pope Archives - Page 4 of 5 - The Automatic Earth

Ah Austria, land of schnitzel, lederhosen, Mozart, alpine meadows and beer drinking. Less widely appreciated is its special place in the history of catastrophic banking crises. It was the failure of Creditanstalt, a Viennese bank founded in 1855 by Anselm von Rothschild, that arguably sparked the Great Depression, setting off an unstoppable chain reaction of bankruptcies throughout Europe and America. No-one would think that what happened last week at Austria’s failed Hypo Alpe-Adria Bank International falls into quite the same category; we are meant to be in the recovery phase of the latest global banking crisis, so this is more about re-setting the system than again bringing it to its knees, right? Well, make up your own mind. I suspect neither financial markets nor policymakers have yet caught onto the full significance of the latest turn of events.

In a nutshell, the Austrian government has had enough of funding the bank’s losses, and announced plans to “bail-in” external creditors to the tune of €7.6bn instead. As such, this marks a test case of new European rules to make creditors pay for failing banks. About time too, you might say. What took them so long? Only in this case, the bonds are notionally guaranteed by the Austrian state of Carinthia, which now theoretically becomes liable for the bail-in. It’s an echo of the mess Ireland got itself into at the height of the banking crisis, when it foolishly attempted to stem the panic by underwriting all Irish banking liabilities; the move very nearly ended up bankrupting the entire country. Hypo will bankrupt Carinthia. Essentially, what the Austrian government is doing is cutting loose an entire region, rather in the way the federal authorities in the US allowed Detroit to go bust a number of years ago.

It’s a mini-Greece going off in the heartlands of Europe. In Hypo’s case, the bail-in also threatens knock-on consequences for public bodies elsewhere, including Bayern Landesbank, a big holder of Hypo bonds which is owned by the German state of Bavaria, and the Munich based FMSW, which is again publicly underwritten. All this is just the tip of the iceberg; Europe is awash with interlinked banking and public liabilities, many of which will never be repaid and basically need to be written off. Massive creditor losses are in prospect. The European authorities had us all half convinced that Europe’s debt crisis was over. In truth, it may have barely begun.

Good interview. Read.

• Tsipras: ‘We Don’t Want to Go on Borrowing Forever’ (Spiegel)

SPIEGEL: Mr. Prime Minister, most of your European partners are indignant. They accuse you of saying one thing in Brussels and then saying something completely different back home in Athens. Do you understand where such accusations come from?
Tsipras: We say the same things in Germany as we do in Greece. But sometimes, problems can be viewed differently, depending on the perspective. (He points to his water glass.) This glass here can be described as being half full or half empty. The reality is that it is a glass filled half-way with water.

SPIEGEL: In Brussels, you have given up your demands for a debt haircut. But back home in Athens, you continue talking about a haircut. What does that have to do with perspective?
Tsipras: At the summit meeting, I used the language of reality. I said: Prior to the bailout program, Greece had a sovereign debt that was 129% of its economic output. Now, it is 176%. No matter how you look at that, it’s not possible to service that debt. But there are different ways to solve this problem: via a debt cut, debt restructuring or bonds whose payback is tied to growth. The most important thing, though, is solving the true problem: the austerity which has driven debt way up.

SPIEGEL: Are you a linguist or a politician? You told the Greeks that you got rid of the troika and sold it as a victory. But the European Commission, the International Monetary Fund (IMF) and the European Central Bank (ECB) are still monitoring your reforms. Now, they are simply called “the institutions.”
Tsipras: No, it isn’t a question of terminology. It has to do with the core of the issue. Every country in Europe has to work together with these institutions. But that is something very different than a troika that is beholden to nobody. Its officials came to Greece to strictly monitor us. Now, we are again speaking directly with the institutions. Europe has become more democratic because of this change.

SPIEGEL: What change? You still have to submit your reform plans to three “institutions” for approval.
Tsipras: The reforms won’t be approved by the institutions. They have a say in the process and establish a framework that applies to all in Europe. Previously, the situation was such that the troika would send an email telling the Greek government what it had to do. Our planned reforms are necessary, but we are deciding on them ourselves. They aren’t being forced onto us by anyone. We want to stop large-scale tax evasion and tax fraud more than anybody. Thus far, it has only been the low earners and not the wealthy that paid. We also want to make the state more efficient.

Lots of emptiness.

• Eurogroup To Consider Greek Reform Proposals Amid Scramble For Funding (Kath.)

Greece faces another tough Eurogroup summit Monday when a slew of reform proposals from Athens are to come under the microscope in Brussels, with the two sides apparently far from a compromise even as state coffers in Athens are close to emptying. Finance Minister Yanis Varoufakis is expected to face a barrage of questions from his eurozone counterparts on a series of proposals set out in an 11-page letter he sent to Eurogroup President Jeroen Dijsselbloem, which include the creation of a so-called fiscal council to generate budget savings, the revision of licensing for gaming and lotteries and the hiring of non-professionals, including students and tourists, as tax agents to help a foundering crackdown on tax evasion.

Sources suggested over the weekend that the proposals had met with skepticism from eurozone officials. In comments on Saturday on the sidelines of a conference in Venice, Varoufakis said he had received a response from Dijsselbloem. He added that Greece was keen to move forward with reforms but that the two sides must agree on “the process by which the reforms will be made more specific, implemented and evaluated so that they can be reviewed by the Eurogroup.” Varoufakis added that Greece’s reform program would be “discussed by technical teams that will convene shortly in Brussels.” Some eurozone officials appeared to be running out of patience. ECB governing council member Luc Coene said in an interview on Saturday that Greece must realize “there is no other way than to reform,” noting that Greeks had been sold “false promises.”

“Perhaps the cupboards of the monetary bureaucrats are short a few plates and in need of a little pharmacological fine-tuning. Just saying.”

• The ECB’s Lunatic Full Monty Treatment (Tenebrarum)

The belief that the market economy requires “steering” by altruistic central bankers, who make decisions influencing the entire economy based on their personal epiphanies, has rarely been more pronounced than today. Most probably it has actually never been stronger. It is both highly amusing and disconcerting that so many economists who would probably almost to a man agree that it would be a very bad idea if the government were to e.g. take over the computer industry and begin designing PCs and smart phones by committee, think that government bureaucrats should determine the height of interest rates and the size of the money supply.

We know of course that central banks are the major income source for many of today’s macro-economists, so it is in their own interest not to make any impolitic noises about these central planning institutions and their activities. Besides, most Western economists have not exactly covered themselves with glory back when the old Soviet Union still existed. Even in the late 1980s, Über-Keynesian Alan Blinder for instance still remarked that the question was not whether we should follow its example and adopt socialism, but rather how much of it we should adopt. The recent ECB announcement detailing its new “QE” program once again confirms though that there is nothing even remotely “scientific” about what these planners are doing. Common sense doesn’t seem to play any discernible role either. [..]

Leaving for the moment aside how sensible it is for the bond yields of virtually insolvent governments mired in “debt trap” dynamics to trade at less than 1.3%, one must wonder: what can possibly be gained by pushing them even lower? Does this make any sense whatsoever? Meanwhile, the ECB let it be known that it wouldn’t buy any bonds with a negative yield-to-maturity exceeding 20 basis points – the level its negative deposit rate currently inhabits as well. What a relief! What makes just as little sense is that the economic outlook presented by Mr. Draghi on occasion of his press conference was actually quite upbeat. To summarize: yields are at record lows, with about €2 trillion in European government bonds sporting negative yields to maturity. The economic outlook is said to be good.

The current slightly negative HICP rate is held to be a transitory phenomenon (it very likely will be). Needless to say, the arbitrary 2% target for “price inflation” makes absolutely no sense anyway. Not a single iota of wealth can be created by pushing prices up. Last but certainly not least, year-on-year money supply growth in the euro area has soared into double digits recently. And the conclusion from all this is that the central bank needs to boost its balance sheet by €1 trillion with a massive debt monetization program? Are these people on drugs? If not, then they should perhaps see a shrink. Perhaps the cupboards of the monetary bureaucrats are short a few plates and in need of a little pharmacological fine-tuning. Just saying.

It’s no longer useful to view this from an investor point of view.

• 7 Things To Know About The ECB’s QE Game Plan (MarketWatch)

After years of discussion, months of urgent calls and weeks of preparation, the European Central Bank is about to write history—on Monday it will kick of its €1.1 trillion-euro, quantitative-easing program. Unlike its U.S., U.K. and Japanese central-bank peers, the ECB never resorted to sovereign QE at the height of the global financial crisis. Instead, it’s attempted an array of other extraordinary policy measures, including a negative deposit rate, programs to provide cheap funding to eurozone banks, and a less-powerful bond-buying program, often called “private QE,” focused on purchasing asset-backed securities and covered bonds. Now, as investors prepare for the launch of full-blown QE on March 9, here’s what we know about the program so far.

What’s the aim of the QE? Under quantitative easing, a central bank creates money electronically, which it then uses to buy securities, such as government bonds, from banks and other institutions. It’s hoped that these institutions will then use the new bank reserves to buy other assets, lowering interest rates and encouraging spending. The ECB hopes QE will revive growth and inflation in the eurozone. Despite repeated attempts to spur an economic recovery, the currency bloc is still grappling with painfully high unemployment, slow growth and negative inflation among its members.

Will the ECB buy government bonds with negative yields?Yes, but nothing that carries a yield below the ECB’s own deposit rate, which currently stands at negative 0.2%. The limit means that bonds currently yielding more than the deposit rate have room to fall further. Even before the big QE bazooka has been fired, yields for most eurozone countries have tanked. For Germany, France, Austria, Belgium, Holland and Finland borrowing costs for shorter-dated debt are now negative, meaning that bondholders essentially agree to pay issuers to hold their debt.

What will QE do to bond yields? Initially, sovereign QE and lower bond yields should march together hand in hand. As the ECB buys large quantities of government debt, bond prices should go up, which will send yields lower. On Friday, borrowing costs for Italy, Spain and Portugal dropped to record lows in anticipation of QE takeoff. However, big moves in the bond markets show much of the impact may have already been priced in. Longer-term, as the QE liquidity injection begins to work on the eurozone economy, and likely boost inflation and growth, bond yields should start to rise to reflect the stronger economy. The latest eurozone data indicate that the region may be turning a corner, leaving room for higher borrowing costs.

London is a wasteland. It may be rich, but it’s still a wasteland. No there there.

• 30 Years Of A Polarised Economy Have Squeezed Out The Middle Class (Observer)

London has always been a city of extremes but the extent to which it has become polarised between rich and poor is laid bare in research that reveals a 43% decrease in middle-income households between 1980 and 2010. England is increasingly divided between the rich and the poor, with a 60% increase in poor households and a 33% increase in wealthy households. This has come at a time – 1980 to 2010 – when the number of middle-income households went down by 27%. But the trend is most marked in London, according to an analysis of census data by Benjamin Hennig and Danny Dorling of the School of Geography and the Environment at the University of Oxford.

Over the three decades, the capital has seen an 80% increase in poor households, an 80% increase in wealthy households – and a 43% decrease in middle households. Around 36% of London households are now classified as poor (up from 20% in 1980), while 37% are middle income (down from 65%). The largest%age point fall in households in the middle has been in Westminster, which saw its middle reduce from nearly three-quarters of all households to just one-third. The largest%age-point increase in wealthy households has been in Richmond-upon-Thames, where more than half of households are now wealthy, compared with a fifth in 1980. In contrast, in Newham, almost one in two households is now poor.

The researchers have drawn up maps of England according to wealth, described by Dorling as “fancy pie charts”. The polarising of wealth has been exacerbated in recent years, with economic growth having been slower than had been hoped, and wages in the middle failing to rise in parallel with the recovery. The economic divide between the beneficiaries of the property bubble and non-homeowners also continues to widen in the country as a whole, with upward pressure on land values. Dorling said: “This analysis shows that England is becoming more polarised, with an increase in households that are poor and those that are wealthy. The number of households in poverty has jumped by 60% since 1980, meaning that now almost three in 10 are poor.

So more PBOC QE too?

• Foreign Banks Tighten Lending Rules For China State-Backed Firms (Reuters)

Some banks are adopting stricter lending criteria for China’s state-owned enterprises (SOEs), demanding collateral from some companies they used to deem as safe as government debt, as Beijing tries to reform its bloated firms and the economy slows. Singapore’s DBS Group, which recently suffered a loss on a bad loan to an SOE-related firm it had assessed as risk-free, plans to launch a “decision grid” to assess the creditworthiness of SOEs, according to draft internal risk guidelines reviewed by Reuters. A banker at Taiwan’s Chang Hwa Commercial Bank said that from the beginning of this year his bank would only lend to state-owned Chinese companies that provide collateral, in recognition that SOEs were no longer risk free.

Such changes in policy suggest some foreign banks are preparing for a rise in defaults in the world’s second-largest economy, which is growing at its slowest pace in a quarter of a century and where the government is trying to make the state sector more efficient.
DBS will now lend more conservatively to SOEs seen as receiving less government support, as China plans to prioritize SOEs in strategic sectors. The January-dated DBS document said: “Not all SOEs receive the same degree of government support. It is our further belief that the differentiation of such support will widen in the future as the government continues to pursue market economy.” DBS will now divide SOEs into tiers according to their likely level of government support, with subsidiaries considered more risky than top-level holding companies.

Group companies that are not consolidated into the parent SOE’s financial statements will be evaluated as an ordinary borrower, the decision grid shows. DBS effectively acknowledges that lenders can no longer take for granted implicit support from above. “Compared to ordinary corporates, implicit support obtained from the parents of SOEs are subject to higher risks because of the risk of policy and people changes,” the document said. A DBS spokeswoman said: “It is still business as usual for us in China. With slower regional economic growth, we continue to be disciplined and watchful of risks in all the markets we operate in..”

C’mon, admit it, you were due for a good laugh.

• China’s February Exports Surge 48.3% (CNBC)

China’s exports surged 48.3% on year in February, sharply above analysts’ forecasts, potentially signaling stronger economic growth for its trade partners. Imports fell 20.5% for the period, according to data from China’s customs department. A Reuters poll had forecast exports would rise 14.2% and imports would fall 10%. For January and February combined – a common metric to help smoothe distortions from the Lunar New Year holiday period – exports rose 15% from a year earlier, while imports declined 20.2%. “The demand from the advanced economies bodes well,” ANZ said in a note Sunday, citing data showing shipments to the U.S. and European Union rose 40.3% and 36.6% on-year respectively.

But the bank noted that the jump in exports could be due to a base effect. “The February 2014 figures were extremely low as Chinese authorities cracked down the round-tripping trade flows,” it said. “We still see strong headwinds facing China’s exports this year,” ANZ said, citing weak export order PMI data. ANZ attributed the decline in imports to weak commodity demand compounded by sharp drops in commodity prices, citing as an example the 45.4% on year drop in the value of iron-ore imports, although the iron-ore import volume only fell 0.9%. As well, “Chinese commercial banks have significantly tightened the trade financing facilities for commodity traders,” ANZ said.

“..it is not likely that she came to Baku with positive intentions, or even with a positive image of the country in her mind.”

• Azerbaijan Should Be Very Afraid of Victoria Nuland (GR)

The US’ Assistant Secretary of State for European and Eurasian Affairs, Victoria Nuland, visited Baku on 16 February as part of her trip to the Caucasus, which also saw her paying stops in Georgia and Armenia. While Azerbaijan has had positive relations with the US since independence, they’ve lately been complicated by Washington’s ‘pro-democracy’ rhetoric and subversive actions in the country. Nuland’s visit, despite her warm words of friendship, must be look at with maximum suspicion, since it’s not known what larger ulterior motives she represents on behalf of the US government. [..]

Given the ideological context in which Nuland likely sees eye-to-eye on with her husband, plus her experience in instigating the Color Revolution in Ukraine, it is not likely that she came to Baku with positive intentions, or even with a positive image of the country in her mind. This is all the more so due to the recent scandal over Radio Free Europe/Radio Liberty. The US-government-sponsored information agency was closed down at the end of December under accusations that it was operating as a foreign agent. While the US has harshly chided the Azeri government for this, at the end of the day, it remains the country’s sovereign decision and right to handle suspected foreign agents as it sees fit. Azerbaijan’s law is similar to Russia’s, in that entities receiving foreign funds must register as foreign agents, and interestingly enough, both of these laws parallel the US’ own 1938 Foreign Agents Registration Act (FARA).

So why does the US feel that it reserves the sole right to register foreign agents and entities, and if need be, identify and punish those that are acting in the country illegally, but Azerbaijan is deprived of this exercise of sovereignty? The reason is rather simple, actually – it’s the US that is the most likely to use these foreign agents to destabilize and potentially overthrow governments (as in Ukraine most recently), whereas Azeri agents in America, should they even exist, are nothing more than an administrative nuisance incapable of inflicting any real harm on the authorities. This double standard is at the core of the US’ relations with all countries in the world, not just Azerbaijan, but it’s a telling example of the power and leverage Washington attempts to hold over Baku, which is seen most visibly by the blistering criticism leveled on the government after Radio Free Europe/Radio Liberty’s closing in compliance with the law.

Too little too late. Fait accompli.

• EU Won’t Be Pushed Into Confrontation Over Ukraine – Foreign Policy Chief (RT)

The EU is resisting calls from hotheads to supply arms to Ukraine, saying it won’t be pulled into a confrontation with Russia. Europeans cite the progress in implementing a ceasefire in eastern Ukraine between Kiev and local rebels. The idea of providing lethal aid to Kiev is popular among many NATO officials and American politicians. US House Speaker John Boehner and a bipartisan group of top lawmakers called on President Barack Obama to deliver the weapons. But Europeans are opposing the move, which would likely escalate tensions with Russia. “The European Union today is extremely realistic about developments in Russia. But we will never be trapped or forced or pushed or pulled into a confrontative [sic] attitude,” the EU’s Foreign Policy Chief Federica Mogherini told the media on Friday, following an informal meeting of EU foreign ministers in Riga, Latvia.

“We still believe that around our continent – not only in but around – cooperation is far better than confrontation. We still argue for that,” she added. Austrian Foreign Minister Sebastian Kurz said the EU’s goal in Ukraine is “a ceasefire, not an escalation.” Germany has been among the most vocal critics of sending arms to Ukraine and now German officials question the assessment of the situation in the country voiced by Kiev armament pundits. “The statements [on Ukraine] from our source do not fully coincide with the statements made by NATO and the US,” German FM Frank-Walter Steinmeier said after the conference. “We are interested in not allowing it to grow into a misunderstanding.” The German Spiegel magazine reported on Saturday that Chancellor Angela Merkel’s government suspects the US and NATO of trying to derail the EU’s mediation effort in Ukraine.

The Minsk ceasefire agreement between Kiev and rebels in eastern Ukraine was brokered last month by Germany, France and Russia. So far, it’s mostly holding, with both parties pulling some of their heavy weapons back from the front line, and OSCE monitors reporting a significant reduction in violence. The EU says it wants to increase the number of OSCE observers on the ground, doubling its current ceiling of 500. “The main point is obviously working to increase the number of selected and skilled people that can do the job,” Mogherini said. The more observers the tougher it would be to violate the conditions of the Minsk agreement with impunity. Kiev and its foreign backers, particularly in Washington, accuse Russia of propping up the rebel forces with weapons and troops. Moscow insists that it has no involvement in the armed conflict and has only delivered humanitarian aid to the ravaged areas.

“86% of the respondents approve of Vladimir Putin as Russia’s president. When asked to name five or six politicians or government officials they trust, 59% responded: ”Putin”.”

• Why Do Russians Still Support Vladimir Putin? (New Statesman)

The news of the assassination of Boris Nemtsov, a Russian opposition politician, dominated the news this weekend. It was possible to imagine – just for a day or two – that the charismatic Boris Nemtsov, who first entered the national political arena in Russia back in the Yeltsin days, had been a prominent figure without whom the opposition would struggle to have a say against Kremlin. Unfortunately, the truth is that Nemtsov was hardly a force to be reckoned with. However open his position on Putin was and however brave his last interview to the Moscow radio station Echo Moskvy was, just hours before his death, Boris Nemtsov was not important. Like any other opposition leader in Russia, he was a scribble on the margin of current affairs. The overwhelming majority of the Russian population supports the country’s president, Vladimir Putin.

A recent poll, conducted between 20-23 February 2015 among 1,600 Russians aged 18 or more in 46 different regions of Russia by an independent Russian not-for-profit market research agency Levada Centre for Echo Moskvy radio station, found that 54% of the population agreed that “[Russia] is moving in the right direction”. 86% of the respondents approve of Vladimir Putin as Russia’s president. When asked to name five or six politicians or government officials they trust, 59% responded: ”Putin”.

Let’s put aside the possibility of rigged polls because there is little to suggest Putin’s popularity is fake. Putin is respected, if not revered. He is referred to as batyushka, the holy father. Many Russians are particularly upset and angry about Nemtsov’s murder because western fingers are pointing at Putin. In their opinion, Nemtsov was most likely killed as a provocation to destabilise Russia and fuel hostility between Kremlin and the west. “With all due respect to the memory of Boris Nemtsov, in political terms he did not pose any threat to the current Russian leadership or Vladimir Putin, said presidential press secretary Dmitriy Peskov. “If we compare popularity levels, Putin’s and the government’s ratings and so on, in general Boris Nemtsov was just a little bit more than an average citizen.”

Who’s “our son of a bitch“?

• The Dark Undercurrents Of The War In The Ukraine (Saker)

The situation in the Ukraine is more or less calm right now, and this might be the time to step back from the flow of daily reports and look at the deeper, underlying currents. The question I want to raise today is one I will readily admit not having an answer to. What I want to ask is this: could it be that one of the key factors motivating the West’s apparently illogical and self-defeating desire to constantly confront Russia is simply revanchism for WWII? We are, of course, talking about perceptions here so it is hard to establish anything for sure, but I wonder if the Stalin’s victory against Hitler was really perceived as such by the western elites, or if it was perceived as a victory against somebody FDR could also have called “our son of a bitch“. After all, there is plenty of evidence that both the US and the UK were key backers of Hitler’s rise to power (read Starikov about that) and that most (continental) Europeans were rather sympathetic to Herr Hitler.

Then, of course and as it often happens, Hitler turned against his masters or, at least, his supporters, and they had to fight against him. But there is strictly nothing new about that. This is also what happened with Saddam, Noriega, Gaddafi, al-Qaeda and so many other “bad guy” who began their careers as the AngloZionists’ “good guys”. Is it that unreasonable to ask whether the western elites were truly happy when the USSR beat Nazi Germany, or if they were rather horrified by what Stalin had done to what was at that time the single most powerful western military – Germany’s? [..] for the western elites, [..] they must have known that their entire war effort was, at most, 20% of what it took to defeat Nazi Germany and that those who had shouldered 80%+ were of an ideology diametrically opposed to capitalism. Is there any evidence of that fear? I think there is and I already mentioned them in the past:

Plan Totality (1945): earmarked 20 Soviet cities for obliteration in a first strike: Moscow, Gorki, Kuybyshev, Sverdlovsk, Novosibirsk, Omsk, Saratov, Kazan, Leningrad, Baku, Tashkent, Chelyabinsk, Nizhny Tagil, Magnitogorsk, Molotov, Tbilisi, Stalinsk, Grozny, Irkutsk, and Yaroslavl.

Operation Unthinkable (1945) assumed a surprise attack by up to 47 British and American divisions in the area of Dresden, in the middle of Soviet lines.This represented almost a half of roughly 100 divisions (ca. 2.5 million men) available to the British, American and Canadian headquarters at that time. (…) The majority of any offensive operation would have been undertaken by American and British forces, as well as Polish forces and up to 100,000 German Wehrmacht soldiers.

Operation Dropshot (1949): included mission profiles that would have used 300 nuclear bombs and 29,000 high-explosive bombs on 200 targets in 100 cities and towns to wipe out 85% of the Soviet Union’s industrial potential at a single stroke. Between 75 and 100 of the 300 nuclear weapons were targeted to destroy Soviet combat aircraft on the ground.

But the biggest proof is, I think, the fact that none of these plans was executed, even though at the time the Anglosphere was safely hidden behind its monopoly on nuclear weapons (and have Hiroshima and Nagasaki not been destroyed in part to “scare the Russians”?). And is it not true that the Anglos did engage in secret negotiations with Hitler’s envoys on several occasions? (The notion of uniting forces against the “Soviet threat” was in fact contemplated by both Nazi and Anglo officials, but they did not find a way to make that happen.) So could it be that Hitler was, really, their “son of a bitch”?

“We support sanctions that bring the other side to the negotiation table.. But we are against sanctions that are imposed simply because someone is angry.”

• ‘Give Peace A Chance, Decide Sanctions Later’: EU Rethinks Russia (RT)

The latest EU meeting has shown that many of its members are in no rush to extend the sanctions which were imposed on Russia last year following a US example, or to exert any more pressure on Moscow, as long as the Minsk ceasefire agreement is holding. Most foreign ministers at the EU two-day meeting in the Latvian capital expressed hopes that the latest Minsk agreement would be a success, and there would be no need to impose further sanctions on Russia. The meeting had a format of an informal discussion, where the ministers touched the topics of the Minsk agreements and the OSCE mission in Ukraine, as well as the possible stepping up of pressure on Russia to “promote peace.”

Scheduled ten days before an official summit in Brussels, the meeting has shown that the EU can’t yet agree even on the automatic extension of existing sanctions – a move that some of the hawkish states have been actively promoting. “In my opinion, we must not make any other steps, we have to give peace a chance. The extension could take place, but only if there is no improvement of the situation,” Spanish FM Jose Manuel Garcia-Margallo said, expressing his views after the meeting , according to Russian news agency RIA Novosti. The Spanish FM is heading to Moscow, during which he will not only discuss the Ukrainian crisis, but will also meet with the Russian Energy minister.

Meanwhile, Italian FM Paolo Gentiloni told reporters the he sees “encouraging signals” on the ground in eastern Ukraine, and so “at the moment we don’t need either new sanctions or automatic renewals.” Austrian Foreign Minister Sebastian Kurz shared the views of his Italian counterpart, saying that there is a “glimpse of hope” following the Minsk agreements: “We should do everything now to improve the situation and decide later whether that improvement really happened and we can reduce the sanctions, or, if we have to, extend them,” Kurz said. Greece has also spoke out against any new sanctions as long as Russia supports the Minsk agreements, with Greek Foreign Minister Nikos Kotzias saying the Greek experience suggests that “not every sanction is constructive” and can succeed. “We support sanctions that bring the other side to the negotiation table,” Kotzias told German ARD. “But we are against sanctions that are imposed simply because someone is angry.”

Wait! Where have we heard this before? “Owner will throw in a brand new car..” “Just pick your favorite colour.”

• Layoffs And Empty Streets As Australia’s Boom Towns Go Bust (Reuters)

When Probo Junio got a visa to work in Australia, he thought he had won a ticket to the good life. In 2013, the 45-year-old boilermaker left his hometown of Cebu in the Philippines, where he was getting paid about $10 a day, to work in Karratha in Western Australia for $30 an hour. Enough to support his relatives and build a new life Down Under. What Junio didn’t expect was that Australia’s booming resources industry would go bust less than two years later, taking his job, and leaving him just 60 days to find work or go home. “It’s very difficult because most of the companies don’t want 457 visa holders,” he said, referring to temporary permits for skilled workers.Across the country, people like Junio are falling victim to downsizing. Jobs, once plentiful and well paid, are scarce.

Real estate prices in boom towns are sinking and even the notoriously high coffee prices in mining capital Perth have levelled off at under $4. Prices of iron ore and coal, the country’s two biggest export earners, have plunged during the last two years amid falling demand from China, in the wake of its economic slowdown. Just a few years ago, foreign workers were flooding into Australia, lured by huge pay as the resources industry scrambled to fill positions. Truck driving and cooking jobs offering $100,000 a year made headlines abroad. But those workers, like Junio, are now hard-pressed to find work, especially if they are on temporary visas. Even permanent residents have to take lower pay. “There is reality coming into the marketplace about salaries,” said John Downing, who runs global resources recruiting firm Downing Teal, adding that salary expectations have fallen 10% to 25%.

“For Lease” signs are everywhere in West Perth, the headquarters of many mining, oil and gas companies. “You could shoot a cannon down those streets,” said resources analyst Peter Strachan. “There’s nobody there.”Commercial vacancy rates in the city are near a 20-year high of 15% as resources companies downsize or shut down, said Joe Lenzo, of the Property Council of Australia. The real estate market has also been hit in the coal country of Queensland, across the continent. “Owner will throw in a brand new car,” read advertisements for houses in the coal-mining town of Moranbah. “Just pick your favorite colour.”

There’s something very positive about South America.

• Venezuela To Get South American Help For Food Crisis (BBC)

Foreign ministers from 12 South American nations gathering in Caracas have promised to help Venezuela overcome an ongoing shortage of food, medicine and other products. The regional Unasur bloc agreed with President Nicolas Maduro to provide items that have gone missing from many Venezuelan supermarkets. The shortage of staples has contributed to popular discontent. Unasur highlighted the importance of safeguarding democratic stability. “The idea is to get all the countries to support the distribution of staples,” said Ernesto Samper, Secretary-General of Unasur (Union of South American Nations). “We will work together with the Venezuelan authorities to strengthen the distribution networks in our countries so they help Venezuela,” said Mr Samper.

He criticised recent anti-government protests in Venezuela that descended into violence. The opposition must “express its opinions in a democratic, peaceful and lawful manner,” said Mr Samper. The Unasur ministers will meet opposition leaders and government officials in the next few days to seek guarantees that Venezuela will be able to hold free and fair elections later this year. Opposition leader Henrique Capriles told the AFP news agency on Tuesday that Mr Maduro could cancel the vote, which is scheduled for the second half of this year. “The government had never had such a large deficit [in the polls] heading into an election. Now it does. How does it change that? It rigs the game,” said Mr Capriles. Mr Maduro said the elections would go ahead as planned.

“For us, water is [now] more important than oil.”

• Why Fresh Water Shortages Will Cause The Next Great Global Crisis (Guardian)

Water is the driving force of all nature, Leonardo da Vinci claimed. Unfortunately for our planet, supplies are now running dry – at an alarming rate. The world’s population continues to soar but that rise in numbers has not been matched by an accompanying increase in supplies of fresh water. The consequences are proving to be profound. Across the globe, reports reveal huge areas in crisis today as reservoirs and aquifers dry up. More than a billion individuals – one in seven people on the planet – now lack access to safe drinking water. Last week in the Brazilian city of São Paulo, home to 20 million people, and once known as the City of Drizzle, drought got so bad that residents began drilling through basement floors and car parks to try to reach groundwater.

City officials warned last week that rationing of supplies was likely soon. Citizens might have access to water for only two days a week, they added. In California, officials have revealed that the state has entered its fourth year of drought with January this year becoming the driest since meteorological records began. At the same time, per capita water use has continued to rise. In the Middle East, swaths of countryside have been reduced to desert because of overuse of water. Iran is one of the most severely affected. Heavy overconsumption, coupled with poor rainfall, have ravaged its water resources and devastated its agricultural output. Similarly, the United Arab Emirates is now investing in desalination plants and waste water treatment units because it lacks fresh water.

As crown prince General Sheikh Mohammed bin Zayed al-Nahyan admitted: “For us, water is [now] more important than oil.” The global nature of the crisis is underlined in similar reports from other regions. In south Asia, for example, there have been massive losses of groundwater, which has been pumped up with reckless lack of control over the past decade. About 600 million people live on the 2,000km area that extends from eastern Pakistan, across the hot dry plains of northern India and into Bangladesh, and the land is the most intensely irrigated in the world. Up to 75% of farmers rely on pumped groundwater to water their crops and water use is intensifying – at the same time that satellite images shows supplies are shrinking alarmingly.

“I look at . . . so many forests, all cut, that have become land . . . that can [no] longer give life..”

• The Francis Miracle: Inside The Transformation Of The Pope And The Church (TIME)

It was probably inevitable that the first pope named Francis—inspired by a saint who preached to birds and gave pet names to the sun and the moon—has turned out to be a strong environmentalist. In fact, Francis has said that concern for the environment is a defining Christian virtue. (The young Jorge Bergoglio trained as a chemist, so he has a foundation to appreciate the scientific issues involved.) This element of the social gospel bubbled to the surface as early as his inaugural mass, when Francis issued a plea to “let us be ‘protectors’ of creation, protectors of God’s plan inscribed in nature, protectors of one another and of the environment.” St. Francis’s imprint on this pope is clearly strong. In unscripted comments during a meeting with the president of Ecuador in April 2013, he said, “Take good care of creation. St. Francis wanted that.

People occasionally forgive, but nature never does. If we don’t take care of the environment, there’s no way of getting around it.” The two previous popes were also environmentalists. The mountain-climbing, kayaking John Paul II was a strong apostle for ecology, once issuing an almost apocalyptic warning that humans “must finally stop before the abyss” and take better care of nature. Benedict XVI’s ecological streak was so strong that he earned a reputation as “the Green Pope” because of his repeated calls for stronger environmental protection, as well as gestures such as installing solar panels atop a Vatican audience hall and signing an agreement to make the Vatican Europe’s first carbon-neutral state. Francis is carrying that tradition forward.

Among other things, he told French President François Hollande during a January 2014 meeting that he is working on an encyclical on the environment. (An encyclical is considered the most developed and authoritative form of papal teaching.) The Vatican has since confirmed that Francis indeed intends to deliver the first encyclical ever devoted entirely to environmental issues. In a July 2014 talk at the Italian university of Molise, Francis described harm to the environment as “one of the greatest challenges of our times.” It’s a challenge, he said, that’s theological as well as political in nature. “I look at . . . so many forests, all cut, that have become land . . . that can [no] longer give life,” the pope continued, citing South American woodlands in particular. “This is our sin, exploiting the Earth. . . . This is one of the greatest challenges of our time: to convert ourselves to a type of development that knows how to respect creation.”

Debt Rattle February 22 2015

Feb 222015

February 22, 2015 Posted by Raúl Ilargi Meijer at 11:22 am Finance Tagged with: Germany, GMO, Greece, Merkel, NATO, pope, Russia, Ukraine 12 Responses »

DPC “Car ferry Michigan Central turning in ice, Detroit River” 1900

• Yellen Confronts Economists’ Ignorance (Bloomberg)

• How The Eurozone Could Tear Apart (Telegraph)

• Greece, The Euro And Solomon’s Wisdom (Kathimerini)

• Greece Says Eurozone Deal Won Time As Cash Bled From Banks (Reuters)

• The Real Battle Over Greece Still Lies Ahead (Bloomberg)

• From Greek Warriors To Battered Soldiers – In A Week (Observer)

• Germany Set To Approve Greek Deal If Promises Met: Merkel Ally (Reuters)

• What Would Happen if Greece Leaves the Euro Zone? (Spiegel)

• The 1 Reason Pope Francis Is The World’s Top Capitalist (Paul B. Farrell)

• Russians Rally Against Kiev ‘Coup’ (BBC)

• Poroshenko Bruised By Ukraine Army Retreat (BBC)

• NATO Must Prepare For Russian Blitzkrieg, Warns UK General (FT)

• Kerry Warns of More Russia Sanctions as Ukraine Simmers (Bloomberg)

• Ousted Ukraine Leader Aims To Return As Rockets Threaten Peace Plan (Observer)

• Ukraine, Rebels Swap Dozens Of Prisoners (Reuters)

• Modi Bets On GMO Crops For India’s Second Green Revolution (Reuters)

What were ya thinking?

• Yellen Confronts Economists’ Ignorance (Bloomberg)

Productivity is probably the most important measure of economic health that policy makers know the least about. Its pace will help determine how soon Federal Reserve Chair Janet Yellen and her colleagues increase interest rates and how far rates ultimately will rise. A quicker advance would argue for a later lift-off because the economy would have more room to run before bumping up against capacity constraints. It also eventually would require a higher ending point to prevent the more-vibrant expansion from overheating. Slower productivity would call for the opposite strategy. The trouble, according to former Fed Vice Chairman Alan Blinder, is that economists – including those at the Fed – don’t have a good idea of how fast productivity will grow in the next few years.

The long-run trend is “hugely important,” but “it can take years” to recognize any changes, he said in an interview. Yellen will lay out the central bank’s views of the economy and policy when she testifies before Congress next week. At their Jan. 27-28 meeting, officials discussed the timing and pace of potential rate increases. Many were inclined to keep the benchmark federal fund rate near zero “for a longer time,” according to minutes of the gathering released Feb. 18. John Fernald, a senior research adviser at the Federal Reserve Bank of San Francisco, pegs the trend growth rate of productivity at 1.8% a year for U.S. businesses and 2.1% for the economy as a whole.

Such projections are consistent with the Fed raising rates this year for the first time since 2006, said Dale Jorgenson, a professor at Harvard University in Cambridge, Massachusetts, and former chairman of its economics department. The margin of error around Fernald’s forecast is wide, though, as he is the first to acknowledge. “There’s basically an 80% chance over the next 10 years that productivity growth will average between 1 and 3%,” the Fed official said. Productivity measures the overall efficiency of the economy and matters beyond the central bank. It governs how fast the economy can expand, how much companies can earn and pay their workers, and how much the government can increase its budget. That is why economists put in a lot of time trying to parse it out.

a 10000 ways.

• How The Eurozone Could Tear Apart (Telegraph)

The eurozone was never designed with an exit plan in mind. The Maastricht Treaty’s 112 pages make no mention of a way for a country to pull out of the euro project. At the height of the eurozone crisis in 2011 and 2012, policymakers refused to countenance the idea of a splintered euro bloc. When pressed on the issue in late 2011, Mario Draghi, the president of the ECB, would only say the possibility “is not in the treaty”. He was discussing the chance of a Greek exit – or Grexit – from the euro, a risk that has come back to haunt the project’s architects in recent weeks. The rise of populist anti-austerity parties across the continent – including Syriza in Greece – threatens to tear apart the bloc. Last week analysts warned that the risk of a euro breakup was greater than at the height of the last crisis. The odds on a Grexit offered this Friday – before a deal between Greece and its creditors was struck – gave it a more than a one-in-three chance by the end of the year.

A breakup of a currency union such as this would have been without recent precedent. The classic example of a union breaking apart – in the absence of violent conflict – is the Austro-Hungarian empire in 1918. It provides a crucial lesson: changes in currency need surprise. Anyone with assets will attempt to move them to safe havens, wary of a sharp devaluation. To work well, as few people as possible should know about the planned switch. Michael Spencer, an economist, told NPR’s Planet Money that while in principle it can be done: “It is much more likely that people see this coming.” The most likely suspects for a euro exit all have weaker economies than the area as a whole. Wary that whatever new currency is issued is likely to suffer a sharp devaluation, anyone with assets will attempt to move them to safe havens. To work well, as few people as possible should know about the planned switch.

In 1918, it became apparent that a breakup was imminent. Mr Spencer said that people took “boxcar loads of currency” across borders to where, upon conversion, their money would have greater worth. The process of conversion then involved stamping currency with ink, as almost all money was held in a physical form. Now, most savings are held electronically, and could be converted in an instant. So as long as word doesn’t get out, most cash can be dealt with. If it does, then capital can flee even more quickly than before, as shuffling currency to a different currency no longer relies upon the maximum speed of a horse. In Greece this deposit exodus has already begun. Capital outflows have reached €1bn a day. JP Morgan warned a week ago that capital flight would leave lenders without collateral within 14 weeks. By Friday, fears that a compromise would not be found led deposits to fall by a further €1bn in just two days, Reuters said citing sources.

“It doesn’t take the wisdom of Solomon to see that the defeat of one is the defeat of all.”

• Greece, The Euro And Solomon’s Wisdom (Kathimerini)

Today we will see who cares more for the future of the Greek people and for the eurozone’s stability, and which government places its own prestige above all else. Will Athens give more ground? Will Berlin remain unyielding? The 19 finance ministers of the Eurogroup face a paradox: they know that what is good for the Greeks is good for the common currency and vice versa – but the clumsy handling of the issue by the protagonists of the drama has created division which harms both Greece and the euro. How can the rift be bridged so that Greece can return to its efforts for economic recovery and Europe can move toward greater union? The Greek government has covered a lot of ground from its initial promises to halve the public debt, reject the austerity program in whole, roll back many reforms and turn its back on the troika of creditors.

On Wednesday, Athens asked the Eurogroup for a six-month extension of the aid agreement and accepted many of its partners’ demands – to the point that this was widely seen as capitulation. Of course, the proposal was murky on several points, so that the government could save face but also implement at least parts of its policy. This was quickly noted by the German Finance Ministry, which rejected the Greek proposal. It is significant that Greece made major concessions whereas Germany remained fixed in its position. We could argue, of course, that Greece had to cover a greater distance because it had strayed so far from the bailout agreement it had reached with its partners, whereas Germany was simply insisting on the restoration of order. But it is also clear that Berlin needs to show some flexibility in order to achieve progress – given the weaknesses, mistakes and many injustices of the program implemented in Greece.

The rigid imposition of the agreements (with only some unclear promises of future flexibility in the program) mirrors the initial rigidity of the Greek government, which put its utopian promises above the need to come to an honorable compromise with its partners. Athens started off by drawing red lines across existing agreements and commitments, presenting any effort at compromise as an effort to blackmail it into surrender. Fortunately, the German “no” did not derail today’s Eurogroup meeting and there is still some hope for an agreement that will allow both sides to work toward the stability of the Greek economy and of the euro. If both sides move a little closer they may just achieve this. Then Greece will be able to turn toward problems that need urgent attention and the EU will have shown that with some flexibility – in a show of leadership and not vengeance – it can keep alive the spirit of communal progress. It doesn’t take the wisdom of Solomon to see that the defeat of one is the defeat of all.

The Greek economy and the Greek government weren’t strangled, as was perhaps the original political plan by centers abroad and within the country..”

• Greece Says Eurozone Deal Won Time As Cash Bled From Banks (Reuters)

Greece’s left-wing government insisted on Saturday it had avoided being “strangled” by the eurozone, which agreed in principle to extend a financial rescue deal as nervous savers pulled huge sums from Greek banks. Athens said the deal struck late on Friday in Brussels should calm Greeks who had feared capital controls might be imposed as a prelude to leaving the euro. But some weary voters questioned what their new leaders had achieved in weeks of testy exchanges with euro zone hardliners led by EU paymaster Germany. After often ill-tempered negotiations, Greece secured late on Friday a four-month extension to euro zone funding, which will avert bankruptcy and a euro exit, provided it comes up with promises of economic reforms by Monday.

“We won time,” said government spokesman Gabriel Sakellaridis. “The Greek economy and the Greek government weren’t strangled, as was perhaps the original political plan by centers abroad and within the country,” he told Mega TV, without naming the euro zone hawks who forced the government into a climbdown at the Brussels talks. Prime Minister Alexis Tsipras has won wide support at home for what Greeks see as their leaders finally getting tough instead of going to Brussels cap in hand and taking orders from Berlin. But it was also under intense pressure at home. About €1 billion flooded out of Greek bank accounts on Friday, due to savers’ fears that the talks would fail and Athens might have to halt such withdrawals or prepare to reintroduce a national currency.

This added to an estimated €20 billion euros that Greeks have withdrawn since December, when it became clear that the radical SYRIZA party of Tsipras was likely to win power in last month’s parliamentary elections. Faced with the risk of a chaotic bank run on Tuesday after a long holiday weekend, Finance Minister Yanis Varoufakis stressed that the deal should calm savers. “It is quite clear that the reason why we had a deposit flight was because every day, even before we were elected, Greeks were being told that if we were elected and we stayed in power for more than just a few days the ATMs will cease functioning,” he told reporters in Brussels on Friday. “Today’s decision puts an end to this fear, to the scaremongering.”

“Syriza’s “red lines won’t be violated, that’s why they’re called red.”

• The Real Battle Over Greece Still Lies Ahead (Bloomberg)

Greek Prime Minister Alexis Tsipras claimed an initial victory after emergency talks with creditors gave the country a reprieve from the prospect of insolvency, as he began the task to sell the deal domestically. “Yesterday we won a battle, but not the war as the difficulties, the real difficulties, not only those related to the discussions and the relationship with our partners, are ahead of us,” Tsipras said in a televised speech on Saturday. Talks in Brussels between officials from the 19 euro-area countries concluded late Friday with an agreement to extend bailout funds to Greece for four months. Tsipras’s government must submit a list of economic measures it will undertake on Monday. Finance chiefs will then decide whether his proposals go far enough.

While the agreement potentially frees up some money to meet at least some of the pledges made by Tsipras before last month’s election, the outcome may still prove politically bruising for him. Even after last night’s agreement, his policies are subject to validation by the International Monetary Fund, the European Central Bank and the European Commission, the institutions collectively known as the troika from which Tsipras vowed to break free. “While Greece secured some ability to rewrite the terms of its current program, the sense is that the combination of pressure on its banking sector and on state cash flows has forced the bulk of concessions to come from their side,” Malcolm Barr, economist at JPMorgan Chase & Co., said in a client note. “This may place some degree of strain within Syriza itself.”

Tsipras said the deal “cancels austerity” and pledges by the previous government to cut wages, pensions and public sector employees and increase sales taxes. The list of reforms will be “based on the current arrangement,” the Eurogroup meeting of finance ministers said in a statement. That will include corruption fight, public administration and tax system changes, government spokesman Gabriel Sakellaridis said on Mega TV on Saturday. Syriza lawmakers would approve the list of measures even if they didn’t fully meet pre-election promises, George Stathakis, Greek minister for economy, shipping, tourism and infrastructure, said in an interview in Kathimerini. Still, Environment and Energy Minister Panagiotis Lafazanis said in an interview with Real News that Syriza’s “red lines won’t be violated, that’s why they’re called red.”

Not getting the idea.

• From Greek Warriors To Battered Soldiers – In A Week (Observer)

Greece’s people have undergone hardship on a scale not seen in a developed country since the 1930s. At the same time, Athens was effectively forced to subcontract economic policymaking to the troika, with its budgets pored over line by line by unelected foreign officials. And as the Jubilee Debt Campaign recently pointed out, more than half of the bailout funds went not to keep schools and hospitals open, but to repay the private sector speculators, in many cases German and French banks, that lent recklessly to Greece in the runup to the crisis, charging the government in Athens little more to borrow at the time than they asked of the parsimonious Germans. Tsipras and Varoufakis were right to question the virtue of austerity as a catalyst for economic recovery, too. The ECB’s recent decision to unleash a €60bn-a-month quantitative easing programme underlines the fact that demand in the eurozone economies remains weak and the recovery fragile.

Yet once Varoufakis and his colleagues were in the harsh spotlight of the world’s media in Brussels, they appeared ill-equipped for the brutal battle. For one thing, they appeared to give away many of their strongest cards almost as a starting point. Debt forgiveness, much talked about during the campaign, seemed to be off the agenda; “Grexit”, which should have been Varoufakis’s nuclear option, seemed ruled out from the start. While extremely risky, default and devaluation could have offered the Greek economy a re-set; and the market chaos that would inevitably follow would exact a high price for other eurozone members. Varoufakis should surely have left that possibility hanging like a sword over last week’s talks, instead of insisting in his long-winded introductory remarks – later leaked to the press – that “Greece is a permanent and inseparable member of the European Union and our monetary union”.

Perhaps it was a tactic, but there was a lot of bluster and very few numbers in Greece’s initial proposals. Wolfgang Schäuble also has a democratic mandate and he was always going to want to see how Athens would make the sums add up. In the end, when Friday night’s deal was announced, it was hard to see what Varoufakis had salvaged. Admittedly no one used the word “bailout”, instead referring to “the Master Facility Agreement”. But Greece will accept the supervision of the troika (without calling it such), submitting detailed reform proposals for review by the end of Monday; it will refrain from “rowing back” on reforms where they might endanger “fiscal sustainability”; and it will seek an extension of financial support, “on the basis of the conditions of the current arrangement”. What’s more, instead of the six-month bridging loan it had asked for, it will get just four months’ grace.

Merkle will prove to be useless in peacetime.

• Germany Set To Approve Greek Deal If Promises Met: Merkel Ally (Reuters)

The German parliament is likely to approve a four-month extension to euro zone funding for Greece, on condition Athens presents a list of reforms as promised, a senior ally of German Chancellor Angela Merkel was quoted as saying. “The Greeks have to do their homework now,” Volker Kauder, leader of Merkel’s conservatives in parliament, told Welt am Sonntag newspaper, according to excerpts of an interview published on Saturday. “Then, an extension of the aid program can be approved by the German Bundestag.” Kauder added: “Greece has finally realized that it cannot turn a blind eye to reality.”

Greece late on Friday secured its four-month funding extension, averting bankruptcy and a euro exit, provided it comes up with promises of economic reforms by Monday. However, Greek Prime Minister Alexis Tsipras said on Saturday the agreement struck with euro zone ministers cancelled austerity commitments made to international creditors by a previous conservative-led government. Other German conservative lawmakers welcomed the agreement cautiously, but also stressed there was still work to do. “We’ve taken an important step forward, but we’ve not reached the finishing line yet,” said Ralph Brinkhaus, deputy parliamentary floor leader for Merkel’s conservatives.

“..companies, banks and governments all prepare for the kind of worst case scenario that isn’t even addressed in euro-zone statutes..”

• What Would Happen if Greece Leaves the Euro Zone? (Spiegel)

On Wednesday of this week, 30 top managers at a large German bank all received a text message and an email at the exact same time. A short time later, their mobile phones rang with an automated voice giving them all passwords and a number to call at exactly 8:30 a.m. to join a teleconference with the board of directors. The communication blast was the initial step of the bank’s emergency “Grexit” plan, a strategy laid out in a document dozens of pages long detailing exactly how managers should react in the event that Greece leaves the euro zone. Each of the 30 bank managers were required to work through the emergency measures pertaining to his or her division. Information was to be transferred to the supervisory board and public officials were likewise to be kept informed as was the German Finance Ministry.

The plan also called for large investors to be put at ease. Questions pertaining to potential bank losses from Greek bond holdings were to be addressed as were changes in monetary transactions with Greece once it was no longer part of the common currency zone. The response also extended to internal bank communication, with instructions to employees for dealing with the new situation posted in the financial institution’s intranet. Customers and stake holders were also to be kept informed. At exactly 6 p.m., the crisis came to an end, as did the work day. Plan “Grexit” was just a dry run, nothing more. At least not yet. Such scenarios are being acted out across Europe these days as companies, banks and governments all prepare for the kind of worst case scenario that isn’t even addressed in euro-zone statutes: the exit of one of the common currency area’s member states.

On Thursday, Greece’s new government under Prime Minister Alexis Tsipras finally applied for an extension to its bailout program. But, from the perspective of German Finance Minister Wolfgang Schäuble, he failed to fulfill the conditions laid down by the Euro Group. Chancellor Angela Merkel spoke on the phone with Tsipras and negotiations have continued, with the next major round scheduled for Friday night. But even if a compromise is found in the end, the game of high-stakes poker will not be over. Both sides would have to agree to a new plan for nursing the country back to financial health.

Farrell going astray…

• The 1 Reason Pope Francis Is The World’s Top Capitalist (Paul B. Farrell)

Yes, Pope Francis really is a capitalist. Forget his anticapitalist, anticonsumerism rhetoric. Unless he reverses Catholicism’s outdated and destructive dogma on population control, Francis is destined to help capitalists take absolute control of the global economy …. and do more damage to Planet Earth’s climate than the “poison of consumerism.” Yes, thanks to Pope Francis and his dogma on population control, marriage and contraception, capitalists have a steady supply of new consumers fueling their growth. And they’ll get far richer as this supply of new consumers grows to 10 billion by 2050. Why is this so crucial? Because the pope’s failure to reverse the Catholic Church’s historic religious policies on birth control is fueling population growth … guaranteeing explosive consumer growth for capitalists … strengthening capitalism.

Will Pope Francis ever change? Unlikely, certainly not in time to save the world from capitalism’s guaranteed self-destructive trajectory. Why? Because Francis is handicapped by his all-male army of more than 200 cardinals, 5,000 bishops and 450,000 priests all committed to celibacy, against artificial birth control, all driven by perpetual population growth policies also essential to economic growth in today’s capitalist economy, while also accelerating climate change disasters that will eventually decimate human civilization, self-destruct the planet, and even destroy their precious capitalism! Can’t save the world? Well actually there is one way Francis could save the world, if he chose to. He could reverse the Catholic dogma fueling out-of-control global population growth.

Yes, that’d ne a start, but not enough. The pope would then have to convince more than his 1.2 million Catholic faithful. He’d also have to nudge all heads of state, and the world’s seven billion humans, especially young parents making babies, that they’d have cut back their family expectations. But that isn’t going to happen, in time. Climate disasters? You bet, demographic experts like The Earth Institute’s Jeff Sachs, who warns that by the end of this century the planet not only can’t feed 10 billion, we cannot even feed five billion. What a dilemma: Parents love babies. Families thrive on children. Capitalists also love babies, but for a different reason. Babies are consumers, fuel businesses, increase revenues, profits, wealth. It’s a simple economic equation, capitalists just see babies as new consumers. It’s all about money, period. Later, those babies grow up. The cycle continues.

Wow, BBC even!

• Russians Rally Against Kiev ‘Coup’ (BBC)

A rally has taken place in Moscow to condemn the “coup” in neighbouring Ukraine, a year after the downfall of its pro-Russian president. Russian state media heavily promoted the rally and march with the slogan “We won’t forget! We won’t forgive!”. Ukraine’s protests ousted pro-Russian President Viktor Yanukovych in 2014. Speaking on Russian TV, the ex-leader condemned “lawlessness” in Ukraine, saying the situation there had caused him “very many sleepless nights”. Since Mr Yanukovych’s departure, Russia has annexed Ukraine’s Crimea peninsula and is accused of backing rebels in eastern Ukraine. A ceasefire plan agreed this month in Minsk has appeared close to collapse since taking effect just over a week ago. The Ukrainian government, Western leaders and Nato say there is clear evidence that Russia is helping the rebels in eastern Ukraine with heavy weapons and soldiers. Independent experts echo that accusation. Moscow denies it, insisting that any Russians serving with the rebels are “volunteers”.

Nearly 5,700 people have died since the fighting erupted last April and some 1.5 million people have fled their homes, according to the UN. Groups of demonstrators gathered in central Moscow on Saturday under patriotic Russian banners. Police estimated that about 35,000 people in total took part. The Moscow event was styled as an “anti-Maidan” march – a reference to Ukraine’s pro-EU protests that started on Kiev’s central Independence Square, widely known as the Maidan. The BBC’s Sarah Rainsford, at the scene, says the event was highly organised, with flags and banners distributed and buses laid on from some provinces. The marchers included Cossacks in full uniform and young women in anoraks emblazoned with pictures of Russian President Vladimir Putin, she says.

Legal status please?

• Poroshenko Bruised By Ukraine Army Retreat (BBC)

The question is not whether the fall of the strategically important road and rail hub of Debaltseve was a blow to Ukraine’s political and military leaders. It was. The question is how big the impact will be. President Petro Poroshenko is portraying the retreat of thousands of Ukrainian government forces as an “orderly” tactical withdrawal. However, initial reports indicate it may have been just the opposite. It is still possible that the retreat avoided a larger, more catastrophic defeat – something along the lines of the Ilovaysk debacle last summer, when Ukrainian forces were encircled by insurgents and possibly regular Russian forces, and were ambushed as they attempted to escape, with untold numbers killed. Much of the political fallout will depend on how big the Debaltseve losses were. So far, the government is saying at least 13 soldiers were killed, 157 wounded, 90 captured and 82 missing.

But the actual figures might be much higher. Also potentially damaging could be the reportedly slapdash, chaotic manner in which the evacuation was carried out, with soldiers escaping on foot after their vehicles were destroyed, and large amounts of armour and ammunition left behind. Already there are rumblings of public discontent. “I have seen this with my own eyes, on the battlefield and in the army headquarters, how military action is planned and executed,” Semyon Semenchenko, commander of the volunteer Donbass battalion, told the BBC. “I can assure you that we lost Debaltseve not because of the Russian military advantage, but because our generals refuse to take responsibility,” he said. Mr Semenchenko has proposed a “parallel” co-ordinating structure for the volunteer battalions fighting in the east. So far 13 battalion leaders have signed up, including Dmytro Yarosh of the nationalist Right Sector.

Mr Semenchenko insists this is not to replace, but to help, the army’s general command in “information exchange, planning, logistical assistance and facilitating mobilisation.” Still, his announcement raised concerns. Eight battalion commanders have refused to join the body, calling on Mr Semenchenko to “end his daily populist and PR statements”. President Poroshenko seems to have a firm grip on power, and many Ukrainians believe he is doing his best in a horrible political and economic situation. Nonetheless, his popularity is slipping. A recent poll showed his approval rating had decreased from 57% to 45%, with 46% saying he was doing a bad job. The “don’t knows” were 9%. Debaltseve has not helped matters at all. And it is possible that the defeat – should the truth be worse than what is being presented at the moment – could significantly damage the Ukrainian president..

Stupid is as stupid does.

• NATO Must Prepare For Russian Blitzkrieg, Warns UK General (FT)

Nato forces must prepare for an overwhelming Blitzkrieg-style assault by Russia on an eastern European member state designed to catch the alliance off guard and snatch territory, the deputy supreme commander of the military alliance has warned. Openly raising the prospect of a conventional armed conflict with Russia on European soil, the remarks by Sir Adrian Bradshaw, second-in-command of Nato’s military forces in Europe, are some of the most strident to date from Nato. They come amid a worsening in relations with the Kremlin just days into a second fragile ceasefire aimed at curbing continued bloodshed in Ukraine’s restive east between Kiev’s forces and Russian-backed separatists.

Speaking at the Royal United Services Institute think-tank in London on Friday, Sir Adrian warned that as well as adapting to deal with subversion and other “hybrid” military tactics being used by Russia in Ukraine, allied forces needed to be prepared for the prospect of an overt invasion. “Russia might believe the large-scale conventional forces she has shown she can generate at very short notice — as we saw in the snap exercises that preceded the takeover of Crimea — could in future not only be used for intimidation and coercion, but could be used to seize Nato territory,” he said.

Sir Adrian is a former commander of British land forces and the most senior UK officer in the alliance. He added: “After which the threat of escalation might be used to prevent re-establishment of territorial integrity — this use of so-called escalation dominance was, of course, a classic Soviet technique.” Deploying overwhelming force at short notice has become a hallmark of recent Russian military exercises. Russia’s 2013 “Zapad” (“West”) war game involved the rapid mobilisation of 25,000 troops in Belarus and the enclave of Kaliningrad for a conflict with a Nato state.

The Heinz tool box.

• Kerry Warns of More Russia Sanctions as Ukraine Simmers (Bloomberg)

U.S. Secretary of State John Kerry warned that further sanctions may be imposed against Russia over the next few days if further breaches of a truce in Ukraine continue. “Some additional steps will be taken in response to the breaches of this cease-fire,” Kerry told reporters at the U.S. Embassy in London after talks Saturday with U.K. Foreign Secretary Philip Hammond. “There are some yet very serious sanctions that can be taken which have a profound, increased negative impact on the Russian economy.” Ukraine accused Moscow of sending more troops into eastern Ukraine, contravening a European-brokered truce that was reached in Minsk and took effect Feb. 15. U.S. officials said at the time they wouldn’t rule out imposing tougher sanctions on Russia or giving more security assistance to Ukraine if the Minsk deal isn’t fully implemented.

“We know to a certainty what Russia has been providing and no amount of propaganda is capable of hiding these actions,” Kerry said. Moscow has denied accusations that its forces are fighting in Ukraine. The Russian economy is already swaying as households are hit by a 44% slump in the ruble in the past year and prices soar. “We are not seeking to hurt the people of Russia who regrettably pay a collateral price as a result of these sanctions,” Kerry said, but “increasingly there will be an inevitable, broader impact as the sanctions ratchet up.” Kerry travels to Geneva Sunday for two days of talks with senior Iranian officials on Tehran’s disputed nuclear program before a March 24 deadline for a framework agreement.

The Ukrainian cease-fire agreement brokered last week has been tested by persistent clashes near the cities of Donetsk and Mariupol. Ukraine’s pro-Russian rebels and the government prepared to exchange prisoners in a move toward meeting the terms of the agreement.
Ukraine, the U.S., the European Union and the North Atlantic Treaty Organization say Russia is backing the separatists with hardware, cash and troops – accusations leaders in the Kremlin deny. Russia says Ukraine is waging war on its own citizens and discriminates against Russian speakers, a majority in the Donetsk and Luhansk regions. EU President Donald Tusk said Friday he’d start consultations on new steps “to increase further the costs of aggression on eastern Ukraine” in response to continued “ruthless attacks” by the rebels.

Ok, well, that’s a bit much maybe.

• Ousted Ukraine Leader Aims To Return As Rockets Threaten Peace Plan (Observer)

Ousted Ukrainian president Viktor Yanukovych has controversially spoken out from self-imposed exile in Russia, promising, exactly a year after he fled Kiev, to return to Ukraine to ease people s lives and help stop the war. Yanukovych’s interview with Russia’s state-owned Channel One was his first public appearance since he gave two bizarre press conferences in Rostov-on-Don in February and March 2014, claiming he remained Ukraine’s president. I regret that I was unable to do anything, Yanukovych said. As soon as it s possible, I will come back and do everything in my power to ease people’s lives. The main task now is to stop the war. In the year since he fled, Russian president Vladimir Putin has annexed Crimea, Russia-backed rebels have established breakaway republics in eastern Ukraine, and at least 5,600 people have died in the conflict.

Yanukovych is despised across much of Ukraine, viewed as a corrupt Russian puppet by the pro-western protesters that forced him from office, and as a coward in the pro-Russia east. As he spoke, a fragile peace plan remained in the balance, with a prisoner exchange proceeding on Saturday amid continued shelling. Meanwhile thousands assembled in Moscow for an anti-Maidan rally . Veterans, Cossacks, prominent pro-Putin bikers and others waved signs denouncing Kiev, and banners reading, We don t need western ideology and gay parades, and Putin is our president.

Rows of buses parked nearby and the rapid departure of attenders after the rally raised suspicions that hired protesters had been brought in from other regions, a common tactic at pro-Kremlin rallies. In Kiev, Petro Poroshenko, the oligarch who publicly backed the EuroMaidan protests last winter and was elected president in May, blamed Russia for inciting conflict at an anniversary vigil in memory of more than 100 demonstrators killed at the height of the unrest. Commemorations continued on Saturday with a display by the defence ministry of grenade-launchers, drones and other weaponry seized in eastern Ukraine, which it claimed was from Russia.

Without the CIA f%#ing things up..

• Ukraine, Rebels Swap Dozens Of Prisoners (Reuters)

Ukrainian government forces and pro-Russian separatists have exchanged dozens of prisoners in east Ukraine, a Ukrainian Security Council aide confirmed on Sunday, a step toward implementing an internationally brokered peace deal. Reuters reporters in the village of Zholobok, 20 km (12 miles) west of the rebel stronghold of Luhansk, saw more than 130 Ukrainian servicemen being released late on Saturday evening in exchange for 52 rebel fighters. The exchange is one of the first moves to implement the peace deal reached on Feb. 12 in the Belarussian capital Minsk after the French, German, Russian and Ukrainian leaders met. The Security Council’s Markian Lubkivskyi, in a post on his Facebook page early on Sunday, published a list of the 139 released Ukrainian servicemen and said the government would do its utmost to free those remaining in rebel captivity.

Fighting has eased in many areas since a ceasefire came into effect a week ago, but the truce was badly shaken by the rebel capture on Wednesday of the strategic town of Debaltseve, forcing a retreat by thousands of Ukrainian troops. The Ukrainian military said rebels had launched 12 separate attacks on government troop positions overnight, using artillery and mortar fire. The town of Pesky near Donetsk had seen the most intense fighting, while separatist groups had attempted to “storm” Ukrainian positions in Shyrokyne, east of the strategic port city of Mariupol on the Sea of Azov, it said on Facebook.

Kiev accuses separatists of building up forces and weapons in Ukraine’s southeast and has said it is braced for the possibility of a rebel attack on Mariupol. Nevertheless, rebel leaders said on Saturday they had signed a document detailing a plan for the withdrawal of heavy weapons, as required by the Minsk agreement, a sign they may be prepared to halt their advance, having achieved their main military objective by seizing Debaltseve. The rebel press service DAN said Ukrainian troops had been shelling parts of Donetsk, reporting that artillery fire could be heard in the city at around 0730 GMT.

That’s all Monsanto needs: an idiot in charge of 20%+s of the world population, and who can be bought.

• Modi Bets On GMO Crops For India’s Second Green Revolution (Reuters)

On a fenced plot not far from Indian Prime Minister Narendra Modi’s home, a field of mustard is in full yellow bloom, representing his government’s reversal of an effective ban on field trials of genetically modified (GM) food crops. The GM mustard planted in the half-acre field in the grounds of the Indian Agricultural Research Institute in New Delhi is in the final stage of trials before the variety is allowed to be sold commercially, and that could come within two years, scientists associated with the project say. India placed a moratorium on GM aubergine in 2010 fearing the effect on food safety and biodiversity. Field trials of other GM crops were not formally halted, but the regulatory system was brought to a deadlock. But allowing GM crops is critical to Modi’s goal of boosting dismal farm productivity in India, where urbanization is devouring arable land and population growth will mean there are 1.5 billion mouths to feed by 2030 – more even than China.

Starting in August last year, his government resumed the field trials for selected crops with little publicity. “Field trials are already on because our mandate is to find out a scientific review, a scientific evaluation,” Environment Minister Prakash Javadekar told Reuters last week. “Confined, safe field trials are on. It’s a long process to find out whether it is fully safe or not.” Modi was a supporter of GM crops when he was chief minister of Gujarat state over a decade ago, the time when GM cotton was introduced in the country and became a huge success. Launched in 2002, Bt cotton, which produces its own pesticide, is the country’s only GM crop and covers 95% of India’s cotton cultivation of 11.6 million hectares (28.7 million acres). From being a net importer, India has become the world’s second-largest producer and exporter of the fiber.

However, grassroots groups associated with Modi’s Hindu nationalist Bharatiya Janata Party (BJP) have opposed GM crops because of the reliance on seeds patented by multinationals. The Swadeshi Jagran Manch, a nationalist group which promotes self-reliance, has vowed to hold protests if GM food crops are made commercially available. “There is no scientific evidence that GM enhances productivity,” said Pradeep, a spokesman for the group. “And in any case, why should we hand over our agriculture to some foreign companies? A handful of agrichemical and seeds companies dominate the global market for GM crops, including Monsanto, DuPont, Dow and Syngenta. Largely agricultural India became self-sufficient in foodgrains after the launch of the Green Revolution in the 1960s, when it introduced high-yielding seed varieties and the use of fertilizer and irrigation. The challenge now is to replicate that success in edible oils and vegetables, which are increasingly in demand.

Debt Rattle January 24 2015

Jan 242015

January 24, 2015 Posted by Raúl Ilargi Meijer at 12:24 pm Finance Tagged with: deflation, drought, Greece, housing, middle class, oil, pope, Syriza 6 Responses »

Unknown Goodyear service station, San Francisco Sep 14 1932

• Ripped Off, Poor, Suicidal: The Greek Farmers Turning To Syriza (Channel4)

• Syriza’s Rise Fueled by Professors-Turned-Politicians (WSJ)

• Economist Vatikiotis: Syriza Proposals Don’t Go Far Enough for Greece (Truthout)

• Tsipras Aims For Deal With Lenders By This Summer (Kathimerini)

• German Finance Minister To Greece: We Support You (CNBC)

• Nothing Is Going to Save the US Housing Market (A. Gary Shilling)

• Central Banks Powerless To Prevent Steep Rise In Real Rates (Russell Napier)

• Will ECB’s Bazooka Be A Game Changer For Emerging Markets? (CNBC)

• Head West for Best Look at US Oil Drillers’ Pain (Bloomberg)

• Ruble Colluding With Oil Brews Russian Toxic Loan Morass (Bloomberg)

• Spain Finance Minister: We Have The ‘Good Kind’ Of Deflation (CNBC)

• Italy Central Bank: We Are Lagging Behind The World (CNBC)

• States Where the Middle Class Is Dying (24/7 Wall St)

• Labor-Force Participation May Hold Key To Fed Moves (MarketWatch)

• Billions in Lost 401(k) Savings, Abusive Brokers Under Scrutiny (Bloomberg)

• RT Equated To ISIS For ‘Daring To Advocate A Point Of View’ (RT)

• Brazil’s Most Populous Region Faces Worst Drought In 80 Years (BBC)

• Pope Francis’s US Tour Will Set Off Economic Fireworks (Paul B. Farrell)

“They keep saying if Syriza wins we’ll be like North Korea or Venezuela. The politicians who tried that line are making a laughing stock of themselves.”

• Ripped Off, Poor, Suicidal: The Greek Farmers Turning To Syriza (Channel4)

There’s pizzazz tonight at the election rally of the Greek conservatives. There is a lot of money riding on their victory. But right now it looks like the election is slipping away from Prime Minister Antonis Samaras. Two polls last night put Syriza ahead – one, by the usually authoritative Mega channel, has the far left on 32.5% against New Democracy’s 26.5%. More polls today tell the same story: a widening Syriza lead. If Greece does elect Alexis Tsipras as the first far-left prime minister in Europe since the 1930s, then the place where it’s lost and won will not be Athens. Syriza is making inroads into towns and provinces that have traditionally voted right. In the gulf of Corinth there are a whole string of mountain villages that have traditionally been known as “castles” for the two main parties – ND and the centre-left Pasok. But Pasok has collapsed, and even some conservative voters are swinging over to support the left.

In Assos, a sleepy farming village Giannis Tsogkas, a grape farmer aged 56, explains why the place has swung towards the left. “Two-thirds of the land here has been mortgaged to the banks. Now we can’t pay our debts and we’re in constant fear of repossession. These are the worst times we’ve ever seen. We’re at a point where we can’t afford anything. “We used to go to the supermarket three times a week, now we only go once every two weeks – and we count every single cent we spend. It never used be like this: we had money, we were.. We produced, we sold, we had an income.” There’ve been a string of suicides, he tells me. And not just because of austerity. Every year, he alleges, the merchants who buy their grapes refuse to pay, or go bust. The legal system is so decrepit that it cannot help them. For the farmers in Assos the problems of falling incomes and a political system they see as corrupt merge into one.

“They shoved us into austerity with the IMF. The small farmer will die, that’s it. People here keep committing suicide. So we looked for someone to protect us, and we found it in Syriza.” Ten years ago Syriza got a grand total of 121 votes in the village – just over 2%. In the June 2012 general election it came second, with 22%. Last year, in the Euro elections it topped the polls with 27% – and Mr Tsogkas believes it will win easily on Sunday. It’s anger like this that has seen poll swings to Syriza in rural areas, suburban communities, and even regions like Thessaly that were once strongly right-wing. The government, which had relied on a fear strategy to stop Syriza, seems bereft of strategy. In the local coffee shop in Assos we meet other farmers, once staunch supporters of the centrist Pasok party. “They keep saying if Syriza wins we’ll be like North Korea or Venezuela. The politicians who tried that line are making a laughing stock of themselves. I don’t care who governs us, I care about Greece,” one man says angrily.

Greece’s best and brightest come home to save the nation.

• Syriza’s Rise Fueled by Professors-Turned-Politicians (WSJ)

Wearing suit pants and a jacket, Costas Lapavitsas stood Wednesday afternoon on the floor of a steel-fabricating shop here and addressed a few dozen workers and small-business owners who smoked while sitting in plastic chairs. “I am not a career politician,” he began. Indeed. Mr. Lapavitsas’s political career is only a few weeks old. In Greece’s elections Sunday, he is a parliamentary candidate for the leftist opposition party Syriza, which leads Prime Minister Antonis Samaras ’s conservative party in the polls and could roil politics throughout Europe if it wins. For more than 20 years, the 54-year-old Mr. Lapavitsas has taught economics at the University of London’s School of Oriental and African Studies. Now, he is part of the cadre of academics-turned-politicians forging Syriza’s economic thinking. European economic orthodoxy, led by Germany, has fought Greece’s debt crisis with painful austerity—public-spending cuts and tax hikes—and other strict reforms.

Syriza’s rise is the most potent challenge yet to that orthodoxy. If Syriza wins, it could embolden left-wing parties in other countries, especially Spain, where political tensions also are boiling. It could even result in a rift with Germany that ruptures the euro. The economic plan advanced by Mr. Lapavitsas and other professors aligned with Syriza is rooted in the core principles of debt forgiveness and higher government spending, which Germany has rejected. “We need to renegotiate the logic,” says Yanis Varoufakis, a visiting professor at the University of Texas at Austin until a few days ago. He describes himself as a “libertarian Marxist” and has been recruited by Syriza to run for a seat in Greece’s parliament. A few years ago, Syriza was a fringe coalition of leftists. It jumped into the political mainstream in 2012 because of populist fervor and the party’s charismatic young leader, Alexis Tsipras. But a muddy economic message left Syriza in second place—and out of power.

It has honed its focus since then, and Mr. Lapavitsas describes the party’s platform as “a Keynesian program with redistribution attached, with some Marxist view of the world.” He adds: “We are not ashamed of that.” In the tradition of John Maynard Keynes, Syriza advocates public spending to reignite economic growth. Greece can afford to spend more if some of its debt is forgiven by other countries. Nikolaos Chountis, a Syriza candidate in Athens, ticks off the party’s spending priorities: food and electricity subsidies for impoverished households, a pension boost for the poorest retirees, a hike in the minimum wage and tax cuts for low earners. “The legislation is ready..” Since 2010, Greece’s economic policy has largely been dictated by the “troika” of technocrats appointed by Europe and the International Monetary Fund to supervise Greece’s €240 billion ($280 billion) bailout. The troika wields a memorandum that minutely details what Greece must do in return for the rescue. Section 5.1.2.6.ii. commits Greece to reviewing customs procedures for canned peaches and four other products.

Worth perusing.

• Economist Vatikiotis: Syriza Proposals Don’t Go Far Enough for Greece (Truthout)

Economist Leonidas Vatikiotis, previously a European Parliament candidate with Greece’s Antarsya political party, shares his take on the upcoming elections in Greece, the economic proposals put forth by main opposition party Syriza, and the need, in his view, for Greece to depart from the eurozone. Michael Nevradakis: We left off before the holidays in the midst of the election for a new president of the Hellenic Republic, and we are now in the new year and in the midst of a snap parliamentary election in Greece. There are many government politicians, pro-government analysts and Greek and international media outlets who keep talking about the irresponsible, as they characterize it, stance of the opposition in not voting in favor of the government’s candidate for the presidency of the republic and for not averting these snap elections. How do you view this issue?

Leonidas Vatikiotis: To characterize as irresponsible a position adopted by several political parties that are represented in parliament, simply because they exercised their constitutional right not to vote for the government’s candidate for the presidency, is an insult to even the most basic democratic ideals. Syriza, the Communist Party of Greece, and the Independent Greeks exercised their constitutional right, and if we want to get to the heart of the matter, what Greek society as well as the political parties in parliament learned from this is that the government did not wish to simply extend its term in office. We were told that the government wished, through the election of its candidate for the presidency of the republic, Stavros Dimas, to extend its hold on power and complete its full four-year term. However, what the government of Antonis Samaras and Evangelos Venizelos also wanted was, essentially, the acceptance by Greek society of a new, and more severe, memorandum agreement.

“The troika leaked to the press that Greece still needed to ratify over 1,000 measures which it had agreed to with the troika but which had not yet been passed legislatively through the Greek parliament.” We should note where the negotiations between the Greek government and its lenders left off, at the Eurogroup meeting on December 8. At that time, the eurozone refused to continue negotiations to complete its review of the Greek economy, pending the election of a new government in Greece. On December 8, the negotiation cycle, which began during the summer of 2014, came to a close, and this was a period during which the government and the prime minister himself, Antonis Samaras, proclaimed that Greece had emerged from the crisis, that the memorandum agreements were a thing of the past, and that better days were ahead, that troika oversight of the Greek economy, which had been in place since May of 2010, would cease.

The intentions of Greece’s lenders, however, were quite different: The troika leaked to the press that Greece still needed to ratify over 1,000 measures which it had agreed to with the troika but which had not yet been passed legislatively through the Greek parliament. This was the point where the Samaras-Venizelos government did not continue its negotiations, knowing that there was no way that it could fulfill the demands of the troika and pass these measures through parliament.

Nice detail: “..he suggested that he would negotiate with representatives of European Union institutions, rather than troika officials.”

• Tsipras Aims For Deal With Lenders By This Summer (Kathimerini)

SYRIZA leader Alexis Tsipras will aim to conclude an agreement with Greece’s international lenders by the summer if his party is able to form a government after Sunday’s elections. In a televised news conference Friday, Tsipras sketched out his plans for government and revealed that he had no specific plans for meeting German Chancellor Angela Merkel if he becomes prime minister. The SYRIZA chief suggested that his government would enter negotiations with Greece’s eurozone partners after being elected and would aim to wrap up talks on the way forward in the relationship between the two sides by July or August, when Greece has a series of debt obligations to meet.

Tsipras said that he is aiming to achieve a “sustainable, mutually acceptable solution for Greece and for Europe.” However, he suggested that he would negotiate with representatives of European Union institutions, rather than troika officials. “Austerity is not enshrined in European treaties,” said Tsipras, adding that his government would recognize Greece’s “institutional obligations” toward the EU but not the “political commitments”» made by the outgoing government. When asked where he would make his first official trip to if elected prime minister, Tsipras said it would be Cyprus. He added that he would not seek direct talks with Merkel. “I do not recognize Mrs Merkel as being any different from the other leaders,” he said. “She is one of 28 so I will not rush to meet her.”

The Greeks know what that is worth. Germany keeps saying: ‘Better do what we tell you to do’.

• German Finance Minister To Greece: We Support You (CNBC)

Germany’s finance minister Wolfgang Schaueble denied that the country has started preparations for a Greece exit from the euro zone, ahead of a key election in the turbulent Mediterranean country on Sunday. “We did whatever could be done to support Greece in difficult times, again and again,” Schaueble told a CNBC panel at the World Economic Forum in Davos, Switzerland. “We had to convince the IMF to make very extraordinary conditions so that we could support this,” he said of the frantic discussions between International Monetary fund and European Union authorities around the $147 billion bailout of Greece in 2010. “There were endless discussions.”

Now, talk among commentators and politicians in Germany suggests the government is more open to the idea of a Greek exit from the single currency region – even though Chancellor Angela Merkel and other senior politicians still want it to stay. “We don’t need any problems,” Schaueble said. “We will wait on the elections in Greece.” The possibility of a Greek exit from the euro zone, if left-wing Syriza, which campaigns on an anti-austerity platform, gains power next week, is only one of many potential political events which could cause turmoil in markets this year. “Most of the disturbing things today that can go wrong are political,” legendary investor George Soros warned in Davos.

How many Americans do you think see this Shilling’s way?

• Nothing Is Going to Save the US Housing Market (A. Gary Shilling)

U.S. housing activity remains weak despite six years of federal government aid, strong interest from overseas buyers, rock-bottom interest rates and massive purchases of mortgage bonds by the Federal Reserve. Does this mean housing may never spring back to its pre-recession levels? Many signs point to yes. Don’t blame the Chinese, who are showing an abundance of interest. Their share of foreign purchases leaped to 16% in the year ending March 2014, from 5% in 2007. They paid a median price of $523,148, higher than any other nationality and more than double the $199,575 median price of all houses sold. The value of home sales to all foreigners rose 35% last year to $92 billion, up more than 50% since 2007 and accounting for 7% of all existing home sales. Foreigners view U.S. homes as safe investments and U.S. schools as good places to teach their children English.

But such robust foreign purchases can’t overcome what ails the U.S. housing market. Activity is weak even now that banks are no longer tightening mortgage-lending standards, according to a Fed survey. Banks are searching for new lines of business since the Dodd-Frank reform law and regulations are depriving them of revenue from proprietary trading, derivative origination and investing and off-balance sheet activities. The end of the mortgage refinancing surge has added to the pressure on banks. By necessity, banks remain selective about the mortgages they’ll underwrite, having paid huge penalties for originating and selling bad mortgages pre-crisis. Banks are also being careful to avoid the high cost of mortgage defaults now that they must repurchase loans with underwriting defects. The result can be seen in foreclosure data: In the third quarter, banks began foreclosure proceedings on only 0.4% of mortgages, far below the 1.4% level in the peak of the financial crisis.

Fed Chair Janet Yellen worries about the negative effects of tight credit standards on housing. While she admits that lenders should have raised their standards earlier, “any borrower without a pretty positive credit rating finds it awfully hard to get a mortgage,” she said in July. Even Ben Bernanke, her predecessor, was turned down when he tried to refinance his mortgage. With the federal funds rate at essentially zero and the Fed having ended its purchases of mortgage securities, the central bank can’t do much to help housing now. The Barack Obama Administration, however, is reversing some of the government post-crisis tightening of lending standards. Fannie Mae and Freddie Mac, which remain under government control and now guarantee about 90% of all new mortgages, have reduced the underwriting standards on packages of mortgages they guarantee, including allowing loans with as little as 3% down payments.

“..central bankers cannot fix very much..”

• Central Banks Powerless To Prevent Steep Rise In Real Rates (Russell Napier)

The Swiss National Bank (SNB) failed to ‘fix’ the exchange rate between the Swiss Franc and the Euro. The simple lesson which investors must learn from this is – central bankers cannot fix very much. The inability of the Swiss National Bank to ‘fix’ the exchange rate will come to be seen as the end of the bull market in the omnipotence of central bankers. Think for just a moment of all the key variables which you believe are ‘fixed’ (made firm), fixed (repaired) , fixed (circumvention of the laws of supply and demand) or fixed (dosed with monetary narcotics) by central bankers. These various fixes by central bankers across the world can also fail. That process of failure began in Bern and Zurich early one morning on January 15th 2015.

As the OED entries for the word ‘fix’ make clear, the failure of the SNB to fix the exchange rate was on many levels. It failed to ‘ fix’ the exchange rate in terms of making the Swiss Franc ‘firm’ to the Euro and hence ‘deprive it of volatility or fluidity’. It failed to ‘fix’ the exchange rate as the ‘laws‘ of supply and demand were ultimately not circumvented. For many, particularly Swiss exporters, the material appreciation of the Swiss Franc on the international exchanges will not ‘fix’ the currency in terms of making it ‘ready for use’. Finally, the adjustment in the exchange rate removes, rather than administers, the dose of monetary ‘narcotic’ in the form of excess growth in Swiss Franc liquidity and cheap funding for speculators in Euro. The monetary ‘fix’, which was the by-product of fixing the exchange rate, has ceased to be and the price of equities has collapsed.

“..the weaker euro reduces the purchasing power of the Europeans and therefore their ability to import from Asia..”

• Will ECB’s Bazooka Be A Game Changer For Emerging Markets? (CNBC)

The ECB bold bond-buying scheme is set to provide a temporary boost to Asian equities but is no game changer for the region’s markets, say analysts. After months of speculation, the ECB on Thursday pledged to buy €60 billion ($70 billion) worth of private and public bonds each month until September 2016 in a program that could amount to €1.1 trillion. This was more aggressive than the €50 billion in monthly asset purchases analysts expected. Investors applauded the move, sending European and U.S. equities higher overnight.The positive sentiment carried over into the Asian trading session on Wednesday, with South Korea’s KOSPI rising 0.8% and Indonesia’s Jakarta Composite up 1%. But, analysts expect the lift will be short-lived.”I doubt the increased liquidity will be driving a lot of fund inflows into Asia [over the medium-term],” Stephen Sheung at SHK Private told CNBC.

“A lot of that amount of money will likely be stuck in European banking system rather than flowing out,” he said.Funds that do flow out are likely to go into the U.S. or U.S. dollar assets instead of Asian stocks, Sheung said, citing deteriorating growth in the region.”We have growth problems here in Asia, U.S. economic conditions are on a much more stable footing, and there are prospects for further U.S. dollar appreciation,” he said. Nicholas Ferres, investment director at Eastspring Investments points out that the ECB’s action may have negative implications for European demand for Asian goods, due to the weakening euro. This does not bode well for Asian exporters. “[On the negative side], the weaker euro reduces the purchasing power of the Europeans and therefore their ability to import from Asia,” Ferres said.

The euro sank to a more than 11-year low against the dollar and a three-month low against the yen on Thursday following the ECB’s announcement.”On the positive side, it will likely improve risk perceptions and risk appetite and that might help cheap cyclical stocks rally,” he said.More than liquidity finding its way into Asia markets, Sheung says the ECB action is likely to drive Asian intuitional investors and large corporations to make investments in Europe.”With liquidly abundant and the euro cheaper, it makes investments more attractive,” he said.”Asian investors won’t necessarily look at equities or debt but more at direct investments in projects or infrastructure. This has been a hot topic for the past two to three quarters.”

“Within the past four weeks, drillers idled half of their rigs in the state..”

• Head West for Best Look at U.S. Oil Drillers’ Pain (Bloomberg)

Little is going right for California’s oil industry. Turns out the state’s shale formation holds less promise than producers expected. Aging conventional wells are drying up. And a rebound in output that cost drillers as much as $3 billion annually to create has been overshadowed by shale oil gushing from wells in North Dakota and Texas. Then, of course, came the collapse in oil prices – a seven-month, 57% drop that was exacerbated by OPEC’s refusal to cut output in order to squeeze the U.S. shale drillers. No state is feeling that pressure more than California. Drillers there have idled more rigs – on a proportional basis – than those in any other part of the country.

“We spent a lot of money to go out and drill and use new technologies just to stop production from depleting in our mature fields,” Rock Zierman, chief executive officer of trade group California Independent Petroleum Association, said by phone. “It took us a lot of capital to basically run in place and now we’re looking at crude prices under $40 a barrel.” While U.S. benchmark West Texas Intermediate oil has fallen by more than half since June, California’s heavy Kern River crude has lost 65% of its value. The spot price of that oil slid to $34.87 a barrel on Jan. 22, below Gulf Coast crudes, below Bakken in North Dakota and under Alaska North Slope oil.

Falling prices haven’t been all bad for California. Governor Jerry Brown said in an interview with Bloomberg News Jan. 15 that while the decline in California’s oil drilling is “of concern,” drivers are benefiting. Gasoline is under $2.50 a gallon for the first time since 2009 in a state that’s usually home to some of the most expensive fuel in the country. Relief at the pump will save the average California household $675 this year, said Patrick DeHaan, a Chicago-based senior petroleum analyst at GasBuddy Organization Inc. “The oil price decline goes right into consumer spending,” Brown said at his Oakland office. “So there will be trade-offs.” Within the past four weeks, drillers idled half of their rigs in the state, dragging the total down to the lowest since 2009. Oil output, which had been creeping up since 2011, is now little changed and a slide will probably follow.

Messy.

• Ruble Colluding With Oil Brews Russian Toxic Loan Morass (Bloomberg)

An increasingly toxic mixture of high interest rates, spiraling inflation and plunging oil means Russian banks will probably need a lot more than the $18 billion set aside last year to protect against bad loans. Russia is facing an “extremely widespread” banking crisis in 2015, and lenders may need to boost provisions for souring debts to $50 billion should oil stay in the mid-$40s, according to Herman Gref, the head of the nation’s biggest lender, Sberbank. That’s after banks increased reserves by 42% last year, compared with 27% in Turkey and 7.5% in Poland in the first 11 months, official figures show. Seven of Russia’s 10 worst-performing bonds this year are from banks as policy makers raised rates by the most since 1998 to shore up the ruble, whose 47% slide over the past 12 months deepened the burden of loan payments for consumers and businesses.

With the economy foundering after crude’s decline and sanctions over Ukraine, the ratio of bad debt will double from the third quarter of 2014 to as much as 13% by year-end, according to Liza Ermolenko at Capital Economics in London. “Bad loans will continue to pile up,” Yulia Safarbakova, an analyst at BCS Financial Group, said by phone. “Companies can’t refinance because of the rate increase and the ruble devaluation has hit them hard.” Lenders are on the front line of Russia’s economic crisis, bearing the brunt of oil’s slump and sanctions over President Vladimir Putin’s annexation of Crimea from Ukraine in March. The turmoil that followed forced the central bank to raise interest rates six times to shore up the ruble, choking loan growth to an almost four-year low, while retail deposits declined and bank profits tumbled 41%. The currency’s slide helped drive inflation to a five-year high of 11.4% in December, curtailing the central bank’s ability to reduce borrowing costs even as executives of the biggest Russian banks warn of the strain they are under.

Certified idiot.

• Spain Finance Minister: We Have The ‘Good Kind’ Of Deflation (CNBC)

The specter of growth-sapping deflation may have finally arrived in the euro zone but you won’t find policymakers in Spain panicking anytime soon. The country has made some “bold reforms” in the last three years, Luis de Guindos, the country’s finance minister told CNBC on Friday, shrugging off the weak consumer price data and blaming it on the dramatic fall in the price of oil. “This is positive, this is a positive sign. In Spain, oil prices are reducing the inflation rate. And it’s not because we have deflation. It’s totally different, inflation is like cholesterol. There are two kinds of deflation. The bad one and the good one. In Spain, you know, we have the good kind,” Luis de Guindos, told CNBC at the World Economic Forum in Davos.

This is the deflation that is filling the pockets of the households, he added, and has been fueled by the reforms Spain has taken in the energy markets and the cheaper price of oil at the pump, he said. Prices in the euro zone fell 0.2% year-on-year in December, marking the first time since 2009 that prices have dipped into negative territory. But the statistics for Europe showed that energy was indeed weighing massively on prices with an annual fall of 6.3%. In Spain, annual consumer prices fell around 1% in December. As well as energy reforms, de Guindos boasted that Spain’s new policies were the perfect example of the reforms that the euro zone is looking for.. “We were on the brink three years ago…we have started to reap the rewards of those policies,” he said.

Couldn’t possibly be even partly his fault, could it?

• Italy Central Bank: We Are Lagging Behind The World (CNBC)

The governor of the central bank of Italy has said slowness to reform and political uncertainty in Italy has left it “lagging behind” other nations, partly due to the political instability the country has faced in recent years. Speaking from the World Economic Forum in Davos, Switzerland, Bank of Italy Governor Ignazio Visco said during his time in office at the central bank, he has seen five separate finance ministers come and go, which has dented foreign investment in the country. “While (German finance minister) Mr. Schauble has been in office (in Germany) for the three years I have been governor of the Bank of Italy, I have had 5 finance ministers. This is a major problem – we need certainty for investment,” he told CNBC. “We are lagging behind a number of sectors, areas in innovation and technological change. We have had enormous change at the global levels in the last 20 years and we should really cut the distance.

This is why you need stability in a number of areas, among them price stability and this is what we are trying to deliver,” he said. Visco also dismissed concerns that the euro could slide below the U.S. dollar, adding that euro dollar exchange rate, which has seen the euro fall to 11-year lows against the greenback after European Central Bank President Mario Draghi unveiled a new stimulus package on Thursday, was not a level central bankers monitored.. “Parity is a figure of imagination really. I have been the chief economist at the OECD when the euro was introduced, we were foreseeing that from $1.19 it should go to £1.30, it went to $0.80, so it’s better not to talk about what is the target,” he said. “We do not target the euro, there is no question. This is a channel of transmission of monetary policy, we are doing monetary policy the old fashioned way, we are simply supplying money to the economy,” Visco added.

“..a decoupling of productivity and wages..”

• States Where the Middle Class Is Dying (24/7 Wall St)

The American economy is by many measures well on the road to full recovery. The national unemployment rate was 6.2% in 2013, down from 9.3% in 2009; U.S. gross domestic product grew 5% in the third quarter of 2014; and the S&P 500 recently reached its all time high. And yet the middle class, which historically was the driver of economic growth, is falling behind. The average income among middle class families shrank by 4.3% between 2009 and 2013, while incomes among the wealthiest 20% of American households grew by 0.4%. Based on average pre-tax income earned by the third quintile, or the middle 20% of earners in each state, middle class incomes in California declined the most in the country. Incomes among middle class Californian households fell by nearly 7% between 2009 and 2013, while income among the state’s fifth quintile, or the top 20% of state earners, grew by 1.3%. [..]

According to Joe Valenti, director of asset building at the Center for American Progress, the American middle class is essential for economic growth because middle income families are spending relatively large shares of their incomes on goods and services. “An additional dollar in the hands of a middle income earner is going to drive a lot more spending than an additional dollar in the hands of someone in that top quintile,” Valenti said. While households in the top quintile are able to spend enormous sums of money, “at some point there’s only so much that an individual can spend, even on all different kinds of luxury goods.” While the middle class is the most important cohort in terms of spending and has in the past been essential for economic growth, middle income families have been the victims of wage stagnation. Valenti argued that as early as the 1970s, American companies started becoming much more productive.

However, because of “a decoupling of productivity and wages,” wages among many workers have remained stagnant, and many in the middle class “have not been able to reap the benefits of higher productivity,” Valenti explained. Instead, returns from higher productivity have gone to owners and investors and not to the workers, he said. Many of the beneficiaries of these returns are likely part of the wealthiest 20% of households, whose incomes have grown in recent years. Much of the income growth among the highest earning households is likely due to stock market gains. As Thomas Piketty argues in “Capital in the 21st Century,” income inequality results from a higher return on capital — money used to make more money in the stock market or other revenue-generating assets — than wage and GDP growth. With the rich holding a disproportionate share of money in the stock market, their incomes have recovered much faster than those of middle class workers.

Not very strong, Barry.

• Labor-Force Participation May Hold Key To Fed Moves (MarketWatch)

Economic historian Barry Eichengreen has spent a lifetime looking at mistakes that economic policymakers have made, especially in his best known work about the Great Depression. In an interview with MarketWatch, Eichengreen, an economics professor at the University of California, Berkeley, discussed some of the challenges facing the Fed, and a recent example of a policy mistake by the Swiss National Bank. He also warns that Washington’s tepid response to the financial crisis makes another, even bigger crisis, a possibility.

MarketWatch: Do you think the Fed will be able to lift interest rates this year?

Eichengreen: I have been skeptical for a while about the market consensus that the Fed is likely to move in June. I’ve been wondering whether the labor force participation rate may begin to rise again, in which case inflationary pressures will remain subdued and the unemployment rate will not continue to fall. And that rise in the labor force participation rate could indeed happen, we simply don’t know. I think the Fed will wait and see before it moves. Now we have in addition a strong dollar that may grow even stronger. That’s going to create headwinds for economic growth in the U.S. and I think it is quite conceivable that it could lead the Fed to wait longer. Finally there is volatility. There is the Swiss National Bank, kind of reminding us that volatility happens. It’s important to recall that the SNB is a small central bank of a small country in the grand scheme of things. If [the SNB] making a surprise move can wrong foot the market so dramatically, imagine what could happen if a big central bank pulled a surprise. So it’s quite possible, in my view, there is more volatility coming, and the Fed will have to deal with that too.

MarketWatch: What are the lessons for the Fed from the Swiss National Bank decision? The Fed has to be cautious and certain before it moves?

Eichengreen: I think the silver lining here is that at the cost of a recession in Switzerland and deflation in Switzerland, the SNB having made a serious mistake, it has reminded us that financial markets are not as liquid as they have been in the past, and there can be very big market moves as a result of a central bank surprise. So people will be looking more closely at the shadow banking system then they have been in the last relatively complacent year. We can thank the SNB for that if nothing else. And secondly, I think central banks have had a reminder about the importance of good communications policy, which we did not have coming out of Switzerland last week. The Yellen Fed has been very focused on the importance of communications and they will be even more focused as a result of last week, which can only be a good thing.

“The current regulatory environment creates perverse incentives that ultimately cost savers billions of dollars a year.”

• Billions in Lost 401(k) Savings, Abusive Brokers Under Scrutiny (Bloomberg)

One of President Barack Obama’s top economic advisers said abusive trading practices are costing workers billions of dollars in retirement savings each year and called for stricter rules on Wall Street brokers. Jason Furman, chairman of Obama’s Council of Economic Advisers, drafted a Jan. 13 memo citing research that says some broker practices, such as boosting commissions with excessive trading, cost investors $8 billion to $17 billion a year. The document was circulated to senior aides and indicates the White House may support tighter oversight of brokers who handle retirement accounts. The memo, obtained by Bloomberg News, makes the case for a Labor Department regulation that would impose a fiduciary duty on brokers handling retirement accounts, requiring them to act in their clients’ best interest.

Under current rules, brokers are held to a ‘suitability’ standard, meaning they must reasonably believe their recommendation is right for a customer. “Consumer protections for investment advice in the retail and small-plan markets are inadequate,” Furman wrote in the memo, also signed by Betsey Stevenson, another member of the economic council. “The current regulatory environment creates perverse incentives that ultimately cost savers billions of dollars a year.” Wall Street has spent more than four years lobbying against the Labor rule. Led by firms like Morgan Stanley and Bank of America, the industry has argued that costlier regulations would take away options for smaller investors, who would lose access to advice as well as investment choices.

A White House official said the document, titled “Draft Conflict of Interest Rule For Retirement Savings,” shouldn’t be seen as a new turn in the Labor Department’s rulemaking. That process, the official said, would include a comment period if the administration moves forward. The Labor Department last year indicated that its proposal could come as soon as this month. A fiduciary duty on brokers would provide “meaningful protections” to investors, according to the memo.

Anything goes in America these days.

• RT Equated To ISIS For ‘Daring To Advocate A Point Of View’ (RT)

Following comments from the US overseas broadcasting chief listing RT as a challenge alongside the Islamic State and Boko Haram, critics said the outlet was singled out for “daring to advocate a point of view,” as well as for “competing for viewership.” On Wednesday, the new chief of the US Broadcasting Board of Governors (BBG), Andrew Lack, told the New York Times that RT posed a significant challenge – putting the broadcaster in a list alongside the Islamic State and Boko Haram terror groups. The comments have since been denounced on social networks and across the media spectrum. Speaking to RT, legal analyst and media commentator Lionel said the channel was being outrageously singled out and equated to the Islamic State for “daring to advocate a point of view.” “In the history of incoherent statements, this might be the granddaddy of them all.

In reading this, he alleges that Russia Today pushes… ‘a point of view,’” he told RT’s Ameera David. Georgetown University journalism professor Chris Chambers added that Lack’s words were “supremely silly and careless,” especially considering his media background. Lack previously worked for NBC, Bloomberg, and Sony Music. “This is a guy who has some media savvy, supposedly, even though he’s moved around a lot – maybe this is one reason he’s moved around,” Chambers told RT. “But this was a very careless and silly thing to say considering the prevalence of corporate media here in the United States, and the purpose of BBG’s constitutes like Voice of America, who are supposed to put out all kinds of views.” While Lack’s comments were roundly criticized, Steven Ellis of the International Press Institute said he was right in one way. “Mr. Lack could have phrased his comments more carefully: RT does indeed pose a challenge to US international broadcasting in terms of competing for viewership,” he said.

“Brazil is supposed to be in the middle of its rainy season but there has been scant rainfall in the south-east and the drought shows no sign of abating.”

• Brazil’s Most Populous Region Faces Worst Drought In 80 Years (BBC)

Brazil’s Environment Minister Izabella Teixeira has said the country’s three most populous states are experiencing their worst drought since 1930. The states of Sao Paulo, Rio de Janeiro and Minas Gerais must save water, she said after an emergency meeting in the capital, Brasilia. Ms Teixeira described the water crisis as “delicate” and “worrying”. Industry and agriculture are expected to be affected, further damaging Brazil’s troubled economy. The drought is also having an impact on energy supplies, with reduced generation from hydroelectric dams. The BBC’s Julia Carneiro in Rio de Janeiro says Brazil is supposed to be in the middle of its rainy season but there has been scant rainfall in the south-east and the drought shows no sign of abating. The crisis comes at a time of high demand for energy, with soaring temperatures in the summer months.

“Since records for Brazil’s south-eastern region began 84 years ago we have never seen such a delicate and worrying situation,” said Ms Teixeira. Her comments came at the end of a meeting with five other ministers at the presidential palace in Brasilia to discuss the drought. The crisis began in Sao Paulo, where hundreds of thousands of residents have been affected by frequent cuts in water supplies, our correspondent says. Sao Paulo state suffered similar serious drought problems last year. Governor Geraldo Alckmin has taken several measures, such as raising charges for high consumption levels, offering discounts to those who reduce use, and limiting the amounts captured by industries and agriculture from rivers. But critics blame poor planning and politics for the worsening situation. The opposition says the state authorities failed to respond quickly enough to the crisis because Mr Alckmin did not want to alarm people as he was seeking re-election in October 2014, allegations he disputes.

Should be fun.

• Pope Francis’s US Tour Will Set Off Economic Fireworks (Paul B. Farrell)

Pope Francis headlines are hard-hitting, targeted, staccato twitters, you get the whole truth in a series of blastings. First, starting with: “Pope Francis Has Declared War on Climate Deniers,” New Republic. Then, at the Week we read: “Republican Party’s war with Pope Francis has finally started,” Yes, 2015 is now a war zone: GOP conservatives at war with the Vatican. Then the Federalist, a conservative website, waves a red flag warning: “Don’t Pick Political Fights With Pope Francis.” Why? “Conservatives have everything to lose and nothing to gain from getting mad at Pope Francis for his public comments on homosexuality, global warming, free speech, and more.” Yes, conservatives warning Republicans: Don’t go to war with Pope Francis, you will lose.

He’s got an army of 1.2 billion faithful worldwide including 78 million American Catholics. Francis will win. A huge army. More important, Francis has a direct link to a heavenly power source. As the 266th descendent of the first leader of Christians, St. Peter, the pontiff will be touring America this fall. First stop, Philadelphia. Ring the Liberty Bell. Yes, Francis is actually on a campaign tour, selling his new economic mandate. And watch out. Behind that sweet smile and happy demeanor, this former boxer is attacking everything conservatives, capitalists, Big Oil, energy billionaires and Republicans love, cherish and believe as gospel. And they can’t defend their agenda nor counterpunch him directly.

From Philly, the pontiff’s campaign march heads for New York City where he’ll address the United Nations General Assembly, pushing his anticapitalist, anti-inequality, anti-the-superrich, anti-global warming, pro-climate-change, pro-the poor, pro-do-the-right-thing moral agenda. Then Francis will jet to Washington and our nation’s capitol, where a grumbling John Boehner and stoic Mitch McConnell have no choice but to invite Pope Francis to address a joint session of Congress. They may wish Pope Francis would quietly disappear. But that just isn’t going to happen, not after six million just attended his mass in the Philippines. He’s a seasoned campaigner, selling a powerful new economic agenda.

Debt Rattle January 21 2015

Jan 212015

January 21, 2015 Posted by Raúl Ilargi Meijer at 11:28 am Finance Tagged with: brokers, Davos, deflation, oil, pope, rate hikes, rigs, riot, TTIP, vortex 3 Responses »

DPC Cab stand at Madison Square, NY 1900

• All Empires Die By Deflation – Not Inflation (Martin Armstrong)

• Global Dollar Economy Hits ‘Deflationary Vortex’ (Zero Hedge)

• Albert Edwards: ‘Markets Will Riot’ On Deflation (Huebscher)

• QE Warfare Pushing World Financial System Out Of Control (AEP)

• Fed Officials on Track to Raise Short-Term Rates Later in the Year (WSJ)

• Central Bankers Lurch From ‘Whatever It Takes’ To ‘Whatever Next’ (Reuters)

• Storm Clouds Gather Over US Economy: Can The Miracle Last? (CNBC)

• Davos Is About More Control And Banksterism, Not Solutions: Lew Rockwell (RT)

• Brokers Reveal Details Of Damage From Swiss Chaos (Independent)

• Iran Oil Minister Sees ‘No Threat’ From $25 Oil (MarketWatch)

• BHP Billiton Cuts US Shale Oil Rigs By 40% Amid Sliding Price (AFP)

• Chinese Stocks’ Booms and Busts Getting Bigger on Margin Debt (Bloomberg)

• The Era Of 7% Growth Is Over For China (CNBC)

• Defiant Obama Pushes ‘Middle-Class Economics’ (Reuters)

• Credit Rater S&P to Be Banned for Year From Commercial-Bond Market (Bloomberg)

• If Money Speaks Louder Than Words, Is It Speech? (Reuters)

• No Clear Majority Yet In EU For TTIP Trade Deal (Reuters)

• Ukraine Crisis ‘Turning Point’ Close: Russian Deputy PM (CNBC)

• If Christine Lagarde And Her EU Pals Are Our Friends, Who Needs Enemies? (IM)

• Pope Francis: Failing to Care for Environment Is a Betrayal of God (Slate)

“This is the death-spiral of empires. They consume all wealth until none is left.”

• All Empires Die By Deflation – Not Inflation (Martin Armstrong)

A lot of people have asked what to do because property taxes keep rising and they can see they are unable to retire under such circumstances. The politicians are wiping out the elderly diminishing their savings and exploiting them in every way. There are no exceptions for taxation when you sell your home as there are in Britain. You pay no tax on the profits from a primary residence there. In the USA, you are taxed until you die. and then they want what is left. Property taxes are the worst of all taxes for they prevent you from really owning your home. Can’t pay the tax – they take it and sell it for pennies on the dollar. You have to pay taxes as if you were still working so all you can do is sell and move south and then pay taxes on your gains. New Jersey even put in an exit tax on the people it has been forcing to leave.

California has been hunting former residents who moved demanding taxes on pensions claiming they earned it when living in that state. It is a wonder why we do not yet have a sea of grey hair people with guns and pitchforks storming Washington yet. This is how empires die. Taxes in Rome kept rising. Its population peaked about 180AD and as corruption began to rise, people began to leave. The higher the taxes, the more people left town. Eventually, people could not afford the taxes and were forced to just abandon their homes. This is the death-spiral of empires. They consume all wealth until none is left. Indeed, Ben Franklin got it right – our fate is always doomed by death and taxes. By the Middle Ages, the Roman Forum, was the grazing grounds for animals. Edward Gibbon wrote the best epitaph:

“Her primeval state, such as she -might–appear in a remote age, when Evander entertained the stranger of Troy, has been delineated by the fancy of Virgil. This Tarpeian rock was then a savage and solitary thicket; in the time of the poet, it was crowned with the golden roofs of a temple, the temple is overthrown, the gold has been pillaged, the wheel of Fortune has accomplished her revolution, and the sacred ground is again disfigured with thorns and brambles. The hill of the Capitol, on which we sit, was formerly the head of the Roman Empire, the citadel of the earth, the terror of kings; illustrated by the footsteps of so many triumphs, enriched with the spoils and tributes of so many nations. This spectacle of the world, how is it fallen! how changed! how defaced!

The path of victory is obliterated by vines, and the benches of the senators are concealed by a dunghill. Cast your eyes on the Palatine hill, and seek among the shapeless and enormous fragments the marble theatre, the obelisks, the colossal statues, the porticos of Nero’s palace: survey the other hills of the city, the vacant space is interrupted only by ruins and gardens. The forum of the Roman people where they assembled to enact their laws and elect their magistrates, is now enclosed for the cultivation of pot-herbs, or thrown open for the reception of swine and buffaloes. The public and private edifices that were founded for eternity lie prostrate, naked, and broken, like the limbs of a mighty giant, and the ruin is the more visible from the stupendous relics that have survived the injuries of time and fortune.”

“..if the trade weighted dollar is appreciating, then this exerts downward pressure on the dollar economy on a near one-to-one basis.”

• Global Dollar Economy Hits ‘Deflationary Vortex’ (Zero Hedge)

One of the macroeconomic observations that has gotten absolutely no mention in recent months is the curious fact that while global economic growth has not imploded in recent quarters, it is because GDP has been represented, as is customary, in local currency terms. Of course, this comes as a time when local currencies (at least those which are not the USD) have been plunging against the greenback on the back of the expectations that the Fed will hike rates some time in the summer or later in 2015. Which also means that in “dollar economy” terms, i.e., converted in USD, things are not nearly as good.

In fact, as the chart below shows, the global dollar economy is not only shrinking fast, but it is doing so at the fastest pace since the Lehman collapse, having shrunk by $4 trillion, or a whopping 5%, in just the last 6 months! By way of comparison the dollar economy lost $7 trillion, or a 10% contraction, during the Lehman crisis. Should the USD continue to appreciate, the global dollar economy collapse may surpass the plunge observed just as the great financial crisis struck. SocGen calls it “a deflationary vortex”; CNBC would call it a “global recovery.” Here is SocGen on this largely undiscussed topic with “The deflationary vortex of a shrinking dollar economy”:

As the ECB prepares to race faster in a bid to export deflation, the risk is that the dollar economy (world GDP measured in US dollars) will shrink further. The dollar economy is down by just over 5% since July, marking a loss of just over $4tn in nominal terms. The last sharp contraction of the dollar economy took place in 2008. Back then the economy shrank by just over $7tn, marking a loss in excess of 10%. The foreign trade mix of the US fairly closely mirrors the composition of world GDP. As such, if the trade weighted dollar is appreciating, then this exerts downward pressure on the dollar economy on a near one-to-one basis.

Any offset then comes from nominal GDP growth in local currency terms. Since July, the trade weighted dollar has gained just over 10%. Viewing the global economy from the vantage point of the dollar economy, it is hardly surprising that when the trade weighted dollar appreciates, commodity demand is eroded as economies with depreciating currencies lose purchasing power. To the extent that central banks actively seek currency depreciation, this could see further shrinkage of the dollar economy and add further downward pressure to commodity prices.

“This is the year the markets really panic about deflation. You haven’t had that panic yet.”

• Albert Edwards: ‘Markets Will Riot’ On Deflation (Huebscher)

Albert Edwards admits that his “uber bear” reputation is well deserved, at least with respect to equities, an asset class he has dismissed for the last 10 years. His bearishness has not abated, and for the coming year, he fears that “deflation will overwhelm the west.” Markets, he said, will riot. Edwards is the chief global strategist for Societe Generale and he spoke at that firm’s annual global strategy conference in London on January 13. Global markets face three risks, according to Edwards: bearishness in the U.S. government bond market, a flawed confidence that the U.S. is in a self-sustaining recovery and undue faith in the relationship between quantitative easing (QE) and the equity markets. Deflation is the main threat, though, according to Edwards. “This is the year the markets really panic about deflation. You haven’t had that panic yet.”

Edwards said that U.S. equities are “stuck in a secular-valuation bear market” and have been inflated by QE. Though he did not predict a recession, he said stocks would react very negatively if one were to happen. “The market embraces a recession by going to a new lower low on valuations,” he said. He offset that pessimism with a bullish view on the U.S. bond market. He said the 10-year yield could go below 1% and “converge on what is happening in Japan.” “Markets move on extreme surprises,” Edwards said, “and when expectations are so firmly held and they are shown not to be the case, you get these extreme moves.”

“QE is not going to help at all. Europe has far greater reliance than the US on small and medium-sized companies and they get their money from banks, not from the bond market..”

• QE Warfare Pushing World Financial System Out Of Control (AEP)

The economic prophet who foresaw the Lehman crisis with uncanny accuracy is even more worried about the world’s financial system going into 2015. Beggar-thy-neighbour devaluations are spreading to every region. All the major central banks are stoking asset bubbles deliberately to put off the day of reckoning. This time emerging markets have been drawn into the quagmire as well, corrupted by the leakage from quantitative easing (QE) in the West. “We are in a world that is dangerously unanchored,” said William White, the Swiss-based chairman of the OECD’s Review Committee. “We’re seeing true currency wars and everybody is doing it, and I have no idea where this is going to end.” Mr White is a former chief economist to the Bank for International Settlements – the bank of central banks – and currently an advisor to German Chancellor Angela Merkel. He said the global elastic has been stretched even further than it was in 2008 on the eve of the Great Recession.

The excesses have reached almost every corner of the globe, and combined public/private debt is 20% of GDP higher today. “We are holding a tiger by the tail,” he said. He warned that QE in Europe is doomed to failure at this late stage and may instead draw the region into deeper difficulties. “Sovereign bond yields haven’t been so low since the ‘Black Plague’: how much more bang can you get for your buck?” he told The Telegraph before the World Economic Forum in Davos. “QE is not going to help at all. Europe has far greater reliance than the US on small and medium-sized companies (SMEs) and they get their money from banks, not from the bond market,” he said. “Even after the stress tests the banks are still in ‘hunkering down mode’. They are not lending to small firms for a variety of reasons. The interest rate differential is still going up,” he said.

The warnings come just as the ECBprepares a blitz of bond purchases at a crucial meeting on Thursday. Most ECB-watchers expect QE of around €500bn now that the eurozone is already in deflation. Even the Bundesbank is struggling to come with fresh reasons to oppose it. The psychological potency of this largesse will depend on whether the ECB opts for shock-and-awe concentration or trickles out the stimulus slowly. It also depends on the exact mechanism used to conduct QE, a loose term at best. ECB president Mario Draghi hopes that bond purchases will push money out into the broader economy through a “wealth effect”, but critics fear this will be worse than useless if it leads to an asset bubble without gaining traction on the real economy. Classic moneratists say the ECB may end up spinning its wheels should it merely try to expand the money base. Mr White said QE is a disguised form of competitive devaluation. “The Japanese are now doing it as well but nobody can complain because the US started it,” he said.

Jon Hilsenrath is the unofficial Fed bullhorn. So pay attention.

• Fed Officials on Track to Raise Short-Term Rates Later in the Year (WSJ)

Federal Reserve officials are staying on track to start raising short-term interest rates later this year, even though long-term rates are going in the other direction amid new investor worries about weak global growth, falling oil prices and slowing consumer price inflation. The Fed’s stance, as it prepares for a policy meeting later this month, is striking because European Central Bank officials are poised to take the opposite approach later this week. The ECB is nearing a decision on whether to launch a controversial stimulus program known as quantitative easing on Thursday. It is widely expected to announce it will buy hundreds of billions or more of euro-denominated government bonds in an effort to beat back Japan-style deflation.

The world hasn’t seen an economic divergence like this since the mid-1990s, when growth in the U.S., Japan and Europe went in different directions. Back then, Japan was mired in a post-real-estate bubble downturn, Europe was grappling with the consequences of the collapse of the Soviet Union and the U.S. was enjoying a burgeoning technology boom. The looming moves have important implications for markets and growth. Investors have already been driving up the value of the U.S. dollar in anticipation of the moves and driving down long-term interest rates across the globe. “I think it is important to get started and to start normalizing policy,” St. Louis Fed President James Bullard said in an interview with The Wall Street Journal on Monday. “Even once we start to normalize, interest rates would be extraordinarily low.” [..]

“The level of inflation is not so low that it can alone justify a policy rate of zero,” Mr. Bullard said in a speech Friday. He wants the Fed to start raising rates by March, earlier than most other officials. San Francisco Fed President John Williams said in a speech Friday the middle of the year may still be the best time for the U.S. central bank to increase rates. Given the health of the broader economy, “what I’m really watching for is underlying inflation—wage growth, prices [..] My forecast is once we get through this slow path in inflation it will start moving back,” he said, adding, “I’m not expecting inflation to be 2% when we raise interest rates.I don’t need to be at the goal when we raise the rates.”

“Monetary methadone..”

• Central Bankers Lurch From ‘Whatever It Takes’ To ‘Whatever Next’ (Reuters)

The Swiss currency shock has raised an awkward question many investors have been fearful of asking – what if central banks become as unpredictable and fallible as they are powerful? The Swiss National Bank’s sudden decision to abandon its three-year-old cap on the franc – the “cornerstone” of its monetary policy just three days before – led to the biggest one-day move in major exchange rates in the post-1973 floating rates era. To some it was a warning sign of other U-turns, mishaps and possible failures by central banks still ahead, outcomes not fully appreciated by long-becalmed markets. For decades the power of currency printing presses has held markets in thrall. “Don’t fight the Fed” and all its international variations has been a devout belief among financial traders.

Even after the failure of Alan Greenspan’s Federal Reserve to spot and headoff one of the biggest credit booms and busts in history, the ability of the Fed, Bank of England, Bank of Japan, European Central Bank and others to flood their money supply to ease the fallout helped anaesthetise fractious markets. The subsequent waves of cheap credit, currency fixes and “quantitative easing” drove down borrowing rates and erased volatility. The demonstrations of central bank might culminated in ECB chief Mario Draghi’s declaration in 2012 that he would do “whatever it takes” to save the euro. In the face of the power of the money printing press, speculation became pointless. So much so that one of the biggest conundrums of recent years became the persistently low implied volatility in markets even in the face of outsized economic, political and policy risks.

Not everyone was pleased by the complacency. “Monetary methadone was the best of no choice but we have become addicted to cheap money everywhere and, somehow, that central bankers are prophetic,” Nigel Wilson, chief executive of UK insurer Legal & General told Reuters. The first cracks appeared last summer, when it became clear the Fed was turning off the printing presses even as counterparts in Europe and Japan were still cranking up theirs. The idea the world’s largest economy was about to suck dollars back out of the world just as others were pumping in euros and yen sent once-steady exchange rates lurching. The power of the central banks was as daunting as ever, but no longer such a reassuring and calming influence.

No.

• Storm Clouds Gather Over US Economy: Can The Miracle Last? (CNBC)

The world just got a bit scarier for risk assets. On Thursday morning, the Swiss National Bank shocked the world by removing its cap on the Swiss franc against the euro, causing its currency to soar and the euro to plunge—and creating fears about more sudden central bank moves. Meanwhile, global growth concerns continue to drive industrial commodities like copper and crude oil to multi-year lows. With the U.S. serving as one of the world’s few bastions of security and growth, the dollar continues to soar and Treasury yields are plummeting in a bid for safe havens. The question now: How long can America continue to shine in an increasingly uncertain and slow-growing world? A key clue could come in the week ahead, as a slate of major companies report their fourth-quarter results and release forward guidance.

Most closely watched will be energy companies like Halliburton and Baker Hughes, consumer discretionary names like Starbucks and McDonald’s, and industrial giants like GE. The overarching questions will be whether the soaring dollar and plunging energy prices are helping or hurting—and just how much the weakening global environment is a concern for corporate managers. “What I’m going to be watching for is some clarity from the companies in terms of the decline in the price of oil, and the decline of interest rates and the rise of the dollar,” said John Conlon, chief investment officer at People’s United Bank. “I’m going to see if there’s some consensus developing in terms of the price of oil and interest rates.”

Thus far, the “blended” estimate for fourth quarter earnings growth (which combines reported earnings with analyst estimates for yet-to-be-reported earnings) stands at a meager 0.6%, according to FactSet. That’s down from 1.7% on December 31st, mostly due to misses from Citigroup, Bank of America and JPMorgan. It’s worth noting that since more companies beat than miss, actual earnings growth tends to be prettier than the estimates. But if the growth rate does stand at 0.6% after the dust has settled, that would mark the slowest earnings growth since the third quarter of 2012, when S&P 500 companies reported an earnings decline of 1%.

“..what they actually are doing is plotting even more wars, interventions, more economic controls, more ‘banksterism’, more benefits to the power elite versus the people”

• Davos Is About More Control And Banksterism, Not Solutions: Lew Rockwell (RT)

The Davos meeting is not looking for world crisis solutions but plotting more controls, ‘banksterism’ and power elite benefits, says economic journalist Lew Rockwell. They are going to tax and rip off their own people to even greater extent, he added.

RT: The main theme of the Davos forum in the past has largely been finding solutions for world economic problems. How about today? Is it still about that?

Lew Rockwell: No, it is actually about control. I think it has always been about control for the US Empire, for the oligarchs associated with it. They may talk about wanting to solve problems, or make people’s lives better, [but] what they actually are doing is plotting even more wars, interventions, more economic controls, more ‘banksterism’, more benefits to the power elite versus the people. We don’t know what is going on there. I’d like to put chest cams on all of them so we can see what they are doing, what they are talking about. It is not good for the cause of freedom, for the cause of prosperity, not good for the cause of human rights what goes on in Davos.

RT: Let’s talk about numbers. For example, this year companies have to pay $20,000 per executive for a ticket. A simple dinner in an average restaurant was $40 last year. A night in a mid-range hotel has gone from roughly $600 to $700. Do the Forum’s participants need all these special arrangements to make an effective decision?

LR: It is a meeting of the very rich and it’s a meeting of the politicians that they own. They all live very well; they are not staying in the middle range hotels and are not eating at the regular restaurants. They are having the times of their lives; they lived the life of riley at the expense of everybody else. I don’t think we need to worry about cost to them. They are happy to spend the money. It is not theirs after all; they are taking it from the rest of us.

“The aftermath is like a black hole that can suck massive amounts of credit from currency trading as we have known it.”

• Brokers Reveal Details Of Damage From Swiss Chaos (Independent)

The UK’s biggest spread-betting firm, IG Group, said yesterday that it would “learn lessons” from last week’s stunning reversal by the Swiss National Bank (SNB), which cost it £30m. IG is nursing £18m in client losses from the SNB’s shock scrapping of the franc’s cap against the euro, as well as £12m in market exposure. IG honoured the loss limits of clients but was unable to close its hedging positions on bets because of the extreme volatility, which saw the euro tumble 30% against the “Swissie” at one stage. The company intends to maintain the dividend at last year’s level. “Although this was because of an unprecedented and unforeseeable degree of movement in a major global currency, and only a few hundred clients were affected, we will seek to learn lessons from this incident which we can incorporate into our risk-management approach,” the company said.

The Swiss blow took the gloss off strong results from the company, which has seen 1,700 clients sign up to a new stockbroking account. IG generated its highest monthly revenue in October, when global markets sank on growth fears, helping half-year profits up 2.8% to £101.4m. Another victim of the SNB’s currency earthquake, the US broker FXCM, also revealed the punishing terms of a $300m (£198m) rescue loan from investment firm Leucadia National, owner of a wide range of companies that includes broker Jefferies. FXCM will pay an eye-watering 10% annual interest on the loan, with the rate increasing by 1.5% a quarter up to a maximum of 17%, to encourage a sale of the business within three years. Leucadia will get half the proceeds on a sale of FXCM after the loan is repaid, although it will claim an even bigger share on a sale above $500m.

Danish investment bank and broker Saxo said it would incur losses from the SNB move but that its capital position was not in peril. The firm gave its clients less leverage to bet on the currency last year, reducing its exposure. Analysts said that the full impact of the scrapping of the Swiss franc-euro ceiling by the Swiss central bank won’t be known for months. “[It is] closer to a nuclear explosion than a 1,000-kilogram conventional bomb” said Javier Paz, senior analyst in wealth management at Aite Group. “The aftermath is like a black hole that can suck massive amounts of credit from currency trading as we have known it.”

“If the oil prices drop to $25 a barrel, there will yet again be no threat posed to Iran’s oil industry..”

• Iran Oil Minister Sees ‘No Threat’ From $25 Oil (MarketWatch)

Do I hear $25-a-barrel oil? Iran’s oil Minister Bijan Namdar Zanganeh hinted at even lower prices for crude as he declared his well positioned for plunging crude oil prices. “If the oil prices drop to $25 a barrel, there will yet again be no threat posed to Iran’s oil industry,” said Zanganeh at a conference in Tehran on Monday. That means the country should be sitting pretty as the OPEC sticks to its guns on production cuts. But Zanganeh also predicted that OPEC and non-OPEC countries will eventually “cooperate to restore balance to the oil market.” Wishful thinking perhaps in a situation where the market only reads: too much supply, not enough demand. On Sunday, his Iraq counterpart, Adel Abdul-Mehdi, said his country pumped out a record four million barrels per day of oil in December

Recently, billionaire Saudi businessman Prince Alwaleed bin Talal, said the market can kiss $100-a-barrel oil goodbye forever. “I said a year ago [that] the price of oil above $100 is artificial,” Alwaleed said. “It’s not correct.” Over at Project Syndicate last week, Anatole Kaletsky, a former Times of London columnist said $50 oil should really be the ceiling for a much lower price range, which could drop all the way down to $20 a barrel. “As it happens, estimates of shale-oil production costs are mostly around $50, while marginal conventional oilfields generally break even at around $20. Thus, the trading range in the brave new world of competitive oil should be roughly $20 to $50,” said Kaletsky, chief economist and co-chairman of Gavekal Dragonomics.

“The announcement that BHP will reduce the number of US onshore oil rigs it operates by the end of this financial year is a pointer to the industry-wide supply response yet to come..”

• BHP Billiton Cuts US Shale Oil Rigs By 40% Amid Sliding Price (AFP)

The world’s biggest miner BHP Billiton is cutting back its operating US shale oil rigs by 40% amid slumping prices. BHP said on Wednesday it would reduce the number of rigs from 26 to 16 by the end of the June in response to weaker oil prices. However, shale volumes were still forecast to grow by approximately 50% during the period. “In petroleum, we have moved quickly in response to lower prices and will reduce the number of rigs we operate in our onshore US business by approximately 40% by the end of this financial year,” chief executive Andrew Mackenzie said. “The revised drilling programme will benefit from significant improvements in drilling and completions efficiency.” Mackenzie said while the firm’s drilling operations would focus on its Black Hawk field in Texas, “we will keep this activity under review and make further changes if we believe deferring development will create more value than near-term production”.

Oil prices slid again Tuesday after the International Monetary Fund slashed its forecast for world economic growth and revived concerns about the strength of crude demand. US benchmark West Texas Intermediate for February sank US$2.30, or 4.7%, to US$46.39 a barrel, not far from its lowest level since March 2009. “The announcement that BHP will reduce the number of US onshore oil rigs it operates by the end of this financial year is a pointer to the industry-wide supply response on lower oil prices that is yet to come,” CMC Markets’ chief market analyst Ric Spooner said in a note. BHP added that its iron ore output had risen by 16% for the three months to December compared to a year earlier, hitting 56.4m tonnes. Prices in iron ore, one of BHP’s core commodities, slumped 47% in 2014 amid a global supply glut and softening demand from China.

“When the tide turns, it’s going to be very ugly, because you will have a forced exit from the market.”

• Chinese Stocks’ Booms and Busts Getting Bigger on Margin Debt (Bloomberg)

The one thing China’s bulls and bears can agree on is that swings in the world’s most-volatile major stock market are only going to get bigger after equity traders took on record amounts of debt. Both Bank of America strategist David Cui, who predicts Chinese shares will fall, and JPMorgans Adrian Mowat, who has an overweight rating, say the surge in margin lending to all-time highs is amplifying price fluctuations in the $4.9 trillion market. Volatility in the benchmark Shanghai Composite Index reached the highest level since 2009 this week after rising more than fourfold since July. While the flood of borrowed money into Chinese stocks added fuel to a 59% rally in the Shanghai Composite during the past 12 months through yesterday, the gauge’s 7.7% tumble on Monday illustrates how leverage can also accelerate declines.

Margin traders unloaded shares at the fastest pace in 19 months during the rout, which was sparked by regulatory efforts to cool the growth of margin debt in a market where individuals drive 80% of equity volumes. “Margin trading will add more up-and-down to the market and increase volatility,” Xie Weiyu at Shenyin & Wanguo in Shanghai, said. “If a correction starts, the magnitude will be bigger than the past few years.” In a margin trade, investors use their own money for just a portion of their stock purchase, borrowing the rest from a brokerage. The loans are backed by the investors’ equity holdings, meaning they may be forced to sell when prices fall to repay their debt.

The Shanghai Composite sank the most in six years on Monday after the China Securities Regulatory Commission suspended the nation’s two biggest brokerages from lending money to new equity-trading clients and said securities firms shouldn’t lend to investors with assets below 500,000 yuan ($80,467). Outstanding margin loans on both the Shanghai and Shenzhen exchanges surged more than tenfold in the past two years to a record 1.1 trillion yuan as of Jan. 16, or about 3.5% of the nation’s market value. On the New York Stock Exchange, margin debt amounts to about 2.1% of market cap on the NYSE Composite Index. Margin lending is a “new phenomenon in China,” said Cui, who anticipates the Shanghai Composite will fall about 5% by year-end. “When the tide turns, it’s going to be very ugly, because you will have a forced exit from the market.”

Again: China is doing far worse than it pretends.

• The Era Of 7% Growth Is Over For China (CNBC)

Brace for growth numbers starting with “6” from China this year, economists say, after data showed the world’s second largest economy expanded at its slowest pace in over two decades in 2014. China’s GDP release on Tuesday showed the economy grew 7.3% in the fourth quarter from the year-ago period, bringing growth in the full year to 7.4% – the weakest performance since 1990. “The challenges facing China’s economy remain as large or even larger compared to a year prior,” Brian Jackson, chief economist at IHS Global Insight wrote in a note, citing the cooling property sector, industrial overcapacity and high debt levels as persistent headwinds for the economy.

IHS predicts growth will moderate to 6.5% in 2015, far short of a 7% official target the government is expected to announce in March, as the government prioritizes economic reform over stimulus While December monthly indicators, including industrial production and retail sales also released Tuesday, pointed to some upward momentum in the economy, economists say this will proved short-lived. “Brief spells of accelerating Chinese growth are taking place within a larger narrative of China’s secular slowdown, a trend which bouts of mini-stimulus and lower commodity prices cannot fully reverse,” Jackson said.

For example, the pickup in industrial output growth to 7.9% on year in December, from 7.2% in November, is a result of the re-opening of factories following a temporary shutdown during the time of the Asia-Pacific Economic Cooperation (APEC) conference, according to Nomura. Of all the headwinds facing the economy, analysts expect the property sector will be the top drag for the economy in the first half of 2015. Real estate is an important pillar of the economy, accounting for approximately 15% of GDP and directly affecting dozens of other sectors from steel to construction. “Chinese growth will continue to face downward pressure because of the slowdown in property investment,” said Tommy Xie, economist at OCBC Bank, who sees growth dipping below 7% in the first-half.

Empty.

• Defiant Obama Pushes ‘Middle-Class Economics’ (Reuters)

President Barack Obama struck a defiant tone for his dealings with the new Republican-led Congress on Tuesday, calling on his opponents to raise taxes on the rich and threatening to veto legislation that would challenge his key decisions. Dogged by an ailing economy since the start of his presidency six years ago, Obama appeared before a joint session of Congress for his State of the Union speech in a confident mood, buoyed by an economic revival that has trimmed the jobless rate to 5.6% and eager to use this as a mandate. It is now time, he told lawmakers and millions watching on television, to “turn the page” from recession and war and work together to boost those middle-class Americans who have been left behind.

But by calling for higher taxes that Republicans are unlikely to approve and chiding those who suggest climate change is not real, Obama set a confrontational tone for his final two years in office. He vowed to veto any Republican effort to roll back his signature healthcare law and his unilateral loosening of immigration policy. Any attempt to increase sanctions on Iran while negotiations with Tehran over its nuclear program are still under way would also be rejected, he said. In sum, Obama appeared liberated: no longer having to face American voters again after his election victories in 2008 and 2012, a point that he reminded Republicans about. “I have no more campaigns to run,” Obama said. When a smattering of applause rose from Republicans at that prospect, he added with a tight smile: “I know because I won both of them.”

Costly.

• Credit Rater S&P to Be Banned for Year From Commercial-Bond Market (Bloomberg)

Standard & Poor’s will be suspended for a year from rating bonds in one of its most lucrative businesses in a $60 million settlement with the U.S. Securities and Exchange Commission, according to a person with knowledge of the matter. The deal, which the person said may be announced as soon as tomorrow, is the agency’s toughest action yet in an industry blamed for fueling the 2008 financial crisis by assigning inflated grades to risky mortgage debt. Instead of securities created during that period, though, the SEC’s investigation has looked at whether S&P bent its criteria to win business on commercial-mortgage bonds issued in 2011.

The suspension will ban S&P from rating debt in the biggest portion of that market, those that bundle multiple loans tied to anything from shopping malls to skyscrapers, into securities that are sold to bond investors, according to the person, who asked not to be identified because the discussions are private. In addition to the SEC fine, the unit of McGraw Hill is also facing a penalty to settle probes of the same ratings by Attorneys General in New York and Massachusetts, said the person and a second with knowledge of the talks. The CMBS probe is separate from a lawsuit by the Justice Department tied to subprime home loans that S&P rated before the credit crisis. S&P is expected to settle that matter as soon as this quarter for about $1 billion in penalties, people familiar with the matter said this month.

” One has a right, for example, to procreative liberty — yet no right to buy a baby. Money would help some people exercise these rights, too. But we don’t treat laws restricting baby selling as if they were restricting procreative liberty.”

• If Money Speaks Louder Than Words, Is It Speech? (Reuters)

Citizens United may have been just what the United States needed — a decision by the U.S. Supreme Court so dramatically wrongheaded that people across the country paid attention to it and said, “Hold on, something is wrong here.” Though the actual ruling simply extended the flawed approach to campaign-finance laws that the court had been following for decades, Citizens United shined a light on the justices’ reasoning and demonstrated its shortcomings by taking that rationale to its logical — if absurd — conclusion. The Supreme Court treats restrictions on both giving and spending money on elections as restrictions on “speech” under the First Amendment. While the case law has been dotted with victories for both advocates and opponents of campaign-finance restrictions over the past 40 years, it is vital to step back and look at the bigger picture.

In the seminal 1976 campaign-finance case, Buckley v. Valeo, the court laid out the line of reasoning relied on ever since. Buckley said that restrictions on giving and spending money in politics should be treated as if they are restrictions on speech. This approach was not obvious or uncontroversial. Campaign-finance laws do not “prohibit” speech — using the word in its ordinary way. Rather, they restrict giving and spending money used on political speech. The decision to treat campaign-finance laws as restrictions on speech was based on the argument that money facilitates speech. “[V]irtually every means of communicating ideas in today’s society requires the expenditure of money,” the court argued. Though that may be somewhat less true today — given the Internet — it is still largely correct.

What this rationale misses is that money facilitates speech not because there is any special connection between the two, but because money is useful stuff. It facilitates the exercise of many other constitutionally protected rights, as well as the fulfillment of many goals and interests. Yet, and here’s the important part, no one — and especially not this Supreme Court — is likely to conclude that restrictions on spending money in connection with the exercise of all other rights would violate these rights. One has a right, for example, to procreative liberty — yet no right to buy a baby. Money would help some people exercise these rights, too. But we don’t treat laws restricting baby selling as if they were restricting procreative liberty.

Here’s how you spell democracy in Europe today: “The EU has said the final wording would, however, remain confidential until an agreement was reached..”

• No Clear Majority Yet In EU For TTIP Trade Deal (Reuters)

No clear majority has so far emerged among EU states for a free-trade agreement between the European Union and the United States and both sides need to explain the benefits of such a deal, the EU’s health chief said. Chancellor Angela Merkel has urged the 28-nation EU to speed up negotiations with the United States on what would be the world’s biggest trade deal. But there is public opposition in Europe based on fears of weaker food and environmental standards. “We have to take people’s concerns seriously,” Vytenis Andriukaitis, European commissioner for health and food safety, told German daily Tagesspiegel, adding that the trade agreement ultimately needed to be ratified by all national parliaments.

“At the moment, I don’t see a safe majority for this yet,” he said in an interview published on Monday, adding the EU Commission had published some negotiating papers to improve transparency. The EU has said the final wording would, however, remain confidential until an agreement was reached on the Transatlantic Trade and Investment Partnership (TTIP). Negotiations for the TTIP were launched in July 2013 and officials are seeking a deal that goes well beyond trade to remove barriers to businesses. There is concern in Europe that U.S. multinationals would use a proposed investment protection clause to bypass national laws in EU countries. In Berlin, more than 25,000 people joined a rally against the TTIP and genetically modified food over the weekend.

Went to Diplomat School: “Russia is interested in stabilizing the situation globally and in Ukraine in particular..”

• Ukraine Crisis ‘Turning Point’ Close: Russian Deputy PM (CNBC)

The conflict over Ukraine’s borders with Russia, which has soured Moscow’s relationship with the West and stirred up new concerns about global unrest, may be close to a “turning point”, according to Arkady Dvorkovich, Russia’s deputy Prime Minister. “Russia is interested in stabilizing the situation globally and in Ukraine in particular,” Dvorkovich told CNBC at the World Economic Forum in Davos, where he is one of Russia’s most senior representatives after both President Vladimir Putin and Prime Minister Dmitry Medvedev declined to make the trip. He extended the possibility of reducing the price of gas to Ukraine, after Russia hiked it earlier in the conflict. This week, military activity in Donetsk and Luhansk, the disputed parts of eastern Ukraine where Russian-backed militants are battling the Ukrainian army, had escalated after falling back over Christmas and New Year.

Petro Poroshenko, the Ukrainian President, who came to power last year, has acknowledged this week that a military solution to the fighting, which has claimed nearly 5,000 lives so far, does not exist. Economic sanctions enacted by Western countries against Russia, following the outbreak of conflict, combined with the falling price of oil and gas, its biggest export, and a tumbling ruble, have helped send the country into economic turmoil. Nonetheless, Dvorkovich argued that thanks to the country’s currency reserves “we have the resources to keep the economy in a relatively normal stance.” “We have resources, we have an anti-crisis plan.” There has also been a lack of external investment in Russia, as Western companies are concerned that they may fall foul of current or future sanctions. But Dvorkovich dismissed this, arguing “CEOs of foreign companies are all saying that they will continue investments in Russia, with the ruble at this low level.”

“Christine Lagarde must be smiling to herself and thinking we are thick Paddies alright.”

• If Christine Lagarde And Her EU Pals Are Our Friends, Who Needs Enemies? (IM)

There is nothing worse than a posh bird arriving into town and insulting the intelligence of the natives. That’s exactly what IMF chief Christine Lagarde did yesterday. She and her friends in Europe robbed around €10,000 a year out of the pocket of every Irish citizen to save the rich on the continent and to ensure no French or German bank would collapse for lending to the bankrupt Irish banks. And then she has the cheek to tell us we are the real heroes of the recovery. What’s even worse, our Taoiseach Enda Kenny stood there applauding her as she praised the victims of brutal austerity. If Lagarde and her cohorts from Europe can be classed as friends, who needs enemies? This country is sick to death of being the best boys and girls in the class in the EU. Let’s tell the truth Brussels couldn’t give a damn about us and never will. They will protect the euro at any cost and we as a nation paid a horrendous price. We have been landed with debt that will take generations to clear, if ever.

The whole crisis set this country back 20 years. Not one treacherous banker has gone to jail. Not one politician or civil servant has been held to account for horrendous decisions taken on the night of the bank guarantee. Europe has been a failure for the Republic of Ireland, they hung this country out to dry. So lets start having the debate about it. There is also no recovery here yet – very few people have any spare cash. The country is taxed to the hilt and the working man and woman is surviving by the skin of the teeth. That’s why the water charge was a tax too far and the people took to the streets. Our politicians are still living in a Leinster House bubble. They may mean well but the majority of them haven’t a clue what’s going on in the real world. They have no vision where Ireland is going it is all a game of retaining power. Christine Lagarde must be smiling to herself and thinking we are thick Paddies alright.

“Respect for the environment means more than simply using cleaner products or recycling what we use.”

• Pope Francis: Failing to Care for Environment Is a Betrayal of God (Slate)

Pope Francis has been wading into environmental issues during his week-long Asian tour, but he issued the strongest words on Sunday, when he said that man was betraying God’s calling by destroying nature. Or at least that’s what he was supposed to say at a rally with young people at a university in Manila. But the pope ended up being moved by the story of an abandoned girl so he improvised a speech. Still, the Vatican has said that when the pope decides to improvise, the prepared text is official, notes Reuters. “As stewards of God’s creation, we are called to make the earth a beautiful garden for the human family,” the pope said in the prepared text. “When we destroy our forests, ravage our soil and pollute our seas, we betray that noble calling.” The pope also pointed out that youth in the Philippines should feel a special obligation to care for the environment.

“This is not only because this country, more than many others, is likely to be seriously affected by climate change,” he said in the prepared text. “You are called to care for creation not only as responsible citizens, but also as followers of Christ!” He also appeared to chastise those who think that simply by buying environmentally friendly products and recycling they are doing enough for the cause. “Respect for the environment means more than simply using cleaner products or recycling what we use. These are important aspects, but not enough,” he said. God “created the world as a beautiful garden and asked us to care for it,” Francis said. “Through sin, man has disfigured that natural beauty. Through sin, man has also destroyed the unity and beauty of our human family, creating social structures that perpetuate poverty, ignorance and corruption.”

Debt Rattle January 16 2015

Jan 162015

January 16, 2015 Posted by Raúl Ilargi Meijer at 11:36 am Finance Tagged with: brokers, China, currency, Iran, oil, pope, shadow banking, Swiss franc, TTIP, Ukraine 6 Responses »

Earl Theisen Walt Disney oiling scale model locomotive at home in LA Sep 1951

• Swiss Mess Could Make Oil Plunge Seem Like Minor Hiccup (MarketWatch)

• World Deflationary Forces Have Swept Away Switzerland’s Defences (AEP)

• Switzerland Shows The Era Of Central Bank Omnipotence Is Over (Krasting)

• Swiss Franc Move Cripples, Wipes Out Currency Brokers (WSJ)

• Wall Street Is Bracing For Shock Waves From Swiss Franc Move (MarketWatch)

• Franc’s Surge Ranks Among Largest Ever in Foreign Exchange (Bloomberg)

• Swiss Bankers Are Accelerating the Euro’s Slide (Bloomberg)

• In Praise Of Price Discovery – The Market Is Off Its Lithium (David Stockman)

• Iran Lowers Oil Price for Budget to $40 After Collapse (Bloomberg)

• BP Sees $50 Oil For Three Years (BBC)

• $50 Oil Is The Ceiling For A Much Lower Trading Range (Anatole Kaletsky)

• Big Oil Gets Serious With Cost Cuts on Worst Slump Since 1986 (Bloomberg)

• Schlumberger Cuts 9,000 Jobs as Oil Slump Portends Uncertainty (Bloomberg)

• Aberdeen, The Energy-Rich Town Counting The Cost Of The New Oil Shock (Guardian)

• Greek Systemic Banks Request Emergency Liquidity Assistance (Kathimerini)

• No Risk Of ‘Deflation Spiral’ In Europe: German Minister (CNBC)

• UK Retailers ‘Throttled’ By Black Friday (Daily Mail)

• Warning: China May Trigger Fresh Rout In Commodities (CNBC)

• China Shadow Banking Surge Chills Stimulus Hopes (CNBC)

• New Russian/Chinese Credit Rating Agencies To ‘Balance Big Three’ (RT)

• Ukraine President Poroshenko Signs Decree To Mobilize Up To 100,000 (TASS)

• ‘Corporate Wolves’ Will Exploit TTIP Trade Deal, MPs Warned (Guardian)

• Pope Francis Says Freedom Of Speech Has Limits (BBC)

Anything could blow now.

• Swiss Mess Could Make Oil Plunge Seem Like Minor Hiccup (MarketWatch)

One day, it’s gold. The next, it’s equities. Most days, it’s crude. On Wednesday, it was copper. On Thursday it was the Swiss franc and Swiss stocks. And the move in those two makes those others look like minor-league hiccups. While you were sleeping, all hell broke loose in Switzerland, as the central bank ditched its currency cap against the euro after four years and slashed interest rates to negative 0.75%. The Swiss franc is rallying wildly, while the Swiss stock market is cratering and U.S. stock futures are mostly on the losing side as investors figure out this latest shock to the markets Meanwhile, collapsing oil is claiming its next batch of victims. Apache just became the first, and certainly not the last, big-name oil producer to cut a notable number of jobs. And Calgary is suffering through it’s worst decline in home prices in almost two years. Airlines stocks aren’t even benefiting anymore.

So where’s that cheap oil upside? Perhaps, it’s in the opportunity created in solar stocks. The best thing that can be said about oil at this point is that, hey, at least it’s not bitcoin. Or the ruble. More fallout to come if $50 does, indeed, turn out to be a ceiling and if, as Goldman Sachs says, prices fall below the bank’s $39 target.

Ambrose gets it right: deflation.

• World Deflationary Forces Have Swept Away Switzerland’s Defences (AEP)

The Swiss National Bank has lost control. It is the latest in a list of venerable central banks to be overwhelmed by deflationary forces and global economic disorder. The country is already in deflation. The Swiss franc ended Thursday 13% higher after the SNB abandoned its three-year efforts to defend a currency floor of 1.20 to the euro. “We have a free exchange rate once again,” said the SNB’s president, Thomas Jordan. Indeed, but nobody is fooled by the SNB’s attempt to spin this as benign. “This is a huge hit to their credibility,” said Deutsche Bank. The official statement claimed that the exchange floor is no longer needed and that “overvaluation has decreased as a whole since the introduction of the minimum exchange rate”. This is eyewash. “They have had to throw in the towel. They couldn’t hold the line anymore,” said David Owen, from Jefferies Fixed Income.

“This is going to cause extreme pain for parts of the Swiss economy but SNB are trapped.” The franc has been level over the past year on a trade-weighted basis. Even before Thursday morning’s events, the exchange rate was 25% above its decade-long average. It is now 40% higher. Just one month ago the SNB argued in its quarterly report that currency floor was imperative to stop Switzerland relapsing back into deflation. “In view of heightened deflation risks, the minimum exchange rate remains the key instrument for ensuring appropriate monetary conditions. A further appreciation of the Swiss franc would have a major impact on salary and price structures. Companies in Switzerland would be forced to cut costs drastically again to remain competitive.” The statement was true then. The threat is much greater now, made all too clear by the howls of protest this morning from the Swiss export sector.

Nick Hayek, head of Swatch Group, said the collapse of the floor would cause havoc. “Words fail me. Today’s SNB action is a tsunami; for the export industry and for tourism, and for the entire country,” he said. The Swiss economy has been muddling through over the past year but the output gap is still -1% of GDP, inflation is negative and the KOF index of business sentiment has been slipping lower for two years. On top of this, the country now has to grapple with the likely hangover from its own domestic credit bubble. The SNB’s Mr Jordan said the end of an exchange floor inevitably requires subterfuge. “You can only end a policy like this by surprise. It is not something you can debate for weeks,” he said. That may be true. Less justifiable is the failure to come clean after the event and explain exactly why the SNB now judges the damage of eternal currency intervention to be even more dangerous than the threat of a systemic deflationary shock. We are left guessing.

It was always but an illusion, though.

• Switzerland Shows The Era Of Central Bank Omnipotence Is Over (Krasting)

I wrote about the Swiss National Bank being forced to abandon its currency peg to the Euro on 12/3/14, 12/8/14 and 1/11/15. That said, I’m blown away that this has happened today. Thomas Jordan, the head of the SNB has repeatedly said that the Franc peg would last forever, and that he would be willing to intervene in “Unlimited Amounts” in support of the peg. Jordan has folded on his promise like a cheap suit in the rain. When push came to shove, Jordan failed to deliver. The Swiss economy will rapidly fall into recession as a result of the SNB move. The Swiss stock market has been blasted, the currency is now nearly 20% higher than it was a day before. Someone will have to fall on the sword, the arrows are pointing at Jordan.

The dust has not settled on this development as of this morning. I will stick my neck out and say that the failure to hold the minimum rate will result in a one time loss for the SNB of close to $100B. That’s a huge amount of money. It comes to 20% of the Swiss GDP! If this type of loss were incurred by the US Fed it would result in a loss in excess of $2 Trillion! In the coming days and weeks there will be more fallout from the SNB disaster. There will be reports of big losses and gains from today’s events. But that is a side show to the real story. We have just witnesses the collapse of a promise by a major central bank. The Fed, Bank of Japan, ECB, SNB and other Central Banks have repeatedly made the same promises over the past half decade:

Don’t worry! We are here. We will do anything it takes to achieve the stability we desire. We are stronger than the markets. We can overwhelm all forces. We will never let go – just trust us!

I never believed in these promises, but the vast majority of those who are active in financial markets did. The entire world has signed onto the notion that Central Banks are all powerful. We now have evidence that they are not. Anyone who continues to believes in the All Powerful CB after today is a fool. Those who believed in Jordan’s promises now have red ink on their hands – lots of it! The next central bank that will come into the market’s cross hairs is the ECB. Mario Draghi has made promises that he would “Do anything – in any amount”. Like I said, you would be a fool to continue to believe in that promise as of this morning. We’ve just taken a huge leap into chaos. The linchpin of the capital markets has been the trust in the CBs. The market’s anchors have now been tossed overboard.

“Where a client cannot cover this loss, it is passed on to us. This has forced Alpari (UK) Limited to confirm…that it has entered into insolvency ..”

• Swiss Franc Move Cripples, Wipes Out Currency Brokers (WSJ)

A major U.S. currency broker warned its equity was wiped out, a U.K. retail broker entered insolvency and a global foreign-exchange trading house failed after suffering big losses sparked by the Swiss central bank’s move to free up its currency. On Friday, regulators in Japan, Hong Kong, Singapore and New Zealand sought information from brokers about what happened. In Japan, the Finance Ministry was checking on trading firms after industry sources said the country’s army of mom-and-pop foreign exchange traders suffered big losses. The losses were caused when liquidity dried up and volatility spiked in the debt-driven foreign exchange market, making it impossible for brokers to execute trades as losses spiraled. Many of these brokers offer 100-to-1 leverage, meaning a 1% loss can wipe a client out.

The Swiss franc jumped 30% against the euro in minutes on Thursday, after the Swiss National Bank stopped capping the rise their nation’s currency against the euro. The surprise move sent the Swiss franc soaring and caused big losses for traders who had bet against the currency. FXCM, the biggest retail foreign-exchange broker in the U.S. and Asia, said in a statement that because of unprecedented volatility in the euro against the Swiss franc, its losses left it with a negative equity balance of about $225 million and that it was trying to shore up its capital. FXCM was operating normally in Hong Kong on Friday with employees trying to sort out trading positions and answer questions from clients about their trading losses. “As a result of these debit balances, the company may be in breach of some regulatory capital requirements.

We are actively discussing alternatives to return our capital to levels prior to today’s events and discussing the matter with our regulators,” the company, which has a market capitalization of about $701.3 million, said in a statement. Shares of the company fell 15% in U.S. trading and tumbled another 12% after hours. In the U.K., retail broker Alpari entered insolvency after racking up losses amid the currency turmoil following the SNB’s decision. Alpari said in a statement on its website that a majority of its clients sustained losses exceeding the equity in their accounts. “Where a client cannot cover this loss, it is passed on to us. This has forced Alpari (UK) Limited to confirm…that it has entered into insolvency,” the firm said.

““We expect that few risk-management algorithms in G-20 currencies were prepared for greater than 20% moves in a currency pair ..”

• Wall Street Is Bracing For Shock Waves From Swiss Franc Move (MarketWatch)

Don’t be too quick to look past the turmoil that swept global financial markets after Switzerland’s central bank unexpectedly scrapped a cap on the value of its currency versus the euro. While European and U.S. equities largely regained their footing after a panicky round of selling in the wake of the decision, dangers may still lurk in some corners of the market. Here are the potential shock waves to look out for:

Needless to say, the Swiss franc, which had long been held down by the Swiss National Bank’s controversial cap, exploded to the upside. The euro is down 15% and the U.S. dollar remains down nearly 14% versus the so-called Swissie after having plunged even further in the immediate aftermath of the move. See: Swiss stunner sends euro to 11-year low against buck. Since the Swiss National Bank had given no indication it was set to move — indeed, it had previously said it would defend the euro/Swiss franc currency floor with the “utmost determination” — investors were holding large dollar/Swiss franc and euro/Swiss franc long positions, noted George Saravelos, currency strategist at Deutsche Bank, in a note. As a result, the moves Thursday likely resulted in some big losses on investor portfolios holding those positions, he said.

“This effectively serves as a large VaR [value-at-risk] shock to the market, at a time when investors were already sensitive to poor [profit-and-loss] performance for the year,” Saravelos wrote. The Wall Street Journal reported that Goldman Sachs on Thursday closed what had previously been one of its top trade recommendations for 2015: shorting the Swiss franc versus the Swedish krona after the franc jumped as much as 14% on the day versus its Swedish counterpart. Douglas Borthwick, managing director at Chapdelaine Foreign Exchange, said forex participants are bracing for aftershocks. “We expect that few risk-management algorithms in G-20 currencies were prepared for greater than 20% moves in a currency pair, for this reason the chance of a binary outcome is significant,” he said, in a note. “Either participants gained or lost considerable amounts.”

“It’s normal for ruble to do this kind of thing, but we’re talking about Swiss franc ..”

• Franc’s Surge Ranks Among Largest Ever in Foreign Exchange (Bloomberg)

The Swiss franc’s 41% surge after the central bank unexpectedly lifted its cap against the euro is one of the biggest moves among major currencies since the collapse of the Bretton Woods system in 1971. Unlike previous foreign-exchange upheavals, today’s action occurred to one of the most-traded currencies that is considered a haven in tumultuous times, and few saw the move coming. “It’s normal for ruble to do this kind of thing, but we’re talking about Swiss franc,” Axel Merk, president and founder of Merk Investments, who has 20 years of experience in the currency market. “That’s quite extraordinary and unheard of.” A history of some of the biggest moves in the now $5.3 trillion a day market:

• Mexico Tequila Crisis, December 1994: U.S. interest-rate increases helped spark a peso devaluation and fueled capital flight across Latin America. The peso lost 53% in three months. The recession the following year, when the economy contracted 6.2%, was among the worst since the 1930s.

• Thai baht, July 1997: The currency fell 48% over the second half of the year after the central bank devalued its the baht in an attempt to revive its slumping economy, marking one of the biggest shifts in Asian currency policy since the country last devalued its currency in 1984.

• Japanese yen, October 1998: During the Asian Financial Crisis, the Japanese currency rallied as much as 7.2% in a day as hedge funds rushed to unwind carry trades by repaying the yen that they borrowed to invest in higher-yielding currencies such as the Thai baht and Russia’s ruble. The yen surged 16% that week.

• Turkish lira, 2001: A spat between then-President Ahmet Necdet Sezer and Prime Minister Bulent Ecevit led to an exodus of foreign capital, pushed up government debt and throwing more than 20 banks into bankruptcy. The currency lost 54% in value that year and inflation jumped to 69% by December.

• Argentine peso, June 2002: Argentina started struggling to finance its debt in 1999 as the one-to-one peg to a rising dollar squeezed exporters and Brazil, the country’s largest trading partner, devalued the real. Interim President Adolfo Rodriguez Saa announced to default on $95 billion debts in December 2001. Within weeks, the central bank abandoned the peg, allowing the peso to fall 74% by June 2002.

• Russian Ruble, December 2014: The currency plummeted 34% in three weeks through mid-December as plunging oil prices and international sanctions pushed Russia toward a recession. The central bank has spent $95 billion of foreign reserves over the past year to shore up the ruble and boosted interest rate five times. While the efforts helped quell volatility, the ruble remains within 5% of the record low set on Dec. 16.

Not too crazy so far.

• Swiss Bankers Are Accelerating the Euro’s Slide (Bloomberg)

The euro is shaping up as the biggest casualty of Switzerland’s decision to scrap its currency cap. Soon after the Swiss National Bank unexpectedly decided yesterday to end its three-year policy of keeping the franc from appreciating beyond 1.20 per euro, bearish bets on Europe’s common currency soared. While setting a record low versus the franc, the euro also plunged 3.5% against a basket of 10 developed-nation peers, the most since its 1999 debut. The SNB’s decision removes a key pillar of support for the euro, boosting the odds that its recent slide will accelerate. Companies from Goldman Sachs to Pimco have in recent days talked about the increasing chance the euro falls to parity with the dollar, which would represent a 14% decline from its current level.

“It adds fuel to the fire,” Atul Lele, the chief investment officer of Deltec International Group, who manages $1.9 billion, said by phone from Nassau, Bahamas. “This move out of Switzerland certainly exacerbates the trade-weighted euro weakness that we expect to see.” The difference in the cost of options to sell Europe’s common currency against the dollar, over those allowing for purchases, jumped by the most in almost two years yesterday. The euro dropped 1.3% to $1.1633 yesterday. In defending its cap on the franc, the SNB almost doubled its holdings of the 19-nation currency to 174.3 billion euros ($203 billion) since September 2011.

Speculation the European Central Bank is only days away from announcing a government-bond purchase program, or quantitative easing, at its Jan. 22 meeting had already weakened the euro against its major peers. The euro also sank below parity with the franc yesterday to an all-time low of 85.17 centimes, before recovering to 1.0096 per euro today. Deltec’s Lele said he sees it falling an additional 5% to 10%. “The euro can’t find a friend for love nor money,” said London-based Kit Juckes, a strategist at Societe Generale SA, which predicts a decline to $1.14 by year-end. When one of the biggest buyers of euros “leaves the building,” losses are inevitable, he said.

Stockman addresses the same issue, the return of price discovery, that I did yesterday in The End Of Fed QE Didn’t Start Market Madness, It Ended It.

• In Praise Of Price Discovery – The Market Is Off Its Lithium (David Stockman)

This morning’s market is more erratic than Claire Danes off her lithium. Gold is soaring, the euro’s plunging, US treasury yields are in free fall, junk bonds are faltering, copper is bouncing, oil has rolled over, the Russell 2000 momos are getting mauled, the swissie has shot the moon, the Dow is knee-jerking down, correlations are failing……and the robo traders are flat-out lost. All praise the god of price discovery! For six years financial markets have been drugged into zombiedom by maniacal central bankers who have violated every known rule of sound money and financial market honesty. In expanding their collective balance sheets from $5 trillion to $16 trillion over the past decade, for instance, they have midwifed a planet-wide fiscal fraud.

Politicians have been enabled to spend and borrow like never before because central banks have swapped trillions of public debt for electronic cash confected from nothing. Likewise, never have carry traders and gamblers been so egregiously pleasured by the state. After 73 straight months of ZIRP they are still pinching themselves, wondering if such stupendous largesse is real. They have bought anything with a yield and everything with prospect of gain, financed it for nothing and collected the arb – while being swaddled in the Fed’s guarantee that it would never surprise them or perturb their trades with unannounced money market rate changes. And so they wallowed in their windfalls, proclaiming their own genius.

Does a pompous dandy like Bill Ackman end up purchasing an absurdly priced $90 million Manhattan condo just “for fun” because markets operate on the level? Do his petulant brawls with other grand “activist” speculators like Carl Icahn mark investment genius or the machinery of honest capitalism at work? No they don’t. There is absolutely nothing honest, productive or fair about the central bank dominated casinos which have morphed out of what used to be legitimate money and capital markets. Indeed, all the requisites of stability, efficiency and honest price discovery have been destroyed by the monetary central planners. The short sellers have been eradicated. Downside insurance against a broad market swoon has become dirt cheap. Momo traders have thereby been enabled to earn unconscionable returns because their carry costs have been negligible and their hedging expenses nearly nothing.

“Saudi Arabia, the biggest producer, is probably assuming $80 ..”

• Iran Lowers Oil Price for Budget to $40 After Collapse (Bloomberg)

Iran, its oil exports curbed by sanctions, is lowering the crude price for this year’s budget to $40 a barrel as the energy slump affects governments and industry. The government is revising its draft budget to assume a base price of $40, from $72, the state-run Fars News Agency reported Finance and Economy Minister Ali Tayebnia as saying Jan. 15. The minister said some projects will have to be halted, according to Fars. Iran’s calendar year begins March 21. Prices of Brent, a benchmark for more than half the world’s oil, have dropped about 50% in the past year, forcing governments to reduce subsidies on diesel, natural gas and utilities and companies to cut billions from capital budgets. Qatar Petroleum and Shell called off plans to build a $6.5 billion petrochemical plant.

“Most Gulf countries are pricing $50 oil for 2015,” said Naeem Aslam, chief market analyst at Dublin-based Avatrade Ltd. in a phone interview from Dubai. “Creditors want to be sure they recoup their money so there could be hesitation to starting up new projects.” Iran President Hassan Rouhani presented a budget to lawmakers on Dec. 7 based on $72 oil. Since then, Brent crude has dropped about 30%. It budgeted $100 oil last year. [..] Iraq, the second-biggest member of OPEC, is using $60 in its budget. Saudi Arabia, the biggest producer, is probably assuming $80, according to John Sfakianakis, a former Saudi government economic adviser. Kuwait has propsed basing its 2015-16 budget on oil at $45.

Makes you wonder how BP itself will survive.

• BP Sees $50 Oil For Three Years (BBC)

BP’s job announcement later today, including a few hundred job losses in Aberdeen, is being made because it does not expect the oil price to bounce any time soon. The oil price has dropped around 60% since June, to $48 a barrel, and I understand that BP expects that it will stay in the range of $50 to $60 for two to three years. Although no oil company has a crystal ball, this matters – especially since it has a big impact on its investment and staffing ambitions. So plans that it had already initiated to reduce costs have taken on a new element, namely postponement of investments in new capacity that have not been started, and shelving of plans to extend the life of older fields where residual oil is more expensive to extract.

Aberdeen is an important centre for BP, and it employs around 4000 there. And it is in no sense withdrawing – it is continuing to invest in the Greater Clair and Quad 204 offshore properties. But the reduction of several hundred in the numbers it will henceforth employ in the Aberdeen area is symbolic of a city and industry that faces a severe recession. Hardest hit will be North Sea companies with stakes in older fields, where production costs are on a rising trend – and whose profitable life will be significantly shortened if the oil price does not recover soon. The reason BP expects the oil price to stay in the range of $50 to $60 for some years is for reasons you have read about here – it is persuaded that the Saudis, Emiratis and Kuwaitis are determined to recapture market share from US shale gas.

This means keeping the volume of oil production high enough such that the oil price remains low enough to wipe out the so-called froth from the shale industry – to bankrupt those high-cost frackers who have borrowed colossal sums to finance their investment. This does not simply require some US frackers to be bankrupted and put out of business, but also that enough banks and creditors are burned such that the supply of finance to the shale industry dries up. Only in that way could Saudi could be confident of reinvigorating its market power.

The end of major parts of the industry.

• $50 Oil Is The Ceiling For A Much Lower Trading Range (Anatole Kaletsky)

If one number determines the fate of the world economy, it is the price of a barrel of oil. Every global recession since 1970 has been preceded by at least a doubling of the oil price, and every time the oil price has fallen by half and stayed down for six months or so, a major acceleration of global growth has followed. Having fallen from $100 to $50, the oil price is now hovering at exactly this critical level. So should we expect $50 to be the floor or the ceiling of the new trading range for oil? Most analysts still see $50 as a floor – or even a springboard, because positioning in the futures market suggests expectations of a fairly quick rebound to $70 or $80. But economics and history suggest that today’s price should be viewed as a probable ceiling for a much lower trading range, which may stretch all the way down toward $20.

To see why, first consider the ideological irony at the heart of today’s energy economics. The oil market has always been marked by a struggle between monopoly and competition. But what most western commentators refuse to acknowledge is that the champion of competition nowadays is Saudi Arabia, while the freedom-loving oilmen of Texas are praying for OPEC to reassert its monopoly power. Now let’s turn to history – specifically, the history of inflation-adjusted oil prices since 1974, when OPEC first emerged. That history reveals two distinct pricing regimes. From 1974 to 1985, the US benchmark oil price fluctuated between $50 and $120 in today’s money. From 1986 to 2004, it ranged from $20 to $50 (apart from two brief aberrations after the 1990 invasion of Kuwait and the 1998 Russian devaluation).

Finally, from 2005 until 2014, oil again traded in the 1974-1985 range of roughly $50 to $120, apart from two very brief spikes during the 2008-09 financial crisis. In other words, the trading range of the past 10 years was similar to that of OPEC’s first decade, whereas the 19 years from 1986 to 2004 represented a totally different regime. It seems plausible that the difference between these two regimes can be explained by the breakdown of OPEC power in 1985, owing to North Sea and Alaskan oil development, causing a shift from monopolistic to competitive pricing. This period ended in 2005, when surging Chinese demand temporarily created a global oil shortage, allowing OPEC’s price “discipline” to be restored.

Just the start.

• Big Oil Gets Serious With Cost Cuts on Worst Slump Since 1986 (Bloomberg)

Major oil companies are awaking from their slumber and facing up to the magnitude of the crash in crude prices. From Shell canceling a $6.5 billion project in Qatar to Schlumberger firing about 9,000 people and Statoil giving up exploration in Greenland, the oil industry this week concluded that the slump is no blip. Top producers follow U.S. shale developers such as Continental in unraveling a boom that produced more oil and natural gas than the world is ready to buy. And there’s certainly more unwinding to come. For most of this month, crude oil has traded below $50 a barrel, a level few predicted even two months ago when OPEC signaled it wouldn’t cut production to defend prices.

If the market stays this depressed, global spending on exploration and production could fall more than 30%, the biggest drop since 1986, according to forecasts from Cowen. “Not too many people expected these levels of oil prices, not even the companies themselves,” said Dragan Trajkov, an analyst at Oriel in London. “Now they have to deal with this new situation and the first impact will be on new investments.” Shell, BP, Chevron and other top producers are preparing to present 2014 earnings to investors at the end of this month or early February and will signal plans for this year. Their chief executive officers are faced with the challenge of assuring shareholders they can see through the depression without cutting dividend payments. The direction of the oil market shows companies probably need to prepare for the worst.

Bank of America, noting the speed global oil inventories are building, forecast Thursday that Brent futures are set to fall to as low as $31 a barrel by the end of the first quarter from about $48 now. That’s even lower than the $36.30 seen during the depths of 2008’s financial crisis. Oil traded above $100 a barrel in July and analysts forecast prices would stay there for years to come. The scale and speed of the price drop has forced companies to start making significant decisions. Shell, Europe’s largest oil company, took the axe this week to a $6.5 billion petrochemicals plant it planned to build in Qatar in partnership with the state oil producer. The company, based in The Hague, said the project wasn’t economically feasible in the current price environment.

“Energy companies are expected to cut spending in the U.S. by as much as 35% this year ..”

• Schlumberger Cuts 9,000 Jobs as Oil Slump Portends Uncertainty (Bloomberg)

Schlumberger, the world’s biggest oilfield-services company, tackled the “uncertain environment” of plummeting crude prices head-on by cutting 9,000 jobs and lowering costs at a vessels unit. The 7.1% workforce cutback, along with the reduction and reassessment of its WesternGeco fleet, were among steps leading to a $1.77 billion fourth-quarter charge in anticipation of lower spending by customers in 2015, the Houston- and Paris-based company said in an earnings report Thursday. Energy companies, coping with oil worth less than half its price six months ago, are expected to cut spending in the U.S. by as much as 35% this year, according to Cowen. The number of onshore U.S. rigs could fall by as much as 750 this year, Wells Fargo said. That would be a 43% decline from the 1,744 in operation at the start of the year, according to Baker Hughes. The coming year “is looking like it’s gonna be pretty rough,” Rob Desai, an analyst at Edward Jones in St. Louis, said.

“With the potential for this to last some time, it’s in the best interest of the company to attack it aggressively.” Schlumberger, which had doubled its workforce in the past 10 years, said the one-time charges for the quarter also resulted from the devaluation of Venezuela’s currency and a lower value for production assets it owns in Texas. Net income dropped to $302 million, from $1.66 billion a year earlier. “In this uncertain environment, we continue to focus on what we can control,” Schlumberger Chief Executive Officer Paal Kibsgaard said in the earnings report. “We have already taken a number of actions to restructure and resize our organization.” Shares in oilfield-services companies, which help customers find and produce oil and natural gas, were the first to fall as crude prices declined. Service companies in the Standard & Poor’s Index dropped 20% in the quarter, more than the 18% decline for producers.

Hit hard.

• Aberdeen, The Energy-Rich Town Counting The Cost Of The New Oil Shock (Guardian)

Billy Campbell’s three-year-old is spinning around in a Peppa Pig plastic rocket in the middle of Aberdeen’s Union Square shopping mall. It is not hard to believe that the wider Aberdonian population is in a similar spin given the crisis that has struck the Granite City’s key industry: oil and gas. Ed Davey, the energy secretary, and Nicola Sturgeon, Scotland’s first minister, have both rushed to Britain’s oil capital in the last 48 hours to reassure the city that they are aware of looming problems – problems that, the Bank of England governor warned on Wednesday, will deliver a “negative shock” to Scotland’s economy. Some experts think the oil price fall will wipe £6bn off the country’s GDP and Sturgeon is setting up a task force to try to preserve energy jobs.

[..] This is a very affluent city where unemployment is only a little over 2% and incomes are well above the Scottish average. In Aberdeenshire some 38% of households have an income of more than £30,000, compared to 28% across Scotland and just 19% in Glasgow. The Union Square car park is crammed with upmarket models and four-wheel drives – a survey last year by accountants UHY Hacker Young showed that Aberdeenshire has the highest sales of 4x4s in the UK. The car park is just yards away from the massive offshore support vessels that are waiting to load in the harbour beyond. But, away from the downtown bustle of the city centre, not everyone is quite so laid back.

Certainly not those at the sprawling business park at Dyce, close to the airport, where oil firms and the industry’s service companies are congregated. It was here that BP staff were just told that 300 jobs are to be lost from the North Sea business. These are just the latest staff cuts at major oil employers in the region. Shell has taken similar steps, as has Chevron. Companies such as the Wood Group and Petrofac that provide drilling and other support services to the big oil companies have also been cutting costs. Last year Wood slashed 10% off the rates it pays to its contractors, saying operating costs in the North Sea were unsustainable. And that was before the price of oil crashed over the last six months by 60% to its lowest level in six years.

Preparing for a bank run.

• Greek Systemic Banks Request Emergency Liquidity Assistance (Kathimerini)

Two Greek systemic banks submitted the first requests to the Bank of Greece for cash via the emergency liquidity assistance (ELA) system on Thursday, sources told Kathimerini. It is thought that requests from the remaining Greek banks will follow in the next few days. The move came in response to the pressing liquidity conditions resulting from the growing outflow of deposits as well as the acquisition of treasury bills forced onto them by the state. Banks usually resort to ELA when they face a cash crunch and do not have adequate collateral to draw liquidity from the European Central Bank, their main funding tool. ELA is particularly costly as it carries an interest rate of 1.55%, against just 0.05% for ECB funding.

The requests by the two lenders will be discussed by the ECB next Wednesday. Bank officials commented that lenders are resorting to ELA earlier than expected, which reflects the deteriorating liquidity conditions in the credit sector. Besides the decline in deposits, banks were dealt another blow on Thursday with the scrapping of the euro cap on the Swiss franc. Bank estimates put the impact of the euro’s drop on the local system’s cash flow at between €1.5 and €2 billion. Deposits recorded a decline of €3 billion in December – a month when they traditionally expand – while in the first couple of weeks of January the outflow continued, although banks say it is under control.

A major blow to the system’s liquidity has come from the repeated issue of T-bills: In November the state drew €2.75 billion in this way, in December it secured €3.25 billion, and it has already tapped another €2.7 billion in January. Of the above amounts, a significant share – amounting to €3 billion according to bank estimates – was in the hands of foreign investors who are not renewing their stakes, so Greek banks have to step in to buy them. Local lenders had also resorted to ELA in 2011 to cope with the outflow of deposits and consecutive credit rating downgrades of the state (and the banks) that made Greek paper insufficient for the supply of liquidity by the Eurosystem. In June 2012, due to the uncertainty of the twin elections at the time, the ELA being drawn by local banks to handle the unprecedented outflow of deposits reached a high of €135 billion. By May 2014, Greek banks had reduced their ELA financing to zero.

If politicians – like this guy – don’t understand what deflation is, and most have no clue, that can obviously cause trouble.

• No Risk Of ‘Deflation Spiral’ In Europe: German Minister (CNBC)

Despite data showing that the euro zone has slid into deflation, Germany’s deputy finance minister brushed off concerns that the region could enter a downward spiral of falling prices and lack of demand. “This is not what economists and textbooks describe as a deflation spiral, this is a modest price development,” Steffen Kampeter told CNBC Thursday. Data released last week showed that the 19-country single currency region had entered deflation territory in December. Prices in the euro zone fell 0.2% year-on-year in December, marking the first time since 2009 that prices have dipped into negative territory. The decline in prices has been largely attributed in the cost of oil, which has slipped over 60% since June 2014. However, core inflation, which strips out volatile factors like fuel and unprocessed food prices, was stable at 0.7% in December.

“I see the facts,” Kampeter said. “And the fact is that the core inflation is rising and we have a very moderate and negative price development, especially in energy and raw material.” Deflation concerns analysts because a decline in the price of goods can cause consumers to delay purchases in the hope of further price falls, putting pressure on the broader economy. The figures prompted widespread market speculation that the European Central Bank (ECB) could announce a full-scale quantitative easing program when it meets on January 22. The deputy finance minister wouldn’t comment on any forthcoming ECB action, however. As a German policymaker, Kampeter said he was tasked with looking at structural reforms in Germany and Europe as a whole, and was aiming to ensure that investment in Europe continued in order to keep the region competitive. The Germany economy – which is the largest in the euro zone – has staged something of a turnaround of late, after veering dangerously close to recession in 2014.

Today’s episode of The Dog Ate My Homework.

• UK Retailers ‘Throttled’ By Black Friday (Daily Mail)

It’s the American import that has played havoc with Christmas retail sales. Black Friday, where US shops slash their prices on the day after Thanksgiving, has joined the school prom as a stars-and-stripes tradition that has invaded our islands. For UK retailers, it has proved an unwelcome arrival. Far from boosting net sales it has proved a festive nightmare, denting Christmas trading, causing websites to crash, and sparking delivery chaos. Shoppers spent an estimated £810m on Black Friday on November 28 – making it the biggest ever day for UK online sales. But consumers more than made up for their spree by tightening their belts later on, in the run-up to Christmas.

Retailers suffered their slowest December growth in six years as Black Friday disrupted the timing and rhythm of festive sales. Several chains have lined up to blame the event for their lacklustre performance, with Argos owner Home Retail Group claiming to be the latest victim. The company, which fell short of City forecasts, accused Black Friday of fostering ‘a discount mentality’ in the run-up to Christmas, a time of year when shoppers are usually prepared to pay full price for gifts. Marks & Spencer said that it had caused systems at its Castle Donington warehouse to collapse, and Game Digital blamed it for Monday’s profit warning. Home Retail Group’s new chief executive John Walden said: ‘This year’s adoption of ‘Black Friday’ promotional events generally by the UK market significantly impacted the shape of Argos sales over its peak trading period.’

But China can make the numbers up as it goes along.

• Warning: China May Trigger Fresh Rout In Commodities (CNBC)

Commodities just can’t catch a break – and China’s GDP release on January 20 could throw another punch at the beleaguered asset class should it underperform expectations, warn analysts. “We are days from the release of China’s Q4 GDP and copper is the best barometer of growth. The rout gives me reason to believe China’s growth is not only moderating but is slowing faster than estimated,” Evan Lucas, market strategist at IG wrote in a note. “If China disappoints next Tuesday, brace for a real rout in commodities,” he said. Copper, regarded as an important indicator of economic health, joined the selloff in commodities Wednesday after the World Bank downgraded its growth outlook for the global economy. The global economy is forecast to expand by 3% this year,the Washington-based lender said in its Global Economic Prospects report released on Tuesday, a notch lower than its previous forecast of 3.4% made in June, but up from an estimated 2.6% in 2014.

The red metal suffered its biggest one-day slide in more than three years on Wednesday, with three-month copper on the London Metal Exchange falling more than 8% at one point to $5,353 a tonne before settling around $5,655 on Thursday. The World Bank expects China’s gradual pace of deceleration to continue,forecasting growth in the world’s second largest economy to slow to 7.1% this year from an estimated 7.4% last year. China plays a dominant role in the commodities market because it’s the world’s largest consumer of energy and metals, including copper. “In our view, the significant pressure on copper price lately indicates either a noticeable slow-down in demand [out of China] or troubles in the shadow banking sector, or both,” said David Cui, strategist at Bank of America Merrill Lynch.

“.. shadow bank credit exceeded new yuan-denominated loans for the first time in 2014.”

• China Shadow Banking Surge Chills Stimulus Hopes (CNBC)

Two months ago calls for broad-based stimulus in China were all the rage, but a sudden spike in shadow banking has led analysts to revise their expectations for looser monetary policy. Aggregate social financing, a measure of credit that covers bank lending and shadow banking activity, hit one-year high of 1.69 trillion yuan ($273 billion) in December, up from 1.15 trillion yuan the previous month, official data showed on Thursday. “A surge in shadow bank credit – entrusted loans, trust loans, banker’s acceptances, corporate bonds and non-financial enterprises’ domestic equity – was responsible for December’s considerably larger than expected increase in aggregate financing,” said Tim Condon, head of Asia research at ING in a note on Friday, noting that shadow bank credit exceeded new yuan-denominated loans for the first time in 2014.

China’s central bank surprised markets by cutting interest rates for the first time in two years in November, sparking expectations for further policy easing via interest rate or reserve ratio requirements (RRR) cuts. Tight funding conditions also fuelled hopes for RRR cuts late last year. The seven-day repo rate, a closely-watched measure of interbank lending costs, spiked suddenly to an over one-year high in mid-December, prompting speculation for central bank action to boost liquidity. But Thursday’s data reduce the likelihood that the People’s Bank of China will cut the RRR for lenders, Condon said: “We are reviewing our forecast of 100 basis-points of RRR cuts in the first half of the year for downward revision.” Shadow banking was fairly stable last year after Beijing introduced regulatory measures to clampdown on the sector, such as stricter financing rules for trust companies.

During the July-September period, the shadow banking sector of China’s total social financing contracted for the first time on quarter since the global financial crisis. However, those tightening measures may be the very reason for December’s surge, according to Barclays. “We suspect that borrowers including local government financing vehicles (LGFVs) could have accelerated their financing activities through shadow banking channels, since they might experience difficulties in accessing bond market for new issuance as a result of tightening regulations/declining support from provincial government on new debt,” analysts said in a note on Friday. The sudden spike in shadow banking credit leaves the central bank in a catch-22 situation, Gavin Parry at Parry International Trading said. “Here is the issue for the PBoC; it is facing rampant speculation bubbling in the economy like the stock market, while also facing weaker loan demand, local government funding needs and deflationary forces,” he said.

Logical step.

• New Russian/Chinese Credit Rating Agencies To ‘Balance Big Three’ (RT)

The creation of a joint Russian-Chinese credit rating agency will balance the global outlook and give the world an alternative view on how credit ratings should be done, Chinese international relations expert Victor Gao told RT. “Traditionally credit rating is mostly done by Western credit rating agencies. They sometimes may not fully understand the dynamics of the economics of any particular company or the sovereign borrower,” he said, adding that the agency won’t pursue a goal of replacing traditional Western credit rating agencies like S&P and Moody’s. “It will give the whole world another perspective of how risks are analyzed and how credit rating should be done,” he said. Gao believes Western rating agencies claim to be independent and professional, but in fact they turn out to be biased when it comes to issues of geopolitical importance.

“During the global financial crisis the Western rating agencies did not react as quickly as possible,” he said. “In terms of the rating of the sovereign debt of the US for example, or even for Japan, they’ve actually displayed much more flexibility in rating these countries compared with many other countries.” The announcement of a rating could actually make a situation even worse rather than help stabilize it, he added. Credit rating agencies are very much at the top of the international financial system and they’re not only active domestically in one particular country but in many cases they are active across national boundaries.

Gao said that China has its own credit rating agency Dagong which is actively operating in the country and abroad, increasingly estimating other countries’ and companies’ credit rating. The analyst believes the global economy is changing and going through an important transformation as the emerging markets are growing and their portion in the global economy is increasing despite a significant turmoil in the international financial, economic and energy sectors. Creating a joint credit rating agency of Russia and China is significant but it’s high time the world’s most important developing economies united and came up with their own credit rating agency, as in case of establishing the BRICS Development Bank, he said.

Up to 60 years old, women up to 50.

• Ukraine President Poroshenko Signs Decree To Mobilize Up To 100,000 (TASS)

Ukrainian President Petro Poroshenko has signed a decree on another mobilization. He put his signature to the document at a meeting with the heads of regional authorities. “I have handed it over to parliament, because it requires approval by the national legislature,” Poroshenko said. Under a decision by the National Security and Defense Council of December 20, 2014, a fourth mobilization wave is beginning on January 20, and two more will be held in April and June.

Some categories of reservists will be exempt from mobilization: men with poor health, university and post-graduate students, clerics, parents having three or more children, and those resident in the territories uncontrolled by the Ukrainian authorities. On January 8, Defense Minister Stepan Poltorak said that in 2015 about 104,000 men may be mobilized, if need be. Ukrainian General Staff spokesman Volodymyr Talalai said that women aged 25 through 50 might be drafted into the army, if necessary.

There needs to be far more protest against TTIP, or it’ll be pushed through.

• ‘Corporate Wolves’ Will Exploit TTIP Trade Deal, MPs Warned (Guardian)

The controversial TTIP trade deal between Europe and the US could depress workers’ wages by £3,000 a year and allow “corporate wolves” to sue the government for loss of profit, MPs have heard. The claims were made in a highly-charged House of Commons debate, with many Conservative MPs defending the proposed Transatlantic Trade and Investment Partnership free trade deal and opposition MPs warning that it risks giving too much power to big US corporations. Anti-TTIP campaigners claim one million people have signed a petition against the deal, mainly because of worries that it could open the door to US health companies running parts of the NHS. This has been firmly denied by the UK government and the European commission, who have said public services are explicitly excluded. However, Labour is still worried that the proposals not do enough to protect the public interest.

Many MPs have particular concerns about the investor-state dispute settlement clauses, which would give private companies the right to sue the government in international tribunals for loss of profit arising from policy decisions. Labour MP Geraint Davies, who called the debate, urged negotiators to drop controversial clauses, insisting the judicial system in each country was sufficient protection in mature democracies. His motion called for the UK parliament to play a role in scrutinising any eventual deal, instead of it being passed exclusively by Brussels. “The harsh reality is this deal is being stitched up behind closed doors by negotiators with the influence of big corporations and the dark arts of corporate lawyers – stitching up laws that will be quite outside contract law and common law, outside the shining light of democracy, to in fact give powers to multinationals to sue governments over laws designed to protect their citizens.”

“My view is we should pull the teeth of the corporate wolves scratching at the door of TTIP by scrapping the investor-state dispute settlement rules altogether and so we can get on with the trade agreement without this threat over our shoulder.” Caroline Lucas, the former Green party leader and MP for Brighton Pavilion, said she believed TTIP amounted to a corporate takeover and cited independent research from Tuft University suggesting workers’ wages could suffer by £3,000 a year. “Countries like the Czech Republic, Slovakia and Poland who are in trade agreements which include this kind of investor-state relationship have been sued 127 times and lost the equivalent money that could have employed 300,000 nurses for a year,” she said. “The idea this isn’t a problem is patently wrong; this is about a corporate takeover and that is why it is right to oppose this particular mechanism.”

Good man.

• Pope Francis Says Freedom Of Speech Has Limits (BBC)

Pope Francis has defended freedom of expression following last week’s attack on French satirical magazine Charlie Hebdo – but also stressed its limits. The pontiff said religions had to be treated with respect, so that people’s faiths were not insulted or ridiculed. To illustrate his point, he told journalists that his assistant could expect a punch if he cursed his mother. [..] Speaking to journalists flying with him to the Philippines, Pope Francis said last week’s attacks were an “aberration”, and such horrific violence in God’s name could not be justified. He staunchly defended freedom of expression, but then he said there were limits, especially when people mocked religion. “If my good friend Doctor Gasparri [who organises the Pope’s trips] speaks badly of my mother, he can expect to get punched,” he said, throwing a pretend punch at the doctor, who was standing beside him. “You cannot provoke. You cannot insult the faith of others. You cannot make fun of the faith of others. There is a limit.”

Debt Rattle January 2 2015

Jan 022015

January 2, 2015 Posted by Raúl Ilargi Meijer at 12:16 pm Finance Tagged with: commodities, dollar, Draghi, ECB, emerging nations, oil, pope, Tolstoy 2 Responses »

G.G. Bain St. Paul’s Church and St. Paul Building from Woolworth Building, NYC Apr 1919

• The Year Of Dollar Danger For The World (AEP)

• Iran Says Saudi Arabia Should Move To Curb Oil Price Fall (Reuters)

• Could 2015 Herald A ‘New Oil Order’? (CNBC)

• Falling Oil Raises Headache For Developing Nations (MarketWatch)

• Russia Oil Output Hits Post-Soviet High (Reuters)

• Oil At $14 A Barrel? Here’s How It Could Happen (CNBC)

• Draghi Says ECB Prepares Action as Deflation Risk Non-Negligible (Bloomberg)

• Draghi: Risk of ECB Failing Its Mandate Higher Than 6 Months Ago (Reuters)

• Euro Forecasters See Pain After Worst Year Since 2005 (Bloomberg)

• Merkel Ally Urges ECB Not To Buy Struggling States’ Bonds (Reuters)

• New Year Brings Eurozone Closer To A Lost Decade (MarketWatch)

• 2014 “End Of Year” Report And A Look Into What 2015 Might Bring (Saker)

• Commodity Prices Are Cliff-Diving: The Case Of Iron Ore (David Stockman)

• China Property Developer Fails To Repay $51 Million Loan (Reuters)

• China Goes Organic Amid Food Scandals (CNBC)

• Thomas Piketty Rejects Légion d’Honneur Award (FT)

• The 10 Most Generous Nations (MarketWatch)

• The Pope Blesses the Climate Treaty (Bloomberg)

• The Secret To A Happy Life – Courtesy Of Tolstoy (BBC)

Ambrose is all over the place here. But the core is dead on: the dollar will decide a lot in 2015, it’ll be a global wrecking ball.

• The Year Of Dollar Danger For The World (AEP)

America’s closed economy can handle a surging dollar and a fresh cycle of rising interest rates. Large parts of the world cannot. That in a nutshell is the story of 2015. Tightening by the US Federal Reserve will have turbo-charged effects on a global financial system addicted to zero rates and dollar liquidity. Yields on 2-year US Treasuries have surged from 0.31% to 0.74% since October, and this is the driver of currency markets. Since the New Year ritual of predictions is a time to throw darts, here we go: the dollar will hit $1.08 against the euro before 2015 is out, and 100 on the dollar index. Sterling will buckle to $1.30 as a hung Parliament prompts global funds to ask why they are lending so freely to a country with a current account deficit reaching 6% of GDP.

There will be a mouth-watering chance to invest in the assets of the BRICS and mini-BRICS at bargain prices, but first they must do penance for $5.7 trillion in dollar debt, and then do surgery on obsolete growth models. The MSCI index of emerging market stocks will slide another third to 28 before touching bottom. The Yellen Fed will be forced to back down in the end, just as the Bernanke Fed had to retreat after planning a return to normal policy at the end of QE1 and QE2. For now the Fed is on the warpath, digesting figures showing US capacity use soaring to 80.1%, and growth running at an 11-year high of 5% in the third quarter. The Fed pivot comes as China’s Xi Jinping is trying to deflate his own country’s $25 trillion credit boom, early in his 10-year term and before it is too late. He does not need or want uber-growth.

The Politburo will more or less keep its nerve as long as China continues to meet its target of 10m new jobs a year – easily achieved in 2014 – and job vacancies outstrip applicants. Uncle Xi will ultimately blink, but traders betting on a quick return to credit stimulus may lose their shirts first. Worse yet, when he blinks, a tool of choice may be to drive down the yuan to fight Japan’s devaluation, and to counter beggar-thy-neighbour dynamics across East Asia. This would export yet more Chinese deflation to the rest of the world. At best we are entering a new financial order where there is no longer an automatic “Fed Put” or a “Politburo Put” to act as a safety net for asset markets.

That may be healthy in many ways, but it may also be a painful discovery for some. A sated China is as much to “blame” for the crash in oil prices as America’s shale industry. Together they have knouted Russia’s Vladimir Putin. The bear market will short-circuit at Brent prices of $40, but not just because shale capitulates. Marginal producers in Canada, the North Sea, West Africa and the Arctic will share the punishment. The biggest loser will be Saudi Arabia, reaping the geostrategic whirlwind of its high stakes game, facing Iranian retaliation through the Shia of the Eastern Province where the oil lies, and Russian retaliation through the Houthis in Yemen.

This is about much more than oil: “The Iranian deputy minister also criticised Saudi military involvement in Bahrain, which has been gripped by tension since 2011 protests led by majority Shi’ite Muslims demanding reforms and a bigger role in running the Sunni-ruled country.”

• Iran Says Saudi Arabia Should Move To Curb Oil Price Fall (Reuters)

Falling world oil prices will hurt countries across the Middle East unless Saudi Arabia, the world’s biggest crude exporter, takes action to reverse the slump, Iran’s deputy foreign minister told Reuters. Hossein Amir Abdollahian described Saudi Arabia’s inaction in the face of a six-month slide in oil prices as a strategic mistake and said he still hoped the kingdom, Tehran’s main rival in the Gulf, would respond. Oil prices closed on Wednesday at a 5-1/2 year low, registering their second-biggest ever annual decline after OPEC oil exporters, led by Saudi Arabia, chose to maintain oil output despite a global glut and calls from some of the cartel’s members – including Iran and Venezuela – to cut production.

“There are several reasons for the drop of the price of oil but Saudi Arabia can take a step to have a productive role in this situation,” Abdollahian said. “If Saudi does not help prevent the decrease in oil price … this is a serious mistake that will have a negative result on all countries in the region,” Abdollahian said in an exclusive interview on Wednesday evening. His comments highlight continued tensions between the Shi’ite Muslim republic and Sunni Muslim kingdom, locked in a battle for regional power and influence despite hopes of rapprochement since the inauguration of Iran’s President Hassan Rouhani in August 2013.

Abdollahian said Iran would have more discussions with Saudi Arabia about the oil price, both through oil officials at OPEC and through the foreign ministry. He did not give specific details on when any meeting might take place. Saudi Arabia said last month that it would not cut output to prop up oil markets even if non-OPEC nations did so. The Iranian deputy minister also criticised Saudi military involvement in Bahrain, which has been gripped by tension since 2011 protests led by majority Shi’ite Muslims demanding reforms and a bigger role in running the Sunni-ruled country. Abdollahian said Bahraini authorities’ continued detention of Shi’ite opposition leader Sheikh Ali Salman would have “serious consequences” for the government there.

Tehran and Riyadh accuse each other of interfering in the pro-Western Gulf island kingdom, one of several countries where their power struggle has played out. They also support opposing sides in wars and disputes in Iraq, Syria, Lebanon and Yemen. Abdollahian dismissed United States efforts to fight Islamic State, also known by its Arabic acronym Daesh, as a ploy to advance U.S. policies in the region. “The reality is that the United States is not acting to eliminate Daesh. They are not even interested in weakening Daesh, they are only interested in managing it,” he said.

“.. the impact on that on production would only be start to felt in 2016 onwards and not as much as we would like to see in 2015.”

• Could 2015 Herald A ‘New Oil Order’? (CNBC)

Last year was a tumultuous year for oil, with Brent crude prices declining around 50% since June on the back of an over-supplied market and lack of global demand. From “old school” oil producers Russia and Saudi Arabia in the east to shale oil in California and oil sands in Alberta in the west, the glut of oil and its impact on currencies and economies has been felt across the world. When OPEC decided not to cut production when it met in November, the 12 major oil producers effectively threw down the gauntlet to the young guns of U.S. oil to see who could withstand the fall in prices and who would blink first and trim production. As of January 2, benchmark Brent crude was trading at $57.58, having fallen from a high of around $115 a barrel hit in mid-June.

With prices falling fast and hitting five-year lows in mid-December, commodities research teams at the world’s investment houses and banks scrambled to revise their 2015 predictions for oil and the potential impact on global economies. And as wildly fluctuating as the price of oil has been, so have the predictions. While HSBC told investors to prepare for $95 a barrel by the end of 2015, other analysts were far more bearish. Morgan Stanley cut its 2015 forecast for Brent saying that in a worst case scenario crude prices could fall to $43 per barrel in 2015, although its base case scenario was for $70. The U.S. shale revolution and its accompanying rise in oil production has been a decisive factor in the fall in the price this year. The newcomer has affronted the old guard of producers like Saudi Arabia, the biggest oil exporter in the OPEC group and analysts believed its decision not to cut production was a move to put price pressure on U.S. producers.

The U.S. might not give up so easily though, according to Citi’s commodities research team who said in their 2015 outlook for the commodities markets that there is a “distinctive underlying ‘Made in America’ quality that looks likely to dominate the commodity complex through 2015.” Whether U.S. shale oil producers can withstand the fall in prices into 2015 and dent OPEC’s market share is a key matter for debate, however. “Prices are already approaching the danger point for the bulk of U.S. shale output, so industry costs would have to fall for prices to be sustainable at these lower levels,” Melanie Debono, economist at Capital Economics, said in the consultancy’s accompanying note.

There was a risk, Debono added, that an extended period of lower oil prices would lead to large cuts in output in both the U.S. and Canada. Companies like ConocoPhillips who are active in the U.S. shale industry have already announced that it would “defer significant investment” in Canada and the U.S. as returns looked far less attractive. “It’s very clear if oil prices remain below in the region of $64 per barrel for a sustained period of time – that’s about a three to six month period at least – we would start seeing increased scale backs in the U.S.,” Abhishek Deshpande, oil and gas analyst at Natixis. “But the impact on that on production would only be start to felt in 2016 onwards and not as much as we would like to see in 2015.”

Oil and the dollar.

• Falling Oil Raises Headache For Developing Nations (MarketWatch)

The drops last year in the prices of oil and other commodities are threatening to stunt growth in poor African and Latin American nations that sought to use vast natural-resource wealth to climb the development ladder. During a decadelong boom, governments on those continents vowed to use a windfall from surging raw-material prices to lift the vast underclass. Governments that sought big development leaps by funding social-welfare programs and ambitious infrastructure initiatives, such as building roads, ports and power plants, may now have less money to do so. “The good-governance records in many [Latin American] countries were linked to commodity prices, and this will be tested by the end of the commodity boom,” said Jorge Castaneda, Mexico’s former foreign minister.

The commodity-rich nations of Africa and Latin America are also facing a slowdown in China, a key buyer of exports from South Africa, Nigeria, Brazil, Chile and others. The two regions have been hit by a global selloff of emerging-market stocks, bonds and currencies. The stakes are high for these often-volatile economies, which have some of the world’s widest rich-poor gaps. Economic slowdowns and declining investment flows threaten to stretch budgets. In Latin America, credit-ratings firm Fitch expects to downgrade more countries than it upgrades in 2015. In some cases, the declines could expose levels of corruption and mismanagement that weren’t detected during the good times. In resource-rich Brazil, millions of families escaped extreme poverty and joined a growing working class.

Now, the country’s growth has stagnated, investment is declining and currency declines are raising inflation fears. Allegations of widespread corruption at the state oil firm Petroleo Brasileiro SA are adding to the pain. Brazilian officials had placed the oil firm at the center of a far-reaching plan to overhaul the economy and lift millions of poor into better paying jobs. Shares of Petrobras have fallen to multiyear lows. The situation is worse in Venezuela, where President Nicolás Maduro is seeking to use oil wealth to fuel a Socialist revolution. With oil prices plunging, investors are gauging the risk that Venezuela may fail to pay its debt. Default would add to the woes of an economy saddled with double-digit inflation and shortages of basic items.

Even countries with more moderate policy mixes, such as Chile, among the biggest copper exporters, are getting hit. Chile cut its 2015 growth outlook by half a percentage point to 2.5% in December. In Africa, the impact is magnified by the dependence of some fast-growing economies, such as Zambia, on the export of a single commodity. If the price of that commodity falls–in Zambia’s case, copper–the fallout can be far-reaching. Countries that didn’t balance budgets or curtail corruption while times were good will face painful choices, said Jack Allen of Capital Economics in London. Capital Economics forecasts average growth in sub-Saharan Africa to fall by one percentage point in 2015, to 4%, the slowest pace in more than a decade.

Race to the bottom.

• Russia Oil Output Hits Post-Soviet High (Reuters)

Russia’s 2014 oil output hit a post-Soviet record high average of 10.58 million barrels per day (bpd), rising by 0.7% helped by small non-state producers, Energy Ministry data showed on Friday. Oil and gas condensate production in December hit 10.67 million bpd, also a record high since the collapse of the Soviet Union. The data showed Russia’s so-called small producers, mostly privately held, increased their output by 11% to just over 1 million barrels per day. Crude oil exports via state monopoly Transneft fell 5% to 195.5 million tonnes due to rising domestic demand and refinery runs.

Exports to China reached a new high of 22.6 million tonnes (452,000 bpd), up 43% on the year as Russia seeks to diversify its energy customers. Russian producers capitalized on rising oil prices in the first half of 2014, when they reached over $113 per barrel. However, they have halved since then. Hurt by falling oil prices and Western sanctions prompted by Moscow’s role in Ukraine, growth in oil output in 2014 slowed from a gain of 1.4% in 2013. Top listed oil company Rosneft, which produces more oil than OPEC members Iraq or Iran, saw its output slip 0.7% as it struggled to arrest declining production at its West Siberian fields. Oil and gas fund about half of Russia’s budget.

The country’s economy is slipping into recession following a fall in oil prices and could see oil output decline to 525 million tonnes in 2015, according to an Energy Ministry forecast. The International Energy Agency (IEA) expects Russian oil output to fall by 1%. The country’s natural gas production in 2014 fell by 4% to 640.237 billion cubic meters (bcm). Top producer Gazprom posted an output fall of 9% to an all-time low of 432 bcm due to its pricing dispute with Ukraine, once its second-largest customer after Germany.

Sounds crazy?

• Oil At $14 A Barrel? Here’s How It Could Happen (CNBC)

No one really saw 2014’s dramatic plunge in oil price coming, so it’s probably fair to say that any predictions about where it’s going from here fall somewhere between educated guesses and picking a number out of a hat. In that light, it’s less than shocking to see one analyst making a case—albeit in a pure outlier sense—for a drop all the way below $14 a barrel. Abigail Doolittle, who does business under the name Peak Theories Research, posits that current chart trends point to the possibility that crude has three downside target areas where it could find support—$44, $35 and the nightmare scenario of, yes, $13.65. Make no mistake, she thinks that’s an extreme case.

Her target for the more likely move is the $35 range, which in itself is quite a call considering light crude had been just above $100 a barrel this summer and the move would represent a 33% or so plunge just from current levels. But Doolittle makes room for an even more extreme scenario, in which technical support gives way as part of what she describes as a triangular pattern forming in an “ascending trend channel” that brings about the extreme case. “There is a wild case scenario for a massive fall in oil and it is made by both the triangle and the possibility that oil’s true trading path will turn out to be sideways on a potential false initial reaction of epic proportions,” Doolittle explained in a report she distributed Wednesday morning.

“This possibility cannot be ignored or discounted because it is simply too strong from a technical standpoint.” She acknowledges that the scenario “may sound outrageous” but cautions “odds appear fairly strongly” that the move could be triggered by “a false initial reaction or basically a massive head fake caused by a variety of factors.” Before consumers get too giddy about the cost of even lower fuel prices at the pump, Doolittle offers a word of caution. “Clearly this would seem to be a tail wind for consumers, but the various shocks and possible financial market crashes that could be triggered by such a collapse in oil would not be, and thus this seems a very dangerous scenario indeed,” she said.

“Italian and Spanish bond yields dropped to record lows after the interview was published and the euro fell to the weakest since June 2010.”

• Draghi Says ECB Prepares Action as Deflation Risk Non-Negligible (Bloomberg)

European Central Bank President Mario Draghi said he can’t exclude the risk of deflation in the euro area, hinting that the likelihood of large-scale quantitative easing is increasing. “The risk that we don’t fulfill our mandate of price stability is higher than it was six months ago,” Draghi said in an interview with German newspaper Handelsblatt. “We are in technical preparations to alter the size, speed and composition of our measures at the beginning of 2015, should this become necessary, to react to a too-long period of low inflation. There’s unanimity in the ECB council on that.”

While policy makers agree in principle, the debate over whether fresh stimulus is needed at this point has reopened a rift on the ECB’s Governing Council that now comprises 25 officials after Lithuania joined the currency region on Jan. 1. With inflation seen turning negative this year, some have warned of a deflationary spiral, as others have urged waiting to allow previously agreed measures to show their effect. Draghi said on deflation that “the risk cannot be entirely excluded, but it is limited” and “we have to act against such risk.” Asked how much the ECB will have to spend on government bonds, he said “it’s difficult to say.” Italian and Spanish bond yields dropped to record lows after the interview was published and the euro fell to the weakest since June 2010.

“A break-up of the euro zone? That will not happen. That’s why there is no plan B ..,”

• Draghi: Risk of ECB Failing Its Mandate Higher Than 6 Months Ago (Reuters)

European Central Bank President Mario Draghi said the risk of the central bank not fulfilling its mandate of preserving price stability was higher now than half a year ago, and reiterated its readiness to act early this year should it become necessary. In an interview with German financial daily Handelsblatt, Draghi urged politicians to implement necessary reforms, reduce tax burdens and cut red tape to support the euro zone recovery, which Draghi said was “fragile and uneven”. There was a limited risk of deflation in the euro zone, Draghi said, but if inflation remained too low for too long and led to receding inflation expectations and a delay in spending, the ECB would need to act to fulfill its mandate.

“The risk that we do not fulfill our mandate of price stability is higher than six months ago,” Draghi was quoted as saying in an interview that will be published on Friday. “We are in technical preparations to adjust the size, speed and compositions of our measures early 2015, should it become necessary to react to a too long period of low inflation. There is unanimity within the Governing Council on this.” He added that government bond purchases were among the tools the ECB could use to fulfill its mandate, but that state financing – which is prohibited by the EU treaty — had to be avoided.

Printing money to buy government bonds, a step known as quantitative easing (QE), is seen as one of the last tools the ECB has to revive inflation, with the key interest rate at 0.05% and growing doubts about the impact of earlier measures. Euro zone inflation stands at 0.3%, far below the ECB’s target of just under 2%, and calls for more ECB action have grown louder as policymakers warn that plunging oil prices could push inflation below zero in coming months. Concerns are that weaker price expectations could affect wages and investments and dampen growth prospects. Regardless, Draghi ruled out a break-up of the euro zone. “A break-up of the euro zone? That will not happen. That’s why there is no plan B,” he said.

Beggar thy world.

• Euro Forecasters See Pain After Worst Year Since 2005 (Bloomberg)

Midway through European Central Bank President Mario Draghi’s May press conference in Brussels, the euro rose to its strongest level during his tenure. Then he said the ECB was ready to introduce more stimulus measures, sending it into a slide that strategists say will extend into 2015. Europe’s common currency, which appreciated to $1.3993 that May day, ended last year down 12% against the dollar at $1.2098, its biggest loss since 2005. Strategists, who were too timid with their call for a decline in 2014 to $1.28, now see a slump to $1.18 by the end of this year. A weaker euro is key for Draghi as he tries to spur the region’s struggling economy and ward off deflation. This week, ECB Chief Economist Peter Praet told German newspaper Boersen-Zeitung the threat of a drop in consumer prices is increasing, bolstering speculation policy makers will soon start actions such as buying bonds that tend to weigh on a currency.

“The euro-bearish consensus was struggling hard for the first half of the year, but it has come good as the ECB has driven rates down,” Kit Juckes, a global strategist at SocGen in London, said in a Dec. 30 phone interview. “The best thing the ECB can try to engineer is still a weaker euro.” Juckes forecasts the euro will weaken to $1.14 by year-end, a level last seen in 2003. With inflation languishing below the ECB’s goal of just under 2% and the market’s outlook for consumer prices crumbling as crude oil declines, more than 90% of respondents in a monthly Bloomberg survey in December predicted that the ECB would expand the supply of euros by beginning to purchase sovereign bonds in 2015. That’s up from 57% the previous month.

The euro-area may see “negative inflation during a substantial part of 2015” amid a slide in crude, and the Governing Council “cannot simply look through” that, Praet said in comments published Dec. 31 on the ECB’s website. “Inflation expectations are extremely fragile” and “the risk of second-round effects seems to be greater today than it was in the past,” he said. Since the May meeting, the ECB cut its deposit rate below zero for the first time on record, began a program of targeted loans, and started purchasing asset-backed securities and covered bonds. At the same time, the dollar is strengthening as the Federal Reserve moves closer to raising interest rates.

The Germans are not about to give in.

• Merkel Ally Urges ECB Not To Buy Struggling States’ Bonds (Reuters)

A senior member of Angela Merkel’s party warned the European Central Bank not to pour money into Greece and other struggling euro zone states through bond purchases, saying this would reduce pressure on them to enact much-needed reforms. Michael Fuchs, deputy parliamentary floor leader of the German chancellor’s Christian Democrats (CDU), told Deutschlandfunk radio on Friday: “We shouldn’t pump extra money into these states, but rather make sure they continue along the reform path. “I’d be grateful if (ECB President Mario) Mr Draghi would make statements along these lines.” In an interview with German financial daily Handelsblatt published on Friday, Draghi urged politicians to implement necessary reforms, reduce tax burdens and cut red tape to support a fragile euro zone recovery.

He also said the risk of the central bank not fulfilling its price stability mandate was higher now than half a year ago, and reiterated its readiness to act soon if needed, with government bond purchases among the tools it could use. With the euro zone flirting with deflation, financial markets interpreted Draghi’s comments on Friday as strongly suggesting the ECB would soon embark on outright money-printing, and the euro sank to a 4-1/2 year low against the dollar. Printing money to buy government bonds, a measure known as quantitative easing (QE), is seen as one of the last tools the ECB has to revive inflation. The bank has already pushed its key interest rate down to a record low of 0.05% and doubts are growing about the impact of earlier measures.

“I expect there to be fierce discussion over this at the next ECB meeting,” said Fuchs, referring to opposition to the bond-buying plan by the head of the Bundesbank Jens Weidmann. The ECB’s next policy meeting is on Jan. 22. Fuchs has frequently expressed frustration felt by many German politicians and the public about the pace of reform in twice-bailed-out Greece. He was quoted as saying in a newspaper interview published on Wednesday that euro zone politicians were not obliged to rescue Greece as the country was no longer of systemic importance to the single currency bloc. Greece holds a general election just three days after the ECB meeting and polls suggest the left-wing Syriza party, which rejects the terms of Greece’s euro zone bailouts, will emerge as the strongest party.

A decade filled with wrong decisions and futile policies.

• New Year Brings Eurozone Closer To A Lost Decade (MarketWatch)

It looks like it will be a “lost decade” after all. As the eurozone enters the eighth year of a slump that began with the 2008 financial crisis, only true optimists believe that the bloc will find a path to faster growth over the next couple of years. Slow growth and rock-bottom inflation have set in. This combination inevitably delays a reduction of the bloc’s heavy private- and public-sector debt burdens. While their debt loads remain high and their incomes in nominal terms are stagnant, people perpetuate slow growth by saving rather than spending. As 2015 begins, economic activity in the eurozone is below the level it was at the start of 2008. The hardest-hit economies are a long way below. With growth so anemic, it doesn’t take much of a shock to turn it negative. Last year, the imposition of European Union sanctions on Russia and its modest retaliation were almost enough to tip the bloc into recession.

This year starts once again with political uncertainties in Greece–and a Jan. 25 general election–that may further set back faltering confidence. And as long as the bloc’s economic prospects remain sickly, the more likely become political crises among members of the currency union. In Greece and in other debt-burdened countries such as Italy and Spain, antiausterity, antiestablishment parties of the left are gaining ground. In Europe’s core, including France, anti-EU, anti-immigration parties of the right are finding traction. At the least, these political shifts are likely to weaken appetite for more supply-side reforms to improve the functioning of labor and goods markets. They may also further fan an incipient backlash against U.S. companies in the vanguard of technological change that would be a motor for long-term growth.

But it could be worse. History offers a cautionary tale about what happens when societies struggle to pay back debt burdens, argues Moritz Kraemer, an analyst with Standard & Poor’s in Frankfurt, in Germany’s struggles after World War I to repay its heavy debts. “While the political and economic environment is hardly comparable one hundred years on and the stakes are not likely to be nearly as high, elevated and sustained debt burdens could still pose risks to social cohesion and political stability,” he wrote in a report last month. To be sure, thanks in part to their expectation that the European Central Bank would step in to save the currency, investors rate the risk of a euro breakup far lower than they did a few years ago. “The existential question for the euro is nowhere near as potent as it was back in 2010 and 2011,” said Peter Goves, a bond strategist at Citi Research in London.

Good read. The Vineyard Saker also has Russian versions of Automatic Earth articles .

• 2014 “End Of Year” Report And A Look Into What 2015 Might Bring (Saker)

Introduction: By any measure 2014 has been a truly historic year which saw huge, I would say, even tectonic developments. This year ends in very high instability, and the future looks hard to guess. I don’t think that anybody can confidently predict what might happen next year. So what I propose to do today is something far more modest. I want to look into some of the key events of 2014 and think of them as vectors with a specific direction and magnitude. I want to look in which direction a number of key actors (countries) “moved” this year and with what degree of intensity. Then I want to see whether it is likely that they will change course or determination. Then adding up all the “vectors” of these key actors (countries) I want to make a calculation and see what resulting vector we will obtain for the next year. Considering the large number of “unknown unknowns” (to quote Rumsfeld) this exercise will not result in any kind of real prediction, but my hope is that it will prove a useful analytical reference.

The main event and the main actors A comprehensive analysis of 2014 should include most major countries on the planet, but this would be too complicated and, ultimately, useless. I think that it is indisputable that the main event of 2014 has been the war in the Ukraine. This crisis not only overshadowed the still ongoing Anglo-Zionist attack on Syria, but it pitted the world’s only two nuclear superpowers (Russia and the USA) directly against each other. And while some faraway countries did have a minor impact on the Ukrainian crisis, especially the BRICS, I don’t think that a detailed discussion of South African or Brazilian politics would contribute much. There is a short list of key actors whose role warrants a full analysis. They are: The USA, The Ukrainian Junta, The Novorussians (DNR+LNR), Russia, The EU. NATO. China. I submit that these seven actors account for 99.99% of the events in the Ukraine and that an analysis of the stance of each one of them is crucial. So let’s take them one by one:

1 – The USA Of all the actors in this crisis, the USA is by far the most consistent and coherent one. Zbigniew Brzezinski, Hillary Clinton and Victoria Nuland were very clear about US objectives in the Ukraine:

Zbigniew Brzezinski: Without Ukraine Russia ceases to be empire, while with Ukraine – bought off first and subdued afterwards, it automatically turns into empire…(…) the new world order under the hegemony of the United States is created against Russia and on the fragments of Russia. Ukraine is the Western outpost to prevent the recreation of the Soviet Union.

Hillary Clinton: There is a move to re-Sovietise the region (…) It’s not going to be called that. It’s going to be called a customs union, it will be called Eurasian Union and all of that, (…) But let’s make no mistake about it. We know what the goal is and we are trying to figure out effective ways to slow down or prevent it.

Victoria Nuland: F**k the EU!

Much of it coming from emerging nations. That’s a triple hit: oil, dollar and other commodities.

• Commodity Prices Are Cliff-Diving: The Case Of Iron Ore (David Stockman)

Crude oil is not the only commodity that is crashing. Iron ore is on a similar trajectory and for a common reason. Namely, the two-decade-long economic boom fueled by the money printing rampage of the world’s central banks is beginning to cool rapidly. What the old-time Austrians called “malinvestment” and what Warren Buffet once referred to as the “naked swimmers” exposed by a receding tide is now becoming all too apparent. This cooling phase is graphically evident in the cliff-diving movement of most industrial commodities. But it is important to recognize that these are not indicative of some timeless and repetitive cycle – or an example merely of the old adage that high prices are their own best cure.

Instead, today’s plunging commodity prices represent something new under the sun. That is, they are the product of a fracturing monetary supernova that was a unique and never before experienced aberration caused by the 1990s rise, and then the subsequent lunatic expansion after the 2008 crisis, of a cancerous regime of Keynesian central banking. Stated differently, the worldwide economic and industrial boom since the early 1990s was not indicative of sublime human progress or the break-out of a newly energetic market capitalism on a global basis. Instead, the approximate $50 trillion gain in the reported global GDP over the past two decades was an unhealthy and unsustainable economic deformation financed by a vast outpouring of fiat credit and false prices in the capital markets.

For that reason, the radical swings in commodity prices during the last two decades mark the path of a central bank generated macro-economic bubble, not merely the unique local supply and demand factors which pertain to crude oil, copper, iron ore, or the rest. [..] What really happened is that the central bank instigated global macro-economic bubble ripped commodity pricing cycles out of their historical moorings, resulting in a one time eruption of price levels that had no relationship to sustainable supply and demand factors in the mines and petroleum patch. What materialized, instead, was an unprecedented one-time mismatch of commodity production and use that caused pricing abnormalities of gargantuan proportions.

Let’s see how many will be allowed to fail.

• China Property Developer Fails To Repay $51 Million Loan (Reuters)

Chinese property developer Kaisa Group Holdings said it had failed to repay a HK$400 million ($51.3 million) loan and warned it may default on more debt, the latest problem to hit the firm amid a downturn in the real estate sector. In a stock market filing late on Thursday, the company said the payment of the loan and its interest became compulsory on Dec. 31, following the resignation of its chairman Kwok Ying Shing. The failure to repay the HSBC term loan may trigger default on other loan facilities, debt and equity securities, co-chairman Sun Yuenan said in the filing to the Hong Kong exchange. Last month, Kaisa said the Chinese authorities had imposed a sales blockage on some its projects in the southern city of Shenzhen. Independent research firm CreditSights said the Shenzhen projects were expected to account for around a fifth of Kaisa’s saleable resources by book value.

It also said two other senior executives – Vice Chairman Tam Lai Ling and Chief Financial Officer Cheung Hung Kwong – had left in December. Analysts have questioned the company’s fund raising ability since these two executives left, as they were instrumental in arranging Kaisa’s offshore debt issues. Trading in Kaisa’s shares, which has a market capitalisation of HK$8.2 billion, was halted on Monday. Its bond yields have also more than trebled, with the yield on its bonds due 2018 rising to more than 29% from around 9% at the start of the month. On Friday, its bonds due 2019 and 2020 were both indicated at 40-50 cents on the dollar, after trading as high as 101 and 104 cents on the dollar in December. Moody’s downgraded its credit rating to B3 from B1, warning of further cuts, and Standard & Poor’s said its sales and operations could be “significantly affected” over the next year.

“In 2013, 3,000 pig carcasses were seen floating in Shanghai’s Huangpu river, one of the city’s key sources of drinking water.”

• China Goes Organic Amid Food Scandals (CNBC)

An organic food craze is emerging among China’s urbanites as food safety scandals spur the younger generation toward alternative ways to buy fresh produce and meat. So far, organic foods’ penetration into China appears small, accounting for 1.01% of total food consumption, but that’s nearly triple 2007’s 0.36%, according to data from organic trade fair Biofach. A series of high-profile food scandals over the past seven years has been a primary catalyst for growth in the organic food market. Biofach expects the segment’s share of China’s overall food market to hit 2% this year. China was ranked as one of the world’s worst safety-violation offenders by American food consulting firm Food Sentry this year. In 2013, 3,000 pig carcasses were seen floating in Shanghai’s Huangpu river, one of the city’s key sources of drinking water.

A few months later, reports that a Beijing crime ring was selling rat and fox meat as lamb sparked international outrage, resulting in the arrest of more than 900 people. The trouble continued in 2014, with the Chinese affiliate of U.S. meat supplier OSI Group accused of using expired meat. OSI caters to major fast-food chains such as McDonald’s and Yum Group’s KFC operating on the mainland. Wal-Mart was also dragged into the limelight this year following revelations that its donkey meat product contained fox meat. Most recently, Subway also came under scrutiny after Chinese media reported in late December that workers at a Beijing franchise changed expiry dates on meat and vegetables to extend their use.

“Mr Piketty added that the government instead “would do better to concentrate on reviving growth in France and Europe.“ Oh well, now I don’t have to read those 600 pages.

• Piketty Rejects Légion d’Honneur Award (FT)

France’s sputtering economy was a source of endless frustration for President François Hollande in 2014. It found a new way to torment the French president on the first day of the new year when Thomas Piketty, one of the country’s most celebrated economists, rejected a Légion d’Honneur award, saying the government had no standing to grant such recognition. Mr Piketty, whose 2014 book Capital in the Twenty-First Century has already sold more than 1m copies, told the AFP on Thursday: “I refuse this nomination because I do not think it is the government’s role to decide who is honourable.”

In a clear indictment of Mr Hollande’s economic record, Mr Piketty added that the government instead “would do better to concentrate on reviving growth in France and Europe”. Mr Piketty’s comments come on top of a series of disappointing performances and false dawns on the economic front ever since Mr Hollande and his socialist government took office. Unemployment has remained persistently high in spite of promises to change the upward trend by the end of last year. Meanwhile, sluggish growth — the economy was stagnant for the first six months of 2014 — has helped drag down Mr Hollande’s popularity to the lowest levels of any French president in modern history.

But the rejection of the award by the French economist – who argues for the redistribution of concentrated wealth in his best-selling book, which was the Financial Times and McKinsey Business Book of the Year – is particularly galling coming on the same day that the French president dumped his supertax scheme for the rich. The measure to increase tax rates to 75% on earnings over €1m, which earned Mr Hollande support from the left when he announced the plan to great fanfare in 2012, was on Thursday abandoned after bringing in just a small portion of the expected revenue. In rejecting the Legion of Honour, Mr Piketty joins a list of personalities that includes Claude Monet, Jean-Paul Sartre, Albert Camus, Hector Berlioz and Brigitte Bardot – all of whom declined the award for varying reasons.

Curious article.

• The 10 Most Generous Nations (MarketWatch)

Have you helped a stranger in the past month? If you live in the U.S., Iraq or Trinidad and Tobago, chances are you have. Americans more likely than any other nationality to help strangers, with 79% of people doing so last year, according to an annual index of the most giving nations. The World Giving Index is based on a Gallup survey of more than 130,000 people in 2013 and evaluates charitable behavior in 135 countries around the world. It is sponsored by the Charitable Aid Foundation. The index scores countries based on an average of three measures of giving behavior — the percentage of people who in a typical month donate money to charity, volunteer their time, and help a stranger.

Giving is about more than just existing wealth, the report notes — only five of the top 20 most generous countries are members of the G-20, a group representing the largest economies in the world. Women were more likely to give money than men, but only in high income countries. The country that scored worst in the index was Yemen, where only 3% of people volunteered their time in 2013. Based on the World Giving Index, these are the 10 most generous nations:

He should simply write his own.

• The Pope Blesses the Climate Treaty (Bloomberg)

When a church that once felt threatened by heliocentrism sees hydrocarbons as a threat to God’s creation, there is reason to hope that today’s science skeptics will find religion, too. Fresh off his success in helping to end one of the last remaining battles of the Cold War, Pope Francis is turning his attention – and bringing his considerable star power – to the fight against global warming. His decision to push for an international treaty on climate change in Paris in December may alienate some conservative Catholics who are skeptical of climate science. But Francis’s leadership on the issue is a hopeful sign that 2015 could be the year that the nations of the world finally commit themselves to collective action. Francis could be forgiven for concentrating on other weighty matters: He is challenging the church’s approach to divorced couples and gays and lesbians, reforming its change-resistant curia, and cleaning up its scandal-plagued bank.

All are mammoth undertakings that will earn him enemies. But this pope has shown no interest in shying away from major controversies. His new focus on climate change is a natural outgrowth of his concern for the poor, who will suffer most if droughts and storms worsen, allowing disease and instability to spread more easily. He is not the first pope to sound the alarm on climate change: Both John Paul II and Benedict XVI did so, and in 2011 the Vatican’s Academy of Sciences issued a report that called on “all people and nations to recognize the serious and potentially irreversible impacts of global warming” caused by human activity. Francis is not changing church teaching, only seizing the moment, as a public consensus emerges around the need for coordinated action. In March, he is expected to visit Tacloban, the Philippine city hardest hit by last year’s typhoon Haiyan, which killed thousands and left millions homeless.

As the planet warms and the seas rise, severe storms are expected to become even more destructive. This trip may be followed by a papal encyclical on climate change, a letter to the bishops that will formalize the church’s position on the issue and guide its ministry at the parish level. In September, Francis will have a chance to raise the issue when he addresses the UN General Assembly. He may also convene a summit of religious leaders to focus attention on climate change, which has generated widespread ecumenical agreement. All these steps will occur in the run-up to the UN summit on climate change in Paris at the end of this year. Francis, who has no lack of ambition, is throwing the weight of the church – and his papacy – behind an international agreement.

Well, Tolstoy was an interesting character.

• The Secret To A Happy Life – Courtesy Of Tolstoy (BBC)

We can learn a lot about the art of living from Tolstoy’s War and Peace. It acutely observes vanity and folly, sexual jealousy and family relationships. But we can also learn from the life of the master novelist himself, writes Roman Krznaric. Tolstoy, who was born in 1828 and died in 1910, was a member of the Russian nobility, from a family that owned an estate and hundreds of serfs. The early life of the young count was raucous, debauched and violent. “I killed men in wars and challenged men to duels in order to kill them,” he wrote. “I lost at cards, consumed the labour of the peasants, sentenced them to punishments, lived loosely, and deceived people…so I lived for ten years.” But he gradually weaned himself off his decadent, racy lifestyle and rejected the received beliefs of his aristocratic background, adopting a radical, unconventional worldview that shocked his peers.

So how exactly might his personal journey help us rethink our own philosophies of life?
1. Keep an open mind
2. Practice empathy
3. Make a difference
4. Master the art of simple living
5. Beware your contradictions
6. Become a craftsman
7. Expand your social circle

Debt Rattle December 28 2014

Dec 282014

December 28, 2014 Posted by Raúl Ilargi Meijer at 12:28 pm Finance Tagged with: climate change, crash, Greece, hunger, Japan, Mexico, oil, OPEC, pope 4 Responses »

DPC Cuyahoga River, Lift Bridge and Superior Avenue viaduct, Cleveland, Ohio 1912

• Pope Francis Climate Change Encyclical To Anger Deniers, US Churches (Observer)

• Hungry Britain: Millions Struggle To Feed Themselves, Face Malnourishment (Ind.)

• Decline in Oil Could Cost OPEC $257 Billion in 2015 (Daily Finance)

• US Oil-Producing States See Budgets, Jobs at Risk as Price Falls (NY Times)

• China’s 3.5% Trade Growth in 2014 Falling Far Short Of 7.5% Target (Reuters)

• Japan Approves $29 Billion Stimulus Plan, Impact In Doubt (Reuters)

• Japan Approves $29 Billion Spending Package to Boost Economy

• The Keynesian End Game Crystalizes In Japan’s Monetary Madness (Stockman)

• How Central Banks Saved The World (Stocks) In 2014 (Zero Hedge)

• Now Whitehall’s Crazy Eco Zealots Want To Ban Your Gas Cooker (Daily Mail)

• Mexico Withdraws $3.4 Billion From Pemex as Oil Revenue Shrinks (Bloomberg)

• Greece Faces New ‘Catastrophe’ As PM Battles To Avert Snap Elections (Observer)

• Challenging UK Party Games Ahead As Greece Threatens 2nd Debt Crisis (Observer)

• You Can Put The Next Crash On Your 2016 Calendar Now (Paul B. Farrell)

• 2014: The Year The Internet Came Of Age (Guardian)

• China Needs Millions of Brides ASAP (Bloomberg)

• Rising Oceans Force Bangladeshi Farmers Inland for New Jobs (Bloomberg)

• Siberian Dog Allowed To Stay In Hospital Where Owner Died 1 Year Ago (RT)

A Papal Encyclical is a big deal.

• Pope Francis Climate Change Encyclical To Anger Deniers, US Churches (Observer)

He has been called the “superman pope”, and it would be hard to deny that Pope Francis has had a good December. Cited by President Barack Obama as a key player in the thawing relations between the US and Cuba, the Argentinian pontiff followed that by lecturing his cardinals on the need to clean up Vatican politics. But can Francis achieve a feat that has so far eluded secular powers and inspire decisive action on climate change? It looks as if he will give it a go. In 2015, the pope will issue a lengthy message on the subject to the world’s 1.2 billion Catholics, give an address to the UN general assembly and call a summit of the world’s main religions. The reason for such frenetic activity, says Bishop Marcelo Sorondo, chancellor of the Vatican’s Pontifical Academy of Sciences, is the pope’s wish to directly influence next year’s crucial UN climate meeting in Paris, when countries will try to conclude 20 years of fraught negotiations with a universal commitment to reduce emissions.

“Our academics supported the pope’s initiative to influence next year’s crucial decisions,” Sorondo told Cafod, the Catholic development agency, at a meeting in London. “The idea is to convene a meeting with leaders of the main religions to make all people aware of the state of our climate and the tragedy of social exclusion.” Following a visit in March to Tacloban, the Philippine city devastated in 2012 by typhoon Haiyan, the pope will publish a rare encyclical on climate change and human ecology. Urging all Catholics to take action on moral and scientific grounds, the document will be sent to the world’s 5,000 Catholic bishops and 400,000 priests, who will distribute it to parishioners. According to Vatican insiders, Francis will meet other faith leaders and lobby politicians at the general assembly in New York in September, when countries will sign up to new anti-poverty and environmental goals.

In recent months, the pope has argued for a radical new financial and economic system to avoid human inequality and ecological devastation. In October he told a meeting of Latin American and Asian landless peasants and other social movements: “An economic system centred on the god of money needs to plunder nature to sustain the frenetic rhythm of consumption that is inherent to it. “The system continues unchanged, since what dominates are the dynamics of an economy and a finance that are lacking in ethics. It is no longer man who commands, but money. Cash commands. “The monopolising of lands, deforestation, the appropriation of water, inadequate agro-toxics are some of the evils that tear man from the land of his birth. Climate change, the loss of biodiversity and deforestation are already showing their devastating effects in the great cataclysms we witness,” he said.

Dickens never died.

• Hungry Britain: Millions Struggle To Feed Themselves, Face Malnourishment (Ind.)

Millions of the poorest people in Britain are struggling to get enough food to maintain their body weight, according to official figures published this month. The Government’s Family Food report reveals that the poorest 10% of the population – some 6.4 million people – ate an average of 1,997 calories a day last year, compared with the average guideline figure of about 2,080 calories. This data covers all age groups. One expert said the figures were a “powerful marker” that there is a problem with food poverty in Britain and it was clear there were “substantial numbers of people who are going hungry and eating a pretty miserable diet”. The use of food banks in the UK has surged in recent years. The Trussell Trust, a charity which runs more than 400 food banks, said it had given three days worth of food, and support, to more than 492,600 people between April and September this year, up 38% on the same period in 2013.

Based on an annual survey of 6,000 UK households, the Family Food report said the population as a whole was consuming 5% more calories than required. Tables of figures attached to the report reveal the average calorie consumption for the poorest 10%, but the report itself did not highlight this. Chris Goodall, an award-winning author who writes about energy, discovered the figures while investigating human use of food resources. “The data absolutely shocked me. What it shows is for the first time since the Second World War, if you are poor you cannot afford to eat sufficient calories,” he said. He also highlights a widening consumption gap between rich and poor. In 2001/2, there was little difference, with the richest 10th consuming a total of 2,420 calories daily, about 4% more than the poorest. But in 2013, the richest group consumed 2,294 calories, about 15% more than the poorest. The report, published by the Department for Environment, Food & Rural Affairs, also found that the poorest people spent 22% more on food in 2013 than in 2007 but received 6.7% less.

2012 revenues: $900 billion. 2015: $446 billion.

• Decline in Oil Could Cost OPEC $257 Billion in 2015 (Daily Finance)

Falling oil prices are giving a huge boost to the U.S. economy just in time for the holidays, and the reprieve from high gas prices doesn’t look like it will stop anytime soon. But elsewhere around the world, the drop in oil might not be looked upon so kindly. Most of OPEC’s 12 member countries rely on oil as a major source of revenue, not only supporting their domestic economies but also balancing national budgets. The amount of potential revenue they’ve lost as crude oil prices have fallen is staggering. If you’re a country like Saudi Arabia, Kuwait or Iraq, which rely on oil as a major revenue source, the drop in oil prices can impact your country dramatically. The U.S. Energy Information Administration just estimated that next year’s OPEC oil export revenue (excluding Iran) will drop an incredible $257 billion to $446 billion. That’s off its peak of nearly $900 billion in 2012.

The chart above shows the scale of OPEC’s potential revenue drop and the chart below shows who has the most at stake. Interestingly, Saudi Arabia is leading the charge against cutting OPEC’s production, which is keeping oil prices low, despite having the most money at stake. The reason may be a long-term need for greater market share in the oil market.

“Nothing is off the table at this point.”

• US Oil-Producing States See Budgets, Jobs at Risk as Price Falls (NY Times)

States dependent on oil and gas revenue are bracing for layoffs, slashing agency budgets and growing increasingly anxious about the ripple effect that falling oil prices may have on their local economies. The concerns are cutting across traditional oil states like Texas, Louisiana, Oklahoma and Alaska as well as those like North Dakota that are benefiting from the nation’s latest energy boom. “The crunch is coming,” said Gunnar Knapp, a professor of economics and the director of the Institute of Social and Economic Research at the University of Alaska Anchorage. Experts and elected officials say an extended downturn in oil prices seems unlikely to create the economic disasters that accompanied the 1980s oil bust, because energy-producing states that were left reeling for years have diversified their economies. The effects on the states are nothing like the crises facing big oil-exporting nations like Russia, Iran and Venezuela.

But here in Houston, which proudly bills itself as the energy capital of the world, Hercules Offshore announced it would lay off about 300 employees who work on the company’s rigs in the Gulf of Mexico at the end of the month. Texas already lost 2,300 oil and gas jobs in October and November, according to preliminary data released last week by the federal Bureau of Labor Statistics. On the same day, Fitch Ratings warned that home prices in Texas “may be unsustainable” as the price of oil continues to plummet. The American benchmark for crude oil, known as West Texas Intermediate, was $54.73 per barrel on Friday, having fallen from more than $100 a barrel in June. In Louisiana, the drop in oil prices had a hand in increasing the state’s projected 2015-16 budget shortfall to $1.4 billion and prompting cuts that eliminated 162 vacant positions in state government, reduced contracts across the state and froze expenses for items like travel and supplies at all state agencies. Another round of reductions is expected as soon as January.

And in Alaska – where about 90% of state government is funded by oil, allowing residents to pay no state sales or income taxes – the drop in oil prices has worsened the budget deficit and could force a 50% cut in capital spending for bridges and roads. Moody’s, the credit rating service, recently lowered Alaska’s credit outlook from stable to negative. States that have become accustomed to the benefits of energy production — budgets fattened by oil and gas taxes, ample jobs and healthy rainy-day funds — are now nervously eyeing the changed landscape and wondering how much they will lose from falling prices that have been an unexpected present to drivers across the country this holiday season. The price of natural gas is falling, too. “Our approach to the 2016 budget includes a full review of every activity in every agency’s budget and the cost associated with them,” said Kristy Nichols, the chief budget adviser to Gov. Bobby Jindal of Louisiana. “Nothing is off the table at this point.”

“.. according to a report on the Ministry of Commerce’s website that was subsequently revised to remove the numbers.”

• China’s 3.5% Trade Growth in 2014 Falling Far Short Of 7.5% Target (Reuters)

China’s trade will grow 3.5% in 2014, implying the country will fall short of a current 7.5% official growth target, according to a report on the Ministry of Commerce’s website that was subsequently revised to remove the numbers. The initial version of the report published on the website on Saturday, which quoted Minister of Commerce Gao Hucheng, was replaced with a new version that had identical wording but with all the numbers and percentages removed. The Commerce Ministry did not answer calls requesting comment on the reason for the change. China’s trade figures have repeatedly fallen short of expectations in the second half of this year, providing more evidence that China’s economy may be facing a sharper slowdown. Foreign direct investment will amount to $120 billion for the year, the earlier version of Ministry of Commerce report said, in line with official forecasts.

The earlier version of the report also said outward non-financial investment from China could also come in around the same level. That would mark the first time outward flows have pulled even with inward investment flows in China, and would imply a major surge in outward investment in December given that the current accumulated level stands slightly below $90 billion. The earlier version of the report also predicted that retail sales growth would come in at 12% for 2014, in line with the current average growth rate. In a separate report, the Chinese Academy of Social Sciences predicted that real estate prices in Chinese cities would continue to slide in 2015, with third- and fourth-tier cities hit hardest. But it said the market would have a soft landing as local governments take action to provide further policy support to the market.

“.. the government will avoid fresh debt issuance and fund the package with unspent money from previous budgets and tax revenues that have exceeded budget forecasts due to economic recovery ..”

• Japan Approves $29 Billion Stimulus Plan, Impact In Doubt (Reuters)

Japan’s government approved on Saturday stimulus spending worth $29 billion aimed at helping the country’s lagging regions and households with subsidies, merchandise vouchers and other steps, but analysts are skeptical about how much it can spur growth. The package, worth 3.5 trillion yen ($29.12 billion) was unveiled two weeks after a massive election victory by Prime Minister Shinzo Abe’s ruling coalition gave him a fresh mandate to push through his “Abenomics” stimulus policies. The government said it expects the stimulus plan to boost Japan’s GDP by 0.7%. Given Japan’s dire public finances, the government will avoid fresh debt issuance and fund the package with unspent money from previous budgets and tax revenues that have exceeded budget forecasts due to economic recovery.

With nationwide local elections planned in April which Abe’s ruling bloc must win to cement his grip on power, the package centers on subsidies to regional governments to carry out steps to stimulate private consumption and support small firms. Of the total, 1.8 trillion yen will be spent on measures such as distributing coupons to buy merchandise, providing low-income households with subsidies for fuel purchases, supporting funding at small firms and reviving regional economies. The remaining 1.7 trillion yen will be used for disaster-prevention and rebuilding disaster-hit areas including those affected by the March 2011 tsunami. Tokyo will also seek to bolster the housing market by lowering the mortgage rates offered by a governmental home-loan agency. “It’s better than doing nothing, but I don’t think this stimulus will have a big impact on boosting the economy,” said Masaki Kuwahara, a senior economist at Nomura Securities.

Shopping vouchers?

• Japan Approves $29 Billion Spending Package to Boost Economy

Japan’s government approved a 3.5 trillion yen ($29 billion) fiscal stimulus package to boost the economy after April’s sales tax hike caused consumption to slump. The measures include shopping vouchers, subsidized heating fuel for the poor and low interest loans for small businesses hurt by rising input costs, and will boost gross domestic product by 0.7%, the government estimates. The spending will be paid for with tax revenue and unspent funds and won’t need new bond issuance, Economy Minister Akira Amari said today in Tokyo. Unexpected falls in output and retail sales in November underscore the continued weakness in the economy. With little sign of a rebound in domestic demand, getting growth back on a recovery track is a priority for Prime Minister Shinzo Abe.

“This will support private consumption and boost regional economies, so that the virtuous economic cycle spreads to all corners of the nation,” Abe said in Tokyo after the decision. About 1.7 trillion yen will be spent on public works in areas damaged by natural disasters and to improve disaster preparedness, with 600 billion yen for revitalizing regional economies and 1.2 trillion yen to support people and small businesses hurt by the current economic situation, according to documents released by the Cabinet Office. The package is part of an extra budget for the fiscal year through March which will be adopted by the cabinet on Jan. 9, Finance Minister Taro Aso said in Tokyo today. The budget then needs to be approved by parliament, which is controlled by the ruling coalition.

Abe last month delayed the planned further hike in the sales tax by 18 months after data showed the economy fell into recession. GDP shrank an annualized 1.9% last quarter, more than initially estimated, after a 6.7% contraction in the three months from April, when the levy was raised for the first time since 1997. The postponement fueled concern about the government’s effort to rein in the world’s heaviest debt and prompted Moody’s Investors Service to cut its credit rating on Japan.

“Japan’s work force of 80 million will drop to 40 million by 2060.”

• The Keynesian End Game Crystalizes In Japan’s Monetary Madness (Stockman)

If the BOJ’s mad money printers were treated as monetary pariahs by the rest of the world, it would at least imply that a modicum of sanity remains on the planet. But just the opposite is the case. Establishment institutions like the IMF, the US treasury and the other major central banks urge them on, while the Keynesian arson squad led by Professor Krugman actually faults Japan for being too tepid with its “stimulus”. Now comes several new data points that absolutely confirm Japan is a financial mad house – even as its policy model is embraced by mainstream officials and analysts peering from a distance. Front and center is the newly reported fact from the Cabinet Office that Japan’s household savings rate plunged to minus 1.3% in the most recent fiscal year, thereby entering negative territory for the first time since records were started in 1955.

Indeed, Japan had been heralded as a nation of savers only a generation ago. During the era before it’s plunge into bubble finance in the late 1980s, households routinely saved 15-25% of income. But after nearly three decades of Keynesian policies, Japan has now stumbled into an insuperable demographic/financial trap; and one that is unusually transparent and rigidly delineated, to boot. Since Japan famously and doggedly refuses to accept immigrants, its long-term demographics are rigidly baked into the cake. Accordingly, anyone who will make a difference over the next several decades has already been born, counted, factored and attrited into the projections.

Japan’s work force of 80 million will thus drop to 40 million by 2060. At the same time, its current 30 million retirees will continue to rise, meaning that its retiree rolls will ultimately exceed the number of workers. Given those daunting facts, it follows that on the eve of its demographic bust Japan needs high savings and generous interest rates to augment retirement nest eggs; a strong exchange rate to attract foreign capital to help absorb its staggering $12 trillion of public debt, which already stands at a world leading 230% of GDP; and rising real incomes in order to shoulder the heavy taxation that is unavoidably necessary to close its fiscal gap and contain its mushrooming public debt.

With its debilitating Keynesian fiscal and monetary policies now re-upped on steroids under Abenomics, however, it goes without saying that nearly the opposite conditions prevail. Most notably, no household or institution anywhere in Japan can earn anything on liquid savings. The money market rate which determines deposit money yields was driven from a “high” of 100 basis points (as ridiculous as that sounds) at the time of the financial crisis to 10 basis points today, which is to say, nothing. But what is even more astounding is that the yield on the 10-year JGB dipped to an all-time low of 0.31% in recent trading. Given the militant insistence of the BOJ that it will hit its 2% inflation target come hell or high water, it is accurate to say that the official policy of Abenomics is to cause holders of the government’s long-term debt to loose their shirts.

“Escape velocity”. Hadn’t heard that in while.

• How Central Banks Saved The World (Stocks) In 2014 (Zero Hedge)

2014 was awash with potentially status quo destabilizing ‘realities’ to the “we’re back on track and world economic growth is about to reach escape velocity” meme… but time after time, the well-conditioned ‘investor’ was rescued… here’s how… Because – fun-durr-mentals.

Love the picture.

• Now Whitehall’s Crazy Eco Zealots Want To Ban Your Gas Cooker (Daily Mail)

As many as 14 million households slid their turkey into a gas oven yesterday, then waited for a succulent, browned and delicious meal to emerge. But such a familiar festive scene will be a thing of the past just a few years down the line, if the Government has its way. As for turning up the thermostat to ensure our gas boiler keeps our home snug and warm on a chilly festive morning – that simple action too, is under threat, even though some 90% of all homes in Britain are heated by gas. Householders across the country will be horrified to learn that, over the next decade or two, the Government plans to phase out all our gas-fired cookers and heating systems – forcing us to replace them at a cost of untold billions. Official documents reveal the Government is seriously contemplating that, within 25 years or so, gas will be all but banned — along with petrol and diesel.

The intention is that not only our cooking and heating but much else, including our cars and most of the vehicles on Britain’s roads, will have to be powered by electricity. The Government admits this astonishingly ambitious plan will be the most far-reaching energy revolution since electricity itself was discovered. But it is not being planned because our gas and oil supplies will have run out – or even because of any looming shortage. On the contrary, the world is now facing a glut of gas and oil, thanks in part to the ‘shale gas revolution’ led by the U.S., a country which almost overnight, has become the world’s largest natural gas producer as a result of a process called fracking – where water and sand are fired at high pressure into shale rock to release the oil and gas inside. This has led to plummeting prices, and prompted many industries to switch to gas.

Yet our own rulers want to abandon it. Astonishingly, the plan to change the way we cook our food and heat our homes is being instigated by the Government as the only way by which we can meet a statutory requirement under the Climate Change Act. This particular piece of legislative folly was pushed through Parliament six years ago by Ed Miliband, as our first ever Secretary of State for Energy and Climate Change, and decreed that Britain must cut its emissions of carbon dioxide from fossil fuels by a staggering 80% within 35 years. When this Act passed almost unanimously through Parliament in 2008, not a single MP, let alone Mr Miliband, had the faintest idea how we could actually meet such an improbable target.

Got to admire the spin: “.. to “make management of public-sector finances more efficient ..”

• Mexico Withdraws $3.4 Billion From Pemex as Oil Revenue Shrinks (Bloomberg)

Mexico’s Finance Ministry took out 50 billion pesos ($3.4 billion) from the state oil company Petroleos Mexicanos, according to a statement sent to the Mexican Stock Exchange. The payment this month was meant to “make management of public-sector finances more efficient,” according to the filing from the oil company, known as Pemex. The withdrawal marks a departure from the government’s usual methods of obtaining revenue from Pemex, which include taxes and royalties.

Pemex typically provides about a third of the federal budget, and its contributions dropped this year as the oil company faced production declines and falling crude prices. During the first 11 months of 2014, taxes paid by Mexico City-based Pemex declined by about 260 billion pesos, or 22%, from the same period of 2013, according to records. The withdrawal shows “a near addiction to Pemex’s revenue by the ministry,” Fluvio Ruiz, a board member of the oil company’s petrochemical unit, said in a phone interview. He said he had no prior knowledge of the disclosure through his role at the company.

I don’t think he still believes in it.

• Greece Faces New ‘Catastrophe’ As PM Battles To Avert Snap Elections (Observer)

Greece’s embattled prime minister, Antonis Samaras, issued an eleventh-hour appeal to parliamentarians on Saturday in an attempt to avert snap elections that would almost certainly plunge the eurozone into renewed crisis. In an impassioned plea, he urged MPs to rid the country of “menacing clouds” gathering over it by supporting the government’s presidential candidate when they gather for the final round of a three-stage vote on Monday. Failure would automatically trigger elections that radical leftists would be likely to win. The ballot has therefore electrified Greece, rattled markets and unnerved Europe. “I am once again appealing to all MPs, of all parties, to vote for the president of the republic,” Samaras told state television. “If we don’t elect a president the responsibility will hang heavily over those who don’t vote for [him]. They will be remembered by everyone, especially history.”

Samaras’s high-stakes gamble of calling the poll two months early has brought him face-to-face with the spectre of losing power if he fails to convince 12 MPs to back Stavros Dimas, his choice for the presidential post. A former European commissioner, Dimas received 168 ballots in a second round of voting last week – well short of the 200 required. On Monday he must amass 180 to be elected. Following a Christmas of frantic behind-the-scenes politicking, the prime minister warned of the perils of taking the debt-stricken country down the road of “absurd adventure” if deputies failed to endorse Dimas. “People do not want early elections… We gave sweat and blood in recent years to keep Greece standing upright.”

Understatement of the day/week/month/year: “With so much cheap money sloshing around the global markets, a second financial crisis cannot be ruled out.”

• Challenging UK Party Games Ahead As Greece Threatens 2nd Debt Crisis (Observer)

Europe. Emerging markets. Earnings. Equality. And the election. Look out, because 2015 is going to be the year of the five Es. In the UK, it will be the election that dominates the economic and business scene, particularly in the first half of the year and for much longer if the result is inconclusive. The prospect of a minority government living from hand to mouth would certainly unsettle the markets. But the election result will be influenced by the four other Es, starting with Europe, where the first crunch moment comes tomorrow in Greece with the third and final chance for the government of Antonis Samaras to get its choice of a new president through parliament. If he fails to secure 180 votes, there will be a snap election that the anti-austerity Syriza party is currently favourite to win. That would prompt fears of a fresh leg to Europe’s debt crisis, which began in Greece more than six years ago. This is something Europe can ill afford. The eurozone economy is barely growing; the German locomotive is slowing; and falling oil prices bring with them the threat of deflation.

The issue for the European Central Bank in 2015 is whether to take the plunge with a quantitative easing programme, something the Germans have resisted up until now. Berlin’s hardline stance has, however, softened in recent months as the situation in Russia – the key emerging market to watch – has deteriorated. Europe’s trade links with Russia are not all that important, but there are two big concerns. The first is of heightened geopolitical risk. Russia is being squeezed by western sanctions and now faces the inevitability of a deep recession in 2015. This might make Vladimir Putin more willing to come to terms over Ukraine, but it might not. The second risk is that the collapse of the rouble puts intolerable strain on Russian companies and Russian banks, with corporate losses ricocheting through the entire global financial system through the sort of highly leveraged derivatives trades that caused the 2007 meltdown. With so much cheap money sloshing around the global markets, a second financial crisis cannot be ruled out.

The third E is equality, brought to prominence in the past year not just by the bestselling book Capital by the French economist Thomas Piketty, but by evidence from the IMF and the Organisation for Economic Co-operation and Development that inequality is bad for growth. Standing trickle-down economics on its head, the OECD said recently that UK growth in the two decades from 1990 to 2010 would have been nine percentage points higher had it not been for widening inequality. Given that the trend towards greater inequality has been evident for the past three decades, it is worth asking why it has become a political issue now. The answer is simple. In the years leading up to the financial crisis, incomes were rising across the board. People on low and middle incomes didn’t mind all that much that the bankers and hedge fund owners were earning stratospheric sums when their own pay packets were going up.

Think it’ll take that long?

• You Can Put The Next Crash On Your 2016 Calendar Now (Paul B. Farrell)

With the recent budget bill, the too-big-to-fail banks were handed even more of what they’ve wanted: a further delay of the Volcker Rule, which could effectively kill it, and, worse, a rollback of Dodd-Frank provisions that protected taxpayers against abusive gambling in the shadowy global derivatives casino using Main Street depositors’ money. It’s as if we’re back to 1999, when the banks got Congress to erase the Glass-Steagall Act, which for 80 years protected Main Street by separating retail banks and investment banking. Now the banks are back to their speculation and gambling, exposing the economy to great risk, just as they were before the 1929 crash. As MarketWatch’s David Weidner put it, Yellen’s Fed looks to have forgotten that banks caused the Great Recession: that hellish era that was set off by the Bear Stearns, Lehman, Countrywide, AIG, Merrill, Freddie, Sallie and the other disasters.

Now Yellen’s Fed and our too-big-to-fail banks and their mainly Republican co-conspirators have set another big trap. A huge trap. As Stephen Roach, former chairman of Morgan Stanley Asia, wrote for Project Syndicate, Yellen’s Federal Reserve “is headed down a familiar — and highly dangerous — path.” “Steeped in denial of its past mistakes, the Fed is pursuing the same incremental approach that helped set the stage for the financial crisis of 2008-2009. The consequences,” writes Roach, “could be similarly catastrophic.” The next crash is due in 2016, around the presidential election. Why? Yellen’s brain is trapped in the same myopic capitalist dogma that blinded Greenspan for 18 years, forcing him to confess he “really didn’t get it till very late,” long after the $10 trillion market loss was a reality.

Same with Yellen. It will happen again. Losses bigger than 2000 and 2008 combined. Think I’m kidding? Bet against this at your peril. Jeremy Grantham’s already on record predicting that “around the presidential election or soon after, the market bubble will burst, as bubbles always do, and will revert to its trend value, around half of its peak or worse.” That could translate to the DJIA crashing – which on Friday posted the week’s (and history’s) second close above the 18,000 level – to around 10,000. The Dow crashing all the way back down to 10,000? Wow. Unimaginable. No wonder our brains tune out. Instead, we prefer the happy talk that will just keep coming out of Wall Street and Washington till 2016. We’ll keep denying reality … till it’s too late, and another $10 trillion loss is in the books.

So the question is: did the internet facilitate the rise in propaganda?

• 2014: The Year The Internet Came Of Age (Guardian)

The best we can say about 2014 is that it was the year when we finally began to have a glimmer of what the internet might mean for society. Not the internet that we fantasised about in the early years, but the network as it has evolved from an exotic curiosity into the mundane underpinning of our lives – a general-purpose technology or GPT. And, in a way, the timescale is about right. The internet that we use today was switched on in January 1983, but it didn’t really become a mainstream medium until the web began to explode in 1993. So we’re about 21 years into the revolution. And what we know from the history of other GPTs is that it generally takes at least two decades before they form the unremarked-upon backdrops to everyday life.

In 1999, Andy Grove, then the CEO of Intel, the dominant chip-maker of the time, made a famous prediction. In five years’ time, he said, “companies that aren’t internet companies won’t be companies at all”. He was widely ridiculed for this pronouncement at the time. But in fact he was just being prescient. What he was trying to communicate was that the internet would one day become like the telephone or mains electricity – something that we take for granted. Grove’s point was that companies that boasted that they “were now on the internet” in 2004 would already be regarded as ridiculous. And so indeed they were.

Could we live without the net? Answer: on an individual level possibly, but on a societal level no – simply because so many of the services on which industrialised societies depend now rely on internet connectivity. In that sense, the network has become the nervous system of the planet. This is why it now makes no more sense to argue about whether the internet is good or bad than to debate whether oxygen or water are desirable. We’ve got it and we’re stuck with it. Which means that we’re also stuck with its downsides. While offline crime has decreased dramatically – car-related theft has reduced by 79% since 1995 and burglary by 67%, for example, what’s happened is that much serious crime has now moved online, where its scale is staggering, even if the official statistics do not count it.

The same goes for industrial espionage (at which the Chinese are currently the world champions) and counter-espionage and counter-terrorism (at which the NSA and GCHQ currently top the international league tables). And we’re just getting started on cyberwarfare. So here we are at the end of 2014, finally wising up to what we’ve got ourselves into: an internet that provides us with much that we love and value and would be hard put to do without. But an internet that is also dangerous, untrustworthy and comprehensively monitored. The question for 2015 and beyond is whether we can have more of the former and less of the latter. Happy New Year!

A problem still in its infancy.

• China Needs Millions of Brides ASAP (Bloomberg)

In the villages outside of Handan, China, a bachelor looking to marry a local girl needs to have as much as $64,000 – the price tag for a suitable home and obligatory gifts. That’s a bit out of the price range of many of the farmers who live in the area. So in recent years, according to the Beijing News, local men have been turning to a Vietnamese marriage broker, paying as much as $18,500 for an imported wife, complete with a money-back guarantee in case the bride fled. But that fairy tale soon fell apart. On the morning of November 21, sometime after breakfast, as many as 100 of Handan’s imported Vietnamese wives – together with the broker – disappeared without a trace. It was a peculiarly Chinese instance of fraud. The victims are a local subset of a fast-growing underclass: millions of poor, mostly rural men, who can’t meet familial and social expectations that a man marry and start a family because of the country’s skewed demographics.

In January, the director of China’s National Bureau of Statistics announced that China is home to 33.8 million more men than women out of a population exceeding 1.3 billion. China’s vast population of unmarried men is sure to pose an array of challenges for China, and perhaps its neighbors, for decades to come. What’s already clear is that fraudulent mail-order wives are only the start of a much larger problem. The immediate cause of China’s gender imbalance is a long-standing cultural preference for boys. In China’s patrilineal culture, they’re expected to carry on the family name, as well as serve as a social security policy for aging parents. In the 1970s, China’s so-called One Child policy transformed this preference into an imperative that parents fulfilled via sex selective abortions (made possible by the widespread availability of ultrasounds). As a result, millions of girls never made it onto China’s population rolls.

In 2013, for example, the government reported 117.6 boys were born for every 100 girls. (The natural rate is 103 to 106 boys to every 100 girls.) In the countryside, the ratio can run much higher — Mara Hvistendahl, in her 2011 book, Unnatural Selection, reports on a town where ratios run as high as 150 to 100. Long-term, such imbalances can create an excess of males that might reach 20% of the overall male population by 2020, according to one estimate. Of course, social expectations aren’t just confined to boys. In China, daughters are expected to marry up – and in a country where men far outnumber women, the opportunities to do so are excellent, especially in the cities to which so many of China’s rural women move. The result is that bride prices – essentially dowries paid to the families of daughters – are rising, especially in the countryside. One 2011 study on bride prices found that they’d increased seventy-fold between the 1960s and 1990s in just one representative, rural hamlet.

Very real. Not some theory.

• Rising Oceans Force Bangladeshi Farmers Inland for New Jobs (Bloomberg)

About seven years ago, Gaur Mondol noticed he couldn’t grow as much rice on his land as salty water seeped in from the Passur River, which stretches from his home in Bangladesh’s interior all the way to the Indian Ocean. Now the rice paddies are completely inundated, leaving the land barren. To find work, he must walk for miles each day to other villages. His annual income has fallen by half to 36,000 taka ($460). He makes about $4 a day if he’s lucky, and most of that goes to buy food for his family of four. “I’m always worried that my house will be washed away someday,” Mondol said from his home in Mongla sub-district, pointing to a river-side tamarind tree with water swirling around its exposed roots. “My family is constantly under threat as the river creeps in.” Rising sea levels are one of the biggest threats to the $150-billion economy over the next half a century, with farmers like Mondol already facing the consequences.

Bangladesh, which needs to grow at 8% pace to pull people out of poverty, stands to lose about 2% of gross domestic product each year by 2050, according to the Asian Development Bank. “The sea-level rise and extreme climate events are the two ways that salinity intrudes into the freshwater system,” Mahfuzuddin Ahmed, an adviser in the ADB’s regional and sustainable development department, said by phone from Manila. “The implication for food security is quite big.” Bangladesh is one of the world’s most densely populated countries, with half the U.S. population crammed into an area the size of New York state. About 50% of its citizens are directly dependent on agriculture for their livelihoods, a quarter live in the coastal zone, and 21% of these lands are affected by an excess of salinity.

The proportion of arable land has fallen 7.3% between 2000-2010, faster than South Asia’s 2% decline, with geography playing a large role. Bangladesh is nestled at a point where tidal waves from the Indian Ocean flow into the Bay of Bengal. While these create the Sundarbans mangroves, home to the endangered Bengal tiger, winds and currents cause saline water to mix with upstream rivers. Global weather changes worsen this. Bangladesh’s average peak-summer temperature in May has climbed to 28.1 degrees Celsius (83 Fahrenheit) in 1990-2009 from 26.9 in 1900-1930, and could rise to 31.5 degrees in 2080-2099, World Bank data show. Average June rainfall has dropped to 467.1 millimeter from 517.5 in that time.

Wonderful.

• Siberian Dog Allowed To Stay In Hospital Where Owner Died 1 Year Ago (RT)

The holiday spirit is alive and well in a hospital in Siberia, where Masha, Russia’s own ‘Hachiko’ dog was given permanent residence status. For a whole year the loyal pet kept ‘dogging’ the hospital, waiting for her owner who had passed away. Despite a number of attempts to have Masha adopted, the heartbroken pooch kept running away and coming back to the Novosibirsk District Hospital Number One, where she last saw her owner in December, 2013. “Masha will always stay here, because she is waiting for her owner. I think that even if we took her to his grave, she wouldn’t believe it. She’s waiting for him alive, not dead,” nurse Alla Vorontsova told the Siberian Times.

The dog’s heartbreaking story has gathered quite a bit of attention in Russia and even abroad, after it went viral in the media. The sad dachshund was adopted a number of times, but all unsuccessfully. “People in Russia tried to adopt her three times, but she always came back. I also heard that a number of foreigners wanted to adopt her too, but it is impossible – she doesn’t want to leave the hospital. And besides, we love her and she loves us. How could she live somewhere far away? She would just pine away,” Vorontsova said. For a year, hospital workers fed and walked Masha, and now they have finally managed to make it official; Masha has her own cozy spot inside the building.

“Here all the patients come to her, stroke her and give something tasty, especially the older people. She warms their hearts,” the nurse added. Masha’s elderly owner was admitted to the hospital and his dog was his sole visitor there. Masha’s loyalty earned her the media nickname Hachiko – in reference to the famous story of a Japanese Akita dog. Agricultural science professor Hidesaburo Ueno got Hachiko in 1924. The dog would greet the owner at the station every day. After Ueno passed away, Hachiko kept returning to the train station for 10 years, waiting for him to come back. The amazing story turned the pet into a national hero and later inspired a Hollywood movie, ‘Hachiko: A Dog’s Tale,’ starring Richard Gere.

Debt Rattle December 19 2014

Dec 192014

December 19, 2014 Posted by Raúl Ilargi Meijer at 11:21 am Finance Tagged with: brain, China, collapse, emerging markets, North Sea, oil, pope, Shale, torture 4 Responses »

John Vachon Trucks loaded with mattresses at San Angelo, Texas Nov 1939

• Oil Crash Exposes New Risks for U.S. Shale Drillers (Bloomberg)

• North Sea Oil Industry ‘Close To Collapse’ (BBC)

• North Sea Oilfields ‘Near Collapse’ After Price Nosedive (Telegraph)

• Exxon Mobil Shows Why U.S. Oil Output Rises as Prices Plunge (Bloomberg)

• Central Banks Are Now Uncorking The Delirium Phase (David Stockman)

• Dow’s 421-Point Leap Is Biggest Gain In 3 Years (MarketWatch)

• Already Crummy US Economy Takes a Sudden Hit (WolfStreet)

• The Fed Delivers the Message that Our Economy is Dead (Beversdorf)

• Emerging Markets In Danger (Erico Matias Tavares)

• China’s Short-Term Borrowing Costs Surge as Demand for Money Grows (WSJ)

• PBOC Offers Loans to Banks as Money Rate Jumps Most in 11 Months (Bloomberg)

• Russia May Seek China Help To Deal With Crisis (SCMP)

• Draghi Counts Cost of Outflanking Germany in Stimulus Battle (Bloomberg)

• Federal Reserve Delays Parts Of Volcker Rule Until 2017 (BBC)

• “Neoconica” – America For The New Millennium (Thad Beversdorf)

• Bombs Away! Obama Signs Bill For Lethal Aid To Ukraine (Daniel McAdams)

• US TV Shows American Torturers, But Not Their Victims (Glenn Greenwald)

• Pope Francis Scores on Diplomatic Stage With U.S.-Cuba Agreement (Bloomberg)

• Can You Live A Normal Life With Half A Brain? (BBC)

“It’s just the nature of the business. You’re not going to go drill holes in the ground if you think prices are going down.”

• Oil Crash Exposes New Risks for U.S. Shale Drillers (Bloomberg)

Tumbling oil prices have exposed a weakness in the insurance that some U.S. shale drillers bought to protect themselves against a crash. At least six companies, including Pioneer Natural Resources and Noble Energy, used a strategy known as a three-way collar that doesn’t guarantee a minimum price if crude falls below a certain level, according to company filings. While three-ways can be cheaper than other hedges, they can leave drillers exposed to steep declines. “Producers are inherently bullish,” said Mike Corley, the founder of Mercatus Energy Advisors, a Houston-based firm that advises companies on hedging strategies. “It’s just the nature of the business. You’re not going to go drill holes in the ground if you think prices are going down.”

The three-way hedges risk exacerbating a cash squeeze for companies trying to cope with the biggest plunge in oil prices this decade. West Texas Intermediate crude, the U.S. benchmark, dropped 50% since June amid a worldwide glut. The Organization of Petroleum Exporting Countries decided Nov. 27 to hold production steady as the 12-member group competes for market share against U.S. shale drillers that have pushed domestic output to the highest since at least 1983. Shares of oil companies are also dropping, with a 49% decline in the 76-member Bloomberg Intelligence North America E&P Valuation Peers index from this year’s peak in June. The drilling had been driven by high oil prices and low-cost financing. Companies spent $1.30 for every dollar earned selling oil and gas in the third quarter, according to data compiled by Bloomberg on 56 of the U.S.-listed companies in the E&P index.

450,000 people work in Britain’s oil industry.

• North Sea Oil Industry ‘Close To Collapse’ (BBC)

The UK’s oil industry is in “crisis” as prices drop, a senior industry leader has told the BBC. Oil companies and service providers are cutting staff and investment to save money. Robin Allan, chairman of the independent explorers’ association Brindex, told the BBC that the industry was “close to collapse”. Almost no new projects in the North Sea are profitable with oil below $60 a barrel, he claims. “It’s almost impossible to make money at these oil prices”, Mr Allan, who is a director of Premier Oil in addition to chairing Brindex, told the BBC. “It’s a huge crisis.” “This has happened before, and the industry adapts, but the adaptation is one of slashing people, slashing projects and reducing costs wherever possible, and that’s painful for our staff, painful for companies and painful for the country. “It’s close to collapse. In terms of new investments – there will be none, everyone is retreating, people are being laid off at most companies this week and in the coming weeks. Budgets for 2015 are being cut by everyone.”

Mr Allan said many of the job cuts across the industry would not have been publicly announced. Oil workers are often employed as contractors, which are easier for employers to cut. His remarks echo comments made by the veteran oil man and government adviser Sir Ian Wood, who last week predicted a wave of job losses in the North Sea over the next 18 months. The US-based oil giant ConocoPhillips is cutting 230 out of 1,650 jobs in the UK. This month it announced a 20% reduction in its worldwide capital expenditure budget, in response to falling oil prices. Other big oil firms are expected to make similar cuts to their drilling and exploration budgets. Research from the investment bank Goldman Sachs predicted that they would need to cut capital expenditure by 30% to restore their profitability at current prices. Service providers to the industry have also been hit. Texas-based oilfield services company Schlumberger cut back its UK-based fleet of geological survey ships in December, taking an $800m loss and cutting an unspecified number of jobs.

“The prolongation of the downward trend of the oil price in world markets is a political conspiracy going to extremes.”

• North Sea Oilfields ‘Near Collapse’ After Price Nosedive (Telegraph)

The North Sea oil industry is “close to collapse”, an expert has warned, as a slump in prices piles pressure on drillers to cut back investing in the region. Robin Allan, chairman of the independent explorers’ association Brindex, told the BBC that it is “almost impossible to make money” with the oil price below $60 per barrel. “It’s a huge crisis. This has happened before, and the industry adapts, but the adaptation is one of slashing people, slashing projects and reducing costs,” he said. Mr Allan’s glum outlook for oil production and exploration in the UK Continental Shelf came on a volatile day of trading for crude. Brent – a global pricing benchmark comprising crude from 15 North Sea fields – ended trading in London down 1% at around $60 per barrel after trading up by as much as 3% earlier in the session. Mr Allan’s warning comes after The Telegraph reported that £55bn worth of oil projects in the North Sea and Europe could be cancelled due to the current slide in prices, according to consultancy Wood Mackenzie.

Concern over the ability of the North Sea to endure the current downturn has increased since OPEC decided to keep pumping at its current rate of 30m barrels per day (bpd) in late November. Opec kingpins Saudi Arabia and Iran were at odds on Thursday over the reason behind falling prices in an indication of the pain being caused to many of the cartel’s 12 members. Iran’s oil minister has said that a “political conspiracy” is to blame for the dramatic slump in remarks which could signal that the Islamic Republic will try to exert pressure on Opec to again consider cutting output. Bijan Zanganeh told the country’s state petroleum news agency: “The prolongation of the downward trend of the oil price in world markets is a political conspiracy going to extremes.”

“Companies that are already producing oil will continue to operate those wells because the cost of drilling them is already sunk into the ground ..”

• Exxon Mobil Shows Why U.S. Oil Output Rises as Prices Plunge (Bloomberg)

Crude oil production from U.S. wells is poised to approach a 42-year record next year as drillers ignore the recent decline in price pointing them in the opposite direction. U.S. energy producers plan to pump more crude in 2015 as declining equipment costs and enhanced drilling techniques more than offset the collapse in oil markets, said Troy Eckard, whose Eckard Global owns stakes in more than 260 North Dakota shale wells. Oil companies, while trimming 2015 budgets to cope with the lowest crude prices in five years, are also shifting their focus to their most-prolific, lowest-cost fields, which means extracting more oil with fewer drilling rigs, said Goldman Sachs. Global giant Exxon Mobil, the largest U.S. energy company, will increase oil production next year by the biggest margin since 2010.

So far, OPEC’s month-old bet that American drillers would be crushed by cratering prices has been a bust. “Companies that are already producing oil will continue to operate those wells because the cost of drilling them is already sunk into the ground,” said Timothy Rudderow, who manages $1.5 billion as chief investment officer at Mount Lucas Management. “But I wouldn’t want to have to be making long-term production decisions with this kind of volatility.” A U.S. crude bonanza that has handed consumers the cheapest gasoline since 2009 has left oil exporters like Russia and Venezuela flirting with economic chaos. The ruble sank as much as 19% on Dec. 16 to a record low of 80 per dollar before recovering to close at 68; Russian bond and equity markets also crumbled.

In Venezuela, the oil rout is spurring concern the country is running out of dollars needed to pay debt and swaps traders are almost certain default is imminent. U.S. oil production is set to reach 9.42 million barrels a day in May, which would be the highest monthly average since November 1972, according to the Energy Department’s statistical arm. Output from shale formations, deep-water fields, the Alaskan wilderness and land-based wells in pockets of Oklahoma and Pennsylvania that have been trickling out crude for decades already have pushed demand for imported oil to the lowest since at least 1995, according to data compiled by Bloomberg.

“The essence of its action was that your money is not welcome in Switzerland ..”

• Central Banks Are Now Uncorking The Delirium Phase (David Stockman)

Virtually every day there is an eruption of lunacy from one central bank or another somewhere in the world. Today it was the Swiss central bank’s turn, and it didn’t pull any punches with regard to Russian billionaires seeking a safe haven from the ruble-rubble in Moscow or investors from all around its borders fleeing Mario Draghi’s impending euro-trashing campaign. The essence of its action was that your money is not welcome in Switzerland; and if you do bring it, we will extract a rental payment from your deposits. For the time being, that levy amounts to a negative 25 bps on deposits with the Swiss Central bank – a maneuver that is designed to drive Swiss Libor into the realm of negative interest rates as well. But the more significant implication is that the Swiss are prepared to print endless amounts of their own currency to enforce this utterly unnatural edict on savers and depositors within its borders.

Yes, the once and former pillar of monetary rectitude, the SNB, has gone all-in for money printing. Indeed, it now aims to become the BOJ on steroids – a monetary Godzilla. So its current plunge into the netherworld of negative interest rates is nothing new. It’s just the next step in its long-standing campaign to put a floor under the Swiss Franc at 120. That means effectively that it stands ready to print enough francs to purchase any and all euros (and other currencies) on offer without limit. And print it has. During the last 80 months, the SNB’s balance sheet has soared from 100B CHF to 530B CHF – a 5X explosion that would make Bernanke envious. Better still, a balance sheet which stood at 20% of Swiss GDP in early 2008 – now towers at a world record 80% of the alpine nation’s total output. Kuroda-san, with a balance sheet at 50% of Japan’s GDP, can only pine for the efficiency of the SNB’s printing presses.

Are they all going to sell in January?

• Dow’s 421-Point Leap Is Biggest Gain In 3 Years (MarketWatch)

A surging U.S. stock market rallied to its best two-day gains in three years Thursday. The monster rally, which kicked off Wednesday after Federal Reserve Chairwoman Janet Yellen assured the markets that the central bank would be patient about lifting interest rate, burst into an all-out bull run late in Thursday trading. The move caps a two-day charge higher, bringing the Dow back to within shouting distance of 18,0000, after rocky trading days. The Dow Jones Industrial Average soared 421 points, or 2.4%, to 17,778.15, its biggest one-day gain in three years, a day after the Federal Reserve said it “can be patient” about the timing of its first rate hike, signalling increases will be slow and steady. It was the first time in more than six years since the Dow recorded back-to-back days of gains exceeding 200 points.

The S&P 500 jumped 48.34 points, or 2.4%, to 2,061.23, it’s biggest one-day gain in nearly two years. It is also the first time since Aug 2002 that the benchmark index posted two consecutive days of gains greater than 2%, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. The Nasdaq Composite jumped 104 points, or 2.2%, to 4,748, as technology companies recorded big gains. Jonathan Golub, chief U.S. market strategist at RBC Capital Markets, attributed today’s rally to halo effect from the Fed’s announcement on Wednesday. “The Fed told equity investors what we already assumed and believed,” Golub said. “There was fear that if there was going to be any change in the stance, it would be towards hawkishness, but the statement dispelled that, so stock markets rallied,” the RBC strategist added.

Can we have some polar vortex please?

• Already Crummy US Economy Takes a Sudden Hit (WolfStreet)

The Fed yesterday, in a fit of its typical though inexplicable optimism, raised its projection for economic growth. In September, it had projected that the US economy would grow between 2.0% and 2.2% in 2014. Now it raised its “central tendency” to a growth of 2.3% to 2.4%. That type of measly economic growth is far below the ever elusive escape velocity that Wall Street keeps promising without fail every year to justify sky-high stock valuations. But now reality is once again mucking up our already not very rosy scenarios. The service sector, the dominant force in the US economy, has taken another hit. Markit’s Services PMI Business Activity index slumped in December to 53.6, down from 56.2 in November. It’s now nearly 3 percentage points below the average over the last two years (56.4). And it is barely above the terrible growth rate in February (53.3), for which the polar vortex that had covered much of the nation was amply blamed.

Here is a chart of the shrinking services PMI. The peak was in June. From that point of maximum exuberance, it has been one heck of a downhill ride. Note the sudden no-polar-vortex plunge from November to December.

This time, there were no polar vortices to blame. But there were plenty of business reasons. Incoming new work was the lowest in nine months, with some survey respondents indicating that “the economic outlook had weighted on client demand at the end of the year.” The rate of job creation dropped to the lowest since April, with some respondents citing softer new business as reason. The Composite PMI, which combines the Services PMI and the Manufacturing PMI, dropped sharply from 56.1 in November to 53.8 in December. It has been on the same trajectory as the Services PMI, with the peak in June, followed by a downhill ride that culminated in a sudden plunge in December that left it below February’s polar-vortex low!

“.. if you read some of Stanley Fischer’s early work on the rational expectation model you find that the key to fixing the lack of long term effectiveness to monetary policy is by confusing the working man. The idea being, people will act rationally with the information they are provided and so what typically happens is that people change their behaviour which counters the impact of the policy being implemented.

• The Fed Delivers the Message that Our Economy is Dead (Beversdorf)

I used to get a kick out of the cute little children waiting for the Fed Chair to come and deliver presents or coal. So giddy and excited from the anticipation of not knowing who Janet thinks were good boys and girls. Who’s going to be rewarded and who disappointed? And I don’t know how many people asked me today what the Fed will do. My answer was “The same f@#*ing thing they always do, nothing. So stop asking”. You see, if you read some of Stanley Fischer’s early work on the rational expectation model you find that the key to fixing the lack of long term effectiveness to monetary policy is by confusing the working man. The idea being, people will act rationally with the information they are provided and so what typically happens is that people change their behaviour which counters the impact of the policy being implemented.

The solution is to keep us guessing. And so what they have done for essentially every meeting is nothing. However, they use the media to talk about all the things they just might do. And the pundits on television go on and on about all the things that might happen and what the follow on implications will be given those alternatives and then the moment comes and ahhh nothing, damn they fooled me again! I really thought this time was it gosh golly dang it!. I guess it was just that this or that was just slightly out of place otherwise they said they were totally gonna do this or that. So close, but ultimately they are right. Yep they made the right choice based on all the variables. They are just swell. At this point, I just get annoyed with the ridiculous foolishness of people. We’ve got to start using our own brains. The Fed stopped using any benchmarks because while the benchmarks were improving, the economy wasn’t and isn’t.

And so they were being railroaded by the transparency that benchmarks provide. And now it is just a black box of various indicators that will be analyzed in real time to form justifiable actions, far too complex for you and I but trust them that there is a definite method and it’s very quantifiable at that, they just can’t tell us what it is because it would just confuse everyone. Does anyone really not get it?? I mean I was under the impression that the pundits on television were just acting for the sake of good drama. Is that not the case? Are people really still confused by what’s happening in the market and broader economy? It’s been 6 years of the absolute same bullshit. How could anyone not clearly understand exactly what is behind the action or non action of the Fed??? Come on people wake up. Take a deep breath, grab some coffee, do whatever you need to do but please wake the hell up.

They’re all addicted to Fed QE. But that’s gone, and there’s no alternative available.

• Emerging Markets In Danger (Erico Matias Tavares)

There are some signs of trouble in emerging markets. And the money at risk now is bigger than ever. The yield spread between high grade emerging markets and US AAA-rated corporate debt has jumped, almost doubling in less than three weeks to the highest level since mid-2012.

MSCI Emerging Markets Index and Yield Spread between High Grade Emerging Markets and US AAA Corporates: 14 March 2003 – Today. Source: US Federal Reserve.

This means that the best credit names in emerging markets have to pay a bigger premium over their US counterparts to get funding. When this spread spikes up and continues above its 200-day moving average for a sustained period of time, it is typically a bad sign for equity valuations in emerging markets, as shown in the graph above. One swallow does not a summer make, but it is worthwhile keeping an eye on this indicator.

As yields go up the value of these emerging market bonds goes down, resulting in losses for the investors holding them. The surge of the US dollar in recent months could magnify these losses: if the bonds are denominated in local currency they will be worth a lot less to US investors; otherwise, the borrowers will now have to work a lot harder to repay those US dollar debts, increasing their credit risk. Any losses could end up being very significant this time around, as demand for emerging markets bonds has literally exploded in recent years.

Average Annual Gross Debt Issuance ($ billions, percent): 2000 – Today. Source: Dealogic, US Treasury. Note: Data include private placements and publicly-issued bonds. 2014 data are through August 2014 and annualized.

The craze in China stocks makes money scarce…

• China’s Short-Term Borrowing Costs Surge as Demand for Money Grows (WSJ)

Short-term borrowing costs in China soared Thursday as demand for cash surged due to a number of new stock offerings and the year-end shopping spree. A recent ruling that bans the use of lower-grade corporate bonds as collateral for loans, once a key source of funding for many institutional investors, has also intensified the scramble for funds. The cash squeeze is putting the country’s financial system under renewed stress, though so far it hasn’t spread to other sectors such as stocks or the bond markets. The money markets in China have grown dramatically in recent years, with smaller banks especially vulnerable to the higher borrowing costs as they’re most reliant on the interbank market for cash.

The weighted average of seven-day repurchase agreements, or repo, a benchmark for short-term funding costs in China’s money market, rose to 5.27% from 3.89% Wednesday and 3.53% at the beginning of this week. However, the level remains well below the 12% peak that it touched at the height of the unprecedented cash crunch that China suffered in the summer of 2013. “The u%oming IPOs is the most important reason behind today’s funding squeeze. The usual year-end thirst for cash also is also playing a part,” said Wang Ming, a partner at Shanghai Yaozhi Asset Management Co. A dozen companies, including broker Guosen Securities and budget carrier Spring Airlines, are raising a total of $2.2 billion over the next few weeks from domestic stock listings. They are set to take orders for their offerings between Dec. 18 and Dec. 23.

Investors’ enthusiasm about the new IPOs was even more evident in the smaller funding market on the Shanghai Stock Exchange, the bigger of China’s two exchanges. The weighted average of the seven-day repo on the Shanghai market, where investors use exchange-listed bonds as collateral for short-term borrowing, soared to 12.20% from 10.60% Wednesday. It stood at 6.80% Monday. Such one-off factors aside, the recent strong rally in China’s stock market and a fresh move by Beijing to rein in growing risk in the corporate bond market are having a more lasting impact on the supply of funds, Mr. Wang said. China’s securities clearing house last week banned the use of lower-grade bonds, mostly issued by cash-strapped local governments and small firms, as collateral for short-term borrowing between investors.

And banks feel the pinch.

• PBOC Offers Loans to Banks as Money Rate Jumps Most in 11 Months (Bloomberg)

China’s central bank offered short-term loans to commercial lenders as the benchmark money-market rate jumped the most in 11 months. The amount of money made available by the People’s Bank of China wasn’t clear, according to people familiar with the matter. Policy makers are adding funds to the financial system to address a cash crunch as subscriptions for the biggest new share sales of the year lock up funds. Twelve initial public offerings from today through Dec. 25 will draw orders of as much as 3 trillion yuan ($483 billion), Shenyin & Wanguo Securities Co. estimated. The seven-day repurchase rate, a gauge of interbank funding availability in the banking system, surged 139 basis points, or 1.39%age points, to a 10-month high of 5.28% as of 4:39 p.m. in Shanghai, according to a weighted average compiled by the National Interbank Funding Center. The increase was the biggest since Jan. 20.

“The IPOs are affecting the market, leading to cautious sentiment with fewer institutions willing to lend,” said Li Haitao, a Shanghai-based analyst at China Guangfa Bank Co. “Quite a few traders found it very difficult to meet their funding needs yesterday.” Lenders paid 4.65% for 60 billion yuan of three-month treasury deposits auctioned today by the PBOC, the most they’ve paid since January for such funds. The central bank also rolled over this week at least some of the 500 billion yuan of three-month loans granted to lenders in September, a government official said yesterday, declining to be identified as the details haven’t been made public. “Banks have to prepare for quarter-end regulatory checks, including loan-to-deposit requirements, and hoard cash to meet year-end demand,” said Wang Ming, chief operations officer at Shanghai Yaozhi Asset Management LLP, which oversees 2 billion yuan of fixed-income investments. “With all these factors affecting the market, it’s no surprise it’s suffering more than during previous IPOs.”

Eastern links will get much stronger as a result of western policies vs Russia.

• Russia May Seek China Help To Deal With Crisis (SCMP)

Russia could fall back on its 150 billion yuan (HK$189.8 billion) currency swap agreement with China if the rouble continues to plunge. If the swap deal is activated for this purpose, it would mark the first time China is called upon to use its currency to bail out another currency in crisis. The deal was signed by the two central banks in October, when Premier Li Keqiang visited Russia. “Russia badly needs liquidity support and the swap line could be an ideal tool,” said Bank of Communications chief economist Lian Ping. The swap allows the central banks to directly buy yuan and rouble in the two currencies, rather than via the US dollar. Two bankers close to the People’s Bank of China said it was meant to reduce the role of the US dollar if China and Russia need to help each other overcome a liquidity squeeze.

China has currency swap deals with more than 20 monetary authorities around the world. Swaps are generally used to settle trade. “The yuan-rouble swap deal was not just a financial matter,” said Wang Feng, chairman of Shanghai-based private equity group Yinshu Capital. “It has political implications as it is a sign of mutual trust.” The rouble has lost more than 50% against the US dollar this year, pushing Russia to the brink of a currency crisis, though measures announced by the central bank helped it recover some ground yesterday. Li Lifan, a researcher at the Shanghai Academy of Social Sciences, said the swap would not be enough for Russia even if it is used in its entirety. “The PBOC might agree to extend something like 15 billion yuan initially as a way of showing China’s commitment to Russia.”

How to blow up the EU.

• Draghi Counts Cost of Outflanking Germany in Stimulus Battle (Bloomberg)

As Mario Draghi prepares to push the European Central Bank into quantitative easing, he’s counting the cost of alienating its home nation. With the ECB president signaling that he’ll override German-led concerns on government bond purchases if needed, his institution is under attack in the country whose DNA inspired it. The outrage reflects concern that the Frankfurt-based central bank, which is modeled on the Bundesbank, is taking risks that its forerunner would never tolerate. The Italian is now pursuing a charm offensive in the euro area’s biggest and most populous economy before the Governing Council’s Jan. 22 meeting to soften the blow as he presses on with stimulus. His challenge is to outflank the Bundesbank without risking a spillover into national politics serious enough to threaten German support for the single currency.

“The ECB has built up enough credibility on its own,” said Holger Schmieding, chief economist at Berenberg Bank in London. “That the Bundesbank may object to sovereign-bond purchases is largely taken for granted by markets. Tacit support from Berlin would neutralize Bundesbank objections in the German public debate.” The momentum toward QE is building, with more than 90% of economists in Bloomberg’s monthly survey predicting it’ll start in 2015. Euro-area inflation was 0.3% in November, compared with the ECB’s goal of just under 2%, and is poised to turn negative because of a slump in oil prices.

“The rule prevents federally-insured banks from using their own money when investing in certain risky assets.”

• Federal Reserve Delays Parts Of Volcker Rule Until 2017 (BBC)

The US Federal Reserve has given Wall Street banks even more time to comply with parts of the Volcker Rule, a key provision of the 2010 Dodd-Frank financial reform bill. The rule prevents federally-insured banks from using their own money when investing in certain risky assets. The Fed had already announced banks would have until 2017 to deal with one type of trading product. It will now grant an extension to other types of funds. Initially, the Fed had said banks would have until 21 July 2017 to stop trading in collateralised loan obligations, which essentially move the risk of investments in loans off their balance sheet. The new extension applies to other types of “legacy covered funds”, according to a release on the Fed’s website, which include “having certain relationships with a hedge fund or private equity fund”.

The Volcker rule is named after former Federal Reserve chair Paul Volcker and it limits the ownership stake banks can have in risky funds to a maximum of 3%. Part of the rule, which bans proprietary trading, is still scheduled to go into effect on 1 July 2015. This is the second big victory for banks, who have spent nearly four years arguing that the regulations stipulated in the 1,600-page Dodd-Frank bill are too onerous. Last week, a coalition of big banks, led by Citigroup, succeeding in convincing Congress to repeal a provision that required banks to put their riskier investments into separate holding companies that would not be insured by the US government.

An exhaustive overview, with tons of graphs, of all aspects of the true state of the union, from obesity to poverty to incarceration rates. Don’t miss it.

• “Neoconica” – America For The New Millennium (Thad Beversdorf)

I recently wrote an piece on the comprehensive breakdown of America. In it I laid out, from an analytical perspective, the things that are leading America to an economic collapse. But it might be interesting to take a look at a broader view of American life today. Policy and economic discussions are useful but in them we can lose the tangibility of what it all comes back to, which is the well being of Americans. Whether or not the national budget is 190% of GDP and whether interest rates will rise or not are important issues but only so far as they will impact the quality of life of the people. And so let s have a look at the lives of the American people. Have the policies over the past 15 to 50 years led to substantial improvements in the day to day real lives of Americans? Let’s have a look. And while we ve seen a couple of these more economic charts think about them in context of the other charts or other sides of life.

The above charts inform us that the bottom 80% of income households are making less than they did in the early 1980s, and remember the number of two income households today is far greater than it was in 1980 making this a staggering reality. However the top 20% and especially the top 1% have seen incredible income gains since the early 1980s. Total net worth for the bottom 80% of Americans has also been crushed. Since 2001 median net worth for the bottom 80% is down some 30% and this is during a period where stocks have reached all time highs. How could this be you ask?? Well this is not happenstance or simple unexplainable market forces. Those things do not exist in today s world. These results are by design.

I get frustrated hearing, even from the most intelligent of people that the Fed is doing its best and that given enough time this will work out for everyone. And that everyone is better off today than they used to be because this is America and that s just the way America works. But when we let the empirical data drive our perspective rather than our blind loyalty we see a very different story. The data tells a story of a political class that has been implementing programs and policies that are making the working class sick. We are given all sorts of medicines in the form of social programs and infinite debt to mask the symptoms but when we look at the actual medical test results we are not getting any better. In fact, our condition continues to worsen. Yet so many of us continue to listen to our political and economic shamans. We have such faith. And it is that faith that people like Ayn Rand recognized would be the death of America. So let’s continue on our journey through the life of the working class American today.

“The solution for these three Members was to ensure that no other Members were present. It would have been difficult for other Members to object anyway, as no one else in the House had even seen the bill!”

• Bombs Away! Obama Signs Bill For Lethal Aid To Ukraine (Daniel McAdams)

President Obama made good today on his promise to sign the Ukraine Freedom Support Act of 2014, which had passed Congress last week. Dubbed by former Rep. Dennis Kucinich the bill that “reignited the Cold War while no one was looking,” the Act imposes new sanctions on the Russian defense and energy industries, authorizes $350 million in lethal military assistance to the US-backed government in Kiev, urges that government to resume its deadly military operations against the Russian-speaking areas of east Ukraine seeking to break away from Kiev’s rule, and authorizes millions of dollars to fund increased US government propaganda broadcasts to the countries of the former Soviet Union.

Just days before Christmas, this bill is a massive gift to the US defense industry from which Ukraine will be required to purchase its lethal wish list. Perhaps as disturbing as the bill itself is the shocking process by which it passed the US House of Representatives. Three Members of the House, Foreign Affairs Committee Chairman Ed Royce (R-CA), Eliot Engel (D-NY), and Marcy Kaptur (D-OH), planned to be on the House Floor after the business of the day (passage of the massive omnibus spending bill) was completed and Members had left the Floor. Under a parliamentary move called “unanimous consent” the normal rules of the House can be suspended provided not a single other Member objects. The solution for these three Members was to ensure that no other Members were present. It would have been difficult for other Members to object anyway, as no one else in the House had even seen the bill!

“Even in the worst of times, ‘we are always Americans, and different, stronger, and better than those who would destroy us.’”

• US TV Shows American Torturers, But Not Their Victims (Glenn Greenwald)

Ever since the torture report was released last week, U.S. television outlets have endlessly featured American torturers and torture proponents. But there was one group that was almost never heard from: the victims of their torture, not even the ones recognized by the U.S. Government itself as innocent, not even the family members of the ones they tortured to death. Whether by design (most likely) or effect, this inexcusable omission radically distorts coverage. Whenever America is forced to confront its heinous acts, the central strategy is to disappear the victims, render them invisible. That’s what robs them of their humanity: it’s the process of dehumanization.

That, in turn, is what enables American elites first to support atrocities, and then, when forced to reckon with them, tell themselves that – despite some isolated and well-intentioned bad acts – they are still really good, elevated, noble, admirable people. It’s hardly surprising, then, that a Washington Post/ABC News poll released this morning found that a large majority of Americans believe torture is justified even when you call it “torture.” Not having to think about actual human victims makes it easy to justify any sort of crime. That’s the process by which the reliably repellent Tom Friedman seized on the torture report to celebrate America’s unique greatness.

“We are a beacon of opportunity and freedom, and also [..] these foreigners know in their bones that we do things differently from other big powers in history,” the beloved-by-DC columnist wrote after reading about forced rectal feeding and freezing detainees to death. For the opinion-making class, even America’s savage torture is proof of its superiority and inherent Goodness: “this act of self-examination is not only what keeps our society as a whole healthy, it’s what keeps us a model that others want to emulate, partner with and immigrate to.” Friedman, who himself unleashed one of the most (literally) psychotic defenses of the Iraq War, ended his torture discussion by approvingly quoting John McCain on America’s enduring moral superiority: “Even in the worst of times, ‘we are always Americans, and different, stronger, and better than those who would destroy us.’”

“The Vatican is historically a place of politics and not just religion and has been for hundreds of years, with many popes starting their careers as diplomats for the Holy See ..”

• Pope Francis Scores on Diplomatic Stage With U.S.-Cuba Agreement (Bloomberg)

After misfires in the Middle East and South Korea, Pope Francis is finding his place on the stage of world diplomacy — by taking the initiative. The pontiff who has made his name mostly by opening up debate in the Catholic Church about divorce and homosexuality yesterday achieved his first geopolitical success: The Argentine-born pope played a key role in brokering the accord between the U.S. and Cuba to move toward normal relations. After Pope Francis and President Barack Obama discussed Cuba during a Vatican meeting in March, the pontiff wrote directly to Obama and Cuban President Raul Castro urging them to conclude a prisoner exchange, according to an Obama administration official. It was the first such letter the president had received from the pope, the official said.

“The role of Pope Francis has been decisive,” said Vatican Secretary of State Pietro Parolin on Vatican Radio today. “He was the one who took the initiative of writing to the two presidents to invite them to overcome the problems between the two countries and find an agreement.” Francis, 78, had greater success with Cuba than in his other political ventures because it was an obsolescent standoff waiting for a solution and because of his Latin American roots, said Philippe Moreau-Defarges, a researcher at the French Institute of International Relations in Paris. “The Cuba situation simply made no sense to anyone anymore,” said Moreau-Defarges.

While the Vatican diplomatic corps exchanges representatives with 179 countries and popes have been sending emissaries since the 4th century, modern-day pontiffs haven’t always been politically involved. Benedict XVI, Francis’ German predecessor, focused more on doctrinal issues. His predecessor, John Paul II, pope from 1978 to 2005, spoke out frequently against military force and dictatorship and is credited with hastening the collapse of communism in his native Poland. “The Vatican is historically a place of politics and not just religion and has been for hundreds of years, with many popes starting their careers as diplomats for the Holy See,” said Federico Niglia, a history professor at Luiss University in Rome. “What’s somewhat unusual is Francis acting in person beyond diplomatic circles, which has close parallels to the style of predecessor John Paul II.”

Brain structures are fascinating, with built-in resilience, redundancy.

• Can You Live A Normal Life With Half A Brain? (BBC)

How much of our brain do we actually need? A number of stories have appeared in the news in recent months about people with chunks of their brains missing or damaged. These cases tell a story about the mind that goes deeper than their initial shock factor. It isn’t just that we don’t understand how the brain works, but that we may be thinking about it in the entirely wrong way. Earlier this year, a case was reported of a woman who is missing her cerebellum, a distinct structure found at the back of the brain. By some estimates the human cerebellum contains half the brain cells you have. This isn’t just brain damage – the whole structure is absent. Yet this woman lives a normal life; she graduated from school, got married and had a kid following an uneventful pregnancy and birth. A pretty standard biography for a 24-year-old. The woman wasn’t completely unaffected – she had suffered from uncertain, clumsy, movements her whole life.

But the surprise is how she moves at all, missing a part of the brain that is so fundamental it evolved with the first vertebrates. The sharks that swam when dinosaurs walked the Earth had cerebellums. This case points to a sad fact about brain science. We don’t often shout about it, but there are large gaps in even our basic understanding of the brain. We can’t agree on the function of even some of the most important brain regions, such as the cerebellum. Rare cases such as this show up that ignorance. Every so often someone walks into a hospital and their brain scan reveals the startling differences we can have inside our heads. Startling differences which may have only small observable effects on our behaviour. This case points to a sad fact about brain science. We don’t often shout about it, but there are large gaps in even our basic understanding of the brain. We can’t agree on the function of even some of the most important brain regions, such as the cerebellum.

Rare cases such as this show up that ignorance. Every so often someone walks into a hospital and their brain scan reveals the startling differences we can have inside our heads. Startling differences which may have only small observable effects on our behaviour. Part of the problem may be our way of thinking. It is natural to see the brain as a piece of naturally selected technology, and in human technology there is often a one-to-one mapping between structure and function. If I have a toaster, the heat is provided by the heating element, the time is controlled by the timer and the popping up is driven by a spring. The case of the missing cerebellum reveals there is no such simple scheme for the brain. Although we love to talk about the brain region for vision, for hunger or for love, there are no such brain regions, because the brain isn’t technology where any function is governed by just one part.

Debt Rattle November 24 2014

Nov 242014

November 24, 2014 Posted by Raúl Ilargi Meijer at 12:02 pm Finance Tagged with: abnormal, bonds, central banks, currency wars, oil, OPEC, pope, poverty, rates, shadow banking, warming Comments Off

William Henry Jackson Hospital Street, St. Augustine, Florida 1897

• Global Business Confidence Plunges To Post-Crisis Low (CNBC)

• Pope Francis Warns Greed Of Man Will ‘Destroy The World’ (Daily Mail)

• Record Numbers Of UK Working Families In Poverty Due To Low-Paid Jobs (Guardian)

• New Abnormal Means Relying on Central Banks for Growth (Bloomberg)

• Why We Can’t Afford Another Financial Crisis (Guardian)

• PBOC Bounce Seen Short Lived as History Defies Bulls (Bloomberg)

• China Rate-Cut Likely To Hurt Banks, Curb New Loans To Small Borrowers (Reuters)

• Bad News Mounts for Chinese Banks, Funds Grow More Bullish (Bloomberg)

• Property, Manufacturing Woes Help Trim China’s Shadow Banking (Reuters)

• The Consequences of Imposing Negative Interest Rates (Tenebrarum)

• Why Countries Wage Currency Wars (A. Gary Shilling)

• How the EU Plans to Turn $26 Billion Into $390 Billion (Bloomberg)

• Draghi’s About to Find Out How Urgent His Call for Action Has Become (Bloomberg)

• UK Supermarket War Turns Smaller Food Suppliers Into ‘Cannon Fodder’ (Guardian)

• ‘OPEC’s Easy Days Setting Oil Production Are Over’ (Bloomberg)

• Russia Losing ‘Up To $140 Billion’ From Sanctions, Oil Drop (Reuters)

• Demand Set to Outstrip the $100 Trillion Bond Market Again in 2015 (Bloomberg)

• Swedish Banks Face Deposit Drain as Interest Rates Slump (Bloomberg)

• World Locked Into ‘Alarming’ Global Warming: World Bank (CNBC)

How much money was thrown into the system in those five years?

• Global Business Confidence Plunges To Post-Crisis Low (CNBC)

Worldwide business confidence slumped to a five-year low, with company hiring and investment intentions at or near their weakest levels in the post-global financial crisis era, according to a new survey. “Clouds are gathering over the global economic outlook, presenting the darkest picture seen since the global financial crisis,” said Chris Williamson, chief economist at Markit. The number of companies expecting their business activity to be higher in a years’ time exceeded those expecting a decline by just 28%. This was below the net balance of 39% recorded in the summer, the Markit Global Business Outlook Survey showed. The tri-annual survey, published on Monday, looked at expectations for the year ahead across 6,100 manufacturing and services companies worldwide. Optimism in manufacturing fell to its lowest since mid-2013 but remained ahead of that seen in services, where confidence about the outlook slumped to the lowest in the survey’s five-year history.

Global hiring intentions slid to within a whisker of the all-time low seen in June of last year, deteriorating in the U.S., Japan, the U.K., euro zone, Russia and Brazil. [..] Investment intentions also collapsed to a new post-crisis low across major economies. China and India bucked the trend, however, with capital expenditure plans in the two countries improving. The survey highlighted a growing list of concerns among companies about the outlook for the year ahead including a worsening global economic climate, the prospect of higher interest rates in countries such as the U.K. and U.S. and geopolitical risk emanating from crises in Ukraine and the Middle East. “Of greatest concern is the slide in business optimism and expansion plans in the U.S. to the weakest seen over the past five years. U.S. growth therefore looks likely to have peaked over the summer months, with a slowing trend signaled for coming months,” Williamson said.

‘It is also painful to see the struggle against hunger and malnutrition hindered by ‘market priorities’, the ‘primacy of profit’, which reduce foodstuffs to a commodity like any other, subject to speculation and financial speculation in particular ..’

• Pope Francis Warns Greed Of Man Will ‘Destroy The World’ (Daily Mail)

Pope Francis has warned that planet earth could face a doomsday scenario if the world does not stop abusing its resources for profit The pontiff warned that nature would exact revenge, and urged the world’s leaders to rein in their greed and help the hungry. He told the Second International Conference on Nutrition (CIN2) in Rome: ‘God always forgives, but the earth does not. ‘Take care of the earth so it does not respond with destruction.’ The three-day meeting aimed at tackling malnutrition, and included representatives from 190 countries.

It was organised by the UN food agency (FAO) and World Health Organization (WHO) in the Italian capital. The 77-year old said the world had ‘paid too little heed to those who are hungry.’ While the number of undernourished people dropped by over half in the past two decades, 805 million people were still affected in 2014. ‘It is also painful to see the struggle against hunger and malnutrition hindered by ‘market priorities’, the ‘primacy of profit’, which reduce foodstuffs to a commodity like any other, subject to speculation and financial speculation in particular,’ Francis said.

Britain’s new normal: ” .. the report showed a real change in UK society over a relatively short period of time.”

• Record Numbers Of UK Working Families In Poverty Due To Low-Paid Jobs (Guardian)

Insecure, low-paid jobs are leaving record numbers of working families in poverty, with two-thirds of people who found work in the past year taking jobs for less than the living wage, according to the latest annual report from the Joseph Rowntree Foundation. The research shows that over the last decade, increasing numbers of pensioners have become comfortable, but at the same time incomes among the worst-off have dropped almost 10% in real terms. Painting a picture of huge numbers trapped on low wages, the foundation said during the decade only a fifth of low-paid workers managed to move to better paid jobs. The living wage is calculated at £7.85 an hour nationally, or £9.15 in London – much higher than the legally enforceable £6.50 minimum wage.

As many people from working families are now in poverty as from workless ones, partly due to a vast increase in insecure work on zero-hours contracts, or in part-time or low-paid self-employment. Nearly 1.4 million people are on the controversial contracts that do not guarantee minimum hours, most of them in catering, accommodation, retail and administrative jobs. Meanwhile, the self-employed earn on average 13% less than they did five years ago, the foundation said. Average wages for men working full time have dropped from £13.90 to £12.90 an hour in real terms between 2008 and 2013 and for women from £10.80 to £10.30.

Poverty wages have been exacerbated by the number of people reliant on private rented accommodation and unable to get social housing, the report said. Evictions of tenants by private landlords outstrip mortgage repossessions and are the most common cause of homelessness. The report noted that price rises for food, energy and transport have far outstripped the accepted CPI inflation of 30% in the last decade. Julia Unwin, chief executive of the foundation, said the report showed a real change in UK society over a relatively short period of time. “We are concerned that the economic recovery we face will still have so many people living in poverty. It is a risk, waste and cost we cannot afford: we will never reach our full economic potential with so many people struggling to make ends meet.

Central banks can’t create growth.

• New Abnormal Means Relying on Central Banks for Growth (Bloomberg)

The “new normal” may be new. It’s hardly normal. The “new abnormal” would be more apt, according to reports published this month by Ed Yardeni and ING’s Mark Cliffe in London. “Dictionaries define ‘normal’ as regular, usual, healthy, natural, orderly, ordinary, rational,” Cliffe said Nov. 7. “It is hard to use those words to describe the current performance of the world economy and financial markets.” Among signs of irregularity since Pimco popularized the expression “new normal” in 2009 to describe an environment of below-average economic growth: Central banks are still deploying near-zero interest rates or quantitative easing six years after the financial crisis, yet output, inflation, business investment and wages remain mostly subpar. In financial markets, equities are hitting new highs as bond yields probe new lows. Even as the U.S. shows signs of strength, commodities are slumping.

The lesson for Yardeni is that by running to the rescue every time asset prices swooned in the past two decades, central bankers’ prescriptions distorted economies. “If a central bank moderates recessions, then speculative excesses are likely to build up much more during the booms and never get fully cleaned out,” Yardeni, a former chief economist at Deutsche Bank, said in a Nov. 19 report. “So each financial crisis gets progressively worse than the previous one, forcing the central bank to provide even more easy money to avert a financial meltdown.” Cliffe at ING is less willing than Yardeni to lambaste central banks, noting it’s hard to say how bad a recession may have occurred without their aid. Still, he agrees that policy makers now find themselves having to keep an eye on markets as much as the economies when setting policy.

“For now, the Federal Reserve, the European Central Bank and the Bank of England prefer not to contemplate this dire possibility.”

• Why We Can’t Afford Another Financial Crisis (Guardian)

A look into the future: David Cameron’s nightmare has come true; the slowdown in the global economy has turned into a second major recession within a decade. In those circumstances, there would be two massive policy challenges. The first would be how to prevent the recession turning into a global slump. The second would be how to prevent the financial system from imploding. These are the same challenges as in 2008, but this time they would be magnified. Zero interest rates and quantitative easing have already been used extensively to support activity, which would leave policymakers with a dilemma. Should they double down on QE or come up with more radical proposals – drops of helicopter money or using QE for specified purposes, such as investment in green energy?

For now, the Federal Reserve, the European Central Bank and the Bank of England prefer not to contemplate this dire possibility. They will deal with it if it happens, but are assuming it won’t. More explicit plans have been drawn up for the big banks. The concern here is obvious. The bailouts last time played havoc with the public finances and the still incomplete repair job has required unpopular austerity. Governments are not flush enough to contemplate a second wave of bailouts. Even if they had the money, they know just how voters would react if there was talk of bailing out the bankers a second time.

They’ll just cut again. Or maybe even just devalue the yuan overnight.

• PBOC Bounce Seen Short Lived as History Defies Bulls (Bloomberg)

China’s benchmark stock index rose to a three-year high after the central bank’s surprise interest rate cut late last week. Recent history suggests the gains won’t last long. While the Shanghai Composite Index climbed 1.9% today, six of the past seven cuts to interest rates and reserve requirements have been followed by declines in stock prices over the next two months. The last time the PBOC lowered lending and deposit rates, in July 2012, the benchmark index fell 7.4%, according to data compiled by Bloomberg. The rate cut, announced after the close of regular trading in China on Nov. 21, underlines concern that a slowdown in the world’s second-largest economy is deepening. Factory production rose 7.7% in October from a year earlier, the second-weakest pace since 2009, while retail sales missed economists’ forecasts.

China’s economy expanded 7.3% in the three months ended September and it’s projected to grow this year at the slowest pace since 1990 amid weakness in the property market and manufacturing. “In the short term, it’s positive, but in the long term, the economic slowdown is probably the main driver of the market,” Lucy Qiu, an emerging markets analyst at UBS Wealth Management, which has $1 trillion in invested assets, said by phone from New York on Nov. 21. “This announcement came after a slew of underperforming economic releases. It kind of shows the government is determined to support growth, but going forward we really have to look at the data.” The PBOC has cut reserve requirements for the nation’s largest lenders three times and lowered benchmark rates three times since late 2011.

Policy makers said in a Nov. 21 statement that the move in interest rates was “a neutral operation and doesn’t mean any change in monetary policy direction.” As China is still able to keep medium to high growth rates, it “has no need to take strong stimulus measures, and the direction of prudent monetary policy won’t change,” the central bank said. China’s retail inflation held at the slowest pace since January 2010 last month. Consumer prices increased 1.6%, matching September’s rate, while producer prices fell for a record 32nd month, slumping 2.2%.

Unintended consequences?!

• China Rate-Cut Likely To Hurt Banks, Curb New Loans To Small Borrowers (Reuters)

China’s latest interest rate cut is set to dent the profitability of domestic lenders, especially mid-sized banks, which are already suffering from higher bad loans and a slowdown in profit growth. The central bank unexpectedly cut rates late on Friday, stepping up efforts to support small and medium-sized enterprises (SMEs) which are struggling to repay loans and access credit, as the economy slides to its slowest growth in nearly a quarter of a century. It slashed the one-year benchmark lending rate by 40 basis points to 5.6% while lowering the one-year benchmark deposit rate by 25 basis points to 2.75%. The narrowing of interest rate margins will eat into lenders’ profitability, with Cinda Securities’ chief strategist, Jiahe Chen, predicting it will cut profits by up to 5%. Interest margins generated from lending have already been shrinking for second-tier lenders, which have been squeezed by competition from online financiers and a rise in funding costs stemming from an industry tussle for deposits.

Fitch Ratings downgraded its credit rating of China Guangfa Bank, a medium-sized lender, two days before the rate-cut announcement, and said the level of off-balance-sheet lending among second-tier banks was a concern. The squeeze on profits will make it tougher for lenders to raise capital to meet new international rules designed to protect depositors from banking collapses. Retained profits are one way in which banks can build up regulatory capital. “In the past when Chinese banks disbursed loans, they mainly relied on profits from their own capital to replenish their capital,” Jiang Jianqing, chairman of China’s biggest commercial bank, the Industrial and Commercial Bank of China, told a conference in Beijing on Saturday. The PBoC said in announcing the rate cut that it wanted to help smaller firms gain access to credit. While the measures may ease the financing costs of these firms’ existing loans, it is unlikely to encourage banks to write new loans to lower-rung borrowers, bankers said.

Bad debt is China’s biggest conundrum. How can they ever get out other than through defaults?

• Bad News Mounts for Chinese Banks, Funds Grow More Bullish (Bloomberg)

China’s banks, already saddled with mounting bad debt, face the risk of sagging profit growth after an interest-rate cut slashed their margins on loans. The twist: some investors are getting more optimistic, not less, about the outlook for the industry’s shares. Victoria Mio, chief investment officer for China at Robeco Hong Kong, whose parent company oversees about €237 billion ($294 billion), said Nov. 21 that bank stocks were very attractive because they were priced at levels that assumed an economic “hard landing.” Hours later, the central bank cut the one-year lending rate by 0.4 percentage point and the one-year deposit rate by 0.25 percentage point. Afterward, Mio said sustained monetary easing may drive an economic rebound and a jump in banks’ share prices. She was “more positive” on the stocks.

Chinese banks are trading at an average 4.8 times estimated earnings for this year, the lowest globally for lenders with a market value of more than $10 billion, according to data compiled by Bloomberg. Another fund manager, Baring Asset Management Ltd.’s Khiem Do, said he was “still bullish” on banks after the rate move and that dividends of more than 6% would become even more attractive as interest rates fall. “You tell me which banks in the world are paying out this yield, and making money, and working in an environment where the economy is growing at about 7% per annum,” he said earlier by phone. Do helps oversee about $60 billion as Hong Kong-based head of Asian multi-asset strategy. Ma Kunpeng, a Shanghai-based analyst at Sinolink Securities Co., has a buy rating on the industry. He said banks’ share prices have fallen even when earnings have exceeded expectations because investors have focused more on “perceived risks” than profits.

China’s economy doesn’t function without shadow banks. There might be a hard lesson for Beijing in the offing here.

• Property, Manufacturing Woes Help Trim China’s Shadow Banking (Reuters)

A bid by China to rein in its “shadow banking” activity is producing results, thanks to slowing economic growth and tighter regulation. But some success for a policy drive to curb risky lending is not all good news for Beijing, as smaller companies may face even bigger struggles to find funding. A cut in interest rates, announced by Beijing on Friday, is unlikely to help them much. Shadow banking includes off-balance-sheet forms of bank finance plus lending by non-traditional institutions, all of which is less regulated than formal lending and thus considered riskier. At the end of 2013, China had the world’s third-largest shadow banking sector, according to the Financial Stability Board, a task force set up by the G-20 economies. It estimated that Chinese assets of “other financial intermediaries” than traditional ones were then just under $3 trillion.

In the three months ended Sept. 30, the shadow banking portion of what China calls total social financing – a broad measure of liquidity in the economy – contracted for the first time on a quarterly basis since the 2008/09 financial crisis. Loans extended by trust companies fell by roughly 100 billion yuan ($16.33 billion). Bankers’ acceptances, a short-term method of financing regularly used by manufacturers, dropped 668.3 billion yuan, according to Reuters calculations based on central bank data. October lending data, released last week, showed further contractions in these types of shadow banking. Bankers’ acceptances and trust loans “fall into categories that have been squeezed by tightening regulations in the last few months, so it’s an ongoing trend,” said Donna Kwok, an economist at UBS in Hong Kong.

“What can be abolished by laws and decrees is merely the right of the capitalists to receive interest. But such laws would bring about capital consumption and would very soon throw mankind back into the original state of natural poverty.”

• The Consequences of Imposing Negative Interest Rates (Tenebrarum)

Ever since the ECB has introduced negative interest rates on its deposit facility, people have been waiting for commercial banks to react. After all, they are effectively losing money as a result of this bizarre directive, on excess reserves the accumulation of which they can do very little about. At first, only a small regional bank, Deutsche Skatbank, imposed a penalty rate on large depositors – slightly in excess of the 20 basis points banks must currently pay for ECB deposits. It turns out this was a Trojan horse. Other banks were presumably watching to see if depositors would flee Skatbank, and when that didn’t happen, Commerzbank decided to go down the same road. However, there is an obvious flaw in taking such measures – at least is seems obvious to us. The Keynesian overlords at the central bank who came up with this idea have failed to consider a warning Ludwig von Mises once uttered about the attempt to abolish interest by decree.

Obviously, the natural interest rate can never become negative, as time preferences cannot possibly become negative: ceteris paribus, consumption in the present will always be preferred to consumption in the future. Mises notes that if the natural interest rate were to decline to zero, all consumption would stop – we would die of hunger while investing all of our resources in capital goods, i.e., while directing all of our efforts and funds toward production for future consumption. This is obviously a situation that would make no sense whatsoever – it is simply not possible for this to happen in the real world of human action. Mises warns however that if interest payments are abolished by decree, or even a negative interest rate is imposed by decree, owners of capital will indeed begin to consume their capital – precisely because want satisfaction in the present will continue to be preferred to want satisfaction in the future regardless of the decree. This threatens to eventually impoverish society and reduce it to a state of penury:

If there were no originary interest, capital goods would not be devoted to immediate consumption and capital would not be consumed. On the contrary, under such an unthinkable and unimaginable state of affairs there would be no consumption at all, but only saving, accumulation of capital, and investment. Not the impossible disappearance of originary interest, but the abolition of payment of interest to the owners of capital, would result in capital consumption.

The capitalists would consume their capital goods and their capital precisely because there is originary interest and present want-satisfaction is preferred to later satisfaction. Therefore there cannot be any question of abolishing interest by any institutions, laws, and devices of bank manipulation. He who wants to “abolish” interest will have to induce people to value an apple available in a hundred years no less than a present apple. What can be abolished by laws and decrees is merely the right of the capitalists to receive interest. But such laws would bring about capital consumption and would very soon throw mankind back into the original state of natural poverty.”

Because they’re desperate.

• Why Countries Wage Currency Wars (A. Gary Shilling)

The U.S. dollar has been on a tear this year, rising against the currencies of virtually all major developed economies. What we’re seeing around the world is intense – and in some cases, deliberate – devaluations. What’s going on and what are the investment implications? One reason for the devaluations is that, when economic growth is weak – as it has been globally for five years – governments feel tremendous pressure to increase exports and reduce imports to restore growth. Often that means lowering the value of the currency so that products sent abroad are relatively less expensive and those coming into the country more so. The European Central Bank, for example, wants to depress the euro to keep deflation at bay. The euro’s earlier strength drove down import prices, forcing domestic producers who compete with imports to slash their prices. As a result, consumer price inflation moved steadily toward zero. It was a mere 0.4% in October versus a year earlier.

The euro-zone economy remains stagnant, with a third recession since 2007 a possibility. Unemployment is high. Youth unemployment tops 25% in many countries; it exceeds 50% in Spain and Greece. Meanwhile, consumer sentiment, which never recovered from the last recession, is again dropping. In early June, the ECB responded by cutting its benchmark interest rate from 0.25% to 0.15% and introducing a penalty charge of 0.1% on reserves it holds for member banks. While these measures were more symbolic than substantive, the euro slid in reaction. In September, the ECB started to make up to €1 trillion in cheap, four-year loans available to member banks, provided they made more credit available to the private sector. Still, these actions didn’t seriously depress the euro, so ECB President Mario Draghi in September announced a further cut in the overnight interest rate to 0.05% and an increase in the penalty rate for member-bank deposits to 0.2%.

In October, the ECB purchased a broad array of securities, including bonds backed by auto loans, home mortgages and credit-card debt, to encourage lenders to offer more credit to companies. Again, these actions have proved more symbolic than substantive, but the euro has weakened a bit further. While the ECB will probably end up with outright quantitative easing in one form or another, keep in mind that QE is less effective in the euro area. Financing is concentrated in the banks, which account for 70% of corporate financing, not in bond markets as in the U.S., where QE works its way into the economy rapidly. Also, weak euro-zone banks are weighed down by bad loans, anemic profits and the need to raise capital to meet new regulatory requirements. In addition, there are 18 euro-area countries and, therefore, 18 separate bond markets for the ECB to consider.

Magic?!

• How the EU Plans to Turn $26 Billion Into $390 Billion (Bloomberg)

The European Union is planning a €21 billion ($26 billion) fund to share the risks of new projects with private investors, two EU officials said. The new entity is designed to have an impact of about 15 times its size, making it the anchor of the EU’s €300 billion investment program, said the officials, who asked not to be named because the plans aren’t final. European Commission President Jean-Claude Juncker is due to announce the three-year initiative this week. The commission will pledge as much as €16 billion in guarantees for the vehicle, which will also include €5 billion from the European Investment Bank, the officials said. Loans, lending guarantees and stakes in equity and debt will be part of its toolbox, with the goal to jumpstart private risk-taking so that stalled projects can get off the ground.

Juncker’s investment plan aims to combine EU resources and regulatory changes “to crowd in more private investment in order to make real investments a reality,” EU Vice President Jyrki Katainen said Nov. 14 in Bratislava. The plan is one element of the EU’s economic strategy and “not a magic wand with which we will be able to miraculously invest ourselves out of a difficult economic climate,” he said. Europe is struggling to spur economic growth as it emerges only slowly from waves of crisis. The 18-nation euro area is forecast to see growth of just 0.8% this year, according to EU forecasts, while the region’s unemployment rate of 11.5% masks rates of about 25% in Greece and in Spain. While the Juncker proposal involves seeding investment in infrastructure and other fields, the €21 billion sum with a proposed leverage rate of 15 times risks disappointing markets.

EU consumer data coming this week.

• Draghi’s About to Find Out How Urgent His Call for Action Has Become (Bloomberg)

Mario Draghi is about to find out just how urgent his call for action has become. One week after the European Central Bank president vowed to revive inflation “as fast as possible,” policy makers will receive a glimpse on just how feeble cost pressures are now in the euro region. Economists forecast data on Nov. 28 will show consumer-price growth matching the weakest since 2009. That would add to the drumroll for a stimulus debate at the Dec. 4 meeting as panels of officials study possible new measures and prepare to cut their economic outlook. While Draghi has stoked pressure toward sovereign-bond buying, colleagues from Germany to the Netherlands are unconvinced quantitative easing is warranted, and his vice president suggested at the weekend that the ECB might hold off until next year. Spanish government bond yields fell today on speculation the ECB will start buy sovereign debt.

“The stakes are high and the risks are asymmetric,” said Frederik Ducrozet, an economist at Credit Agricole in Paris. “A drop in inflation, even a small one, could push the ECB to do something more in December. On the other hand if there is an upside surprise, that buys them time.” Inflation data for November are forecast to show a dip to 0.3% from 0.4%, while economic confidence is seen declining and October unemployment staying at 11.5%, according to economists surveyed by Bloomberg News before those reports this week.

Deflation at work.

• UK Supermarket War Turns Smaller Food Suppliers Into ‘Cannon Fodder’ (Guardian)

Food producers have become cannon fodder in the bitter supermarket price war, according to accountancy firm Moore Stephens, which found 28% more specialist manufacturers have gone into insolvency this year than last. In the year to September, 146 food producers went into insolvency, including wholesale bakeries, pasta makers, fish processors and ready meal manufacturers. In one of the larger cases, 170 jobs were lost when Sussex-based fresh pasta maker Pasta Reale went into administration in August after it lost three major supermarket contracts in a year. Duncan Swift, head of the food advisory group at Moore Stephens, said: “The supermarkets are going through the bloodiest price war in nearly two decades and are using food producers as the cannon fodder. UK supermarkets are trying to compete on price with Aldi and Lidl but with profit margins that are far higher than these discount chains.

“To try and make the maths work, the big supermarkets are putting food producers under so much pressure that we have seen a sharp increase in the number of producers failing.” The rise in insolvencies among food suppliers is in stark contrast to the 8% fall in liquidations in the economy as a whole over the same period. Swift said that because supermarket buyers’ bonuses were based on securing cash contributions from suppliers, they were being hit with “spurious deductions”, cancellations at short notice and threats to take them off the supplier list.

Highlighting contracts where suppliers contribute to supermarkets’ costs, he said: “Supplier contributions cause major cashflow problems for food producers and can tip them into insolvency. It’s a raw deal for food producers, who need the supermarkets to reach the public, but who can’t afford the terms of business that the supermarkets foist on them.” The extent of these contributions has come into the spotlight this year after Tesco admitted it had found a £263m black hole in its accounts relating to the way it booked payments from suppliers.

This is OPEC’s biggest problem, followed closely by infighting within the cartel. Agreements won’t be worth the paper they’re written on. Who’s going to check production?

• ‘OPEC’s Easy Days Setting Oil Production Are Over’ (Bloomberg)

The days when OPEC members could all but guarantee consensus when deciding production levels for oil are long gone, according to a veteran of almost two decades of the group’s meetings. The global glut of crude, which has contributed to a 30% decline in prices since June 19, has left the organization disunited and dependent on non-members to shore up the market, said former Qatari Oil Minister Abdullah Bin Hamad Al Attiyah. The 12-member Organization of Petroleum Exporting Countries is scheduled to meet in Vienna on Nov. 27. “OPEC can’t balance the market alone,” Al Attiyah, who participated in the group’s policy meetings from 1992 to 2011, said in a Nov. 19 phone interview. “This time, Russia, Norway and Mexico must all come to the table. OPEC can make a cut, but what will happen is that non-OPEC supply will continue to grow. Then what will the market do?”

Sounds very bearable.

• Russia Losing ‘Up To $140 Billion’ From Sanctions, Oil Drop (Reuters)

Russia is suffering losses at a rate of about $40 billion per year because of Western sanctions and $90-100 billion from the drop in the oil price, Finance Minister Anton Siluanov said on Monday. The admission came on the same morning that a central bank official said that banking profits could be 10% lower in 2014, compared to the previous year. External markets are largely closed for Russian banks and companies, some of which – including top banks Sberbank and VTB – are under Western sanctions over Moscow’s role in the Ukraine crisis. Banks’ profits and margins are also under pressure because they have to serve increased domestic demand for loans, while their sources of capital and liquidity are limited.

That’s what you get in a world run on zombie money.

• Demand Set to Outstrip the $100 Trillion Bond Market Again in 2015 (Bloomberg)

Even in the $100 trillion market for bonds worldwide, one of the most persistent dilemmas facing potential buyers is a dearth of supply. Demand for debt securities has surpassed issuance five times in the past seven years, according to data compiled by JPMorgan. The shortfall is set to continue into 2015, with the New York-based firm predicting demand globally will outstrip supply by $400 billion as central banks in Japan and Europe step up their own debt purchases. The mismatch helps to explain why bond yields worldwide have fallen by more than half since the financial crisis in 2008 to a record-low 1.51% in October, even as borrowing by governments, businesses and consumers added $30 trillion to the market for debt securities. Now, with a global economic slowdown threatening to hold back the U.S. recovery and few signs of inflation anywhere in the developed world, the shortage of bonds may temper the rise in yields forecasters project next year.

“It will keep global yields lower than they would be otherwise,” Chris Low, the New York-based chief economist at FTN Financial, said in a telephone interview on Nov. 19. The demand for bonds “reflects disappointing global growth and that’s been a consistent theme.” Potential bond buyers are poised to spend $2.4 trillion next year on a net basis, while borrowers will issue an estimated $2 trillion of debt, according to JPMorgan, the top-ranked firm for fixed-income research in the U.S. and Europe by Institutional Investor magazine. Since the end of 2007, JPMorgan estimates the potential bond demand has exceeded supply by more than $2.5 trillion, including a gap almost a half-trillion dollars this year. The Bank for International Settlements estimates the amount of bonds outstanding has surged more than 40% since 2007 as countries such as the U.S. increased deficits to pull their economies out of recession and companies locked in low-cost financing as central banks dropped interest rates. Even so, a shortfall emerged.

How to shoot yourself in the foot: tell banks they need more deposits, but enact low interest policies that drain them away. All part of the same brilliant plan. They had a visit from Krugman, didn’t they?

• Swedish Banks Face Deposit Drain as Interest Rates Slump (Bloomberg)

Sweden’s biggest banks could see deposits plunge as record-low interest rates prod households to start seeking higher returns elsewhere. Net deposit inflows declined to 4.4 billion kronor ($589 million) in the third quarter from 44.3 billion kronor the prior quarter, according to Statistics Sweden. While the period typically sees a seasonal decline, deposits were less than half the 10.2 billion kronor recorded a year earlier. While the financial crisis initially saw an influx of deposits into Nordea Bank and other Swedish lenders amid a flight to safety, record-low interest rates are now driving savers into riskier assets. Swedish bank depositors earn on average about 0.4%, while the country’s benchmark stock index has returned more than 8% this year. “We’ve never had such big savings in rates but they have now hit the floor and will return very little in the coming five to seven years,” Claes Hemberg, an economist at Avanza Bank, which offers online trading accounts as well as deposit accounts, said by phone Nov. 20.

“That knowledge hit home when the Riksbank cut rates to zero and it’s now obvious that there is nothing there to fetch. It’s a real U-turn.” The trend threatens to erode a cheap and stable funding source for banks just as regulators demand more. Swedes have about 60% to 65% of their savings in bank accounts or bonds and the rest in stocks, down from about 70% in 2000, according to Avanza. The shift comes amid a campaign by policy makers, including former Finance Minister Anders Borg, to urge banks to reduce their reliance on market funding and increase deposits. The Financial Stability Council, comprised of the Riksbank, the government, the debt office and the regulator, earlier this year said risks that need to be kept under surveillance include bank reliance on market funding in foreign currency.

1.5°C is lowballing it. There is no doubt we’re looking at 2ºC minimum.

• World Locked Into ‘Alarming’ Global Warming: World Bank (CNBC)

The world is locked into 1.5°C global warming, posing severe risks to lives and livelihoods around the world, according to a new climate report commissioned by the World Bank. The report, which called on a large body of scientific evidence, found that global warming of close to 1.5°C above pre-industrial times – up from 0.8°C today – is already locked into Earth’s atmospheric system by past and predicted greenhouse gas emissions. Such an increase could have potentially catastrophic consequences for mankind, causing the global sea level to rise more than 30 centimeters by 2100, droughts to become more severe and placing almost 90% of coral reefs at risk of extinction. The World Bank called on scientists at the Potsdam Institute for Climate Impact Research and Climate Analytics and asked them to look at the likely impacts of present day (0.8°C), 2°C and 4°C warming on agricultural production, water resources, cities and ecosystems across the world.

Their findings, collated in the Bank’s third report on climate change published on Monday, specifically looked at the risks climate change poses to lives and livelihoods across Latin America and the Caribbean, Eastern Europe and Central Asia, and the Middle East and North Africa. In the report entitled “Turndown the heat – Confronting the new climate normal,” scientists warned that even a seemingly slight rise in global warming could have dramatic effects on us all. “A world even 1.5°C [warmer] will mean more severe droughts and global sea level rise, increasing the risk of damage from storm surges and crop loss and raising the cost of adaptation for millions of people,” the report with multiple authors said. “These changes are already underway, with global temperatures 0.8 degrees Celsius above pre-industrial times, and the impact on food security, water supplies and livelihoods is just beginning.”

Debt Rattle November 15 2014

Nov 152014

November 15, 2014 Posted by Raúl Ilargi Meijer at 11:53 am Finance Tagged with: benefits, hackers, lost decade, oil, pope, Putin, recession, Shale, small business, wages, Xi 2 Responses »

DPC Elephants in Luna Park promenade, Coney Island 1905

• Oil Price Slump To Trigger New US Debt Default Crisis (Telegraph)

• How Low Can the Price of Oil Plunge? (WolfStreet)

• Russia Braces for ‘Catastrophic’ Drop in Oil Prices (Bloomberg)

• What Really Happened In Beijing Between Putin, Obama and Xi (Salon)

• Can Low Oil Prices Be Good for the Environment? (AP)

• More Than 4 In 10 Americans Still Exhaust Unemployment Benefits (MarketWatch)

• Most Americans Make Less Than $20 Per Hour (MarketWatch)

• The Reason Small Businesses Are Disappearing (Zero Hedge)

• Italy’s Crazy New Economy from Hell Suffocates Small Businesses (WolfStreet)

• Beppe Grillo: The Euro Is Destroying The Italian Economy (Zero Hedge)

• Eurozone Dodges Recession But Submerges In ‘Lost Decade’ (AEP)

• Who Will Pay for China’s Bust? (Bloomberg)

• China Slowdown Deepens as Targeted Stimulus Fails (Bloomberg)

• Take Cover Now – They Don’t Ring A Bell At The Top (David Stockman)

• Asset Bubbles Are Top Concern for US Heartland’s Fed Banker (Bloomberg)

• Fed’s Bullard Still Wants Rate Rise in Q1 2015 (Dow Jones)

• Turkish Hackers Crack Electric Utility; Delete $670 Billion Of Pending Bills (ZH)

• California Pension Funds Are Running Dry (LA Times)

• Pope Francis’s ‘Holy War’ On Capitalism And Toxic Inequality (Paul B. Farrell)

The end of shale as we know it.

• Oil Price Slump To Trigger New US Debt Default Crisis (Telegraph)

Remember the global financial crisis, triggered six years ago when billions of dollars of dodgy loans – doled out by banks to subprime borrowers and then resold numerous times on international debt markets – began to unravel and default? Stock markets plunged, banks collapsed and the entire global financial system teetered on the brink of catastrophe. Well a similarly chilling economic scenario could be set off by the current collapse in oil prices. Based on recent stress tests of subprime borrowers in the energy sector in the US produced by Deutsche Bank, should the price of US crude fall by a further 20pc to $60 per barrel, it could result in up to a 30pc default rate among B and CCC rated high-yield US borrowers in the industry. West Texas Intermediate crude is currently trading at multi-year lows of around $75 per barrel, down from $107 per barrel in June. “A shock of that magnitude could be sufficient to trigger a broader high-yield market default cycle, if materialised,” warn Deutsche strategists Oleg Melentyev and Daniel Sorid in their report.

Five years ago at the beginning of what has become known as the US shale oil revolution, drillers started to load up on debt to fund their operations and acquire new acreage as vast areas of North America started to open up for exploration. In 2010, energy and materials companies made up just 18pc of the US high-yield index – which tracks sub-investment grade borrowers – but today they account for 29pc of the measure after drilling firms spent the past five years borrowing heavily to underwrite the operations. The result of this debt splurge has been a spectacular rise in US oil and gas output. Latest estimates suggest that by the end of the decade the US will have outstripped even Saudi Arabia and Russia in terms of oil production. The development of new shale resources in North America and the opening up of fields in the Arctic seas off Alaska could see the country pumping 14.2m barrels per day (bpd) of oil and petroleum liquids by 2020, up from 7.5m bpd in 2013.

This rush to pump more oil in the US has created a dangerous debt bubble in a notoriously volatile segment of corporate credit markets, which could pose a wider systemic risk in the world’s biggest economy. By encouraging ever more drilling in pursuit of lower oil prices, the US Department of Energy has unleashed a potential economic monster and pitched these heavily debt-laden shale oil drilling companies into an impossible battle for market share against some of the world’s most powerful low-cost producers in the Organisation of Petroleum Exporting Countries (Opec). It’s a battle the US oil fracking companies won’t win.

Excellent piece by Wolf Richter. If you want to know where oil is going, read it.

• How Low Can the Price of Oil Plunge? (WolfStreet)

It is possible that a miracle intervenes and that the price of oil bounces off and zooms skyward. We’ve seen stocks perform these sorts of miracles on a routine basis, but when it comes to oil, miracles have become rare. As I’m writing this, US light sweet crude trades at $76.90 a barrel, down 26% from June, a price last seen in the summer of 2010. But this price isn’t what drillers get paid at the wellhead. Grades of oil vary. In the Bakken, the shale-oil paradise in North Dakota, wellhead prices are significantly lower not only because the Bakken blend isn’t as valuable to refiners as the benchmark West Texas Intermediate, but also because take-away capacity by pipeline is limited.

Crude-by-rail has become the dominant – but more costly – way to get the oil from the Northern Rockies to refineries on the Gulf Coast or the East Coast. These additional transportation costs come out of the wellhead price. So for a particular well, a driller might get less than $60/bbl – and not the $76.90/bbl that WTI traded for at the New York Mercantile Exchange. Fracking is expensive, capital intensive, and characterized by steep decline rates. Much of the production occurs over the first two years – and much of the cash flow. If prices are low during those two years, the well might never be profitable. Meanwhile, North Sea Brent has dropped to $79.85 a barrel, last seen in September 2010.

So the US Energy Information Administration, in its monthly short-term energy outlook a week ago, chopped down its forecast of the average price in 2015: WTI from $94.58/bbl to $77.55/bbl and Brent from $101.67/bbl to $83.24/bbl. Independent exploration and production companies have gotten mauled. For example, Goodrich Petroleum plunged 71% and Comstock Resources 58% from their 52-week highs in June while Rex Energy plunged 65% and Stone Energy 54% from their highs in April. Integrated oil majors have fared better, so far. Exxon Mobil is down “only” 9% from its July high. On a broader scale, the SPDR S&P Oil & Gas Exploration & Production ETF is down 28% from June – even as the S&P 500 set a new record. So how low can oil drop, and how long can this go on?

Did they know beforehand it would come?

• Russia Braces for ‘Catastrophic’ Drop in Oil Prices (Bloomberg)

President Vladimir Putin said Russia’s economy, battered by sanctions and a collapsing currency, faces a potential “catastrophic” slump in oil prices. Such a scenario is “entirely possible, and we admit it,” Putin told the state-run Tass news service before attending this weekend’s Group of 20 summit in Brisbane, Australia, according to a transcript e-mailed by the Kremlin today. Russia’s reserves, at more than $400 billion, would allow the country to weather such a turn of events, he said. Crude prices have fallen by almost a third this year, undercutting the economy in Russia, the world’s largest energy exporter.

Even the central bank’s forecast of zero growth next year may be in danger as the International Energy Agency forecasts a deepening rout in oil prices as the market enters a period of weaker demand. Brent crude, the grade traders look at for pricing Russia’s Urals main export blend, has collapsed into a bear market as leading members of the Organization of Petroleum Exporting Countries resisted calls to cut production and U.S. output climbed to the highest level in three decades because of the shale boom. Brent is heading for its eighth weekly decline after sliding below $80 for the first time in four years. Futures were at $78.29 a barrel in London today, down 6.1% this week and 29% this year.

Must read from Patrick Smith at Salon.

• What Really Happened In Beijing Between Putin, Obama and Xi (Salon)

By way of events on the foreign side, the past few weeks start to resemble some once-in-a-while event in the heavens when everyone is supposed to go out and watch as the sun, moon and stars align. There are lots of things happening, and if we put them all together, the way Greek shepherds imagined constellations, a picture emerges. Time to draw the picture. The situation on the ground in Ukraine is getting messy again. Equally, events of the past year now leave Ukraine’s economy not far from sheer extinction. You have not read of this because it does not fit the approved story, but Ukraine’s heart barely beats. Further east, we hear in the financial markets that the ruble’s decline brings Russia to the brink of another financial collapse. Let’s see. Oil prices are now below $80 a barrel. It costs me nearly $20 less to put gasoline in my car than it did a year ago, and good enough. But why has the price of crude tumbled in so short an interval? It makes little sense when you gather the facts, and – goes without saying – you get no help with that from our media.

Let’s keep on trucking. Secretary of State Kerry went to Oman for another round of talks on the Iranian nuclear question last weekend. Russia recently emerged as a potentially key part of a deal, which will be the make-or-break of Kerry’s record. In effect, he now greets Russian Foreign Minister Sergei Lavrov with one hand and punches him well below the belt with the other. Somewhere beyond our view this must make sense. En avant! Obama went to Beijing last week for a sit-down with Xi Jinping, who makes Vladimir Putin look like George McGovern when he wants to, which is not infrequently. Still in the Chinese capital, our president then attended a meeting with other Asian leaders to push a trade agreement, one primary purpose of which is to isolate China by bringing the rest of the region into the neoliberal fold. (Or trying to. Washington will never get the overladen, overimposing Trans-Pacific Partnership off the ground, in my view.)

A big item on Xi’s agenda — he was in on the Pacific economic forum, too — was the recent launch of an Asians-only lending institution intended to rival the Asian Development Bank, the World Bank affiliate doing the West’s work in the East. Being entirely opposed to people helping themselves advance without American assistance and all that goes with it, Washington used all means possible to sink this ship. When Obama got off the plane in Beijing, the Asian Infrastructure Investment Bank had $50 billion in capital and 20 members, more to come in both categories. Xi, meantime, had a productive encounter — another — with the formidable Vlad. My sources in attendance tell me both put in strong performances. In short order, Russia will send enough natural gas eastward to meet much of China’s demand and — miss this not — in the long run could price out American supplies in other Pacific markets, which are key to the success of the current production boom out West.

This is a lot of dots to connect. As I see it, the running themes in all this are two: There is constructive activity and there is the destructive. Readers may think this oversimplifies, but for this there is the ever-lively comment box below. I am willing to listen. Let’s go back to early September. On the 5th, Germany brokered a cease-fire between the Ukraine government in Kiev and the rebels in the eastern Donbass region. Washington made it plain it wanted no part of this, preferring to continue open hostilities. And then strange things happened. Less than a week after the Minsk Protocol was signed, Kerry made a little-noted trip to Jeddah to see King Abdullah at his summer residence. When it was reported at all, this was put across as part of Kerry’s campaign to secure Arab support in the fight against the Islamic State.

Stop right there. That is not all there was to the visit, my trustworthy sources tell me. The other half of the visit had to do with Washington’s unabated desire to ruin the Russian economy. To do this, Kerry told the Saudis 1) to raise production and 2) to cut its crude price. Keep in mind these pertinent numbers: The Saudis produce a barrel of oil for less than $30 as break-even in the national budget; the Russians need $105. Shortly after Kerry’s visit, the Saudis began increasing production, sure enough – by more than 100,000 barrels daily during the rest of September, more apparently to come. Last week they dropped the price of Arab Light by 45 cents a barrel, Bloomberg News just reported. This has proven a market mover, sending prices to $78 a barrel at writing.

No worries, mate, we’ll find a way to screw that up too.

• Can Low Oil Prices Be Good for the Environment? (AP)

Deepwater drilling rigs are sitting idle. Fracking plans are being scaled back. Enormous new projects to squeeze oil out of the tar sands of Canada are being shelved. Maybe low oil prices aren’t so bad for the environment after all. The global price of oil has plummeted 31% in just five months, a steep and surprising drop after a four-year period of prices near or above $100 a barrel. Not long ago a drop of that magnitude would have hit the environmental community like a gut-punch. The lower the price of fossil fuels, the argument went, the less incentive there would be to develop and use cleaner alternatives like batteries or advanced biofuels.

But at around $75 a barrel, the price is high enough to keep investments flowing into alternatives, while giving energy companies less reason to pursue expensive and risky oil fields that also pose the greatest threat to the environment. “Low prices keep the dirty stuff in the ground,” says Ashok Gupta, director of programs at the Natural Resources Defense Council. Economists and environmentalists caution that if the price goes too low, and stays there, consumption could swell and the search for alternatives could stop. They say a good price range for the environment could be somewhere between $60 and $80. As oil demand in developing countries began rising in the last decade, drillers struggled to keep up and prices began to rise. It seemed the world might be running out of oil. Investors poured money into advanced biofuels companies and battery-makers betting high oil prices would make it cheaper to drive on plant waste or electricity.

It hasn’t happened, despite some headway. Even after years of growth, electric cars accounted for just 0.4% of new vehicle sales so far this year, according to Edmunds.com. Biofuels from plant waste account for even a smaller percentage of the nation’s fuel mix. The high prices instead inspired drillers and investors to pursue oil wherever it might be found no matter the expense. They developed projects in environmentally-sensitive areas or using environmentally-destructive methods. They developed technology that has unlocked vast resources once thought out of reach. What was once a shortage now looks to be a surplus. “It was a net negative from a climate perspective,” says Andrew Logan, director of oil and gas programs at the environmental group Ceres. “It locked us into long-term dependence on oil.”

That’s when we stop counting them.

• More Than 4 In 10 Americans Still Exhaust Unemployment Benefits (MarketWatch)

The number of Americans applying for unemployment compensation is near a 15-year low, but a higher percentage than usual still don’t find jobs before their benefits run out. The percentage of people who received unemployment benefits each week until they were no longer eligible stood at a 12-month average of 41.5% in September, according to Labor Department data. In other words, more than four in 10 unemployed Americans still exhaust their benefits before finding a job. Granted, the rate has fallen sharply from a postrecession peak of 55.8% in March 2010 – the highest level since the government began keeping track in 1972. But the rate is still markedly higher vs. a 34.7% low point reached during the 2002-2006 expansion. The percentage who exhaust benefits is also well above the historical average of 35.9%. The U.S. labor market is improving, but a variety of measures such as the exhaustion rate for unemployment benefits shows that a lot more work needs to be done.

Let’s get a mortgage, shall we? And a car loan.

• Most Americans Make Less Than $20 Per Hour (MarketWatch)

According to data compiled by Goldman Sachs, most American workers earn below $20 per hour. Goldman Sachs economists David Mericle and Chris Mischaikow crunched Labor Department data that is used to generate the monthly jobs report that the market closely watches, in particular from the survey of employers. 19% of workers make less than $12.50 per hour, 32% of workers make between $12.50 and $20 per hour, 30% make between $20 and $30 an hour, 14% make between $30 and $45 per hour, and 5% make over $45 an hour. (It’s important to note that this includes all workers covered by the establishment survey, not just hourly workers; to convert annual pay to hourly pay, divide by 2080, for a standard 40-hour week.) The economists also found that, while wage growth has been soft, the fastest growth in income has come to the lowest-paid workers. And they found that the biggest driver to income growth has been rising employment, with help from rising wages and more hours worked.

See also the following article, this is not just happening in the US.

• The Reason Small Businesses Are Disappearing (Zero Hedge)

Confused why despite endless daily propaganda that the US economy is getting better – after all “just look at the record high S&P 500” – fewer and fewer Americans believe the narrative, as the Democrats and Obama found out the very hard way in last week’s midterm elections? Then the following explanation written by the owner of a small business – the segment of the US economy that has historically led every single recovery but this time was left behind – should help answer some questions.

The reason small businesses are disappearing written by a small business owner. I want to start out by saying that i am a 27 year old male with a small business in Sacramento CA. I started this business a few years ago with savings of 15k. With a lot of hard work and determination i have succeeded, but it sure as hell was not easy. I am a long time lurker and have never seen anyone go in depth about what its like to own a small business and the reason why they are disappearing. Without going into to much detail, i own a furniture store so obviously things are different then other businesses but a lot of the things are the same. I wanted to begin with the things that are killing small businesses. Also only my opinion.

Small Business Loans – Although they are not killing small business they sure as hell don’t help anyone. Unless you are opening a unique small business you are not going to get any funding. By unique i mean something along the lines of creating solar panels. According to a recent investigation by the SBA Inspector General (ill post the article if you would like), over 75% of SBA loans went to large businesses. So basically if you want to open a normal business you need a ton of collateral and a miracle to get a loan.
Permits and Licensing – In opening my specific business the first year totaled about $2000.00.
Advertising – Many small business’s cant afford to take out pages or flyers in the news paper or TV ads so they only have a few choices such as Yelp or the Penny-saver. (Don’t get me started in Yelp).
Street Advertising – While this used to be a good portion of how you get business it is now off limits. Code enforcement will not allow you to put anything outside. No balloons, signs, anything with your store name, window paint more than 50%, or any mattresses. Also delivery vehicles can not be closer than 50 feet from the curb. In my case that means behind the building.
Board of Equalization – Cant go into to much detail here but they sure as hell aren’t here to help.
Health Insurance – Now obviously with the people that have a large work force working full time they will be hit hard by obamacare, but i wanted to give you a perspective on a single person. The cheapest rate for myself and me only, and believe me i have looked around, is $250.00/month. Some might say oh that’s not bad, but let me explain what that covers, NOTHING lol. Basically if something happens to me i have to shell out 6K before insurance gets involved. Also 100 dollar co pay every time i go.
The economy – While many know that when the President comes on TV and says the economy is doing great, we all know it is not, some people don’t. Every month more people drop out of the Labor Force and the number of families on food stamps is sky rocketing. So for those of you who don’t know the economy is terrible because of all the top stories of Kim Kardashian and whoever else, lots of people in america are struggling.
Merchant Fees – This is for credit card processing machines. The machine itself costs 600.00 plus the percentages on sales and cards. Companies such as BofA charge once a year on top of the regular fees $150.00 to protect you from fraud (which they can’t even stop) and yes its mandatory. Paypal or Square seem to be the best options these days.
Fire Department – Yes even the Fire Department wants a piece. Starting last year you must do your own visual inspection and send them a check for 150! Basically if you don’t they will come to your store and give you a million violations for wasting there time.

I quoted Beppe Grillo yesterday as saying that 25% of Italy’s industry has gone sine the country joined the eurozone in 1997. That’s a scorched earth-type devastation.

• Italy’s Crazy New Economy from Hell Suffocates Small Businesses (WolfStreet)

Italy is a country of entrepreneurs and of vibrant small enterprises. Or was. Now these businesses are dying. Of its 5.3 million companies (as of December 31, 2013), 3.3 million are small, often family-owned outfits, according to Rome-based credit information provider Cerved Group. And another 900,000 are sole proprietorships, or 17% of all companies, a larger percentage than anywhere else in the EU, ahead of France (12%), Spain (10%), and Germany (10%). The remaining 1 million companies are corporations of all sizes. And life in Italy has been exceedingly tough for small outfits. Consumer spending has dropped sharply since the onset of the crisis. Industrial production continued its downward spiral in September and is down 0.5% for the first nine months of 2014 over the same period a year ago. Unemployment is 12.6%, and rising. Youth unemployment is at a catastrophic 43%, up from an already terrible 26% in 2010.

It doesn’t help that the government refuses, and I mean refuses – due to “technical” problems, as a minister explained – to pay its long overdue bills to these already strung-out businesses. It’s a shell game to lower Italy’s overall indebtedness and thus pacify the financial markets and Italy’s masters in Brussels. So this shouldn’t come as a surprise, given that the largest customer in the country, the government, refuses to pay its bills to the members of the private sector which then can’t pay their own bills: in September, non-performing loans held by Italian banks jumped 19.7% from a year ago, according to the Bank of Italy. At the same time, loans to the private sector dropped 2.3%. Economic “growth” has been negative or zero for the last 13 quarters. And this is what Italy’s glorious “recovery” from hell looks like:

My man Beppe. Perhaps still the only man in Europe who makes real sense. He says 2/3 of the Italian Parliament supports his plan for a referendum on the euro. Martin Armstrong suggests the EU may kill him before letting it happen.
See yesterday’s: The Only Man In Europe Who Makes Any Sense.

• Beppe Grillo: The Euro Is Destroying The Italian Economy (Zero Hedge)

Next week, Italy’s Beppe Grillo – the leader of the Italian Five Star Movement – will start collecting signatures with the aim of getting a referendum in Italy on leaving the euro “as soon as possible,” just as was done in 1989. As Grillo tells The BBC in this brief but stunning clip, “we will leave the Euro and bring down this system of bankers, of scum.” With two-thirds of Parliament apparently behind the plan, Grillo exclaims “we are dying, we need a Plan B to this Europe that has become a nightmare – and we are implementing it,” raging that “we are not at war with ISIS or Russia! We are at war with the European Central Bank,” that has stripped us of our sovereignty.

Beppe Grillo also said today:

It is high time for me and for the Italian people, to do something that should have been done a long time ago: to put an end to your sitting in this place, you who have dishonoured and substituted the governments and the democracies without any right. Ye are a factious crew, and enemies to all good government; ye are a pack of mercenary wretches, and would like Esau sell your country for a mess of pottage, and like Judas betray your God for a few pieces of money. Is there a single virtue now remaining amongst you? A crumb of humanity? Is there one vice you do not possess? Gold and the “spread” are your gods. GDP is you golden calf.

We’ll send you packing at the same time as Italy leaves the Euro. It can be done! You well know that the M5S will collect the signatures for the popular initiative law – and then – thanks to our presence in parliament, we will set up an advisory referendum as happened for the entry into the Euro in 1989. It can be done! I know that you are terrified about this. You will collapse like a house of cards. You will smash into tiny fragments like a crystal vase. Without Italy in the Euro, there’ll be an end to this expropriation of national sovereignty all over Europe. Sovereignty belongs to the people not to the ECB and nor does it belong to the Troika or the Bundesbank. National budgets and currencies have to be returned to State control. They should not be controlled by commercial banks. We will not allow our economy to be strangled and Italian workers to become slaves to pay exorbitant interest rates to European banks.

The Euro is destroying the Italian economy. Since 1997, when Italy adjusted the value of the lira to connect it to the ECU (a condition imposed on us so that we could come into the euro), Italian industrial production has gone down by 25%. Hundreds of Italian companies have been sold abroad. These are the companies that have made our history and the image of “Made in Italy”.

Ambrose sees is happening, but doesn’t know why.

• Eurozone Dodges Recession But Submerges In ‘Lost Decade’ (AEP)

The eurozone has averted a triple-dip recession but remains stuck in a deep structural slump, with too little momentum to create jobs or to stop a relentless rise in debt ratios. The region eked out growth of 0.2pc in the third quarter, yet Italy’s economy shrank again and has now been in contraction for over three years. Stefano Fassina, the former Italian finance minister, said “Titanic Europe” is heading for a shipwreck without a radical change of course. He warned that contractionary policies are destroying the Italian economy and called on the country’s leaders to “bang their fists of the table”. He said they should threaten an “orderly break-up” of the euro unless policies change. His comments have made waves in Rome since he is a respected figure in the ruling Democratic Party of Matteo Renzi.

While France rebounded by 0.3pc, the jump was due to a rise in inventories and a 0.8pc spike in public spending, mostly on health care. The previous quarter was revised down to minus 0.1pc. “It flatters to deceive,” said Marc Ostwald from Monument Securities. “France was basically horrible. How anybody could celebrate this as a recovery story is beyond me.” “A close reading of details is sobering. Just about all the drivers of growth are near-dead,” said Denis Ferrand, head of the French research institute Coe-Rexecode. Michel Sapin, the French finance minister, said the economy remains “too weak” to make a dent on unemployment. France’s brief rebound in employment has already sputtered out. The economy shed 34,000 jobs in the third quarter. This will not be easy to reverse since Paris has pledged to push through a further €50bn of fiscal cuts over three years to meet EU deficit targets.

Maxime Alimi from Axa said France’s public debt is likely to reach 100pc of GDP by 2017, warning that investor patience may not last. He said bond yields could rise in a “non-linear, abrupt fashion” in the next downturn. Europe is caught in limbo. The data is not weak enough to force a radical change in EMU policy, whether that might be a ‘New Deal’ blitz of investment or full-fledged quantitative easing by the European Central Bank. The risk is that the currency bloc will drift into another year in near deflationary conditions, without any catalyst for real recovery. The US Treasury Secretary, Jacob Lew, warned this week that Europe faces a “lost decade” unless surplus countries such as Germany do more to stimulate demand. “The eurozone is the epicentre of a global Keynes liquidity trap,” said Lena Komileva from G+Economics. “For the markets, the previous consensus of a periphery-led recovery has crumbled.”

” Over the past several years, loans outstanding and other exposure to China have roughly quadrupled to more than $800 billion.” Wanna bet it’s more than that?

• Who Will Pay for China’s Bust? (Bloomberg)

One reason not to worry about a Chinese credit bubble is that most of the lenders are inside the country. If there’s a wave of defaults, the logic goes, it won’t affect the global financial system in the same way as the U.S. subprime crisis in 2008.

Judging from data on global bank exposures to China, this argument is rapidly becoming less convincing.

Over the past several years, loans outstanding and other exposure to China have roughly quadrupled to more than $800 billion, according to the Bank for International Settlements, an international organization of central banks (see chart). Add in about $170 billion in derivatives, credit commitments and guarantees, and the total comes to about $1 trillion.

It’s hard to know how much of that money is used to finance the construction of buildings that won’t be filled, excess steelmaking capacity or other misadventures. The BIS does know that the cash is mostly going to Chinese banks, followed by non-bank companies.

Australian banks have increased their exposure to China at the fastest pace over the past five years, though U.K. banks still account for the largest share of lending.

Knowing more about who stands to take the biggest losses would be crucial to managing the global repercussions of a Chinese credit bust. Unfortunately, six years after the financial crisis of 2008, the world’s regulators are still very far from possessing an early-warning system that would allow them to identify – in anything close to real time – concentrations of risk. This weekend’s Group of 20 summit in Brisbane, Australia, would be a good place to try to make some progress in building that system.

It’s getting hard(er) for China to hide behind its official numbers.

• China Slowdown Deepens as Targeted Stimulus Fails (Bloomberg)

Credit growth in China weakened last month, adding to signs that the world’s second-largest economy slowed further this quarter and testing policy makers’ determination to avoid broader stimulus measures. Aggregate financing in October was 662.7 billion yuan ($108 billion), the People’s Bank of China’s said in Beijing yesterday, down from 1.05 trillion yuan in September and lower than the 887.5 billion yuan median estimate in a Bloomberg survey of analysts. Earlier this week, reports showed deceleration in industrial output and fixed-asset investment. The evidence underscores concern that, outside the U.S., the global economic outlook is deteriorating. For Premier Li Keqiang, the question is whether to stick with targeted liquidity injections or embrace nationwide monetary or fiscal easing that reignites the risk of a jump in debt. “The key is not to further expand credit, given the weak credit demand, but to lower funding costs,” said Wang Tao, chief China economist at UBS in Hong Kong. A benchmark interest rate cut “is more urgent.”

The central bank has added liquidity while refraining from broad-based interest rate or reserve requirement ratio cuts. China’s benchmark money-market rate fell for a second week on speculation it will conduct more targeted fund injections. New local-currency loans were 548.3 billion yuan, and M2 (CNMS2YOY) money supply grew 12.6% from a year earlier. New yuan loans, which measure new lending minus loans repaid, compared with economists’ median estimate of 626.4 billion yuan, while the M2 figure compared with the median estimate of 12.9%. “Sluggish domestic demand and risk-aversion among commercial banks dragged credit growth,” said Zhou Hao, a Shanghai-based economist at Australia & New Zealand. “Disappointing monetary data suggest overall growth will remain soft in the last quarter.”

And don’t you forget it. Nobody’s holding your hand anymore.

• Take Cover Now – They Don’t Ring A Bell At The Top (David Stockman)

This is getting downright stupid. After the minor 8% correction in October, the dip buyers came roaring back and the shorts got sent to the showers still another time. Earlier this morning the S&P 500 was pushing 2050 – or up 12% in less than a month. So the great con game remains in tact. The casinos run by the Fed and other central banks can’t go down for more than a few of days – until one or another central banker hints that more free money is on the way. A few weeks ago it was James Bullard hinting at a QE extension. Next was Mario Draghi pronouncing that the whole ECB is unified behind a plan to expand its already swollen balance sheet by another $1.2 trillion.

And then Haruhiko Kuroda, the certifiable madman running the BOJ, not only announced his 80 trillion yen buying scheme, but soon averred that falling oil prices – a godsend to Japan – were actually a threat to his mindless 2% inflation goal that might necessitate even more money printing. That is, after buying up 100% of the massive Japanese government bond market, the BOJ would not hesitate to monetize ETF’s, stocks, securitized real estate debt and, apparently, sea shells, if necessary. Accordingly, bounteous wealth is seemingly to be had by the three second exercise of clicking “buy” on the SPU (basket of S&P 500 stocks). Indeed, for the past 68 months running, the stock market has blown through every mini-correction, and has been traversing a near parabolic rise.

Big call for imminent rate hike from a so far pretty quiet voice inside the Fed.

• Asset Bubbles Are Top Concern for US Heartland’s Fed Banker (Bloomberg)

As a Federal Reserve bank examiner in the mid-1980s, Esther George delivered bad news to a Nebraska banker: she was downgrading overdue loans, putting his firm’s survival on the line. The owner “broke down and said, ‘This was my life’s work and your decisions are taking my bank away from me,’” George, now president of the Federal Reserve Bank of Kansas City, said in an interview. “I was absolutely sympathetic. I knew what it meant for the community.” The man was a victim of the early 1980s speculative bubble that George witnessed firsthand. Today, after the crisis of 2008-9, she sees aggressive lending and lofty asset-price valuations as evidence that financial excesses may again pose a risk to the economy. To forestall another bubble, George, 56, says it’s time for the Fed to start raising interest rates it has kept near zero since 2008. She argues that ultra-cheap credit is no longer needed to support an expansion that’s in its sixth year after the worst recession since the 1930s.

“The Fed took pretty aggressive action because we were in a fairly desperate situation,” George said. “Once we saw the economy turn, we might have removed some of those emergency measures, including zero interest rates.” Her concern with financial stability prompted her to dissent against the Fed’s accommodative policy at seven of eight Fed meetings last year. Now her warnings, along with those of fellow regional Fed bank presidents including Richard Fisher of Dallas and Charles Plosser of Philadelphia, are starting to resonate at a central bank dominated by its Washington-based Board of Governors. St. Louis Fed President James Bullard today called financial imbalances “my biggest worry going forward,” and said the Fed must avoid fanning a boom like the one in housing that could lead to another bust.

“Asset-price bubbles are the elephant in the room for monetary policy in the U.S.,” he told reporters after a speech in St. Louis. Fed officials including Chair Janet Yellen have said they are watching deteriorating leveraged-loan underwriting standards, and the central bank in September created a committee on financial stability under Vice Chairman Stanley Fischer. ‘Esther George has centered attention on the issue,’’ said Lawrence Goodman, a former U.S. Treasury official who is now president of the Center for Financial Stability in New York, an independent research organization. “There are an increasing number of converts at the Fed that financial stability matters.”

Bullard follows up on Esther George’s remarks and makes sure they’ll keep on guessing. As I said before, all Fed utterances are carefully scripted.

• Fed’s Bullard Still Wants Rate Rise in Q1 2015 (Dow Jones)

Federal Reserve Bank of St. Louis President James Bullard said low inflation in the U.S. economy is no longer enough to justify the current rock bottom setting for short-term interest rates, and he repeated his view that rates should be lifted off their current near zero levels early next year. “Inflation at the current level is not enough to justify remaining at a near-zero policy rate,” Mr. Bullard said in a speech in St. Louis. “Low inflation can justify a policy rate somewhat lower than normal, but not zero.” “Labor markets continue to improve and are approaching or even exceeding normal performance levels,” Mr. Bullard said. “Over the next year, it will become more and more difficult to point to labor market performance as a rationale for a near-zero policy rate.” He told reporters after his formal remarks that his continued expectation of 3% growth and job gains through next year means “that the best time to raise the policy rate will be at the end of the first quarter of 2015.” Mr. Bullard added, “That’s based on a forecast; data could come in differently.”

In his speech, Mr. Bullard took stock of the robust gains seen in the job market, which have come at a time where inflation has run persistently below the Fed’s 2% price rise target. In a speech Thursday, New York Fed President William Dudley said ongoing labor market weakness and inflation that is falling short of the Fed’s goal argue in favor of patience when it comes to raising rates. He, like many other Fed officials, expects short-term rates to be raised from near zero levels some time next year. In his speech Friday, however, Mr. Bullard said that the job market had recovered enough to reach long-term trend levels, and that justifies changing Fed policy. Mr. Bullard expressed some caution about the current level of inflation, which is currently at a tepid 1.4% rise, having persistently fallen short of the Fed’s goals. But he also said that despite some warning signs, he still expects prices to move back toward 2%.

Big smile on my part.

• Turkish Hackers Crack Electric Utility; Delete $670 Billion Of Pending Bills (ZH)

RedHack – a Turkish hacker collective – has hacked the website of the Turkey Electricity Transmission Company, and, as TechWorm reports, claim to have deleted the pending bills of Turkish citizens amounting to Turkish Lira 1.5 trillion (a stunning $668.5 billion). The collective, which has many hacktivism projects against Turkey’s internet censorship laws, posted a video of how they deleted the debt of millions of Turks. As TechWorm reports,

RedHack the Turkey’s number one hacker collective today hacked into the website of the Turkey Electricity Transmission Company website. They then did something which will cheer a lot of Turkish citizens who owe large amounts to the Electricity department. They have claimed that they have deleted the pending bill of Turkish citizens amounting to Turkish Lira 1.5 trillion.

Redhack, are a Turkish hacker collective. They follow the Marxist–Leninist ideology and were founded in 1997. The RedHack has so far hacked several high profile Turkish websites like Council of Higher Education, Turkish police forces, the Turkish Army, Türk Telekom, and the National Intelligence Organization and many other websites.

“Somebody who is knowledgeable and interested, is several clicks away from the ugly mess that will define California’s financial future,”

• California Pension Funds Are Running Dry (LA Times)

A decade ago, many of California’s public pension plans had plenty of money to pay for workers’ retirements. All that has changed, according to a far-reaching package of data from the state controller. Taxpayers are now on the hook for billions of dollars more to cover the future retirements of public workers, with the bill widely varying depending on where they live. The City of Los Angeles Fire and Police Pension System, for instance, had more than enough funds in 2003 to cover its estimated future bill for workers’ retirement checks. A decade later, it is short $3 billion. The state’s pension goliath, the California Public Employees’ Retirement System, had $281 billion to cover the benefits promised to 1.3 million workers and retirees in 2013. Yet it needed an additional $57 billion to meet future obligations.

The bill at the state teachers’ pension fund is even higher: It has an estimated shortfall of $70 billion. The new data from a website created by state Controller John Chiang come at a time of growing anger from taxpayers over the skyrocketing cost of public workers’ retirements. Until now, the bill for those government pensions was buried deep in the funds’ financial reports. By making this data available, Chiang is bound to stir debate about how taxpayers can afford to make retirement more comfortable for public workers when private-sector employees’ own financial futures have become less secure. For most non-government workers, fixed monthly pensions are increasingly rare.

“Somebody, who is knowledgeable and interested, is several clicks away from the ugly mess that will define California’s financial future,” said Dan Pellissier, president of California Pension Reform, a Sacramento-area group seeking to stem rising statewide retirement costs. Chiang has assembled reams of data from 130 public pension plans run by the state, cities and other government agencies. It’s now accessible at his website, ByTheNumbers.sco.ca.gov. In nearly eight years as controller, essentially the state’s paymaster, Chiang has made good on a commitment to make government financial records more transparent and accessible.

” .. he speaks with a powerful moral authority — something totally missing from American political leaders who are ideologically guided by atheist Ayn Rand.”

• Pope Francis’s ‘Holy War’ On Capitalism And Toxic Inequality (Paul B. Farrell)

Big first-year anniversary for anticapitalist, anticonservative, socialist Pope Francis. Fortune magazine ranks him first among the “World’s 50 Greatest Leaders.” Tenure unlimited. Now he’s in an ideological war with U.S. Senate Majority boss Mitch McConnell’s Big Oil backed GOP as well as conservative ideologues. At war in America’s unstable, endlessly fickle, myopic, rigged political arena. At least till 2016. Then another twist. Warren Buffett predicts Hillary Clinton is next, probably till 2024. In a long war. Big picture: Economics trumps the political soap opera. Lurking in the shadows, a new crash. Inevitable.

And like 2000, nobody will hear it coming … hidden under irrational exuberance, dot-com mania, millennium celebrations … followed by a 30-month bear recession … later the 2008 crash … Alan Greenspan, Henry Paulson clueless … two crashes already this century … $10 trillion losses each … next one coming in 2016 election cycle, with echoes of the McCain/Palin loss … yes, a bigger badder bear than 2000 and 2008 … because once again bulls and optimists, traders and leaders fall into denialism … blinded by a new wave of irrational exuberance.

What about the promise of big political changes? House Speaker John Boehner and McConnell talk a good game, but their anxious, conservative GOP base is sitting on the shifting tar sands of Big Oil cash threatened by higher costs, long-term risks. Yes, talk is cheap, but once partisan conflicts blow up, climate disasters will bury the GOP’s aggressive energy agenda, support will fade. Yes, Pope Francis is celebrating his one-year anniversary since laying down his anticapitalism manifesto for his army of 1.2 billion Catholics worldwide. He’s also been removing conservative cardinals and bishops from leadership roles. He’s hell-bent on changing the world fast. And his mandate is unwavering and unequivocal. He’s drawing clear moral and political battle lines against repressive capitalism, excessive consumerism, rigid conservatism.

Listen: “Inequality is the root of social ills … as long as the problems of the poor are not radically resolved by rejecting the absolute autonomy of markets and financial speculation and by attacking the structural causes of inequality, no solution will be found for the world’s problems or, for that matter, to any problems.” Yes, it sure sounds like a declaration of war: The anticapitalist Pope Francis versus America’s self-destructive amoral capitalism. Bet on Mitch? Pope Francis’s target is clear: economic inequality is the world’s No. 1 problem. Capitalism is at the center of all problems of inequality. And he speaks with a powerful moral authority — something totally missing from American political leaders who are ideologically guided by atheist Ayn Rand, patron saint of the GOP’s capitalism agenda in this moral war. Without moral grounding, the GOP is no match for Francis’ vision, his principled mandate, his long-game strategy to raise the world’s billions out of poverty, to eliminate inequality, to attack the myopic capitalism driving today’s economy, markets and political system.

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