Aug 012016
 
 August 1, 2016  Posted by at 8:54 am Finance Tagged with: , , , , , , ,  Comments Off on Debt Rattle August 1 2016


Wyland Stanley Marmon touring car at Yosemite 1919

Abe’s Fiscal Plan Follows a Long Road of Packages That Failed (BBG)
China July Factory Activity Unexpectedly Dips (R.)
China’s Love Affair With U.S. Real Estate Fades (BBG)
For Social Security “Time’s Up – The Pain Must Begin Now” (CH)
Impact Of Poverty Costs The UK £78 Billion A Year (G.)
Did Germany Just Blink? (DQ)
US Shale Producers Weather Oil Price Storm (AEP)
Growing Oil Glut Shows Investors There’s Nowhere to Go But Down (BBG)
Amid Britain Nuclear Debacle, China’s Xinhua Decries ‘Suspicion’ (R.)
Greece Eases Back On Capital Controls In Bid To Reverse Currency Flight (G.)
Building a Progressive International (YV)
India Rescues 10,000 Starving Workers In Saudi Arabia (Sky)

 

 

There’s a hole in the bucket, dear Shinzo.

Abe’s Fiscal Plan Follows a Long Road of Packages That Failed (BBG)

Prime Minister Shinzo Abe’s “bold” plan to revive the economy with a $273 billion package leaves him traveling down a well-trod path: it marks the 26th dose of fiscal stimulus since the country’s epic markets crash in 1990, in a warning for its effectiveness. The nation has had extra budgets every year since at least 1993, and even with that extra spending, it has still had six recessions, an entrenched period of deflation, soaring debt and a rapidly aging population that has left the world’s third-largest economy still struggling to get off the floor. While some analysts say the latest round of spending may buy the economy time, few are convinced it will be enough to dramatically change the course.

First off, much of the 28 trillion yen announced by Abe last week won’t be spending, but lending. And if previous episodes are any guide, an initial sugar hit to markets and growth will quickly fade amid a realization that extra spending does little to cure the economy’s underlying problems. A Goldman Sachs study found that markets gave up their gains in the first month after the cabinet approved the stimulus in 18 of the 25 packages it studied since 1990. Skeptics of Abe’s latest plan aren’t hard to find. Instead of adding to a debt pile already more than twice the economy’s size, more should be done to tackle thorny structural problems such as a declining labor force and protected industries, according to Naoyuki Shinohara, a former Japanese finance ministry official.

“Looking at the history of the Japanese economy, there have been lots of fiscal stimulus packages,” according to Shinohara, who was a top official at the IMF until last year. “But the end result is that it didn’t have much impact on the potential growth rate.”

Read more …

A lot of seemingly contradictory reports today. Manufacturing PMI down, but services PMI up.

China July Factory Activity Unexpectedly Dips (R.)

Activity in China’s manufacturing sector eased unexpectedly in July as orders cooled and flooding disrupted business, an official survey showed, adding to fears the economy will slow in coming months unless the government steps up a huge spending spree. While a similar private survey showed business picked up for the first time in 17 months, the increase was only slight and the much larger official survey on Monday suggested China’s overall industrial activity remains sluggish at best. Both surveys showed persistently weak demand at home and abroad were forcing companies to continue to shed jobs, even as Beijing vows to shut more industrial overcapacity that could lead to larger layoffs.

And other readings on Monday pointed to signs of cooling in both the construction industry and real estate, which were key drivers behind better-than-expected economic growth in the second quarter. The official Purchasing Managers’ Index (PMI) eased to 49.9 in July from the previous month’s 50.0 and below the 50-point mark that separates growth from contraction on a monthly basis. While the July reading showed only a slight loss of momentum, Nomura’s chief China economist Yang Zhao said it may be a sign that the impact of stimulus measures earlier this year may already be wearing off. That has created a dilemma for Beijing as the Communist Party seeks to deliver on official targets, even as concerns grow about the risks of prolonged, debt-fueled stimulus.

“The government has realized the downward pressure is great but they’ve also realized that stimulus to stimulate the economy continuously is not a good idea and they want to continue to focus on reform and deleveraging,” Zhao said.

Read more …

Monopoly money running out.

China’s Love Affair With U.S. Real Estate Fades (BBG)

For David Wong, the business of selling homes isn’t as good this year as it was in 2015, and he’s blaming that on a decline in customers from China. “The residential-property market here, especially for those priced between $2.5 million to $3 million, has been affected by China’s measures to control capital flight,” said the New York City-based Keller Williams Realty Landmark broker. “You need to cut the price, or it may take a real long time.” Wong is not the only one who has felt the cooling in the U.S. real estate market for foreign buyers. Total sales to Chinese buyers in the 12 months through March fell for the first time since 2011, to $27.3 billion from $28.6 billion a year earlier, according to an annual research report released by the National Association of Realtors.

The number of properties purchased by Chinese also declined to 29,195 units from 34,327 units. While the total international sales saw its first decline in three years, the 1.25% pace is slower than 4.5% recorded for Chinese buying. In terms of U.S. dollar value, the total share of Chinese buying of international sales dropped from 27.5% to 26.7%. [..] The yuan began plummeting in August, driving the Chinese currency to a five-year low versus the U.S. dollar. The Chinese authorities have been compelled to increasingly tighten the noose on cross-border capital flows to defend the yuan and to slow down the burnout of the nation’s foreign-exchange reserves since then. This includes increasing scrutiny of transfers overseas, to closely check whether individuals send money abroad by breaking up foreign-currency purchases into smaller transactions.

Read more …

This is why I recently wrote that a basic income should replace old-age provisions.

For Social Security “Time’s Up – The Pain Must Begin Now” (CH)

In 2010, Social Security (OASDI) unofficially went bankrupt. For the first time since the enactment of the SS amendments of 1983, annual outlays for the program exceeded receipts (excluding interest credited to the trust funds). The deficit has grown every year since 2010 and is now up to 8% annually and is projected to be 31% in 2026 and 44% by ’46. The chart below highlights the OASDI annual surplus growth (blue columns) and total surplus (red line). This chart includes interest payments to the trust funds and thus looks a little better than the unvarnished reality. For a little perspective, the program pays more than 60 million beneficiaries (almost 1 in 5 Americans), OASDI (Old Age, Survivors, Disability Insurance) represents 25% of all annual federal spending, and for more than half of these beneficiaries these benefits represent their sole or primary source of income.

The good news is since SS’s inception in 1935, the program collected $2.9 trillion more than it paid out. The bad news is that the $2.9 trillion has already been spent. But by law, Social Security is allowed to pretend that the “trust fund” money is still there and continue paying out full benefits until that fictitious $2.9 trillion is burned through. To do this, the Treasury will issue another $2.9 trillion over the next 13 years to be sold as marketable debt so it may again be spent (just moving the liability from one side of the ledger, the Intergovernmental, to the other, public marketable). However, according to the CBO, Social Security will have burnt through the pretend trust fund money (that wasn’t there to begin with) by 2029.

Below, the annual OASDI surplus (in red) peaking in 2007, matched against the annual growth of the 25-64yr/old (in blue) and 65+yr/old (grey) populations. The impact of the collapse of the growth among the working age population and swelling elderly population is plain to see. And it will get far worse before it eventually gets better. [..] Americans turning 67 in 2030 will be told that after being mandated to pay their full share of SS taxation throughout their working lifetime, they will not see anything near their full benefits in their latter years. However, those in retirement now and those retiring between now and 2029 are being paid in full despite the shortfall in revenue. They will be paid in full until this arbitrary “trust fund” is theoretically drained.

I have no intention of funding, in full, current retirees benefits with my tax dollars only to know I will hit the finish line with a 30%+ reduction that will only worsen over time. My goal is to pay it forward to my kids and then do my best to never to be a burden to them. The SS (OASDI) benefits must be cut now to be in line with revenues. Raise taxes, lower benefits…your choice. But I’m not about to make the old whole so I can then subsequently see my generation go bankrupt in my latter years.

Read more …

Perfect fit for a basic income. But it won’t come. Austerity as controlled poverty is a power(ful) tool.

Impact Of Poverty Costs The UK £78 Billion A Year (G.)

Dealing with the effects of poverty costs the public purse £78bn a year, or £1,200 for every person in the UK, according to the first wide-ranging report into the impact of deprivation on Britain’s finances. The Joseph Rowntree Foundation (JRF) estimates that the impact and cost of poverty accounts for £1 in every £5 spent on public services. The biggest chunk of the £78bn figure comes from treating health conditions associated with poverty, which amounts to £29bn, while the costs for schools and police are also significant. A further £9bn is linked to the cost of benefits and lost tax revenues. The research, carried out for JRF by Heriot-Watt and Loughborough universities, is designed to highlight the economic case, on top of the social arguments, for tackling poverty in the UK.

The prime minister, Theresa May, has made cutting inequality a central pledge. Julia Unwin, the chief executive of the foundation, said: “It is unacceptable that in the 21st century, so many people in our country are being held back by poverty. But poverty doesn’t just hold individuals back, it holds back our economy too. “Taking real action to tackle the causes of poverty would bring down the huge £78bn yearly cost of dealing with its effects, and mean more money to create better public services and support the economy. UK poverty is a problem that can be solved if government, businesses, employers and individuals work together.”

Read more …

“But did anyone tell you that Germany from 2009 onwards bailed out its failing banks with public money? Banks, that is, with holes in their balance sheets visible from the Moon.”

Did Germany Just Blink? (DQ)

Put simply, the EU is a half-way house with too much democracy and nothing in the way of transfer union. “There are too many moving parts in the electoral politics of 28 nation states, and too many conceivable random-like events that could push political and economic developments in one direction or another, with impossible-to-predict consequences and timelines,” the agency added. The perfect case in point is Italy’s banking crisis. If the country’s struggling banks are not saved with a combination of public and private money — a process that, to all intents and purposes, began on Friday with the announcement of Monte dei Paschi’s suspension of the ECB’s stress test as well as a €5 billion capital expansion later this year — the resulting carnage could unleash not only a tsunami of financial contagion but also an unstoppable groundswell of political opposition to the EU.

For a taste of just how disastrous the political fallout would be for Italy’s embattled premier, Matteo Renzi, here’s an excerpt from a furious tirade given by Italian financial journalist Paolo Barnard on prime-time TV, addressing Renzi directly:

“You went to meet Mrs. Merkel to ask for a minor public funded bail-out of Italian banks and you got a sharp NO. But did anyone tell you that Germany from 2009 onwards bailed out its failing banks with public money? “Banks, that is, with holes in their balance sheets visible from the Moon.

Germany bailed them out to the tune of €704 billion. It was all paid for by European taxpayers’ money, public funds that is. “It was done through the EU Commission of Mr Barroso and by Mr Mario Draghi at the ECB. Didn’t you know that Mr Renzi? Couldn’t you have barked this right into Ms Merkel’s face?”

Barnard rounded off his rant with a rallying call for Italians to follow the UK’s example and demand an exit from the EU — a prospect that should be taken very seriously given that one of the manifesto pledges of Italy’s rising opposition party, the 5-Star Movement, is to call a referendum on Italy’s membership of the euro.

Read more …

Ambrose has religion. He believes!

US Shale Producers Weather Oil Price Storm (AEP)

Opec’s worst fears are coming true. Twenty months after Saudi Arabia took the fateful decision to flood world markets with oil, it has failed to break the back of the US shale industry. The Saudi-led Gulf states have certainly succeeded in killing off a string of global mega-projects in deep waters. Investment in upstream exploration from 2014 to 2020 will be $1.8 trillion less than previously assumed, according to consultants IHS. But this is an illusive victory. North America’s hydraulic frackers are cutting costs so fast that most can now produce at prices far below levels needed to fund the Saudi welfare state and its military machine, or to cover Opec budget deficits.

Scott Sheffield, the outgoing chief of Pioneer Natural Resources, threw down the gauntlet last week – with some poetic licence – claiming that his pre-tax production costs in the Permian Basin of West Texas have fallen to $2.25 a barrel. “Definitely we can compete with anything that Saudi Arabia has. We have the best rock,” he said. Revolutionary improvements in drilling technology and data analytics that have changed the cost calculus faster than most thought possible. The “decline rate” of production over the first four months of each well was 90pc a decade ago for US frackers. This dropped to 31pc in 2012. It is now 18pc. Drillers have learned how to extract more. Mr Sheffield said the Permian is as bountiful as the giant Ghawar field in Saudi Arabia and can expand from 2m to 5m barrels a day even if the price of oil never rises above $55.

His company has cut production costs by 26pc over the last year alone. Pioneer is now so efficient that it already adding five new rigs despite today’s depressed prices in the low $40s, and it is not alone. The Baker Hughes count of North America oil rigs has risen for seven out of the last eight weeks to 374, and this understates the effect. Multi-pad drilling means that three wells are now routinely drilled from the same rig, and sometimes six or more. Average well productivity has risen fivefold in the Permian since early 2012. Consultants Wood Mackenzie estimated in a recent report that full-cycle break-even costs have fallen to $37 at Wolfcamp and Bone Spring in the Permian, and to $35 in the South Central Oklahoma Oil Province. The majority of US shale fields are now viable at $60.

Read more …

Once again: demand.

Growing Oil Glut Shows Investors There’s Nowhere to Go But Down (BBG)

Money managers have never been more certain that oil prices will drop. They increased bets on falling crude by the most ever as stockpiles climbed to the highest seasonal levels in at least two decades, nudging prices toward a bear market. The excess supply hammered the second-quarter earnings of Exxon Mobil and Chevron. Inventories are near the 97-year high reached in April as oil drillers boosted rigs for a fifth consecutive week. “The rise in supplies will add more downward pressure,” said Michael Corcelli, chief investment officer at Alexander Alternative Capital, a Miami-based hedge fund. “It will be a long time before we can drain the excess.”

Hedge funds pushed up their short position in West Texas Intermediate crude by 38,897 futures and options combined during the week ended July 26, according to the Commodity Futures Trading Commission. It was the biggest increase in data going back to 2006. WTI dropped 3.9% to $42.92 a barrel in the report week, and traded at $41.75 at 12:20 p.m. Singapore time. WTI fell by 14% in July, the biggest monthly decline in a year. It’s down by 19% since early June, bringing it close to the 20% drop that would characterize a bear market.

U.S. crude supplies rose by 1.67 million barrels to 521.1 million in the week ended July 22, according to U.S. Energy Information Administration data. Stockpiles reached 543.4 million barrels in the week ended April 29, the highest since 1929. Gasoline inventories expanded for a third week to 241.5 million barrels, the most since April. “The flow is solidly bearish,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “It reflects a recognition that the market is, at least for the time being, oversupplied.”

Read more …

Hinkley Point is about the worst British plan ever, and that’s saying something.

Amid Britain Nuclear Debacle, China’s Xinhua Decries ‘Suspicion’ (R.)

China will not tolerate “unwanted accusations” about its investments in Britain, a country that cannot risk driving away other Chinese investors as it looks for post-Brexit trade deals, China’s official Xinhua news agency said on Monday. British Prime Minister Theresa May was concerned about the security implications of a planned Chinese investment in the Hinkley Point nuclear plant and intervened to delay the project, a former colleague and a source said on Saturday.The plan by France’s EDF to build two reactors with financial backing from a Chinese state-owned company was championed by May’s predecessor David Cameron as a sign of Britain’s openness to foreign investment.

But just hours before a signing ceremony was due to take place on Friday, May’s new government said it would review the project again, raising concern that Britain’s approach to infrastructure deals, energy supply and foreign investment may be changing. China General Nuclear Power, which would hold a stake of about a third in the project, said on Saturday it respected the decision of the new British government to take the time needed to familiarise itself with the program. Xinhua, in an English-language commentary, said China understood and respected Britain’s requirement for more time to think about the deal. “However, what China cannot understand is the ‘suspicious approach’ that comes from nowhere to Chinese investment in making the postponement,” it said.

The project will create thousands of jobs and create much needed energy following the closure of coal-fired power plants, Xinhua added, dismissing fears China would put “back-doors” into the project. “For a kingdom striving to pull itself out of the Brexit aftermath, openness is the key way out,” it said.

Read more …

But please don’t think this means problems are over.

Greece Eases Back On Capital Controls In Bid To Reverse Currency Flight (G.)

More than a year after they were imposed, capital controls in Greece will be substantially eased on Monday in a bid to lure back billions of euros spirited out of the country, or stuffed under mattresses, at the height of the eurozone crisis. The relaxation of restrictions, whose announcement sent shockwaves through markets and the single currency, is aimed squarely at boosting banking confidence in the eurozone’s weakest member. The Greek finance ministry estimates around €3bn-€4bn could soon be returned to a system depleted of more than €30bn in deposits in the run-up to Athens sealing a third bailout to save it from economic collapse last summer.

“The objective is to re-attract money back to the banking system which in turn will create more confidence in it,” said Prof George Pagoulatos who teaches European politics and economy at Athens University. “And there are several billion that can be returned. People just need to feel safe.” As such the loosening of measures initially seen as an aberration in the 19-strong bloc is being viewed as a test case: of the faith Greeks have in economic recovery and the ability of their leftist-led government to oversee it. New deposits will not be subject to capital controls; limits on withdrawals of money brought in from abroad will also be higher; and ATM withdrawals will be raised to €840 every two weeks in a reversal of the policy that allowed depositors to take out no more than €420 every week.

[..] From 2008, the year before the country’s debt crisis erupted, until the end of 2015, an estimated 244,700 small- and medium-sized businesses have closed with many more expected to declare bankruptcy this year. The latest move, which follows easing of transactions abroad, is directed at small entrepreneurs, for years the lifeline of the Greek economy, and individual depositors. But while economists are calling the easing of restrictions a significant step to normalisation, Greek finances are far from repaired. Challenges for the prime minister, Alexis Tsipras, are expected to peak – along with social discontent – in the autumn when his fragile two-party coalition is forced to meet more milestones and creditor demands, starting with the potentially explosive issue of labour reform. Further disbursement of aid – €2.8bn – will depend exclusively on the painful measures being passed.

Read more …

The Great Deflation.

Building a Progressive International (YV)

Politics in the advanced economies of the West is in the throes of a political shakeup unseen since the 1930s. The Great Deflation now gripping both sides of the Atlantic is reviving political forces that had lain dormant since the end of World War II. Passion is returning to politics, but not in the manner many of us had hoped it would. The right has become animated by an anti-establishment fervor that was, until recently, the preserve of the left. In the United States, Donald Trump, the Republican presidential nominee, is taking Hillary Clinton, his Democratic opponent, to task – quite credibly – for her close ties to Wall Street, eagerness to invade foreign lands, and readiness to embrace free-trade agreements that have undermined millions of workers’ living standards.

In the United Kingdom, Brexit has cast ardent Thatcherites in the role of enthusiastic defenders of the National Health Service. This shift is not unprecedented. The populist right has traditionally adopted quasi-leftist rhetoric in times of deflation. Anyone who can stomach revisiting the speeches of leading fascists and Nazis of the 1920s and 1930s will find appeals – Benito Mussolini’s paeans to social security or Joseph Goebbels’ stinging criticism of the financial sector – that seem, at first glance, indistinguishable from progressive goals.
What we are experiencing today is the natural repercussion of the implosion of centrist politics, owing to a crisis of global capitalism in which a financial crash led to a Great Recession and then to today’s Great Deflation.

The right is simply repeating its old trick of drawing upon the righteous anger and frustrated aspirations of the victims to advance its own repugnant agenda. It all began with the death of the international monetary system established at Bretton Woods in 1944, which had forged a post-war political consensus based on a “mixed” economy, limits on inequality, and strong financial regulation. That “golden era” ended with the so-called Nixon shock in 1971, when America lost the surpluses that, recycled internationally, kept global capitalism stable.

Read more …

What a crazy story.

India Rescues 10,000 Starving Workers In Saudi Arabia (Sky)

The Indian government has come to the rescue of more than 10,000 of their starving citizens in Saudi Arabia. Some 16,000 kg of food was distributed on Saturday night by the consulate to penniless workers who’ve lost their jobs and not been paid. The issue came to light when a man tweeted India’s foreign minister Sushma Swaraj saying around 800 Indians had not eaten for three days in Jeddah, asking her to intervene. Investigations found that there were thousands starving across Saudi Arabia and Kuwait. Ms Swaraj instructed the consulate to make sure no unemployed worker is to go without food, and is said to have monitored the situation on an hourly basis.

She tweeted: “Large number of Indians have lost their jobs in Saudi Arabia and Kuwait. The employers have not paid wages, closed down their factories. “The number of Indian workers facing food crisis in Saudi Arabia is over ten thousand.” Many workers in Saudi Arabia and Kuwait have been living in inhumane conditions after losing their jobs. Hundreds have been laid off without being paid their wages. Indian newspapers reported that one firm – the Saudi Oger company – did not pay wages for seven months. Of its 50,000 employees, 4,000 were Indians. India’s Consul General Mohammad Noor Rehman Sheikh, told a news agency: “For the last seven months these Indian workers of Saudi Oger were not getting their salaries and the company had also stopped providing food to these workers.”

[..] India’s junior foreign minister VK Singh has been tasked to travel to Saudi Arabia to put in place an evacuation process which is due to begin soon. He had successfully led the evacuation of a large number of Indians from war-torn Yemen and most recently from South Sudan. There are more than three million Indians living and working in Saudi Arabia and more than 800,000 in Kuwait. Falling oil prices have hit the economy of Saudi Arabia and other Gulf countries.

Read more …

Dec 222015
 
 December 22, 2015  Posted by at 9:06 am Finance Tagged with: , , , , , , , , ,  Comments Off on Debt Rattle December 22 2015


DPC Old Absinthe House, bar, New Orleans 1906

Global Investors Are More Exposed To Interest-Rate Hikes Than Ever (BBG)
The Keynesian Recovery Meme Is About To Get Mugged, Part 1 (Stockman)
Brent Oil Hits 11-Year Low As Global Supply Balloons (Reuters)
US Gas Prices Fall Below $2 – In Some Places Under $1.60 (MarketWatch)
The Real “Death Cross” Of Oil Markets (ZH)
Risk Of Insolvency Hangs Over UK High Street Retailers (Guardian)
UK Economy Concerns As Household Debt Balloons To £40 Billion (PA)
The Bank of Japan’s $2.5 Billion Plan to Buy Non-Existent ETFs (BBG)
China ‘Suspends’ Another Unofficial PMI Data Set For A ‘Major Adjustment’ (ZH)
Zimbabwe To Make Chinese Yuan Legal Currency After Beijing Cancels Debts (AFP)
Russia, EU Trade Talks Fail, Kiev Set To Face Retaliation (Reuters)
Political Uprising In Spain Shatters Illusion Of Eurozone Recovery (AEP)
Portugal Taxpayers Face €3 Billion Loss After 2nd Bank Bailout In 2 Years (ZH)
Christmas Present (Jim Kunstler)
Et Tu, Brute? – How Empires Die (Thomas)
Do We Need The Fed? (Ron Paul)
Apple Says UK Surveillance Law Would Endanger All Customers (BBG)
Half of World’s Coal Must Go Unmined to Meet Paris Climate Target (BBG)
It’s ‘Almost Too Late’ To Stop A Global Superbug Crisis (PA)

Because the entire system is leveraged to the hilt.

Global Investors Are More Exposed To Interest-Rate Hikes Than Ever (BBG)

With any luck, the world economy will eventually be strong enough for central banks to follow the U.S. Federal Reserve in ending what has been an unprecedented period of extremely low interest rates. If and when they do, they’ll run straight into the same issue that the Fed now faces: Raising rates will precipitate unusually large losses for investors. Over the past several years, investors have gone to great lengths in their search for returns in a low-rate environment. They’ve done so in part by buying longer-maturity bonds, which tend to offer higher yields but are also more sensitive to changes in rates. One gauge of this risk is effective duration, which estimates the percentage decline in a bond’s price given a one-percentage-point increase in yield.

The measure is near all-time highs in the U.S., according to a report issued last week by the Office of Financial Research. The situation globally is no less precarious. Consider the effective duration for the BofA Merrill Lynch Global Broad Market Index, which tracks about $45 trillion in investment-grade bonds issued in major currencies – including government, corporate, mortgage and other asset-backed securities. As of last week, it stood at 6.6, meaning that a one-percentage-point increase in yield would wipe almost $3 trillion off the value of all the bonds included in the index. That’s a larger potential loss than at just about any point since the index’s inception in 1996. Here’s how that looks:

The high level of interest-rate risk illustrates a dilemma for central bankers everywhere. The power of traditional monetary stimulus depends in large part on the willingness of people and companies to borrow for new projects and purchases. But as the debt burden grows, it makes markets and the entire economy more susceptible to rate increases. It can also undermine the effect of rate cuts, as borrowers increasingly struggle under the weight of their existing obligations.

Read more …

“These academic pettifoggers are so blinded by their tinker toy macro-model that they can’t even see the flashing red lights warning of recession just ahead.”

The Keynesian Recovery Meme Is About To Get Mugged, Part 1 (Stockman)

Yellen said at least one thing of importance last week, but not in a good way. She confessed to the frightening truth that the FOMC formulates its policies and actions based on forecasts of future economic developments. My point is not simply that our monetary politburo couldn’t forecast its way out of a paper bag; that much they have proved in spades during their last few years of madcap money printing. Notwithstanding the most aggressive monetary stimulus in recorded history – 84 months of ZIRP and $3.5 trillion of bond purchases – average real GDP growth has barely amounted to 50% of the Fed’s preceding year forecast; and even that shortfall is understated owing to the BEA’s systemic suppression of the GDP deflator.

What I am getting at is that it’s inherently impossible to forecast the economic future, but that is especially true when the forecasting model is an obsolete Keynesian relic which essentially assumes a closed US economy and that balance sheets don’t matter. Actually, balance sheets now matter more than anything else. The $225 trillion of debt weighing on the world economy – up an astonishing 5.5X in the last two decades – imposes a stiff barrier to growth that our Keynesian monetary suzerains ignore entirely. Likewise, the economy is now seamlessly global, meaning that everything which counts such as labor supply and wage trends, capacity utilization and investment rates and the pace of business activity and inventory stocks is planetary in nature. By contrast, due to the narrow range of activity they capture, the BLS’ deeply flawed domestic labor statistics are nearly useless. And they are a seriously lagging indicator to boot.

Nevertheless, Yellen & Co. are obsessed with the immeasurable and largely irrelevant level of “slack” in the domestic labor market. They falsely view it as a proxy for the purported gap between potential and actual GDP. Not surprisingly, they are now under the supreme illusion that the labor slack has been largely absorbed and the output gap nearly closed. So they are raising money market rates by a smidgeon to confirm the US economy’s strength and that the Keynesian nirvana of full employment is near at hand. No it isn’t! These academic pettifoggers are so blinded by their tinker toy macro-model that they can’t even see the flashing red lights warning of recession just ahead.

Read more …

Oil went up a whiff overnight. I always look at the spread between WTI and Brent. The smaller it gets, the higher the risks. Usually, it hovers between $2-3. Right now, it’s at 50 cents.

Brent Oil Hits 11-Year Low As Global Supply Balloons (Reuters)

Brent oil cratered to its lowest price in more than 11 years on Monday, as demand for heating oil slumped on warmer-than-normal temperatures and traders tested for a bottom. U.S. crude remained above its 2009 low and settled up a penny a barrel as traders squared positions ahead of the January contract’s expiration. The February contract declined and analysts expect stockpiles to build again this week, signaling further oversupply in already glutted market. Concerns about swelling global crude supply and slow demand sparked by economic weakness in China have been recurring themes during this year’s rout. Analysts said the market was still testing for a bottom. “The key in finding the bottom of the market comes in a tightening of the supply side,” said Gene McGillian, senior analyst at Tradition Energy in Stamford, Connecticut.

OPEC and Russia will keep producing at high volumes, increasing pressure on U.S. producers to throttle back production, he said. “I think we’re getting ready for another round of capex cuts in North America,” he said. Heating oil futures weighed down the crude complex, hitting a new July 2004 low warmer-than-expected temperatures have hit seasonal demand. “The market is waiting for the next announcement,” said Tyche Capital Advisors senior research analyst John Macaluso. “The equity markets are waiting on crude oil, and crude oil is waiting for a bounce before shorts will come back into the market.” Crude short-sellers will be reluctant to return before U.S. crude recovers to $35.50, he said. Global oil production is running close to record highs. With more barrels poised to enter the market from nations such as Iran and Libya, the price of crude is set for its largest monthly percentage decline in seven years.

Read more …

“..1% of stations selling gas at $1.59 a gallon..”

US Gas Prices Fall Below $2 – In Some Places Under $1.60 (MarketWatch)

Christmas came early for U.S. drivers on Monday, as the national average gasoline price fell below $2 a gallon for the first time since March 2009. AAA put the average U.S. gas price at $1.998 per gallon on Monday, while fuel-price tracking service GasBuddy.com calculated the national average at $1.995 a gallon. That’s the lowest price by either measure since March 25, 2009. Unsurprisingly, drivers can credit a global glut of crude oil for the steady pressure on gas prices. Brent crude the global oil benchmark, plumbed levels last seen in 2004 on Monday, while the January contract for the U.S. benchmark CLF6, -0.20% West Texas Intermediate crude, was down 49 cents, or 1.4%, ahead of expiration at $34.24 a barrel on Nymex. The most-active February contract is down 1.3% at $35.58.

“In areas where there are no refinery bottlenecks, we’ve been able to see the falling price of crude oil translated directly into cheaper gas prices,” said Patrick DeHaan, senior petroleum analyst at GasBuddy.com, in a phone interview. Nymex reformulated gasoline futures for January delivery slumped 6.33 cents, or 5%, to $1.2114 a gallon. So how low are gas prices? In much of the country, the price is already well under $2 a gallon, AAA notes, with 1% of stations selling gas at $1.59 a gallon. On a state-by-state basis, Missouri has the lowest average price at $1.77, followed by Oklahoma and South Carolina at $1.78, and Tennessee and Kansas at $1.79.

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China. That’s all.

The Real “Death Cross” Of Oil Markets (ZH)

The ‘death cross’ of these two energy market indicators is all one needs to know about the oil market… As Bloomberg notes, total industry oil stocks reported by the International Energy Agency rose for a third month, increasing by 0.5% to the highest on record at 2.99 billion barrels. China’s Beige Book, released last week, showed further economic deterioration in one of the world’s largest commodity-consuming nations in the fourth quarter. Until these two indicators change direction, lower-er for longer-er will remain.

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Lots of last legs there.

Risk Of Insolvency Hangs Over UK High Street Retailers (Guardian)

A string of retailers could face insolvency in the new year with tough trading on the high street in the run-up to Christmas leaving businesses fighting for survival, two influential industry bodies have warned. Widespread discounting and warmer-than-average weather have cranked up the pressure on high street retailers over the festive period. In the last few years a number of high street retailers have called in administrations either just before or after Christmas, including Woolworths, HMV, Zavvi, and Jessops. Retailers generate roughly 40% of their annual profits between October and December, underlining the importance of the period. However, if a high street business struggles during the festive season then its death knell is typically the quarterly rental payment they have to make to landlords at the end of December.

Atradius, one of the world’s largest trade credit insurers, has warned that retailers face a “perfect storm” that could lead to a bleak start to 2016 and a “fresh wave of insolvencies”. The comments from Atradius are significant because if a credit insurer refuses to back a retailer then suppliers will be unable to insure their orders with the business and could decide not to provide it with products. Owen Bassett, senior risk underwriter at Atradius, said: “Those who went into the fourth quarter needing – rather than wanting – a strong performance could be looking at a troubled future. “Experience tells us that when retailers need an exceptional seasonal sales period and then hit financial difficulty, we often see failures in the first quarter. It is not unusual in this sector to be loss-making during Q1 and with the first payment of quarterly rent due in January it can be difficult to survive after a poor Q4.”

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Private debt. Should have a lot more attention. And not just in Britain.

UK Economy Concerns As Household Debt Balloons To £40 Billion (PA)

Families are expected to run up £40bn of debt this year, sparking fears about Britain’s economic recovery. Labour raised concerns that millions of households would face “serious hardship” if interest rates rise and warned the borrowing trend could harm the economy. The latest Office for Budget Responsibility (OBR) forecasts have found that households have moved from a surplus of £67bn in 2010, the year the coalition took power, to a £40bn deficit this year. Unsustainable borrowing is on course to near the levels reached in the run-up to the 2008 financial crash, according to Labour. Seema Malhotra, the shadow chief secretary to the Treasury, said: “George Osborne is relying on millions of British families going further into debt to hit his growth targets.

“This is risky behaviour from a chancellor whose policy decisions are hurting, not helping, British families. Alarm bells should be ringing. There is a real risk that millions of families will face serious hardship if interest rates start to rise. “Of course families need access to credit and the ability to borrow to invest for the future. George Osborne should be seeking to rebalance the economy away from an over-reliance on borrowing and debt. “Labour is clear about the need for a strong and sustainable economic recovery. Osborne’s short-term political decisions risk real long-term damage to the finances of millions of British families and the nation’s economy.” The former business secretary Sir Vince Cable warned Britain was returning to “old and unhappily discredited” methods of economic growth. He told the Independent: “We’re back on the treadmill of growth being sustained by personal borrowing. Much of it is against an inflating housing stock.

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Abenomics is a different way of saying anything goes.

The Bank of Japan’s $2.5 Billion Plan to Buy Non-Existent ETFs (BBG)

Haruhiko Kuroda has a new plan. He’s going to buy $2.5 billion of something that doesn’t exist. Markets were roiled Friday after the Bank of Japan unveiled measures including purchasing exchange-traded funds that track companies which are “proactively making investment in physical and human capital.” The central bank will spend 300 billion yen ($2.5 billion) a year from April buying such securities to offset the market impact as it resumes selling stocks purchased earlier from financial institutions. The only problem is such ETFs have never been made in Japan, at least not yet. Even as fund providers start hundreds of so-called “smart beta” products that choose stocks based on everything from dividends to volatility, ETFs that pick companies for how they deploy their cash are rare in global markets.

“These kinds of ETFs don’t exist now. Using capital spending as a factor in deciding what goes in an ETF is quite unusual,” said Koei Imai, who oversees $25 billion of ETFs at Nikko Asset Management Co. in Tokyo. “I think the message from the BOJ is for us to go out and make them.” The central bank is aware such products aren’t yet available and in the meantime will buy ETFs tracking the JPX-Nikkei Index 400, a government-backed equity measure started last year that chooses companies based on return on equity and operating profit. The BOJ also already purchases ETFs linked to the Nikkei 225 Stock Average and Topix index and owns roughly half of the market for ETFs in Japan.

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How to kill confidence.

China ‘Suspends’ Another Unofficial PMI Data Set For A ‘Major Adjustment’ (ZH)

For the second time in two months, an economic data series that indicate drastically weak performance in China has been “suspended.” Having seen Markit/Caixin’s flash gauge of China’s manufacturing discontinued in October (having plunged notably divergently from the government’s official data), Bloomberg reports that the publishers of the alternative China Minxin PMI will stop updating the series to make a “major adjustment.” Guess which time series was just “suspended”…

As Bloomberg details,

Release of the unofficial purchasing managers index jointly compiled by China Minsheng Banking Corp. and the China Academy of New Supply-side Economics will be suspended starting this month, the Beijing-based academy said in an e-mailed statement Monday, about six hours before the latest monthly data were scheduled for release.

Minxin’s suspension is the second in recent months as policy makers in the world’s second-largest economy struggle to arrest a deceleration in growth. Another early estimate of China’s manufacturing sector, a flash gauge of a purchasing managers index compiled by Markit Economics and sponsored by Caixin Media, was discontinued Oct. 1. Minxin’s PMI readings are based on a monthly survey covering more than 4,000 companies, about 70% of which are smaller enterprises. The private gauges have shown a more volatile picture than the official PMIs in the past year.

The manufacturing PMI declined to 42.4 in November from 43.3 in October, while the non-manufacturing reading fell to 42.9 from 44.2, according the the latest release. The factory gauge fell to a record low of 41.9 in August. China’s official PMI from the National Bureau of Statistics fell to a three-year low of 49.6 in November.

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Humor?

Zimbabwe To Make Chinese Yuan Legal Currency After Beijing Cancels Debts (AFP)

Zimbabwe has announced that it will make the Chinese yuan legal tender after Beijing confirmed it would cancel $40m in debts. “They [China] said they are cancelling our debts that are maturing this year and we are in the process of finalising the debt instruments and calculating the debts,” minister Patrick Chinamasa said in a statement. Chinamasa also announced that Zimbabwe will officially make the Chinese yuan legal tender as it seeks to increase trade with Beijing. Zimbabwe abandoned its own dollar in 2009 after hyperinflation, which had peaked at around 500bn%, rendered it unusable. It then started using a slew of foreign currencies, including the US dollar and the South African rand.

The yuan was later added to the basket of the foreign currencies, but its use had not been approved yet for public transactions in the market dominated by the greenback. Use of the yuan “will be a function of trade between China and Zimbabwe and acceptability with customers in Zimbabwe,” the minister said. Zimbabwe’s central bank chief John Mangudya was in negotiations with the People’s Bank of China “to see whether we can enhance its usage here,” said Chinamasa. China is Zimbabwe’s biggest trading partner following Zimbabwe’s isolation by its former western trading partners over Harare’s human rights record.

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Europe’s dumb struggle with Moscow continues.

Russia, EU Trade Talks Fail, Kiev Set To Face Retaliation (Reuters)

The EU failed to allay Russia’s concerns about Ukraine’s free-trade accord with the 28-nation bloc on Monday, leaving Kiev to face Russian retaliation through tighter bilateral trade rules from 2016. Closer ties between Ukraine and the EU, including the free trade deal, were at the heart of a battle for influence between Brussels and Moscow in Russia’s former satellite. When the then-Ukrainian president, Viktor Yanukovich, ditched the accord in early 2014 under pressure from Russia, protests erupted on the street of Kiev leading to a crisis in which he fled power and a pro-Europe leadership took over. The EU and Ukraine delayed implementation of their trade deal by a year out of deference to Moscow’s concerns that it could lead to a flood of European imports across its borders, damaging the competitiveness of Russian exports.

But comments by EU and Russian officials on Monday indicated that numerous meetings between the two sides to try to narrow differences and assuage Moscow’s concerns had failed. EU Trade Commissioner Cecilia Malmstrom raised doubts about the validity of the Russian concerns, saying some were “not real.” “We have been very open in listening to some of the concerns of Russia. Some of them we think are not real in economic terms. Some of them could potentially be real,” Malmstrom told a news conference following final talks in Brussels. Russian Economy Minister Alexei Ulyukayev, speaking in Brussels, said there was no deal and Moscow would scrap trade preferences dating back to 2011 for Ukraine as of 2016, when the bilateral EU-Ukraine deal will be implemented. “An agreement has not been reached. We were left with our concerns on our own and we are forced to safeguard our economic interest unilaterally,” Ulyukayev told reporters.

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A stalemate that seems to end in either a fragile left government or new elections.

Political Uprising In Spain Shatters Illusion Of Eurozone Recovery (AEP)

Spain risks months of political paralysis and a corrosive showdown with Germany over fiscal austerity after insurgent movements smashed the traditional two-party system, leaving the country almost ungovernable. The electoral earthquake over the weekend in one of the eurozone’s ‘big four’ states has echoes of the shock upsets in Greece and Portugal this year, a reminder that the delayed political fuse from years of economic depression and mass unemployment can detonate even once the worst seems to be over. Bank stocks plummeted on the Madrid bourse as startled investors awoke to the possibility of a Left-wing coalition that included the ultra-radical Podemos party, which won 20.7pc of the votes with threats to overturn the government’s bank bail-out and to restructure financial debt.

Pablo Iglesias, the pony-tailed leader of the Podemos rebellion, warned Brussels, Berlin, and Frankfurt that Spain was retaking control over its own destiny after years of kowtowing to eurozone demands. “Our message to Europe is clear. Spain will never again be the periphery of Germany. We will strive to restore the meaning of the word sovereignty to our country,” he said. The risk spread on Spanish 10-year bonds jumped eight basis points to 123 over German Bunds, though there is no imminent danger of a fresh debt crisis as long as the European Central Bank is buying Spanish bonds under quantitative easing. The IBEX index of equities slid 2.5pc, with Banco Popular and Caixabank both off 7pc. Premier Mariano Rajoy has lost his absolute majority in the Cortes.

Support for the conservative Partido Popular crashed from 44pc to 29pc, costing Mr Rajoy 5m votes as a festering corruption scandal took its toll. The electorate punished the two mainstream parties that have dominated Spanish politics since the end of the Franco dictatorship in the 1970s, and which by turns became the reluctant enforcers of eurozone austerity. The Socialists (PSOE) averted electoral collapse but have lost their hegemony over the Left and risk being outflanked and ultimately destroyed by Podemos, just as Syriza annihilated the once-dominant PASOK party in Greece. It had been widely assumed that Mr Rajoy would have enough seats to form a coalition with the free-market and anti-corruption party Ciudadanos, but this new reform movement stalled in the closing weeks of the campaign.

“There is enormous austerity fatigue and the country as a whole has clearly shifted to the Left,” said sovereign bond strategist Nicholas Spiro. Yet the Left has not won enough votes either to form a clear government. “The issue now is whether Spain is governable. All the parties are at daggers drawn and this could drag on for weeks. I don’t see any sustainable solution. We can certainly forget about reform,” he said. Mr Spiro said Spain has already seen a “dramatic deterioration” in the underlying public finances over the last eighteen months, although this has been disguised by a cyclical rebound, the stimulus of cheap oil and a weak euro, and QE from Frankfurt. “They have simply gone for growth,” he said.

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Posterchild no more.

Portugal Taxpayers Face €3 Billion Loss After 2nd Bank Bailout In 2 Years (ZH)

Back in August of 2014, Portugal had an idea. Lisbon would use some €5 billion from the country’s Resolution Fund to shore up (read: bailout) Portugal’s second largest bank by assets, Banco Espirito Santo. The idea, basically, was to sell off Novo Banco SA (the “good bank” that was spun out of BES) in relatively short order and use the proceeds to pay back the Resolution Fun. That way, the cost to taxpayers would be zero. You didn’t have to be a financial wizard or a fortune teller to predict what was likely to happen next. Unsurprisingly, the auction process didn’t go so well.

As we recounted in September, there were any number of reasons why Portugal had trouble selling Novo, not the least of which was that two potential bidders – Anbang Insurance Group and Fosun International which, you’re reminded, is run by the recently “disappeared” Chinese Warren Buffett – suddenly became far more risk-averse in the wake of the financial market turmoil in China. Talks with US PE (Apollo specifically) also went south, presumably because no one knows if this “good” bank will actually turn out to need more capital going forward given that NPLs sit at something like 20% while the H1 loss totaled €250 million thanks to higher provisioning for said NPLs. Now, the auction process has been mothballed and will restart in January. This matters because if the bank can’t be sold, the cost of the bailout ends up being tacked onto Lisbon’s budget.

The impact is substantial. In September, when the effort to sell Novo collapsed, the government restated its 2014 deficit which, after accounting for the bailout, ballooned to 7.2% of GDP from 4.5%. Portugal will tell you that this is only “temporary,” but let’s face it, if they haven’t managed to sell it by now, then one has to believe the prospects are grim – at least in terms of fetching anything that looks like a decent price. Well don’t look now, but Portugal’s seventh-largest bank, Banco Internacional do Funchal, now needs a bailout too. Banif (as it’s known) will be split into a “good” and “bad” bank, and its “healthy” assets will be sold to Banco Santander for €150 million. The government will inject up to €2.2 billion the European Commission said on Monday, to cover “future contingencies.”

Hilariously, the bailout was necessary because the bank was unable to repay a previous government cash injection. “The government injected €1.1 billion of fresh capital into the lender in January 2013 to allow it to meet minimum capital thresholds imposed by the banking regulator,” WSJ writes. For its trouble, Lisbon got a 60% stake in the bank and several hundred million worth of CoCos which the bank missed a payment on last year. “That,” WSJ goes on to note, “triggered close scrutiny by the European Commission, which opened an investigation into the legality of the state aid.” “The commission had said that Banif’s restructuring plan might not be enough to allow the bank to repay the state,” Bloomberg adds. “The Bank of Portugal said in the statement on Sunday that a ‘probable’ decision from the commission declaring the state aid illegal would create a shortage of capital at the bank.”

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“We now enter the “discovery” phase of financial collapse, where things labeled “capital” and “credit” turn out to be mere holograms.”

Christmas Present (Jim Kunstler)

Theory du jour: the new Star Wars movie is sucking in whatever meager disposable lucre remains among the economically-flayed mid-to-lower orders of America. In fact, I propose a new index showing an inverse relationship between Star Wars box office receipts and soundness of the financial commonweal. In other words, Star Wars is all that remains of the US economy outside of the obscure workings of Wall Street — and that heretofore magical realm is not looking too rosy either in this season of the Great Rate Hike after puking up 623 points of the DJIA last Thursday and Friday. Here I confess: for thirty years I have hated those stupid space movies, as much for their badly-written scripts (all mumbo-jumbo exposition of nonsensical story-lines between explosions) as for the degenerate techno-narcissism they promote in a society literally dying from the diminishing returns and unintended consequences of technology.

It adds up to an ominous Yuletide. Turns out that the vehicle the Federal Reserve’s Open Market Committee was driving in its game of “chicken” with oncoming reality was a hearse. The occupants are ghosts, but don’t know it. A lot of commentators around the web think that the Fed “pulled the trigger” on interest rates to save its credibility. Uh, wrong. They had already lost their credibility. What remains is for these ghosts to helplessly watch over the awesome workout, which has obviously been underway for quite a while in the crash of commodity prices (and whole national economies — e.g. Brazil, Canada, Australia), the janky regions of the bond markets, the related death of the shale oil industry, and the imploding hedge fund scene. As it were, all credit these days looks shopworn and threadbare, as if the capital markets had by stealth turned into a swap meet of previously-owned optimism.

Who believes in anything these days besides the allure of fraud? Capital is supposedly plentiful these days — look how much has rushed into the dollar from the nervous former go-go nations with their wobbling ziggurats of bad loans and surfeit of production capacity — but what actually constitutes that capital? Answer: the dwindling faith anyone will pay you back next Tuesday for a hamburger today. We now enter the “discovery” phase of financial collapse, where things labeled “capital” and “credit” turn out to be mere holograms. Fed Chair Janet Yellen herself had a sort of hologramatic look last Wednesday when she stepped onto her Delphic platform to reveal the long-heralded interest rate news. Perhaps Mrs. Yellen is a figment conjured by George Lucas’s Industrial Light & Magic shop (now owned by Disney). What could be more fitting in a smoke-and-mirrors culture?

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Recognizable patterns.

Et Tu, Brute? – How Empires Die (Thomas)

The state-owned Bank of China has been ordered by an American court to hand over customer information to the US. The bank has refused to comply, as to do so would violate China’s privacy law. The US court has subsequently ordered the Bank of China to pay a fine of $50,000 per day. Any guess as to how this is likely to turn out? China is a sovereign nation, halfway around the globe from the US, yet the US seems to feel that it’s somehow entitled to set the rules for China (as well as the other nations in the world). When China sees fit to develop islands in the South China Sea that it has laid claim to for centuries, it begins to hear threatening noises from the US military. A candidate for US president declares that he would buzz the islands with Air Force One, the Presidential jet, saying, “They’ll know we mean business.”

All over the world, those who live outside the US are increasingly observing that the US has become so drunk with power that they’re threatening both friend and foe with fines, trade restrictions, monetary sanctions, warfare, and invasions. And in so-observing, those of us who have studied the history of empires note that history is once again repeating itself. Time and time again, great empires build themselves up through industriousness and sound economic management only to subsequently decline into debt, complacency, and an entitlement mind-set. Over the millennia, empires as disparate as Persia, Rome, Spain, and Great Britain rose to dominate the world. Of course, we know how those empires turned out and, by extension, we might hazard an educated guess as to how the present American Empire will end.

In the final throes of empire-decline, we invariably observe the more sociopathic trends of a failing power, such as we’re seeing today from the US. First and foremost, any empire declines as a result of economic mismanagement. Decline from within (pandering to the populace with “bread and circuses”) and without (endless conquest and/or maintenance of dominance over far-flung geography) drain even the wealthiest government. Even eighteenth-century Spain, with all its billions in stolen New World gold, could not pay its ever-increasing bills and warfare-driven debt. Typically, the empire of the day enjoys the world’s greatest fighting force/armada/weapons build-up yet, when the money runs out, the war machine simply stops. Soldiers think more about their empty bellies than how much ammunition they have left.

Generals continue to issue orders, but they cease to be followed after the supply lines begin to dry up. And the leaders of a collapsing empire invariably make a fatal mistake: they assume that all the goodwill the empire gained when it was on its rise is permanent – that it will continue, even if the empire behaves like the world’s foremost bully. This is never the outcome. Invariably, as the decline nears its end, allies, without ever saying so, begin to withdraw their support. We see this today, as European leaders (America’s most essential allies) realise that the empire is becoming an arrogant liability and they begin cutting deals with the other side, as European leaders are now doing with Russia and others.

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“The only way to avoid future crashes is for the Fed to stop creating inflation and bubbles.”

Do We Need The Fed? (Ron Paul)

Stocks rose Wednesday following the Fed’s announcement of the first interest rate increase since 2006. However, stocks fell just two days later. One reason the positive reaction to the Fed’s announcement did not last long is that the Fed seems to lack confidence in the economy and is unsure what policies it should adopt in the future. At her Wednesday press conference, Fed Chair Janet Yellen acknowledged continuing “cyclical weakness” in the job market. She also suggested that future rate increases are likely to be as small, or even smaller, then Wednesday’s. However, she also expressed concerns over increasing inflation, which suggests the Fed may be open to bigger rate increases. Many investors and those who rely on interest from savings for a substantial part of their income cheered the increase.

However, others expressed concern that even this small rate increase will weaken the already fragile job market. These critics echo the claims of many economists and economic historians who blame past economic crises, including the Great Depression, on ill-timed money tightening by the Fed. While the Federal Reserve is responsible for our boom-bust economy, recessions and depressions are not caused by tight monetary policy. Instead, the real cause of economic crisis is the loose money policies that precede the Fed’s tightening. When the Fed floods the market with artificially created money, it lowers the interest rates, which are the price of money. As the price of money, interest rates send signals to businesses and investors regarding the wisdom of making certain types of investments.

When the rates are artificially lowered by the Fed instead of naturally lowered by the market, businesses and investors receive distorted signals. The result is over-investment in certain sectors of the economy, such as housing. This creates the temporary illusion of prosperity. However, since the boom is rooted in the Fed’s manipulation of the interest rates, eventually the bubble will burst and the economy will slide into recession. While the Federal Reserve may tighten the money supply before an economic downturn, the tightening is simply a futile attempt to control the inflation resulting from the Fed’s earlier increases in the money supply. After the bubble inevitably bursts, the Federal Reserve will inevitability try to revive the economy via new money creation, which starts the whole boom-bust cycle all over again. The only way to avoid future crashes is for the Fed to stop creating inflation and bubbles.

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The more they can infringe on privacy, the more they will.

Apple Says UK Surveillance Law Would Endanger All Customers (BBG)

Apple outlined its opposition to a proposed U.K. surveillance law, saying threats to national security don’t justify weakening privacy and putting the data of hundreds of millions of users at risk. The world’s most valuable company is leading a Silicon Valley challenge to the proposed U.K. law, called the Investigatory Powers bill, which attempts to strengthen the capabilities of law-enforcement agencies to investigate potential crimes or terrorist attacks. The bill would, among other things, give the government the ability to see the Internet browsing history of U.K. citizens. Apple said the U.K. government already has access to an unprecedented amount of data.

The Cupertino, California-based company is particularly concerned the bill would weaken digital privacy tools such as encryption, creating vulnerabilities that will be exploited by sophisticated hackers and government spy agencies. In response to the U.K. rules, other governments would probably adopt their own new laws, “paralyzing multinational corporations under the weight of what could be dozens or hundreds of contradictory country-specific laws,” Apple said. “The creation of backdoors and intercept capabilities would weaken the protections built into Apple products and endanger all our customers,” Apple said in an eight-page submission to the U.K. committee considering the bill. “A key left under the doormat would not just be there for the good guys. The bad guys would find it too.”

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And that will not happen.

Half of World’s Coal Must Go Unmined to Meet Paris Climate Target (BBG)

Coal, the fuel that powered the industrial revolution, is in hiding. While the world still has 890 billion tons of reserves, enough to last more than 65 years, about half must stay underground if nations are to meet environmental limits agreed to earlier this month in Paris, Bank of America Corp. said in a report. Burning less coal is the easiest way to lower emissions blamed for climate change, the bank said. The pact reached by 195 nations doesn’t target specific fuels, yet coal remains the world’s largest source of planet-warming carbon dioxide. A global oversupply of the power plant fuel has pushed producers into bankruptcy and sent prices to at least seven-year lows. The Paris agreement only further diminishes prospects for a recovery.

“The latest carbon initiatives are the nail in the coffin for global coal,” Sabine Schels, Peter Helles and Franciso Blanch, analysts at Bank of America said in the Dec. 18 report. If emissions limits take hold, “50% of the world’s current coal reserves may never be dug out.” Coal demand stopped growing in 2014 for the first time since the 1990s as China’s economy cooled, the Paris-based International Energy Agency said Dec. 18. Coal for delivery to Amsterdam, Rotterdam, and Antwerp, an Atlantic benchmark, is trading near an eight-year low. Newcastle coal, a barometer for the Asia-Pacific market, is at the cheapest in records going back to 2008, data compiled by Bloomberg show.

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Last month, the warning came from China. Now it’s England and Wales.

It’s ‘Almost Too Late’ To Stop A Global Superbug Crisis (PA)

It is “almost too late” to stop a global superbug crisis caused by the misuse of antibiotics, a leading expert has warned. Scientists have a “50-50” chance of salvaging existing antibiotics from bacteria which has become resistant to its effects, according to Dr David Brown. The director at Antibiotic Research UK, whose discoveries helped make more than £20bn ($30bn) in pharmaceutical sales, said efforts to find new antibiotics are “totally failing” despite significant investment and research. It comes after a gene was discovered which makes infectious bacteria resistant to the last line of antibiotic defence, colistin (polymyxins). The resistance to the colistin antibiotic is considered to be a “major step” towards completely untreatable infections and has been found in pigs and humans in England and Wales.

Public Health England said the risk posed to humans by the mcr-1 gene was “low” but was being monitored closely. Performing surgery, treating infections and even travelling abroad safely all rely to some extent on access to effective antibiotics. It is feared the crisis could further penetrate Europe as displaced migrants enter from a war-torn Middle East, where countries such as Syria have increasing levels of antibiotic resistance. Dr Brown told said: “It is almost too late. We needed to start research 10 years ago and we still have no global monitoring system in place. “The issue is people have tried to find new antibiotics but it is totally failing – there has been no new chemical class of drug to treat gram-negative infections for more than 40 years.

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Dec 012015
 
 December 1, 2015  Posted by at 10:19 am Finance Tagged with: , , , , , , , ,  2 Responses »


John Vachon Hull-Rust-Mahoning, largest open pit iron mine in the world, Hibbing, Minnesota 1941

4 Telltale Signs The Credit Cycle Is Turning Now (Zero Hedge)
This Chart Should Put Stock Investors On High Alert (MarketWatch)
There’s a Big Drop in US Treasury Debt Supply Coming in 2016 (BBG)
Perverse Incentives : Stock Buybacks Blow Up Corporate America (Lebowitz)
IMF Approves Reserve-Currency Status for China’s Yuan (BBG)
Euro to Bear Brunt of Yuan’s Inclusion in Reserve-Currency Club (BBG)
No QE: Easy Money Is The Source Of China’s Problems, Not The Solution (Balding)
China Manufacturing At Three-Year Low (AFP)
The Debt Deadlines Faced By 5 Chinese Firms With Alarming Cash Problems (BBG)
Sydney Home Prices Drop Most in 5 Years (BBG)
Greek Debt Relief Talks To Focus On Net Present Value (Reuters)
The War on Terror is Creating More Terror (Ron Paul)
TPP Clauses That Let Australia Be Sued: Weapons Of Legal Destruction (Guardian)
Why the US Pays More Than Other Countries for Drugs (WSJ)
The Story Line Dissolves (Jim Kunstler)
The Slow Death Of Hope For America’s Loyal Friends In Iraq (FT)
Migrant Blockades Of Train Tracks In Northern Greece Hit Commerce (Kath.)

Otherwise known as deflation.

4 Telltale Signs The Credit Cycle Is Turning Now (Zero Hedge)

Earlier today, the FT wrote an article in which it found that “companies have defaulted on $78bn worth of debt so far this year, according to Standard & Poor’s, with 2015 set to finish with the highest number of worldwide defaults since 2009” which together with a chart we have been showing for the past year, namely the staggering disconnect between junk bond yields and the S&P500… has made many wonder if the credit cycle – a key leading indicator to economic inflection points and in the case of the last credit bubble, the Great Financial Crisis – has already turned. According to a recent analysis by Ellington Management, the answer is a resounding yes. [..] Ellington concludes: “once “fickle investors exit the market, high yield bonds and leveraged loan prices should settle at a supply/demand equilibrium well below today’s levels.”

Telltale Signs the Credit Cycle is Turning Now

We believe that we are now at the end of the “over-investment” phase of the corporate credit cycle in the US that has been playing out since the depths of the GFC. This view is supported by a number of telltale signs of a reversal in the credit cycle:
Worsening Fundamentals – Declining corporate profits, record levels of corporate leverage, and an elevated high yield share of total corporate debt issuance
Defaults/Downgrades – Credit rating downgrades at a pace not seen since 2009
Falling Asset Prices – Price deterioration in the lowest quality loans and the most junior CLO tranches
Tightening Lending Standards – Weak investor appetite for new distressed debt issues, declines in CLO and CCC HY bond issuance, and tightening in domestic bank lending standards

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Similar stocks vs junk bonds data. But do note the differences in the graphs too, in the 2012-14 period.

This Chart Should Put Stock Investors On High Alert (MarketWatch)

The continued downtrend in the high-yield bond market is warning that liquidity is drying up, which could bode very badly for the stock market. When financial markets are flooded with liquidity, investors tend to feel safer about investing in riskier, higher-yielding assets, like noninvestment grade, or “junk,” bonds, and stocks. When the flow of money slows, the appetite for risk tends to decrease as well. That’s why many stock market watchers keep a close eye on the longer-term trends in the high-yield bond market. If money is flowing steadily into junk bonds, investors are likely to be just as willing, if not more willing, to buy equities.

When money is coming out of junk bonds, like the chart below shows, many see that as a warning that investors could start selling stocks. “High yield corporate bonds are thought by many to behave like the rest of the bond market, but they actually behave a lot more like the stock market,” Tom McClellan, publisher of the investment newsletter McClellan Market Report, wrote in a recent note to clients. “And when high-yield bonds start to suffer, that is usually a reliable sign that liquidity is drying up, and bad times are about to come for the stock market.”

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Oh, well, they’ll have to buy the ones China will be selling.

There’s a Big Drop in US Treasury Debt Supply Coming in 2016 (BBG)

Lost in the debate over the U.S. Treasury market’s resilience as the Federal Reserve starts to raise interest rates is one simple fact: supply is falling – and fast. Net issuance of U.S. notes and bonds will tumble 27% next year, according to estimates by primary dealers that are obligated to bid at Treasury debt auctions. The $418 billion of new supply would be the least since 2008. While a narrowing budget deficit is reducing the U.S.’s funding needs, the Treasury has shifted its focus to T-bills as post-crisis regulations prompt investors to demand a larger stock of short-term debt instead. The drop-off in longer-term debt supply may keep a lid on yields, providing another reason to believe Fed Chair Janet Yellen can end an unprecedented era of easy money without causing a jump in borrowing costs that derails the economy.

“Longer-term yields will be slower to move up next year because the Treasury will be funding more with bills,” said Ward McCarthy, the chief financial economist at Jefferies, who has analyzed U.S. debt markets for over three decades and was a senior economist at the Richmond Fed. “There is also a global appetite for Treasuries as U.S. debt is one of the world’s highest-yielding and is among the most liquid markets.” Excluding bills, Jefferies forecasts net issuance of $404 billion in 2016, down from their $607 billion estimate for this year. Of the ten estimates compiled by Bloomberg, the Bank of Montreal was the lone primary dealer calling for an increase in 2016. Net issuance of interest-bearing securities, or those with maturities from two years to 30 years, has fallen every year since the U.S. borrowed a record $1.61 trillion in 2010, data compiled by the Securities Industry and Financial Markets Association show.

After the market for Treasuries more than doubled since the financial crisis to $12.8 trillion as the government ran deficits to bail out banks and support the economy, the U.S. has started to scale back supply. One reason is the narrowing budget gap. With the Fed holding its benchmark rate near zero since December 2008, the jobless rate has fallen by half from its post-crisis peak in 2009, to 5% today. As tax revenue increases, the Congressional Budget Office forecasts the shortfall will narrow to $414 billion in the fiscal year ending Sept. 30, 2016, from $439 billion in the previous 12 months and $483 billion in the prior annual period. To lock in record-low long-term borrowing costs, the government has also lengthened the average maturity of its debt to 5.8 years from 4.1 years at the end of 2008. One consequence is that the Treasury market’s share of bills has shrunk to about 10%, the smallest in Bloomberg data going back to 1996.

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Perverse incentives 101. How corporate America blows itself up.

Perverse Incentives : Stock Buybacks Blow Up Corporate America (Lebowitz)

Vast swaths of the population in the United States are not enjoying the benefits of the so-called post-crisis recovery. Meanwhile, the top executives of major corporations are prospering in a way never before seen. This contrast between the rich becoming ultra-rich and the rest of the population stagnating at best, was a characteristic of the pre-depression “Roaring 20’s” as well. A report issued by the Economic Policy Institute on CEO pay highlights that in 2014 the CEO-to-worker compensation ratio was 303X compared with 58x in 1989 and 20X in 1965. The exponential rise in executive compensation has occurred in both relative and absolute terms. From 1978 to 2014, inflation-adjusted CEO compensation increased 997%, almost double the rise in stock market value.

When compared with other highly paid workers (defined as those earning more than 99.9% of other wage earners), CEO compensation was 5.84 times greater. The rate at which CEO compensation outpaced the top 0.1% of wage earners reflects the power of CEO’s to extract “concessions” rather than an outsized contribution to productivity. The composition of executive pay has gone from one predominately salary based with less than 15% stock and option rewards in the mid-1960’s to one heavily dependent on stock and option rewards averaging well over 80% in 2013. These stock-based incentives make executives highly motivated to keep their stock price elevated at all costs.

The compensation structure in conjunction with the rise in pressure from Wall Street and investors to keep stock prices elevated arguably leads to short-term decision-making that ultimately does not afford proper consideration of the long-term problems those decisions create. One of the most prevalent ways in which executives can carry out such a compensation-maximizing scheme is through share buybacks. Share buybacks as a percentage of corporate use of cash are at near-record levels and rising rapidly. In a market where all major indices and the majority of publicly-traded company shares are near all-time highs, the proper question is, why? As Warren Buffett wrote in his 1999 letter to shareholders, “Managements, however, seem to follow this perverse activity (buy high, sell low) very cheerfully.”

It is vital to give proper consideration to the improper liberties that are being taken by those with “unwarranted influence” and “misplaced power”. Value extraction has replaced value creation in pursuit of short-term, self-serving benefits at the expense of long-term stability and durability of corporate America and therefore the country as a whole.

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It’s going to be interesting to see what happens when China falls into recession. Will the IMF be inclined to pretend to believe Beijing’s ‘official’ numbers because otherwise it would look dumb? Or will it insist on real data and stifle Xi that way?

IMF Approves Reserve-Currency Status for China’s Yuan (BBG)

The IMF will add the yuan to its basket of reserve currencies, an international stamp of approval of the strides China has made integrating into a global economic system dominated for decades by the U.S., Europe and Japan. The IMF’s executive board, which represents the fund’s 188 member nations, decided the yuan meets the standard of being “freely usable” and will join the dollar, euro, pound and yen in its Special Drawing Rights basket, the organization said Monday in a statement. Approval was expected after IMF Managing Director Christine Lagarde announced Nov. 13 that her staff recommended inclusion, a position she supported. It’s the first change in the SDR’s currency composition since 1999, when the euro replaced the deutsche mark and French franc.

It’s also a milestone in a decades-long ascent toward international credibility for the yuan, which was created after World War II and for years could be used only domestically in the Communist-controlled nation. The IMF reviews the composition of the basket every five years and rejected the yuan during the last review, in 2010, saying it didn’t meet the necessary criteria. “The renminbi’s inclusion in the SDR is a clear indication of the reforms that have been implemented and will continue to be implemented and is a clear, stronger representation of the global economy,” Lagarde said Monday during a press briefing at the IMF’s headquarters in Washington. Renminbi is the currency’s official name and means “the people’s currency” in Mandarin; yuan is the unit.

The addition will take effect Oct. 1, 2016, with the yuan having a 10.92% weighting in the basket, the IMF said. Weightings will be 41.73% for the dollar, 30.93% for the euro, 8.33% for the yen and 8.09% for the British pound. The dollar currently accounts for 41.9% of the basket, while the euro accounts for 37.4%, the pound 11.3% and the yen 9.4%.

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Sorry, but that’s not quite true. Sterling loses more, percentage wise. It goes to 8.09% from 11.3%, while the euro moves to 30.93% from 37.4%.

Euro to Bear Brunt of Yuan’s Inclusion in Reserve-Currency Club (BBG)

The euro’s worst year in a decade is looking even grimmer after the Chinese yuan’s inclusion in the IMF’s basket of reserve currencies. The 19-nation currency’s weighting in the IMF’s Special Drawing Rights basket will drop to 30.93%, from 37.4%, the organization said Monday. The yuan will join the dollar, euro, pound and yen in the SDR allocation from Oct. 1, 2016, at a 10.92% weighting. The euro has tumbled 13% against the dollar this year, the most in a decade, and central banks have reduced the proportion of the currency in their reserves to the lowest since 2002. ECB Mario Draghi signaled on Oct. 22 that policy makers are open to boosting stimulus, after embarking on a €1.1 trillion asset-purchase program in March. “The euro will get the most impact from this weight adjustment,” said Douglas Borthwick at New York-based brokerage Chapdelaine. “The IMF is taking from euro to give to China; the other rebalancing amounts are largely negligible.”

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How you can write that without adding that this is true everywhere, I don’t get it. “..[a] yawning gap between capacity and demand is what’s driving the precipitous fall in prices..”

No QE: Easy Money Is The Source Of China’s Problems, Not The Solution (Balding)

The first of the month means one thing in China: more gloomy numbers. On Tuesday, the official purchasing managers’ index fell to its weakest level in three years. If analysts aren’t panicking, that’s partly because the benchmark lending rate still stands at 4.35%. The central bank has plenty of room to juice the economy with rate cuts, as its counterparts in the U.S., Japan and Europe have done for years. That assumption, however, may be flawed. The People’s Bank of China has already slashed rates six times in a year, without producing any uptick in growth. To the contrary, deflationary pressures remain intense: Factory-gate prices have declined for four years running, falling 6% annually. Further easing might actually make the problem worse, not better.

This flies in the face of post-crisis orthodoxy. Since 2009, as inflation rates have converged to zero and growth slowed across the world, central bankers have almost uniformly sought to stimulate their economies using various loose-money policies. The Fed, Bank of Japan and ECB have all lowered interest rates and made more credit available in hopes of spurring investment and demand. Though inflation remains subdued in the major developed economies, the underlying logic behind quantitative easing hasn’t been seriously questioned. The consensus is that without these radical interventions, the world’s biggest economies would be in even worse shape than they are.

China is in a category of its own, however. Its reaction to the financial crisis – much praised at the time – was to launch a credit-fueled investment-and-construction binge. Using borrowed capital to build roads, airports, factories and homes at a frenzied pace has created massive overcapacity throughout the economy. To take just one example, China will install around 14 gigawatts of solar panels in 2015. Yet domestic panel-manufacturing capacity dwarfs this number: According to the Earth Policy Institute, in 2014 Chinese manufacturers produced 34.5 gigawatts of solar panels. The world as a whole only installed 38.7 gigawatts that year. In other words, Chinese manufacturers alone could meet nearly 90% of global demand.

This yawning gap between capacity and demand is what’s driving the precipitous fall in prices. A recent Macquarie report found that the Chinese steel industry is losing around 200 yuan ($31) per ton because its mills are churning out too much steel. One might think manufacturers would scale back production to bring things into balance. But as Macquarie notes, “mills are concerned about losing market share and having to spend fresh capital to resume operation if they stop producing now.” At the same time, Chinese “banks have been pushing mills to stay in the market so they don’t have to admit large bad loans.”

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Not going well.

China Manufacturing At Three-Year Low (AFP)

A key measure of China’s manufacturing activity dropped to its weakest level in more than three years in November, underlining weaknesses in the world’s second-largest economy. The official Purchasing Managers’ Index (PMI), which tracks activity in the crucial factories and workshops sector, fell to 49.6, the government statistics bureau said. It was the fourth consecutive month of decline and the lowest figure since August 2012. Investors closely watch the index as a barometer of the country’s economic health. A reading above 50 signals expanding activity while anything below indicates shrinkage. The statistics bureau blamed the disappointing figure on weak overseas and domestic demand, falling commodity prices and manufacturers’ reluctance to restock.

“Facing downward pressures on the economy, companies’ buying activities slowed and their will to restock was insufficient,” it said. China’s economy expanded 7.3% in 2014, the slowest pace since 1990, the government says, and at 7% in each of the first two quarters of this year. Officials say it decelerated further to 6.9% in the July-September period, its slowest rate since the aftermath of the financial crisis. But those statistics are widely doubted and many analysts believe the real rate of growth could be several percentage points lower. The government has depended on monetary loosening to stimulate growth. In October it cut interest rates for the sixth time in a year and abolished the official cap on interest rates for savers.

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Can Beijing still bail them out now it’s in the SDR basket?

The Debt Deadlines Faced By 5 Chinese Firms With Alarming Cash Problems (BBG)

A chemical producer, chicken processor, a sausage maker, a tin smelter and a coal miner have something in common. Surging losses and high leverage have prompted brokerages to put red flags on their debt. China International Capital, Guotai Junan Securities and Haitong Securities all flagged the five companies’ liquidity risks this month after China Shanshui Cement Group Co. became at least the sixth firm to default in the onshore bond market on Nov. 12. Corporate notes are suffering, with the yield premium for five-year AA- rated debentures over the sovereign widening 19.8 basis points this month, the most this year.

“One of the triggers for a financial crisis in China would be high-profile corporate defaults, which could change a deep-rooted mindset among investors that the government would always stand behind troubled companies,” said Xia Le at Banco Bilbao Vizcaya Argentaria“Then a panic would follow.” Premier Li Keqiang has pledged to weed out zombie companies to help restructure the economy while trying to prevent a hard landing amid the worst slowdown in a quarter century. A Chinese producer of pig iron, Sichuan Shengda Group said on Thursday it may not be able to repay bonds next month if investors demand their early redemption. Fertilizer maker Jiangsu Lvling Runfa Chemical is asking its guarantor to repay debt due Dec. 4. The following is a list of other companies wrestling with high debt and low liquidity, according to CICC, Guotai Junan and Haitong.

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The madness is far from over, though. It could be in a split second, mind you.

Sydney Home Prices Drop Most in 5 Years (BBG)

Sydney home prices fell the most in five years in November as a regulatory crackdown forces banks to tighten lending and increase mortgage rates. Dwelling values in Australia’s largest city dropped 1.4% from a month earlier, data from property researcher CoreLogic Inc. showed on Tuesday. That was the biggest drop since December 2010 and the first decline since May. Prices across the nation’s capital cities declined 1.5%, with Melbourne leading with a 3.5% decrease. “The fact that mortgage rates have risen independently of the cash rate has, in all likelihood, become a contributor to the slowdown in housing market conditions,” Tim Lawless, head of research at the firm, said in an e-mailed statement. “Tighter mortgage servicing criteria across the board and affordability constraints in the Sydney and Melbourne markets are also having an impact on market demand.”

The drop in home prices is yet another indicator of the cooling Sydney property market after mortgage rates close to five-decade lows and buying by foreigners sent prices up 44% in the past three years. Sydney auction clearance rates, a measure of demand, have dropped for nine consecutive weeks and loans to investors climbed at the slowest pace in 14 months as banks raised interest rates to protect themselves from the risks of an overheated market. Buyers are hesitating after the price rise hurt affordability, and a regulatory clampdown prompted banks to raise rates for owner-occupiers for the first time in five years. Economists from Macquarie to Bank of America forecast a decline in prices over the next two years. Values in New South Wales state, where Sydney is the capital, are expected to climb 2.2% in 2016, a survey by National Australia Bank showed Monday.

“Supervisory measures are helping to contain risks that may arise from the housing market,” the Reserve Bank of Australia said Tuesday as it left its benchmark cash rate at a record-low 2%. “The pace of growth in dwelling prices has moderated in Melbourne and Sydney over recent months.” Still, Sydney home prices are up 12.8% in the past 12 months and Australia & New Zealand Banking Group Ltd. said in a note Monday “strong underlying demand” is likely to contain any price declines in the major capital cities to less that 10% in the absence of an economic downturn. On Saturday, 106 of 111 yet-to-be-built apartments worth about A$160 million ($116 million) in Chatswood, 10 kilometers north of Sydney’s business district, were sold in three hours, according to Domain, an online real estate website.

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In other words: no real debt restructuring. But didn’t the IMF label that highly important?

Greek Debt Relief Talks To Focus On Net Present Value (Reuters)

Future talks on debt relief for Greece will focus on the debt’s net present value, Greek deputy central bank governor Ioannis Mourmouras told a business conference on Tuesday. Eurozone governments believe that forgiving Greece part of its debt – a “nominal haircut” – is not necessary, because thanks to very low interest, long maturities and grace periods, the net present value of the debt is manageable. “I estimate that the basis of the discussion will be the net present value of the debt,” Mourmouras said. He also said that once Greece completes reforms agreed with creditors under the first review of its bailout program, it could benefit from the ECB’s bond-buying program. “The participation in the ECB’s QE, after the first review, will be a catalyst for the Greek economy,” he said. “In the beginning the amounts will be minor, something like €3 billion.”

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Michael Moore had it oh-so right: “You can’t declare war on a noun”.

The War on Terror is Creating More Terror (Ron Paul)

The interventionists will do anything to prevent Americans from seeing that their foreign policies are perpetuating terrorism and inspiring others to seek to harm us. The neocons know that when it is understood that blowback is real – that people seek to attack us not because we are good and free but because we bomb and occupy their countries – their stranglehold over foreign policy will begin to slip. That is why each time there is an event like the killings in Paris earlier this month, they rush to the television stations to terrify Americans into agreeing to even more bombing, more occupation, more surveillance at home, and more curtailment of our civil liberties. They tell us we have to do it in order to fight terrorism, but their policies actually increase terrorism. If that sounds harsh, consider the recently-released 2015 Global Terrorism Index report.

The report shows that deaths from terrorism have increased dramatically over the last 15 years – a period coinciding with the “war on terrorism” that was supposed to end terrorism. According to the latest report: “Terrorist activity increased by 80% in 2014 to its highest recorded level. …The number of people who have died from terrorist activity has increased nine-fold since the year 2000.” The world’s two most deadly terrorist organizations, ISIS and Boko Haram, have achieved their prominence as a direct consequence of US interventions. Former director of the Defense Intelligence Agency Michael Flynn was asked last week whether in light of the rise of ISIS he regrets the invasion of Iraq. He replied, “absolutely. …The historic lesson is that it was a strategic failure to go into Iraq.” He added, “instead of asking why they attacked us, we asked where they came from.”

Flynn is no non-interventionist. But he does make the connection between the US invasion of Iraq and the creation of ISIS and other terrorist organizations, and he at least urges us to consider why they seek to attack us. Likewise, the rise of Boko Haram in Africa is a direct result of a US intervention. Before the US-led “regime change” in Libya, they just were a poorly-armed gang. Once Gaddafi was overthrown by the US and its NATO allies, leaving the country in chaos, they helped themselves to all the advanced weaponry they could get their hands on. Instead of just a few rifles they found themselves armed with rocket-propelled grenades, machine guns with anti-aircraft visors, advanced explosives, and vehicle-mounted light anti-aircraft artillery. Then they started killing on a massive scale. Now, according to the Global Terrorism Index, Boko Haram has overtaken ISIS as the world’s most deadly terrorist organization.

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Signing these deals is going to be far more expensive than any nation can afford.

TPP Clauses That Let Australia Be Sued: Weapons Of Legal Destruction (Guardian)

Andrew Robb, the Australian trade minister, was quick to defend the agreement from its detractors. He lauded Australia’s efforts to secure significant exemptions, which he said would make it impossible for foreign corporations to sue the Australian government for enacting environmental policy. “It’s a trade agreement which looks at issues relating to trade that can affect public policy in the environmental area … It does provide safeguards, the best safeguards that have ever been provided in any agreement in this regard.” Robb said critics were just the usual suspects “jumping at shadows”, “peddling lines they’ve been peddling for years without having a decent look at what’s been negotiated”. But George Kahale III is not one of the usual suspects.

As chairman of the world’s leading legal arbitration firm – Curtis, Mallet-Prevost, Colt & Mosle – his core business is to defend governments being sued by foreign investors under ISDS. Some of his clients are included in the TPP, and he says the trade minister’s critics are right: “There are significant improvements in this treaty, but they do not immunise Australia from any of these claims. If the trade minister is saying, ‘We’re not at risk for regulating environmental matters’, then the trade minister is wrong.” Speaking via Skype from his office in New York, Kahale thumbs through the investment chapter, pointing out the critical loopholes that leave Australia wide open. “The one where all the discussion should be focused is 9.15,” he says, referring to one of the “safeguards”.

“That’s a very nice provision, which I imagine the trade minister points to as, ‘We’ve really protected ourselves on anything of social importance.’ I think that’s nonsense, frankly.” Here’s what 9.15 says: “Nothing in this chapter shall be construed to prevent a party from adopting, maintaining or enforcing any measure otherwise consistent with this chapter that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental, health or other regulatory objectives.” This entire provision is negated, says Kahale, by five words in the middle: “unless otherwise consistent with this chapter”. “So at the end of the day, this provision, which really held out a lot of promise of being very protective, is actually much ado about nothing.”

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“The U.S. is responsible for the majority of profits for most large pharmaceutical companies..”

Why the US Pays More Than Other Countries for Drugs (WSJ)

Norway, an oil producer with one of the world’s richest economies, is an expensive place to live. A Big Mac costs $5.65. A gallon of gasoline costs $6. But one thing is far cheaper than in the U.S.: prescription drugs. A vial of the cancer drug Rituxan cost Norway’s taxpayer-funded health system $1,527 in the third quarter of 2015, while the U.S. Medicare program paid $3,678. An injection of the asthma drug Xolair cost Norway $463, which was 46% less than Medicare paid for it. Drug prices in the U.S. are shrouded in mystery, obscured by confidential rebates, multiple middlemen and the strict guarding of trade secrets. But for certain drugs—those paid for by Medicare Part B—prices are public. By stacking these against pricing in three foreign health systems, as discovered in nonpublic and public data, we were able to pinpoint international drug-cost differences and what lies behind them.

What we found, in the case of Norway, was that U.S. prices were higher for 93% of 40 top branded drugs available in both countries in the third quarter. Similar patterns appeared when U.S. prices were compared with those in England and Canada’s Ontario province. Throughout the developed world, branded prescription drugs are generally cheaper than in the U.S. The upshot is Americans fund much of the global drug industry’s earnings, and its efforts to find new medicines. “The U.S. is responsible for the majority of profits for most large pharmaceutical companies,” said Richard Evans, a health-care analyst at SSR LLC and a former pricing official at drug maker Roche. The reasons the U.S. pays more are rooted in philosophical and practical differences in the way its health system provides benefits, in the drug industry’s political clout and in many Americans’ deep aversion to the notion of rationing.

The state-run health systems in Norway and many other developed countries drive hard bargains with drug companies: setting price caps, demanding proof of new drugs’ value in comparison to existing ones and sometimes refusing to cover medicines they doubt are worth the cost. The government systems also are the only large drug buyers in most of these countries, giving them substantial negotiating power. The U.S. market, by contrast, is highly fragmented, with bill payers ranging from employers to insurance companies to federal and state governments. Medicare, the largest single U.S. payer for prescription drugs, is by law unable to negotiate pricing. For Medicare Part B, companies report the average price at which they sell medicines to doctors’ offices or to distributors that sell to doctors. By law, Medicare adds 6% to these prices before reimbursing the doctors. Beneficiaries are responsible for 20% of the cost.

The arrangement means Medicare is essentially forfeiting its buying power, leaving bargaining to doctors’ offices that have little negotiating heft, said Sean Sullivan, dean of the School of Pharmacy at the University of Washington.

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“It all looks like a feckless slide provoked by our side into World War III, and for what? To make the world safe for the Kardashians?”

The Story Line Dissolves (Jim Kunstler)

Sometimes societies just go crazy. Japan, 1931, Germany, 1933. China, 1966. Spain 1483, France, 1793, Russia, 1917, Cambodia, 1975, Iran, 1979, Rwanda, 1994, Congo, 1996, to name some. By “crazy” I mean a time when anything goes, especially mass killing. The wheels came off the USA in 1861, and though the organized slaughter developed an overlay of romantic historical mythos — especially after Ken Burns converted it into a TV show — the civilized world to that time had hardly ever seen such an epic orgy of death-dealing. I doubt that I’m I alone in worrying that America today is losing its collective mind. Our official relations with other countries seem perfectly designed to provoke chaos. The universities have melted into toxic sumps beyond even anti-intellectualism to a realm of hallucination.

Demented gunmen mow down total strangers weekly in what looks like a growing competition to end their miserable lives with the highest victim score. The financial engineers have done everything possible to pervert and undermine the operations of markets. The political parties are committing suicide by cluelessness and corruption. There is no narrative for our behavior toward Russia that makes sense anymore. Our campaign to destabilize Ukraine worked out nicely, didn’t it? And then we acted surprised when Russia reclaimed the traditionally Russian territory of Crimea, with its crucial warm-water naval ports. Who woulda thought? Then we attempted to antagonize them further with economic sanctions. The net effect is that Vladimir Putin ended up looking more rational and sane than any leader in the NATO coalition.

Lately, Russia has filled the vacuum of competence in Syria, cleaning up a mess that America left with its two-decade-long crusade to leave a train of broken governments everywhere in the region. A few weeks back, Mr. Putin made the point before the UN General Assembly that wrecking every national institution in sight among weak and unstable nations was probably not a recipe for world peace. President Obama never did formulate a coherent comeback to that. It’s a little terrifying to realize that the leader of our former arch-adversary is the only figure onstage who can come up with a credible story about what needs to happen there. And his restraint this week following what may have been a US-assisted shoot-down of a Russian bomber by idiots in Turkey is really estimable. It all looks like a feckless slide provoked by our side into World War III, and for what? To make the world safe for the Kardashians?

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Yeah, Americans are your best friends…

The Slow Death Of Hope For America’s Loyal Friends In Iraq (FT)

The phone calls in the past week were tearful. I spoke to two Iraqis, former colleagues who had risked their lives for Americans, to tell them I doubted they would ever be welcomed in my country. As France mourned murders by Islamist terrorists, and US politicians thousands of miles away spewed anti-refugee rhetoric, I realised my friends probably had no friends in Washington. For years after the 2003 invasion, Americans relied on Iraqis to navigate a country whose terrain we barely knew and whose sectarian loyalties it was vital to understand. Journalists could not have survived without them. Neither could the troops, aid workers or diplomats. The goodwill of those caught in the middle of these war zones — whether in Iraq or now perhaps in Syria — allowed us to stay safe and do our jobs.

The men I knew had been translators and drivers for the Chicago Tribune, then my employer. They reported through mortar attacks, even a car bomb. Then Sinan Adhem and Nadeem Majeed decided they wanted to live in the US. They applied 10 years ago for visas. As they waited, they became fathers, perfected their English and found better jobs. Sinan is now a security analyst for the UN. Nadeem works for Nissan Motors. Both live in Baghdad. Last year, both Sinan and Nadeem received emails from the US Citizenship and Immigration Services stating that they could not be trusted. No one disputed they had presented all the proper papers or that the visa applications were credible. Yet form letters dismissed Sinan, then Nadeem, with vague finality: “Denied as a matter of discretion for security-related reasons.”

“Are the Americans calling me a terrorist?” Sinan sputtered over the phone. I calmed him down; it had to be a clerical error by USCIS and the Department of Homeland Security. I was sure I could sort it and I knew we had to work fast. Neighbouring Syria was falling apart; my friends could soon be vying with thousands of desperate refugees. In the weeks that followed, though, I found few people in my government willing to help. No single bureaucrat wanted to accept responsibility.

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Huh?: “..losses in excess of around €1.5 million.” Is that the same as around in excess of?

Other than that: hey, it works. Let the 1500 refugees go and you can ship your holiday rush gadgets and trinkets. Easy.

Migrant Blockades Of Train Tracks In Northern Greece Hit Commerce (Kath.)

Trainose, the company that manages Greece’s state-owned railway system, has said that a blockade of the tracks at the country’s northern border has led to losses in excess of around €1.5 million. Speaking to Skai on Tuesday, Trainose CEO Thanasis Ziliaskopoulos said that about 1,800 cars waiting to cross the border between Greece and the Former Yugoslav Republic of Macedonia (FYROM) have been affected by protests as an estimated 1,500 refugees and migrants remain stuck at the crossing as they try to make their way deeper into Europe.

About a dozen or so protesters have been lying or camping out on the tracks since November 18 in demand that FYROM relax its border controls, following its decision in the wake of the Paris terror attacks to bar entry to what it deems are “economic migrants.” Ziliaskopoulos said that Trainose has been receiving complaints from some of its biggest clients – including Cosco, Hewelett Packard and Sony – over the delays in shipments, adding that contracts may be at stake unless the situation is resolved, particularly given the pre-holiday rush to meet orders.

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 October 1, 2015  Posted by at 8:41 am Finance Tagged with: , , , , , , , , , , ,  1 Response »


John Vachon Beer signs on truck, Little Falls, Minnesota Oct 1940

2015 Is Turning Out to Be a Terrible Year for Investors (Bloomberg)
End Of World’s Biggest Ever Credit Boom Means More “Glencores” Ahead (Howell)
Traders Start Pricing Glencore Bonds Like Junk (FT)
Why Dow’s Three-Quarter Losing Streak Is A Big Deal (MarketWatch)
October 1 2015: China Factory Activity Picks Up To Beat Expectations (BBC)
Futures Soar After Chinese Composite PMI Drops To Lowest On Record (Zero Hedge)
China Cuts Minimum Home Down Payment for First-Time Buyers (Bloomberg)
Oil Suffers A Loss Of 24% For The Quarter (MarketWatch)
Market Moves That Aren’t Supposed to Happen Keep Happening (Tracy Alloway)
Wide Range Of Cars Emit More Pollution In Realistic Driving Conditions (Guardian)
VW Emissions Scandal: 1.2 Million UK Cars Affected (Guardian)
VW Board Considering Steps To Prop Up Credit Rating (Reuters)
Eurozone Inflation Turns Negative, Putting ECB In Corner (Reuters)
Tsipras Finds ‘Open Ears’ In US To Greek Appeal For Debt Relief (Kath.)
Greek Regulator Bans Short-Selling Of Bank Shares (Reuters)
How Greece Could Collapse The Eurozone (Satyajit Das)
Greek Shipowners Prepare to Weigh Anchor on Prospect of Higher Taxes (WSJ)
Iceland’s Next Collapse Is “Unavoidable,” Employers Union Warns (Bloomberg)
Obama Hands $1 Billion In Military Aid To Goverments Using Child Soldiers (CNN)
Millions Of Illegal Immigrants Will Overrun Trump’s ‘Beautiful Wall’ (Farrell)
Farmers Driven From Homes ‘Like Pests’ As Asia Plans 500 Dams (Bloomberg)

Debt. Deflation.

2015 Is Turning Out to Be a Terrible Year for Investors (Bloomberg)

For investors around the world, 2015 is turning into a year to forget. Stocks, commodities and currency funds are all in the red, and even the measly gains in bonds are being wiped out by what little inflation there is in the global economy. Rounding out its steepest quarterly descent in four years, the MSCI All Country World Index of shares is down 6.6% in 2015 including dividends. The Bloomberg Commodity Index has slumped 16%, while a Parker Global Strategies index of currency funds dropped 1.8%. Fixed income has failed to offer much of a haven: Bank of America’s global debt index gained just 1%, less than the 2.5% increase in world consumer prices shown in an IMF index. After three years in a virtuous cycle of rising share prices and unprecedented monetary easing, markets are now sinking as emerging economies from China to Brazil weaken and corporate profits slump.

Analysts have cut their global growth estimates for 2015 to 3% from 3.5% at the start of the year, and the turmoil has added pressure on central banks to prolong their stimulus programs, with traders scaling back forecasts for a Federal Reserve interest-rate increase by year-end. “There was an element of people believing they had found some sort of holy grail to investing, then this breakdown occurs and it breaks down in a way that’s remarkable,” said Tobias Levkovich, Citigroup’s chief U.S. equity strategist. “What seemed to trigger this all was China. It sent us on a wave of downward fears.” Investors suffered the brunt of this year’s losses in the third quarter. MSCI’s global equity index sank about 10% in the period, while the Bloomberg commodity index lost 14% in its biggest slump since the global financial crisis seven years ago.

The average level of Bank of America’s Market Risk index, a measure of price swings in equities, rates, currencies and raw materials, was the most this quarter since the end of 2011. The Chicago Board Options Exchange Volatility Index, a gauge of turbulence known as the VIX, reached the highest since 2011 in August. China has been the biggest source of anxiety for investors, after turmoil in the nation’s financial markets fueled concern that the country’s worst economic slowdown since 1990 was deepening. The Shanghai Composite Index fell 29% in the third quarter, the most worldwide, and the yuan weakened 2.4% after authorities devalued the currency in August. That sent a shudder around the world.

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And all over the world too.

End Of World’s Biggest Ever Credit Boom Means More “Glencores” Ahead (Howell)

It’s the great unwind show. Admittedly, Glencore’s latest problems may run deeper and look more specific, but together with Vale and Rio, the other great international mining houses plus their suppliers, like America’s Caterpillar, all are suffering the fall-out from the end of the world’s biggest ever credit boom. Oil is testing recent lows and commodity prices almost across the board are skidding. Alongside, emerging market currencies are being trashed and some even fear that this turmoil will spill-over into a recession by next year. It will. Your white-knuckle ride is far from over. So how did we get here? The answer comes in three parts.

Firstly, the fragile global financial system that disintegrated spectacularly in 2008 has simply been taped back together and not fundamentally rebuilt, so leaving it vulnerable to a renewed bust of funding problems. Secondly, debt problems have not been tackled. By demanding “austerity”, many governments have simply reshuffled debts from their balance sheets on to more fragile private sector ones. Debt burdens across emerging markets, for example, have jumped since 2007. Lastly, the biggest factor is China. China is only just starting to adjust to its huge credit boom. Since the year 2000, the size of its asset economy has jumped an eye-watering 12-fold.

This includes the construction of new cities, thousands of miles of motorway, several airports and, as the brochures once advertised, a new skyscraper every 14-days, pushing up her credit markets to a bloated $25 trillion. History teaches us that there are four stages to every credit cycle: (1) 20-30% rates of new loan growth; (2) asset price bubbles in real estate, commodities, equities and often art; (3) banking problems, corruption and state intervention, and (4) currency collapse. China already ticks the first three boxes, and a pen is hovering over the fourth. The decision to weaken the renminbi in August may have less to do with exchange rate politics, as some have suggested, and more to do with a plain shortage of US dollars.

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“..trading in the $36bn of bonds outstanding has moved to a cash basis, where prices are quoted in terms of cents on the dollar of face value.”

Traders Start Pricing Glencore Bonds Like Junk (FT)

Traders have started to quote prices for Glencore debt in a manner normally associated with lower-quality paper, commonly known as junk bonds. The shift in pricing dynamics in the private over-the-counter markets this week came as shares in Glencore swung wildly as investors worry about the ability of the miner and trading house to manage its debt pile in a commodity downturn. The group retains an investment grade credit rating according to rating agencies and its $36bn of outstanding bonds have up to now been bought and sold on the basis of their yield, which moves inversely to price. But this week, dealers and investors say trading in the $36bn of bonds outstanding has moved to a cash basis, where prices are quoted in terms of cents on the dollar of face value. This form of pricing is generally used for junk bonds, which have a higher risk of default.

Pressure on the company’s debt and equity has intensified as analysts debate the effect of falling raw materials prices and rising debt costs. One investment bank warned on Monday that the group’s equity might be worthless if commodity prices did not recover swiftly. The company said it retained “strong lines of credit and access to funding”. Unsecured senior Glencore debt maturing in May 2016 traded below 93 cents on the dollar on Tuesday, with some trades occurring below 90 cents, according to investors. A buyer of the debt should receive a 0.85 cent coupon in November, and a dollar of principal back in eight months’ time. The return available from doing so is equivalent to around a 13% yield on an annual basis. Prices for longer-term debt fell even further as investors began to assess the potential recovery values for Glencore debt, most of which is unsecured. “Everything beyond five years is trading around or below 70 cents on the dollar,” Zoso Davies at Barclays said.

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The history of three-quarter losing streaks is not pretty.

Why Dow’s Three-Quarter Losing Streak Is A Big Deal (MarketWatch)

The Dow Jones Industrial Average has suffered a third-straight quarterly decline for the first time since the Great Recession. This marks just the third time in nearly 40 years that a quarterly losing streak for the blue-chips benchmark stretched at least that long. The Dow surged 236 points on Wednesday, but has lost 1,335 points, or 7.6%, since the end of June. The Dow had lost 156.61 points, or 0.9%, over the second quarter and 46.95 points, or 0.3%, over the first quarter. The last time the Dow had a three-quarter losing streak was the six-quarter stretch ending the first quarter of 2009. Before that, there was a five-quarter losing streak ending with the first quarter of 1978, according to FactSet data.

In the Dow’s 119-year history, there have now been 20 quarterly losing streaks that stretched at least three quarters. The longest losing streak is six quarters, suffered twice, through the first quarter of 2009 and through the second quarter of 1970. There have been 12 quarterly losing streaks that have lasted longer than three quarters. If the current quarterly losing streak were to be snapped in the fourth quarter, the total three-quarter loss of 8.6% would be the smallest of all the other three-quarter losing streaks.

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What a difference a week makes, and/or a survey…

October 1 2015: China Factory Activity Picks Up To Beat Expectations (BBC)

Factory activity in China picked up in September, beating expectations, according to the government’s official manufacturing survey. The manufacturing purchasing managers’ index (PMI) was up to 49.8 from 49.7 in August, but the sector did shrink for the second consecutive month.

23 September 2015: China Factory Activity Contraction Worsens (BBC)

China’s factory activity contracted at the fastest pace for six and a half years in September, according to a preliminary survey of the vast sector. The Caixin/Markit manufacturing purchasing managers’ index (PMI) fell to 47 in September, below forecasts of 47.5 and down from 47.3 in August.

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More of that discrepancy in China numbers.

Futures Soar After Chinese Composite PMI Drops To Lowest On Record (Zero Hedge)

Chinese markets may be closed for the next week due to a national holiday but China’s goalseeked manufacturing survey(s), which were the most anticipated data points of the evening, came right on schedule (or rather, were leaked just ahead of schedule). And they certainly did not disappoint in their disappointment. First, it was the official NBS September PMI, which at 49.8 was the smallest possible fraction above both the previous and expected, both of which were 49.7. The number was leaked about 6 minutes before the official statement, and while the leaked print which all humans were aware of well before the official release time at 9pm Eastern, had no impact on markets, it was the flashing red headline which confirmed the leak and which was read by machine-reading algos everywhere, that sent the E-mini spasming higher.

But while the official “data” was bad, and confirmed the economy remains in contraction, the Caixin – aka the new HSBC – Markit PMIs were absolutely atrocious. We bring you… the HSBC Manufacturing print, which dropped from 47.3 to 47.2, and which according to Caixin was the lowest print since March 2009. From the report:

A key factor weighing on the headline index was a sharper contraction of manufacturing output in September. According to panellists, worsening business conditions and subdued client demand had led firms to cut their production schedules. Weaker customer demand was highlighted by a further fall in total new orders placed at Chinese goods producers in September. Furthermore, the rate of reduction was the steepest seen for just over three years. Data suggested that the faster decline in total new business partly stemmed from a sharper fall in new export work. The latest survey showed new orders from abroad declined at the quickest rate since March 2009.

Reflective of lower workloads, manufacturing companies cut their staff numbers again in September. Moreover, the latest reduction in employment was the fastest seen in 80 months. Meanwhile, reduced production capacity led to an increased amount of unfinished work, though the pace of backlog accumulation was only slight.

Manufacturing companies noted a further steep decline in average cost burdens during September. Furthermore, the rate of deflation was the sharpest seen since April. Reports from panellists mentioned that lower raw material prices, particularly for oil-related products, had cut overall input costs. Increased competition for new work led manufacturing companies to generally pass on their savings to clients, as highlighted by a solid decline in output charges.

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“It’s one policy that’s part of a grand strategy to revive property investment and the whole national economy.”

China Cuts Minimum Home Down Payment for First-Time Buyers (Bloomberg)

China’s central bank cut the minimum home down payment required of first-time buyers for the first time in five years, stepping up support for the property market after five interest-rate reductions since November failed to reverse an economic slowdown. The People’s Bank of China cut the minimum down payment for buyers in cities without purchase restrictions to 25% from 30%, according to a statement released on its website Wednesday. The previous requirement had been in place since 2010, when the government boosted the ratio from 20% to help curb property speculation.

The move extends a year of loosening in the property market as Premier Li Keqiang seeks to boost demand in the world’s second-largest economy after fiscal and monetary stimulus produced few signs of a rebound. Growth will slow to 6.8% this year, according to the median of economist estimates compiled by Bloomberg. That’s below the government’s target for an expansion of about 7%. “Amid China’s economic slowdown, property’s role as a growth pillar has become even more important, and the government clearly sees it,” said Shen Jianguang at Mizuho in Hong Kong. “It’s one policy that’s part of a grand strategy to revive property investment and the whole national economy.”

While property investment has remained weak, home sales have recovered after mortgage policy easing and removal of purchase restrictions helped support demand. New-home prices rose in 35 of 70 cities in August, up from 31 in July and just two cities in February. UBS Group has estimated the real-estate industry accounts for more than a quarter of final demand in the economy when including property-related goods including electric machinery and instruments, chemicals and metals. The government also has urged some cities to allow citizens to borrow more from housing funds to help buyers, and encouraged cities to securitize more of those loans, according to a statement on the housing ministry’s website.

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In Q4, a lot of ‘reserves’ must be marked to much more realistic levels. That’s going to hurt.

Oil Suffers A Loss Of 24% For The Quarter (MarketWatch)

Oil futures tallied a loss of 24% for the third quarter, after ending Wednesday lower on the back of a report revealing the first U.S. crude-supply increase in three weeks. The report also showed a modest decline in domestic production, helping prices limit losses for the session. November West Texas Intermediate crude settled at $45.09 a barrel, down 14 cents, or 0.3%, on the New York Mercantile Exchange, trading between a high of $45.85 and a low of $44.68, according to FactSet data. WTI prices, based the front-month contracts, lost 8.4% for the month and were 24% lower for the quarter. Year to date, they’re down by more than 15%. November Brent crude on London’s ICE Futures exchange tacked on 14 cents, or 0.3%, to $48.37 a barrel.

Year to date, prices have fallen more than 15%. The U.S. Energy Information Administration reported Wednesday an increase of four million barrels in crude supplies for the week ended Sept. 25. That was the first climb in three weeks. Analysts polled by Platts expected supplies to be unchanged, while the American Petroleum Institute Tuesday said supplies jumped 4.6 million barrels. Part of the reason for the increase in crude supplies was less demand from refineries, where activity decreased with maintenance season in effect. Refinery utilization fell to 89.8% last week from 90.9%.

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Volatility. Way outside Fed control.

Market Moves That Aren’t Supposed to Happen Keep Happening (Tracy Alloway)

A counterpoint to Bill Dudley’s Wednesday speech on bond market liquidity comes courtesy of TD Securities. While the New York Fed president argued that there’s little evidence so far that new financial regulation has cut into the ease of trading U.S. Treasuries, TD analysts Priya Misra and Gennadiy Goldberg think otherwise. They point to daily, wild swings in the bond market as evidence of diminished liquidity.

Our findings show that daily changes in 10-year Treasury yields exceeded one standard deviation (√) 58% of the time so far in 2015, considerably higher than the 49% observed last year. The 58% measure is the highest reading going back to 1975, suggesting that recent volatility in Treasury markets is unprecedented. As if a record number of “choppy days” were not enough, 10-year yield movements also exceeded 3√ in as many as 9% of trading days this year. This is higher than the average of 6% of days since 1975.

It’s a point that’s been brought up before, notably by Bank of America Merrill Lynch’s Barnaby Martin. These observers argue that the number of assets registering large moves four or more standard deviations away from their normal trading range has been growing in recent months. Moves greater than one standard deviation should (based on a normal distribution of probabilities) happen about 32% of the time. Instead as the TD analysts point out, they are happening 58% of the time in U.S. Treasuries. Moves greater than three standard deviations should be happening about 1% of the time, not 9%.

While Dudley finds little evidence of average bond market liquidity having deteriorated, TD reckons the problem lies in so-called “tail events,” in which increased regulation and changes to market structure exacerbate the potential for extreme moves. Looking at average liquidity conditions won’t show much evidence of a problem, therefore. That might go some way toward explaining why all those market moves that are supposed to not happen very often keep occurring with some regularity.

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If everybody does it, who are you going to punish?

Wide Range Of Cars Emit More Pollution In Realistic Driving Conditions (Guardian)

New diesel cars from Renault, Nissan, Hyundai, Citroen, Fiat, Volvo and other manufacturers have all been found to emit substantially higher levels of pollution when tested in more realistic driving conditions, according to new data seen by the Guardian. Research compiled by Adac, Europe’s largest motoring organisation, shows that some of the diesel cars it examined released over 10 times more NOx than revealed by existing EU tests, using an alternative standard due to be introduced later this decade. Adac put the diesel cars through the EU’s existing lab-based regulatory test (NEDC) and then compared the results with a second, UN-developed test (WLTC) which, while still lab-based, is longer and is believed to better represent real driving conditions. The WLTC is currently due to be introduced by the EU in 2017.

[..] Emissions experts have warned for some time that there were problems with official lab-based NOx tests, meaning there was a failure to limit on-the-road emissions. “Gaming and optimising the test is ubiquitous across the industry,” said Greg Archer, an emissions expert at Transport & Environment. A recent T&E round-up of evidence found this affected nine out of 10 new diesel cars, which were on average seven times more polluting in the real world. But the Adac data are the first detailed list of specific makes and models affected. Adac also measured a Volvo S60 D4 producing NOx emissions over 14 times the official test level [..]

T&E argues that the Adac WLTC tests are minimum estimates of actual on-the-road emissions. Archer said the EU must back up the WLTC with on-the-road tests and end the practice of carmakers paying for the tests at their preferred test centres. “It is more realistic but it still isn’t entirely representative,” said Archer. “We still think there is a gap of about 25% between the WLTC test and typical average new car driving.”

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“The admission means that the UK is one of the countries worst affected by the scandal..”

VW Emissions Scandal: 1.2 Million UK Cars Affected (Guardian)

Volkswagen has revealed that almost 1.2m vehicles in the UK are involved in the diesel emissions scandal that has rocked the carmaker, meaning more than one in 10 diesel cars on the country’s roads are affected. VW said the diesel vehicles include 508,276 Volkswagen cars, 393,450 Audis, 76,773 Seats, 131,569 Skodas and 79,838 Volkswagen commercial vehicles. The total number of vehicles affected is 1,189,906. This is the first time VW has admitted how many of the 11m vehicles fitted with a defeat device to cheat emissions tests are in the UK.

The admission means that the UK is one of the countries worst affected by the scandal and will increase the pressure on the government to launch a full investigation. Figures from the Department for Transport show that there were 10.7m diesel cars on Britain s roads at the end of 2014 and that an estimated 5.3m of the petrol and diesel cars are Volkswagens or one of the groups sister brands. Patrick McLoughlin, the transport secretary, said: The government s priority is to protect the public and I understand VW are contacting all UK customers affected. I have made clear to the managing director this needs to happen as soon as possible. “The government expects VW to set out quickly the next steps it will take to correct the problem and support owners of these vehicles already purchased in the UK.”

VW said 2.8m vehicles in Germany are involved, while 482,000 cars have been recalled in the US. The company intends to set up a self-serve process that will allow UK motorists to find out if their vehicle is affected. Dealers will also be sent the vehicle identification numbers of those involved. Affected customers will be contacted about visiting a mechanic to have their cars refitted. The cars fitted with a defeat device have EA 189 EU5 engines. However, VW is yet to reveal the full details of the recall plan, which will need to be approved by regulators. The carmaker said: “In the meantime, all vehicles are technically safe and roadworthy. Volkswagen Group UK is committed to supporting its customers and its retailers through the coming weeks.”

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Buyback!

VW Board Considering Steps To Prop Up Credit Rating (Reuters)

Members of Volkswagen’s supervisory board are concerned about the carmaker’s credit rating and are considering steps to prop it up but have no plans to sell off assets, two sources close to the board said. Volkswagen declined to comment on the sources, who spoke to Reuters late on Wednesday evening. They said that following recent actions from credit rating agencies Fitch and Moody’s, there were worries that a downgrade could inflict higher borrowing costs on the company, hampering its ability to win back the trust of investors. As a result, the board is considering cost cuts and revenue-generating measures. However no discussions on selling off VW assets or brands have taken place, the sources said. The Wolfsburg-based company has been hammered by the revelations that it manipulated diesel emissions tests.

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An endless supply of stupidity. Or is it perfidiousness?

Eurozone Inflation Turns Negative, Putting ECB In Corner (Reuters)

Eurozone inflation turned negative again in September as oil prices tumbled, raising pressure on the European Central Bank to beef up its asset purchases to kick start anaemic price growth. Prices fell by 0.1% on an annual basis, the first time since March that inflation has dipped below zero, missing analysts’ expectations for a zero reading after August’s 0.1% increase. The negative reading is a headache for the ECB, which is buying €60 billion of assets a month to boost prices. It has already said it may have to increase or extend the QE scheme because inflation may fall short of its target of almost 2% even in 2017.

Long term inflation expectations have dropped to their lowest since February, before the ECB’s asset purchases started, as China’s economic slowdown, the commodity rout and paltry euro zone lending growth reinforce pessimistic predictions. Even Finnish central bank chief Erkki Liikanen, normally considered an inflation hawk, has warned that euro zone growth is at risk from the slowdown in emerging markets and that inflation could fall short of already modest expectations. “We believe the ECB will extend its QE programme beyond September 2016, most likely until mid-2018, and that it could reach €2.4 trillion – more than twice the original €1.1 trillion commitment,” credit ratings agency Standard & Poor’s said on Wednesday.

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Let’s see it first.

Tsipras Finds ‘Open Ears’ In US To Greek Appeal For Debt Relief (Kath.)

Prime Minister Alexis Tsipras on Wednesday indicated that Greece’s appeal for debt relief had been received far better in New York than in Brussels, continuing his US visit which included talks with Secretary of State John Kerry. “The Greek government has found far more open ears [here] than in Brussels for the need for there to be a fair resolution of the crisis and a necessary reduction of the unbearable and unsustainable public debt that has accumulated all those years,” Tsipras told reporters. He was speaking on the fifth day of an official visit to the US and following meetings with representatives of the Greek-American community in New York who he described as “the best ambassadors for Hellenism in the US, a country which plays the most significant role globally in all the crucial decisions that relate to our country’s future.”

Tsipras said Greeks have been “the victim of choices that led to the gradual erosion of the country’s national sovereignty and to the need for borrowing which resulted in the enforcement of measures which have… weakened the production base and the economy.” The comments came just a few days before representatives of Greece’s international creditors are to return to Athens for negotiations on the prior actions that Greek authorities must legislate to secure crucial rescue loans.

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Yeah, that’ll do the trick…

Greek Regulator Bans Short-Selling Of Bank Shares (Reuters)

The Greek securities regulator said on Wednesday it had banned short-selling of Greek bank shares to avoid pressure on prices ahead of the recapitalization of the sector. “The decision will come into effect starting Oct. 1 and will last until Nov. 9,” the Capital Markets Commission said in a statement. It affects the shares of the country’s four largest banks – National Bank, Alpha Bank, Eurobank and Piraeus Bank – and also the smaller Attica Bank.

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“At a deeper level, the EU’s actions are promoting political radicalization on both the political right and left with unknown consequences.”

How Greece Could Collapse The Eurozone (Satyajit Das)

The Greek debt affair has also harmed the European Project, potentially irreparably. The problem is not that the eurozone found itself facing serious economic challenges. The issue is its failure to anticipate the risk of such a crisis ever happening, the lack of contingency planning, and the eurozone’s inability to deal with the problem on a timely basis. The Greek crisis is now over five years old, with no signs of a permanent solution. There are only unpalatable choices. Some concessions will not solve the problem. Other eurozone members will have to continue to provide additional financing to Greece, further increasing their risk. Favorable treatment for the Greek government risks opening a Pandora’s Box of demands from other countries to relax austerity measures.

Demands for relaxation of budget deficit and debt level targets are likely from Spain, Portugal, Ireland, Italy, and France. A write-down of debt would crystallize losses. It might threaten the governments of Spain, Portugal, Italy, Finland, the Netherlands, and Germany. If Greece leaves the euro, then the consequences for the eurozone are unclear. Should Greece prosper outside the single currency, it reduces the attraction of the eurozone for weaker members. Given the absence of painless solutions, it seems for the moment that neither Greece nor its creditors have any objectives other than avoiding having their fingerprints on the instrument that triggers default, the world’s largest sovereign debt restructuring or a breakup of the euro.

The approach of the EU has also undermined the European project. Major countries such as Germany have reacted to the inability to resolve the crisis by resorting to economic and political repression, entailing less, not more, flexibility, with tougher rules and stricter enforcement, including tighter supervision of national budgets. [..] The EU fails to recognize that its actions may destabilize Europe in unexpected ways. Greece has the potential to undermine Western security, creating a large corridor of vulnerability through the Balkans, the Levant, the Middle East, and Caucasus. While a member of the EU, Greece can veto sanctions reducing European power. Its actions or lack thereof can aggravate the serious refugee crisis confronting Europe. An embittered Greece, hostile to European partners and NATO, has caused alarm in the US. At a deeper level, the EU’s actions are promoting political radicalization on both the political right and left with unknown consequences.

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Age old threat.

Greek Shipowners Prepare to Weigh Anchor on Prospect of Higher Taxes (WSJ)

Many of Greece’s world-leading shipowners are actively exploring options to leave their home country, reacting to the prospect of sharply higher shipping taxes in the debt-ridden nation. Dominated by some 800 largely family-run companies that control almost a fifth of the global shipping fleet from their base at the main Greek port of Piraeus, the industry has long been a source of national pride. But at the behest of Greece’s international creditors, the newly re-elected Syriza-led government has reluctantly agreed to raise taxes on the long-protected sector. While Greek owners have agreed to voluntarily double until 2017 the amount they pay in tonnage tax-a fixed annual rate based on the size of each vessel-they are adamant on keeping their tax-free status on ship profits and money generated from ship sales.

Yet Greece’s creditors want taxes gradually to be applied on all shipping operations and are pushing for a permanent increase in the tonnage tax. Senior Greek government officials, who asked not to be named, said the finance ministry is trying to find alternative sources of income to avoid saddling owners with more taxes, but one said that “the exercise is proving very difficult.” Final decisions on the matter are expected by the end of October. Income-based shipping taxes, levied in countries such as the U.S., China and Japan, can raise much more revenue than tonnage taxes, levied in most European countries. An owner of a midsize vessel in Greece would pay a flat tonnage tax of $50,000 a year at the temporary double rate.

A comparable U.S. owner, depending on daily freight rates, might pay about $3.7 million in annual taxes, and a Japanese owner could pay $7 million. However, while European owners have to pay the tonnage tax every year regardless of profitability, U.S. and Japanese owners get substantial tax refunds if their vessels lose money. Many in the Greek shipping world say any increase in taxes on shipping operations would prompt a mass exodus of the country’s shipowners. Relatively low-tax global shipping centers such as Cyprus, London, Singapore and Vancouver are positioning themselves to benefit.

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Rising wages.

Iceland’s Next Collapse Is “Unavoidable,” Employers Union Warns (Bloomberg)

The head of Iceland’s main employers’ group says the nation is displaying some worrying signs. Wages are soaring much too fast and will ruin the economy if they continue unchecked, according to Thorsteinn Viglundsson, managing director of Business Iceland. “Another economic collapse is unavoidable, if we’re going to keep going down this path,” Viglundsson said in a phone interview in Reykjavik. Pay is set to rise about 30% through 2019 in many industries. Unions wanted increases as high as 50%, to compensate for years of moderate pay growth, but some were forced to settle for less after the government put the matter to an arbitration court. Icelanders, who work longer hours than their Nordic peers according to the OECD, are demanding a bigger share of the island’s economic recovery after eight years of belt-tightening.

Pay growth has barely kept pace with inflation, with real wages rising little more than 3% in the six years through 2014, statistics office figures show. Over the same period, real gross domestic product grew 29%. Viglundsson says wage growth above 25% through 2019 will have “very serious economic consequences.” “It will mean a surge in inflation, to which the central bank will respond by raising rates considerably,” he said. Iceland’s main policy rate is already above 6%, a developed-world record. “It will mean that, in the end, the krona will lose its value, like it has always done in the past under similar circumstances,” Viglundsson said.

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To bring democracy. And protect our freedom.

Obama Hands $1 Billion In Military Aid To Goverments Using Child Soldiers (CNN)

When the extremist group the Islamic State of Iraq and Syria (ISIS) abducts boys from Friday prayers at mosques or indoctrinates children as young as 10 to become fighters or suicide bombers, there is little the United States can do. But when recipients of U.S. military aid recruit children into their forces as soldiers, the United States has a lot of leverage. It is disappointing that the Obama administration has been reluctant to use it. This week, U.S. President Barack Obama is expected to make his annual announcement about the issue, on whether he will waive sanctions on military foreign aid under U.S. law for any of the eight governments currently on the State Department’s list for using child soldiers.

In 14 countries around the world, according to the United Nations, children are recruited and used in armed conflicts as informants, guards, porters, cooks, and often, as front-line armed combatants. In some, only non-state armed groups are responsible for the practice, but in others, the perpetrators are rebel forces and governments alike. In South Sudan, child recruitment spiked sharply last year, with estimates that 12,000 children were fighting with both government and non-state armed groups. In Yemen, where UNICEF has estimated that one-third of all fighters are under 18, all sides to the ongoing conflict, including the government, use child soldiers. Yet both governments have received millions of dollars in U.S. military assistance.

In 2008, Congress enacted a law based on two simple ideas: first, that U.S. tax dollars should not support the use of child soldiers, and second, that suspending U.S. military assistance could be a powerful incentive to prompt governments to end this reprehensible practice. The law, the Child Soldiers Prevention Act, took effect in 2010, restricting U.S. military support to governments using children in their armed forces. But the Obama administration’s implementation of the law has fallen far short of the law’s goals. Our analysis found that during the five years the law has been in effect, President Obama has invoked “national interest” waivers to authorize nearly $1 billion in military assistance and arms sales for countries that are still using child soldiers. In contrast, we found that only $35 million in military assistance and arms sales – a mere 4% of what was sanctionable under the law – was actually withheld from these abusive governments.

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Farrell may be on to something.

Millions Of Illegal Immigrants Will Overrun Trump’s ‘Beautiful Wall’ (Farrell)

Warning to the next president, to all future U.S. presidents: They’re coming. More illegal immigrants. More refugees. Millions more than conservatives fear are here already. Millions more coming, like Syrian refugees storming Europe. This warning is targeted specifically for a future President Donald Trump. You cannot stop them. Nobody can. They will overrun America, add trillions more debt. Brag all you want, this is one deal you will never, never negotiate successfully. Never win. Worse, you lose, we lose big.

Can’t win? No, not even if you’re bankrolled with unlimited funds, a blank-check from a GOP-controlled Congress and Treasury … not even if you win carte blanche clearance to build your “classy, beautiful” dream wall to your specs … build it extra high… superthick … not even if you staff it with thousands of well-armed special-ops soldiers … add new guard towers … patrolled by thousands of drones, sonar ships, nuclear subs … all to stop every illegal coming by aircraft, by boats, using battering rams, secretly entering through an ever-increasing vast underground network built by drug cartels … a near impenetrable system operating as an integrated high-tech network designed by our best minds to keep out the new flood of illegal immigrants that you so fear … it still won’t stop them.

Give it up you guys: Nobody can stop the coming tidal wave rising dead ahead. Not you, Mr. Next President, not Congress, nor any combination of our Armed Forces, FBI, ATF, CIA will ever stop the coming flood, a tsunami of illegals and refugees. Why? Because they’re escaping dying lands, doing what is natural, fighting, desperate, in survival mode, for themselves, their families, future generations, escaping climate-caused natural disasters, droughts, water and food shortages, starvation, genocide, pandemics, dust bowls, and so many more dark consequences of global warming climate change. Yes, all this is so obvious, so predictable. In the next few decades the same conditions that created the Syrian civil war between President Bashar al-Assad and his people will overwhelm the American southwest.

As climate change puts increasing pressure on the 160 million people in Mexico and Central America, millions of refugees and illegal immigrants will escape north into the United States, overrunning us by the end of this century. Of course, this human tsunami will not be understood by the clueless mind of America’s climate-science-denying GOP Congress held captive by Big Oil. Nor by the candidates in the GOP presidential debates. Worse, this would be a total fantasy to a GOP President Trump who’s sole obsession is a slogan “Make America Great Again” by building a “beautiful” wall to keep out illegal refugees. Except they’re all just making matters worse, delaying the inevitable collapse of America.

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Clean energy.

Farmers Driven From Homes ‘Like Pests’ As Asia Plans 500 Dams (Bloomberg)

Developing nations are in the middle of the biggest dam construction program in history to generate power, irrigate fields, store water and regulate flooding. Yet governments are finding it harder to move people, who have become less trusting of officials and more connected to information about the effects of the dams. Corruption and wrangles over payments have stalled projects from Indonesia to India for decades and frustrated governments are increasingly turning to the ultimate threat: Move, or we will flood you out. Jatigede is the latest example, and it is unlikely to be the last. Indonesia plans to build 65 dams in the next 4 years, 16 of which are under construction. India aims to erect about 230.

China is in the middle of a program to add at least 130 on rivers in the mountainous southwest and Tibetan plateau, including barriers across major rivers like the Mekong and Brahmaputra that flow into other countries. It is reported to have relocated people before inundating land. Like Jatigede, many are financed by Chinese banks and led by the nation s biggest dam builder, Sinohydro Corp. China is involved in constructing some 330 dams in 74 different countries, according to environmental lobbying group International Rivers, based in Berkeley, California. “Sending rising waters to flood out people like pests is barbaric”, said Professor Michael Cernea at the Brookings Institution. “Indonesia has the resources and know-how to resettle these people decently”.

“The relocation program is the responsibility of the government”, Sinohydro President Liang Jun said in an interview on Aug. 31 at the Jatigede dam. West Java governor Ahmad Heryawan said the dam will irrigate 90,000 hectares of land and provide water to Cirebon, a city of about 300,000 people on the northern coast of Java. At a ceremony on top of the dam on Aug. 31 to begin filling the reservoir, he acknowledged that not everyone had received compensation and that thousands remained in their homes. Those being relocated were “heroes of development, not victims”, he said. “We don t want them to suffer, we want to improve their welfare”. [..] Protests against dams have multiplied across Asia as activists mobilize residents and media against large projects and question their long-term benefits.

Indian Prime Minister Narendra Modi plans about 200 hydropower projects on the mountainous rivers in northeast India, as well as a program of 30 large dams that would help link major rivers across the country. “We are considering approvals for about 20 to 30 hydro and about 15 irrigation dam projects at the moment,” said Ashwinkumar Pandya, chairman of India’s Central Water Commission, which gives technical and economic clearances for dams. “Dams are an important aspect of planning and they ensure that water and power requirements for the nation are met.” “There is not a single dam – not a single one – for which India has done proper rehabilitation of people,” said Himanshu Thakkar at South Asia Network on Dams, Rivers and People. “And typically, all of them have seen costs escalate and delays in building.”

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Sep 232015
 
 September 23, 2015  Posted by at 8:54 am Finance Tagged with: , , , , , , , , , ,  6 Responses »


Arthur Rothstein President Roosevelt tours drought area near Bismarck, ND 1936

Signs Point To Deepening China Distress (FT)
Shadow Finance Expansion by Chinese Banks Deepens Credit Mystery (Bloomberg)
China Flash PMI Falls To Lowest Since May 2009 (CNBC)
China’s Workers Stumble as Factories Stall (WSJ)
Xi Jinping Defends China Stock Market Interventions On First US Visit (Guardian)
China Has A Message Markets Don’t Understand (CNBC)
VW Scandal Caused Nearly 1 Million Tonnes Of Extra Pollution (Guardian)
California Tests To Include Larger Diesel Engines From Audi, Porsche (Reuters)
VW Emissions Fallout Spreads To Asia (FT)
VW Emissions Investigations To Widen to Entire Auto Industry (WSJ)
VW Emissions Cheating Affects 11 Million Cars Worldwide (WaPo)
Europe Stumbles Towards A Migrant Plan (BBC)
EU’s East-West Rift Exposed In Refugee-Sharing Plan (Reuters)
Hungary Mobilizes Troops, Prisoners, Jobless To Fence Out Refugees (Reuters)
Hollande Wrongfooted on Refugee Surge, Fearing Le Pen’s Rise (Bloomberg)
The Fed Just Made A Gigantic Mess (CNBC)
Economic Policy Often Seems To Have Little To Do With Economists. Why? (Ind.)
English Farmland Prices Double In Five Years (Guardian)
Alaska Fossil Find Points To New ‘Lost World Of Dinosaurs’ (Guardian)

“Suddenly, the debate in China has shifted from a perception of too much money sloshing round and too many reserves earning meagre returns, to a concern about the adequacy of reserves given the extent of debt — much of it hidden.”

Signs Point To Deepening China Distress

China’s foreign exchange reserves fell alarmingly in August, anywhere from $94bn to as much as $150bn according to various calculations. That was just another in a series of dramatic data points that are leading to an increasing sense both within the Middle Kingdom and without that all is not well. For a long time now many hedge funds have been short Macau, once the main beneficiary of both the Chinese propensity to gamble and the rise of China as a market for luxury goods. Then the anti-corruption campaign put a big chill on the junkets to the former Portuguese enclave, as it did on sales of everything from Rolex watches to shark fin soup and abalone in top restaurants. But now there is another strand to the story.

Macau has long been one of the more porous parts of the wall meant to keep capital flows in and out of China under strict control. For example, those who wanted to get significant amounts of money out of China would purchase a dozen watches, using their renminbi credit cards, only to return the time pieces instantly and receive cash refunds, with a discount for the jeweller’s trouble. The currency would then be converted and go straight into bank accounts and investments abroad. Today, the thesis of hedge fund managers putting on the Macau trade is that regulators will tighten up on such practices, causing further damage to Macau’s wounded economy. Suddenly, the debate in China has shifted from a perception of too much money sloshing round and too many reserves earning meagre returns, to a concern about the adequacy of reserves given the extent of debt — much of it hidden.

After all, the downdraft in the stock market was all about the use of borrowed money, invisible to regulators and almost everyone else. Meanwhile, the capital flows out of China continue. It is difficult to calculate what is prudent diversification and what is capital flight. At the same time, more alarmingly, the signs of distress in the real economy are deepening, with ripple effects far beyond the mainland. Greek shipyards, for example, report that the yards in China are desperately discounting the containers they construct. The Chinese shipbuilders have to discount to compensate for the fact they are competing against builders whose currencies have fallen dramatically against the renminbi.

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Assessing China without including the shadows is of no use at all.

Shadow Finance Expansion by Chinese Banks Deepens Credit Mystery (Bloomberg)

China’s riskier banks are investing more customer funds in financing that is kept off their loan books, making it harder for rating companies to gauge their asset quality. There has been a surge in a balance-sheet item known as receivables, which often includes shadow funding such as trusts and wealth products, said Moody’s Investors Service. Fitch Ratings said it is hard to analyze this escalation in activity. Listed banks excluding the Big Four saw short-term investments and other assets – which include receivables – jump 25% in the first half, compared with total asset growth of 12%, data compiled by Bloomberg show. Slower growth in the world’s second-largest economy coupled with “still significant” credit expansion prompted Standard & Poor’s to cut its view of the banking industry’s economic risk to negative from stable this week.

Shadow-finance assets, estimated at 41 trillion yuan ($6.4 trillion) by Moody’s at the end of 2014, have become more attractive as five interest-rate cuts by the central bank since November curbed profits from lending. “Our concern with some of these investment positions is banks are using them as a way to bypass lending restrictions,” said Grace Wu at Fitch in Hong Kong. “Unlike bank loans, they don’t get reported into loan provisions, so it’s more difficult for us to ascertain the asset quality.” The opacity of Chinese banks’ credit exposure helps explain why they are priced as if investors are expecting a nonperforming loan ratio of 10 to 12% next year, which would mark a “sizeable credit crisis” in other countries, according to Wei Hou at Sanford C. Bernstein.

The reported ratio is 1.5%, according to the China Banking Regulatory Commission. The nation’s shadow-banking industry emerged as a way for creditors to circumvent lending restrictions and for savers to attain yields higher than the legally capped deposit rate. It includes trusts, asset-management plans and wealth-management products, which package loans into products for buyers.

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As long as Xi is in the US, the homefront will keep things smooth and quiet. But this number points to contraction, even as Xi just reiterated growth is at 7%.

China Flash PMI Falls To Lowest Since May 2009 (CNBC)

The preliminary Caixin China manufacturing purchasing managers’ index (PMI) fell to a six-and-a-half-year low of 47.0 in September, below the 47.5 forecast in a Reuters poll. This compares with a final reading of 47.3 in August, the lowest since March 2009. A print above 50 indicates an expansion in activity while one below points to a contraction. The closely-watched gauge of nationwide manufacturing activity focuses on smaller and medium-sized companies, filling a niche that isn’t covered by the official data. The decline in the flash PMI was mainly led by the new orders and new export orders sub-indexes, suggesting weak domestic and external demand. The new orders sub-index fell 0.6 percentage points to 46.0 in September, while the new export orders sub-index slipped 0.8percentage points to 45.8.

Wednesday’s data weighed on investor sentiment in Asia, with stock indices in Sydney and Seoul widening losses to more than 1% each in the morning trading session. China stocks, however, trimmed losses to 0.9%, from an over 1% decline at the open. “The principle reason for the weakening of manufacturing is tied to previous changes in factors related to external demand and prices,” said He Fan at Caixin Insight Group. “Fiscal expenditures surged in August, pointing to stronger government efforts on the fiscal policy front. Patience may be needed for policies designed to promote stabilization to demonstrate their effectiveness,” he added. A recent run of disappointing data has raised concerns around the health of China’s economy, leading several banks and international institutions to pare growth forecasts for the country.

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“..roughly 55% of China’s 1.37 billion people now live in cities, compared with just under 18% in 1978…”

China’s Workers Stumble as Factories Stall (WSJ)

For decades, an army of migrant workers drove China’s boom times, flocking to its cities to sew T-shirts, assemble iPhones, or build apartment blocks and Olympic stadiums. The arrangement helped millions of poor, rural Chinese join a new consumer class, though many also paid a heavy price. Now, many migrant workers struggle to find their footing in a downshifting economy. As factories run out of money and construction projects turn idle across China, there has been a rise in the last thing Beijing wants to see: unrest. In Xiguozhuang, a village among cornfields some 155 miles south of Beijing, it had been rare to see working-age men for much of the year. This year, however, many of the men are at home, sidelined by a fading property boom.

“Times are tough now,” said Wang Hongxing, a 39-year-old father of three who has worked at building sites across China’s northeast since his teens, but who has spent the past two months tending his farmland plot. “There are too many workers and wages are dropping.” But for other migrants, especially those of a younger generation who took jobs in factories along China’s coast, a return to farming isn’t an option. Nor do they necessarily want to join the service sector China sees as a cornerstone in its shift to a new economic model. Wang Chao dropped out of school when he was 15 and left his home in Anhui province. After a series of jobs up and down China’s east coast, he felt he had struck gold with a job in a textile factory near his hometown.

The factory closed in July. Mr. Wang, now 19, and other workers gathered recently outside the factory premises to demand back wages. He says he is owed two months’ pay, or about 2,000 yuan, or $320. The owner of the factory, which produces cheap trousers, told workers he is in deep debt and can’t afford to pay them. He couldn’t be reached to comment. Mr. Wang hopes he can find another factory job. In Shanghai, he worked in a restaurant but doesn’t want to do that again. “Factory work is so much more comfortable in comparison, and better paid,” he said. As a result of a rural-to-urban flow that many scholars say is likely the largest in history, roughly 55% of China’s 1.37 billion people now live in cities, compared with just under 18% in 1978.

The migrant workforce now numbers some 274 million but the pace of its expansion has slowed, and many economists believe China now faces a shortage of unskilled labor in urban areas. A mismatch of workers’ skills and aspirations with actual labor demand has exacerbated the problem. “There’s a broad structural imbalance in China’s labor market—a shortage of low-end labor and surfeit of high-end workers,” said Peng Xizhe, professor of population and development at Fudan University in Shanghai. “In China’s job market today, we see university graduates struggling to find work, while employers are finding it hard to fill traditional blue-collar positions.”

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“Xi peppered his speech with US cultural references from Sleepless in Seattle and House of Cards to Henry David Thoreau, Walt Whitman, Ernest Hemingway..”

Xi Jinping Defends China Stock Market Interventions On First US Visit (Guardian)

China’s president, Xi Jinping, has sought to reassure global concern about the world’s second-largest economy, defending his government’s actions in the stock market and saying growth will be maintained. “China’s economy will stay on a steady course with fairly fast growth. It’s still operating in a proper range with a growth rate of 7% … Our economy is under pressure but that is part of the path on the way toward growth,” the Chinese president said in a speech in Seattle on Tuesday, the first day of his state visit to the US. The president defended his government’s intervention into the country’s stock market saying the “recent abnormal ups and downs” in the market had now reached “a phase of self-recovery”.

Xi also reiterated there was no basis for continuing depreciation of the renminbi, saying Beijing was opposed to currency wars and would not devalue yuan to boost exports. World markets experienced more than a month of volatility after China devalued its currency, fuelling concerns about the state of the world’s No 2 economy. Intervention from authorities into the country’s bourses also added to worries Beijing had lost control over the economy. But just minutes after the speech, fresh data showed renewed signs of weakness in the Chinese economy with the Caixin China manufacturing flash PMI coming in at 47, the lowest since March 2009. [..]

Xi peppered his speech with US cultural references from Sleepless in Seattle and House of Cards to Henry David Thoreau, Walt Whitman, Ernest Hemingway – saying he once ordered a Mojito at El Floridita in Havana to better understand Hemingway and Cuba. Dismissing speculation that his sweeping anti-corruption campaign was about factional infighting, Xi said “We have punished tigers and flies. It has nothing to do with power struggles. In this case there is no House of Cards.”

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Or they understand it all too well.

China Has A Message Markets Don’t Understand (CNBC)

China may be compounding its own problems by the way its leaders talk about them. With the country’s growth a concern for global markets, investors are trying to fathom the depth of China’s economic issues and understand what authorities are doing. Analysts say it is difficult to discern what’s really going on there and that the economy has always been difficult to measure. Ahead of his U.S. visit that kicked off Tuesday, Chinese President Xi Jinping said in an interview with The Wall Street Journal that recent intervention in capital markets was necessary or normal and that China is still on track to transform its economy. “I think they are mostly nothing new and simply a repeat of what other officials have said,” Ilya Feygin, managing director at WallachBeth Capital, said of Xi’s comments.

Sticking to policy lines casts doubt for many on whether Chinese leaders have a grip on maneuvering the country’s economic transition in a way that doesn’t shock global markets more than it already has. “I think it’s a combination of missteps that add up to a lot of worries, capacity of the Chinese government to manage its economy through a very challenging environment and not making it worse,” said Scott Kennedy of the Center for Strategic and International Studies. “It begins with their intervention to push up their stock market last year.” Rapid-fire policy changes in the last few months have befuddled outsiders on Chinese leaders’ intentions, which raise real concern on whether the world’s second-largest economy can make a timely transition from a manufacturing hub to a consumer-oriented system.

“The point is to recognize there’s a structural transition going on,” said Arthur Kroeber, head of research at Gavekal Dragonomics. “And the problem we have is the data we have on the bad part of the economy is actually pretty developed. The data on services (is) much better but fuzzier.” Most of the economic reports still focus on manufacturing-related aspects of the economy, such as electricity use and the producer price index. Data such as the Caixin nonmanufacturing PMI provide some light on services, which continued to hold above the 50 expansion/contraction line in August. Manufacturing PMI fell below that line.

Growth in the services sector has outpaced that of the manufacturing sector in the last year and a half, according to the latest National Bureau of Statistics of China data compiled by Wind information. Amid the transition, questions also surround the accuracy of China’s reports on headline GDP growth. The official figure is 7%, the slowest in more than two decades In a report Tuesday, the Asian Development Bank lowered its forecast for Chinese growth in 2015 to 6.8% from 7.2% previously. Other analyst estimates range from 2 to 4 percentage points lower.

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“..roughly the same as the UK’s combined emissions for all power stations, vehicles, industry and agriculture..”

VW Scandal Caused Nearly 1 Million Tonnes Of Extra Pollution (Guardian)

Volkswagen’s rigging of emissions tests for 11m cars means they may be responsible for nearly 1m tonnes of air pollution every year, roughly the same as the UK’s combined emissions for all power stations, vehicles, industry and agriculture, a Guardian analysis suggests. The potential scale of the scandal puts further pressure on Volkswagen’s board and its chief executive, Martin Winterkorn. The company’s executive committee plans to meet on Wednesday to discuss the affair and to agree the agenda of a full board meeting scheduled for Friday, amid reports that Winterkorn could be replaced. The carmaker has recalled 482,000 VW and Audi brand cars in the US after the Environmental Protection Agency (EPA) found models with Type EA 189 engines had been fitted with a device designed to reduce emissions of nitrous oxides (NOx) under testing conditions.

A Guardian analysis found those US vehicles would have spewed between 10,392 and 41,571 tonnes of toxic gas into the air each year, if they had covered the average annual US mileage. If they had complied with EPA standards, they would have emitted just 1,039 tonnes of NOx each year in total. The company admitted the device may have been fitted to 11m of its vehicles worldwide. If that proves correct, VW’s defective vehicles could be responsible for between 237,161 and 948,691 tonnes of NOx emissions each year, 10 to 40 times the pollution standard for new models in the US. Western Europe’s biggest power station, Drax in the UK, emits 39,000 tonnes of NOx each year. [..] For years, UK air pollution measurements have failed to show improvements in air quality, even as standards have tightened.

“Since 2003 scientists have been saying things are not right. It’s not just the VW story, this is part of something much bigger,” said Dr Gary Fuller of King’s College. “It has a serious public health impact.” Last week, a report from NGO Transport & Environment found that Europe’s testing regime was allowing nine out of every 10 new diesel vehicles to breach EU limits. Testing regimes in the EU are known to fail to pick up “real world” emissions because cars are not driven in the same way in the laboratory as on the road. Some studies suggest the discrepancy may be up to seven times the legal limit. Williams said being able to mask their NOx emissions would also enable carmakers to pass carbon emissions tests more easily as there was a trade-off between NOx and CO2 in diesel engines.

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Bets are open on this one.

California Tests To Include Larger Diesel Engines From Audi, Porsche (Reuters)

The California Air Resources Board will broaden its testing of Volkswagen cars with diesel engines to include those with 3.0-liter V6 engines sold by two subsidiaries, a spokesman for the state regulator said on Tuesday. The latest models to be examined are the Porsche Cayenne and the Audi A6, Stanley Young, communications director for the Air Resources Board, told Reuters. Volkswagen said on Tuesday that engine software connected with a scandal over falsified U.S. vehicle emission tests could affect 11 million of its cars worldwide as investigations of its diesel models multiplied. The California Air Resources Board’s testing uncovered software in several Volkswagen models that allowed the company to cheat state and federal emissions requirements by switching performance levels between testing and real-world conditions.

“That investigation looked at two-liter four-cylinder engines,” said Young. “Now we’re going to start looking at six-cylinder, three-liter diesel engines.” Young said VW engineers acknowledged the use of a so-called defeat device – in fact, a software algorithm – to circumvent state and federal emissions standards during a Sept. 3 meeting in the board’s El Monte, California testing headquarters, attended by senior engineering executives of the regulator and the car company. It was the 10th meeting between the two sides, called by CARB to resolve the discrepancy between pollution levels measured on the road and those obtained under controlled testing conditions. “They literally ran out of excuses,” Young said, describing the meeting in which the car manufacturer “admitted there was a defeat device.”

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It’ll have to be worldwide. Wouldn’t it be funny if test results vary greatly?

VW Emissions Fallout Spreads To Asia (FT)

South Korea’s environment ministry said it would investigate the emissions compliance of Volkswagen’s diesel cars, as the fallout for the German carmaker after its admission that it rigged US emissions tests spread to Asia. The announcement on Tuesday came a day after Germany called for a probe into the matter, confirming fears Volkswagen’s trouble was unlikely to be confined to the US and that breaches could have occurred in other regions. The US Environmental Protection Agency on Friday ordered the world’s second-biggest carmaker to recall nearly 500,000 cars in the US after it admitted that it had fitted “defeat devices” to bypass environmental standards.

In the first public appearance by a senior executive since the scandal emerged, Michael Horn, VW’s US chief executive, said at an event in New York on Monday that the carmaker had “screwed up”, vowing to fix the vehicles involved and ensure no repetition. Seoul’s environment ministry said it would conduct emissions tests on 4,000-5,000 of VW’s Jetta and Golf models and the Audi A3 sedan that were imported into South Korea since 2014. “We will review if the three car models sold here show the same problems as those in the US, although the carmaker says its cars here have no such problems,” said Park Pan-kyu, the ministry’s deputy director. “We plan to complete the investigation within two months and will come up with punitive measures if any problems are found.

“If South Korean authorities find problems in VW diesel cars, the probe could be expanded to all German diesel cars,” he said. If the cars are found to have breached air pollution standards, the ministry could issue a recall order for vehicles already sold in the country, or order the German carmaker to stop domestic sales of problematic models. It could also impose a maximum Won1bn ($850,000) fine on each model. The ministry said any punitive measures would be levied in consultation with the German government, in keeping with the Korea-EU trade agreement.Volkswagen is one of the best-selling foreign brands in South Korea. VW and Audi accounted for nearly 30% of all foreign cars sold in the country in the first eight months of this year, and more than 90% of the roughly 25,000 vehicles VW sold were diesel models.

Shares in South Korean carmakers Hyundai Motor and affiliate Kia Motors rose more than 3% on Tuesday, on the view that Asian competitors could benefit at VW’s expense. “Volkswagen’s brand value is expected be hit by this issue as its strong diesel engine technology has been the backbone of its brand recognition,” said Yim Eun-young, analyst at Samsung Securities. “This could lead to gains for Hyundai and Kia, which are competing with Volkswagen in the sedan segment.”

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As I said yesterday, if VW couldn’t even come close to required emissions, what are the odds others could?

VW Emissions Investigations To Widen to Entire Auto Industry (WSJ)

Investigations into Volkswagen’s alleged manipulation of U.S. emissions tests should widen to include the entire auto industry, German and French officials said Tuesday, as regulators begin to ponder whether such deception is widespread. Calls for a broader probe came as Italy opened an investigation into the issue and a spokesman for the European Union said its regulators would soon meet with national authorities to discuss how to address the Volkswagen crisis. Concerns that the scandal could lead to broader damage for the industry hit the shares of car companies across Europe on Tuesday and those losses accelerated after Volkswagen warned that 11 million vehicles could be affected.

Shares in Volkswagen dived as much as 23% while those of Daimler AG dropped 5.5% and BMW AG slumped 5.4%. In France, Renault SA dropped 6.3% and PSA Peugeot Citroën was down 8.6%. The state of Lower Saxony, a major Volkswagen shareholder with 20% of the car maker’s voting stock, said the emissions allegations raised doubts about tailpipe data published by all car makers. The French government also called for a broader probe, suggesting a European-wide examination of the auto industry. “We need to do it at the European level,” French Finance Minister Michel Sapin said Tuesday.

In Germany, Olaf Lies, Lower Saxony’s economy minister and a member of the Volkswagen’s supervisory board, called for a wider probe and said investigations into the scandal would have consequences for any executives found guilty of deliberate manipulation. “I am convince that everyone is going to become intensely interested in knowing whether the emissions values that have been measured are the real emissions levels,” he said. “This question will not only affect Volkswagen, but the entire public debate and will certainly play a role at other companies.”

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“The only way to change auto company behavior is to put the responsible executives in jail..”

VW Emissions Cheating Affects 11 Million Cars Worldwide (WaPo)

The deception perpetrated by Volkswagen in the United States reaches around the globe, with about 11 million cars worldwide equipped with software designed to cheat emissions tests, the company said Tuesday. The automaker said it will set aside $7.3 billion to cover fixes and other efforts to win back the trust of our customers. That amount is likely to fall many times short of the actual costs, including car repairs, lawsuits and government penalties around the world. Exactly what alterations are necessary on all of those cars is unknown, and independent engineers said it could be extremely difficult to repair the emissions systems without harming engine efficiency and performance. None could offer what they deemed a reliable estimate of the cost of a potential repair.

“In my German words, we have totally screwed up”, Volkswagen s U.S. chief, Michael Horn, said at an event in Brooklyn late Monday night. The broad scale of the deception suggests that knowledge of the emissions cheating was widespread, and Justice Department investigators are focusing on the actions of executives, according to two people familiar with the inquiry. German news outlets reported Tuesday that the firing of chief executive Martin Winterkorn is imminent, citing unidentified members of the company s board. Also Tuesday, new details of the cat-and-mouse interactions between suspicious regulators and the German car giant showed how far the company was willing to go to assure the government that, contrary to the best evidence, nothing was amiss in its diesel cars.

Last year, Volkswagen informed regulators that it was initiating a 500,000-car recall in the US that would fix the problem. The recall was either a technical failure or, as some U.S. officials said, a ruse. Whether those involved in the emissions cheating software will face more severe penalties is unknown, but anger among customers, who are stuck with cars that violate pollution standards, and dealers, who are left with unsold inventory, has become increasingly evident. Their appeals have been heard in Washington. “It is an outrage that VW would take advantage of its consumers by purposely deceiving them on their mileage on diesel vehicles …There ought to be some prosecutions, and corporate executives that knew this and have done it ought to be going to jail”, Sen. Bill Nelson (D-Fla.) said in a speech on the Senate floor Tuesday, citing the repeated failures of automakers.

“And I lay this not only on the corporate culture, I lay it at the feet of the U.S. regulatory agencies who ought to be doing their job, ought to be doing it in a forceful way”. Noting that Volkswagen had been accused of similar tactics in the United States in the early 1970s, when the company paid fines of $120,000, Clarence Ditlow, director of the Center for Auto Safety, argued that financial penalties are not enough to keep the company honest. “The only way to change auto company behavior is to put the responsible executives in jail,” he said.

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In firm denial.

Europe Stumbles Towards A Migrant Plan (BBC)

There was a sense of grim determination about the crowd of cold and tired refugees and other migrants we met crossing the border one damp and windy night this week from Hungary into Austria. No euphoria. No desperation, such as we’ve seen at so many European borders over the last months, but more a sense of quiet purpose. The young men and families we spoke to were passing through what has become a relatively efficient people’s pipeline established on the ground from southern, into central and onto northern Europe. EU leaders may be in disarray over what to do next but in the meantime – for now – chaos on the ground has given way to an orderly means of transporting migrants from country to country.

One 19-year-old told us it had taken him five days to get from Turkey to Austria, passing through Greece, Macedonia, Serbia, Croatia and Hungary along the way. He still hoped to reach Germany, to join the Syrian community there, which is growing larger by the day. But this is no long-term solution to Europe’s migration conundrum. Europe’s prime ministers and heads of state will discuss that at their emergency meeting in Brussels on Wednesday. A quick or easy fix will be impossible to find and the meeting is likely to be fiery but leaders know they have to stumble towards some sort of plan or risk the unravelling of the EU itself. Look at the anger of Slovakia, Hungary, Romania and the Czech Republic forced on Tuesday at a meeting of European interior ministers to accept their share of 120,000 asylum seekers who will be re-located across the continent. [..]

EU leaders will discuss how to tighten the control of European borders. They’ll also debate a workable EU asylum policy, the more efficient deportation of economic migrants, defining who is a refugee, an asylum seeker or economic migrant, the better integration of refugees and their families already here and sending significant aid abroad to improve living conditions closer to people’s home countries so they shouldn’t be tempted to come to Europe in the first place. Decisions and debates tomorrow and in the months to come will affect all of our lives. Endre Sik is the director of the Centre for Refugee and Migration Studies in Budapest. He told me in 10 years’ time, we will look back and see this as a moment that changed Europe – its general landscape, its politics and its economics. There’s no turning back now from mass migration Europe, he says. This is an unprecedented social phenomenon.

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“We would have preferred a consensus but we could not reach that, and it is not for want of trying..”

EU’s East-West Rift Exposed In Refugee-Sharing Plan (Reuters)

The European Union approved a plan on Tuesday to share out 120,000 refugees across its 28 states, overriding vehement opposition from four ex-communist eastern nations. The European Commission, the EU executive, had proposed the scheme with the backing of Germany and other big powers in order to tackle the continent’s worst refugee crisis since World War Two. But the rift it has caused between older and newer members was glaringly evident as the interior ministers of the Czech Republic, Slovakia, Romania and Hungary voted against the plan at a meeting in Brussels, with Finland abstaining. “We would have preferred a consensus but we could not reach that, and it is not for want of trying,” Luxembourg Interior Minister Jean Asselborn, whose country holds the rotating presidency of the EU, told a news conference.

Slovak Prime Minister Robert Fico said pushing through the quota system had “nonsensically” caused a deep rift over a highly sensitive issue and that, “as long as I am prime minister”, Slovakia would not implement a quota. And Czech Interior Minister Milan Chovanec tweeted: “We will soon realize that the emperor has no clothes. Common sense lost today.” This year’s influx of nearly half a million people fleeing war and poverty in the Middle East, Asia and Africa has already sparked unseemly disputes over border controls as well as bitter recriminations over how to share out responsibility. Refugees and migrants arriving in Greece and Italy have been streaming north to reach more affluent nations such as Germany, prompting countries in central and eastern Europe alternately to try to block the flow or shunt it on to their neighbors.

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How is this Europe? How can Germany and France continue in a Union with Hungary?

Hungary Mobilizes Troops, Prisoners, Jobless To Fence Out Refugees (Reuters)

Built in a matter of weeks by soldiers, prison laborers and cadres of the unemployed, a vast new wall along Balkan frontiers is a monument to the ruthless efficiency with which Prime Minister Viktor Orban has mobilized Hungary against migrants. Orban describes the arrival of hundreds of thousands of refugees and other migrants in Europe this year from Asia, Africa and the Middle East as an attack on the continent’s Christian welfare model. Until last week, most trekked through Hungary, the main overland entry route into the EU’s border-free Schengen zone from the Balkan peninsula, which they cross after arriving by dinghy in Greece.

While Europe dithered over a collective response, Hungary took matters into its own hands, shutting off the route with a new fence along its entire 175 km (110 mile) border with Serbia, topped with razor wire and guarded by helmeted riot police. It was erected at a cost of 22 billion forints (about $80 million), a rare example of efficiency in a country which built its last underground metro line ten years behind schedule at triple the projected cost. The government says it put the military in charge of the construction so that it could act more quickly. By swiftly mobilizing state resources, the authorities also managed to turn the fence into a national project, immensely popular at home even as it is denounced by European partners.

“It took a while but the government’s campaign to rouse public opinion against the refugees is bearing fruit, and having brought much of the media under control is paying dividends,” said Richard Szentpeteri Nagy, an analysts at Centre for Fair Political Analysis. “By properly filtering the message through public television, what viewers at home see is that this is a mob, throwing stones and attacking police.” In just days since it shut the Serbian frontier, Hungary has already moved even faster to shut the border with Croatia, which is inside the European Union but outside the Schengen zone. A 41-kilometre temporary fence was thrown up within four days. Work is already underway on a permanent barrier, with machines clearing the land, fence posts driven into the ground and razor wire rolled out.

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Hollande’s a dunce and a coward. Full stop.

Hollande Wrongfooted on Refugee Surge, Fearing Le Pen’s Rise (Bloomberg)

As Europe searches for a solution to the migrant crisis, French President Francois Hollande is in his customary position: stuck in the middle and pleasing few. The Socialist leader finds himself playing second fiddle to German Chancellor Angela Merkel in the unfolding drama as European Union leaders meet Wednesday to seek a way out of their impasse on how to cope with thousands of migrants knocking on the region’s gates. France’s acceptance of migrants has been overshadowed by greater generosity shown next door by Germany. “The government is fearful of doing anything that would benefit the anti-immigration right,” said Francois Gemenne , researcher at Sciences Po University.

“At the same time, they have intellectuals in the press and much of their base saying that France, the nation of human rights, looks ridiculous next to Germany. The government doesn’t know what foot to dance on. They’ve ended up with a policy that satisfies no one.” That mirrors much of what Hollande has done in his three years in office. On the economy, his socialist base feels he has sold out by recent moves to liberalize labor markers and ease rules for business, while conservative parties pillory him for raising taxes. Hollande’s approval rating fell one point to 24% in September, according to the most recent Ifop poll. Hollande and Merkel on Sept. 4 jointly urged the EU to agree on a redistribution plan for refugees and to speed up processing in countries where they arrive.

Under a formula proposed by the European Commission, France and Germany agreed to take 30,000 and 44,000 refugees respectively, out of the 160,000 who had made their way to Italy, Greece and Hungary. Those pledges have been overtaken by events as thousands of Syrians a day cross to Greek islands from Turkey, and then try to reach northern Europe. The Organisation for Economic Cooperation and Development said Tuesday that 700,000 refugees have sought asylum in Europe so far this year and that it’ll be 1 million by year end, a record. That has led Hollande’s opponents to say he’s doing too much or too little.

Marine Le Pen, leader of the anti-immigration National Front and by some measures the most popular presidential candidate in France, has compared the influx of refugees to the barbarian invasions that destroyed the Roman empire. Former President Nicolas Sarkozy said France should reinstall border controls, has blamed Hollande’s handling of the Syrian crisis for the influx, and has called into question automatic citizenship for children born in France. “There are differences of tone between Le Pen and Sarkozy on this issue, but they are basically on the same page,” said Smain Laacher, a sociology professor at the University of Strasbourg.

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Damned if you do, doomed if you don’t.

The Fed Just Made A Gigantic Mess (CNBC)

The Federal Reserve is creating a negative-feedback loop with its mixed messages on interest rates — and it’s messing with the markets. In explaining why the Fed opted to hold rates steady, Fed Chair Janet Yellen said that policy makers remain concerned about slowing economic growth — especially in China — and the impact on global markets and inflation. But then, she added that the Fed could still raise rates in before the year was out — as early as October. What? If slowing global growth and market turbulence was a reason to pause, how likely was it, then, that all of that would be resolved by October? Since Chair Yellen spoke, a number of Fed officials have spoken, reiterating that a rate hike in 2015 remains likely. This is cognitive dissonance at its worst. Investors are now simultaneously worried about incompatible outcomes.

If growth is weak, and inflation continues to fall, the Fed should NOT, and would NOT, raise rates. If this global problem is truly transitory (a word most Fed officials need to look up in the dictionary), then a rate hike should have already occurred. This is a problem of the Fed’s own making. By insisting that interest rate normalization is imminent, the Fed is creating the very problem it is combatting by delaying that very same process. From my vantage point, the Fed more clearly needs to define what it takes to meet its dual mandate — inflation and employment. Clearly, the Fed has reached many of its goals on the employment front, although wage inflation is not accelerating to the point where a rate hike would be justified to cool an overheating economy.

Low inflation, while “transitory,” has persisted for nearly six years and is being pushed even lower by the huge drop in oil prices; the crash in other commodities; slowing growth in China and Japan and Asian emerging markets; recessions in Russia and Brazil and uneven growth in Europe. If the world is not normal, why normalize policy at all? The world affects the U.S. As we have seen in innumerable instances in the past, global instability has altered the course of domestic monetary policy for decades. Factoring that in, does not mean that the Fed has a “third mandate” as some Fed bashers claim. It simply means that the Fed has an obligation to consider how all variables affect its mandate. With an economy only “half-normal,” the normalization of interest rates can wait. But if the Fed continues to convey confusing messages about the timing of normalization, in an abnormal world, it will only serve to exacerbate the very trends it is hoping will abate.

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Economics is just politics in disguise.

Economic Policy Often Seems To Have Little To Do With Economists. Why? (Ind.)

With Jeremy Corbyn as leader of the Labour Party we will hear a great deal from his opponents that his economic policies are not “credible”. At the moment we do not have a clear idea of what these policies will be, but it is worth asking beforehand what exactly a credible economic policy is. A natural way to define a credible economic policy is one that accords with what most economists think. If this was true, you might expect it would be difficult to win an election based on a macroeconomic policy that most economists regard as mistaken. Unfortunately, the last General Election provides a clear counter-example. In that election George Osborne proposed eliminating the overall budget deficit within five years. That contradicted what most economists believe is a sensible fiscal policy, for at least two reasons.

First, it precluded any significant increase in public investment, on things like building schools and flood defences. Every economist I know agrees that now is an excellent time to increase infrastructure investment, because labour is cheap and interest rates are low. Second, another round of austerity is very risky when interest rates are so low. Osborne says we must reduce government borrowing quickly to prepare for the next crisis. That makes little economic or business sense. Firms that cut back on investment when borrowing is cheap and the economy is expanding generally fail. The more significant risk is that the world economy takes a turn for the worse in the next year or two because of events in China or elsewhere. If interest rates are already low because they are having to offset the impact of austerity, the Bank of England has little room to counter these global shocks.

So the prudent policy while interest rates are low is to avoid austerity. The fiscal policy platform on which the Conservatives won was not credible to most academic macroeconomists. The problem is that most people in politics and the media do not get their notion of credibility from this source. So where does their idea of economic credibility come from? Discussion of economic policy in the media is dominated by political rather than economic journalists. They routinely provide comment after major economic policy announcements and interview politicians. They spend most of their time talking to politicians, so the Westminster bubble defines what the media sees as a credible economic policy.

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How to turn farmers into serfs.

English Farmland Prices Double In Five Years (Guardian)

The price of good quality English farmland has doubled over the past five years, making it the most expensive in the world and offering a better return than prime London property, the FTSE 100 or gold. According to agents Knight Frank demand from wealthy private individuals as well as pension funds, has driven up the average price for an acre of “investment grade” English farmland (large plots with economies of scale) to £12,500, up 100% since 2010. In comparison, the price of luxury London homes has risen 42% over the same period, the FTSE 100 has increased 33%, while gold has dropped 10%. Many recent buyers of prime farmland arelifestyle buyers, often London financiers, for whom farming can be more of a hobby than about making the land pay its way.

Even what Knight Frank describes as some of the best land in the world – the pampa west of Buenos Aires in Argentina – sells for just a third of the average price investors are paying for farmland in England. An acre of investment grade land in Argentina sells for £4,510, while in France it fetches about £4,490. On the vast wheat-producing prairies of Canada, quality land fetches just £800 an acre, only 7% of the price achieved in England. Australian farmland values, blighted by drought, have largely flatlined in recent years.

The inflation in English land values is taking place despite a crisis among farmers struggling with falling global prices, particularly for wheat. After peaking at about £214 a tonne in December 2012, feed wheat values have since fallen by more than 50%. Global demand for wheat was 679m tonnes in 2012/13, but only 657m tonnes was produced, pushing prices up sharply. But the situation has now reversed, with global production forecast to hit about 725m tonnes this year but consumption at about 715m tonnes, sending prices spiralling down on commodity markets. UK farm gate milk prices are down by a third since 2013, prompting a wave of closures among English dairy farmers.

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And now dinosaurs are literally cool.

Alaska Fossil Find Points To New ‘Lost World Of Dinosaurs’ (Guardian)

Fossils from a unique plant eating dinosaur found in the high Arctic of Alaska may change how scientists view dinosaur physiology, Alaska and Florida university researchers have said. A paper published on Tuesday concluded that fossilized bones found along Alaska’s Colville river were from a distinct species of hadrosaur, a duck-billed dinosaur not connected to hadrosaurs previously identified in Canada and the Lower 48 states. It’s the fourth species unique to northern Alaska. It supports a theory of Arctic-adapted dinosaurs that lived 69m years ago in temperatures far cooler than the tropical or equatorial temperatures most people associate with dinosaurs, said Gregory Erickson, professor of biological science at Florida State university. “Basically a lost world of dinosaurs that we didn’t realise existed,” he said.

The northern hadrosaurs would have endured months of winter darkness and probably snow. “It was certainly not like the Arctic today up there – probably in the 40s (five to nine degrees ) was the mean annual temperature,” Erickson said. “Probably a good analogy is thinking about British Columbia.” The next step in the research program will be to try to figure out how they survived, he said. Mark Norell, curator of paleontology at the American Museum of Natural History in New York, said by email that it was plausible the animals lived in the high Arctic year-round, just like musk oxen and caribou do now. It’s hard to imagine, he said, that the small, juvenile dinosaurs were physically capable of long-distance seasonal migration. “Furthermore, the climate was much less harsh in the Late Cretaceous than it is today, making sustainability easier,” he said.

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Nov 202014
 
 November 20, 2014  Posted by at 12:26 pm Finance Tagged with: , , , , , , , , , , ,  13 Responses »


Jack Delano Truck service station on US 1, NY Avenue, Washington DC Jun 1940

Growth Isn’t God in Indonesia (Bloomberg)
Federal Reserve In Easy Decision To End Stimulus (BBC)
Fed Debate Shifts to Tightening Pace After First Rate Increase (Bloomberg)
The Only Thing More Bullish Than Inflation Is …. Deflation (Zero Hedge)
Cheap-Oil Era Tilts Geopolitical Power to US (Bloomberg)
Oil Industry Risks Trillions Of ‘Stranded Assets’ On US-China Climate Deal (AEP)
Iron Ore’s Massive Expansion Era Is Finished: BHP Billiton (Bloomberg)
China’s Factory Activity Stalls In November (CNBC)
Distressed Debt in China? You Ain’t Seen Nothing Yet (Bloomberg)
The Yen Looks Like It’s Ready To Get Crushed (CNBC)
BOJ Warns Abe Over “Fiscal Responsibility” While Monetizing All Debt (ZH)
Why UK Needs ‘Radical’ Change As Exports Fall (CNBC)
Michael Pettis: Spain Needs to Debate Leaving the Euro (Mish)
Eurozone PMI Falls To 16-Month Low In November (MarketWatch)
French Manufacturing Slump Deepens as Economic Weakness Persists (Bloomberg)
Pressure Mounts for EU Crackdown on Tax Havens (Spiegel)
Senator Slaps Plan For Low-Down-Payment Loans At Fannie, Freddie (MarketWatch)
Junk-Bond Banking Boom Peaks as Firms Drop off Deal List (Bloomberg)
Goldman Fires Staff For Alleged NY Fed Breach (FT)
Banking Industry Culture Promotes Dishonesty, Research Finds (Guardian)
New International Gang Of Thieves Make Somali Pirates Look Like Amateurs (Black)

Is there still hope and sanity in the world?

Growth Isn’t God in Indonesia (Bloomberg)

Joko Widodo’s rise from nowhere to Jakarta governor and then the presidential palace showed the wonders of Indonesia’s democracy. Now, he wants to democratize the economy as well, focusing as much on the quality of growth as the quantity. Sixteen years ago, Indonesia was cascading toward failed statehood. In 1998, as riots forced dictator Suharto from office, many wrote off the world’s fourth-most populous nation. Today, Indonesia is a stable economy growing modestly at 5%, with quite realistic hopes of more. There’s plenty for Widodo, known by his nickname “Jokowi,” to worry about, of course. Indonesia still ranks behind Egypt in corruption and near Ethiopia in ease-of-doing-business surveys. More than 40% of the nation’s 250 million people lives on less than $2 a day.

A dearth of decent roads makes it more cost-effective to ship goods to China than across the archipelago. Retrograde attitudes abound: to this day, female police recruits are subjected to humiliating virginity tests. But this week, Jokowi reminded us why Indonesia is a good-news story — one from which Asian peers could learn. His move to cut fuel subsidies, saving a cash-strapped nation more than $11 billion in its 2015 budget, showed gumption and cheered investors. Even more encouraging is a bold agenda focusing not just on faster growth, but better growth that’s felt among more than Jakarta elites. This might seem like an obvious focus in a region that’s home to a critical mass of the world’s extreme poor (those living on $1 or $2 a day).

But grand rhetoric about “inclusive growth” hasn’t even come close to meeting the reality on the ground. In India, for example, newish Prime Minister Narendra Modi boasts that he will return gross domestic product to the glory days of double-digit growth rates, as if the metric mattered more than what his government plans to do with the windfall. The “Cult of GDP,” the dated idea that booming growth lifts all boats, has long been decried by development economists like William Easterly. The closer growth gets to 10%, the more likely governments are to declare victory and grow complacent. In many cases rapid GDP growth masks serious economic cracks. In her recent book, “GDP: A Brief but Affectionate History,” Diane Coyle called the figure a “familiar piece of jargon that doesn’t actually mean much to most people.”

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Janet Yellen lives in virtual reality.

Federal Reserve In Easy Decision To End Stimulus (BBC)

Although the US Federal Reserve was worried about turmoil in emerging markets, the central bank reached an easy consensus to end its stimulus programme, its latest minutes reveal. Minutes from the central bank’s October meeting show officials were concerned about stock market fluctuations and weakness abroad. However, they worried that saying so could send the wrong message. Overall, officials were confident the US economy was on a strong footing. That is why they decided to end their stimulus programme – known as quantitative easing (QE) – in which the Fed bought bonds in order to keep long-term interest rates low and thus boost spending. “In their discussion of the asset purchase programme, members generally agreed … there was sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment,” read the minutes, referring to the decision to end QE. US markets reacted in a muted way to the news, with the Dow Jones briefly rising before falling once more into the red for the day.

However, to reassure markets that the Fed would not deviate from its set course, the central bank decided to keep its “considerable time” language in reference to when the Fed would raise its short term interest rate. That interest rate – known as the federal funds rate – has been at 0% since late 2008, when the Fed slashed rates in the wake of the financial crisis. Most observers expect that the bank will begin raising that rate in the middle of 2015, mostly in an effort to keep inflation in check as the US recovery gathers steam. However, US Fed chair Janet Yellen has sought to reassure market participants that the bank will not act in haste and remains willing to change its timeline should economic conditions deteriorate in the US. The minutes also show that the Fed is still concerned about possibly lower-than-expected inflation, particularly as oil prices continue to decline and wage growth remains sluggish.

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They’re going to do it. Screw the real economy, it’s dead anyway.

Fed Debate Shifts to Tightening Pace After First Rate Increase (Bloomberg)

U.S. central bankers are weighing whether they should communicate more of their views about the probable pace of interest-rate increases after they lift off zero next year. “A number of participants thought that it could soon be helpful to clarify the committee’s likely approach” to the pace of increases, according to minutes of the Oct. 28-29 Federal Open Market Committee meeting released today in Washington. The discussion last month underscored how much officials will rely on forward guidance on the pace of tightening in the future. After bond purchases ended last month, guidance may be the most practical option left to assure investors that policy won’t become overly restrictive if officials decide to take a stand against inflation seen as too low. The pace of rate increases is “going to be slow until they are really convinced that inflation’s sustainably at target and the labor market’s in really, really good shape,” said Guy Berger, a U.S. economist at RBS Securities. “They are going to take their sweet time.”

The minutes showed that many FOMC participants last month felt the committee should stay on the lookout for signs that inflation expectations were declining. Declining expectations could herald an actual fall in prices. Such deflation does economic damage by encouraging consumers to delay spending in anticipation of lower prices in the future. The potency of the first rate increase could be diminished or increased, depending on what the FOMC says about how it views its subsequent moves, said Laura Rosner, U.S. economist at BNP Paribas SA in New York. “It isn’t just the timing of liftoff the Fed cares about, but the whole path of federal funds rate,” said Rosner, a former New York Fed staff member. “I think they do probably want to limit the extent of tightening that people expect, at least at the beginning.” While telegraphing the future rate path may be attractive to some officials, it may also be unpopular with those, such as Chair Janet Yellen, who recall the Fed’s experience in 2004 with language saying the pace of increases would be “measured.”

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“Positioning for a deflationary boom is a binary event.”

The Only Thing More Bullish Than Inflation Is …. Deflation (Zero Hedge)

Deflation. And not just deflation, but a deflationary bust! At least, such is the goalseeked logic of Cornerstone Marco, which has released a bullish (no really) note titled the Coming Deflationary Boom in the U.S. In it the authors throw in the towel on the most conventional concept in modern economics, namely that for growth one needs stable inflation which in turn causes earnings growth and is low enough not to pressure multiples too high. Well, according to the BLS’ hedonic adjustments and courtesy of Japan’s epic exporting of deflation, inflation is nowhere to be seen (except if one eats pork or beef, or drinks milks), so it is time to give ye olde paragidm shift a try. The paradigm that the only thing more bullish for stocks than inflation, is deflation. To wit:

The concept of a deflationary boom is a controversial one in economics. Truth be told it will not work in every economy. Indeed, a prerequisite for this to unfold is an economy driven by consumers. In that sense, it does not get more consumer-centric than the US. The second, and necessary, condition calls for a major decline in commodity prices ideally compounded by a strong currency to provide the fuel for growth. In essence, a decline in commodity and import prices creates disposable income the same way the Fed Funds rate cuts used to a decade ago.

Positioning for a deflationary boom is a binary event. After all, “deflationary” implies that stocks levered to lower inflation will have a powerful tailwind, these are what we like to call early cyclicals such as consumer, transports and other similar segments. Meanwhile, the “boom” part of the story implies that segments levered to growth, US growth in this case, also find a tailwinds. This should help the beleaguered financials to a better year in 2015 and also provides support for sectors like technology and some of the industrials. As we see it, “deflation” is going to become the operative word on the street … that and PE expansion since they typically go hand in hand. As always, we shall see.

Indeed we shall. Then again the only thing we will see is how every time there is deflation somewhere in the world, one after another central bank somewhere will admit its only mandate is to keep stocks at record highs and inject a few trillion in risk-purchasing power into what was once called a market.

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Wait till shale implodes, then we can talk again.

Cheap-Oil Era Tilts Geopolitical Power to US (Bloomberg)

A new age of abundant and cheap energy supplies is redrawing the world’s geopolitical landscape, weakening and potentially threatening the legitimacy of some governments while enhancing the power of others. Some changes already are evident. Surging U.S. oil production enabled America and its allies to impose tough sanctions on Iran without having to worry much about the loss of imports from the Middle Eastern nation. Russia, meanwhile, faces what President Vladimir Putin called a possibly “catastrophic” slump in prices for its oil as its economy is battered by U.S. and European sanctions over its role in Ukraine. “A new era of lower prices is being ushered in” by the U.S. shale oil and gas revolution, Ed Morse, global head of commodities research for Citigroup, said in an e-mail.

“Undoubtedly some of the geopolitical changes will be momentous.” They certainly were a quarter of a century ago. Plunging oil prices in the latter half of the 1980s helped pave the way for the breakup of the Soviet Union by robbing it of revenue it needed to survive. The depressed market also may have influenced Iraqi leader Saddam Hussein’s decision to invade fellow producer Kuwait in 1990, triggering the first Gulf War. Russia again looks likely to suffer from the fallout in oil markets, along with Iran and Venezuela, while the U.S. and China come out ahead. Oil is “the most geopolitically important commodity,” said Reva Bhalla, vice president of global analysis at Stratfor.

“It drives economies around the world” and is located in some “usually very volatile places.” Benchmark oil prices in New York have dropped more than 30% during the last five months to around $75 a barrel as U.S. crude production reached the highest in more than three decades, driven by shale fields in North Dakota and Texas. Output was 9.06 million barrels a day in the first week of November, the most since at least January 1983, when the weekly data series from the Energy Information Administration began.

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Petrobras was aiming to be the world’s first trillion-dollar company. Now it’s the most indebted company in the world.

Oil Industry Risks Trillions Of ‘Stranded Assets’ On US-China Climate Deal (AEP)

Brazil’s Petrobras is the most indebted company in the world, a perfect barometer of the crisis enveloping the global oil and fossil nexus on multiple fronts at once. PwC has refused to sign off on the books of this state-controlled behemoth, now under sweeping police probes for alleged graft, and rapidly crashing from hero to zero in the Brazilian press. The state oil company says funding from the capital markets has dried up, at least until auditors send a “comfort letter”. The stock price has dropped 87pc from the peak. Hopes of becoming the world’s first trillion dollar company have deflated brutally. What it still has is the debt. Moody’s has cut its credit rating to Baa1. This is still above junk but not by much. Debt has jumped by $25bn in less than a year to $170bn, reaching 5.3 times earnings (EBITDA). Roughly $52bn of this has been raised on the global bond markets over the last five years from the likes of Fidelity, Pimco, and BlackRock.

Part of the debt is a gamble on ultra-deepwater projects so far out into the Atlantic that helicopters supplying the rigs must be refuelled in flight. The wells drill seven thousand feet through layers of salt, blind to seismic imaging. The Carbon Tracker Initiative says the break-even price for these fields is likely to be $120 a barrel. It is much the same story – for different reasons – in the Arctic ‘High North’, off-shore West Africa, and the Alberta tar sands. The major oil companies are committing $1.1 trillion to projects that require prices of at least $95 to make a profit. The International Energy Agency (IEA) says fossil fuel companies have spent $7.6 trillion on exploration and production since 2005, yet output from conventional oil fields has nevertheless fallen. No big project has come on stream over the last three years with a break-even cost below $80 a barrel.

“The oil majors could not even generate free cash flow when oil prices were averaging $100 ,” said Mark Lewis from Kepler Cheuvreux. They have picked the low-hanging fruit. New fields are ever less hospitable. Upstream costs have tripled since 2000. “They have been able to disguise this by drawing down legacy barrels, but they won’t be able to get away with this over the next five years. We think the break-even price for the whole industry is now over $100,” he said. A study by the US Energy Department found that the world’s leading oil and gas companies were sinking into a debt-trap even before the latest crash in oil prices. They increased net debt by $106bn in the year to March – and sold off a net $73bn of assets – to cover surging production costs. The annual shortfall between cash earnings and spending has widened from $18bn to $110bn over the last three years. Yet these companies are still paying normal dividends, raiding the family silver to save face.

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They’ve all invested for continuing huge growth numbers. And now growth is gone.

Iron Ore’s Massive Expansion Era Is Finished: BHP Billiton (Bloomberg)

Iron ore’s golden spending era is history. That’s the verdict of BHP Billiton, the world’s biggest mining company. BHP and rivals Rio Tinto and Vale are flooding the global iron ore market after a $120 billion spending spree to boost the capacity of their mines from Australia to Brazil. Now prices have slumped to the lowest in more than five years as surging supply coincides with a slowdown in China, the world’s biggest consumer. “Our company has been very clear that the time for massive expansions of iron ore are over,” BHP CEO Andrew Mackenzie told reporters today after a shareholder meeting in Adelaide, South Australia. While BHP is still increasing production, the company last approved spending on an iron ore expansion in 2011.

It’s shifting investment into copper and petroleum, he said Global seaborne output will exceed demand by 100 million metric tons this year from 16 million tons in 2013, HSBC said last month. Prices, which are trading around $70 a ton in China, may drop to below $60 a ton next year, according to Citigroup forecasts. “At these prices, we still have a very decent business,” Mackenzie said. “We’ve been fairly clear that prices at about these levels were what we were expecting for the longer term.” Investments in copper may help BHP seize on rising demand for energy in emerging economies. Demand from China, the biggest metals consumer, will be supported by electricity grid expansion and greater adoption of renewable energy sources, all of which require more copper wiring, according to Citigroup.

The prospects for an expansion of BHP’s Olympic Dam copper, gold and uranium mine in Australia are looking more promising after testing of new processing technology shows early signs of success, Mackenzie said. Olympic Dam in South Australia is the world’s largest uranium deposit and fourth-biggest copper deposit. BHP is pilot testing a heap leaching extraction process used in its copper mines in Chile. If the tests “are successful, and they are showing considerable promise, we will use this technology and phased expansions of the underground mine to further increase Olympic Dam’s output,” Mackeznie told the meeting. In 2012, BHP halted a proposed expansion of Olympic Dam, estimated by Deutsche Bank AG to cost $33 billion. Mackenzie was addressing the first annual meeting held in the state since the decision.

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Flash PMI at zero growth.

China’s Factory Activity Stalls In November (CNBC)

China’s factory activity stalled in November as output shrank for the first time in six months, a private survey showed on Thursday. The HSBC flash Purchasing Managers’ Index (PMI) for November clocked in at the breakeven level of 50.0 that separates expansion from contraction, compared with a Reuters estimate for 50.3 and following the 50.4 final reading in October. Overall, new orders picked up slightly but new export orders slowed markedly, dragging on activity. The factory output sub-index fell to 49.5, the first contraction since May.

The Australian dollar eased against the greenback on the news, trading at $0.8607. But shares in China and Hong Kong appear unaffected by the data. The reading is the latest evidence that the world’s second biggest economy continues to lose traction. Recent data on housing prices and foreign direct investments also missed forecasts. “China is slowing and we think it will continue to slow. A lot of it is structural, and in our view, growth will slow to about 4.5% over the next 10 years. We see some sectors that are very challenged; clearly real estate is one,” Robin Bew, MD of Economist Intelligence Unit, told CNBC.

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“They keep reporting such a low number for so many years, there’s only one way it can go – up …”

Distressed Debt in China? You Ain’t Seen Nothing Yet (Bloomberg)

Bad debts in China are well underestimated because authorities persist in propping up weak companies and bailing out local investors, according to DAC Management. The Chicago-based asset management and advisory firm, which focuses on distressed credit and special situations in China, says the worst is yet to come, and that means lots of opportunities for the world’s biggest distressed debt traders. Nonperforming loans at Chinese banks jumped by the most since 2005 in the third quarter to 766.9 billion yuan ($125.3 billion), official statistics released earlier this month showed. The People’s Bank of China has injected 769.5 billion yuan into its banking system over the past two months to support an economy growing at the slowest pace in more than a decade.

“They keep reporting such a low number for so many years, there’s only one way it can go – up,” DAC co-founder Philip Groves said in an interview. “We’ve yet to see it because if you look at corporate defaults, they keep getting covered by the government. At some point, they can’t cover every single one.” DAC manages about $400 million of its own and clients’ money onshore in China. It first bought Chinese bad loans in December 2001 from China Orient Asset Management, one of four asset management companies created by the government to buy, repackage and onsell soured debt, Groves said.

While China’s bad loan ratio is relatively small versus other countries in Asia – soured loans are equivalent to 1.16% of total advances compared with 3.88% in Vietnam and 0.86% in South Korea – their total is still in an order of magnitude greater than the funds raised by distressed investors, Groves said. There hasn’t been enough capital to soak up the nonperforming debt and much ends up being reabsorbed by the government, he said. That’s why distressed activity in China has been “sporadic” over the past 10 years and why some large investors aren’t participating. “It never became a market where you could put a billion dollars to work in a year,” Groves said. “But if the wave of bad debt comes, and there are things to buy, the money will follow.”

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I’ve said it before, Japan is not going to be a nice place to be.

The Yen Looks Like It’s Ready To Get Crushed (CNBC)

Japan has slipped back into recession, with the economy shrinking 1.6% in the third quarter, surprising economists who forecast it would grow 2%. The takeaway? Double down on the dollar versus the yen. How weak can the yen get? Forecasters are lowering their already bearish targets after the new disappointing economic data. “I’d expect another 20% drop next year, which would take us north of 140,” said Peter Boockvar of the Lindsey Group about the dollar-yen rate. The team at Capital Economics raised their forecast for dollar-yen to finish next year at 140 as well, up from 120 previously.

Those are bold calls, because it’s unusual for any currency to move more than 5% to 10% per year. Also, the yen has already tumbled 14% in the past 12 months and 19% the previous year, making it the worst-performing major currency against the dollar both years. But when it comes to the yen right now, it seems, no forecast is too bearish. “When I started in the business, dollar-yen was 230,” recalled David Rosenberg, chief economist and strategist at Gluskin Sheff. “For those that think this move is over, this is probably going to be a round trip, meaning that the dollar’s run-up against the yen has a lot further to go.”

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Japan is a state of panic.

BOJ Warns Abe Over “Fiscal Responsibility” While Monetizing All Debt (ZH)

If one were to look up the definition of hypocrisy, the image of BoJ head Kuroda should be front-and-center. Having tripled-down on his money-printing and ETF-buying largesse just last week, he came out swinging last night at the government’s fiscal irresponsibility blasting Abe’s policies by saying Japan’s fiscal health “is the responsibility of parliament and the government, not an issue for the central bank to be held responsible for.” Aside from the fact that he is directly monetizing all JGB issuance – thus enabling Abe’s arrogant fiscal stimulus plan (by issuing 30Y and 40Y debt), Bloomberg notes that “Kuroda is making it crystal clear the government has to tackle the debt problem and if fiscal trust is lost that’s not going to be on the BOJ.” The world has truly gone mad. Seemingly paying the same lip-service as Bernanke and Yellen in the US and Draghi in Europe, BoJ’s Haruhiko Kuroda is carefully positioning the blame for lack of growth and economic chaos on the government’s lack of growth-oriented policies… and not the central bank’s enabling experiments… (via Bloomberg):

Bank of Japan chief Haruhiko Kuroda emphasized the onus is on the government to strengthen its finances after PM Shinzo Abe postponed a sales-tax hike and outlined plans to boost fiscal stimulus. “It’s the responsibility of parliament and the government, not an issue for the central bank,” Kuroda said when asked about risks to Japan’s fiscal health. The BOJ’s job is to achieve its inflation target, he said at a press conference in Tokyo. Kuroda’s repeated comments at a press conference today on the importance of fiscal discipline indicate the governor is unhappy and may signal a change in strategy, said Credit Suisse economist Hiromichi Shirakawa. “Kuroda is making it crystal clear the government has to tackle the debt problem and if fiscal trust is lost that’s not going to be on the BOJ,” said Shirakawa, a former BOJ official. “This is true, but he used to highlight that the BOJ and the government were working together. Abe might have created an enemy by postponing the sales-tax hike.”

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This is how you expose the madness in all those nonsensical plans and targets.

Why UK Needs ‘Radical’ Change As Exports Fall (CNBC)

The U.K. government needs to make radical changes to halt the slide in export growth, the head of British Chambers of Commerce told CNBC. “Exports are tailing off, the rate of growth is tailing off — it’s the one part of the economy we are failing on,” BCC’s Director- General John Longworth told CNBC Europe’s “Squawk Box” on Thursday. “They always say that the definition of madness is carrying on doing the same thing as before and expecting a different result. We need to do something radically different as a country.” His comments come as the BCC published its third-quarter Trade Confidence Index on Thursday. The survey, carried out with delivery company DHL Express, measures U.K. exporting activity and business confidence of more than 2,300 exporting firms.

It found that in the latest quarter, fewer exporters reported increased sales: 29% of exporters stated that sales had increased in the third quarter of 2014, a sharp drop from 47% in the second quarter. Of those exporters no longer seeing an increase in export sales, most said that sales have remained consistent. “There has a slowdown in the U.K.’s export potential because of the slowdown global economic circumstances,” Longworth said, or government export targets would be missed. The U.K. Prime Minister David Cameron said in his 2012 budget that he wanted the U.K. to double exports to £1 trillion ($1.5 trillion) by 2020. In order to achieve that, however, Longworth said the U.K. would have to see export growth of nearly 11% year-on-year growth every year. “So far since the beginning of the recovery in 2010, the total growth in those years has been 14%. So we’ve got a real issue and unless we do something different we’re not going to hit those targets.”

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And so must Italy, Greece, and many others. Let the people debate it, and give them alll the information, not just choice bits.

Michael Pettis: Spain Needs to Debate Leaving the Euro (Mish)

Michael Pettis has a very interesting article on the Spanish news site ABC regarding a possible default of Spain and the eventual breakup of the eurozone. [..] What follows is my heavily modified translation of key portions of Pettis’ article after reading both of the above translations.

In the Panic of 1837, two-thirds of the US, including several of the richest states, suspended payment of external debt. The United States survived. If the European Union is to survive, it will have to find a solution to the European debt. The more hope instead of action, the more likely there’s a permanent breakdown of the euro and the European Union. In a gesture more of faith than economic or historical data, Madrid assures us that with the right reforms, it will eventually be able to get out of debt. Other countries in debt crises have made the same promise, but the promise is rarely fulfilled. Excessive debt itself impedes growth. Even without the straitjacket of the euro, Spain probably cannot afford its debt. Even those who are against debt cancellation recognize that the only thing that shielded Germany from a Spanish default was the European Central Bank.

Despite their obnoxious policies, far-right parties across Europe flourish more than ever because the ECB protects the euro and European banks at enormous costs for the working and middle classes. These extremists exploit the refusal of European leaders to acknowledge their errors. The longer the economic crisis, greater their chances of winning, and then comes an end to Europe. The only thing that prevented a suspension of payments by Spain and other countries was the promise of the European Central Bank in 2012 to do “whatever it takes” to protect the euro. But debt continues to grow faster than GDP in Europe, and the ECB load increases inexorably month after month. There will come a time when rising debt and a weakening of the German economy will jeopardize the credibility of the guarantee of the ECB (which will be useless), little by little at first, and then suddenly later. In a matter of months Spain will suspend payments.

For now, with debt settlement postponed, German banks strengthen capital to protect themselves from bankruptcy that many predict. Berlin is playing the same game as Washington during the crisis in Latin America in the 1980s. Then US banks actively strengthened their capital, mainly at the covert expense of ordinary Americans, while insisting that Latin American countries needed further reforms and no debt forgiveness. However, multiple reforms led to extremely high rates of unemployment and enormous social upheaval throughout Latin America. From 1987 to 1988, when US banks finally had enough capital, Washington officially recognized that full payment of the debt in 1990 was impossible and forgave the debt of Mexico. In the years following, US banks forgave almost the entire debt of other Latin American countries.

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It’s getting painful. Stop the experiment, it’s failed beyond repair.

Eurozone PMI Falls To 16-Month Low In November (MarketWatch)

Activity in the eurozone’s private sector slowed in November, according to surveys of purchasing managers, an indication the currency area’s economy will continue to grow weakly, if at all, in the final quarter of the year. The surveys also found that businesses again cut their prices in the face of weak demand, a development that will concern the European Central Bank, which is struggling to raise the currency area’s inflation rate from the very low level it has settled at for more than a year. Data firm Markit on Thursday said its composite purchasing managers index – a measure of activity in the manufacturing and services sectors in the currency bloc – fell to 51.4 from 52.1 in October, reaching a 16-month low. A reading below 50.0 indicates activity is declining, while a reading above that level indicates it is increasing.

Preliminary results from Markit’s survey of 5,000 manufacturers and service providers also showed that a significant pickup in activity is unlikely in the coming months, with new orders falling for the first time since July 2013, while employment was unchanged. The surveys also found that businesses continued to cut their prices, although at a slightly less aggressive pace. “The deteriorating trend in the surveys will add to pressure for the ECB to do more to boost the economy without waiting to gauge the effectiveness of previously announced initiatives,” said Chris Williamson, chief economist at Markit.

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France toast.

French Manufacturing Slump Deepens as Economic Weakness Persists (Bloomberg)

French manufacturing shrank more than analysts forecast in November and demand fell, signaling that an economic rebound seen in the third quarter might be short lived. A Purchasing Managers Index fell to 47.6, the lowest in three months, from 48.5 in October, London-based Markit Economics said today. That’s below the 50-point mark that divides expansion from contraction and compares with the median forecast of 48.8 in a Bloomberg News survey. A separate index showed services also contracted, while new business across both industries fell the most in 17 months. The euro area’s second-largest economy has barely grown in three years and recent data suggests that 2014 will be little different. With unemployment near a record and the budget deficit widening, President Francois Hollande is under pressure to deliver on his promises of business-friendly reforms.

“The continued softness in private-sector activity signaled by the PMIs suggests an ongoing drag on growth during the fourth quarter,” said Jack Kennedy, senior economist at Markit. “Another round of job shedding by companies during November meanwhile provides little hope of bringing down the high unemployment rate.” An index of services activity rose to 48.8 this month from 48.3 in October, while a composite gauge for the whole economy increased to 48.4 from 48.2, according to today’s report. Employment across both manufacturing and services fell for 13th month, though the rate of decline slowed compared with the previous month. The French economy grew 0.3% in the three months through September as a jump in public spending offset a fourth quarterly decline in investment. The unemployment rate stood at 10.5% in September, more than double than Germany’s 5%, according to Eurostat. Hollande, whose popularity is among the lowest ever registered for a French president, has said he won’t run for a second term if he is unable to bring down joblessness.

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Please, let’s have some violent infighting in Brussels.

Pressure Mounts for EU Crackdown on Tax Havens (Spiegel)

In Luxembourg, corporate income taxes are as low as 1% for some companies. An average worker in Germany with a salary of €40,000 ($50,000) who doesn’t joint file with a spouse has to pay about €8,940 in taxes each year. At the Luxembourg rate, the worker would only have to pay €400. But some companies have even managed to finagle a tax rate of 0.1%, which would amount to a paltry €40 for the average German worker. As delightful as those figures may sound, normal workers will never have access to those kinds of tax discounts. That’s why it came across as obscene to many when Juncker defended Luxembourg’s tax arrangements on Wednesday as “legal”. They may be legal, but they are anything but fair. It also strengthens an impression that gained currency during the financial crisis – that capitalism favors banks and companies, not normal people, and that these institutions profit even more than previously known from tax loopholes.

But the Juncker case also sheds light on the two faces of European politics. Top Brussels politicians are recruited from the individual EU member states and, as such, have long representated their countries’ national interests. Then they move to Brussels, where they are expected to advocate for the European Union. At times like this, though, when dealings in Brussels are becoming increasingly politicized, the idea that these politicians are promoting the EU’s interests as a bloc loses credibility. And Juncker, the very man who had a hand in stripping Luxembourg’s neighbors of tax money, is supposed to be the main face representing the EU. It’s also very problematic that he, as the man who led a country that was one of the worst perpetrators of these tax practices, is now supposed to see to it that these schemes are investigated and curbed in the future.

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Kudos Crapo. Let’s cut the crap, not reintroduce it.

Senator Slaps Plan For Low-Down-Payment Loans At Fannie, Freddie (MarketWatch)

A controversial housing-finance proposal quickly came under fire during a Wednesday Capitol Hill hearing, with a top committee Republican questioning whether it’s a good idea to allow federally controlled mortgage-finance giants Fannie Mae and Freddie Mac to back mortgages with very low down payments. “I’m troubled,” said Idaho Sen. Mike Crapo, the leading Republican member of the Senate Banking, Housing and Urban Affairs Committee, by a plan from the Federal Housing Finance Agency to enable Fannie and Freddie to buy mortgages with down payments as low as 3%. “After the problems we’ve seen” it could be risky for Fannie and Freddie to buy loans when borrowers have little equity, Crapo said.

In response, Mel Watt, who became FHFA’s director in January and was the sole witness at the agency-oversight hearing, told senators that mortgages with low down payments will require insurance, and that borrowers will be required to have relatively strong credit profiles otherwise. He added that FHFA will provide more details in December about the types of borrowers who would be eligible for such mortgages. “We are not making credit available to people that we cannot reasonably predict, with a high degree of certainty,” will make their mortgage payments, Watt said. Decisions over who can qualify for loans bought by Fannie and Freddie can have a large impact on the housing market. Together Fannie and Freddie back about half of new U.S. mortgages. The FHFA must carefully craft rules that support the housing market’s somewhat erratic recovery without creating too much risk.

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This could make plenty waves, it’s a high stakes game.

Junk-Bond Banking Boom Peaks as Firms Drop off Deal List (Bloomberg)

The explosion of brokers plowing into the lucrative junk-bond underwriting business may be fading. The number of firms managing U.S. high-yield bond sales isn’t growing for the first year since 2008, according to data compiled by Bloomberg. The ranks will likely thin in upcoming years as yields rise, making it more expensive for speculative-grade companies to borrow, according to Charles Peabody, a banking analyst at research firm Portales Partnersin New York. “You’re going to see fewer and fewer deals,” he said in a telephone interview. “Underwriting volumes are probably going to decline from here and you’re going to see more of a consolidation or exodus.” So far, the decline has been small, with 87 firms managing high-yield bond sales this year, down from the record 92 in the same period in 2013, Bloomberg data show.

The number of underwriters is still about twice as many as in 2009, when a slew of bankers founded their own firms to grab business from Wall Street firms that were shrinking as the credit crisis caused trillions of dollars of losses and writedowns. The new firms sought to win assignments managing smaller deals that bigger banks didn’t have the appetite for anymore. Five years later, the scene is changing. The least-creditworthy companies have borrowed record amounts of debt, spurred by central-bank stimulus that pushed borrowing costs to all-time lows. Now, the Federal Reserve is preparing to raise rates and junk-bond buyers are getting jittery.

The notes have declined 1.7% since the end of August as oil prices plunged, eroding the value of debt sold by speculative-grade energy companies, Bank of America Merrill Lynch index data show. While junk-bond sales are still on track for a new record this year, issuance has been choppy, with deals being canceled one week and then a flood of sales going through the next. For the past few years, high-yield underwriting has been a bright spot for banks, especially compared with flagging trading revenues. Speculative-grade companies have sold $1.2 trillion of dollar-denominated debt since the end of 2010 to lock in historically low borrowing costs. That’s also meant there have been a swelling number of firms elbowing each other out of the way for a chance to manage those deals, vying for fees that have been almost three times as much as those on higher-rated deals.

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Pot and kettle.

Goldman Fires Staff For Alleged NY Fed Breach (FT)

Goldman Sachs has fired an investment banker who allegedly accessed confidential information from the Federal Reserve Bank of New York, his former employer. Goldman said it had fired Rohit Bansal, a junior employee, in September and then fired his supervisor Joe Jiampietro, a better-known senior banker in the financial institutions group, which advises other banks. Mr Jiampietro was himself a former government official – a top adviser to Sheila Bair when she was chairman of the Federal Deposit Insurance Corporation. The New York Fed said: “As soon as we learned that Goldman Sachs suspected one of its employees may have inappropriately obtained confidential supervisory information, we alerted law enforcement authorities.”

The news, first reported by the New York Times, comes ahead of a congressional hearing on Friday that is examining whether there is too “cosy” a relationship between regulators and banks. Goldman has been nicknamed “Government Sachs” as the epitome of the “revolving door” between government and banking. Several of its employees formerly worked at government agencies, including the Fed and US Treasury. Hank Paulson, Goldman’s former chief executive, left the bank to become US Treasury secretary under President George W. Bush. On Friday, the Senate banking committee is due to examine allegations from a former New York Fed examiner, who says that she was fired because her bosses wanted her to water down criticism of Goldman. Bill Dudley, president of the New York Fed and himself a former Goldman employee, is due to testify.

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A little skimpy perhaps, but who would doubt the premise?

Banking Industry Culture Promotes Dishonesty, Research Finds (Guardian)

How do you tell if a group of bankers is dishonest? Simply by getting them all to toss a coin. That may not seem like in-depth research, but it is the basis of an academic paper published in Nature magazine this week, which investigates whether the financial sector’s culture encourages dishonesty – and concludes that it does. The academics from the University of Zurich used a sample of 128 employees of a large bank, and split them into two groups. The first set of bankers were primed to start thinking about their job, with questions such as “what is your function at this bank?”. They were then asked to toss a coin 10 times, in private, knowing which outcome would earn them $20 a flip. They then had to report their results online to claim any winnings. Unsurprisingly perhaps, there was cheating – with the percentage of winning tosses coming in at an incredibly fortunate 58.2% (although the research omitted to say how many bankers also trousered the coin).

Meanwhile, the second group completed a survey about their wellbeing and everyday life, that did not include questions relating to their professional life. They then performed the coin-flipping task, which threw up a quite astonishing finding: these bankers proved honest. Identical exercises in other industries did not produce the same skewing in results when participants were primed to start thinking about their work. The research does not reveal which institution took part in the survey, presumably to avoid it suing the authors for unearthing some decent behaviour among the cheating. “The effect induced by the treatment could be attributable to several causes,” the authors muse, “including the competitiveness expected from bank employees, the exposure to competitive bonus schemes, the beliefs about what other employees would do in the same situation or the salience of money in the questionnaire.”

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Anti-tax rant. Simon Black knows quite a bit about moving abroad.

New International Gang Of Thieves Make Somali Pirates Look Like Amateurs (Black)

This past month, a real-life guild of thieves was formed. With 51 governments pledging their support to each other for the protection of their ignoble craft of theft. And another 30 pledging to join by 2018. From day one, governments have been pilfering their citizens’ assets through taxation, claiming a monopoly on thievery. From the largest institution to the pettiest pickpocket, anyone else who tries to engage in theft is severely punished, as governments work to protect their exclusive right to steal. Frighteningly, they do this all out in the open, believing that they actually have a moral right to commit theft. You can see this delusion in the US government’s claims that last year they “lost out” on $337 billion from people avoiding taxes. As if they have some moral claim to the money they’d failed to pilfer. Nonetheless, they use this claim to justify actively hunting down and penalizing anyone who takes action to avoid being stolen from.

The ones that are doing this are the bankrupt countries, and the deeper they slide into debt, the more desperate they become. Which is why these broke governments are now joining forces, pledging to to collect and share information amongst themselves about citizens’ bank accounts, taxes, assets and income outside local tax jurisdictions. Basically – I’ll help you steal from your citizens if you help me steal from mine. Both the punishment and the likelihood of getting caught for tax evasion are growing. Don’t even bother trying. However that doesn’t mean that you have no choice but to sit there and let your self be stolen from. While there are still ways of legally reducing your tax burden from within a country, your best option is to move and diversify. Diversification is key, because if you have all your eggs in one bankrupt basket, you are really taking on extraordinary risk. Moving some assets abroad can legitimately reduce some of this risk. And an even greater strategy is considering moving yourself.

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