to refinance more often, in many cases refinancing multiple times between each move. It’s widely expected that mortgage rates will rise further. This is more important than we may even realize because the housing market has not experienced a rising rate environment in almost three decades! No longer is there a financial incentive to refinance for most homeowners, and there’s more to consider when moving. Why move when it will cost more each month to borrow the same amount from the bank? A homeowner can re-extend the mortgage term another 30 years to increase the amount one can borrow at the higher rate, but the mortgage has to be paid off at some point.

Hopefully before or soon after retirement. Existing homeowners are increasingly financially imprisoned in their own home by their historically low mortgage rate. It makes choosing a kitchen renovation seem more appealing than moving.” There is one more possibility caused by the fact that the existing-home owner is both seller and buyer. In today’s market, sellers face a prisoner’s dilemma, a situation in which individuals don’t cooperate with each other, even though it is seemingly in their best interest to do so. Consider two existing homeowners. They both want to buy a new house and move, but are unable to communicate with each other. If they both choose to sell, they both benefit because they increase the inventory of homes available, and collectively alleviate the supply shortage.

However, if one chooses to sell and the other doesn’t, the seller must buy a new home in a market with a shortage of supply, bidding wars and escalating prices. Because of this risk, neither homeowner sells (non-cooperation) and neither get what they wanted in the first place – a move to a new, more desirable home. Imagine this scenario playing out across an entire market. If everyone sells there will be plenty of supply. But, the risk of selling when others don’t convinces everyone not to sell and produces the non-cooperative outcome. Rising mortgage rates and the fear of not being able to find something affordable to buy is imprisoning homeowners and causing the inventory shortages that are seen in practically every market across the country. So, what gives in a market short of supply relative to demand? Prices. According to the First American Real House Price Index, the fast pace of house price growth, combined with rising rates, has had a material impact on affordability.

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A weird turnaround in an already weird file. Tillerson?

Saudi-Led Bloc Drops List Of Demands For Qatar (BBC)

The four Arab nations leading a boycott of Qatar are no longer insisting it comply with a list of 13 specific demands they tabled last month. Diplomats from Saudi Arabia, the United Arab Emirates, Bahrain and Egypt told reporters at the UN they now wanted it to accept six broad principles. These include commitments to combat terrorism and extremism and to end acts of provocation and incitement. There was no immediate comment from Qatar, which denies aiding terrorists. It has refused to agree to any measures that threaten its sovereignty or violate international law, and denounced the “siege” imposed by its neighbours. The restrictions put in place six weeks ago have forced the gas-rich emirate to import food by sea and air to meet the basic needs of its population of 2.7 million.

At a briefing for a group of UN correspondents in New York on Tuesday, diplomats from the four countries said they wanted to resolve the crisis amicably. Saudi permanent representative Abdullah al-Mouallimi said their foreign ministers had agreed the six principles at a meeting in Cairo on 5 July and that they “should be easy for the Qataris to accept”. This latest development does, on the surface, hint at a possible way out of the current standoff between Qatar and its neighbours. But it is unlikely to provide a permanent solution. The problem comes down to how countries choose to interpret “extremism and terrorism”. Qatar has long prided itself on giving voice to alternative views to the edited, government-approved ones aired by its conservative neighbours. Hence one of the reasons why Qatar’s Al Jazeera network has been such a thorn in their sides. However, the charge levelled against Qatar is that those alternative voices include people committed to the overthrow of governments in the region.

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Please pay $64.450 to comply with bylaws.

Toronto Man Builds Park Stairs For $550, Irking City After $65,000 Estimate (CTV)

A Toronto man who spent $550 building a set of stairs in his community park says he has no regrets, despite the city’s insistence that he should have waited for a $65,000 city project to handle the problem. The city is now threatening to tear down the stairs because they were not built to regulation standards. Retired mechanic Adi Astl says he took it upon himself to build the stairs after several neighbours fell down the steep path to a community garden in Tom Riley Park, in Etobicoke, Ont. Astl says his neighbours chipped in on the project, which only ended up costing $550 – a far cry from the $65,000-$150,000 price tag the city had estimated for the job. “I thought they were talking about an escalator,” Astl told CTV News Channel on Wednesday.

Astl says he hired a homeless person to help him and built the eight steps in a matter of hours. Astl’s wife, Gail Rutherford, says the stairs have already been a big help to people who routinely take that route through the park. “I’ve seen so many people fall over that rocky path that was there to begin with,” she said. “It’s a huge improvement over what was there.” Astl says members of his gardening group have been thanking him for taking care of the project, especially after one of them broke her wrist falling down the slope last year. “To me, the safety of people is more important than money,” Astl said. “So if the city is not willing to do it, I have to do it myself.” City bylaw officers have taped off the stairs while officials make a decision on what to do with it. However, Astl has not been charged with any sort of violation.

Mayor John Tory acknowledged that the city estimate sounds “completely out of whack with reality” on Wednesday. However, he says that still doesn’t justify allowing private citizens to bypass city bylaws to build public structures themselves. “I think everyone will understand that it will be more than $550,” he said on Wednesday. “We just can’t have people decide to go out to Home Depot and build a staircase in a park because that’s what they would like to have.”

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Result: reisistant superbugs.

US-Style Mega Farms Invade The World (G.)

Since the days of the wild west frontier, the popular image of American farming has been of cowboys rounding up steers on wide open ranches, to whoops, whips and hollers. Today, the cowboys on their ranches under wide open skies have been replaced by vast sheds, hulking over the plains, housing tens of thousands of animals each, with the noises and smells spreading far beyond their fences. The US has led the world in large-scale farming, pioneering the use of intensive livestock rearing in hog farms, cattle sheds and sheep pens. There are now more than 50,000 facilities in the US classified as concentrated animal feeding operations (CAFOs), with another quarter of a million industrial-scale facilities below that threshold. Around the world, developing countries in particular were quick to catch up.

Intensive farming of livestock offers many advantages over traditional open ranges, not least economies of cost and scale, more efficient healthcare for the herds and flocks, and ultimately cheaper food. According to the UN, globally CAFOs account for 72% of poultry, 42% of egg, and 55% of pork production. In 2000, there were an estimated 15 billion livestock in the world, according to the Worldwatch Institute. By last year, that had risen to about 24 billion, with the majority of eggs, chicken meat and pork produced on intensive farms. Ranching was never an option in the UK, but most people still expect farms to consist of green fields rather than vast industrial-scale sheds. The reality is an increasing number of livestock are “zero graze”, spending all or almost all of their time indoors in large warehouse-type facilities.

[..] at least 789 megafarms, meeting the US definition of CAFOs, now operate around the UK, with every region of the country hosting several such operations, many of them owned by foreign multinationals. These are the biggest in a wave of intensive farms that has increased by more than a quarter in six years. [..] Emma Slawinski, director of campaigns at Compassion in World Farming, said the problems of mega farms around the world included over-medication, where animals are given antibiotics whether they are needed or not. “Factory-farmed animals are regularly given antibiotics in their feed or water, because of the higher risk of disease when large numbers of animals are kept in these overcrowded conditions. There is strong evidence that this overuse of antibiotics in intensive farming is contributing to antibiotic resistance in human medicine.

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How is this new information?

Australia Was Colonized By Humans 20,000 Years Before Europe (Ind.)

Australia was colonised about 20,000 years before humans first arrived in Europe, according to new research. The discovery of the world’s oldest stone axes with ground edges, ochre used to make “spectacular rock art” and other artefacts in northern Australia pushes back the earliest known presence of humans to 65,000 years ago. Despite the relative closeness of Europe to Africa, where modern humans first evolved about 200,000 to 3000,000 years ago, the first concrete signs of Europeans are about 45,000 years old. In addition to their sophisticated axes, the people who first arrived on Australia’s shores may also have been armed with spears. The objects were found at Madjedbebe within the traditional lands of the Mirarr clan, an area of land that was excluded from the surrounding Kakadu National Park after a lease to mine uranium in the area was granted in 1982.

Representatives of the Mirarr said the research showed the “universal importance” of the area and called for it to receive the “highest level of conservation and protection”. Writing in the journal Nature, the researchers said: “The settlement of Madjedbebe around 65,000 years ago … sets a new minimum age for the human colonisation of Australia and the dispersal of modern humans out of Africa and across south Asia. “The final stages of this journey took place at a time of lower sea level, when northern Australia was cooler and wetter. “Our chronology … extends the period of overlap of modern humans and Homo floresiensis [the hominin species better known as hobbits] in eastern Indonesia to at least 15,000 years and, potentially, with other archaic hominins – such as Homo erectus – in southeast Asia and Australasia.”

In addition to changing the story of our species’ expansion across the globe, the new much older date challenges theories that Australia’s astonishing megafauna – a two-tonne wombat, giant kangaroos that were so big they couldn’t hop and a two-metre-tall bird – were quickly wiped out by humans. “Our chronology places people in Australia more than 20,000 years before continent-wide extinction of the megafauna,” the Nature paper said.

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Deterrent is still the favorite approach for Greece as well as the EU. Cowards.

Child Refugees Denied Care Amid Suicide And Abuse In Greek Camps (Ind.)

Unaccompanied child refugees are being wrongly identified as adults by Greek authorities and denied vital care in squalid camps, a new report has found. Human Rights Watch (HRW) interviewed children as young as 15, who said they had been denied special protections required under international law. The group found Greece’s legal age assessment procedure was not being “followed in practice” on the island of Lesbos, which has been at the epicentre of the Aegean refugee crisis. [..] Under Greek law, the government is supposed to appoint a guardian for each child to represent them in legal proceedings, hear their views and act in their best interests, separating minors into designated areas of “hotspot” processing centres.

The Greek Reception and Identification Service (RIS) is responsible for identifying unaccompanied children and other vulnerable groups, with support from the UN, Frontex border agency and EU, and referring them to social services and information. But HRW said the authority was “failing to meet its responsibilities” and sometimes “arbitrarily” recording ages above those given, sometimes using controversial dental examinations without any other evidence. Those classified as adults are left to fend for themselves at heightened risk of exploitation, trafficking and other abuse, including prostitution, aid workers have warned. “They live in official and unofficial sites with unrelated adult single men; are exposed to inhumane living conditions, including overcrowding, unsanitary conditions, and frequent incidents of violence; and are unable to go to school or otherwise access education,” HRW said.

[..] When there is no space in safe shelters for unaccompanied children, authorities frequently detain them in police stations, immigration detention facilities and asylum processing centres, with 1,149 unaccompanied minors currently awaiting places. The uncertainty and distress provoked by the process is worsening an ongoing mental health crisis in Greek camps, aid workers said, having already warned of increasing rates of suicide and self-harm. [..] Greek officials told HRW that a thorough procedure is followed to establish the ages of asylum claimants [..] The group called on authorities in Greece to bring age assessments in line with international best practice, so proper accommodation, care, education, counselling and legal aid can be given to those who need it.

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Scandalous. But at least something UK and EU can agree on: let ’em rot.

UK Has Not Taken In Any Child Refugees Under Dubs Scheme This Year (G.)

Home Office ministers have tried to deflect cross-party anger as it emerged that not a single extra lone child refugee has been brought to Britain from Europe under the “Dubs amendment” this year. The immigration minister, Brandon Lewis, met accusations that the government was “dragging its feet” by disclosing he will visit Italy and Greece next week to follow up the invitation to refer eligible children to be brought to Britain. But during an urgent Commons question raised by the outgoing Liberal Democrat leader, Tim Farron, he faced cross-party criticism that it was taking too long to process eligible refugee children in Europe to bring them to Britain. Home Office ministers have confirmed in written answers that only 200 children were transferred under Dubs in 2016 after the closure of the Calais camp and 280 local authority places remain to be filled.

The Dubs amendment, known as section 67, was passed in April 2016 amid a campaign to bring 3,000 lone refugee children stuck in camps in Europe to Britain. Ministers initially estimated local authority capacity at 350 but extended it to 480 in April after saying there had been “an administrative error” in the initial figure. Lily Caprani, of Unicef UK, said: “It’s unacceptable that we have seen no children brought under the Dubs scheme this year. As a nation we showed our compassion and our principles when we helped refugee children stranded in Calais, but we were told this was not the end of the story. We are seeing too many children still having to make dangerous journeys to reach safety.”

In the Commons, Farron said it was hard to see the government’s response as anything more than lip service and demanded to know when the “measly commitment” of 480 would be met. “I have visited the camps in Greece and elsewhere – something neither the home secretary nor the prime minister have done. I have met these children who, through no fault of their own, find their lives paused as ministers have chosen to ignore them,” said the Lib Dem leader. “Has the UK government even signed a memorandum of understanding with Greece to get these transfers under way? I know of two young people who signed a consent form to be transferred under Dubs over a year ago. They are still stuck in Greece.”

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Bringing carbon to the surface.

The World Has Made More Than 9 Billion Tons of Plastic (CNBC)

More than 9 billion tons of plastic have been made since the 1950s, and the vast majority of it has been thrown in the trash, says a new study. The paper says it is the first attempt to measure the total amount of plastic produced since the beginning of mass plastic production in the middle of the 20th century. A team of researchers from the University of California, Santa Barbara, the University of Georgia, and the Woods Hole Oceanographic Institution, say that although plastic materials such as Bakelite were in use in the early 20th century, the material’s popularity began to rapidly rise after World War II, making it one of the most commonly used man-made materials. For example, the researchers estimated that the amount of plastic in use now is 30% of all the plastic ever produced.

While that has brought its benefits, such as lower-cost materials or capabilities like water resistance, our love of plastic has also produced a lot of trash. About 7 billion tons of it, by their estimate. And as of 2015, only 9% of the plastic waste produced ended up recycled, and another 12% was incinerated, the researchers found in their report. The remaining 79% has built up in landfills or ended up elsewhere in the environment. The team published their results in the journal Science Advances on Wednesday. To make their estimates, the researchers cobbled together datasets on global plastic production, such as global annual pure polymer (resin) production data from 1950 to 2015, published by the Plastics Europe Market Research Group, and global annual plastic fiber production data from 1970 to 2015 published by The Fiber Year and Tecnon OrbiChem.

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Production is not just growing, growth is still accelerating.

World’s Plastic Waste Could Bury Manhattan 2 Miles Deep (AP)

Industry has made more than 9.1 billion tons of plastic since 1950 and there’s enough left over to bury Manhattan under more than two miles of trash, according to a new cradle-to-grave global study. Plastics don’t break down like other man-made materials, so three-quarters of the stuff ends up as waste in landfills, littered on land and floating in oceans, lakes and rivers, according to the research reported in Wednesday’s journal Science Advances . “At the current rate, we are really heading toward a plastic planet,” said study lead author Roland Geyer, an industrial ecologist at the University of California, Santa Barbara. “It is something we need to pay attention to.” The plastics boom started after World War II, and now plastics are everywhere. They are used in packaging like plastic bottles and consumer goods like cellphones and refrigerators.

They are in pipes and other construction material. They are in cars and clothing, usually as polyester. Study co-author Jenna Jambeck of the University of Georgia said the world first needs to know how much plastic waste there is worldwide before it can tackle the problem. They calculated that of the 9.1 billion tons made, nearly 7 billion tons are no longer used. Only 9% got recycled and another 12% was incinerated, leaving 5.5 billion tons of plastic waste on land and in water. Using the plastics industry own data, Geyer, Jambeck and Kara Lavender Law found that the amount of plastics made and thrown out is accelerating. In 2015, the world created 448 million tons of plastic — more than twice as much as made in 1998.

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Apr 102017
 
 April 10, 2017  Posted by at 8:21 am Finance Tagged with: , , , , , , , , , ,  9 Responses »
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Todd Webb Rue des Plantes, Paris 1950

 

Americans Are Becoming Obsessed With Putting Everything On Credit (MW)
Cash Is Dead. Long Live Cash. (WSJ)
A Change In The Change Of Change (Peters)
Great Debt Unwind: Bankruptcies Surge (WS)
Trump’s Rollback of Bank Regulations Risks a Bondholder Backlash (Street)
Syria Strike Designed To Intimidate North Korea: China State Newspaper (G.)
Is Globalisation Dead? (Pettifor)
Housing Costs Are Pushing People Further Out of Sydney (BBG)
Toronto Mayor Says He’s Open to Sale of City Real Estate Assets
Secret Recording Implicates Bank of England In Libor Manipulation (BBC)
The Fire In The Hold Of The Doomed Euro (Ward)
Tsipras: Debt Relief Prerequisite to Legislate New Measures (GR)
Great Barrier Reef at ‘Terminal Stage’ (G.)
John Clarke has Died

 

 

We need a war on plastic, not cash.

Americans Are Becoming Obsessed With Putting Everything On Credit (MW)

It’s more likely that the last time you bought a pack of gum or a can or soda, you used a credit card. People like their credit cards so much they’re using them even for the tiniest purchases, according to a new survey released Monday from the credit cards site CreditCards.com. Among people with credit cards, 17% said they use them to buy items in brick-and-mortar stores that cost less than $5, up from 11% last year. CreditCards.com surveyed about 1,000 U.S. adults in March 2017. After a lull in the wake of the Great Recession, credit cards are once again being used with increased frequency. The Federal Reserve reported last week that collective credit card debt in the U.S. had reached $1 trillion.

Credit-card debt and auto loan debt balances for people ages 60 and older have also risen since 2008, that Fed data showed, whereas credit-card debt for those 59 and younger has fallen. The Fed, when describing that phenomenon, said lending standards have tightened since the recession, and those who are older may also be more creditworthy. But when consumers can pay their balances each month, turning to credit cards for small purchases isn’t a bad thing, said Matt Schulz, a senior industry analyst for CreditCards.com. Putting more charges on a credit card may indicate consumers feel more optimistic about their financial picture for the future, he said. “People who are chasing rewards realize that those little purchases can add up to a lot of rewards over the course of a year,” he added.

Indeed, several high-profile credit cards offer cash back and perks for spending. For example, Amazon introduced a credit card this year for Prime members that gives 5% cash back on Amazon purchases (Prime itself costs $99 per year.) Some retailers, however, prohibit credit-card purchases below a certain amount to avoid paying transaction fees to the credit-card issuers for such purchases. That said, cash and debit cards still are the go-to options for making small purchases, despite the speed with which credit cards are gaining on them. Of those surveyed, 24% said they use debit cards for small purchases, and 55% said they use cash. It appears younger consumers are behind at least some of the growth in credit card use: Some 70% of baby boomers and their older cohorts, the Silent Generation, still choose cash for small purchases versus 43% of those under 53.

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A little incoherent article, but point taken. Countries that try to go cashless should be careful.

Cash Is Dead. Long Live Cash. (WSJ)

[..] the push to get rid of cash is hitting speed bumps all over. India, for example, is already partly reintroducing its 500- and 1000-rupee bills after the government’s abrupt demonetization program drew sharp criticism for hurting its cash-dependent rural population. The U.S. shows no inclination to pare back its notes. “I’m very conscious of the $100 bill being the world’s reserve currency, and every central bank around the world has stacks of $100 bills where they used to have gold,” Treasury Secretary Jacob Lew said in an interview with The Wall Street Journal shortly before he left office in January. One reason it’s a non-starter in the U.S.: About 8% of people don’t have a checking or savings account, making it all-but-impossible for them to participate in a cashless economy.

Banning cash “would bring the economy and many people to their knees if enforced,” said Hoover Institution economist John Cochrane. In the aboveground economy, card-based and digital payment systems offering ever-greater speed, safety and convenience have been steadily encroaching on paper money, even for small consumer transactions. Euromonitor International, a market-research firm, said the volume of global cash payments in 2016 for the first time fell below payments on credit and debit cards. Some of the growth in cash can be attributed to the financial crisis and the aftermath, when people lost faith in banks, and when ultralow interest rates and anemic investment returns reduced the opportunity costs of holding savings in cash. The number of $100 bills in circulation, worth $1.15 trillion in December, has surged 76% since 2009, according to Federal Reserve data.

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“Brexit was a joke. Trump was a joke..”

A Change In The Change Of Change (Peters)

“The change of change is now negative,” said the CIO. “Global growth is still rising, but the rate of improvement is slowing,” he explained. “Same holds true for global inflation, oil prices, copper, iron ore. Credit growth is slowing in the US, Europe, Japan, China.” If these things were all contracting, we’d plunge into recession, but we’re not there. We’re simply at the point in the cycle where the rate of acceleration is slowing – which is both evidence of a pause, and a precondition for every major turn. “The last time we had a major shift in the change of change was a year ago.” In Jan/Feb 2016, China was imploding. Commodity prices were tanking with equity markets, the dollar soared alongside volatility. Then China unleashed explosive credit stimulus, while the Fed blinked, guiding forward interest rates dramatically lower. Within a short time, the change of change turned positive.

Which is not to say things immediately accelerated, it’s just that they started contracting more slowly. And that marked the time to buy. “Pretty much everything that happened in 2016 can be explained by two things; China and oil prices,” he said. “Literally, that’s it.” China’s stimulus-induced rebound and the oil price recovery is all that mattered. “Brexit was a joke. Trump was a joke. In fact, the only real significance of those events was that they provided investors with opportunities to jump on board the reflation trade at back near Q1 prices.” The reflation trade quietly began in the Q1 collapse, and accelerated off the extreme post-Brexit summer lows in global interest rates. That’s what made last year remarkable. Even investors who missed the first opportunity, had two chances to make a lot of money.” You see, that reward is usually reserved for those who act on the first signs of a change in the change of change.

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Credit shrinks, the Zombies fall.

Great Debt Unwind: Bankruptcies Surge (WS)

Commercial bankruptcy filings, from corporations to sole proprietorships, spiked 28% in March from February, the largest month-to-month move in the data series of the American Bankruptcy Institute going back to 2012. They’re up 8% year-over-year. Over the past 24 months, they soared 37%! At 3,658, they’re at the highest level for any March since 2013. Commercial bankruptcy filings skyrocketed during the Financial Crisis and peaked in March 2010 at 9,004. Then they fell sharply until they reached their low point in October 2015. November 2015 was the turning point, when for the first time since March 2010, commercial bankruptcy filings rose year-over-year.

Bankruptcy filings are highly seasonal, reaching their annual lows in December and January. Then they rise into tax season, peak in March or April, and zigzag lower for the remainder of the year. The data is not seasonally or otherwise adjusted – one of the raw and unvarnished measures of how businesses are faring in the economy. Note that there is no “plateauing” in this chart: since the low-point in September 2015, commercial bankruptcies have soared 65%! That red spike is the mega-increase in March:

At first, they blamed the oil bust. The price of oil began to collapse in mid-2014. By 2015, worried bankers put their hands on the money spigot, and a number of companies in that sector, along with their suppliers and contractors, threw in the towel and started filing for bankruptcy protection. But now the price of oil has somewhat recovered, banks have reopened the spigot, Wall Street has once again the hots for the sector, new money is gushing into it, and oil & gas bankruptcy filings have abated. So now they blame brick-and-mortar retail which is in terminal decline, given the shift to online sales. I have reported extensively on the distress of the larger chain stores, but brick-and-mortar retailers include countless smaller operations and stores that no ratings agency follows because they’re too small and can’t issue bonds, and many of them are even more distressed.

[..] Now come the consumers – not all consumers, but those with mounting piles of debt and stagnating or declining real incomes, of which there are many. They’d been hanging on by their teeth, with bankruptcy filings consistently declining since 2010. But that ended in November 2016. In December, bankruptcy filings rose 4.5% from a year earlier. In January they rose 5.4%. It was the first time consumer bankruptcies rose back-to-back since 2010. I called it “a red flag that’ll be highlighted only afterwards as a turning point.” In March, consumer bankruptcy filings rose 4% year-over-year, to 77,900, the highest since March 2015, when 79,000 filings occurred, according to the American Bankruptcy Institute data. The turning point has now been confirmed. Total US bankruptcy filings by consumers and businesses in March spiked 40% from February and rose 4% year-over-year to 81,590, the highest since March 2015:

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Trust at risk.

Trump’s Rollback of Bank Regulations Risks a Bondholder Backlash (Street)

President Donald Trump’s pledge to roll back regulations on U.S. banks could face resistance from an influential constituency: bondholders. While stockholders of firms like JPMorgan Chase and Goldman Sachs have cheered Trump’s plans to repeal or soften rules imposed in the wake of the 2008 financial crisis, bond-rater Standard & Poor’s is warning that such a move could undermine the industry’s creditworthiness. Measures like “stress testing,” in which regulators evaluate banks annually to determine if they’re sufficiently prepared to withstand a deep economic or market downturn, have made the firms safer, according to S&P. And so-called resolution planning – the practice of planning in advance how big banks would be wound down following a Lehman Brothers-style collapse – also has contributed to the industry’s resilience, the ratings firm wrote in a March 20 report.

The timetable for any such changes isn’t yet clear, however. Trump in February signed an executive order directing U.S. Treasury Secretary Steven Mnuchin to identify any laws that might impede economic growth or vibrant markets. Those could include the 2010 Dodd-Frank Act, signed by former President Barack Obama to curb risky activities like using excessive borrowings to fuel earnings growth and allowing in-house traders to speculate on markets with proprietary capital. “An overhaul of Dodd-Frank could be detrimental for bank creditors,” S&P wrote in the report. “If changes to Dodd-Frank watered down these features, and if banks reacted to such changes by weakening their financial management, we could lower ratings.” The fresh concerns could contribute to a shift in investor sentiment that’s been mostly positive toward banks since Trump’s surprise election on Nov. 8.

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Xi responds after he’s left Mar-a-Lago.

Syria Strike Designed To Intimidate North Korea: China State Newspaper (G.)

Donald Trump’s decision to attack Syria had also been designed to intimidate North Korean leader Kim Jong-un, a Chinese newspaper has claimed, as G7 foreign ministers meet to discuss the fallout from last week’s missile incursion. The state-run Global Times said a US strike against North Korea would unleash carnage on the Korean peninsula. The US navy has deployed a strike group towards the western Pacific Ocean, to provide a presence near the Korean peninsula. South Korean officials suspect Kim may be planning to hold his country’s sixth nuclear test later this week to mark the 105th anniversary of the birth of founder Kim Il-sung on 15 April, an event a number of foreign journalists have been invited to cover.

In an editorial entitled: ‘After Syria strikes, will North Korea be next?’, the Global Times suggested the US might now be preparing to launch “similar actions” against Pyongyang and warned of catastrophic consequences if it did. “A symbolic strike against North Korea by the US would bring a disaster to the people in Seoul,” the newspaper said, claiming a “decapitation attack” on North Korea was now “highly possible”. Such a strike would “very likely evolve into large-scale bloody war on the peninsula”. The Global Times noted the decision to deploy a strike force to the Western Pacific over the weekend and cautioned Pyongyang against doing anything that might further inflame the situation.

“New nuclear tests will meet with unprecedented reactions from the international community, even to a turning point.” The warnings came after the US secretary of state, Rex Tillerson, claimed that the situation in North Korea had “reached a certain level of threat that action has to be taken”. Asked if the attack on Syria could be seen as a message to Pyongyang, Tillerson told ABC: “The message that any nation can take is: ‘If you violate international norms, if you violate international agreements, if you fail to live up to commitments, if you become a threat to others, at some point a response is likely to be undertaken.”

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“Hayek: state regulation leads to totalitarianism. But instead self-regulating markets led to today’s authoritarians.”

Is Globalisation Dead? (Pettifor)

In the BBC’s brief and pressured half-hour I wanted to get across that globalisation had not delivered on its promise – to make ‘the market’ the main driver of a more effective, more productive economy; to transform societies into nations of ‘shareholders’; to ensure a revolution in homeownership, and to avoid what Hayek called the threat of a totalitarian state. Instead financial globalisation has been an era largely fuelled by carbon (oil and coal) – as had been the case for over a century. However, unlike the Bretton Woods era, post 1970s de-regulated financial globalisation was built on mountains of private and public debt. The first – private debt – led to recurring financial crises, and the second – public debt – rose as private sector activity weakened, and tax revenues fell.

The consequences of these recurring financial crises in ‘advanced’ economies included ‘austerity’, the removal of employment protection, rising housing and education costs, the return of deflationary pressures, high unemployment, falling real wages, low productivity and rising inequality. These crises have led to increased insecurity and over-rapid social and economic change- as well as the greatest financial and economic crisis since 1929 (itself a product of excessive laissez-faire ideology). More widely, the insecurities and dislocations generated by financial globalisation have led whole populations to seek the ‘protection’ of a strong man (e.g. Presidents Trump, Duterte in the Philippines, Modi in India, Erdogan in Turkey, Putin in Russia).

Not that this worries the extreme adherents of laissez-faire – recall how Hayek supported the murderous dictator Pinochet in Chile for his brutal imposition of deregulatory ‘reform’. And so, contrary to Hayek’s expectations, financial globalisation has proved that it is market fundamentalism, and not the regulatory state that is leading the world into an era of authoritarianism and totalitarianism – in the US, Eastern Europe, India and China.

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But politicians will keep saying that it’s all because not enough is being built. Why don’t you raise rates first and see what happens?

Housing Costs Are Pushing People Further Out of Sydney (BBG)

New South Wales has taken over as Australia’s economic engine as the mining investment boom tails off, with central Sydney contributing almost a quarter of the nation’s growth last fiscal year. That success has come with a price. As workers flock to Sydney, an under-supply of housing, coupled with record-low interest rates, has made the city the world’s second-most expensive property market. Home prices jumped 19 percent in the past 12 months, stoking concern home ownership is increasingly beyond the reach of younger people. That’s a big political problem for the state’s new Premier Gladys Berejiklian, who made housing affordability one of her priorities when she took the job in late January. Housing affordability is “a barbecue stopper,” Berejiklian, 46, said in an interview in her Sydney office on Thursday.

“We are convinced if we put downwards pressure on prices through supply, that’s the best way we can solve it as a state government.” Sydney’s housing completions reached a 15-year high in 2016, though Berejiklian says the state is only now playing catch-up after “a decade of under-investment.” “There are about 100,000 dwellings we are behind on in terms of really digging into the demand,” she said. [..] There are several barriers to boosting housing supply in Sydney. The city is bordered by mountains to the west, the ocean to the east and rivers and national parks to the north and south, restricting the supply of new land, while moves to increase housing density in established suburbs have run into opposition from residents. That’s meant in the past three years, almost 70 percent of new detached houses have been built more than 30 kilometers from Sydney’s central business district…

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“..the Canadian government has been trying to find ways to “crystallize” the value in some of its property assets…”

Toronto Mayor Says He’s Open to Sale of City Real Estate Assets

Toronto’s mayor won’t rule out selling some of the city’s prime downtown real estate as he looks to make better use of assets amid an unprecedented property boom. “Would I take that off the table? No, I wouldn’t,” Mayor John Tory said in an interview last week at Bloomberg’s Toronto office. Selling buildings in the city’s costly downtown market probably wouldn’t be “quite as politically charged” as divesting other types of assets, such as the parking authority or power utility Toronto Hydro, he said. The need for North America’s fourth-largest city to fund critical transit upgrades and housing improvements coincides with skyrocketing property prices in the region. Toronto’s real estate portfolio includes 6,976 buildings with 106.3 million square feet (9.9 million square meters), almost half of which is multifamily, according to a Dec. 6 report on the city’s assets.

With all of the demands on the city to raise money for building transit lines and repairing existing housing, then “might you be looking at the business case for handling real estate in a different way? Because this is the most expensive downtown real estate you could possibly have,” said the mayor, elected in 2014. The report, commissioned by the city and conducted by Deloitte, estimates the value of municipal real estate including community housing, parks and forestry is C$27 billion ($20 billion), while the annual operating costs in “core” real estate and facilities management is C$1.1 billion. Tory said he watched with passing interest the federal government’s sale earlier this year of the Dominion Public Building. The historic downtown property beside Toronto’s Union Station sold for about C$275 million ($205 million), according to newspaper reports.

The property was “super underutilized,” BMO analyst Heather Kirk said in an interview, adding the Canadian government has been trying to find ways to “crystallize” the value in some of its property assets. “What a building is worth to the government in current form is totally different than the value to a developer,” Kirk said. “They are buying density.” When asked how any properties might be sold, Tory stressed he didn’t currently have any specific recommendations to make to the city council, although “I just know those are things that sit out there still as options that are in front of the city government to raise money to do the things we have to do,” he said.

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Ehh.. how do you lock up the Bank of England?

Secret Recording Implicates Bank of England In Libor Manipulation (BBC)

A secret recording that implicates the Bank of England in Libor rigging has been uncovered by BBC Panorama. The 2008 recording adds to evidence the central bank repeatedly pressured commercial banks during the financial crisis to push their Libor rates down. Libor is the rate that banks lend to each other and it sets a benchmark for mortgages and loans for ordinary customers. The Bank of England said Libor was not regulated in the UK at the time. The recording calls into question evidence given in 2012 to the Treasury select committee by former Barclays boss Bob Diamond and Paul Tucker, the man who went on to become the deputy governor of the Bank of England. Libor, the London Interbank Offered Rate, tracks how much it costs banks to borrow money from each other.

As such it is a big influence on the cost of mortgages and other loans. Banks setting artificially low Libor rates is called lowballing. In the recording, a senior Barclays manager, Mark Dearlove, instructs Libor submitter Peter Johnson, to lower his Libor rates. He tells him: “The bottom line is you’re going to absolutely hate this… but we’ve had some very serious pressure from the UK government and the Bank of England about pushing our Libors lower.” Mr Johnson objects, saying that this would mean breaking the rules for setting Libor, which required him to put in rates based only on the cost of borrowing cash. Mr Johnson says: “So I’ll push them below a realistic level of where I think I can get money?” His boss Mr Dearlove replies: “The fact of the matter is we’ve got the Bank of England, all sorts of people involved in the whole thing… I am as reluctant as you are… these guys have just turned around and said just do it.”

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The warnings have always been there. Totally ignored.

The Fire In The Hold Of The Doomed Euro (Ward)

The more basic stuff goes back at least twenty years, to the period where trouble was stored up for the future by fanatical federalists cutting every corner and pulling out all the stops to get EMU (the prototype single currency) up and running. Several eminent economists on continents ranging from Australia and the US to the UK and Europe itself made very sound predictions at the time about coming disaster, and they did so saying two related things: 1) It would offer Germany a cheap, fixed currency leading inevitably to its economic dominance, 2) It would point up the economic consequences of imposing one rigid means of exchange on 18 varietal cultures, leading generally to Southern/South Eastern Europe falling behind.

Just to add more weedkiller to the poisonous formulation, the key European leaders not only ignored the advice; they also first, ignored all the data showing that several member States were nowhere near ready to join the eurozone based on agreed criteria; and then second, were implicated in several corrupt deals on commodities – as varied as German butter, Italian wines and Greek olive oil – to cloud the existence of stark differentials in both export and industrial development. For once, the economic naysayers proved to be soothsayers. Messrs Hollande and Muscovici shrink from the limelight about their own book on the subject of cultural difference (fancy that) but it proved to be spot on….as did the musings of Lawson and Thatcher et al in relation to Germany’s dominance.

The Mark from around 1963 until the creation of EMU was the most reliable, performance-related currency on the planet. But only massive debt forgiveness by the victors after the Second World War enabled that outcome. Both the realities in that last paragraph explain why lectures from Hollande and Merkel today – when joined by hypocrisy from Draghi at the ECB – evoke so much hatred of the EU’s prime movers among the so-called ClubMed nations….and those of us Brits in the Brexit camp. I make these points not to be nihilistic, but rather to level the playing field of media coverage that has been so bombed, excavated, deliberately over-watered and then tilted for good luck by Brussels, Wall Street and Berlin obfuscation and mendacity since 2010. A very real outcome of nihilism is being encouraged (and indeed made inevitable) by the EC’s refusal to recognise that – even as the SS Eunatic set sail – there was a raging fire in the hold.

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Big words.

Tsipras: Debt Relief Prerequisite to Legislate New Measures (GR)

The mid-term debt relief measures so that Greece can enter the quantitative easing program is the prerequisite to vote for the new measures, Greek Prime Minister Alexis Tsipras said on Sunday. Addressing the SYRIZA Central Committee, the party leader spoke about the new austerity measures his administration has agreed to with creditors. He spoke of a compromise that had to be made so that measures had to be counter-balanced by social relief measures of equal fiscal value and aid that the Greek negotiating team. “There are measures that are neither necessary, nor are they the ones we would ever choose, but the compromise achieved would have counter-measures that would counterbalance the fiscal impact and generate zero fiscal balance, and both will be legislated and implemented simultaneously,” Tsipras said.

Speaking on the initial agreement reached at the Malta Eurogroup on Friday, the prime minister said that, “After Malta the way for the identification of the medium-term measures for the debt is open. This will send a clear message to the markets that the uncertainty is over.” “Now we will be the ones to decide the fiscal path the country will follow after the end of the program,” Tsipras said, explaining the strategy for the next round of negotiations. He stressed that without medium-term measures for debt relief that would allow Greece to enter the QE program, he would not implement the new measures.

The prime minister also unleashed an indirect attack against main opposition New Democracy claiming that, “Some were scheming so that the evaluation would not close, because they didn’t want us to be the ones who will pull Greece out of the crisis.” He also attacked ND leader Kyriakos Mitsotakis accusing him of “rushing to meet with the German finance minister to get his blessing and undermine the negotiations.” He also said that the conservative party espouses extreme neoliberalism.

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It was a big mistake to put the Great Barrier Reef near Australia.

Great Barrier Reef at ‘Terminal Stage’ (G.)

Back-to-back severe bleaching events have affected two-thirds of Australia’s Great Barrier Reef, new aerial surveys have found. The findings have caused alarm among scientists, who say the proximity of the 2016 and 2017 bleaching events is unprecedented for the reef, and will give damaged coral little chance to recover. Scientists with the Australian Research Council’s Centre of Excellence for Coral Reef Studies last week completed aerial surveys of the world’s largest living structure, scoring bleaching at 800 individual coral reefs across 8,000km. The results show the two consecutive mass bleaching events have affected a 1,500km stretch, leaving only the reef’s southern third unscathed. Where last year’s bleaching was concentrated in the reef’s northern third, the 2017 event spread further south, and was most intense in the middle section of the Great Barrier Reef.

This year’s mass bleaching, second in severity only to 2016, has occurred even in the absence of an El Niño event. Mass bleaching – a phenomenon caused by global warming-induced rises to sea surface temperatures – has occurred on the reef four times in recorded history. Prof Terry Hughes, who led the surveys, said the length of time coral needed to recover – about 10 years for fast-growing types – raised serious concerns about the increasing frequency of mass bleaching events. “The significance of bleaching this year is that it’s back to back, so there’s been zero time for recovery,” Hughes told the Guardian. “It’s too early yet to tell what the full death toll will be from this year’s bleaching, but clearly it will extend 500km south of last year’s bleaching.”

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A really funny man died over the weekend.

John Clarke has Died

We featured quite a few Clarke and Dawe videos through the years. Here’s a few favorites:

How does the financial system work?

European Debt Crisis

The Greek Economy

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Dec 212016
 
 December 21, 2016  Posted by at 9:47 am Finance Tagged with: , , , , , , , ,  1 Response »
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Laurits Andersen Ring At Breakfast 1898

Most Expensive Housing Ever: A 1% Mortgage Rate Surge Changes Everything (MH)
This Christmas Americans Will Spend An Average Of $422 Per Child (EC)
Ray Dalio Says Animal Spirits Under Donald Trump Just Getting Started (F.)
Someone Has to Tell The Fed Inflation Is Not Accelerating (CEPR)
Brace Yourself For Italy’s Bankruptcy (Gavekal)
Italy Bank Rescue Won’t Fill $54 Billion Hole in Balance Sheets (BBG)
Top French Banks Sue ECB To Reduce Capital Demands (R.)
Spanish Banks Lose EU Case on Mortgage Interest Repayments (BBG)
India’s Small Businesses Facing ‘Apocalypse’ (G.)
Let The Yuan Fall Or Not? Beijing’s Big Burning Currency Question (SCMP)
Yuan Bears Strike as Capital Outflows Override PBOC (BBG)
To Problems With China’s Financial System, Add the Bond Market (NYT)
China’s Anticorruption Drive Ensnares the Lowly and Rattles Families (WSJ)
Smog Refugees Flee Chinese Cities As ‘Airpocalypse’ Blights Half A Billion (G.)
Obama Invokes 1953 Law To Indefinitely Block Arctic, Atlantic Drilling (CNBC)

 

 

Income vs prices has never been more expensive. There’s much more in Hanson’s article.

Most Expensive Housing Ever: A 1% Mortgage Rate Surge Changes Everything (MH)

BUILDER HOUSES: The average $361k builder house requires nearly $65k in income assuming a 4.5% rate, 20% down, and A-grade credit. Problem is, 20% + A-credit are hard to come by. For buyers with less down or worse credit, far more than $65k is needed. For the past 30-YEARS income required to buy the average priced house has remained relatively consistent, as mortgage rate credit manipulation made houses cheaper. Bottom line: Reversion to the mean can occur through house price declines, credit easing, a mortgage rate plunge to the high 2%’s, or a combination of all three. However, because rates are still historically low and mortgage guidelines historically easy, the path of least resistance is lower house prices.

The following chart compares Bubble 1.0 (2004 and 2006) to Bubble 2.0 on an apples-to-apples basis using the popular loan programs of each era. Bottom line: Builder prices are up 19% from 2006 but the monthly payment is 43% greater and annual income needed to qualify for a mortgage 83% more.

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‘T is the season to be plastic.

This Christmas Americans Will Spend An Average Of $422 Per Child (EC)

For many Americans, the quality of Christmas is determined by the quality of the presents. This is especially true for our children, and some of them literally spend months anticipating their haul on Christmas morning. I know that when I was growing up Christmas was all about the presents. Yes, adults would give lip service to the other elements of Christmas, but all of the other holiday activities could have faded away and it still would have been Christmas as long as presents were under that tree on the morning of December 25th. Perhaps things are different in your family, but it is undeniable that for our society as a whole gifts are the central feature of the holiday season. And that is why so many parents feel such immense pressure to spend a tremendous amount of money on gifts for their children each year.

Of course this pressure that they feel is constantly being reinforced by television ads and big Hollywood movies that continuously hammer home what a “good Christmas” should look like. Once again in 2016, parents will spend far more money than they should because they want to make their children happy. According to a brand new survey from T. Rowe Price, parents in the United States will spend an average of 422 dollars per child this holiday season… “More than half of parents report they aim to get everything on their kids’ wish lists this year, spending an average of $422 per child, according to a new survey from T. Rowe Price.” To me, that seems like a ridiculous amount of money to spend on a single child, but this is apparently what people are doing.

But can most families really afford to be spending so wildly? Of course not. As I have detailed previously, 69% of all Americans have less than $1,000 in savings. That means that about two-thirds of the country is essentially living paycheck to paycheck. So all of this reckless spending brings with it a lot of additional financial pressure. But because we are a “buy now, pay later” society, we do it anyway. We are willing to mortgage a little bit of the future in order to have a nice Christmas now. Another new survey has found that close to half the country feels “pressure to spend more than they can afford during the holiday season”…

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Possible only -beyond short term- with Fed money. Animal spirits sounds cute, but all investors have is money based on ultra cheap rates.

Ray Dalio Says Animal Spirits Under Donald Trump Just Getting Started (F.)

During the dark days of the financial crisis Ray Dalio, head of the world’s largest hedge fund Bridgewater Associates, published papers and YouTube seminars to describe the forces that drive the economy and explain why severe cycles like the credit collapse occur. The effort was intended to guide productive responses to the implosion of Wall Street, which crippled Main Street, and avert policies that could diminish a recovery. With the Dow Jones Industrial Average nearing a record 20,000, unemployment below 5% and the U.S. economy in the seventh year of a recovery, Dalio’s tomes on ‘how the economic machine works’ aren’t as top of mind as they once were. But that’s not to say Dalio, one of Wall Street’s weightiest hedge fund investors, has lost interest in the subject.

On Tuesday morning, Dalio published a monthly update that indicates he believes the U.S. economy is poised for a sudden and dramatic shift under President-elect Donald Trump. If the economic machine is presently churning along in a steady but somewhat muted recovery from the Great Recession, Dalio believes it may kick into overdrive as Trump implements a pro-business agenda that could stimulate the animal spirits of investors and businesses across United States. “[T]he Trump administration could have a much bigger impact on the US economy than one would calculate on the basis of changes in tax and spending policies alone because it could ignite animal spirits and attract productive capital,” Dalio states in a post published to LinkedIn. He adds, “regarding igniting animal spirits, if this administration can spark a virtuous cycle in which people can make money, the move out of cash (that pays them virtually nothing) to risk-on investments could be huge.”

Dalio believes Trump has staffed his administration with business-people who will be inclined to take quick action on perceived drags on the economy, whether that involves taxation, regulation or labor laws. What’s also clear is Dalio believes there are presently major impediments to the economy that need to be lifted. “This new administration hates weak, unproductive, socialist people and policies, and it admires strong, can-do, profit makers,” says Dalio. The Trump administration “wants to, and probably will, shift the environment from one that makes profit makers villains with limited power to one that makes them heroes with significant power,” he adds [..] “A pro-business US with its rule of law, political stability, property rights protections, and (soon to be) favorable corporate taxes offers a uniquely attractive environment for those who make money and/or have money. These policies will also have shocking negative impacts on certain sectors,” Dalio says, without describing in more detail the winners and losers.

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The ongoing confusions about what inflation is. One key rule: if spending doesn’t rise, and by a lot, there will be no inflation. There may be higher prices for some things, but that’s not the same. And where could higher spending come from when 2/3 of Americans don’t even have $1000 saved for an emergency?

Someone Has to Tell The Fed Inflation Is Not Accelerating (CEPR)

The Federal Reserve Board raised interest rates last week and seem poised to do so again in the not distant future. The rationale is that the economy is now near or at full employment and that if job growth continues at its recent pace it will lead to a harmful acceleration in the inflation rate. We have numerous pieces raising serious questions about whether the labor market is really at full employment, noting for example the sharp drop in employment rates (for all groups) from pre-recession levels and the high rate of involuntary part-time employment. But the story of accelerating inflation is also not right. This is particularly important, since John Williams, the president of the San Francisco Fed, cited accelerating inflation as a reason to support last week’s rate hike, and possibly future rate hikes, in an interview in the New York Times.

Williams has been a moderate on inflation, so there are many members of the Fed’s Open Market Committee who are more anxious to raise rates than him. A close look at the data does not provide much evidence of accelerating inflation. The core PCE deflator, the Fed’s main measure of inflation, has risen 1.7% over the last year, which is still under the 2.0% target. This target is an average, which means that the Fed should be prepared to allow the inflation rate to rise somewhat above 2.0%, with the idea that inflation will drop in the next recession. Anyhow, the 1.7% rate is slightly higher than a low of 1.3% reached in the third quarter of 2015, but it is exactly the same as the rate we saw in the third quarter of 2014. In other words, there has been zero acceleration in the rate of inflation over the last two years.

Furthermore, even this modest acceleration has been entirely due to the more rapid increase in rent over the last two years. The inflation rate in the core consumer price index, stripped of its shelter component, actually has been falling slightly over the last year. It now stands at 1.1% over the last year. It is reasonable to pull shelter out of the CPI because rents do not follow the same dynamic as most goods and services. In fact, higher interest rates, by reducing construction, are likely to increase the pace of increase in rents rather than reduce them.

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Italy’s banks are about to do the country in.

Brace Yourself For Italy’s Bankruptcy (Gavekal)

Matteo Renzi has joined a long line of Italian prime ministers who failed to “reform” their country. This is another way of saying that he could not wave a magic wand and make Italy competitive with Germany. The grim reality is that no Italian leader stood a chance of changing their country once the fateful decision was made to peg its currency to Germany’s. At the time of the euro’s launch in 1999, I argued that the risk profile of Italy would change from being an economy where there was a high probability of many currency devaluations to the certain probability of eventual bankruptcy. Sadly, that moment is not so far away.

The chart below tells the story of Italy’s recent economic history in two parts, namely, (i) March 1979 to March 1999, and (ii) March 1999 to the present. Italy joined the Exchange Rate Mechanism in 1979 at 443 lira per deutschemark, yet by 1990 frequent devaluations meant that rate had slid to about 750 lira. By the early 1990s, the Bundesbank was overseeing a newly unified German monetary system and in order to fight inflation it had driven real interest rates to 7%. By September 1992 the stresses on the system caused the UK, Sweden and Italy to exit the ERM, which meant another huge currency devaluation, pushing the lira as low as 1250 against the deutschemark, but delivering a huge tourist boom to boot.

Still, from 1979 to 1998 Italian industrial production outpaced that of Germany by more than 10%, while Italian equities outperformed German equivalents by 16% (this indicates that Italian firms were earning a higher return on invested capital than those in Germany). Then came the euro. By 2003 it was clear that Italy was uncompetitive and subsequently, Italian equities have underperformed German equities by -65%, reversing the previous half century’s pattern when Italian equities outperformed on a total return basis. Similarly, since 2003 Italian factory output has lagged Germany’s by 40%.

The diagnosis is simply that Italy has become woefully uncompetitive, and as a result, is not solvent. This much is clear from the perilous state of its banking system, which is always the outcome when banks lend to firms that have been rendered uncompetitive by some reckless central banker. Short of imposing Greek-style slavery on Italy, there is not much hope of solving the problem, but I rather doubt that the Italian electorate will be as patient as its neighbours across the Ionian sea.

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Let Beppe Grillo have a go at this. What does Italy have to lose?

Italy Bank Rescue Won’t Fill $54 Billion Hole in Balance Sheets (BBG)

Italian banks need at least €52 billion ($54 billion) to clean up their balance sheets, much more than the rescue package proposed Monday by the government. The shortfall is an estimate of how much lenders would have to increase loan-loss provisions to allow for the sale of bad debt. It includes the 8 billion euros of provisions UniCredit has said it will add before selling €18 billion of its worst loans and uses that ratio as a proxy for the gap at other banks. The total also includes the 5 billion euros Banca Monte dei Paschi di Siena has been struggling to raise in recent months. The Italian government asked parliament this week to increase the public borrowing limit by as much as €20 billion to potentially backstop Monte Paschi and other lenders.

The rescue package needs to be closer to €30 billion to solve Italy’s bad-debt crisis, according to Paola Sabbione at Deutsche Bank. That conclusion assumes UniCredit and some other lenders can raise about €20 billion through capital markets, asset sales and profit retention – leaving the government to fill the rest of the €52 billion hole. “Some of the publicly traded banks can probably raise some of the funds needed for a cleanup, including Monte Paschi,” said Sabbione, who has covered Italian banks for the past decade. “So the government would have to plug in the rest. But still, at this level, it won’t do the full job.” UniCredit, the nation’s largest lender, plans to increase loan-loss provisions to 75% for nonperforming loans with the lowest chances of recovery and 40% for two other categories considered less dire.

The increased writedowns will help the Milan-based lender sell about a third of its bad loans to asset manager Fortress Investment. UniCredit is planning to raise €13 billion of new equity funding to cover the increased provisions as well as other restructuring costs and to improve its capital ratio. The company’s shares have jumped 15% since the Dec. 13 announcement, giving analysts confidence the bank will have little trouble tapping investors for the funds. Italian banks had €356 billion of bad loans at the end of June and €165 billion of provisions against them, according to the latest Bank of Italy data. To get the worst category to 75% provisioning and the rest to 40%, as UniCredit is doing, would take €52 billion.

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French banks in turn are heavily into Italian banks. Just like they were into Greek banks, but they dodged that one when their political clout made the EU shift their burden onto the Greek pople. Will Italy let them do the same?

Top French Banks Sue ECB To Reduce Capital Demands (R.)

France’s top lenders are suing the ECB to get an exemption from holding capital against deposits parked with a state-owned fund, the most high-profile challenge to supervision from Frankfurt to date. As well as providing euro zone banks with funding, the ECB has been their main regulator for the past two years, tasked with ending cozy relationships between the industry and national authorities that contributed to the financial crisis. The Frankfurt-based institution has been sued repeatedly over its bond-buying programs and by smaller banks seeking to escape its supervision. But this is the first case brought by major banks in the euro zone and is a rare confrontation between France’s financial elite and the ECB’s supervisory board, led by the former head of France’s own banking regulator, Daniele Nouy.

The lawsuits have been brought by BNP Paribas, Societe Generale, Credit Agricole, Credit Mutuel, Groupe BPCE and La Banque Postale over the past few weeks, filings with the European Court of Justice show. Sources with direct knowledge of the cases told Reuters the banks are protesting the ECB’s demand that they set aside capital against special deposits they have with state investment institution Caisse des Dépôts et Consignations (CDC). The legal action comes amid heightened tension between banks and the ECB, which is inundating the financial sector with excess cash to try to stimulate growth while charging banks for depositing it with the central bank overnight. “You are seeing banks more and more go to court to challenge the supervisor,” a senior legal source said. “Years ago that was unthinkable.”

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So, Italy, France and Spain too, all have severely troubled banks.

Spanish Banks Lose EU Case on Mortgage Interest Repayments (BBG)

Competition watchdogs won a partial victory at the EU’s top court over their attempt to force Spanish banks to pay back millions of euros in tax breaks for the acquisition of stakes in foreign firms, Bloomberg News reports. Lenders, including Banco Popular Espanol SA and Banco Bilbao Vizcaya Argentaria SA, may have to give back billions of euros to mortgage customers after a ruling by the court.

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Over 6 weeks later, “India’s Reserve Bank has issued around 1.7 billion new notes, with less than one-third the value of what was removed..”

India’s Small Businesses Facing ‘Apocalypse’ (G.)

India’s vast informal economy has been reeling since 8 November, the morning after India’s prime minister, Narendra Modi, announced the sudden voiding of the country’s two most-used bank notes. It is the largest-scale financial experiment in Indian history: gutting 14 trillion rupees – 86% of the currency in circulation – from the most cash-dependent major economy in the world. More than a month on, India’s Reserve Bank has issued around 1.7 billion new notes, with less than one-third the value of what was removed. The sixth-largest economy in the world is running on 60% less currency than before. Lines outside banks continue to stretch, and India’s small business lobby says its members are facing an “apocalypse”. But Modi insists he isn’t done.

Initially intended to flush out the “black money” said to be hoarded by elites and criminals, the government now frames demonetisation as the first step in a “cashless” revolution to shift the billions of transactions undertaken each day in India online – and onto the radar of tax authorities. This week, labour minister Bandaru Dattatreya announced it would soon be mandatory for employers to pay their staff into bank accounts, a hugely ambitious step in a country where as many as 90% of workers are paid in cash. Already struggling, businessmen such as Sharma are dreading the prospect of more enforced digital migration. “How do you think I can pay the workers with a cheque if they don’t have a bank account?” he asks, in a tiny office thick with incense smoke. “And it takes three days to clear a cheque. What will they eat during those days?”

His reasons are not just altruistic. Apart from potentially raising his tax bill – in a country where just 1% pay income tax – paying salaries electronically would mean giving staff Delhi’s mandated minimum wage, currently 9,724 rupees (£114) per month for unskilled workers. “Right now no one pays the minimum wage that the government decides,” Sharma says. “It will only make things expensive: we will charge the customer.” Outside his workers’ earshot, he adds: “If someone is doing the work of Rs.2000, why should we pay them Rs.15,000?” But workers too are wary of the big push online. Tens of millions of Indians have been given zero-deposit bank accounts in the past two years under a government scheme to boost financial inclusion. But even after demonetisation prompted a rush of new deposits, 23% of the accounts still lie empty.

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Stuck. A large depreciation would be too costly, but keeping it high would eat up foreign reserves.

Let The Yuan Fall Or Not? Beijing’s Big Burning Currency Question (SCMP)

As the Chinese yuan keeps weakening against the dollar, a question is becoming acute for Beijing: should China let the market take its course and permit a deep currency fall or should it keep burning its foreign exchange reserves to support the currency’s value? The debate over what Beijing should do about its currency is heating up as regulators’ ambiguity over the question is becoming costly and unsustainable, particularly since the Federal Reserve raised interest rates. Against Beijing’s desire for a “controllable” depreciation, the government is losing control over capital flight, depleting foreign exchange reserve stockpile at an alarming speed, and failing to convince investors that there is “no fundamental basis for the continuous depreciation”.

Yu Yongding, a renowned Chinese economist who sat on the central bank’s monetary policy committee when the yuan was revalued in July 2005, said it was time for Beijing to reconsider the matter. “The fear of the yuan’s depreciation has become a burden for us,” Yu told a forum over the weekend. Yu, who for years has called for liberalizing the yuan’s exchange rate over years, said China should give up foreign exchange interventions and safeguard its foreign exchange reserves so that China will “have sufficient ammunition” for future rainy days. While Yu’s view is not in line with Beijing’s current policy, it is winning academic support. Xu Sitao, the China chief economist at Deloitte, an auditing firm, said “the best strategy is to let the yuan fall in full, and the worst strategy is slowly depleting foreign exchange reserves”.

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“The currency is facing a triple whammy of accelerating capital outflows, faster U.S. interest-rate increases and concerns over domestic financial markets..”

Yuan Bears Strike as Capital Outflows Override PBOC (BBG)

China’s renewed efforts to curb declines in its currency are doing little to dissuade yuan bears. Traders have turned increasingly negative amid tighter liquidity, sending bets for further losses soaring. The gap between forward contracts wagering on the offshore yuan a year from now versus its current level is heading for a record monthly jump, just as the extra cost for options to sell the currency against the dollar hit a six-month high relative to prices for contracts to buy. The currency is facing a triple whammy of accelerating capital outflows, faster U.S. interest-rate increases and concerns over domestic financial markets as liquidity tightens.

Strategists say its weakening, set to be the biggest this year in more than two decades, may accelerate as the government restores the annual quota for citizens to convert yuan holdings into foreign exchange. President-elect Donald Trump has also threatened to slap 45% tariffs on China’s imports to the U.S. “Bears are adding positions because expectations for the yuan to depreciate are getting stronger and stronger,” said Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong. “The pressures will likely continue and could get even worse, considering capital outflows and concerns on the reset of individuals’ conversion quota.”

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..in China, state-run banks are by far the main source of funding. Shadow banks.

To Problems With China’s Financial System, Add the Bond Market (NYT)

Chinese officials cheered on the country’s stock market when it reached heady new highs, offering hope that it could become a new source of money to fix China’s economic problems. Then, last year, the market crashed. Now another fast-growing part of China’s vast and increasingly complicated financial market is showing signs of distress: its $9 trillion bond market. Prices for government and corporate bonds have tumbled over the past week, a sell-off that continued on Tuesday. The situation has spooked investors, prompting the government to temporarily restrain some trading and to make emergency loans to struggling financial institutions. The price drops have resulted in higher borrowing costs at a time when more Chinese companies need the money to cope with slowing economic growth. Yields reached new highs again on Tuesday.

In part, China is reacting to financial shifts across the globe. With the Federal Reserve raising short-term interest rates and many expecting the presidency of Donald J. Trump to lead to heavier government spending, investors worldwide are selling bonds. But China is struggling with its own balancing act. The Chinese bond slump also stems from Beijing’s efforts to wring excess money from its financial system and to stop potential bubbles that may lurk in shadowy, hard-to-track corners of its economy. Should it continue with those efforts, bonds could fall further. “The adjustment has not yet finished,” said Miao Zuoxing, a partner at the FXM Brothers Fund. “It will continue and normalize until money is put where the government can see it.”

[..] China has particular reason to worry. As the world’s second-largest economy, after the United States, it relies on a rickety financial system that is mired in debt and susceptible to hidden stresses. Higher overseas interest rates could also prompt more Chinese investors to move their money out of the country, either to chase higher returns elsewhere or to avoid what some see as China’s growing problems. In the mature financial system of the United States, businesses have plenty of ways to get money. They can borrow from a bank, raise money selling stocks or bonds, or seek funds directly from any number of investors.

But in China, state-run banks are by far the main source of funding. That helped power the country’s economic rise, but it also led to loans going to politically connected borrowers rather than to where the economy needed it most. That is one reason the Chinese economy is now stuck with more steel, glass, cement and auto factories than it needs. Particularly in the past two years, China has taken steps to encourage the development of robust stock and bond markets as well as private lenders, needing a way to ensure the flow of money was being directed by profit-minded investors rather than politicians and their allies at state-owned banks.

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Heavy fisted. It’s all history has taught.

China’s Anticorruption Drive Ensnares the Lowly and Rattles Families (WSJ)

When Liu Chongfu returned home to his pig farm in December 2014 after months in detention, he was haunted by what he had done. Under interrogation, he later told his family, he falsely admitted to bribing government officials. Back home, released without being charged, Mr. Liu had nightmares and splitting headaches. His conscience weighed on him, his family said. So he publicly recanted in March 2015. In a written statement sent to the court, he said interrogators had deprived him of sleep and threatened his family to extract a phony confession that helped send four other men to prison. In his statement, also posted online, he said he lied “because they forced me to where there was no other way than death. I didn’t want to die.”

President Xi Jinping has called his anticorruption campaign, one of the leader’s defining initiatives, a “life or death” matter. It is among the most popular elements of his administration, given how corruption has been endemic in China and how it threatens to undermine confidence in Communist Party control. Since the campaign began in 2013, its reach has allowed Mr. Xi to root out resistance to his rule and secure party control over a society that is more prosperous and demanding. Mr. Liu’s confession and retraction suggest a dark side to Mr. Xi’s efforts. Families around China say overzealous authorities have forced confessions, tortured suspects and made improper convictions.

The farmer tried to retract his confession before, while still in detention. “I cannot violate my conscience to do this,” he told his interrogators, according to his statement, a transcript of a video he made with his lawyer. He knew it would send innocent officials to jail, he said, and that “the real tragedy is still to follow.” The four were convicted anyway.

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“I finally saw the blue sky. It was wonderful!”

Smog Refugees Flee Chinese Cities As ‘Airpocalypse’ Blights Half A Billion (G.)

Tens of thousands of “smog refugees” have reportedly fled China’s pollution-stricken north after the country was hit by its latest “airpocalyse” forcing almost half a billion people to live under a blanket of toxic fumes. Huge swaths of north and central China have been living under a pollution “red alert” since last Friday when a dangerous cocktail of pollutants transformed the skies into a yellow and charcoal-tinted haze. Greenpeace claimed the calamity had affected a population equivalent to those of the United States, Canada and Mexico combined with some 460m people having to breathe either hazardous pollution or heavy levels of smog in recent days.

Lauri Myllyvirta, a Beijing-based Greenpeace activist who has been chronicling the red alert on Twitter, said that in an attempt to shield his lungs he was avoiding going outside and using two air purifiers and an industrial grade dust mask “that makes me look like Darth Vader”. “You just try to insulate yourself from the air as much as possible,” said Myllyvirta, a coal and air pollution expert. Others have simply opted to flee. According to reports in the Chinese media, flights to some pollution-free regions have been packed as a result of the smog. Ctrip, China’s leading online travel agent, said it expected 150,000 travellers to head abroad this month in a bid to outrun the smog. Top destinations include Australia, Indonesia, Japan and the Maldives.

Jiang Aoshuang, one of Beijing’s “smog refugees”, told the state-run Global Times she had skipped town with her husband and 10-year-old son in order to spare their lungs. Jiang’s family made for Chongli, a smog-free ski resort about three hours north-west of the capital, only to find it packed with other fugitives seeking sanctuary from the pollution. “It really felt like a refugee camp,” she was quoted as saying. Yang Xinglin, who also fled to Chongli, said she had requested time off from her job at a state-owned real estate firm so she did not have to inhale the smog. “You ask me why I left Beijing? It’s because I want to live,” Yang, 27, told the Guardian.

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But why in the last few days of an 8-year term?

Obama Invokes 1953 Law To Indefinitely Block Arctic, Atlantic Drilling (CNBC)

President Barack Obama on Tuesday moved to indefinitely block drilling in vast swaths of U.S. waters. The president had been expected to take the action by invoking a provision in a 1953 law that governs offshore leases, as CNBC previously reported. The law allows a president to withdraw any currently unleased lands in the Outer Continental Shelf from future lease sales. There is no provision in the law that allows the executive’s successor to repeal the decision, so President-elect Donald Trump would not be able to easily brush aside the action. Trump has vowed to open more federal land to oil and natural gas production in a bid to boost U.S. output. Obama on Tuesday said he would designate “the bulk of our Arctic water and certain areas in the Atlantic Ocean as indefinitely off limits to future oil and gas leasing, though the prospects for drilling in the affected areas in the near future were already questionable.

The lands covered include the bulk of the Beaufort and Chukchi seas in the Arctic and 31 underwater canyons in the Atlantic. The United States and Canada also announced they will identify sustainable shipping lanes through their connected Arctic waters. Canada on Tuesday also imposed a five-year ban on all oil and gas drilling licensing in the Canadian Arctic. The moratorium will be reviewed every five years. “These actions, and Canada’s parallel actions, protect a sensitive and unique ecosystem that is unlike any other region on earth,” Obama said in a statement. “They reflect the scientific assessment that, even with the high safety standards that both our countries have put in place, the risks of an oil spill in this region are significant and our ability to clean up from a spill in the region’s harsh conditions is limited.”

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Oct 052016
 
 October 5, 2016  Posted by at 9:12 am Finance Tagged with: , , , , , , , , ,  Comments Off on Debt Rattle October 5 2016
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DPC El Paso, Texas 1903

Existential Threat To World Order Confronts Elite At IMF Meeting (BBG)
US High-Yield Default Rates Hit 6-Year High (S&P)
Gundlach Says Deutsche Bank Shows Harm of Negative Rates (BBG)
Jeff Gundlach Thinks A ‘Pivot’ Is Coming To Economic Policy (BI)
Pound Sinks To 1985 Low, Is Likely ‘Going To Go Down The Tubes’ (CNBC)
Manhattan Apartment Sales Plunge 20% (BBG)
Rescue of Italy’s Monte dei Paschi Gets ‘Dark’ & ‘Complicated’ (DQ)
China’s Efforts To Shrink Bloated Coal Industry May Have Worked Too Well (BBG)
Obama Warned to Defuse Tensions with Russia (CN)
‘Great Pacific Garbage Patch’ Far Bigger Than Imagined (G.)
At Least 28 Migrants Found Dead Off Libya (AFP)

 

 

Three things: First, in the jargon, “the backlash against globalization” has now become equal to the anti-trade movement. Which is nonsense: preferring another approach to trade is not the same as being against it altogether.

And second, look at that first graph! See that upward line at the end? Well, it’s an IMF growth ‘forecast’. Which are always so wrong, and always revised downward, that you must wonder if the term ‘forecast’ is even appropriate.

Third: “Existential Threat To World Order” ?! Isn’t that perhaps what the IMF and the rest of the elites themselves are?

Existential Threat To World Order Confronts Elite At IMF Meeting (BBG)

Policy-making elites converge on Washington this week for meetings that epitomize a faith in globalization that’s at odds with the growing backlash against the inequities it creates. From Brexit to Donald Trump’s championing of “America First,” pressures are mounting to roll back the economic integration that has been a hallmark of gatherings of the IMF and World Bank for more than 70 years. Fed by stagnant wages and diminishing job security, the populist uprising threatens to depress a world economy that IMF Managing Director Christine Lagarde says is already “weak and fragile.” The calls for less integration and more trade barriers also pose risks for elevated financial markets that remain susceptible to sudden swings in investor sentiment, as underscored by recent jitters over Deutsche Bank’s financial health.

“The backlash against globalization is manifesting itself in increased nationalistic sentiment, against the outside world and in favor of increasing isolation,” said Louis Kuijs at Oxford Economics, a former IMF official. “If we lose consensus on what kind of a world we want to have, the world will probably be worse off.” In its latest World Economic Outlook released Tuesday, the fund highlighted the threats from the anti-trade movement to an already subdued global expansion. After growth of 3.2% in 2015, the world economy’s expansion will slow to 3.1% this year before rebounding to 3.4% in 2017, according to the report, keeping those estimates unchanged from July projections. The forecasts for U.S. growth were cut to 1.6% this year and 2.2% in 2017. “We’d like to see an end to the creeping protectionism in the world and more progress on moving ahead with free-trade agreements and other trade-creating measures,” Maurice Obstfeld, director of the IMF’s research department, said.

[..] Perhaps the biggest beneficiary of free trade over the past generation, China, still restricts access to many of its key industries, with economists worried about increasingly mercantilist policies. It’s also seeking a larger role in the existing global framework, with entry of the yuan into the IMF’s basket of reserve currencies on Oct. 1 the most recent example. An all-out trade war would be a disaster for China’s economy, with Trump’s threatened tariff potentially wiping off almost 5% of its GDP, according to a calculation by Daiwa Capital Markets. John Williamson, whose Washington Consensus of open trade and deregulation was effectively the governing ethos for the IMF and World Bank for decades, said the 2008-09 financial meltdown had undercut support for economic integration. “There was agreement on globalization before the crisis and that’s one thing that’s been lost since the financial crisis,” said Williamson.

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Deteriorating quality of debt. Not good.

US High-Yield Default Rates Hit 6-Year High (S&P)

The U.S. speculative-grade default rate has hit a six-year high of 4.79%, while the global default rate has crept to 4.04%, also a six-year high, according to S&P Global Fixed Income Research. Of course, the long-troubled energy sector plays a major role here. Excluding energy and natural gas companies, the U.S. default rate drops to 2.44%. Looking ahead, S&P says the number of ‘Weakest Links’ – issuers rated B- or lower, with either a negative outlook or implication – grew to 249 as of Sept. 20, the second-highest total since 2009.

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“You cannot save your faltering economy by killing your financial system..”

Gundlach Says Deutsche Bank Shows Harm of Negative Rates (BBG)

Famed bond investor Jeffrey Gundlach said Deutsche Bank’s slumping share price highlights the impact of the negative-interest-rate policy in Europe on the region’s lenders and may help prompt central bankers to reconsider their approach. “You cannot save your faltering economy by killing your financial system and one of the clear poster children for this is Deutsche Bank’s stock price,” Gundlach, 56, said at Grant’s Fall 2016 Investment Conference on Tuesday in New York. “If you keep these negative interest rate policies for a sufficient future period of time you are going to bankrupt these banks.” Europe’s banks have seen their value shrink by about $280 billion this year, with Deutsche Bank losing almost half its market value.

Germany’s largest lender extended losses after the U.S. Department of Justice last month requested $14 billion to settle a probe into residential mortgage-backed securities, sparking concerns that it will have to raise capital. While the Frankfurt-based bank would ultimately be rescued by the German government if needed, other banks in the region wouldn’t be able to count on such support, Gundlach said. “Deutsche Bank will be supported by Germany if push comes to shove,” he said. “But what about Credit Suisse, which has shown a similar decline in stock price? Who’s there to bail them out?”

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More Gundlach. “I can bring back inflation by 5:00 pm by giving everyone $1 billion. The lines at BMW lots would be a sight to see..”

Jeff Gundlach Thinks A ‘Pivot’ Is Coming To Economic Policy (BI)

Jeff Gundlach, Wall Street’s bond god, thinks the world of monetary and fiscal policy is about to pivot. “How in the world could we be talking about rates never going up when in fact rates have bottomed?” he asked the crowd of investors at the Grant’s Interest Rates Observer conference in New York City on Tuesday. He explained that it was on July 6th when he decided that the narrative that benchmark interest rates around the world would stay lower for longer was “getting quite old.” He cited several reasons: inflation is picking up, the dollar did not strengthen after the Federal Reserve raised rates the last time. Also there’s this: “In the investment world when you hear ‘never’,” ( as in rates are ‘never going up’), “it’s probably about to happen,” said Gundlach, who is CEO of DoubleLine Funds.

Now, an uptick in inflation and the dollar’s tolerance for higher rates are factors that don’t necessarily require urgency. And generally without urgency there is no change in policy. They are also factors he discussed in his last presentation, ‘Turning Points,’ back in September. But there is one thing that has changed since then. That thing is Deutsche Bank. “You cannot save your faltering economy by killing the financial system,” said Gundlach. That is, in effect, what low rates do. Over the last few weeks the world has watched as Deutsche Bank has struggled to convince investors and the public that it is in a sound fiscal position. Two weeks ago the US threatened the bank with a massive $14 billion fine for transgressions that led up to the financial crisis, and the bank’s stock really started to plummet.

In euros, Deutsche Bank’s stock price has hovered near the single digits. “There’s something about big banks being in the single digits that makes people nervous,” Gundlach said. He believes that Germany will bail out Deutsche Bank, despite the fact that the government has said that it intends to do no such thing. The problem isn’t Deutsche Bank in his mind, though — it’s other banks in a similar position that don’t have countries like Germany to bail them out. He mentioned Credit Suisse, arguing that Switzerland can’t handle a banking catastrophe its size.

So what will the new world order be if rates must go up to save international banks? “I can bring back inflation by 5:00 pm by giving everyone $1 billion. The lines at BMW lots would be a sight to see,” he joked. What he’s saying is that now is the time to pivot to fiscal stimulus. Both presidential candidates Donald Trump and Hillary Clinton have talked about spending hundreds of billions on infrastructure and other investments. Meanwhile, US debt to GDP has been stable since 2011, and no one is really talking about the deficit anymore. Here’s a key chart he showed to the crowd. It was also in his last presentation:

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Sounds doable.

Pound Sinks To 1985 Low, Is Likely ‘Going To Go Down The Tubes’ (CNBC)

Sterling’s tumble isn’t finished, Koon How Heng, a senior foreign-exchange strategist at Credit Suisse, told CNBC, as the currency dropped below July’s post-Brexit referendum low. “We still have a very negative view on the sterling,” Heng said. Sterling was fetching as little as $1.2683 in Asia trading hours on Wednesday, under the $1.2796 low it hit on July 6 in the wake of Brexit. Wednesday’s levels were down from levels over $1.30 last week and well off the high of $1.5018 the currency touched before the June 23 poll. The pair is currently at their lowest level since March 1985, when the pound neared parity with the U.S. dollar amid an acrimonious miners’ strike in the U.K. “Officially, our forecast for sterling dollar is at 1.25,” Heng told CNBC’s “Street Signs” just hours before the currency took its latest leg lower. “We would think it’s going to head lower. It’s probably going to go down the tubes.”

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It’ll take more to prick that bubble.

Manhattan Apartment Sales Plunge 20% (BBG)

There are a lot more apartments available for purchase these days in Manhattan. And fewer people are buying. Sales of previously owned condominiums and co-ops fell 20% in the third quarter from a year earlier as potential buyers grew cautious amid more choices, according to a report Tuesday from appraiser Miller Samuel and brokerage Douglas Elliman Real Estate. There were 5,290 resale apartments on the market at the end of September, 53% more than the number available in late 2013, the lowest point for listings. The swelling inventory is providing an opportunity to New Yorkers shut out of a market in which construction has been dominated by ultra-luxury condos aimed at the wealthiest buyers.

Resales, particularly those priced at less than $1 million, were in chronically short supply in recent years, and those that made it to the market sparked bidding wars. Now, more owners are listing apartments to profit from climbing values, and they’re finding lots of company. “Rapidly rising prices over the years have pulled more sellers into the market hoping to cash out,” Jonathan Miller, president of Miller Samuel, said in an interview. “But buyers are more wary. There isn’t the same intensity of activity to burn through the new supply.”

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Funny, Don Quijones makes the same comparison I did last week between Monte dei Paschi and Goldman’s very lucrative and very shady derivatives deals enabling former Greek governments to hide debt. Italy has indicted MPS, Nomura and Deutsche Bank over MDP. Goldman was never charged over Greece.

Rescue of Italy’s Monte dei Paschi Gets ‘Dark’ & ‘Complicated’ (DQ)

Shares of Monte dei Paschi di Siena, the world’s oldest bank and by now the world’s most famous penny stock, trade at €0.18. Things have gotten so bad that Italy’s financial markets regulator Consob extended the deadline and widened the scope of its ban on short selling of the bank’s shares. The restrictions were initially introduced on July 7 just after the bank’s shares had crashed 20% in one day. Since then they have shed a further 45%. Doubts continue to mount over the chances of success for the bank’s latest rescue program, its third since the Global Financial Crisis began. “The situation has got more complicated,” reported Il Corriere della Sera, one of Italy’s most influential newspapers. It’s also apparently quite “dark” — as in sinister.

“For weeks, MPS has been in the center of dark, worrying maneuvers,” said Azione Mps, an association of the bank’s retail shareholders. If the worst comes to the worst, the institution they’re invested in will either be bailed-in, resulting in a complete loss of their already basically worthless investment, and/or bailed-out by either Italy’s government or the ECB, in the process massively diluting the value of their already basically worthless shares. Nonetheless, “dark” is an interesting turn of phrase, especially given that the Italian bank’s latest desperate bid to save its derriere without outright state intervention is being led by America’s most corrupt financial institution (according to Forbes), JP Morgan Chase.

Also, in recent days MPS’ head offices, fittingly housed within a restored ancient fortress, have been transformed into a gargantuan crime scene after a Milan court ordered MPS, Nomura and Deutsche Bank to stand trial for a string of alleged financial crimes, including crimes that the Bank of Italy, under Mario Draghi’s tutelage, apparently knew about yet sat on its hands. The court also indicted 13 former and current managers from the three banks over the case, with prosecutors alleging they had used complex derivatives trades to conceal losses at MPS, in much the same way that Goldman Sachs helped the Greek government to conceal its mountain of excess debt with complex derivatives.

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Rock and a hard place or two.

China’s Efforts To Shrink Bloated Coal Industry May Have Worked Too Well (BBG)

China’s efforts to shrink its bloated coal industry may have worked too well, too fast. Prices have surged more than 50% this year after the government ordered miners to cut output to ease a glut and help lift the industry out of crisis. Now, as winter looms and fuel demand peaks, the consumer and producer of about half the world’s coal is having to relax some of those controls, or face even higher fuel costs, according to analysts at Citigroup and ICIS China, as well as China Coal Transport and Distribution Association. “The extent of the production cuts earlier this year has been too severe,” David Fang, a director with the CCTD, said. “Now the government is trying to fix the problem by relaxing some controls on output, but there is only limited time now before the winter arrives.”

The government earlier this year unveiled efforts to revitalize the coal industry and throw a lifeline to miners, many of them government-controlled, who struggled to repay debts as prices of the fuel used in power stations fell to the lowest in about a decade amid excess supply. President Xi Jinping’s administration ordered miners to lower output to the equivalent of 276 days of production, from the standard 330 days. And as part of the country’s broader “supply side structural reform,” regulators went after the industry’s massive overcapacity, cutting about 150 million tons of unneeded capacity as of August, out of a target of 500 million tons by 2020. The reforms may be a victim of their own success. Output fell more than 10% in the first eight months of this year, pushing up domestic prices and helping imports, including coking coal used to make steel, rise to the highest since December 2014.

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Veteran Intelligence Professionals for Sanity.

Obama Warned to Defuse Tensions with Russia (CN)

A group of ex-U.S. intelligence officials is warning President Obama to defuse growing tensions with Russia over Syria by reining in the demonization of President Putin and asserting White House civilian control over the Pentagon.
ALERT MEMORANDUM FOR: The President
FROM: Veteran Intelligence Professionals for Sanity
SUBJECT: PREVENTING STILL WORSE IN SYRIA

We write to alert you, as we did President George W. Bush, six weeks before the attack on Iraq, that the consequences of limiting your circle of advisers to a small, relatively inexperienced coterie with a dubious record for wisdom can prove disastrous.* Our concern this time regards Syria. We are hoping that your President’s Daily Brief tomorrow will give appropriate attention to Saturday’s warning by Russia’s Foreign Ministry spokesperson Maria Zakharova: “If the US launches a direct aggression against Damascus and the Syrian Army, it would cause a terrible, tectonic shift not only in the country, but in the entire region.”

Speaking on Russian TV, she warned of those whose “logic is ‘why do we need diplomacy’… when there is power… and methods of resolving a problem by power. We already know this logic; there is nothing new about it. It usually ends with one thing – full-scale war.” We are also hoping that this is not the first you have heard of this – no doubt officially approved – statement. If on Sundays you rely on the “mainstream” press, you may well have missed it. In the Washington Post, an abridged report of Zakharova’s remarks (nothing about “full-scale war”) was buried in the last paragraph of an 11-paragraph article titled “Hospital in Aleppo is hit again by bombs.” Sunday’s New York Times totally ignored the Foreign Ministry spokesperson’s statements.

In our view, it would be a huge mistake to allow your national security advisers to follow the example of the Post and Times in minimizing the importance of Zakharova’s remarks. Events over the past several weeks have led Russian officials to distrust Secretary of State John Kerry. Indeed, Foreign Minister Sergey Lavrov, who parses his words carefully, has publicly expressed that distrust. Some Russian officials suspect that Kerry has been playing a double game; others believe that, however much he may strive for progress through diplomacy, he cannot deliver on his commitments because the Pentagon undercuts him every time. We believe that this lack of trust is a challenge that must be overcome and that, at this point, only you can accomplish this.

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Maybe the clean-up will work. But we add more faster.

‘Great Pacific Garbage Patch’ Far Bigger Than Imagined (G.)

The vast patch of garbage floating in the Pacific Ocean is far worse than previously thought, with an aerial survey finding a much larger mass of fishing nets, plastic containers and other discarded items than imagined. A reconnaissance flight taken in a modified C-130 Hercules aircraft found a vast clump of mainly plastic waste at the northern edge of what is known as the “great Pacific garbage patch”, located between Hawaii and California. The density of rubbish was several times higher than the Ocean Cleanup, a foundation part-funded by the Dutch government to rid the oceans of plastics, expected to find even at the heart of the patch, where most of the waste is concentrated. “Normally when you do an aerial survey of dolphins or whales, you make a sighting and record it,” said Boyan Slat, the founder of the Ocean Cleanup.

“That was the plan for this survey. But then we opened the door and we saw the debris everywhere. Every half second you see something. So we had to take snapshots – it was impossible to record everything. It was bizarre to see that much garbage in what should be pristine ocean.” The heart of the garbage patch is thought to be around 1m sq km (386,000 sq miles), with the periphery spanning a further 3.5m sq km. [..] Following a further aerial survey through the heart of the patch on Sunday, the Ocean Cleanup aims to tackle the problem through a gigantic V-shaped boom, which would use sea currents to funnel floating rubbish into a cone. A prototype of the vulcanized rubber barrier will be tested next year, with a full-sized 100km (62-mile) barrier deployed by 2020 if trials go well.

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1000 on one crappy boat.

At Least 28 Migrants Found Dead Off Libya (AFP)

Twenty-eight Europe-bound migrants were found dead on a day of frantic rescues off Libya on Tuesday, including at least 22 in an overloaded wooden boat, an AFP photographer and the Italian coastguard said. The photographer, who was able to go aboard the vessel, said it appeared that many of the dead had suffocated. He said there were about 1,000 people on three levels. He counted 22 bodies and said there were more dead in the hold. The Italian coastguard – which is coordinating rescue efforts in international waters north of Libya – said 28 bodies had been recovered over the course of 33 operations on Tuesday, while 4,655 migrants had been rescued.

The photographer was travelling on the Astral, a ship chartered by Spanish NGO ProActiva Open Arms, which rescues migrants at sea. Late on Tuesday, the Italian navy took over helping survivors and retrieving bodies, the photographer said. It was yet another day of drama at sea after more than 6,000 migrants, most of them Africans in packed rubber dinghies, were rescued off Libya on Monday. Nine bodies were found in those operations, including a pregnant woman.

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Sep 182016
 
 September 18, 2016  Posted by at 9:15 am Finance Tagged with: , , , , , , , , , ,  Comments Off on Debt Rattle September 18 2016
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John Collier FSA housing project for Martin aircraft workers, Middle River, MD 1943

Rogoff’s Cashless Society Proposal Is An Admission Of US Insolvency (Sprott)
How A ‘Twist’ By The Bank Of Japan Could Upstage The Fed (MW)
China ‘Tulip Fever’ Sees House Prices Skyrocket 76% (CNBC)
Italian Banking Crisis Turns into Mission Impossible (DQ)
Most Likely Scenario For Hanjin Is Liquidation (WSJ)
US Bombs Assad’s Troops, ISIS Makes Dramatic Advance as Result (McAdams)
Italian PM Renzi Says He Is Tired Of Wasting Time At European Summits (DW)
Greek Public Assets Being Sold For A Fraction Of Their Actual Value (Kath.)
Hundreds Of Thousands Take To Streets In Germany To Protest TTiP (CNBC)
France Bans All Plastic Cups, Plates And Cutlery (Ind.)

 

 

“..the US government and the Federal Reserve have spent, borrowed, and printed so much that there is no future left to mortgage.”

Rogoff’s Cashless Society Proposal Is An Admission Of US Insolvency (Sprott)

Ken Rogoff is by all accounts a brilliant man. The Harvard professor and former IMF chief economist is a chess grandmaster. His thesis committee included current Fed vice-chair Stanley Fischer. But like many survivors of Ivy League hoop jumping, the poor fellow appears to have emerged punch drunk. That’s the only conclusion to be drawn from Rogoff’s new book, The Curse of Cash , which, in effect, proposes a ban on paper currency. It’s terrifying piece of work, for several reasons. [..]

Rogoff’s “cashless society” is an elegant solution to a key problem bedeviling the Federal Reserve: with interest rates at the zero bound, the US central bank has no ammunition left to fight the next recession – because if cuts rates below zero, savers will withdraw their cash and put it under their mattresses. “In principle, cutting interest rates below zero ought to stimulate consumption and investment in the same way as normal monetary policy,” Rogoff writes. “Unfortunately, the existence of cash gums up the works.” That argument is spurious at best. By now, it is fairly clear from experiences in Japan and the US since 2008 that below neutral level interest rates provide little or no net new economic stimulus. At best, easy monetary policy brings forward spending and investment from the future into the present.

However, the US government and the Federal Reserve have spent, borrowed, and printed so much that there is no future left to mortgage. Rogoff, one of the country’s top economists, knows this; which is an important clue that there is much more to his proposals than meet the eye. It seems clear that Rogoff’s negative interest rate/cashless society proposal is structured to engineer a back-door US government debt default. Over the long term, by forcing savers, businesses, and banks to give the US government their money, and allowing Washington to repay less of that money each year, the US can legally default – on all that it owes. More worrying for investors: the fact that Rogoff, Ben Bernanke and others are proposing negative rates despite the considerable evidence that they will do no economic good suggests that they believe that the US government cannot pay back its debts – that it is already insolvent.

[..] maybe Rogoff is just as good a player on the public policy front as he is on the chess board. There is a possibility that he wrote The Curse of Cash as a quasi-job application for a higher government post, possibly as Treasury Secretary in a Clinton Administration. “If you give me the job, I’ll help make sure that government can borrow all it wants and it won’t have to pay any of it back,” may be the sub-text to Rogoff’s book. There is a precedent for this. Ben Bernanke’s 2002 “helicopter money” speech is widely credited with having set the ground for his appointment as Fed Chairman several years later. Brilliant? Cynical? Delusional? Or maybe all three? Take your pick. Either way, you haven’t heard the last of Ken Rogoff.

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“Speculation has mounted that the Bank of Japan could undertake an “inverse twist,” shifting its bond purchases away from the longer end of the yield curve. ..”

How A ‘Twist’ By The Bank Of Japan Could Upstage The Fed (MW)

News reports paint a picture of a Bank of Japan board that remains solidly in favor of maintaining an ultra-easy monetary policy, but is sharply divided over the best way to proceed as the country’s banking sector feels the pinch of low rates and a flat yield curve. Ideas the Bank of Japan could ultimately move to adjust its program in a way designed to further steepen the yield curve are behind recent market moves, analysts said, and could pave the way for further steepening of yield curves around the world, including U.S. Treasurys. Speculation has mounted that the Bank of Japan could undertake an “inverse twist,” shifting its bond purchases away from the longer end of the yield curve.

That would be a mirror image of a Federal Reserve maneuver dubbed “Operation Twist” that the central bank used in 1961 and 2011 to flatten the yield curve by buying long-term debt and selling short term debt. Bond yields move inversely to prices. There are other measures the Bank of Japan could take to try to steepen the yield curve, including simply changing the mix of maturities it buys or setting a yield target. Christoph Rieger at Commerzbank urged against undertaking an inverse twist, noting that Kuroda has expressed concerns that a “bear steepening” of the yield curve—a phenomenon in which long-term rates rise faster than short term rates—tends to tighten monetary conditions. Obviously, that would blunt the impact of the BOJ’s easing efforts and prove unwelcome in an economy that’s contracting.

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“The (stock) market exploded to the upside and then crashed dramatically. That money had to go somewhere, so it washed around the system … so a lot of it has gone into housing.”

China ‘Tulip Fever’ Sees House Prices Skyrocket 76% (CNBC)

Housing in major cities in China has seen price hikes over the last year that resemble the famous Dutch “Tulip Fever” bubble of 1637, according to new research by economic consultancy firm Longview Economics. “I think what’s going on in China is troubling … some of the valuations there are really quite extraordinary,” Chris Watling, the CEO of Longview Economics, told CNBC Thursday. “We’ve double checked these numbers about seven times, because I found them quite hard to believe.” The firm’s research found that only San Jose in the Silicon Valley is more expensive than Shenzhen. The Chinese city has seen prices rise 76% since the start of 2015, with the acceleration beginning in April 2015 as the country’s stock market was nearing its peak.

The situation in Beijing and Shanghai is similar, albeit less extreme, the company states. “Housing in some of the tier 1 cities is more expensive than it is in London, which I think itself is on a bubble, Watling added. “The (stock) market exploded to the upside and then crashed dramatically. That money had to go somewhere, so it washed around the system … so a lot of it has gone into housing.” The analysis suggests that the typical home in Shenzhen costs approximately $800,000. Watling said that the house-income ratio in Shenzhen is now running at 70 times, compared to around 16 times in somewhere like London.

China, the biggest economic story of the last 30 years, has soured in the eyes of many analysts. A stock market crash that began in the country last summer has highlighted the vast difficulties Chinese lawmakers are now facing. Watling said Chinese housing was a story built on credit, lots of liquidity and lots of debt. He added that all bubbles, though, once established, will eventually burst and deflate. “It’s simply a question of when,” Watling said in a research note earlier this week, adding that the removal of cheap money would be the likely scenario that would lead to the beginning of the tightening and subsequent prices falls.

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“.. the collapse of Unicredit, which has vast, sprawling operations across Germany and Eastern Europe, would threaten the stability of the entire Eurozone.”

Italian Banking Crisis Turns into Mission Impossible (DQ)

[..] for Monte dei Paschi’s latest rescue plan to have any chance of working, both parts of the plan — Part A and Part B — must succeed. Part A consists of a €28 billion bad-loan sale for which JP Morgan Chase, Citi and Italian investment bank Mediobanca are already assembling a bridge loan, in return for very handsome fees. Atlante, Italy’s deeply opaque, Luxembourg-based bank rescue fund, has reportedly agreed to buy the so-called mezzanine tranche in Monte dei Paschi’s bad loan securitization. Apparently demand for heavily discounted, slowly-decomposing bank debt in Italy is high, which is great news considering Italy is purportedly home to roughly a third of all of the bad debt at EU banks.

In a perfect sign of our yield-starved times, last week saw around 250 global investors converge on Venice to attend Banca Ifi s SpA’s “Non-performing Loan” conference. That’s twice as many as last year, reports Bloomberg. In other words, Part A of the rescue plan seems to be coming along nicely — as long as no one asks who will make up the difference between the book value of the bank’s toxic assets and the discount value at which they’re now being sold. As for Part B of the Plan — MPS’ €5 billion cash call scheduled for the end of this year — it’s going nowhere fast. Twice-bitten, thrice-shy investors are no longer buying the hype. Gennaro Pucci at London-based PVE Capital said that even if a significant proportion of MPS’ bad loans were “spun off into a special vehicle,” he would not buy more MPS shares out of fear that the bank could suffer further losses from the remaining soured debt.

This is a serious problem in today’s Italy: as long as the economy continues to stagnate, much of the supposedly good debt currently on the banks’ books will also, sooner or later, end up putrefying. It’s already happened to Banca Popolare di Vicenza, a regional lender that was rescued from bankruptcy late last year by the Atlante fund, but which is already in need of fresh funds. So, too, is Italy’s biggest and only global systemically important financial institution, Unicredit, which has a staggering €80 billion in bad debt on its balance sheets — more than any other European bank. While the downfall of MPS would be enough to cause serious damage to Italy’s already fragile financial system, the collapse of Unicredit, which has vast, sprawling operations across Germany and Eastern Europe, would threaten the stability of the entire Eurozone.

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But first a fire sale.

Most Likely Scenario For Hanjin Is Liquidation (WSJ)

Debt-ridden Hanjin Shipping is working on a restructuring plan that calls for the drastic reduction of its owned fleet and returning the vast majority of the ships it charters to their owners, according to people with direct knowledge of the matter. Despite the efforts, these people say the most likely scenario is still that the Korean operator— the world’s seventh-biggest in terms of capacity—will be liquidated, marking one of the shipping industry’s biggest failures. Hanjin filed for bankruptcy protection last month. The South Korean government has strongly indicated it has no plans to bail out the company. A Korean court will decide in December whether to accept the plan or let the company go under, according to court officials in Seoul.

One person with knowledge of Hanjin’s efforts to restructure said the operator is considering a number of scenarios but focusing on one that involves Hanjin keeping up to 15 of its 37 ships, and returning to owners almost all of the 61 chartered vessels. Under that scenario, which is subject to approval by the bankruptcy court, “Hanjin will emerge as a small regional operator in Asia that will move a small part of Korea’s exports,” the person said. [..] Hanjin’s main charterers, including Danaos, Navios and Seaspan, with a combined exposure of more than $1 billion to Hanjin, were hoping for a last-minute intervention by the Korean government that would allow Hanjin to honor its vessel-leasing commitments. That looks less and less likely.

“Hanjin now has two alternatives: either to drastically downsize or to liquidate,” said Iraklis Prokopakis, Danaos’s COO. “We have eight ships chartered to Hanjin and five will be returned. The other three still have cargo on them so I don’t know what will happen.” Danaos has a $560 million exposure to Hanjin. Mr. Prokopakis said the key issue at the December court hearing will be whether Hanjin has enough cash to continue operating, even at a much smaller scale.

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“Yesterday, US-backed FSA “moderate” opposition troops chased US Special Forces out of one town in Syria.”

US Bombs Assad’s Troops, ISIS Makes Dramatic Advance as Result (McAdams)

The US military has bombed Syrian government positions in the eastern province of Deir el-Zour today, where the Syrian military had been battling ISIS. According to the report, the US attack on Syrian troops “enabled an [ISIS] advance on the hill overlooking the air base.” This is the second time US forces have directly targeted Syrian government troops inside Syria. It would be the first time such an attack produced a battlefield advantage to ISIS. The US attack has killed at least 62 and perhaps as many as 100 Syrian government troops. Earlier today it was reported that the Syrian government had sent some 1,000 members of the elite Republican Guard into the Deir el-Zour province, as battles with ISIS in the area increase.

This US attack has wiped out perhaps 10% of this force and has obliterated Syrian army weapons and other materiel. The US government has admitted to the attack, but claims it was all a mistake. As some observers have pointed out, however, ISIS does not behave as traditional military units. They do not generally gather in large numbers like this or establish “bases.” The US Central Command released a statement earlier today claiming that the US coordinated the strike with the Russians, but Moscow has vehemently denied the claim. In fact, spokesman for the Russian Foreign Ministry Maria Zakharova was quoted by the state news agency Tass as saying that “after today’s attack on the Syrian army, we come to the terrible conclusion that the White House is defending the Islamic State.”

This dramatic development comes as the latest ceasefire begins to crumble. Russia has condemned Washington’s refusal to implement a key component of the agreement, to press US-backed rebels to cease fighting alongside al-Qaeda; and the main US-backed “moderate” Islamist group, Ahrar al-Sham, has refused to take part in the ceasefire at all. Yesterday, US-backed FSA “moderate” opposition troops chased US Special Forces out of one town in Syria. Is today’s attack a turning point in the war, where the US will begin to strike Syrian government forces more frequently? If so, how will Russia and Iran react to this overt shift in US strategy? Is this the flashpoint?

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But that’s all he’s going to get.

Italian PM Renzi Says He Is Tired Of Wasting Time At European Summits (DW)

Italian Prime Minister Matteo Renzi blasted the latest European Union summit in Bratislava on Saturday, effectively labeling Friday’s high-level meeting a waste of time. “I don’t think it would be right for Italy to pretend not to notice when things are not getting any better,” Renzi said at a conference in Florence. Hours earlier, he criticized the summit in an interview with TV broadcaster RTV38. “As Italy, we strongly believe that the EU has a future, but we need to be doing things for real, because we have no use for staged events,” he said. Renzi also said he did not partake in the closing press conference with Angela Merkel and Francois Hollande because he was unhappy with the decisions reached concerning economic and migrant policy.

Renzi said Italy would not “serve as a fig leaf” for the likes of France or Germany. In what was the first European summit without the United Kingdom in over four decades, European leaders sought to show unity in the wake of this summer’s Brexit vote. This, Renzi said, “signals a small step forward, but it is still a rather long way away from the idea of Europe that we have in mind.” Renzi castigated the summit for not raising the African migrant issue. The documents “didn’t even mention Africa,” he said. As the first European destination for migrants arriving from Africa, Italy has been left to cope with the influx of refugees largely on its own while politicians debate how to address refugees in Turkey and along the so-called Balkan Route though Greece, eastern and central Europe.

Italy has long pushed for an international agreement with African states that would close migrant routes to Europe in exchange for increased investment. Renzi repeated his critiques of the EU’s austerity policy. While the country is respecting the EU’s strict budget disciplinary rules, he said Italy retains the right to stress that the rules are not working and it is not prepared “to pretend not to notice.”

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Insult to injury. It never stops. Electricity prices were raised 4-5% in Greece. Who can afford that?

Greek Public Assets Being Sold For A Fraction Of Their Actual Value (Kath.)

Public properties, including real estate assets, are very often sold for extremely low prices, as the political risk factor supersedes even the crucial financial risk that comes with investing in Greece. The Hellenic Federation of Enterprises (SEV) this week commented on the issue, saying that this institutional shortfall of the Greek state and the lack of trust this generates in the three pillars of power (legislative, executive, judiciary) have turned the optimum utilization of state property into “a political point-scoring battle among parties.” As SEV pointed out, “in many instances we see the state’s assets devalued, owing to the delays that political tensions bring about in privatizations, so that they are sold off at particularly low prices. In other instances the prevailing criterion becomes the price of the privatization, without taking into consideration any distortions created in the market from incomplete planning.”

For the industrialists’ association there is no doubt that “the correct utilization of public property along clear and stable rules and terms of economic efficiency, both for state revenues and for the operation of markets, can become a key growth factor for the economy.” All this becomes clearer when one considers the tenders that the state privatization fund (TAIPED) has been conducting for the concession of real estate assets. As property market professionals observe, in most cases the prices investors offer – particularly in instances of plot development – are just a fraction of each asset’s actual value. The reason for that is not to be found in the financial crisis and the drop in market prices, but in investors’ need to factor the political risk into their calculations regarding the sustainability of their chosen investment, in order to secure the desired returns.

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CNBC tries an odd twist by claiming it’s not really a TTiP protest, but a form of general ‘easy anti-Americanism’. The same tactics as used in Brexit and the US elections. Curious to see when these people will realize these are losing tactics.

Hundreds Of Thousands Take To Streets In Germany To Protest TTiP (CNBC)

Hundreds of thousands of Germans took to the streets Saturday, in protest of pending trade deals with the United States and Canada. The deals in question are the Transatlantic Trade and Investment Partnership (TTIP) between the U.S. and the European Union and the Comprehensive Economic and Trade Agreement (CETA) for the Canadian-EU relationship. Neither free trade agreement has been ratified yet, but popular outcry has been growing for the last few years. The demonstrations took place in seven cities throughout Germany: Berlin, Frankfurt, Hamburg, Cologne, Leipzig, Munich and Stuttgart. Organizers told CNBC that the official estimate is 320,000 demonstrators across Germany.

In Berlin, where discussions of trade policy are frequently overheard in cafes and most available surfaces are plastered in posters and stickers against the deals, the largest demonstration of the day took place with about 70,000 attendees, according to the organizers. Earlier, local reports had indicated there could be as many as 80,000 in the German capital, but a heavy downpour close to the start time may have depressed turnout. A broad coalition of organizations helped plan the event, but the stated rationale for opposing the agreements centers on the belief that such deals “primarily serve the interests of powerful economic interest groups, and thus only cement the imbalance between the common good and economic interests,” according to one organization.

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Under TTiP, this would have been impossible.

France Bans All Plastic Cups, Plates And Cutlery (Ind.)

France has passed a new law to ensure all plastic cups, cutlery and plates can be composted and are made of biologically-sourced materials. The law, which comes into effect in 2020, is part of the Energy Transition for Green Growth – an ambitious plan that aims to allow France to make a more effective contribution to tackling climate change. Although some ecologists’ organisations are in favour of the ban, others argue that it has violated European Union rules on free movement of goods. Pack2Go Europe, a Brussels-based organization representing European packaging manufacturers, says it will keep fighting the new law and hopes it doesn’t spread to the rest of the continent. “We are urging the European Commission to do the right thing and to take legal action against France for infringing European law,” Pack2Go Europe secretary general Eamonn Bates told AP. “If they don’t, we will.”

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Apr 142016
 
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Unknown Butler’s dredge-boat, sunk by Confederate shell, James River, VA 1864

SocGen: Corporate America Is Nearing A ‘Toxic’ Debt Crisis (BI)
US Corporations Have $1.4 Trillion Hidden In Tax Havens: Oxfam (G.)
US Banks Not Prepared For Another Financial Crisis (G.)
The Beginning of the End of Central Bank Easing (BBG)
Negative Swap Rates Impede Kuroda’s Push To Boost Japan Lending (BBG)
Currencies Across Asia Fall Sharply Against US Dollar (WSJ)
China’s Trade Data Has Never Been This Fake (ZH)
China’s Leaders Are Blowing Their Last Chance To Avert An Economic Crisis (AEP)
Panama Papers Reveal Hong Kong’s Murky Financial Underbelly (AFP)
IMF: $1.3 Trillion In Corporate Bank Loans At Risk Of Default In China (Sky)
Is The IMF ‘Consistently Wrong’? (CNBC)
OPEC Warns of Deeper Cuts to Oil Demand (BBG)
Seen From The Future, Ours Is The Era Of Plastic (BBG)
Greenland’s Melt Season Started Nearly Two Months Early (CC)
EU Nations Use Foreign Aid Budgets To Pay For Refugee Costs (G.)

Where would they be without a stock market bubble, and without ZIRP?

SocGen: Corporate America Is Nearing A ‘Toxic’ Debt Crisis (BI)

US companies have a looming problem of their own making, and it may soon come back to crush them. According to Andrew Lapthorne, head of quantitative analysis at Societe Generale, the amount of debt that businesses have accumulated over the last five to six years has put them on the verge of a serious crisis. Lapthorne wrote in a note to clients on Tuesday: “This level of borrowing in some sectors of the economy is now booming (with the risk of spinning out of control) to such an extent that we think that the build-up of debt on US non-financial corporate balance sheets represents one of the largest mispriced risks in terms of future market stability, downside risk and future economic growth.”

Lapthorne’s argument is essentially that US corporations have decided to borrow money in order to fuel growth larger than that warranted by economic demand. But now with the assets backing this debt starting to decline in value, the wheels are going to fall off. Lapthorne believes there has been one cause of this behavior: central banks. “Aggressive monetary policy in the form of QE and zero or negative interest rates is all about encouraging (forcing?) borrowers to take on more and more debt in an attempt to boost economic activity, effectively mortgaging future growth to compensate for the lack of demand today,” he wrote. From the supply end, making financing debt easier through low interest rates and quantitative easing “encouraged” corporations to take on the debt loads.

On the demand end, investors loved the higher-yielding corporate debt, since US Treasury yields remained so low. Put it together and you have a central-bank-fueled bubble, which Lapthorne called “toxic.” And so with little economic growth to speak of or invest in, corporations have funneled this debt-financed money into share buybacks and mergers in order to improve profitability and the illusion of growth. In fact, Lapthorne said, companies are spending 35% more than their incoming cash flows, higher than previous peaks in 1998 and 2008. The upside is that as stock prices have risen, companies have been able to pay back debt either through raising new debt or still-growing profits. But now with profits on the decline and shakier asset markets, the danger is coming to a head.

So no matter how you look at it, argued Lapthorne, companies have mountains of debt. And as profits and eventually stock prices start to get squeezed from all-time highs, the ability of companies to pay back their debt will get worse.

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Something tells me the real number is much higher.

US Corporations Have $1.4 Trillion Hidden In Tax Havens: Oxfam (G.)

US corporate giants such as Apple, Walmart and General Electric have stashed $1.4tn (£980bn) in tax havens, despite receiving trillions of dollars in taxpayer support, according to a report by anti-poverty charity Oxfam. The sum, larger than the economic output of Russia, South Korea and Spain, is held in an “opaque and secretive network” of 1,608 subsidiaries based offshore, said Oxfam. The charity’s analysis of the financial affairs of the 50 biggest US corporations comes amid intense scrutiny of tax havens following the leak of the Panama Papers. And the charity said its report, entitled Broken at the Top was a further illustration of “massive systematic abuse” of the global tax system. Technology giant Apple, the world’s second biggest company, topped Oxfam’s league table, with some $181bn held offshore in three subsidiaries.

Boston-based conglomerate General Electric, which Oxfam said has received $28bn in taxpayer backing, was second with $119bn stored in 118 tax haven subsidiaries. Computing firm Microsoft was third with $108bn, in a top 10 that also included pharmaceuticals giant Pfizer, Google’s parent company Alphabet and Exxon Mobil, the largest oil company not owned by an oil-producing state. Oxfam contrasted the $1.4tn held offshore with the $1tn paid in tax by the top 50 US firms between 2008 and 2014. It pointed out that the companies had also enjoyed a combined $11.2tn in federal loans, bailouts and loan guarantees during the same period. Overall, the use of tax havens allowed the US firms to reduce their effective tax rate on $4tn of profits from the US headline rate of 35% to an average of 26.5% between 2008 and 2014.

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A bit moot as long as they’re TBTF?!

US Banks Not Prepared For Another Financial Crisis (G.)

Some of the US’s biggest banks still lack a proper plan for bankruptcy, in the event of another major financial crisis, US regulators said on Wednesday. In the wake of the great recession banks were required to come up with “living wills” to prove they had a credible plan for bankruptcy that would not require another bailout from the taxpayers. But after reviewing the plans of five institutions – JP Morgan Chase, Wells Fargo, Bank of America, Bank of New York Mellon and State Street Corp – the Federal Reserve and the Federal Deposit Insurance Corp (FDIC) have determined that the banks have yet to meet that requirement. “The goal to end too big to fail and protect the American taxpayers by ending bailouts remains just that: only a goal,” said Thomas Hoenig, FDIC vice-chairman. The banks are to submit revised proposals by 1 October.

According to feedback from the regulators, one of the main concerns with JP Morgan’s proposal was the bank’s liquidity in a time of need. Regulators were concerned the bank would not be able to shift money around to fund some of its operation during a time of stress or bankruptcy. “Obviously we were disappointed,” said Marianne Lake, JP Morgan’s chief financial officer. “The most important thing is that we work with our regulators to understand their feedback in more detail.” Bank of America also needs better processes for estimating its liquidity needs, the regulators said. And while Wells Fargo was deemed to have “firm-wide, high-quality liquid assets”, regulators raised concerns over “quality control, senior management oversight, and recovery and resolutions planning staffing”. In its statement, Wells Fargo said it was disappointed its plan was “determined to have deficiencies” but the feedback was “constructive and valuable to our resolution planning process”.

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As confidence recedes…

The Beginning of the End of Central Bank Easing (BBG)

Traders are now taking the long view on central bank easing, shifting focus to which monetary policymakers will be the first to change course and withdraw stimulus, according to Bank of America Merrill Lynch FX Strategist Athanasios Vamvakidis. The euro-area, Japan, Norway, New Zealand, and Sweden are the five major developed economies in which central banks have eased policy this year—and by some financial metrics, they don’t have much to show for it. In all of these instances, currencies have strengthened relative to the U.S. dollar in the wake of more accommodative monetary policy (denoted by a circle on the chart below.)

A possible counterpoint: it’s not necessarily that fighting central banks has worked, but that the Federal Reserve’s dovish surprise in March has meant more to these currency pairs than outright easing. That argument might not fully pass the smell test, however, as most of these domestic stocks markets have also declined since monetary policy became more accommodative. So with currencies getting stronger and equities falling (with the exception of New Zealand), Vamvakidis argues “that positioning for a scenario in which some central banks give up easing is worth the cost.” His observations support the notion that the marginal efficacy of stimulus is waning—or as this worry is more commonly expressed, that central banks are running out of ammunition.

He adds, “It is unlikely, in our view, that the next big FX trade will be from a central bank that surprises markets by easing policies more, which was the case in recent years.” A soft global economic backdrop prompted the Federal Reserve to telegraph a slower path for higher interest rates in March. As such, this shift to a focus on exit strategies might seem premature or optimistic, but the opposite may also be true. For instance, in the case of Japan, there are technical limits to the amount of sovereign bonds that can be bought, a dynamic which might force the central bank to begin dialing down this part of its asset-purchasing program. “Markets have already started testing central banks and have been reacting counterintuitively to policy easing,” concludes Vamvakidis. “Central banks can fight back, as the Fed has successfully done recently, but we do not believe that this is sustainable as long as the global recovery continues.”

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Boomerang.

Negative Swap Rates Impede Kuroda’s Push To Boost Japan Lending (BBG)

Negative rates for swapping interest payments are hindering the ability of corporate borrowers to hedge their liabilities – another way in which the Bank of Japan’s unorthodox attempt to revive lending could backfire. The fixed rate paid in exchange for floating-rate payments for a year in Japan’s interest rate swap market fell below zero after the BOJ started charging banks for reserves in February, and was at minus 0.049% on Thursday. Floating-rate loans in Japan aren’t allowed to have repayment rates below zero, causing a disconnect with traditional hedging methods. “Interest-rate swaps aren’t functioning properly” as hedging tools, said Satoshi Oda at Credit Agricole in Tokyo. “Without swaps, banks will have trouble making floating-rate loans and will need to extend fixed-rate loans, but most banks don’t like lending at fixed rates, so they’re becoming hesitant about making new loans.”

Lending growth in Japan excluding trusts slowed to 2% in March from a year earlier, the weakest pace in three years, according to BOJ data released Tuesday. Sumitomo Mitsui Trust Bank sees a drop in swap-market activity as companies avoid using the contracts amid uncertainty about whether regulators will allow floating-rate repayments below zero. When companies take out such loans, they often enter into a derivative deal to hedge, agreeing to pay the fixed swap rate in return for a floating-rate payment that protects them if borrowing costs rise. However, while loan deals stipulate that repayment rates won’t be negative, depriving companies of that benefit, swap transactions do allow for negative payments, meaning the hedger could wind up exposed to risks in both the swap and loan market.

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Can’t keep the greenback down forever. It’s too costly.

Currencies Across Asia Fall Sharply Against US Dollar (WSJ)

Currencies across Asia including the Chinese yuan dropped sharply against the U.S. dollar Thursday, with markets caught off-guard as the Singapore central bank restrained the appreciation of its currency to stoke growth. The yuan saw its biggest one-day depreciation since January, and the Singapore dollar fell by the most within a day this year. Meanwhile, the South Korean won weakened after the ruling party lost its parliamentary majority. Asian currencies had firmed up against the greenback in recent weeks, partly thanks to the Federal Reserve having signaled it would raise interest rates at a slower rate this year than previously expected. Economic policy makers from the Group of 20 nations had pledged at a meeting in February to avoid sparking a currency war through competitive devaluation.

A weakening of the yuan against the U.S. dollar in its daily fix weighed on currencies across the region, after a 0.46% depreciation—the biggest since January. The region’s currency markets had started the day on the back foot as traders assessed first the impact of South Korea’s elections, followed by a surprise easing of monetary policy by Singapore’s central bank. Movements of the yuan fix, which determines the levels at which the currency can trade inside mainland China, have recently been more determined by market forces. Today’s depreciation reflects strength in the U.S. dollar on Wednesday. Thursday’s yuan depreciation was the biggest since Jan. 7, when markets had speculated that moves to weaken the yuan could trigger a global currency war. Competitive currency devaluation hasn’t materialized among major economies since then, but other central banks in smaller countries in Asia are loosening policy in the meantime.

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“China’s March imports from Hong Kong soared an implausible 116% YoY!”

China’s Trade Data Has Never Been This Fake (ZH)

The narrative is set – today’s rally is predicated on “strong” Chinese trade data. So what happens when one chart explodes that narrative as totally fallacious for three simple reasons… First, the data is clearly cooked… As Bloomberg’s Tom Orlik notes, China’s March imports from Hong Kong soared an implausible 116% YoY! As it is clearly disguising capital flows… “Trade mis-invoicing as a way to hide capital flows remains a factor. In the past, over-invoicing for exports was used as a way to hide capital inflows. The latest data show the reverse phenomenon, with over-invoicing of imports as a way of hiding capital outflows.” Does this look “real”?

Second, there is the base effect which EVEN CHINA warned would be a factor: “But beware two factors; the government itself has warned that the base line from March 2015 is low. A reminder that observers shouldn’t get complacent about the downward pressures still threatening China’s economy”. And then finally, there’s the figures themselves, can they be trusted? But did anyone really need an excuse to buy the record highs in stocks, or send Trannie sup 3% on the day? Of course not!

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Ambrose loses faith.

China’s Leaders Are Blowing Their Last Chance To Avert An Economic Crisis (AEP)

China panic has abated. The Shanghai Composite index is back above 3,000. The much-feared devaluation never happened. The yuan has strengthened against the dollar this year, to the consternation of Western macro-tourists. Outflows of money have slowed as dollar debt is paid off and Chinese investors wind down ‘carry trade’ positions. The central bank (PBOC) is no longer depleting the country’s $3.2 trillion foreign reserves to defend the exchange rate, and thereby tightening monetary policy as a nasty side-effect. China has the apparatus of an authoritarian state to curb capital flight, and is not shy about using it. The IMF has just raised its forecast for Chinese growth this year to 6.5pc, insisting that it is still far too early to talk about a hard-landing. Yet that is where the good news ends, for there is a poisonous sting in the tail.

Maurice Obstfeld, the IMF’s chief economist, said the trade-off for this year’s growth spurt is even more trouble down the road. “While we have upgraded near-term projections, we have downgraded the farther out projections,” he said. “Our concern is some of the stimulus is likely to take the form of higher credit growth, more support for sectors that are in a secular sense declining and not that productive. We worry about the quality of growth more than the quantity of growth,” he said. There you have the nub of the matter. Stripped of IMF circumlocutions, he is telling us that the Communist Party has once again let rip with debt-driven stimulus for the housing market and rust-bowl industries already chocking with overcapacity, stoking yet another mini-cycle to put off the day of reckoning.

The likelihood that China will fail to grasp the nettle of reform in time to avert a structural crisis is rising from probable to almost certain. As the well-meaning premier Li Keqiang keeps warning his colleagues in the Standing Committee, the current course leads straight into the middle income trap. We can put away those charts projecting China’s ‘sorpasso’, the moment when the country overtakes the US to become the world’s biggest economy. It is not going to happen in 2020, and will look even less likely in 2030, when China’s demographic dividend turns to deficit and the workforce goes into precipitous decline. “Implementation of a more ambitious and comprehensive policy agenda is urgently needed to stay ahead of rising financial sector vulnerabilities,” said the IMF today in its Global Financial Stability Report.

The section on China reads like a horror story. The “credit overhang” has exploded to 25pc of GDP, perpetuating a vicious circle of falling factory gate prices and plunging profits. While the IMF does not use the term, China is basically in a ‘debt-deflation’ trap. Earnings have been dropping more quickly than nominal interest rates, automatically tightening the noose. “The ability of many Chinese listed firms to service their debt obligations is eroding,” it said. The ratio of gross debt to earnings (EBITDA) has doubled to four since 2010. Debt at risk – where earnings do not cover interest payments – has risen from 4pc to 14pc in five years. It has reached 39pc for steel, 35pc for mining and retail, and 18pc for manufacturing and transport.

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And thereby China’s.

Panama Papers Reveal Hong Kong’s Murky Financial Underbelly (AFP)

Jasmine Li was still a student when she opened her first offshore bank account through Mossack Fonseca Hong Kong, but the shady world she entered that day had been part of the city’s underbelly for decades. The granddaughter of China’s then fourth-ranked politician was among dozens named in a vast cache of documents leaked from the Panama law firm that have given a glimpse into how the rich and powerful hide their money. But the so-called Panama Papers, released by the International Consortium of Investigative Journalists this month, have also exposed the key role played by Hong Kong and Singapore in funnelling that wealth into tax havens.

Mossack Fonseca’s Hong Kong offices were their busiest in the world, the ICIJ analysis showed, setting up thousands of shell companies including some linked to China’s top political brass, the city’s richest man, Li Ka-shing, and movie star Jackie Chan. Experts say the Asian financial hubs have already channelled billions into tax havens, and the Boston Consulting Group predicts they will be the world’s fastest-growing offshore centres over the next five years. “Hong Kong is set up to make it easy for people to do business, and it is very easy to do business here,” said Douglas Clark, a barrister with one of Hong Kong’s largest chambers.

“But when it’s easy to do business then it’s easy to do any type of business, legal or illegal.” Offshore companies are not necessarily illegal, but they operate on the fringes of what is allowed and their opaque structures make it easy to conceal ill-gotten or politically inconvenient wealth. They have proved a boon for Hong Kong and Singapore, which are known not only for their financial expertise but also light-touch regulation, discretion and non-cooperation with foreign tax authorities. Both are already on regulators’ radars – the EU briefly added Hong Kong to its tax blacklist last year – but experts say they are unlikely to do anything to jeopardise the lucrative offshore business.

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For what it’s worth (It’s IMF, after all): “These loans could translate into potential bank losses of approximately 7% of GDP..”

IMF: $1.3 Trillion In Corporate Bank Loans At Risk Of Default In China (Sky)

The IMF has warned that $1.3tn (£913bn) in corporate bank loans are at risk of default in China. The fund’s latest Global Financial Stability Report said the figure was recognised by the authorities in Beijing and was “manageable” given the country’s rate of economic growth – currently running just below 7%. But the world’s lender of last resort said the situation underlined the concerns of financial markets over the sustainability of China’s economic model, given the volatility witnessed last summer and in January when stock values plunged. It said: “The magnitude of these vulnerabilities calls for an ambitious policy agenda”.

The IMF said the issue of corporate debt could not be ignored and it called for a further strengthening of China’s financial institutions, suggesting that another global stock market rout could knock world GDP growth by as much as 4%. Investor confidence has been damaged by a slowdown in the world economy – blamed on the deterioration in Chinese growth as it moves to rebalance its economy from a heavy infrastructure and industrial powerhouse towards a more services-based model. The IMF said falling profitability in China, linked to lower GDP growth, was behind its concern for borrowings at risk of default. There was clear evidence, it said, that a growing number of companies were not earning enough to cover interest payments. “These loans could translate into potential bank losses of approximately 7% of GDP,” it added.

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All these parties chiming in on Brexit will achieve the opposite of what they want.

Is The IMF ‘Consistently Wrong’? (CNBC)

Supporters of a British exit from the European Union were left enraged this week after a new report by the IMF led to calls of inaccuracy and political bias. The Washington D.C.-based organization said the U.K. referendum on its membership of the EU had already created uncertainty for investors and said a so-called “Brexit” could do “severe regional and global damage by disrupting established trading relationships.” U.K. Prime Minister Cameron and Finance Minister George Osborne both used their Twitter accounts Tuesday to promote the IMF’s latest assessment with the latter calling it “one of most important interventions yet in EU debate.” Bookmaker Ladbrokes is currently predicting there’s a 33% chance that Britons will vote to leave the European bloc in an upcoming referendum on June 23.

The fierce debate has strained relationships and seen major political heavyweights put forward opposing views. The warning – just weeks before the June 23 vote – was heavily criticized by John Longworth, a former director-general of the British Chambers of Commerce, who resigned from his role in March after being drawn into the political row. The British government is officially campaigning to stay within a renegotiated EU and Longworth claimed that it had “friends in high places” with this latest backing by the IMF. The IMF did not respond immediately when asked by CNBC about claims of bias and inaccuracy. “I’m fully expecting a whole series of international organizations to make comments saying we ought to stay in the EU running up to the 23rd of June, no doubt orchestrated by the U.K. government,” Longworth told CNBC Wednesday.

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Real demand cuts will be much deeper than OPEC lets on.

OPEC Warns of Deeper Cuts to Oil Demand (BBG)

OPEC said it may deepen cuts to its forecast for global oil demand growth due to slowing economic expansion in emerging markets, warmer weather and the removal of fuel subsidies. OPEC trimmed estimates for demand growth in 2016 by 50,000 barrels a day because of a slowdown in Latin America, projecting worldwide growth of 1.2 million barrels a day. Weakness in Brazil’s economy, the removal of fuel subsidies in the Middle East and milder winter temperatures in the northern hemisphere could prompt further cutbacks, the group said. “Current negative factors seem to outweigh positive ones and possibly imply downward revisions in oil demand growth, should existing signs persist going forward,” the organization’s Vienna-based secretariat said in its monthly market report.

“Economic developments in Latin America and China are of concern.” Oil climbed to a four-month high in London on Tuesday as OPEC nations prepare to meet with Russia and other non-members in Doha this weekend to complete an accord on freezing oil production, an effort to tame the global crude surplus. OPEC’s report said that “positive market sentiments continue to arise” from the freeze plan. The group’s data shows that the 11 OPEC members who are confirmed to attend the Doha talks are pumping 487,000 barrels a day below January levels, the benchmark proposed for the freeze deal.

Libya has said it won’t attend the meeting, and Iran has yet to decide. Saudi Arabia’s output has remained stable since January, the report showed. All 13 members pumped 32.25 million barrels a day in March, up 14,900 a day from February, according to external estimates compiled by OPEC. Global oil demand will average 94.18 million barrels a day in 2016, according to the report. This year’s growth rate of 1.2 million barrels a day is down from 1.54 million a day in 2015 amid a slowdown in consumption of industrial fuels and middle distillates in China and Latin America.

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The era of plastic is in fact simply the era of oil.

Seen From The Future, Ours Is The Era Of Plastic (BBG)

Historians may soon be looking back at the 20th and early 21st centuries as the time of computers and the Internet, bold ventures into space and the splitting of the atom. But what will scholars in the distant future find worthy of note? If there’s anyone around with a penchant for paleontology hundreds of thousands of years from now, a surprise awaits in the stratigraphic layers containing the remains of our time. Anyone digging into the earth would find a sudden, explosive increase in a new kind of material – plastic. Once underground, plastic will fossilize well, leaving a distinct signature. And there’s plenty of it. Until the 20th century, plastic was virtually nonexistent. Since then, humans have created 5 billion tons. The paleontologist Jan Zalasiewicz has calculated that if it were all converted into cling wrap, there would be enough to wrap the globe.

Until about 20 years ago, Zalasiewicz said, the idea that people could permanently change the planet was considered nonsense. Human beings were too puny and the planet too vast. “The scale of geological processes such as mountain building and volcanic eruptions have been held to be much greater than anything humans can rustle up,” he said. But over the last several decades, he added, it’s become clear that human-generated effects “can be big on a geological scale and can be more or less permanent.” Geologic maps of the future might refer to our time as the Slobocene era, or the Trashiferous period. Or maybe the name scientists recently coined – Anthropocene – will stick. It refers to the time when humankind started to make an indelible mark. Changes that characterize the Anthropocene include the widespread production of aluminum and concrete as well as plastics, and distinct changes in the chemistry of the atmosphere and oceans.

Plastics have been important for distributing clean food and water, for medical devices, surgical gloves and affordable clothing. They’ve played a big role in health and sanitation. The fact that they don’t dissolve or decay is a plus for most of their intended uses. But there are unintended consequences. Some plastics are recycled, but most go into landfills or become litter. Recently, scientists have come to realize that much of the plastic in the environment is in the form of invisible particles. Some of these come from the breakdown of bags and other floating trash in the oceans, some from toothpaste and cosmetics, and much of it from clothes, which are mostly made from synthetic materials and give off plastic fibers every time they go through a wash. These “microplastics” can be measured in sand from beaches around the world, and in the guts of many fish.

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Scary graph of the day.

Greenland’s Melt Season Started Nearly Two Months Early (CC)

To say the 2016 Greenland melt season is off to the races is an understatement. Warm, wet conditions rapidly kicked off the melt season this weekend, more than a month-and-a-half ahead of schedule. It has easily set a record for earliest melt season onset, and marks the first time it’s begun in April. Little to no melt through winter is the norm as sub-zero temperatures keep Greenland’s massive ice sheet, well, on ice. Warm weather usually kicks off the melt season in late May or early June, but this year is a bit different. Record warm temperatures coupled with heavy rain mostly sparked 12% of the ice sheet to go into meltdown mode. Almost all the melt is currently centered around southwest Greenland.

According to Polar Portal, which monitors all things ice-related in the Arctic, melt season kicks off when 10% of the ice sheet experiences surface melt. The previous record for earliest start was May 5, 2010. This April kickoff is so bizarrely early, scientists who study the ice sheet checked their analysis to make sure something wasn’t amiss before making the announcement. “We had to check that our models were still working properly” Peter Langen, a climate scientist at the Denmark Meteorological Institute (DMI), told the Polar Portal. But alas, the models are definitely working and weather data and stories coming out of West Greenland have borne that out. According to DMI, temperatures at Kangerlussuaq, a small village in southwest Greenland, set an April record for that location when they reached 64.4°F (17.8°C) on Monday. That’s just a scant .4°F (.2°C) off the all-time Greenland high for April. Heavy rain have also inundated local communities.

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As long as their own people don’t pay a penny….

EU Nations Use Foreign Aid Budgets To Pay For Refugee Costs (G.)

The amount of foreign aid money rich nations spend on dealing with the impact of the refugee crisis at home has almost doubled over the past year and now accounts for 9% of all development expenditure, according to the latest official figures. The preliminary statistics, from the OECD, show that wealthy donor countries spent a net total of $131.6bn (£92.5bn) on aid in 2015, compared with $135.2bn the previous year. Of that, $12bn went on domestic spending – or “in-donor refugee costs”, up from $6.6bn in 2014. Many of the European countries most affected by the mass migration of people recorded surges in their official development assistance (ODA) in 2015: Greece’s aid spending rose by 38.7%; Sweden’s by 36.8%; Germany’s by 25.9%; the Netherlands’ by 24.4%, and Austria’s by 15.4%. The OECD says that all these rises, to greater or lesser extents, were caused by growing in-donor refugee costs.

According to the organisation, members of its development assistance committee (DAC) spent 6.9% more in real terms in 2015 than they did the previous year, making it “the highest level ever achieved for net ODA”. It said ODA as a share of gross national income was 0.3%, putting it on a par with 2013, when aid reached a record, real terms high of $135.1bn. However, the European Network on Debt and Development (Eurodad) said many EU countries are now the biggest recipients of their own aid, adding that the latest figures had been “dramatically inflated” by the diversion of aid to cover the domestic costs of the refugee crisis. “While it is very important that we care for refugees arriving on our shores, our own costs should not be classed as international development aid, and money to cover this must come from other sources,” said Jeroen Kwakkenbos, Eurodad’s policy and advocacy manager.

“We must stop raiding aid budgets to solve our own problems at the expense of the poorest people who desperately need more and better aid. The figures presented today show clear issues with the reporting rules as the largest increases were for domestic budget gaps related to the refugee crisis.” Amy Dodd, of the Concord AidWatch initiative, said: “Unfortunately, official figures today confirm that despite some positive exceptions, the EU once again missed its overall aid target in 2015. “The figures are a real blow to the credibility of the EU and its member states at precisely the moment they should be demonstrating their commitment to implementing the promises they made to provide sufficient, high quality sustainable development financing for [the sustainable development goals].”

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Sep 012015
 
 September 1, 2015  Posted by at 9:15 am Finance Tagged with: , , , , , , , ,  4 Responses »
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Jack Delano Colored drivers entrance, U.S. 1, NY Avenue, Washington, DC Jun 1940

European Efforts to Stem Migrant Tide Sow Chaos on Austria-Hungary Border (WSJ)
Trains Carrying Refugees Reach Germany As EU Asylum Checks Collapse (Reuters)
Hungary Shuts Down Rail Traffic For Westward-Bound Refugees (AP)
The Refugee Crisis Reveals What We Have Become (Martin Sandbu)
Icelanders Call On Government To Take In More Syrian Refugees (Guardian)
Preparing For A Potential Economic Collapse In October (Jeff Thomas)
China PMI Shrinks, Sending Stocks Lower (FT)
Beijing’s Incompetence Is Now China’s Biggest Problem (MarketWatch)
Why China Had To Crash Part 2 (Steve Keen)
China Encourages Cash Bonuses, Share Buybacks (Xinhua)
Why Is China Finding It Hard To Fight The Markets? (Bruegel)
China Reporter Confesses To Stoking Market ‘Panic And Disorder’ (FT)
SocGen: Half-Hearted Capital Controls Are Coming to China (Bloomberg)
China Has Lots of Treasuries, Not Much Leverage (Pesek)
China’s Wealthy Look To Raise Overseas Investments (FT)
Global Trade Damaged By Weakness In Emerging Market Currencies (FT)
Reflation Threat To Bonds As Money Supply Catches Fire In Europe (AEP)
The Dying Institutions Of Western Civilization (Paul Craig Roberts)
Up To 90% Of Seabirds Have Plastic In Their Guts (Guardian)

Merkel: egg on her face and blood on her hands.

European Efforts to Stem Migrant Tide Sow Chaos on Austria-Hungary Border (WSJ)

Austrian and Hungarian efforts to stem a growing tide of migrants sowed chaos along their frontier on Monday as Germany’s chancellor warned that Europe’s open-border policy was in danger unless it united in its response to the crisis. In Austria, police toughened controls on the border, triggering miles of traffic jams as they checked cars and trucks for evidence of people smuggling. They said they were compelled to conduct the highway searches after discovering the decomposed bodies of 71 people, most of them believed to be Syrian refugees, in an abandoned truck last week. Authorities also stopped and boarded several Germany-bound trains overcrowded with hundreds of migrants, refusing entry into Austria until some of them got off.

Migrants had packed into the trains in Hungary earlier in the day after officials in Budapest abruptly lifted rules barring them from traveling further into the European Union without visas. Such temporary checks remain in accord with the Schengen Agreement, which allows people to travel freely across the borders of 26 European countries that have signed onto the treaty. But in Berlin, German Chancellor Angela Merkel cautioned that some countries could move to reintroduce systematic passport controls at their borders—unless EU governments agreed to more equally bear the burden of the bloc’s escalating crisis, “Europe must move,” she told reporters in Berlin. “Some will certainly put Schengen on the agenda if we don’t succeed in achieving a fair distribution of refugees within Europe.”

Ms. Merkel’s warning—aimed at governments in the bloc’s east that have resisted taking on a greater number of migrants—marked her most direct intervention in the fraught debate between those European countries, such as Germany, Italy and France, that have called for a fairer distribution of migrants across the bloc, and those that have opposed binding quotas. The comments also came as a rebuttal to opposition politicians and some members of the chancellor’s ruling coalition who have accused her of being slow to address the crisis. Echoing comments she made last week in a German town shaken by three days of antimigrant riots, Ms. Merkel urged her compatriots to welcome those fleeing war or persecution while warning that economic migrants, namely those from Southeastern Europe, couldn’t expect to settle in Germany. “If Europe fails on the question of refugees, then [Europe’s] close link with universal civil rights will be destroyed and it won’t be the Europe we wished for,” she said.

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“Syrians call [Chancellor Angela] Merkel ‘Mama Merkel’..” Well, mama let some 20,000 of you drown.

Trains Carrying Refugees Reach Germany As EU Asylum Checks Collapse (Reuters)

Packed trains arrived in Austria and Germany from Hungary on Monday, as European Union asylum rules collapsed under the strain of an unprecedented migration crisis. As men, women and children – many fleeing Syria’s civil war – continued to arrive from the east, authorities let thousands of undocumented people travel on towards Germany, the favoured destination for many. The arrivals are a crisis for the European Union, which has eliminated border controls between 26 Schengen area states but requires asylum seekers to apply in the first EU country they reach. In line with EU rules, an Austrian police spokesman said only those who had not already requested asylum in Hungary would be allowed through, but the sheer pressure of numbers prevailed and trains were allowed to move on.

“Thank God nobody asked for a passport … No police, no problem,” said Khalil, 33, an English teacher from Kobani in Syria. His wife held their sick baby daughter, coughing and crying in her arms, at the Vienna station where police stood by as hundred of people raced to board trains for Germany. Khalil said he had bought train tickets in Budapest for Hamburg, northern Germany, where he felt sure of a better welcome after traipsing across the Balkans and Hungary. “Syrians call [Chancellor Angela] Merkel ‘Mama Merkel’,” he said, referring to the German leader’s relatively compassionate response so far to the crisis. Late on Monday, a train from Vienna to Hamburg was met in Passau, Germany, by police wearing bullet-proof vests, according to a Reuters witness.

Police entered the train and several passengers were asked to accompany them to be registered. About 40 people were seen on the platform. Police said they would be taken to a police station for registration. Merkel, whose country expects some 800,000 migrants this year, said the crisis could destroy the Schengen open borders accord if other EU countries did not take a greater share. “If we don’t succeed in fairly distributing refugees then of course the Schengen question will be on the agenda for many,” she told a news conference in Berlin. “We stand before a huge national challenge. That will be a central challenge not only for days or months but for a long period of time.”

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I changed migrants to refugees in the title. Getting really tired of this politically motivated misnomer.

Hungary Shuts Down Rail Traffic For Westward-Bound Refugees (AP)

Hungarian authorities are stopping all trains from leaving Budapest’s main train terminal in an effort to prevent migrants from using it to leave for Austria and Germany. An announcement over the station’s loudspeakers Tuesday said the measure would be in effect for an undetermined length of time. Scuffles broke out earlier in the morning among some of the hundreds of migrants as they pushed toward metal gates at the platform where a train was scheduled to leave for Vienna and Munich, and were blocked by police. Several say they spent hundreds of euros for tickets after police told them they would be allowed free passage. Police in Vienna say 3,650 migrants arrived from Hungary Monday at the city’s Westbahnhof station. They say most continued on toward Germany.

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Fat and stupid?

The Refugee Crisis Reveals What We Have Become (Martin Sandbu)

When Sir Nicholas Winton died in July, he was widely celebrated for a few days. Obituarists eulogised his work in rescuing Jewish children from Germany and central Europe just before the second world war. Then everyone went back to their everyday business. Few noted the contrast between Winton’s initiative and our own attitudes to the refugee crisis lapping Europe’s shores. Winton was a banker who, in 1938-39, bankrolled and managed part of what became known as the Kindertransport, by which some 10,000 mostly Jewish children were moved and admitted to the UK. The government was persuaded to waive immigration restrictions for the children (they had to leave their parents, most of whom would soon perish) if the rescue organisers promised to find housing and guarantee funds for repatriating the children later.

There is no comparison today with the Holocaust. But last week’s mass deaths in capsized boats and an abandoned lorry show the risks hundreds of thousands of families are prepared to take for a journey they find preferable to the desperation they flee. Children are in large numbers among them: more than a quarter of those applying for asylum in Europe last year were minors, and almost one-fifth less than 14 years old. The two most welcoming countries in Europe are Germany and Sweden. Berlin is preparing for some 800,000 asylum applications this year, 1% of its population and four times more than last year. Even in 2014, Germany received and granted more than 25% of all asylum applications in the EU, far above its population share.

Sweden, with just 2% of the EU’s population, last year accounted for 13% of all applications and 18% of all successful ones. Twentieth-century history gives possible explanations for why these two countries stand out. Germany was responsible for the second world war and much of the country’s current openness to refugees can be attributed to a sense of historic responsibility. Sweden was one of very few European countries to pass through the war relatively unscathed. (Switzerland, too, accepted a disproportionate share of refugees last year, though at only half Sweden’s rate.) Most of the others, however, are twisting themselves into contortions to avoid letting people in. It is hard to banish the thought that guilt motivates determined action, and empathy does not.

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“Refugees are our future spouses, best friends, or soulmates, the drummer for the band of our children, our next colleague, Miss Iceland in 2022, the carpenter who finally finished the bathroom, the cook in the cafeteria, the fireman, the computer genius, or the television host.”

Icelanders Call On Government To Take In More Syrian Refugees (Guardian)

Thousands of Icelanders have called on their government to take in more Syrian refugees – with many offering to house them in their own homes and give them language lessons. Iceland, which has a population of just over 300,000, has currently capped the number of refugees it accepts at 50. Author and professor Bryndis Bjorgvinsdottir put out a call on Facebook on Sunday asking for Icelanders to speak out if they wanted the government to do more to help those fleeing Syria. More than 12,000 people have responded to her Facebook group “Syria is calling” to sign an open letter to their welfare minister, Eyglo Hardar.

“Refugees are human resources, they have experience and skills”, the letter said. “Refugees are our future spouses, best friends, or soulmates, the drummer for the band of our children, our next colleague, Miss Iceland in 2022, the carpenter who finally finished the bathroom, the cook in the cafeteria, the fireman, the computer genius, or the television host.”

Many of those posting on the group have said they would offer up their homes and skills to help refugees integrate. “I have clothing, kitchenware, bed and a room in Hvanneyri [western Iceland], which I am happy to share with Syrians”, one wrote. I would like to work as a volunteer to help welcome people and assist them with adapting to Icelandic society. “I want to help one displaced family have the chance to live the carefree life that I do”, another wrote. “We as a family are willing to provide the refugees with temporary housing near Egilsstadir [eastern Iceland], clothing and other assistance. I am a teacher and I can help children with their learning.”

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True, October has a bad reputation when it comes to markets.

Preparing For A Potential Economic Collapse In October (Jeff Thomas)

There’s no question that the world economy has been shaky at best since the crash of 2008. Yet, politicians, central banks, et al., have, since then, regularly announced that “things are picking up.” One year, we hear an announcement of “green shoots.” The next year, we hear an announcement of “shovel-ready jobs.” And yet, year after year, we witness the continued economic slump. Few dare call it a depression, but, if a depression can be defined as “a period of time in which most people’s standard of living drops significantly,” a depression it is. Many people are surprised that no amount of stimulus and low interest rates have resulted in creating more jobs or more productivity.

Were they a bit more cognizant of the simple, understandable principles of classical economics (as opposed to the complex theoretical principles of Keynesian invention), they’d recognise that, when debt reaches the level that it cannot be repaid, a major re-set of some sort must take place. The major economies of the world have reached and exceeded that point and the debt problem is no mere anomaly that can be papered over. It is, instead, systemic. There must be a major forgiveness of debt, a default, or an economic collapse, or some combination of the three. And so, those who recognise the inevitability of such an event have been storing their nuts away in preparation for an economic winter.

Those of us who warned of the 2008 crash in advance had been regarded as economic “Chicken Littles.” After the crash, we were largely resented as having made a “lucky guess.” Following that time, a moderate amount of credence has been allowed us, as we’ve recommended investments in real estate and precious metals (outside of those jurisdictions that are most at risk). However, since the Great Gold Correction (2011-2015), that begrudging credence has worn away and been replaced with renewed contempt. To the naysayers, the 2001-2011 gold boom has been relegated to the investment dustbin and, to most punters, gold is clearly “over.”

Just as importantly, the most significant events of the “Greater Depression” that we had been predicting have clearly not yet come to pass. They’re still ahead of us. And, in this, we must confess that those of us who made this prediction did unquestionably believe that it would have taken place by now. We were wrong. Or at least we were wrong on the timing, but most of us still believe, more than ever, in the inevitability of a collapse (again, this is true because the problem is systemic, not symptomatic). All of the above is a preface of the coming of October, a month which, historically, has seen more than its fair share of negative economic events. This time around, there are warning signs aplenty that, sometime around October of this year, we shall see a number of black swans on the wing, headed our way.

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Shanghai is the gift that keeps on giving.

China PMI Shrinks, Sending Stocks Lower (FT)

Activity in China’s manufacturing sector contracted at its fastest pace in three years, sending shares down and exacerbating fears about a China slowdown that have roiled global markets. The official Purchasing Managers’ Index (PMI) fell to 49.7 in August from the previous month’s reading of 50, the first time since February that the bellwether figure for large industrial enterprises has fallen below 50 — the level that separates expansion from contraction. The reading backs up the earlier Caixin flash PMI, representing a group of private sector and small and medium enterprises, which fell to 47.1 in August, from the final reading of 47.8 in July. China’s stock markets spiralled as much as 5.8% lower after the data, but pared back losses later.

The Shanghai Composite Index was down 1.1% at the lunchtime close while Shenzhen had fallen 2.9%. Wang Tao, chief China economist at UBS, said the reading showed the persistence of downward pressure on growth — a pressure that has triggered a flurry of supportive measures from Beijing, dented stock markets around the world and sent emerging market currencies into a swoon. “This is why the [Chinese] government has intensified policy support recently, announcing plans to bring forward some key infrastructure projects, ways to fund them, and another marginal easing for property purchase in the past couple of days,” said Ms Wang. China’s central bank cut interest rates last week and said it would inject liquidity into the banking sector, in a move to stimulate the slowing economy and stem a slide in share prices that has rattled global investors.

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It has been for many years.

Beijing’s Incompetence Is Now China’s Biggest Problem (MarketWatch)

For much of the summer, global markets have been able to carry on with a detached bemusement at Beijing’s fumbled handling of its stock market burst. But after last week’s “Black Monday” plunge in Shanghai stocks triggered a global equity selloff, suddenly the policy competence of China’s leaders matters to everyone from London to New York. As Beijing lurches between intervening to support its stock market and currency peg, while blaming everyone from the Federal Reserve to rogue brokers for the selloff, the enduring casualty has been confidence. The veil of omnipotence of President Xi Jinping’s government and the “exceptionalism” of China’s economy has been well and truly lifted.

Where once there was the “Beijing put” and policy certainty, now there is a wall of questions as market forces nibble away at China’s model of state-led capitalism. If China’s debt, equity and property markets — together with its currency — are finally marked to market, it could be quite a reckoning. Daiwa Research warns, “The debate for China is no longer between realizing a soft landing or a hard one. It is now between a hard landing and a financial crisis.” Other analysts are also flagging the risk of the equity rout snowballing into something much bigger. Credit Suisse says that because state banks were the main source of lending that financed the last round of stock purchases, intervention may pose a threat to financial stability.

The decision to mobilize the state to support a stock market that had been propelled to bubble highs through massive margin financing, always looked foolhardy, in that its chance of success were limited from the start. Beijing also failed to realize that by effectively becoming the only buyer, it has reduced investing in equities to a binary bet on when the government was buying or not. Last Monday’s plunge was attributed to rumors Beijing had capitulated in its stock-support efforts. The subsequent rebound from Thursday afternoon suggested the “national team” of state-owned investment funds was back in the market. But now once again it is believed state buying may be over after a $200 billion spend in recent weeks, according to a new report in the Financial Times. This suggests more extreme volatility lies ahead.

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“Cherchez La Debt!”

Why China Had To Crash Part 2 (Steve Keen)

One thing my 28 years as a card-carrying economist have taught me is that conventional economic theory is the best guide to what is likely to happen in the economy. Read whatever it advises or predicts, and then advise or expect the opposite. You (almost) can’t go wrong. Nowhere is this more obvious than in its strident assurances that the value of shares is unaffected by the level of debt taken on, either by the firms themselves or by the speculators who have purchased them. This theory, known as the “Modigliani-Miller theorem”, asserted that since a debt-free company could be purchased by a highly levered speculator, or a debt-laden company could be purchased by a debt-free speculator, therefore (under the usual host of Neoclassical “simplifying assumptions”, which are better described as fantasies) the level of leverage of neither firm nor speculator had any impact on a firm’s value—and hence its share price.

The sole determinant of the share price, it argued, was the rationally discounted value of the firm’s expected future cash flows. Armed with that theorem, I was always confident of the contrary assertion: that debt played a crucial role in determining stock prices. So, like the fictional 19th century French detective who began every investigation with the cry “Cherchez La Femme!”, my first port of call in understanding any stock market bubble is “Cherchez La Debt!”. It took a while to locate Shanghai’s margin debt data (the easier to find stock index data is here), but once I plotted it, the reliability of my trusty old contrarian indicator was obvious. While these figures may well substantially understate the actual level of margin debt [see also here], they imply that, starting at the truly negligible level of 0.000014% of China’s GDP in early 2010, margin debt rose to over 2% of China’s GDP at its peak in June of this year. It has since plunged to just under 1% of GDP—see Figure 1.

Figure 1: Margin debt as a percent of China’s GDP: from 0.000014% to 2% in 5 years–and back down again

The ups and downs of margin debt have both paralleled and driven the stock market boom and bust in China: as the leverage of speculators rose and fell, so did the market—see Figure 2.

Figure 2: A debt bubble begets a stock market bubble

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Hey, it worked for Apple until it didn’t…

China Encourages Cash Bonuses, Share Buybacks (Xinhua)

China issued a notice Monday encouraging mergers, cash bonuses and share repurchases by listed companies as part of its efforts to push forward reforms of state-owned enterprises and promote the steady and healthy development of the capital market. The notice was jointly announced by China Securities Regulatory Commission, Ministry of Finance, State-owned Assets Supervision and Administration Commission of the State Council and China Banking Regulatory Commission. The notice took effect Monday. The value of mergers and acquisitions (M&A) among listed companies totaled nearly 1.27 trillion yuan (198.77 billion U.S. dollars) in the first seven months this year, accounting for 87.5% of the overall value registered last year.

The notice also encouraged cash bonuses among listed companies. State-controlled listed companies took the lead, accounting for 76.9% of the total cash bonuses made in 2014. As an important way to repay investors, listed companies should repurchase their shares in due time, said the notice. Of the entire share repurchases published by the Shanghai and Shenzhen bourses since July this year, 72.8% were made by state-controlled listed companies. The notice also vowed to push forward market-oriented reforms and further cut red tape in order to facilitate the implementation of mergers, cash bonuses and share repurchases.

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Good evaluation, good graphs.

Why Is China Finding It Hard To Fight The Markets? (Bruegel)

China’s market drama started in June this year with the collapse of the Shanghai stock exchange, followed by frantic interventions by the Chinese authorities. As if the estimated $200 billion already spent on propping up stock prices were not enough, China found itself in another battle with the market, defending the RMB against depreciation pressures after the PBoC devalued the RMB by nearly 2% on August 11. The cost of the foreign exchange intervention to keep the RMB stable is estimated at $200 billion.This adds to existing pressures on China’s international reserves, which though still extensive, have been reduced by as much as $345 billion in the last year, notwithstanding China’s still large current account surplus and still positive net inflows of foreign direct investment (Graph 1).

The fall in reserves is not so much due to foreign investors fleeing from China but, rather, capital flight from Chinese residents. Another –more positive reason – for the fall in reserves is that Chinese banks and corporations, which had borrowed large amounts from abroad in the expectation of an ever appreciating RMB, finally started to redeem part of their USD funding while increasing it onshore. While this is certainly good news in light of the recent RMB depreciation, the question remains as to how much USD debt Chinese banks and corporations still hold and, more generally, how leveraged they really are a time when the markets may become much less complacent, at least internationally.

Public and corporate sector over-borrowing can be traced back to the huge stimulus package and lax monetary policies which Chinese economic authorities introduced during the global financial crisis in 2008-2009. A RMB 4 trillion investment plan focusing on infrastructure was deployed, but the real cost spiralled. The government also subsidized the development of several important industries and lowered mortgage rates to boost housing demand. At the same time, the PBoC substantially loosened monetary policy with interest rate cuts, reductions in reserve requirements and even very aggressive credit targets for banks. According to the authorities’ initial plan, the funds needed for the stimulus package would come from three sources: central government, local governments, and banks, with costs shared relatively equally.

However in practice, given their limited fiscal capacity, local governments had to turn to banks to meet their borrowing needs. Banks could not decline loan requests from central or local government because of government ownership and control over most banks. In the meantime, government subsidies for specific industries boosted credit demand as firms in these sectors sought to take advantage of policy support and expand their production capacity. Mini-stimulus packages have since become the new norm of China’s economic policy. When growth started to slow in 2012, the authorities responded by rolling out more infrastructure projects to revive the economy, which has blotted China’s consolidated deficits every year since 2008. Although no official statistics exist on this, our best estimate is 8-10% fiscal deficits with the corresponding increase in public debt every year.

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Are we sure this is not from the Onion?

China Reporter Confesses To Stoking Market ‘Panic And Disorder’ (FT)

A leading journalist at one of China s top financial publications has admitted to causing panic and disorder in the stock market, in a public confession carried on state television. The detention of Wang Xiaolu, a reporter for Caijing magazine, comes amid a broad crackdown on the role of the media in the slump in China’s stock market, which is down about 40% from its June 12 peak. Nearly 200 people have been punished for online rumour-mongering, state news agency Xinhua reported at the weekend. “I acquired the news from private conversations, which is an abnormal way, and added my personal judgment and subjective views to finish this story, said Mr Wang in a confession aired on China Central Television. I shouldn’t have released a report with a major negative impact on the market at such a sensitive time. I shouldn’t do that just to catch attention which has caused the country and its investors such a big loss. I regret . . . [it and am] willing to confess my crime.”

Mr Wang’s confession came after he was detained for allegedly fabricating and spreading false information about the stock market, according to Xinhua. High quality global journalism requires investment. State TV channels in China frequently broadcast public confessions in high-profile cases. CCTV on Monday also aired a confession by Liu Shufan, an official of market watchdog the China Securities Regulatory Commission, and reported that four senior executives of investment bank Citic Securities had confessed to insider trading. The state broadcaster showed Mr Liu confessing to market-related crimes including insider trading. The wider clampdown has also targeted those spreading online rumours about the recent fatal explosions in Tianjin and “other key events”. According to Xinhua’s report, crimes punished include claiming a man had jumped to his death in Beijing because of the stock market slump.

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Capital outflows is yet another losing wager for Beijing.

SocGen: Half-Hearted Capital Controls Are Coming to China (Bloomberg)

It’s a tough time to be a Chinese policymaker. Obvious overcapacity in industrial sectors forced the world’s second-largest economy to shift to a more consumer-oriented growth model. Maintaining an elevated currency was conducive to this goal, as it boosted the purchasing power of Chinese citizens. But the yuan’s peg to the U.S. dollar constituted an effective tightening of financial conditions as the greenback soared, despite a deterioration in the Chinese growth outlook. Even with continued current account surpluses, the currency appreciation was also beginning to hamper Chinese competitiveness in an environment in which external demand remains lackluster. Meanwhile, the liberalization of China’s capital account over the past five years provided a conduit for market forces to exert greater pressure on the exchange rate.

The manner by which the People’s Bank of China has been able to maintain an overvalued yuan—by intervening in foreign exchange markets—effectively dried up domestic liquidity, which serves as a rising potential vulnerability for the economy in light of China’s dependence on cheap credit for growth. When policymakers moved to devalue the yuan, market turmoil soon ensued—and China’s fingerprints were all over some of the bizarre moves that occurred in equities and fixed income last week. How Chinese policymakers elect to manage the currency in the face of continued capital outflows will likely play an outsize role in determining whether the current respite from market volatility will endure or prove to be the eye of the hurricane.

Société Générale China economist Wei Yao thinks Chinese policymakers will take a measured approach to solving this conundrum—allowing the currency to depreciate in a controlled manner while placing more restrictions on the flow of capital out of the country. Yao notes that in this discussion, it’s important to distinguish which variable is the dog and which is the tail. “The total size of capital outflows, among other factors, is mathematically a function of the PBoC’s choice of currency policy, not the other way around,” she writes. “That is, total capital outflows equal the current account surplus plus the amount of FX reserves that the PBoC is willing to sell based its target for the RMB relative to the market’s view.”

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Depends on what kind of leverage you mean.

China Has Lots of Treasuries, Not Much Leverage (Pesek)

In recent years, China’s relationship with the U.S. has resembled nothing so much as a hostage situation. Beijing’s enormous holdings of Treasuries gave it immense leverage over Washington, which lived in perpetual fear of China choosing to not finance any new debt, or sell off its current holdings. That worst-case scenario is closer than ever to becoming a reality – or so say the Republicans who are vying for their party’s presidential nomination. But one important point has escaped Donald Trump and company: If the dynamic between China and the U.S. is still a hostage scenario, the roles have been reversed. Beijing has been trimming its holdings of Treasuries in recent months in order to prop up the yuan.

Over the past year, its overall foreign-exchange reserves have fallen by about $315 billion to $3.7 trillion. But the scale of these sales have been relatively modest. And there are at least three reasons that a more massive Chinese selloff of Treasuries is exceedingly unlikely. The first reason is China’s rickety economy. It has always been true that if Beijing dumped hundreds of billions of dollars of Treasuries, U.S. yields would skyrocket and devastate the key market to which China ships its goods. In 2004, former U.S. Treasury Secretary Lawrence Summers warned about relying on this dynamic to ensure stability for the long term: “It surely cannot be prudent for us as a country to rely on a kind of balance of financial terror to hold back reserve sales that would threaten our stability.”

But as Summers also pointed out, the arrangement “is a reason a prudent person would avoid immediate concern.” That’s especially true in the current economic environment, as Chinese growth sputters and traders begin to short Shanghai stocks. China needs every growth engine it can muster. And that means enticing U.S. consumers to spend by ensuring their government enjoys low interest rates. The second reason China will hesitate to sell off Treasuries is Japan. Beijing knows that if it ends its unique relationship with the U.S., Tokyo would gladly step in to take its place. With about $1.2 trillion of Treasuries, Japan is already only marginally behind China in the dollar-leverage department. And two of Prime Minister Shinzo Abe’s signature policies are especially relevant in this context: keeping the yen weak and Barack Obama happy.

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Why not let them purchase your neighborhood too with monopoly money? What could go wrong?

China’s Wealthy Look To Raise Overseas Investments (FT)

China’s wobbly response to the bursting of its stock market bubble, the sudden devaluation of the renminbi and the mystery over the true health of the country’s economy continue to spook investors, large and small. But China’s wealthiest people know exactly what to do in these bewildering times: get some of their money out. More than 60% of wealthy Chinese people surveyed in July by FT Confidential, an investment research service at the FT, said they planned to increase their overseas holdings in the coming two years. Residential property was the most popular future investment, followed by fixed-income securities, commercial property, trust products and life insurance policies.

A significant proportion of China’s wealthy are self-made business people who have managed to profit from the nation’s economic expansion — a phenomenon that has led to massive inflows of foreign investment into China. FT Confidential identified and polled 77 wealthy individuals, divided into two groups: those with Rmb6m ($941,000) or more to invest, and a so-called “mass affluent” group with Rmb600,000-Rmb6m. An attempted rebalancing of the economy away from investment and towards greater consumption has dealt a blow to many once highly lucrative industries such as energy and low-end manufacturing, putting business owners under stress as profits have fallen.

The high-level anti-graft campaign kicked off by President Xi Jinping is making the problem worse as private bosses scramble to adjust their relationships with the government – key to their business success. With uncertainty rising at home, China’s rich have started looking elsewhere to store their wealth. “China’s policy changes so quickly,” said a businessman in Shenzhen who would only give his name as Mr Huang. “I am worried about the safety of my wealth.” The July stock market rout in Shanghai and the policy dilemma it has thrown up is likely to have underlined those concerns. The survey found that 47% of so-called high net worth individuals had earmarked more than 30% of their assets for investment overseas. The US was the preferred destination for 42% of respondents.

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No, that should read ‘damaged by central bankers’ incompetence and/or criminal actions’.

Global Trade Damaged By Weakness In Emerging Market Currencies (FT)

Weakness in emerging market currencies is hurting global trade by reducing imports without any benefit to export volumes, according to FT research based on more than 100 countries. The findings suggest any currency war between developing nations is likely to be even more damaging than previously thought, leading to a reduction in global trade and possibly economic growth, rather than just reapportioning a fixed level of trade between “winners” and “losers”. The analysis coincides with concerns that some countries are engaging in competitive devaluations in order to undercut their neighbours and steal market share. “We risk slipping into a beggar thy neighbour, competitive spiral of currency devaluations, with all the currency overshoots and volatility that go with that,” said Mohamed El-Erian.

Since June 2014, the currencies of Russia, Colombia, Brazil, Turkey, Mexico and Chile have fallen by between 20% and 50% against the dollar, while the Malaysian ringgit and Indonesian rupiah are at their weakest since the Asian financial crisis of 1998.\ China, which had held the renminbi firm against the dollar until this month, has since allowed it to fall 4.5%, triggering a further wave of currency weakness across emerging markets. The FT compared changes in the value of 107 emerging market countries’ currencies with their trade volumes in the following year.

The analysis found that having a weaker currency did not lead to any rise in export volumes. However, it did lead to a fall in import volumes of about 0.5% for every 1% a currency depreciated against the dollar. A fall in the value of a country’s currency pushes up the price of imports, leading to lower demand for imported goods. Brazilian import volumes for the past three months, for example, are falling at a pace of 13% year-on-year, according to estimates from Capital Economics, following a 37% collapse in the real over the past 12 months. Russia, South Africa and Venezuela have also seen imports fall in the wake of plummeting currencies.

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Well, uh, no, Ambrose. No matter how much Europe inflates its money supply, if people don’t spend, there’ll be no reflation or inflation. Spending is the crucial factor. Velocity of money.

Reflation Threat To Bonds As Money Supply Catches Fire In Europe (AEP)

Eurozone money supply is surging at a blistering pace as stimulus gains traction, signalling a powerful economic recovery over coming months and raising the risk of a mjaor sell-off in bond markets. The growth of narrow M1 money surged to 12.1pc in July, higher than the peak levels seen a decade ago when the EMU credit boom was reaching a crescendo. Such explosive rates of growth are usually associated with over-heating. The M1 figures cover cash and current accounts. They are watched closely by monetarists for clues of future spending and economic vigour six months or so ahead. The surge is the clearest evidence so far that zero interest rates and €60bn of asset purchases each month by the ECB are starting to ignite the eurozone’s damp kindling wood.

Doubts are growing over whether the ECB really can keep going with quantitative easing at the current blistering pace. “It is full steam ahead. I don’t see how they can continue to do QE until September (2016),” said Simon Ward from Henderson Global Investors. “It will be clear by early next year that there is a lot more life in the eurozone economy than people think. The bond markets are going to be vulnerable,” he said. The yields on Europe’s sovereign bonds are still at historic lows, priced for depression as far as they eye can see. Two-year yields are negative in 14 countries, including Ireland, Slovenia, Latvia and the Czech Republic. Ten-year yields are 1.09pc in France, 0.74pc in Germany and -0.17pc in Switzerland. Any sign that growth is picking up and that the “output gap” is closing faster than expected in these countries could lead to a spike in yields, and potentially a full-blown bond rout.

The eurozone’s broader M3 measure of the money supply is growing more slowly than M1 but has reached a post-Lehman high of 5.3pc. Private sector lending is coming back from the dead after three years of outright contraction. Loans to households rose by 1.9pc. Demand for housing loans and consumer credit is rocketing, surpassing levels reached at the height of the previous boom. The ECB is in no hurry to wind down QE. Vice-president Vitor Constancio raised eyebrows this week with hints that Frankfurt might actually increase the dosage if needed to stop inflation falling too low, or to avert further fall-out from trouble in China. “The Governing Council stands ready to use all the instruments available within its mandate to respond to any material change to the outlook for price stability,” he said.

Neil Mellor, from BNY Mellon, said the ECB risks a policy mistake by keeping the taps on too long to meet its inflation target. “There is a risk that this will end in asset price inflation, and we should have learned from 2008 how much damage asset booms can do,” he said. The inflation price data have been distorted by the slump in oil and commodity prices over the past year. Modern central banks usually take the view that such “positive supply shocks” increase spending power and are therefore benign.

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Could have read The Dying Constitutions.

The Dying Institutions Of Western Civilization (Paul Craig Roberts)

The US no longer has a judiciary. This former branch of government has transitioned into an enabler of executive branch fascism. Privacy is a civil liberty protected by the US Constitution. The Constitution relies on courts to enforce its prohibitions against intrusive government, but if the executive branch claims (no proof required) “national security,” courts kiss the Constitution good-bye. Federal judges are chosen by the executive branch. The senate can refuse to confirm, but that is rare. The executive branch chooses judges who are friendly to executive power. This is especially the case for the appeals courts and the Supreme Court. The Justice (sic) Department keeps tabs on district court judges who rule against the government, and these judges don’t make it to the higher courts. The result over time is to erode civil liberty.

Recently a three-judge panel of the US Appeals Court for the District of Columbia ruled that the National Security Agency can continue its mass surveillance of the US population without showing cause. The panel avoided the constitutional question by ruling on procedural terms that NSA had a right to withhold the information that would prove the plaintiffs’ case. By refusing to extend the section of the USA PATRIOT Act—a name that puts a patriotic sheen on Orwellian totalitarianism—that gave carte blanche to the NSA and by passing the USA Freedom Act, Congress attempted to give NSA’s spying a constitutional patina. The USA Freedom Act allows the telecom companies to spy on us and collect all of our communications data and for NSA to access the data by obtaining a warrant from the Foreign Intelligence Surveillance Act (FISA) Court.

The Freedom Act protects constitutional procedures by requiring NSA to go through the motions, but it does not prevent telecom companies from invading our privacy in behalf of NSA. No one has ever explained the supposed threat that American citizens pose to themselves that requires all of their communications to be collected and stored by Big Brother. If the US Constitution was respected by the executive branch, Congress, the judiciary, law schools and bar associations, there would have been a public discussion about whether Americans are most threatened by the supposed threat that requires universal surveillance or by the loss of their constitutional protections. We all know what our Founding Fathers’ answer would be.

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Feel proud of yourself?

Up To 90% Of Seabirds Have Plastic In Their Guts (Guardian)

As many as nine out of 10 of the world’s seabirds are likely to have pieces of plastic in their guts, a new study estimates. An Australian team of scientists who have studied birds and marine debris found that far more seabirds were affected than the previous estimate of 29%. Their results were published in the journal Proceedings of the National Academy of Sciences. “It’s pretty astronomical,” said study coauthor Denise Hardesty, a senior research scientist at the CSIRO. She said the problem with plastics in the ocean was increasing as the world made more of it. “In the next 11 years we will make as much plastic as has been made since industrial plastic production began in the 1950s.”

Birds mistook plastic bits for fish eggs so “they think they’re getting a proper meal but they’re really getting a plastic meal”, Hardesty said. Some species of albatross and shearwaters seem to be the most prone to eating plastic pieces. She combined computer simulations of garbage and the birds, as well as their eating habits, to see where the worst problems are. Hardesty’s work found the biggest problem was not where there was the most garbage, such as the infamous patch in the central north Pacific Ocean. Instead it was in areas with the greatest number of different species, especially in the southern hemisphere near Australia and New Zealand. Areas around North America and Europe were better off, she said.

By reducing plastic pellets Europe was seeing less of it in one key bird, the northern fulmar. Hardesty said she had seen an entire glowstick and three balloons in a single short-tailed shearwater bird. “I have seen everything from cigarette lighters … to bottle caps to model cars. I’ve found toys,” Hardesty said. And it is only likely to get worse. By 2050, 99% of seabirds will have plastic in them, Hardesty’s computer model forecasts. That prediction “seems astonishingly high but probably not unrealistic”, said American University environmental scientist Kiho Kim, who wasn’t part of the study but praised it.

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Dec 122014
 
 December 12, 2014  Posted by at 11:59 am Finance Tagged with: , , , , , , , , ,  Comments Off on Debt Rattle December 12 2014
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Jack Delano Atchison, Topeka & Santa Fe train at Emporia, Kansas Mar 1943

IEA Warns On Social Unrest As It Cuts 2015 Oil Demand Growth Forecast (CNBC)
Oil Drops Below $60 After Saudis Question Need to Cut (Bloomberg)
Oil Pressure Could Sock It To Stocks (CNBC)
Fed Bubble Bursts in $550 Billion of Energy Debt (Bloomberg)
Oil Bust Contagion Spreads to Wall Street and the Banks (WolfStreet)
Ruble Consolation Gets Putin Record Oil Income (Bloomberg)
This Has Never Happened Before Without A Drop In Stock Prices (Napier via ZH)
France Drifts Into Deflation As ECB ‘Pea-Shooter’ Falls Short (AEP)
WTF Chart Of The Day: Explaining The Surge In US Retail Sales (Zero Hedge)
China’s Slowdown Deepens as Factory Output Growth Wanes (Bloomberg)
China Tells Banks To Step Up Lending To Lift Flagging Growth (Reuters)
Skepticism Jumps in Options as VIX Rises 70% in Four Days (Bloomberg)
NY Regulator Probing Barclays And Deutsche Over Forex Algorithms (FT)
US House Narrowly Passes Spending Bill, Averts Government Shutdown (Reuters)
US Prosecutors Face New Fallout From Insider Trading Ruling (Reuters)
Welcome To The UK: DIY Burials And Payday Loans For Kids (CNBC)
Crystal Ball: Top 10 Economic Predictions For 2015 (CNBC)
These Are Lies The New York Times Wants You To Believe About Russia (Salon)
Full Scale Of Plastic In The World’s Oceans Revealed For First Time (Guardian)

“Venezuela needs to fill a capital shortfall of around $29 billion next year ..” “.. a currency devaluation would not do much to alleviate the pain. “This is a country really facing a perfect storm.”

IEA Warns On Social Unrest As It Cuts 2015 Oil Demand Growth Forecast (CNBC)

Weak demand and oversupply in oil markets raise the risk of global social instability and the potential for financial defaults, the International Energy Agency (IEA) warned on Friday, as it cut its forecasts for global oil demand growth in 2015. The report came as oil prices slid to new multi-year lows, with Brent crude hitting a 5.5-year low of $63.33 a barrel on Friday. “Continued price declines would for some countries and companies make an already difficult situation even worse,” the IEA said in its new monthly report. Global oil inventories are projected to build by around 300 million barrels in the first half of 2015 in the absence of any disruption, the group said. It estimated that stocks in major global economies could start to “bump” against storage capacity limits.

“The resulting downward price pressure would raise the risk of social instability or financial difficulties if producers found it difficult to pay back debt,” it said. Singling out Russia and Venezuela, the IEA said that further price drops would heighten the financial risks to “highly leveraged” producers, and countries that are heavily dependent on oil revenues. It warned on the threat to international financial stability should the situation in Russia deteriorate to the point of a default. Bond yields and the cost of insuring Russia against a default have risen in recent weeks amid fears over falling oil prices and intensifying sanctions from the West. Oil the country’s biggest export – is crucial for its economy, and influence in the world.

“Lower oil prices significantly dent potential export revenues in net oil exporting countries, slashing their income streams and in turn denting demand,” it said. “In particularly cash strapped economies, such as Venezuela and Russia, this impact is likely to be magnified as the risk of default escalates,” it said, adding that Venezuela’s capital Caracas was currently struggling to make bond payments, fund social programs and pay debts to oil partners. Venezuela needs to fill a capital shortfall of around $29 billion next year, according to Bradford Jones at hedge fund Sagil Capital. He told CNBC Friday that the country was facing a number of very tough decisions and believed a currency devaluation would not do much to alleviate the pain. “This is a country really facing a perfect storm,” he said.

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“When you see a persistent trend like this you can be sure there are a lot of investors caught on the wrong side ..”

Oil Drops Below $60 After Saudis Question Need to Cut (Bloomberg)

Benchmark U.S. oil prices dropped below $60 a barrel for the first time since July 2009 as Saudi Arabia questioned the need to cut output, signaling its priority is defending market share. West Texas Intermediate crude slid 1.6% in New York. The market will correct itself, according to Saudi Arabian Oil Minister Ali Al-Naimi. Global demand for crude from the Organization of Petroleum Exporting Countries will drop next year by about 300,000 barrels a day to 28.9 million, the least since 2003, the group predicted yesterday. Oil’s collapse into a bear market has been exacerbated as Saudi Arabia, Iraq and Kuwait, OPEC’s three largest members, offered the deepest discounts on exports to Asia in at least six years. The group decided against reducing its output quota at a meeting last month, letting prices drop to a level that may slow U.S. production that’s surged to the highest level in more than three decades.

“The path of least resistance is lower,” Mike Wittner, head of oil research at Societe Generale in New York, said by phone. “This week we’ve had the Saudis cut prices to Asia, OPEC reduced the call on its crude and al-Naimi reiterated that they aren’t cutting output and letting the market do its work. They all reinforce the bearish message.” WTI for January delivery dropped 99 cents to close at $59.95 a barrel on the New York Mercantile Exchange. It was the lowest settlement since July 14, 2009. Total volume was 14% above the 100-day average for the time of day. The U.S. benchmark is down 39% this year. [..] “When you see a persistent trend like this you can be sure there are a lot of investors caught on the wrong side,” Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $2.4 billion, said by phone. “They are looking for any glimmer of green as an opportunity to get out of positions. Any moves higher will be of short duration.”

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“It’s (oil) actually much weaker than the futures markets indicate. [..] The Canadian crude, if you go into the oil sands, is in the $30s, and you talk about Western Canadian Select heavy crude upgrade that comes out of Canada, it’s at $41/$42 a barrel. Bakken is probably about $54.” Kloza said there’s some talk that Venezuelan heavy crude is seeing prices $20 to $22 less than Brent ..”

Oil Pressure Could Sock It To Stocks (CNBC)

With crude sliding through the key $60 level, oil pressure could stay on stocks Friday. West Texas Intermediate futures for January closed at $59.95 per barrel, the first sub-$60 settle since July 2009. The $60 level, however, opens the door to the much bigger, $50-per-barrel level. Besides oil, traders will be watching the producer price index Friday morning, and it’s expected to be off 0.1% with the fall in energy. Consumer sentiment is also expected at 10 a.m. EST. Consumers stepped up and spent in November, as evidenced in the 0.7% gain in that month’s retail sales Thursday. That better mood should show up in consumer sentiment. Stocks on Thursday gave up sizeable gains after oil reversed course and fell through $60. Traders also were nervously watching the progress of a spending bill in Washington, which was delayed. The Dow was up 63 at 17,596, wiping out much of a 225-point intraday gain.

“Oil has pretty much spooked people,” said Daniel Greenhaus, chief global strategist at BTIG. “There just isn’t a bid. With everything in energy and the oil price collapsing as it is, who is going to step in and be a buyer now? The answer is nobody.” Oil continued to slide in after-hours trading. “The selling appears to have accelerated a little bit after the close with really no bullish news in sight,” said Andrew Lipow, president of Lipow Associates. WTI futures temporarily fell below $59 in late trading. “The big level is going to be $50 now in terms of psychological support. Much as $100 is on the upside,” said John Kilduff of Again Capital. Oil stands a good chance of getting there too. Tom Kloza, founder and analyst at Oil Price Information Service, said the market could bottom for the winter in about 30 days, but then it will be up to whatever OPEC does. The cartel in November voted to keep its production unchanged in an effort to hold market share.

“It’s (oil) actually much weaker than the futures markets indicate. This is true for crude oil, and it’s true for gasoline. There’s a little bit of a desperation in the crude market,” said Kloza. “The Canadian crude, if you go into the oil sands, is in the $30s, and you talk about Western Canadian Select heavy crude upgrade that comes out of Canada, it’s at $41/$42 a barrel. Bakken is probably about $54.” Kloza said there’s some talk that Venezuelan heavy crude is seeing prices $20 to $22 less than Brent, the international benchmark. Brent futures were at $63.20 per barrel late Thursday. “In the actual physical market, it’s fallen by even more than the futures market. That’s a telling sign, and it’s telling me that this isn’t over yet. This isn’t the bottoming process. The physical market turns before the futures,” he said.

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A portrait of a bloodbath.

Fed Bubble Bursts in $550 Billion of Energy Debt (Bloomberg)

The danger of stimulus-induced bubbles is starting to play out in the market for energy-company debt. Since early 2010, energy producers have raised $550 billion of new bonds and loans as the Federal Reserve held borrowing costs near zero, according to Deutsche Bank AG. With oil prices plunging, investors are questioning the ability of some issuers to meet their debt obligations. Research firm CreditSights Inc. predicts the default rate for energy junk bonds will double to 8% next year. “Anything that becomes a mania – it ends badly,” said Tim Gramatovich, chief investment officer of Peritus Asset Management. “And this is a mania.”

The Fed’s decision to keep benchmark interest rates at record lows for six years has encouraged investors to funnel cash into speculative-grade securities to generate returns, raising concern that risks were being overlooked. A report from Moody’s Investors Service this week found that investor protections in corporate debt are at an all-time low, while average yields on junk bonds were recently lower than what investment-grade companies were paying before the credit crisis. Borrowing costs for energy companies have skyrocketed in the past six months as West Texas Intermediate crude, the U.S. benchmark, has dropped 44% to $60.46 a barrel since reaching this year’s peak of $107.26 in June.

Yields on junk-rated energy bonds climbed to a more-than-five-year high of 9.5% this week from 5.7% in June, according to Bank of America Merrill Lynch index data. At least three energy-related borrowers, including C&J Energy Services, postponed financings this month as sentiment soured. “It’s been super cheap” for energy companies to obtain financing over the past five years, said Brian Gibbons, a senior analyst for oil and gas at CreditSights in New York. Now, companies with ratings of B or below are “virtually shut out of the market” and will have to “rely on a combination of asset sales” and their credit lines, he said.

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“Six years of the Fed’s easy money policies purposefully forced even conservative investors to either lose money to inflation or venture way out on the risk curve. So they ventured out, many of them without knowing it because it happened out of view inside their bond funds. And they funded the fracking boom and the offshore drilling boom, and the entire oil revolution in America ..”

Oil Bust Contagion Spreads to Wall Street and the Banks (WolfStreet)

Oil swooned again on Wednesday, with the benchmark West Texas Intermediate closing at $60.94. And on Thursday, WTI dropped below $60, currently trading at $59.18. It’s down 43% since June. Yesterday, OPEC forecast that demand for its oil would further decline to 28.9 million barrels a day next year, after having decided over Thanksgiving to stick to its 30 million barrel a day production ceiling, rather than cutting it. It thus forecast that there would be on OPEC’s side alone 1.1 million barrels a day in excess supply. Hours later, the US Energy Information Administration reported that oil inventories in the US had risen by 1.5 million barrels in the latest week, while analysts had expected a decline of about 3 million barrels. So the bloodletting continues: the Energy Select Sector ETF is down 26% since June; S&P International Energy Sector ETF is down 34% since July; and the Oil & Gas Equipment & Services ETF is down 46% since July.

Goodrich Petroleum, in its desperation, announced it is exploring strategic options for its Eagle Ford Shale assets in the first half next year. It would also slash capital expenditures to less than $200 million for 2015, from $375 million for 2014. Liquidity for Goodrich is drying up. Its stock is down 88% since June. They all got hit. And in the junk-bond market, investors are grappling with the real meaning of “junk.” Sabine Oil & Gas’ $350 million in junk bonds still traded above par in September before going into an epic collapse starting on November 25 that culminated on Wednesday, when they lost nearly a third of their remaining value to land at 49 cents on the dollar. In early May, when the price of oil could still only rise, Sabine agreed to acquire troubled Forest Oil Corporation, now a penny stock. The deal is expected to close in December.

But just before Thanksgiving, when no one in the US was supposed to pay attention, Sabine’s bonds began to collapse as it seeped out that Wells Fargo and Barclays could lose a big chunk of money on a $850-million “bridge loan” they’d issued to Sabine to help fund the merger. A bridge loan to nowhere: investors interested in buying it have evaporated. The banks are either stuck with this thing, or they’ll have to take a huge loss selling it. Bankers have told the Financial Times that the loan might sell for 60 cents on the dollar. But that was back in November before the bottom fell out entirely. As so many times in these deals, there is a private equity angle to the story: PE firm First Reserve owns nearly all of Sabine and leveraged it up to the hilt. [..]

Six years of the Fed’s easy money policies purposefully forced even conservative investors to either lose money to inflation or venture way out on the risk curve. So they ventured out, many of them without knowing it because it happened out of view inside their bond funds. And they funded the fracking boom and the offshore drilling boom, and the entire oil revolution in America, no questions asked.

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Makes it look less awful.

Ruble Consolation Gets Putin Record Oil Income (Bloomberg)

While Russia’s plunging currency is becoming a growing concern for policy makers in Moscow, the benefits for the Treasury are swelling as it receives more and more rubles for each dollar of oil export revenue. The CHART OF THE DAY shows that Brent crude sold for an average 3,759 rubles a barrel this year, the most on record, even after the mean dollar price of $101.74 dropped to the lowest since 2010. Russia’s fiscal accounts are benefiting from this year’s more than 40% decline in the ruble as it kept pace with a similar slide in oil, which is priced in dollars.

The government’s budget surplus is 1.27 trillion rubles ($23 billion) through November, compared with 600 billion rubles in the same period last year and 789 billion rubles in 2012, according to Finance Ministry data. It was 1.34 trillion in 2011. “A weak ruble is good for the government budget,” Dmitry Postolenko, a money manager at Kapital Asset Management in Moscow, said Dec. 10 by e-mail. “It’s in the government’s interest to let the ruble devalue but it should do it in a way that will not lead to a panic among Russians who keep money in rubles.”

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” The consensus, it would seem, views this deflationary move as one without tears. With US equities trading at 27X CAPE , that’s one hell of a bet!!”

This Has Never Happened Before Without A Drop In Stock Prices (Napier via ZH)

The Solid Ground has long flagged the importance of falling inflation expectations when nominal interest rates are so low. The Fed cannot lower nominal rates, so its control over real rates of interest rests entirely with its ability to create actual inflation or manage inflation. After five and a half years of QE, inflation expectations are very near their lows. Over the next five years investors now expect inflation to average just below 1.3%. This level of expected inflation has always previously been associated with a decline in US equity prices. There have been no exceptions until today.

THE PROWLER: Which force is currently depressing the corporations share of GDP? It is a question worth asking, because if such suppression lifts then the corporates share of GDP can go higher and, the likelihood is, share prices will go with it. While most questions in finance are difficult to answer this one is really easy because nobody and nothing is depressing the corporations share of GDP. The usual suspects for depriving the corporation of higher profits — labour, creditors and the state — are all “quiescent”, to use a word favoured by the man formerly known as ‘The Maestro’. Indeed, these forces are so quiescent that most equity investors consider them to be demons which have been slain.

THE SLEEPING TIGER: There is nothing in the historical record to equate dormancy with death when it comes to the future path of wages, interest rates or corporate taxation. For the equity bulls who choose to believe in the prolonged dormancy of labour, creditors and the state, all at the same time, history has a very clear warning that there is another potent force which can drive mean reversion of corporate profits and equity valuations – deflation. [..]

BOOM! Ultimately, just such a shock would come to many places if China tired of the monetary tightening implicit in its link to the world’s strongest currency, the USD. At some stage China will need to relax the monetary reins and this will be virtually impossible if it is tethered to a rising USD. The 1994 devaluation of the RMB wreaked havoc with the finances of China’s competitors and a similar, in fact even more powerful, dynamic is evident today. A devaluation of the RMB would thus be another trigger for a credit crisis. The consensus, it would seem, views this deflationary move as one without tears. With US equities trading at 27X CAPE , that’s one hell of a bet!!

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“The ECB is presiding over a deflationary disaster. They need to act fast and aggressively or else markets will start to attack Italian debt.” Well, and Greece, and Spain etc. Perhaps even France this time. The vigilantes played European whack-a-mole before.

France Drifts Into Deflation As ECB ‘Pea-Shooter’ Falls Short (AEP)

France is sliding into a deflationary vortex as manufacturers slash prices to keep market share, intensifying pressure on the European Central Bank to take drastic action before it is too late. The French statistics agency INSEE said core inflation fell to -0.2pc in November from a year earlier, the first time it has turned negative since modern data began. The measure strips out energy costs and is designed to “observe deeper trends” in the economy. The price goes far beyond falling oil costs and is the clearest evidence to date that the eurozone’s second biggest economy is succumbing to powerful deflationary forces. Headline inflation is still 0.3pc but is expected to plummet over the next three months. French broker Natixis said all key measures were likely to be negative by early next year.

Eurostat data show prices have fallen since April in Germany, France, Italy, Spain, Holland, Belgium, Portugal, Greece and the Baltic states, as well as in Poland, Romania and Bulgaria outside the EMU bloc. Marchel Alexandrovich, from Jefferies, said the number of goods in the eurozone’s price basket now falling has reached a record 34pc. “Eurozone deflation is now inevitable. There is no way around it,” said Andrew Roberts, at RBS. “We think yields on German 10-year Bunds will fall to 0.42pc next year.” “The ECB is presiding over a deflationary disaster. They need to act fast and aggressively or else markets will start to attack Italian debt. Italy’s nominal GDP is falling faster than their borrowing costs and that is pushing them towards a debt spiral,” he added. The Bank of Italy’s governor, Ignazio Visco, said any further falls in prices at this stage could have “extremely grave consequences for economies with very high public debt levels, such as Italy”.

The trade-weighted exchange rate of the euro has risen by 2pc over the past two months as the rouble plummets and currencies buckle across the emerging market nexus, despite the ECB’s efforts to talk it down. This is a form of monetary tightening. The German-led hawks at the ECB are running out of excuses for opposing quantitative easing after demand for the ECB’s second auction of cheap four-year loans (TLTROs) fell short of expectations. “The TLTRO is a peashooter rather than a bazooka,” said Nick Kounis, at ABN Amro.
Lenders took up just €129.8bn of fresh credit, far less than €270bn of old loans due to be repaid. This means that the ECB’s balance will continue to contract – rather than expanding by €1 trillion as intended – unless it embraces full-blown QE.

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Holiday seasonal adjustment?!

WTF Chart Of The Day: Explaining The Surge In US Retail Sales (Zero Hedge)

Confused at how such awesome retail sales headlines can lead to the kind of weakness we are seeing in stocks now that Lending Club’s IPO has started trading? Wondering why bonds are now lower in yield on the day in the face of ‘proof’ that the US consumer is back? Wonder no more, as STA Wealth Management’s Lance Roberts points out, November’s seasonal adjustment for retail sales was – drum roll please – the 3rd largest on record… so maybe, just maybe, the ‘market’ is seeing through that pure riggedness, wondering about the huge surge in continuing claims, and agog at the blowout in credit spreads and collapse in crude… Seriously?!! The 3rd largest November seasonal adjustment on record… why? and remember retail sales only beat by 0.1ppt!

Speechless, yet? Well look at this…

Rigged much?

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“.. factory production will continue to slow in the first quarter of next year, while a gauge of manufacturing activity will fall below the 50 expansion-contraction line ..”

China’s Slowdown Deepens as Factory Output Growth Wanes (Bloomberg)

China’s economy slowed in November as factory shutdowns exacerbated weaker demand, raising pressure on the central bank to add further stimulus. Bloomberg’s gross domestic product tracker came in at 6.78% year-on-year in November, down from 6.91% in October and a fourth month below 7%, according to a preliminary reading. Factory production rose 7.2% from a year earlier, retail sales gained 11.7%, and investment in fixed assets expanded 15.8% in January through November from a year earlier, official data showed. The government ordered some factories to close in Beijing and surrounding provinces during the Asia-Pacific Economic Cooperation forum in early November to curb pollution. China’s central bank cut benchmark interest rates last month as a property slump weighs on the world’s second-biggest economy.

“The major reason for the slowdown is weak demand,” said Ding Shuang, senior China economist at Citigroup Inc. in Hong Kong. “Both external and internal demand are relatively weak.” Ding said he expects factory production will continue to slow in the first quarter of next year, while a gauge of manufacturing activity will fall below the 50 expansion-contraction line, prompting the central bank to cut banks’ required reserve ratios. “The data adds to evidence of weakness in China’s economy,” Bloomberg’s Beijing-based economist Tom Orlik wrote in a note. “The People’s Bank of China’s hands may be tied by the speculative surge on the mainland’s equity markets. Fear of adding further fuel to the fire appears to have constrained the PB0C to return to targeted measures, at least temporarily.”

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“The amount of new loans issued by Chinese banks fell by more than a third in October.”

China Tells Banks To Step Up Lending To Lift Flagging Growth (Reuters)

China has told its banks to lend more in the final months of 2014 and relaxed enforcement of loan-to-deposit ratios to expand credit, sources told Reuters, as Beijing prepares to release data that could confirm the relentless slowing of its economy. Figures on inflation, imports and fiscal spending in November have already undershot expectations since the People’s Bank of China (PBOC) sprang a surprise interest rate cut on Nov. 21, raising fears that the bid to boost lending could foreshadow more weak figures on industrial activity for the month, due on Friday, and on lending, due in the next few days. “I wouldn’t be surprised by that at all,” said Andrew Polk, resident economist for the Conference Board in Beijing. “It seems pretty clear activity is continuing to weaken throughout this fourth quarter.” Two sources with knowledge of the matter said China’s central bank increased the annual new loan target to 10 trillion yuan($1.62 trillion) for 2014, up from what Chinese media have said was a previous target of 9.5 trillion yuan.

Banks have disbursed 8.23 trillion yuan of loans between January and October, so they will have to quicken the pace in the last two months if they are to meet the new target. If upcoming data also proves worse than expected, some analysts say the PBOC could cut banks’ reserve requirement ratio (RRR) as soon as this weekend, allowing them to further increase lending. Bank lending is a crucial part of China’s monetary policy as the government instructs commercial banks, most of which are directly or indirectly controlled by the state, how much to lend and when to lend each year. The amount of new loans issued by Chinese banks fell by more than a third in October. “If credit supply is increased, it will certainly help economic growth in the first quarter,” said Chang Chun Hua, an economist at Nomura in Hong Kong. “If this is true, it shows that the government is quite concerned about growth.”

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Inevitable.

Skepticism Jumps in Options as VIX Rises 70% in Four Days (Bloomberg)

Options traders aren’t buying the stock market’s message. While the Standard & Poor’s 500 Index posted its first gain of the week on Dec. 11, rising 0.5%, the Chicago Board Options Exchange Volatility Index also jumped, climbing 8.4% to cap its biggest four-day advance since 2011. The two gauges, one measuring share prices and the other anxiety among traders, only move in unison about 20% of the time. Investors watching oil plunge day after day are growing concerned the decline will destabilize financial markets and that’s boosting demand for hedges, according to Bob Doll, the chief equity strategist at Nuveen Asset Management. Gains in the VIX picked up after House Minority Leader Nancy Pelosi said Republicans lack the votes to pass a $1.1 trillion U.S. spending bill and urged fellow Democrats to force removal of some banking and campaign-finance provisions.

“I’d put oil front and center,” Doll said by phone. “We’ve had a move from $100 to $60, and if that had happened over a year or two that’s one thing, but this has been so much so fast that it creates higher uncertainty, which creates higher volatility, and that’s the reason you’re seeing people buy protection.” The S&P 500 and VIX haven’t posted a bigger lockstep advance since at least 2000, according to data compiled by Bloomberg. They’ve both gained on the same day on only 22 other times this year, the data show.

U.S. stocks rebounded from the worst day in eight weeks as an improvement in retail sales helped overshadow a drop in West Texas Intermediate crude below $60. The S&P 500 rose 0.5% at 4 p.m. in New York, paring an earlier rally of 1.5%. “It is unusual to see stocks rally like they did and premiums rise on the same day,” Jared Woodard, a New York-based equity derivatives strategist at BGC Partners LP, said by phone. “When the index gave back a lot of these gains you saw more demand for put protection. As stocks reversed a bit, people thought there may be another leg down.”

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“The probe into the possible use of algorithms is one of the reasons why DFS, led by Benjamin Lawsky, declined to participate in a broad forex settlement with banks.”

NY Regulator Probing Barclays And Deutsche Over Forex Algorithms (FT)

New York’s top banking regulator is investigating whether Barclays and Deutsche Bank used algorithms to manipulate foreign exchange rates, which could increase the penalties they face, a person familiar with the probe said. The state’s Department of Financial Services is reviewing whether the use of computer algorithms in bank currency trading platforms suggests a systemic problem at the lenders, as opposed to wrongdoing by several rogue traders, the person said. If the algorithms are seen as a bank-wide issue, DFS could seek to impose bigger penalties, the person added. The probe into the possible use of algorithms is one of the reasons why DFS, led by Benjamin Lawsky, declined to participate in a broad forex settlement with banks.

In November, UBS, Citigroup, JPMorgan Chase, HSBC, Royal Bank of Scotland and Bank of America were fined more than $4bn for their role in a forex rate-rigging scandal. The UK’s Financial Conduct Authority and the US’s Commodity Futures Trading Commission were part of that settlement. But the US Department of Justice and DFS did not participate and their investigations are ongoing. The DOJ’s probe includes the six banks that were part of the broad settlement, and the investigation is expected to result in large penalties and criminal findings. DFS is investigating about a dozen banks in its forex probe. Deutsche said it had “received requests for information from regulatory authorities that are investigating trading in the foreign exchange market. The bank is co-operating with those investigations, and will take disciplinary action with regards to individuals if merited.”

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“.. both Obama and JPMorgan chief executive Jamie Dimon were calling Democrats to support it. “It is very strange, very strange that the two of them would be working for the support of this bill ..”

US House Narrowly Passes Spending Bill, Averts Government Shutdown (Reuters)

The U.S. House of Representatives averted a government shutdown on Thursday, narrowly passing a $1.1 trillion spending bill despite strenuous Democratic objections to controversial financial provisions. The vote followed a long day of drama and discord on Capitol Hill that highlighted fraying Democratic unity and featured an uneasy alliance between President Barack Obama and House Speaker John Boehner, enemies in past budget battles but on the same side this time in pushing for passage. A vote on the measure was delayed for hours after Democrats revolted against provisions to roll back part of the Dodd-Frank financial reform law and allow more big money political donations, while conservative Republicans objected because the measure did not block funds for Obama’s immigration order.

Democrats said Republican leaders, flexing their new political muscle after big wins in the midterm elections that will give them control of both chambers of Congress next year, had gone too far in trying to roll back Dodd-Frank. “We have enough votes to show them never to do this again,” Democratic House Leader Nancy Pelosi told members of her party, behind closed doors, according to a source in the room. Some Democrats also demanded the removal of a provision that allows a massive increase in individual contributions to national political parties for federal elections, potentially up to $777,600 a year.

The debate pitted Obama against Pelosi, one of his most loyal allies in Congress, as Obama and his administration waged a last-ditch campaign to persuade Democrats to set aside their objections, arguing that if it failed, the party would get a worse spending deal next year under Republican control. The effort to save the bill angered some Democrats, who complained that both Obama and JPMorgan chief executive Jamie Dimon were calling Democrats to support it. “It is very strange, very strange that the two of them would be working for the support of this bill,” said Representative Maxine Waters, the top Democrat on the House Financial Services Committee. In the 219-206 vote, 67 Republicans rejected the spending bill, largely because it failed to take action to stop Obama’s executive immigration order. But that was offset by 57 Democrats who voted in favor.

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“The three-judge panel not only found that prosecutors needed to prove a trader knew that the original source of non-public information has received a benefit in exchange for the tip, but also narrowed what actually constituted such a benefit.”

US Prosecutors Face New Fallout From Insider Trading Ruling (Reuters)

U.S. prosecutors, already smarting from an appeals court ruling that weakens their ability to crack down on future insider trading, on Thursday faced widening fallout from the decision as some existing cases threatened to unravel. Lawyers for some defendants hinted they might seek to withdraw guilty pleas, and a Manhattan federal judge questioned if four such pleas were affected. The moves were the latest repercussions from the 2nd U.S. Circuit Court of Appeals finding that prosecutors presented insufficient evidence to convict Todd Newman, a former portfolio manager at Diamondback Capital Management, and Anthony Chiasson, co-founder of Level Global Investors. Speaking at a conference, U.S. Securities and Exchange Commission Chair Mary Jo White said Thursday “there is no question it’s a significant decision,” adding her agency was reviewing the Wednesday ruling, which she called “overly narrow.”

Some defendants who cooperated and pleaded guilty in the prosecution of Newman and Chiasson are now considering taking the extraordinary step of withdrawing their pleas, two lawyers said Thursday. The three-judge panel not only found that prosecutors needed to prove a trader knew that the original source of non-public information has received a benefit in exchange for the tip, but also narrowed what actually constituted such a benefit. In several such cases, the defendants were tipped based on information they received third- or fourth-hand, rather than straight from the source, which made it tougher to prove their awareness that source had obtained something tangible in return. The ruling threatens to challenge a broad insider trading crackdown underway since 2009 under Manhattan U.S. Attorney Preet Bharara, whose office during his tenure has secured 82 other convictions.

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As another headline today at the Guardian says: “UK standard of living rises to fourth highest in EU”.

Welcome To The UK: DIY Burials And Payday Loans For Kids (CNBC)

The tight financial conditions faced by Brits were highlighted again this week with reports on how cash-strapped young people are using payday loans and impoverished relatives are burying their loved ones at home. One in eight young people say they have borrowed money from lending firms, according to a new report released Thursday by the U.K. children’s charity Action for Children. The report interviewed 1,058 people in focus groups between the ages of 12 and 18 and found that 41% of those that had borrowed had done so with payday loan providers. The charity also found that store cards are also be used more and more, with over a third of the young people saying they had used them. Its anecdotal evidence suggested that young people were using the debt to replace household goods, set up their first home or to keep up with their friends.

“Baffling financial jargon and a lack of knowledge will dramatically create a vicious circle of debt, increasing the risk of mental health problems and unemployment,” said Tony Hawkhead, the chief executive of Action for Children, in Thursday’s report. Payday loan companies have been heavily criticized by policymakers in the U.K. for the four-figure interest rates they tie to cash advances. Regulators have moved to introduce new rules to cap charges and these firms have made changes to their lending criteria in response. The companies stress they have strict rules on who can receive loans, with the minimum age being 18 years. However the breakdown within Thursday’s study shows that minors are receiving these loans with 46% of the 12-year-old respondents saying they had borrowed money from a payday lender.

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Take your pick. Much more of this to come in the weeks ahead.

Crystal Ball: Top 10 Economic Predictions For 2015 (CNBC)

The global economy muddled along this year, with the resurgence in the U.S. economy helping to offset slowing growth in Europe, Japan and China. So, where does this leave the world economy in 2015? “Positive fundamentals are in place for the momentum in the global economy to improve during 2015,” said Nariman Behraves, Chief Economist at IHS, which expects global growth to pick up to 3% from an estimated 2.7% this year.

IHS outlined its top 10 economic predictions that make up its global outlook:
1. U.S. economy will power ahead
2. Euro zone’s struggle to continue
3. Japan to emerge from recession
4. China will keep slowing
5. EMs: a mixed bag
6. Commodities slide to extend
7. Disinflation threat
8. Fed will be the first to hike rates
9. Dollar will remain king
10. Perennial downside risks easing

The global recovery has been plagued by a multitude of “curses” during the past few years, including high public- and private-sector debt levels that have necessitated deleveraging by households corporates and governments, says IHS. But these obstacles to growth are easing in some countries, notably the U.S and U.K., which explains their better-than-average performance.

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Strong piece from Patrick Smith, former Asia bureau chief of the Herald Tribune.

These Are Lies The New York Times Wants You To Believe About Russia (Salon)

You can look at the Russian economy two ways now and you should. So let’s: It is an important moment in the destruction of something and the construction of something else, and we had better be clear just what in both cases. The world we live in changes shape as we speak. Truth No. 1: Russians are besieged. Sanctions the West has insisted on prosecuting in response to the Ukraine crisis — Washington in the lead, the Europeans reluctant followers — are hitting hard, let there be no question. Oil prices are at astonishing lows, probably if not yet provably manipulated by top operatives in the diplomatic and political spheres.

Truth No. 2: Russians are hot. With an energetic activism just as astonishing as the oil prices, Russian officials, President Putin in the very visible lead but with platoons of technocrats behind him, are forging an extensive network of South-South relationships — East-East, if you prefer — that are something very new under the sun. Some of us were banging on about South-South trade and diplomatic unity as far back as the 1970s; I have anticipated the arriving reality since the early years of this century. But I would never have predicted the pace of events as we have them before us. Stunning. Holiday surprise: There is a Truth No. 3 and it is this: Truth No. 1, the siege of the Russian economy, is proving a significant catalyst in the advance of Truth No. 2, the creative response of a nation under ever-mounting pressure.

Timothy Snyder, the Yale professor whose nitwittery on the Ukraine crisis is simply nonpareil (and praise heaven he has gone quiet), exclaimed some months ago that Putin is threatening to undermine the entire postwar order. I replied in this space the following week, Gee, if only it were so. Already it seems to be. But miss this not: Russia is advancing this world-historical turn with a considerable assist from its adversaries in the West, not alone. For all the pseuds who pretend to know Schumpeter but know only one thing, the creative destruction bit, how is this as a prime example of the phenom? Details in a sec, but this thought first: We are all bound to pay close attention to these events because they matter to everyone, whether this is yet obvious or not. Probably in our lifetimes — and I had it further out until recently — we will begin to inhabit a different planet.

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We deserve all we’ve got coming.

Full Scale Of Plastic In The World’s Oceans Revealed For First Time (Guardian)

More than five trillion pieces of plastic, collectively weighing nearly 269,000 tonnes, are floating in the world’s oceans, causing damage throughout the food chain, new research has found. Data collected by scientists from the US, France, Chile, Australia and New Zealand suggests a minimum of 5.25tn plastic particles in the oceans, most of them “micro plastics” measuring less than 5mm. The volume of plastic pieces, largely deriving from products such as food and drink packaging and clothing, was calculated from data taken from 24 expeditions over a six-year period to 2013. The research, published in the journal PLOS One, is the first study to look at plastics of all sizes in the world’s oceans.

Large pieces of plastic can strangle animals such as seals, while smaller pieces are ingested by fish and then fed up the food chain, all the way to humans. This is problematic due to the chemicals contained within plastics, as well as the pollutants that plastic attract once they are in the marine environment. “We saw turtles that ate plastic bags and fish that ingested fishing lines,” said Julia Reisser, a researcher based at the University of Western Australia. “But there are also chemical impacts. When plastic gets into the water it acts like a magnet for oily pollutants. “Bigger fish eat the little fish and then they end up on our plates. It’s hard to tell how much pollution is being ingested but certainly plastics are providing some of it.”

The researchers collected small plastic fragments in nets, while larger pieces were observed from boats. The northern and southern sections of the Pacific and Atlantic oceans were surveyed, as well as the Indian ocean, the coast of Australia and the Bay of Bengal. The vast amount of plastic, weighing 268,940 tonnes, includes everything from plastic bags to fishing gear debris. While spread out around the globe, much of this rubbish accumulates in five large ocean gyres, which are circular currents that churn up plastics in a set area. Each of the major oceans have plastic-filled gyres, including the well-known ‘great Pacific garbage patch’ that covers an area roughly equivalent to Texas.

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