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Japan’s economy contracted for the second straight quarter in the July-to-September period, revised data released Monday showed, serving as a bitter reminder to Prime Minister Shinzo Abe that the nation’s economy remains in the woods two years after he came into office. Gross domestic product shrank an annualized 1.9% in the third quarter from the previous three-month period. The government last month estimated that the economy shrank 1.6% in the third quarter after a 6.7% plunge in the second quarter, indicating that the economy had entered a recession.

The key economic figures come just six days before general elections, which Mr. Abe is framing as a referendum on his economic policy program known as Abenomics. Recession or not, Japan’s economy is in a funk. Private consumption, the most important pillar of the economy, has shown little sign of life after a one-two punch of a sales tax increase in April and inflation caused by the yen’s 30% fall against the dollar. The consumption slump had led businesses to slash production and capital investment, further undermining economic growth.

How crazy will he get after being re-elected?

• Japan’s Recession Deepens as Election Looms for Abe (Bloomberg)

Japan’s recession was deeper than initially estimated as company investment unexpectedly shrank, a blow to Prime Minister Shinzo Abe as he campaigns for re-election on his economic credentials. The economy contracted an annualized 1.9% in the July to September period from the previous quarter, weaker than the 1.6% drop reported in preliminary data. The result was also below every forecast in a Bloomberg News survey that showed a median 0.5% decrease. The surprise decline in business investment sapped the strength of the world’s third-biggest economy, compounding damage from a slump in consumer spending after a sales-tax rise in April. With the main opposition party caught unprepared, Abe is on-track to win the Dec. 14 election, even as a decline in the yen cuts into people’s spending power. “Today’s report shows a pretty bleak picture of Japan’s economy,” said Taro Saito, director of economic research at NLI Research Institute in Tokyo. “We are going to see a recovery but only a gradual one. The weakening yen should provide a boost to manufacturers and those benefits will penetrate through a wide range of industries.”

Not much use, these analysts.

• China Trade Data Miss Forecasts By A Wide Margin (MarketWatch)

China’s exports rose a disappointing 4.7% in November while imports unexpectedly fell, as the world’s second-largest economy grapples with sluggish global activity and weak demand at home. Analysts said the data the government released on Monday show that the country’s crucial export sector – the one segment of the economy that had been showing signs of strength – was struggling during the month. “This was worse than expected,” said Ma Xiaoping, economist at HSBC. “We can see there is considerable downward pressure on the economy.” China’s economy has been showing slower growth after years of double-digit expansion. Growth slipped to 7.3% year-over-year in the third quarter, its slowest pace in more than five years. Full-year growth could fail to reach the government target of about 7.5% for the year.

November exports were below market expectations of an 8% gain compared with a year earlier and much less robust than the 11.6% increase in October. Meanwhile, imports sank 6.7% against expectations for a 3% rise, after a 4.6% year-over-year rise in October. Analysts said a rebound in the yuan’s value against other currencies could have been a factor. CIMB economist Fan Zhang said the weak export growth also reflects a strong month in the year-earlier period, while the drop in imports includes the impact of a sharp decline in global commodities prices, particularly oil. “In 2015, I still expect exports to improve over 2014 because of U.S. economic growth,” Mr. Zhang said. China’s central bank in late November cut benchmark interest rates for the first time in more than two years in a bid to give the economy a boost and cut borrowing costs for struggling companies. It has also injected liquidity into the banking system and encouraged banks to lend to struggling small businesses and the agricultural sector.

Time for Xi and Li to set a new, much power, growth target?!

• China Trade Data Paints Dreary Picture Of Economy (CNBC)

China’s annual import and export figures slowed sharply in November, data showed on Monday, reinforcing signs of fragility in the world’s second-largest economy. Exports rose 4.7% in November from a year earlier, much slower than an 11.6% rise in October and below expectations for an 8.2% increase in a Reuters poll. Imports fell an annual 6.7% in November, well below October’s 4.6% rise, and below expectations for a 3.9% increase. That left the country with a trade surplus of $54.5 billion for the month, above expectations of $43.5 billion. The Australian dollar weakened against the U.S. dollar after the data was released, recently trading at $0.8297.

“It’s clear domestic demand is pretty weak, most of the decline seems to be commodity related – which partly reflects lower prices, but is also because of the slowdown in the housing sector and overcapacity in industrial sectors,” Alaistair Chan, economist at Moody’s Analytics told CNBC. The slowdown in exports, meanwhile, was likely driven by a clamp down on over-invoicing seen earlier in the year and could suggest a cooling in global demand, said Dariusz Kowalczyk, senior economist and strategist at Credit Agricole.

“The Asian powerhouse, which has been the world’s biggest consumer of raw materials, is now on course to post its slowest growth in nearly a quarter of a century.”

• The Two Main Threats That Are Shaking Global Firms: China And Deflation (CNBC)

With an uneasiness looming over the global economy as the year draws to a close, chief financial officers (CFOs) have told CNBC that softer growth in China and the threat of deflation in the euro zone are the two biggest issues their firms are facing. Fifty-one CFOs from Europe and Asia – who make up the CNBC CFO Global Council – were asked what the major risks that their firms are currently up against. Coming ahead of the pack by a clear margin was the threat of falling growth in China. It came top of the list for Asian CFOs and was the third biggest risk for their European counterparts. When asked which of the year’s geopolitical or economic risks had the greatest impact on their businesses, 57% pointed at the warning signs coming from the world’s second largest economy.

The results underline how important China is for global confidence as the country shifts from its traditional role as the world’s factory floor to becoming a consumer-led economy. The Asian powerhouse, which has been the world’s biggest consumer of raw materials, is now on course to post its slowest growth in nearly a quarter of a century. It grew 7.3% year-on-year during the July-September period, its slowest pace in more than five years, jeopardizing Beijing’s 7.5% target for 2014. The slowdown comes after years of double-digit growth and at a time when the country’s new leadership is stepping up regulation and trying to curb an overheated credit market. As well as the tougher stance by Beijing, there has been a more gentle touch from the People’s Bank of China.

The central bank looks increasingly ready to backstop the economy and manage the fall in growth after announcing a surprise rate cut last month. Diana Choyleva, the head of macroeconomic research at Lombard Street Research, believes that growth and monetary conditions in China are actually much weaker than the official numbers suggest. She regularly concentrates her research on the country and said in a note last week that Beijing is battling an ongoing correction in investment and capital flight from its shores. “China’s banks are one of the victims of Beijing’s past excesses and will have to pay the price as the needed cleanup and financial market reforms unfold,” she said.

“.. what the Fed has been worrying about is already happening in the energy sector: leveraged loans are getting mauled. And it’s just the beginning.”

• Oil, Gas Bloodbath Spreads to Junk Bonds, Leveraged Loans. Defaults Next (Wolf)

The price of oil has plunged nearly 40% since June to $65.63, and junk bonds in the US energy sector are getting hammered, after a phenomenal boom that peaked this year. Energy companies sold $50 billion in junk bonds through October, 14% of all junk bonds issued! But junk-rated energy companies trying to raise new money to service old debt or to fund costly fracking or off-shore drilling operations are suddenly hitting resistance.

And the erstwhile booming leveraged loans, the ugly sisters of junk bonds, are causing the Fed to have conniptions. Even Fed Chair Yellen singled them out because they involve banks and represent risks to the financial system. Regulators are investigating them and are trying to curtail them through “macroprudential” means, such as cracking down on banks, rather than through monetary means, such as raising rates. And what the Fed has been worrying about is already happening in the energy sector: leveraged loans are getting mauled. And it’s just the beginning.

This monthly chart by S&P Capital IQ’s LeveragedLoan.com shows the leveraged loan index for the oil and gas sector. Earlier this year, when optimism about the US shale revolution was still defying gravity, these loans were trading at over 100 cents on the dollar. In July, when oil began to swoon, these loans fell below 100 cents on the dollar. The trend accelerated during the fall. And in November, these loans dropped to around 92 cents on the dollar.

How bad is it? The number of leveraged loans in the oil and gas sector trading between 80 and 90 cents on the dollar (blue line in the chart below) has soared parabolically from 0% in September to 40% now. These loans are now between 10% and 20% in the hole! And some leveraged loans are now trading below 80 cents on the dollar:

And so is Australia’s.

• Canada’s LNG Export Dream Is Dead (Oilprice.com)

Lower oil prices have killed off major plans for liquefied natural gas exports from Canada’s west coast. On December 2 the state-owned oil company of Malaysia, Petronas, decided to shelve plans to build an enormous LNG export terminal in British Columbia, citing the falling price of oil. It is common for LNG contracts to be priced using a formula linked to the price of crude oil, so declining oil prices pushes down prices for LNG. Petronas’ Pacific NorthWest LNG, as it was known, was a proposed $32 billion export terminal that would send LNG to Asia. The decision highlights how competitive global LNG trade has become, despite growing demand. Greenfield projects, such as Pacific Northwest LNG, face steep startup costs that become prohibitive when oil prices fall. Although low oil prices may have been the icing on the cake, Canadian LNG projects were facing serious obstacles before oil prices plummeted.

There is stiff competition from a slew of LNG projects already under construction in the U.S. and Australia, which will come online much earlier than anything from British Columbia. Several LNG export facilities in the U.S. are not starting from scratch, for example. The Sabine Pass terminal on the Gulf Coast and the Cove Point facility on the Chesapeake Bay were both originally constructed to import LNG rather than export. The original facilities were put on ice when the U.S. no longer needed LNG imports. Now, companies are retrofitting them to handle exports – a much cheaper process than building a new facility. The indefinite cancellation of Pacific NorthWest LNG is a major setback for Canada’s plans to export natural gas. The move comes after BG Group abandoned plans to build a separate LNG export terminal on Canada’s west coast. Chevron is also in limbo with its Kitimat LNG project after its partner Apache pulled out.

“BIS officials are worried that tightening by the US Federal Reserve will transmit a credit shock through East Asia and the emerging world, both by raising the cost of borrowing and by pushing up the dollar.”

• Dollar Surge Endangers Global Debt Edifice, Warns BIS (AEP)

Off-shore lending in US dollars has soared to $9 trillion and poses a growing risk to both emerging markets and the world’s financial stability, the Bank for International Settlements has warned. The Swiss-based global watchdog said dollar loans to Chinese banks and companies are rising at annual rate of 47%. They have jumped to $1.1 trillion from almost nothing five years ago. Cross-border dollar credit has ballooned to $456bn in Brazil, and $381bn in Mexico. External debt has reached $715bn in Russia, mostly in dollars. A chunk of China’s borrowing is disguised as intra-firm financing. This replicates practices by German industrial companies in the 1920s, which hid their real level of exposure as the 1929 debt trauma was building up. “To the extent that these flows are driven by financial operations rather than real activities, they could give rise to financial stability concerns,” said the BIS in its quarterly report. “More than a quantum of fragility underlies the current elevated mood in financial markets,” it warned.

Officials are disturbed by the “risk-on, risk-off, flip-flopping” by investors. Some of the violent moves lately go beyond stress seen in earlier crises, a sign that markets may be dangerously stretched and that many fund managers do not really believe their own Goldilocks narrative. “Mid-October’s extreme intraday price movements underscore how sensitive markets have become to even small surprises. On 15 October, the yield on 10-year US Treasury bonds fell almost 37 basis points, more than the drop on 15 September 2008 when Lehman Brothers filed for bankruptcy.” “These fluctuations were large relative to actual economic and policy surprises, as the only notable negative piece of news that day was the release of somewhat weaker than expected retail sales data for the US one hour before the event,” it said.

The BIS said 55% of collateralised debt obligations (CDOs) now being issued are based on leveraged loans, an “unprecedented level”. This raises eyebrows because CDOs were pivotal in the 2008 crash. “Activity in the leveraged loan markets even surpassed the levels recorded before the crisis: average quarterly announcements during the year to end-September 2014 were $250bn,” it said. BIS officials are worried that tightening by the US Federal Reserve will transmit a credit shock through East Asia and the emerging world, both by raising the cost of borrowing and by pushing up the dollar. “The appreciation of the dollar against the backdrop of divergent monetary policies may, if persistent, have a profound impact on the global economy. A continued depreciation of the domestic currency against the dollar could reduce the creditworthiness of many firms, potentially inducing a tightening of financial conditions,” it said.

They do know.

• Sudden Swings Expose Fragility Of Financial Markets: BIS (Reuters)

Sudden swings in financial markets recently suggest they are becoming increasingly sensitive to unexpected events, the global organization of central banks said on Sunday, warning “more than a quantum of fragility” underlies the current bullish mood. MSCI’s all-country world stock index is hovering around multi-year highs after rebounding from sell-offs in August and October. The downturns were triggered by uncertainty over the global economic outlook and monetary policy, as well as geopolitical tensions, and the Bank for International Settlements (BIS) said the sharp and sudden dips pointed to frailty in the markets. “These abrupt market movements (in October) were even more pronounced than similar developments in August, when a sudden correction in global financial markets was quickly succeeded by renewed buoyant market conditions,” the BIS said in its quarterly review.

“This suggests that more than a quantum of fragility underlies the current elevated mood in financial markets,” it said, adding that recent developments suggest markets are becoming “increasingly fragile” “Global equity markets plummeted in early August and mid-October. Mid-October’s extreme intra-day price movements underscore how sensitive markets have become to even small surprises,” it said in the report. The comments followed the organization’s warning in September that financial asset prices were at “elevated” levels and market volatility remained “exceptionally subdued” thanks to ultra-loose monetary policies being implemented by central banks around the world.

Since then, the U.S. Federal Reserve has brought its monthly bond-purchase program to an expected end. However, Japan’s central bank has spurred global markets by expanding its massive stimulus spending while China unexpectedly cut interest rates, adding to stimulus measures from the European Central Bank. The BIS said these divergent monetary policies, coupled with the recent appreciation of the dollar, could have a “profound impact” on the global economy, particularly in emerging markets where many companies have large dollar-denominated liabilities. Separately, the BIS report said that international banking activity expanded for the second quarter running between end-March and end-June. Cross-border claims of BIS reporting banks rose by $401 billion. The annual growth rate of cross-border claims rose to 1.2% in the year to end-June, the first move into positive territory since late 2011.

“China’s share of BIS reporting banks’ foreign claims on all emerging markets stood at 28% in mid-2014, up from just 6% at the end of 2008.”

• International Lending To China Soars In 2014: BIS (Reuters)

China has become the largest emerging market destination for international bank lending, accounting for more than a quarter of cross-border claims on all emerging market economies, a central banking report shows. Cross-border claims on China increased by $65 billion in the second quarter of 2014 to $1.1 trillion, and were up nearly 50% in the year to the end of June, according to a quarterly report from the Bank for International Settlements on Sunday. “China has become by far the largest (emerging market) borrower for BIS reporting banks. Outstanding cross-border claims on residents of China totaled $1.1 trillion at end-June 2014, compared with $311 billion on Brazil and slightly more than $200 billion each on India and Korea,” the report says.

It said China’s share of BIS reporting banks’ foreign claims on all emerging markets stood at 28% in mid-2014, up from just 6% at the end of 2008. The BIS, often referred to as the central bankers’ central bank, says China’s status as the principal emerging market destination for international bank lending reflects a “remarkable evolution” since the financial crisis of 2008-9. However, concerns are mounting among international investors of a credit bubble developing in China, with the country’s property market seen as the biggest risk to the economy.

In late November, after saying for months that China did not need any big economic stimulus, the People’s Bank of China surprised financial markets with its first interest rate cut in more than two years to shore up growth and help firms pay off mountains of debt. Outside China, cross-border claims on emerging market economies rose 2.7%, or $33 billion, in the three months to the end of June, the BIS said, with the increase coming mainly from Asia. However, cross-border lending to Russia declined 10%. Russia has seen its finances come under strain from western sanctions over Moscow’s role in the Ukraine crisis and the falling price of oil, its main export.

“We argue that the dollar’s role may reflect instead the share of global output produced in countries with relatively stable dollar exchange rates – the ‘dollar zone’ ..”

• Why The Dollar Is Still King: BIS (CNBC)

A question that has frustrated even the most experienced economists in the last few decades is how the dollar has remained the most prominent reserve currency in the world despite the global share of U.S. output eroding away. The Bank for International Settlements (BIS), a Basel-based institution that is known as the central bank of central banks, thinks it has found the answer. “We argue that the dollar’s role may reflect instead the share of global output produced in countries with relatively stable dollar exchange rates – the ‘dollar zone’,” it said in its new quarterly report released on Sunday. In 1978, economists Robert Heller and Malcolm Knight were credited as first to draw attention to the fact that countries held an average of 66% of their foreign-exchange reserves in dollars. Even today that number hasn’t budged much with the latest statistics from the International Monetary Fund showing that just over 60% of allocated funds are held in the greenback.

The higher the correlation in price between a given currency and the dollar, the higher the economy’s dollar share of that country’s official reserves, according to Robert McCauley and Tracy Chan, the two authors of the BIS report. The report adds that the dollar’s robustness comes despite an 18% decline against major currencies since 1978 and the U.S. economy’s share of global GDP (gross domestic product) shrinking 6% in those 36 years. “The ‘dollar zone’ still accounts for more than half of the global economy. In countries whose currencies are more stable against the dollar than against the euro, reserve composition that favors the dollar produces more stable returns in terms of the domestic currency,” they said.

It’s a shame this guy feels he needs to resort to Putin bashing.

• Why The World Is Like A Real-Life Game Of Global Domination (Guardian)

Putin gives a speech and the rouble falls. Europe’s central bank boss gives a speech and the stock markets fall. Opec meets in Vienna and the oil price plummets. Japan’s prime minister calls a snap election and the yen’s slide against the dollar accelerates. All these things in the last six weeks of an already fractious year. There are suddenly multiple conflicts being played out in the global markets, conflicts the global game’s usual rules are not built to handle. The first concerns a clear game of beggar thy neighbour between China and Japan. Since 2012 Japan has printed money hand over fist, with the aim of kickstarting economic growth. With growth stalling for a third time in the final quarter of 2014 its premier Shinzo Abe printed more. China perceives this as unfair competition, and with its own growth slowing, it responded in late November with a surprise interest-rate cut.

Many see this as the outbreak of a classic currency war, along 1930s lines, where rival economic giants engage in a pointless game of devaluing their own currency – boosting exports but hitting the spending power of their people – to their mutual detriment. By hitting each other’s capacity to export, they edge the region towards deglobalisation. The second new dynamic is the game of chicken being played over the oil price between America, Russia and Opec. Oil demand is falling because growth in the emerging markets – China, Brasil and the like – is slowing down. Yet supply has risen – by 11m barrels to 92m barrels per day since the global financial crisis began. America has become the world’s biggest oil producer thanks to the rapid rollout of shale and deep sea oilfields.

Since June 2014 the price of a barrel of Brent crude has fallen from $115 to $68 – and after Opec met in late November and rejected calls to cut production some analysts predicted the price could collapse to $40. Saudi Arabia and the other gulf monarchies were the key players in the decision to keep production high and prices falling – and few doubt there is politics behind the move. It hurts Russia, Venezuela and Iran. For Saudi Arabia there are scores to settle with both Russia and Iran over their role in crushing the Syrian revolution, and with Venezuela for being Russia’s perpetual Bolivarian cheerleader.

As a result, Vladimir Putin has had to admit to his people that a combination of western sanctions and Saudi oil strategy will push Russia into recession next year. At times like this economists resort to game theory, warning sparring countries that, in a game where everybody is trying to shrink something – whether it be prices or currencies – everybody loses out. So let’s game it out – not in the austere language of theory but of the empire-building “god games” popular on games consoles.

The whole shebang is still under lockdown after all this time.

• Citigroup Panicked Over Fraud at Chinese Ports (Bloomberg)

Citigroup was in a “state of panic” when alleged fraud was uncovered in two Chinese ports, Mercuria Energy’s lawyer said as a London trial over disputed metal finance deals got under way. “The discovery of the fraud was a massive problem for Citi as it was their metal and it was at their risk,” Mercuria lawyer Graham Dunning told a London judge. “There was a state of panic.” The disputed copper and aluminum is under lockdown in the ports of Qingdao and Penglai, where Chinese authorities are investigating an alleged fraud. Neither side can get access and they don’t know how much of the metal is there, Dunning said at a pre-trial hearing in August. Citigroup argues that it effectively delivered the metal to Mercuria under the terms of a sale-and-repurchase agreement by handing over warehouse receipts. The bank says it is owed about $270 million. Mercuria, a Cyprus-based firm with major trading operations in Geneva, argues the products were never properly delivered.

“It appears that substantial quantities may be missing from the warehouses or may be the subject of multiple pledges,” Dunning said today. The probe at Qingdao, China’s third-largest port, is examining companies owned by a Chinese-Singaporean metals trader, Chen Jihong, who is alleged to have pledged the same metal inventories multiple times for collateral on loans. Chinese authorities have uncovered almost $10 billion in fraudulent trade, including irregularities at Qingdao, according to the country’s currency regulator. Standard Chartered, Standard Bank and ABN Amro have also made loans affected by the alleged fraud. “Mercuria’s apparent goal is for it to be Citi, not Mercuria, which is left out of pocket,” Citigroup said in documents from the trial. Mercuria was responsible for safeguarding and insuring the metal, the bank said.

What do they do all day?

• The Long Slow Inexorable Demise Of America’s Working-White-Male (Zero Hedge)

Not “off the lows”…

Germany holds the levers here.

• ECB’s Loans Offer Clues In QE Guessing Game (Reuters)

The guessing game over the timing of euro zone money printing will intensify as the European Central Bank unveils a closely watched gauge of policy in the coming week, the highlight of a calendar dominated by Europe’s malaise. On the other side of the Atlantic, investors will continue placing their bets on a different but equally crucial event: when the U.S. Federal Reserve might raise interest rates. U.S. data and several Fed central bankers will give a sense of the speed of the recovery and when a rate rise might be merited, while oil prices and Chinese data will provide plenty more for markets to digest. “The key story is going to be in the euro zone,” said James Knightley, ING’s senior economist, referring to the results of the ECB’s targeted long-term refinancing operations (TLTROs) on Thursday. The cheap loans for banks are one of the ECB’s main ways to flush money into the stagnating euro zone economy. “If the take-up is poor, that could increase market talk that the ECB is going to step in and use other tools,” Knightley said.

That means a sovereign bond-buying program like those used in the United States, Britain and Japan, but which Germany fears would encourage reckless state borrowing and fuel inflation. Such a program may come early next year. “The take-up of TLTROs could swing the ECB’s Governing Council between January and March, depending on how the number looks,” said Citigroup economist Guillaume Menuet. The first TLTRO was taken up only to the tune of €83 billion. Hopes are higher for this time but forecasts hover around the €150 billion mark, leaving the ECB short of the €400 billion it was prepared to offer banks in total. On Monday in Brussels, ECB President Mario Draghi will tell euro zone finance ministers no amount of stimulus can replace reforms to tax, labor and pension systems to bring down near-record unemployment.

Rate rises will be murder.

• Bank of England: Half A Million Housebuyers Face Mortgage Arrears (Guardian)

The Bank of England has warned half a million families would be at risk of falling into mortgage arrears once it started to raise interest rates from their emergency level of 0.5%. Threadneedle Street said the number of households running into difficulties would increase by a third to 480,000 in the event of a two-percentage-point increase in the cost of borrowing. The Bank stressed the proportion of borrowers having trouble paying their home loans should remain well below the levels of the early 1990s – when Britain suffered its worst postwar property crash – provided incomes rose alongside interest rates. “Higher interest rates will increase financial pressure on households with high levels of debt,” the Bank said in its Quarterly Bulletin. “The%age of households with high debt-servicing ratios, who would be most at risk of financial distress, is not expected to exceed previous peaks given the likely paths of interest rates and income.

“But developments in incomes for the households who are potentially most vulnerable will be an important determinant of the extent to which financial distress does increase.” The findings were based on a survey for the Bank conducted by NMG consulting. It found that the average outstanding mortgage debt was £83,000 per household, with average household income of £33,000 a year (£43,000 for those with a mortgage) and unsecured debt £8,000. Interest rates have been pegged at 0.5% – the lowest in the Bank’s 320-year history – since March 2009 and cheap borrowing costs have made it easier for households with large home loans to keep up payments on their mortgages. The Bank has used its forward guidance policy to stress that interest rate rises, when they come, will be gradual and limited in size. Financial markets do not anticipate the first rise to come before the second half of 2015 but the Bank is exploring the impact of tighter policy on households where more than 40% of income is spent on mortgage repayments, since these housebuyers are most likely to fall into arrears.“

Oh, great! 950% of GDP. What could go wrong?

• Bank of England: UK Banking To Double In Size, Reach 950% of GDP (Guardian)

Britain’s exposure to its banks, already the largest in the G20 group of leading nations, is set to double in the next 35 years. “The size of the UK banking system might roughly double from its current size to over 950% of GDP by 2050, far outstripping the projected increase in other G20 banking systems,” the Bank of England said. The UK’s banking system is currently 450% of GDP, Threadneedle Street said. In money terms, it would amount to a rise from over £5tn to £60tn. “Some have suggested that the current size of the UK banking system represents a material risk to economic stability and that action should be taken to reduce its size,” the central bank said in its latest quarterly bulletin. However, in an article asking “Why is the banking system so big and is that a problem?” the Bank of England said it had not found evidence of a link between the size of the economy and the risk of a crisis.

It said more work was needed and that it had not looked at the interconnectedness of the banking system and its opacity as it increases in size. “The empirical analysis in this article does not find a strong link between banking system size and the probability or output cost of a crisis, at least once the resilience of the system is taken into account,” the bank said in the article. “Establishing empirically whether banking system size is a leading indicator of banking crises is not straightforward,” it said. The banking system has undergone a dramatic shift in past 40 years, with assets rising from about 100% of GDP in 1975, the Bank of England said. It said the UK’s banking system was the largest out of Japan, the US and the 10 biggest EU economies. Nearly a fifth of global banking activity is booked in the UK, where there are 150 deposit-taking foreign branches of banks and almost 100 foreign subsidiaries from more than 50 countries.

“Since peaking at $4.07 trillion last August, the Fed’s monetary base has been reduced by $259.2 billion as of the latest reserve reporting date on November 26, 2014.”

• Keep An Eye On The Fed’s Accelerating Asset Sales (CNBC)

The U.S. monetary authorities (Fed) are stepping up the contraction of their balance sheet at a surprisingly fast pace. Since peaking at $4.07 trillion last August, the Fed’s monetary base has been reduced by $259.2 billion as of the latest reserve reporting date on November 26, 2014. More than half of these Fed asset sales occurred between the end of October and the end of November. But the balance sheet remains an impressive $3.8 trillion – a huge difference with the pre-crisis monetary base of $820-$830 billion. It is interesting to note that even at these comparatively modest amounts of high-powered money, the pre-crisis U.S. monetary policy was very expansionary: the federal funds rate was fluctuating around 3% while the inflation rate was accelerating above 4%.

Obviously, these are different times now: the U.S. financial system and the economy have changed in a rapidly evolving global context. Still, the comparison is useful because it shows how much the Fed’s balance sheet will have to adjust in the months ahead. One key aspect of that adjustment process is the Fed’s statement that interest rates will remain low well after the beginning of large liquidity withdrawals to “normalize” the policy stance. The question is: how is that possible? If the quantity of money is being reduced in as large amounts as is currently the case, would it not be normal to expect that its price (i.e., interest rate) would also have to rise? Certainly it would.

But what makes the Fed’s statement credible is the fact that huge excess reserves (money banks can use to make loans) of the U.S. banking system – $2.4 trillion at the last count – will continue to keep an extraordinarily liquid interbank market for some time. Last Friday, for example, the effective federal funds rate (overnight money banks lend to each other) closed trading at 0.11% – more than half way below the Fed’s target of 0.25%. These excess reserves are now being drained by the Fed’s bond sales; they have been cut by $286.1 billion from their peak of last August. There is still plenty of cutting to do, though. Just think that during the pre-crisis period from January 2007 to June 2008 banks’ average excess reserves were fluctuating around monthly levels of $1.9 billion (sic). That is a far cry from the $2.4 trillion we have now.

Not exactly a new point, but ..

• Bill Gross: You Can’t Cure Debt With More Debt (CNBC)

Central banks are trying to solve a debt crisis by piling on more debt, creating a “point of low return” for investors, bond guru Bill Gross said in a letter to clients. The Janus Capital portfolio manager and Pimco founder takes the Federal Reserve, Bank of Japan and European Central Bank to task for using monetary policy to make it easier for governments to run up debt, all in the hopes of stimulating anemic global growth. “How could they?” Gross asks, using nursery rhymes including the characters Punch and Judy to bemoan the possibility of “inflationary horror” that characterized the 1970s. It’s probably better to read the Gross letter in its entirety – get it here – to see how he connects the dots, but his conclusion is stark:

Ah, policymakers. Perhaps the last five years have been one giant nursery rhyme. But each of these central bankers is trying to achieve the same basic objective: Solve a debt crisis by creating more debt. Can it be done? A few years ago, I wrote that this uncommonsensical feat could be accomplished, but with a number of caveats: 1) Initial conditions must not be onerous; 2) Both monetary and fiscal policies must be coordinated and lead to acceptable structural growth rates; and 3) Private investors must continue to participate in the capital market charade that such policies produced.

Several pitfalls have occurred within each caveat, not the least of which is stagnant growth and companies using the easy money of the past six years not to propel the economy but to jack up their own stock prices and reward themselves and shareholders. At the same time, the much-awaited handoff from monetary to fiscal policy has not happened, in large part because the Fed and others have been willing to provide trillions in accommodation:

In the U.S., as elsewhere, there has been little focus on public investment and infrastructure spending. It’s been all monetary policy, all of the time, with most of the positives flowing over to markets as opposed to the real economy. The debt currently being created is not promoting real growth and solving a debt crisis – it is being used by corporations to repurchase shares and accentuate the growing inequality between the very rich and the middle class.

” .. as Dr. Paul so clearly points out, the sole purpose of H. Res. 758 is simply a pouring of the legal foundation for something much more substantive. You see, this is how wars begin.”

• The Most Essential Lesson of History That No One Wants To Admit (Beversdorf)

Ron Paul wrote an eye opening article recently about some legislation that was just signed in Congress, namely H. Res. 758. In the article Dr. Paul explains the purpose of the resolution. It’s not a new law but provides a basis of facts that will be relied on for future action. So essentially the resolution purports that Russia behaved badly in various ways and by way of signing H. Res. 758 each congressman was indicating their agreement that the propositions contained therein are factual. Now just because a group of obnoxiously arrogant A-holes stand around in a tax-revenue financed chamber and say “yeah” to several assertions does not make those assertions factual, but here in the United Orwellian States of America it kinda does. Because those assertions that were voted to be fact (similar to the First Council of Nicaea) will now be written as factual history and taught to our children as having happened that way. The very same way we all attained our ideas of American superiority.

The dishonesty and ignorance it creates is reason enough not to do such things, however, the real stinker of it is, as Dr. Paul so clearly points out, the sole purpose of H. Res. 758 is simply a pouring of the legal foundation for something much more substantive. You see this is how wars begin. And the wheels for this particular war have been in motion for many years now. We’ve been told our actions heretofore are simply a necessary response to the Ukraine situation. However, those who can objectively look at the Ukraine situation will realize the US sponsored coup in Ukraine was simply a spark to light the fuse of a much larger detonation.

Now I understand many at this point are thinking “yep another conspiracy theory, why can’t it ever just be the US government thinks what they are doing is best for Americans”? And it can, it just never is anymore and perhaps ever was. Lies are told and public opinion is manipulated. For war must be every bit good theatre in the press, as good strategy on the ground. It is the theatre that makes war so ugly. Fighting a war for what one believes in is unfortunate and brutal but fighting for lies and deceit to an end that benefits only those telling the lies is a type of ugliness most of us cannot comprehend. It is only in the world ruled by sociopaths where such things can happen.

“No worries, Father Allen, Brother Ben and Sister Janet figured out how to turn the universe’s economic waters into wine.”

• Uncork the Central Bank Bubbly (StealthFlation)

What a glorious global economic gala! Apparently, contracting world GDP growth, monumental sovereign debt loads, ballooning central bank balance sheets, crashing commodity prices, competitive currency devaluations and synthetically suppressed interest rates, as far as the eye can see, are all great tidings to be joyously celebrated throughout this holiday season. Well, at least that’s the takeaway from the whooping wonderful world of capital markets. Have no fear, all is perfectly in order. Jamie Dimon, Jim Cramer, Larry Fink and Company have our back. The rest of us mere mortals are simply supposed to stand aside and take their professional word for it, silently sipping the financial establishment’s spiked eggnog until we attain a sheepish state of stupid stupor. After all, the money experts at the Fed are on the case, what could possibly go wrong?

Joy to the world! es, it’s true, your Nation too can enjoy the very same blissful state of economic euphoria, all you need is the will to turn your monetary policy completely on its head, a la festive freeloading Fed. No need to maintain the integrity of your means of exchange, that’s so old school. That’s right, you too are absolutely invited to enter the ZIRP zero bound party zone, just buy out all your own newly issued treasury obligations and be sure to lap up any illiquid debt that may be languishing. Set it and forget it, that’s it, nothing to it. In the end, it will all take care of itself according to the all knowing fabulous Fed heads and the crazed Keynesian collegiate kooks that orchestrated and obliged this opulent banker blowout. No worries, Father Allen, Brother Ben and Sister Janet figured out how to turn the universe’s economic waters into wine.

Oh, there is one important caveat which needs to be pointed out, along with the monetary ecstasy ease regime, your Nation is also required to unequivocally serve the United States’ geopolitical ambitions and global economic interests, otherwise, no monetary marmalade for you! Just ask Vlad on that score. His toast is badly burnt, his olive oil spread is spoiled, and his Ruble is now rubble. No money honey for comrade Putin until he bows down to the high and mighty masters of the badass bully banking USD monetary system hegemony.

Wealth inequality is a symptom. Power inequality is the disease.

• Taming Corporate Power: The Key Political Issue Of Our Age (Monbiot)

Does this sometimes feel like a country under enemy occupation? Do you wonder why the demands of so much of the electorate seldom translate into policy? Why parties of the left seem incapable of offering effective opposition to market fundamentalism, let alone proposing coherent alternatives? Do you wonder why those who want a kind and decent and just world, in which both human beings and other living creatures are protected, so often appear to be opposed by the entire political establishment? If so, you have encountered corporate power – the corrupting influence that prevents parties from connecting with the public, distorts spending and tax decisions, and limits the scope of democracy.

It helps explain the otherwise inexplicable: the creeping privatisation of health and education, hated by the vast majority of voters; the private finance initiative, which has left public services with unpayable debts; the replacement of the civil service with companies distinguished only by incompetence; the failure to re-regulate the banks and collect tax; the war on the natural world; the scrapping of the safeguards that protect us from exploitation; above all, the severe limitation of political choice in a nation crying out for alternatives. There are many ways in which it operates, but perhaps the most obvious is through our unreformed political funding system, which permits big business and multimillionaires in effect to buy political parties. Once a party is obliged to them, it needs little reminder of where its interests lie. Fear and favour rule.

And if they fail? Well, there are other means. Before the last election, a radical firebrand said this about the lobbying industry: “It is the next big scandal waiting to happen … an issue that exposes the far-too-cosy relationship between politics, government, business and money … secret corporate lobbying, like the expenses scandal, goes to the heart of why people are so fed up with politics.” That, of course, was David Cameron, and he’s since ensured that the scandal continues. His Lobbying Act restricts the activities of charities and trade unions but imposes no meaningful restraint on corporations.

Wealth Inequality Is Not A Problem, It’s A Symptom

Oct 182014

October 18, 2014 Posted by Raúl Ilargi Meijer at 8:12 pm Finance Tagged with: EU, IMF, inequality, NATO, power, UN, USA, wealth, World Bank 7 Responses »

NPC Dedication, George Washington Masonic Memorial, Alexandria, VA Nov 1 1923

A comment on an article that comments on a book. I don’t think either provides, for the topic they deal with, the depth it needs and deserves. Not so much a criticism, more a ‘look further, keep digging, and ye shall find more’. And since the topic in question is perhaps the most defining one of our day and age, it seems worth it to me to try and explain.

The article in question is Charles Hugh Smith’s Why Nations (and organizations) Fail: Self-Serving Elites, and the book he references is Why Nations Fail: The Origins of Power, Prosperity, and Poverty by Daron Acemoglu and James Robinson.

Charles starts off by saying:

The book neatly summarizes why nations fail in a few lines:

(A nation) is poor precisely because it has been ruled by a narrow elite that has organized society for their own benefit at the expense of the vast mass of people. Political power has been narrowly concentrated, and has been used to create great wealth for those who possess it.

The Amazon blurb for the book states that the writers “conclusively show that it is man-made political and economic institutions that underlie economic success (or lack of it)”, and continues with examples used such as ancient Rome, North Korea, Zimbabwe, the Congo, to make the point that some countries get rich and others don’t, because of differences in leadership structures. That in itself certainly seems true, but that doesn’t necessarily make it the whole story.

In the case of the Congo, for instance, the perhaps richest place on earth when it comes to resources, there’s not only the devastating history it’s had to endure with incredibly cruel Belgian colonial powers, there’s to this day a lot of western involvement aimed at keeping the region off balance, and feed different tribes and peoples with weaponry up the wazoo, in order to allow the west to keep plundering it. It’s not just about national goings-on, it’s – also – a supra-national thing.

That’s one of two shortcomings in the material, the breadth and width of why nations and organizations fail their people but serve their masters. In the present day, national boundaries, whether they are physical or merely legal/political, are not the best yardsticks anymore by which to measure and gauge events.

The second shortcoming, in my view, is that inequality, a theme so popular that even Janet Yellen addressed it this week in what can only be seen as her worst possible impression of Marie Antoinette, and expressed her ‘worry’ about wealth inequality in America. The very person publicly responsible for that inequality thinks it’s ‘just awful’. Go bake a cake, gramps.

Wealth inequality is but a symptom of what goes on. Charles Hugh Smith has a few graphs depicting just how bad wealth inequality has become in the US. We all know those by now. It’s bad indeed. But where does that come from? Charles touches on it, but still hits a foul ball:

I submit that this dynamic of failure – the concentrated power and wealth of self-serving elites – is scale-invariant, meaning that it is equally true of communities, towns, cities, states, nations and empires alike: all fail when they’re run for the benefit of a narrow elite. There is a bitter irony in the ease with which American pundits discern this dynamic in developing-world kleptocracies while ignoring the same dynamic in America.

One would imagine it would be easier to see the elites-inevitably-cause-failure in one’s home country, but the pundits by and large are members of the Clerisy Upper Caste, well-paid functionaries, apparatchiks, lackeys, factotums, toadies, sycophants and apologists for the very elites that are leading America down the path of systemic failure as the ontological consequence of their self-serving consolidation of wealth and power.

Here’s the thing: especially after WWII, though before that already as well, the western world woke up to the need for international co-operation. Dozens of organizations were established to structure that co-operation. But then, in yet another fountain of unintended consequences, something man is better at than just about anything else, we let those organizations loose upon the world without ever asking what happened to what they were intended for, or whether the original grounds for founding them still existed, and whether they should perhaps be abolished or put on a tight leash.

These are questions that should be asked about any large-scale organization. Be they multinational corporations, global banks, Google or indeed the United States of America. We can’t just assume these powers, which gather more power as time goes by, share and serve the purposes of the people. What if they gradually come to serve only their own purpose, and it contradicts that of the people? Should we not get that leash out?

Turns out, we never do. If someone would suggest today to break up the USA, because its present status contradicts that which the Founding Fathers had in mind (and there are plenty of arguments to be made that such contradictions exist in plain view), (s)he would not even be sent to a nuthouse, because no-one would take him/her serious enough to do so.

But wealth inequality still rises rapidly within America, and it doesn’t serve the people. So why does it happen, and why do we let it? Because the inequality that matters most is not wealth, but power. And we’ve been made to believe that we still have that power, but we don’t. Voting in elections has the same function today as singing around a Christmas tree: everyone feels a strong emotional connection, but it’s all just become one giant TV commercial.

Even if families are genuinely happy to meet up and exchange gifts and stories, it’s all modeled after the building blocks handed to us by chain stores. It isn’t really our story anymore, and Jesus certainly wasn’t born in a manger: he was born in a MacMansion and the first thing the child saw was his mom’s fake boobs, a wall-sized TV and an iPhone.

In that same vein, we lost the stories bitterly fought and suffered for by our grandparents through two world wars and the brutal invasions of Vietnam and Iraq, the stories of how we can best keep ourselves safe and out of – international – trouble. Not just military trouble, but economic and political trouble. These things are no longer our decision. We founded supra-national, indeed global, institutions for that. And then let them slip out of our sight.

The US is a bit of an outlier here, simply because it’s older. But the IMF, the World Bank, UN, NATO and the EU absolutely all fit the picture of organizations that have – happily – grown beyond our range of view, and that exhibit the exact same inverted pyramid characteristics we see on wealth inequality, only for these organizations it’s not wealth that floats and concentrates increasingly from the bottom to the top, it’s power.

Wealth comes after that. And one shouldn’t confuse that order. Because power buys wealth infinitely faster than wealth buys power.

All these supra-national institutions were established with good intentions – at least from some of the founders. But then we forgot, ignored, to check on them, and they accumulated ever more power when we weren’t watching (we were watching TV, remember?)

And what we see now is that any effort, any at all, to break up the IMF, World Bank, UN, NATO and EU would be met with the same derision that an effort to break up the USA would be met with. We have built, in true sorcerer’s apprentice or Frankenstein fashion, entities that we cannot control. And they have taken over our lives. They serve the interests of elites, not of the people. So why do we let them continue to exist?

What powers do we have left when it comes to bailing out banks, invading countries, making sure our young people have jobs when they leave school? We have none. We lost the decision making power along the way, and we’re not getting it back unless we quit watching the tube (or the plasma) and fight for it. Until we do, power will keep floating to the top like so much excrement; it’s a law of – human – nature.

That the people we voluntarily endow with such control over our lives would also use that control to enrich themselves, is so obvious it barely requires mentioning. But that doesn’t mean this is about wealth inequality, that’s not the main issue, in fact it’s not much more than an afterthought. It’s about the power we have over our lives. Or rather, the power we don’t have.

The Disgrace of Sacrificing a Generation

Oct 082014

October 8, 2014 Posted by Raúl Ilargi Meijer at 9:44 pm Finance Tagged with: children, Growth, power, sacrifice 19 Responses »

DPC Launch of the Western Star, Wyandotte, Michigan Oct 3 1903

Would you like to know how bankrupt our societies are? Financially AND morally? Before you say yes, please do acknowledge that you too ar eparty to the bankruptcy. Even if you have means, or you have no debt, or you’re under 25, you’re still letting it happen. And you may have tons of reasons or excuses for that, but you’re still letting it happen.

Our financial and moral bankruptcy shows – arguably – nowhere better than in the way we treat our children. A favorite theme of mine is that any parent you ask will swear to God and cross and hope to die that they love their kids to death, but the facts say otherwise. We only love them as far as the tips of our noses, or as far as the curb. That means you too.

While we swear on our mother’s graves that we love them so much, we leave them with a world that lost half of its wildlife species in 40 years, that can expect to make coastal areas around the globe uninhabitable during their lifetimes, and a world that is so mired in debt just so we can hang on to our dreams of oversized homes and cars and gadgets that all there will be left for them are nightmares.

But I always wanted what was best for them! Yeah, well, you always chose to not pay too much attention, too, and instead elected to work that job you hate and keep up with the Joneses and tell yourself there was nothing you could do about it anyway other than a yearly donation to some socially accepted charity in bed with corporations (you didn’t know? well, did you try to find out?)

You elected leaders that promised to let you keep what you had, and provide more of the same on top. You voted for the people who promised you growth, but you never questioned that promise. You never wondered, sitting in your home, the size of which would only 100 years ago have put aristocracy to shame, what would be the price to pay for your riches.

And you certainly never asked yourself if perhaps it would be your own children who were going to pay that price. Well, ‘Ich hab es nicht gewüsst’ has not been a valid defense since the Nuremberg trials, in case you were going for that.

The fact of the matter is, we can continue our lifestyles, best as we can, because we are able to make our children pay for it. We allow ourselves to continue to kill more species, at home but mostly abroad, because we never get in touch with any of those species anyway. Other than mosquitoes, which we swat. We can drive our 3 cars per family because we only see the ice melt in the Arctic on TV.

And we allow ourselves, and our governments, to get deeper into debt everyday, because we’ve been told that without – ever – more debt we would all die, that debt is the lifeblood of our very existence. We don’t understand what it means that our governments increase their debt levels by trillions every year, and we choose not to find out.

That’s a matter for the next generation; we’re good with our oversized flatscreens and coal powered central heating and all of that stuff. We are better off than the generation of our parents, and isn’t life always supposed to be like that?

Which brings us back to your kids. Because no, life is not supposed to be like that. Not every generation can be better off than the one before. In fact, you are the last one for whom that is true. It’s been a short blip in human history, let alone in the earth’s history, and now it’s over. And you must figure out what you’re going to do, knowing that not doing anything will make your sons and daughters futures even bleaker than they already are.

Europe Sacrifices a Generation With 17-Year Unemployment Impasse

Seventeen years after their first jobs summit European Union leaders are divided on how to create employment and a fifth of young people are still out of work. At a meeting in Milan today Italian Prime Minister Matteo Renzi plans to tout the new labor laws he’s pushing through. French President Francois Hollande will argue for more spending, a proposal German Chancellor Angela Merkel intends to reject. Britain’s prime minister David Cameron isn’t coming.

Their lack of progress may increase the frustration of ECB President Mario Draghi’s calling on the politicians to do their bit now and loosen the continent’s rigid labor markets even if that means facing the ire of protected workers. “An entire generation is being sacrificed in countries such as Spain,” economist Ludovic Subran said. “That has a real impact on productivity in the long run.”

How someone can talk about “a real impact on productivity” in the face of millions of lost and broken lives is completely beyond me. You have to be really dense to do that. And they pay people like that actual salaries.

When EU leaders met in Luxembourg in November 1997, the soon-to-be-born euro zone’s unemployment rate was about 11%. Jean-Claude Juncker, then prime minister of the host country, now president designate of the European Commission, promised a mix of free-market solutions and government plans would mean a “new start” for young people. Today the jobless rate is 11.5%. The Milan summit will focus on youth unemployment, which afflicts 21.6% of people under 25 across Europe, according to Eurostat. Even this number is almost identical to 1997, when it stood at 21.7%.

Average European youth unemployment numbers may not have changed much since 1997, which is bad enough, but plenty numbers did change. The young people of Greece, Spain, Italy and Portugal were not nearly as poorly off 17 years ago as they are today. That’s what the eurozone project has accomplished.

The leaders “need to discuss meaningful job creation,” Subran said. “It’s about avoiding the neither-nor situation of people being out of both work and school. This means providing jobs in the short term and training to improve skills and employability in the long term.” In February 2013, the EU allotted €6 billion ($7.6 billion) for youth-employment initiatives between 2014 and 2020, with the bulk of the spending in the first two years.

The centerpiece of the initiative is a “Youth Guarantee” that anyone under 25 should have either a job, apprenticeship, or training program within four months of leaving formal education or becoming unemployed. The initiative focuses on regions with over 25% youth unemployment, which is the whole of Spain, Greece, and Portugal, all but the north-east of Italy, about half of France, and a few regions of eastern Germany.

Lofty words. But nothing has come of them in many years, and nothing will. Politicians vie for the votes and campaign donations of the parents, not the children. Until the children are the majority block, but by then present day leaders will be gone.

Germany is opposed to discussing new spending until already allotted sums have been spent. Instead, Merkel’s government has stressed liberalization of labor markets as the best path to create jobs. France and Italy argue they are already taking steps to loosen their labor markets and those efforts won’t work without a background of growth.

Italy’s proposed rules, opposed by some lawmakers from Renzi’s Democratic Party, aim at making firing easier while providing a new system of income support for those who lose their job. European employment did improve after 1997, with the unemployment rate bottoming between 2007 and 2008 at 7%, and 15.7% for young people, as a credit bubble boosted growth in Spain and Greece.

It ballooned during the subsequent financial crisis. “I’m worried how the euro zone has detached itself from the rest of the world economy,” French Prime Minister Manuel Valls told business leaders in London Oct. 6. “If there is no strategy to support growth at the eurozone, we will be in even greater trouble.”

The only solutions in the minds of the leadership are reforms (make it easier to get rid of the older people and let the young do their jobs at half the price) and growth. Both of which have failed for all those years, but that’s all folks so they press for more of the same. Who cares about the young until they can unseat you?

The present leadership selects for a future in which they – and theirs – will still be the leadership. It’s only natural. Any victims made along the way there are seen as necessary collateral damage. Reforms and growth. Reforms being break down what generations of workers have built up in rights. Fighting squalid working conditions and miserable low pay. Think about that what you like.

But growth? What if there is no growth? Hey, even the IMF just said growth won’t return to levels of old. And then called for more reforms. But what lives will your children have if growth is gone, and what are you prepared to for them is it is? How are you going to soften the blow for them? How much are you willing to sacrifice for your children lest they be sacrificed by society?

One last thing: it seems obvious that we teach our kids the wrong skills. Or there wouldn’t be so many unemployed or in low-paying jobs. So if we want our kids to get a job, what should change in our education systems? Now, I must be honest with you, I’ve found our education so bad ever since I was even younger than I am now that I up and left.

I simply noticed that it was meant for people happy to be pawns in someone else’s game, and I knew that wasn’t me. Colleges and universities mold people into usable – not even useful – ‘things’, provided there is no independent thinking going on. Because that kills the entire set-up. It’s all been an utter disgrace for decades.

But this is not about me. The question is, what are we going to teach our kids? Well, with our present power structure, it will be a mere extension of what there is today. The overriding idea is that tomorrow will be like today, just with more of the same. That’s all we know, and all we have. And that’s what keeps our leaders happy too: a world in which they feel they can be safely settled into their comfy seats. Progress while sitting still. Don’t think I’m right? THink about it.

So would do you think the consensus would be when it comes to education? I think it would be having our kids be managers, lawyers, programmers, the same things that are ‘in’ today. More of the same, just more. But is that so wise if even the IMF says growth will never be the same it once was? What if things get really bad? What skills will they have that can help them through times like that?

Shouldn’t we perhaps teach our kids basic skills first, just in case? So they can grow and preserve food, build a home, repair machinery, that kind of thing? And only after that deal with the fancier stuff?

We have become utterly dependent on the ‘system’. Is it a good idea for our kids to be too? We lost our basic skills – or at least our parents did – at the exact same time that ‘growth’ became the magic word du jour. The idea was that we didn’t need them anymore, that other people would grow our food and take care of all the other basic necessities for us.

But what if that was just a temporary bubble, and it’s gone now? The data sure point to it. In that case, should we rush to move back our sons and daughters to the skillset our grandparents had?

And just in case you think this is all and only about Europe, this is a great portrait of America:

Debt Rattle Sep 15 2014: The Yin and Yang of Growth and Power

Sep 152014

September 15, 2014 Posted by Raúl Ilargi Meijer at 5:40 pm Finance Tagged with: centralization, concentration, independence, power, war 11 Responses »

Arthur Rothstein Bathgate Avenue in the Bronx Dec 1936

These are dangerous times. The dangers come from places hardly anybody ever thought to look for them. And that is a danger in itself.

The world has become an amalgamation of centralized blocks of power on the one hand, and a move away from these blocks on the other. The latter happens for good reason. Not that any such reason should be required. The plain and basic human right to, and desire for, freedom and self-governance should be enough. It isn’t, though, as we shall find out soon enough.

The centralized blocks have been able to gather far too much power, politically, socially and militarily, all concentrated in the hands of far too few people. And because we are who we are as a species, once you arrive at that sort of power concentration, it is inevitable that the people who go look for it, and obtain it, are the last ones who should have it. That is, from the point of view of all the rest of us.

It takes a certain mindset to want so much power over others, and if you don’t end up with outright psychopaths holding the reins, you’ll get something very close to it. Nevertheless, on the other hand, the process of increasingly concentrated powers is a natural one.

But then so is the move away from that concentration, the urge to break away from the huge entities and into smaller ones. It’s as yin and yang as it gets. Still, we all understand where the problem lies: those who have accumulated all that power in their few handfuls of hands, will be extremely reluctant to give up even a few crumbs of it.

They will instead look for more and more. Which will clash with the, again, entirely natural movement elsewhere in society towards the dilution of this massive power centralization. And guess who holds the arms, which in today’s setting are the most devastating ones in human history by a factor of a thousand, or a million, or more.

The drive away from condensed power is fed by deteriorating economic circumstances, even if those are not immediately clear to all (just about everyone’s still talking about, and believing in, a ‘recovery’).

The power blocks have served their purpose, which was the concentration of wealth, and have now overstayed their welcome. This is most evident in blocks such as NATO and the EU, but it applies just as much to the US, China and the Russian empire.

Our choices then are clear. We can at this moment choose to prepare a smooth path towards de-centralization, or we can prepare to fight a thousand bloody battles over it. There are no other flavors available.

What is more evident than anything else is that we live in a failed economic model. And recovery from that failure is a mere pipedream. We will need to come up with different answers than that. Before people in America and Europe start dying by the side of the road again. If we wait until they actually do, we’ll be too late.

You will hear from many sides that independence movements such as Scotland’s and Catalunya’s are founded on populist sentiments. But that’s nowhere near the whole story. People have the right to govern themselves, if they so choose. And if you try to stop that, if you let these sentiments fester, without giving them room to breathe, they may indeed well manifest in nasty ways.

If it takes a populist leader to channel the desire for independence, chances are such a leader will emerge. To prevent such things from happening, the ‘free’ world needs to assemble something akin to a blueprint for situations in which peoples express their desire for self-determination.

The absence of such a blueprint equals a surefire way towards trouble, unrest, and worse. It can’t be that 2 million Catalans take to the streets of Barcelona, and old school soldiers issue threats to kill them, or the Madrid government declares the entire movement illegal. ‘It’s against the Spanish constitution’, they proclaim. Well, then it’s high time to change that constitution, because it violates UN charters Spain has signed up to.

Self-determination is not illegal. And that should be expressed very clearly by all nations and all leaders, through the UN, but also in EU and US law, so nobody is in doubt any longer, and the path towards independence is clear for everyone to see.

The main problem of course is: how do you make a change such as this happen when all incumbents, all those who hold power, are on one side of the divide?

We could start off by realizing that presenting de-centralization as some sort of ideological drive misses the point entirely. What we’re looking at is a wholly natural sequence of events. But nature has no edicts or laws that decide against violence and bloodshed.

That’s where we come in. We can pass international agreements that ban violence against peoples who seek to become independent. Not one inch of it will come easy, but we don’t have much of a choice if we don’t want to live in some kind of ongoing war situation for years to come.

The demise of the communist block has presented a number of examples of de-centralization, some peaceful, some incredibly bloody. There are lessons in there for us to learn.

Scotland is a timely reminder of things to come. It won’t be the last, it’s in fact only the vanguard. The more it become obvious and inescapable that our economies will not recover, because they are too deep in debt and they don’t have sufficient access to cheap fossil fuels anymore, the more the call for independence will gather momentum and volume. And it will be contagious.

We have a narrow window left to regulate the process. Before countries start pulling out of international bodies because these no longer serve a purpose for them. Before the power brokers and holders sense too much threat to their acquired positions, and decide it’s time to call in the cavalry.

There’s no way we can prevent mayhem in every single case, there’ll simply be too many of them, and they will all have their very different and unique characteristics. But we still can do a lot.

Or we can close our eyes and wait for the recovery our masters will keep on promising until they pull the plug on the whole mirage.

• OECD Trims Developed World Growth Forecast as Risks Build (BW)

The Organization for Economic Cooperation and Development trimmed its growth forecasts for the biggest developed economies in the face of increasing geopolitical risks and subdued European inflation. Euro-area gross domestic product is now expected to expand 0.8% this year, down from 1.2% in May, while the U.S. will expand 2.1% instead of 2.6%, the Paris-based OECD said today in a report. “The bullishness of financial markets appears at odds with the intensification of several significant risks,” the organization said. “Continued slow growth in the euro area is the most worrying feature of the projections.” The MSCI All Country World Index has gained 6% this year even as conflicts in the Ukraine and the Middle East have intensified and inflation in the euro-area has dipped to a fraction of the European Central Bank’s target rate. The OECD, which advises its 34 member governments on economic policy, urged European officials to learn lessons from Japan where inflation expectations didn’t flag a later descent into deflation.

“The experience of Japan in the 1990s is a reminder that such expectations measures can be poor predictors of the actual future rate of inflation,” the OECD said. “The 6-to-10 year consensus expectations in Japan were similarly near 2% in the early 1990s, failing to foresee the descent into deflation.” The OECD cut its GDP forecasts for Germany, France and Italy to 1.5%, 0.4% and a contraction of 0.4%, respectively. In 2015, those economies will grow 1.5%, 1% and 0.1%, generating growth of 1.1% for the euro area as a whole. Similarly, in Brazil the OECD foresees a weak investment and uncertainty related to looming elections as keeping growth below potential at 0.3% this year and 1.4% in 2015. The outlook for other economies is brighter. The OECD sees Japan expanding 0.9% this year and 1.1% in 2015, while China is on track to grow 7.4% and 7.3%. India, the only major economy to have its growth forecast raised this year, will expand 5.7% in 2014 and 5.9% next year, the OECD said.

“Nobel prize-winner Lars Peter Hansen described U.S. economic growth as “stunningly sluggish.”

• OECD Cuts US Growth Forecast, Warns On Risk Assets (CNBC)

A stuttering recovery in the U.S. and the continued fragility of the euro zone means that risk assets are “mispriced,” the Organization for Economic Cooperation and Development warned on Monday. In its Interim Economic Assessment, the Paris-based research organization became the latest to suggest markets are at risk of a sudden correction, stressing that the current bullishness appeared “at odds” with the “intensification of several significant risks.” The OECD forecast the U.S. would grow by 2.1% this year, down from its May projection of 2.6% growth. For 2015, the group expects the U.S. economy to grow 3.1%, down from earlier estimates of 3.5%. The euro area has also been downgraded from 1.2% growth in May to 0.8% and 1.1% for next year, and the stubbornly slow growth in the region is the most “worrying feature” of the OECD’s projections.

The anticipated tapering of U.S. monetary policy could lead to shifts in international financial flows and sharp exchange rate movements, which could be particularly disruptive for emerging market economies, the OECD noted. “A number of equity markets are reaching record highs, sovereign bond yields in several countries are near all-time lows and implied share price volatility in the United States and Europe is around pre-crisis levels,” it said. “This highlights the possibility that risk is being mispriced and the attendant dangers of a sudden correction.” Speaking to CNBC, economist Robert Shiller warned of pricey valuations in stocks last month and fellow Nobel prize-winner Lars Peter Hansen described U.S. economic growth as “stunningly sluggish.”

That’s why it’ll come.

• BIS Warns Rate Shock Could Spark ‘Damaging Feedback Loops’ (CNBC)

The emerging markets are at risk of “damaging feedback loops” once the world’s central banks start reining in their monetary policy and raise rates, the Bank for International Settlements (BIS) warns. BIS, known as the central bank of central banks and one of the few organizations to foresee the global financial crisis of 2008, believes that non-financial companies from emerging economies have been encouraged to increase leverage and overseas borrowing but might have been left inadequately hedged and susceptible to currency risks. “These factors have increased the risks facing these companies, implying the existence of ‘pockets of risk’ in particular sectors and jurisdictions”, Michael Chui, Ingo Fender and Vladyslav Sushko said in the organization’s new quarterly report released on Sunday. “If these risks were to materialize, adding to broader (emerging market) vulnerabilities, stress on corporate balance sheets could rapidly spill over into other sectors, inflicting losses on the corporate debt holdings of global asset managers, banks and other financial institutions.”

This could be a source of “powerful feedback loops” in the event of an exchange rate or an interest rate shock, the three economists warn. The concerns come after a so-called “taper tantrum” in May 2013, when the minutes of a Federal Reserve policy meeting sparked fears the central bank could start tapering off its $85 billion-a-month bond purchasing program. Emerging market currencies tumbled on the news as investors started to bring their dollars back to the U.S. in anticipation of higher interest rates. This gave a short and sharp insight into what could happen overseas if the yields on U.S. Treasurys suddenly spiked higher, although most expect the normalizing of interest rates to be facilitated at a smooth pace with the Federal Reserve managing market expectations and being alert to financial risks.

Tech has a booboo.

• Record S&P 500 Masks 47% of Nasdaq Mired in Bear Market (Bloomberg)

Beneath the U.S. stock market’s record-setting gains, trouble is stirring. About 47% of stocks in the Nasdaq Composite Index are down at least 20% from their peak in the last 12 months while more than 40% have fallen that much in the Russell 2000 Index and the Bloomberg IPO Index. That contrasts with the Standard & Poor’s 500 Index, which has closed at new highs 33 times in 2014 and where less than 6% of companies are in bear markets, data compiled by Bloomberg show. The divergence shows the appetite for risk is narrowing as the Federal Reserve reins in economic stimulus after a five-year rally that added almost $16 trillion to equity values.

It’s been three years since investors saw a 10% decline in the S&P 500 and they’re starting to avoid companies that will suffer the most when the market stumbles, said Skip Aylesworth, a portfolio manager for Hennessy Funds in Boston. “The small caps have had big runs and tend to get ahead of themselves,” Aylesworth said in a Sept. 10 phone interview. Hennessy Funds oversees about $5 billion. “It’s kind of like the tortoise and the hare, and they’re the hare. But then they get expensive, and when the market corrects, they get whacked.” The proportion of technology companies, small-caps and newly listed stocks stuck in their own personal bear markets has risen from 30% in March 2013, when the overall equity market surpassed its 2007 record. S&P 500 stocks with at least 20% losses have fallen since then, the data show.

Fool me once …

• Draghi’s $3.9 Trillion Ambition May Be a Stretch to Achieve (Bloomberg)

Mario Draghi’s €3 trillion ($3.9 trillion) ambition could be a stretch to achieve. New stimulus measures ranging from long-term loans to asset purchases probably aren’t enough to expand the European Central Bank’s balance sheet back to the size its president would like, Bloomberg’s monthly survey of economists shows. The first gauge of the ECB’s success will come this week when it issues the initial funds under a four-year lending program to banks. Draghi said this month he wants to boost the ECB’s assets to the level seen at the start of 2012, an increase of as much as €1 trillion from current levels. Investors are watching to see whether he’ll take the controversial step of large-scale quantitative easing to get there. “Draghi has put himself into a corner by announcing a quantitative target,” said Elwin de Groot, senior market economist at Rabobank. “As such, we envisage the possibility that if things don’t work out the way it’s hoped they will, the Governing Council may feel compelled to do proper QE after all.”

The ECB will allot the first funds under its so-called targeted longer-term refinancing operations on Sept. 18. The median estimate in the survey is that banks will receive €150 billion. Predictions ranged from €100 billion to €300 billion. The operation comes shortly before the end of the ECB’s Comprehensive Assessment of lenders’ balance sheets, aimed at ensuring the soundness of banks’ health. The results of the review, including a stress test, will be published next month and the ECB will start as euro-area bank supervisor in November. The ultimate value of the TLTROs, which run through 2016, and programs to buy asset-backed securities and covered bonds will be €985 billion, the Bloomberg survey shows. Against that, almost €350 billion of outstanding three-year loans made by the ECB to banks at the height of the euro-area debt crisis will mature and must be repaid by early next year. That would leave the three stimulus measures adding about a net €635 billion, well below the amount Draghi’s balance-sheet target implies.

Get ready to get rich, Europe!

• Draghi Prods Euro Area to Ready Ground for Economic Boost (Bloomberg)

Mario Draghi is about to give the euro-area economy a jump-start. He’s asking the currency bloc’s leaders to make sure they’re in gear. Over the next six weeks, the ECB will be rolling out measures that could begin to restore the central bank’s balance sheet to the levels it had at the height of the sovereign debt crisis. At a Sept. 12-13 meeting of finance ministers in Milan, he told them his efforts would have limited impact if they didn’t make their economies ready to absorb it. With the TLTRO liquidity scheme that starts on Sept. 18, an asset-purchase plan targeted at easing access to credit next month, and the potentially cathartic end to a year-long bank health review coming before November, Draghi’s ECB is increasing the intensity of its economic support. Political leaders are beginning to follow suit.

“The new measures together with the TLTROs will have a sizable impact on our balance sheet, which is expected to move toward the size it used to have at the beginning of 2012,” Draghi told reporters on Sept. 12. “No matter what the monetary and even fiscal stimulus has been decided, we won’t see much growth coming from these measures only if there are no serious structural reforms.” Draghi arrived in Milan with political will for those reforms at risk. While there are some stirrings of fiscal stimulus that could boost growth, such as a 300 billion-euro ($389 billion) plan floated by incoming EU Commission President Jean-Claude Juncker, governments are dragging their feet on measures to make the economy more efficient. Last week France and Italy were both scolded by the EU for their lack of progress.

“We need to accelerate the implementation of our ambitious structural reform agenda,” said Jeroen Dijsselbloem, the Dutch finance minister who leads meetings of euro-area finance chiefs. “We cannot solely rely on monetary policy, but need the appropriate policy mix.” In response, finance ministers said they will “take stock” of the need to reduce the tax burden on labor when discussing member states’ draft budgets in November.

• Scots Aren’t the Only Angry Bunch (Bloomberg)

This week’s referendum in Scotland could result in the U.K. losing almost one-third of its landmass, and 8% of its population, and, very likely, its present prime minister. In a summer rich with shocks, the breakup of a United Nations Security Council member suddenly seems more likely than the long-predicted fracturing of Iraq. Most people I spoke with when traveling through Scotland last month expected the battle for independence waged by the Scottish Nationalist Party to have been lost. Recent opinion polls, however, show that almost half of Scottish voters hope to break free of their London masters on Thursday. Their disaffection was not the work of a day. It has been in the making for at least three decades. Jason Cowley, editor of Britain’s leading political weekly, the New Statesman, correctly points out that Britain’s Conservative prime minister in the 1980s, Margaret Thatcher, did more for Scottish independence with her regime of privatization, deregulation and unfair taxation than any Scottish nationalist.

By some estimates, the deindustrialization that Thatcher presided over had more devastating effects in Scotland than in England. That’s why Thatcher’s Conservative Party is almost extinct in Scotland, and its current leaders, David Cameron, George Osborne and Boris Johnson, evoke a visceral hostility and scorn. This isn’t just class hatred for privately educated and plummy-accented Tories, or for the axis of Eton College, Rupert Murdoch’s News International and the City of London that they embody. Many Scots are unhappy, too, with the City-obsessed Labour Party, which under Tony Blair, Thatcher’s self-proclaimed heir, placed itself in the avant garde of marketization, initiating among other things the privatization of the National Health Service. Recriminations have now erupted in England as financial markets finally register the prospect of Scotland’s secession. But blaming Cameron, who fecklessly called the referendum and limited it to a binary choice, obscures the fact that the Scottish mutiny is part of a larger worldwide trend.

Yes, but …

• Alex Salmond: No Neverendum For Scotland (NS)

One question that has risen with increasing frequency, as the Scottish independence polls have narrowed, is whether a narrow No on Thursday would result in a second referendum in the near future. With the SNP expected to remain the dominant force at Holyrood, the potential exists for a “neverendum” (the term coined by Canadian writer Josh Freed to describe the repeated votes on Quebec’s status). But asked this morning on The Andrew Marr Show, whether “if it’s a No vote by a whisker”, he could come back for another “in a few years’ time”, Alex Salmond said that it was still his view that the result would stand for “a generation.” He said: “By that what I mean is that, if you remember the previous constitutional referendum in Scotland [on devolution], there was one in 1979 and then the next one was in 1997. That’s what I mean by a generation. In my opinion, and it is just my opinion, this is a once in a generation opportunity. ”

Asked whether he could pledge that “Alex Salmond will not bring back another referendum if you don’t win this one”, he added: “Well, that’s my view. In my view this is a once in a generation, perhaps even once in a lifetime opportunity for Scotland.” But as Salmond, who will turn 60 this year, was careful to state, this is just his view. Nicola Sturgeon, the 44-year-old deputy first minister, who has emerged more clearly than ever as his heir-in-waiting during the campaign, has suggested that another referendum could be held within 15 years (a generation is usually defined as 25 years). As Harry recently noted on our new May 2015 site, the nationalists’ demographic advantage means that they would be in a strong position to win a second vote. The possibility of a neverendum is one that Alistair Darling is understandably keen to forestall. He told Marr: “The one point that I do actually agree with Alex Salmond is that I think with Thursday we’ve got to decide this for a generation. I don’t know anybody who actually wants to go through another two-and-a-half year referendum.”

Blah.

• World Waits For White Smoke From The Fed (Reuters)

The U.S. Federal Reserve may give clearer hints on when it will hike the cost of borrowing in the United States in the coming week, as struggling Europe braces for a tight vote in Scotland on whether to leave the United Kingdom. As the U.S. economy picks up pace, its central bank is inching closer to raising interest rates, a move that will send ripples across the globe. In the euro zone, however, the European Central Bank is moving in the opposite direction in a desperate bid to rekindle growth and inflation. The United States is shaking off the hangover from a financial crisis that hammered Europe and even knocked mighty China off its stride. But the U.S. rebound, thanks in large part to cheap Fed money, now means Federal Reserve Chair Janet Yellen will have to decide when to pare back this support.

Further hints as to when the first U.S. rate hike in more than eight years will happen could come on Wednesday in a statement after the bank’s governors meet. “It does seem like a done deal that it is going to increase interest rates,” said Paul Dales of economics consultancy Capital Economics. “We are going into a new phase where the Fed is trying to bring things back to normal. It can send reverberations around the world economy.” Choosing when to increase the cost of borrowing in the world’s biggest economy – a move expected next year – is a delicate balancing act. Yellen and others will be trying to work out how to keep the economic recovery on a steady keel without stopping it before the effects of the upswing lead to higher wages.

“92% of millennials who don’t already own a home do not plan on buying one in the future. Ever.”

• California Home Sales Collapse, Prices Hit Wall (WolfStreet)

This must be part of the explanation why home sales in the expensive parts of California, which is where most people live, are collapsing: according to a Harris Poll on behalf of electronic broker Redfin, 92% of millennials who don’t already own a home do not plan on buying one in the future. Ever. These people, now between 25 and 34, are in their peak home-buying age. They’re the much sought-after first-time buyers. They’re the foundation of the market. But not this generation. Homeownership rate among them, according to the Commerce Department, already plunged from 41% in 2008 to 36% currently; as opposed to 65% for all Americans. These folks are not “pent-up demand” accumulating on the sidelines, as the wishful thinkers have proclaimed. “Millennials who flock straight from college to San Francisco and other expensive cities are making a choice to spend their income on quadruple-digit rents and eight-dollar gourmet hot dogs from trendy food trucks,” explained Redfin San Francisco agent Mark Colwell.

“This means they’re not saving for a down payment, further removing them from the housing market.” So Redfin checked Census data to find the 20 Zip codes in the country with the highest population of educated millennials. Median household income in these neighborhoods is 50% higher than in all ZIP codes. Median home prices are on average $255,000 higher as well. And the average down payment for homes in these neighborhoods is $80,000. A down payment that is out of reach for most millennials. A new report about consumer finances by the Federal Reserve shows that the median family headed by a millennial earned $35,509 in 2013 dollars, 6% less than their counterparts in the Fed’s first survey of this type in 1989. Actually, median households headed by someone under 55 also made less than their predecessors in 1989 (this is what inflation does to real wages; FOMC members who’re clamoring for more, or any, inflation should read these reports from other corners of the Fed).

Yup.

• ECB’s Securities Purchases A Risk For Taxpayers: German Central Banker (CNBC)

European taxpayers should not be left accountable for the securities that form part of the European Central Bank’s (ECB) new asset-purchase program, Jens Weidmann, the president of the Deutsche Bundesbank has told CNBC. The central bank is about to embark on the purchase of asset-backed securities (ABS) in an attempt to boost the region’s economy and boost inflation. This means euro zone banks would sell the ECB their loans and other types of credit that have been packaged together. The ECB has said that it would only purchase less risky “senior” tranches of securitized debts and loans, but also wants to purchase riskier “mezzanine” tranches which are deemed to be more effective. These riskier tranches would require public guarantees, according to ECB President Mario Draghi, which is the stumbling block for Weidmann, who is also a member of the ECB’s Governing Council.

“I am more skeptical about these initiatives which rely on purchasing ABSs and transferring risk from banks’ balance sheets to the taxpayer,” he told CNBC in Milan on Saturday. ABS became infamous in the latter part of the last decade when the complex bundles of securities were believed to have played a key role in the global financial crash of 2008. In a speech last week Draghi said the “senior” tranches of ABS can be considered high-quality assets. He cited data from the Association of Financial Markets in Europe which estimated that only 0.12% of European residential mortgage-backed securities left outstanding in mid-2007 had defaulted since that date. Weidmann told CNBC that the revival of the ABS market can be beneficial to the economy, adding that it “liberates liquidity and liberates capital in the banks’ balance sheet.”

With the kind of personal debt the Swedes have, such turmoil may not end well.

• Election Throws Sweden Into Turmoil as Nationalists Advance (Bloomberg)

Sweden’s election threw the nation’s political establishment into turmoil as backing for the anti-immigration Sweden Democrats more than doubled, leaving the largest Nordic economy facing a hung parliament. The three-party Social Democratic opposition led by Stefan Loefven won 43.7%, versus 39.3% for the four-party government of Prime Minister Fredrik Reinfeldt, with all the votes counted. The Sweden Democrats garnered 12.9% to become the third largest party. The result, which sent the krona lower, marks an end to eight years of rule by Reinfeldt’s conservative-led coalition, which delivered successive rounds of tax cuts without adding to Sweden’s debt.

The premier said he will hand in his resignation today as the responsibility of forming a new government falls to the Social Democrats, which won the most votes. “We have a new unique parliamentary situation in Sweden,” Loefven said at an election-night party. He vowed to keep the Sweden Democrats from influence, opening the doors to government parties to “put the interest of Sweden first.” Traders and investors have been bracing themselves for market turbulence amid signs the election would fail to produce a clear winner.

Boom boom.

• Australians Face Repayment Shock on High-Risk Mortgages (Bloomberg)

Sydney mortgage broker Luke Gardiner, who started his business just last year, is already overwhelmed with customers. “There has not been a slow period in the last 12 months,” said the broker, whose Gardiner Financial Services Pty arranged more than A$5 million ($4.5 million) in mortgages in both June and July, about A$1 million more than in May. “I’ve been waiting for a break, but it hasn’t come.” Driving the growth is demand for high-risk mortgages such as interest-only loans and financing to buy rental properties. That’s setting the stage for a jump in mortgage delinquencies when interest rates increase from record lows, Moody’s Investors Service said this month. The easier terms are fueling housing demand, boosting prices 11% in major cities in August from a year earlier. “There has been an advent of higher-risk lending,” said Nader Naeimi, head of dynamic asset allocation at Sydney-based AMP Capital Investors Ltd., which manages about A$144 billion. The regulator “hasn’t been able to curb it.”

The Australian Prudential Regulation Authority in May warned of growing evidence of “lending with higher risk characteristics.” It issued draft guidelines urging lenders to assess whether borrowers were capable of repaying mortgages at higher interest rates. It also asked banks to conduct regular stress tests on its loan books to determine the impact of rising unemployment, interest rates and falling property prices. Interest-only mortgages jumped to 43% of all new home lending in the three months through June 30, and credit to buy rental properties climbed to 38%, both record highs, according to APRA data starting in the first quarter of 2008. “The higher proportion of investment and interest-only lending suggests that APRA’s efforts have not slowed a broad increase in higher-risk exposures,” Ilya Serov, senior credit officer at Moody’s, wrote in a Sept. 1 report.

Time to go, François.

• France Braces For A ‘Tough Autumn’ (CNBC)

With all the sound and fury coming from the debate over the future of Scotland, the tough choices facing France appears to have slipped off the radar. A confidence vote on Prime Minister Manuel Valls’ new cabinet, scheduled for Tuesday, equally has the potential to shake up markets, analysts warn. President Francois Hollande announced the shake-up of his cabinet at the end of August – a upheaval that saw left-leaning Economy Minister Arnaud Montebourg depart. This attempt to regain a handle on power by the embattled President, who is currently under fire following the publication of a headline-grabbing memoir by his former partner which claimed he didn’t like poor people, may yet backfire. While the government is expected to pass through, there are likely to be a few key abstentions from members of Hollande’s Socialist Party (PS), which will emphasize the fragility of the government as it tries to push through economic reforms. “The vote is likely to display the growing rift inside the PS,” Antonio Barroso, senior vice president at Teneo Intelligence, wrote in a research note Monday.

It could even lead to the dissolution of the government, he warned, as he forecast a “tough autumn” for the country’s government. “It is likely that rogue deputies will continue to defy Valls in the coming months, with the 2015 budget being the first major test that the PM will face in the coming weeks,” Barroso wrote. Hollande’s budget is increasingly worrying to investors. The French economy, as measured in gross domestic product, is forecast to grow 0.4% on average this year and 1% in 2015 by the government. At the same time, inflation is expected to remain low and the government is planning to cut expenditure, but not increase taxes. This will mean that the public deficit to GDP ratio will rise to 4.4% this year, according to Barclays economists’ calculations, and that France will not hit the 3% public deficit to GDP target until 2017 – which could get it in trouble with its European Union partners.

China can lie with the best.

• Li’s Options Narrow as China Growth Slowdown Deepens (Bloomberg)

Chinese Premier Li Keqiang’s options have narrowed: stimulate or miss his 2014 growth target. The weakest industrial-output expansion since the global financial crisis, and moderating investment and retail sales growth shown in data released Sept. 13, underscore the risks of a deepening economic slowdown led by a slumping property market. Stocks, metals and currencies including the Australian dollar fell as analysts cut their forecasts for 2014 growth. “This is a pretty important wakeup call that they need to do more,” said Helen Qiao, chief Greater China economist at Morgan Stanley in Hong Kong. “The government is trying very hard to reach this particular target rate, which will not necessarily be mission impossible if they roll out more easing measures starting from now. The risk is they could underestimate how much more easing tools they need.”

The slowdown in August economic data that included a second straight decline in imports and a 40% drop in the broadest measure of new credit will test Li’s resolve to avoid stronger monetary stimulus to meet his 7.5% goal. An unprecedented lending spree from 2009 to 2013 led to a surge in debt on a scale that’s triggered banking crises in other economies, according to the International Monetary Fund, underscoring the premier’s reluctance to open the spigot. Growth in gross domestic product may slip to 6.5% to 7% in the third quarter if September numbers are also weak, Australia & New Zealand Banking Group analysts estimate, down from 7.5% in the April-June period. A monthly GDP tracker compiled by Bloomberg shows the economy expanding 6.3% in August from a year earlier, down from 7.4% in July. Royal Bank of Scotland cut its forecast for China’s 2014 economic growth to 7.2% from 7.6%, citing weak momentum indicated by the August data.

That should read: they will.

• Bad Loans Could Bust China (Bloomberg)

The risk of what Nobel laureate Paul Krugman calls “Japanification” – a semi-permanent economic funk – has haunted China for at least a couple years now. Last week a Bank of America Merrill Lynch report again asked, “Will China Repeat Japan’s Experience?” Let’s dispense with the suspense: Yes, China very likely will. And the outcome will have far more serious global implications than Krugman’s main worry, which focuses on the chances of stagnation in Europe. China’s “severely under-capitalized financial system,” “imbalanced growth” and chronic “overcapacity” all remind Merrill Lynch analysts Naoki Kamiyama and David Cui of Japan in 1992, when its bubble troubles first began to paralyze the economy. China is even more reliant on exports than Japan was in the 1990s, and its all-important property market now “may be tipping over.”

Most worrying is the shaky banking sector. What concerns Kamiyama and Cui is the lack of bold action in Beijing at a time when the scale of Chinese bad debt may be higher than Japan’s ever was; they believe non-performing loan ratios are “significantly into double-digit” territory. In the first half of this year, the analysts estimate, commercial banks had to book larger non-performing loan liabilities than for all of 2013. Mind you, this comes even as the government claims financial imbalances are being addressed. As recently as July, total social financing, a proxy for debt, was still growing by almost 1% y-o-y, a rate well above China’s nominal GDP growth.

In other words, China has spent much of this year adding to its debt and credit bubbles – not curbing them. If this were 1992, China could simply force state-owned banks and enterprises to rein in excesses and ride out the resulting modest hit to gross domestic product. But China passed the point of no return after the crash of Lehman Brothers in 2008, when it unleashed a $652 billion stimulus package, followed by untold smaller ones since. The moves put China, in the words of New York hedge-fund manager James Chanos, on a “treadmill to hell.” If Beijing were to attempt a broad credit shakeout now, virtually every sector of the economy would suffer. The risks of social unrest would soar.

Somone get rid of these clowns.

• Kiev Threatens To Restart Nuclear Weapons Program (RT)

Kiev’s promise to restart its nuclear weapons program if it doesn’t get enough support from the West is completely insane, be it real or just an empty threat, political commentator Daniel Patrick Welch told RT. “If we cannot protect Ukraine today, if the world doesn’t help us, we will have to go back to the development of nuclear weapons, which will protect us from Russia,” Ukrainian Defense Minister Valery Geletey said in an interview with Ukrainian TV, also claiming that NATO members have already started supplying Kiev with conventional weapons.

RT: Is the prospect of a nuclear Ukraine something to be concerned about?

Daniel Patrick Welch: You know, your guess is as good as mine. I think what it shows first and foremost is that the inmates are fully in charge of the asylum here. This is a completely insane threat. If it is real then it is suicidal. And if it is a threat then it is petulant. In the same briefing Geletey mentioned that arms were starting to come in from their new friends in the NATO alliance. So it really is just a matter of watching, and speaks of the fragility of this truce. There is nothing there. These people in Kiev are desperate to keep the war on Russia going at all possible costs.

RT: And Ukraine’s neighboring countries, what do they have to say about that?

DPW: Well, I think slowly, I mean these people, some of them – Slovakia, to some extent the Czechs, Hungary, are creeping out of under the jackboot of American control. The Americans obviously put them up to everything they say. They know in advance. They know exactly what he is going to say. Now the Eastern European bordering states have to be realizing that they have backed a really bad horse in this race. And I can’t imagine that this isn’t seen as something incredibly destabilizing and dangerous.

Then again, Kiev has lied about everything lese.

• Kiev Says NATO Members Have Started Supplying Weapons (RT)

NATO member states have started supplying weapons to Ukraine, the country’s Defense Minister said on TV. His comments came a few days after a similar statement by a Ukrainian presidential aide sparked a diplomatic scandal and a rash of denials. In an interview with Channel 5, Ukrainian Defense Minister Valery Geletey said that he had held verbal consultations with the defense ministers of the “leading countries of the world, those that can help us, and they heard us. We have the supply of arms under way.” “This process has begun, and I feel that this is exactly the way we need to go,” the minister said. Ukrainian President Petro Poroshenko, who attended the Sept. 4-5 NATO summit in Wales, announced that he had negotiated direct modern weapons supplies with a number of NATO member states.

Poroshenko claimed that some of the NATO member states said during bilateral consultations they are ready to supply Ukraine with lethal and non-lethal arms, including “high precision weapons,” as well as with medical equipment. NATO has had repeatedly said that the alliance is not going to supply any weapons or military equipment to Ukraine. At the same time, NATO Secretary-General Anders Fogh Rasmussen said that the alliance would not interfere if member states made decisions of their own regarding arms supply to Ukraine. When Poroshenko’s aide Yury Lutsenko wrote on his Facebook page that the US, along with France, Italy, Poland and Norway, would supply modern weapons to Ukraine, the news prompted all the countries mentioned in Lutsenko’s post to say they had no information about supplies.

What a stupid denial this is.

• Glenn Greenwald Accuses New Zealand PM Over Spying Claims (Guardian)

An already tumultuous New Zealand election campaign took another dramatic turn less than a week before polling day when the prime minister, John Key, responded angrily to claims by the American journalist Glenn Greenwald that he had been “deceiving the public” over assurances on spying. Greenwald, who is visiting New Zealand at the invitation of the German internet entrepreneur Kim Dotcom, says he will produce documents provided by the NSA whistleblower Edward Snowden that prove the New Zealand government approved mass surveillance of its residents by the Government Communications Security Bureau (GCSB), New Zealand’s equivalent of the NSA. Dotcom, who is sought for extradition from New Zealand by the US on copyright charges relating to his now defunct Megaupload file-storage site, is hosting an event in Auckland on Monday called The Moment of Truth, which doubles as a rally for the Dotcom-founded Internet party.

Greenwald has promised to produce his evidence at the event, while Dotcom is pledging to show further links between Key and Hollywood relating to his own case. Adding to the spectacle, Julian Assange is expected to beam in via video link from the Ecuadorian embassy in London, while Dotcom has hinted that Snowden may also appear on the big screen from Moscow. In media interviews, Key has repeatedly dismissed Greenwald as “Dotcom’s little henchman”. Speaking on TVNZ’s Q+A programme, he acknowledged that the government had in 2012 considered a “mass cyber-protection” proposal, which he said was “really a Norton antivirus at a very high level”, but rejected it. Greenwald, he argued, would therefore have seen incomplete material. “This is what happens when you hack in to illegal information, when you wander down to New Zealand six days before an election trying to do Dotcom’s bidding – what happens is you get half the story,” said Key.

He said he was ready to declassify secret documents to support his argument. “There is no ambiguity here. There is no and there never has been any mass surveillance.” Greenwald responded by saying: “I absolutely stand by everything I’ve said.” He told 3 News: “They did far more than look at the idea; they adopted the idea and took steps to make it a reality.” He added: “I’ve done reporting of surveillance all over the world and a lot of governments haven’t liked what I’ve said, but I’ve never seen a head of government lose their dignity and get down in the mud and start chucking names to discredit the journalist in order to discredit the journalism.”

One of the world’s oldest living species …

• Wild Chinese Sturgeon On Brink Of Extinction In Polluted Yangtze River (AFP)

The fish has survived for 140m years but failed to reproduce last year according to Chinese researchers The wild Chinese sturgeon is at risk of extinction after none of the rare fish were detected reproducing naturally in the polluted and crowded Yangtze river last year. One of the world’s oldest living species, the wild Chinese sturgeon is thought to have existed for more than 140m years but has seen its numbers crash as China’s economic boom has brought pollution, dams and boat traffic along the world’s third-longest river. For the first time since researchers began keeping records 32 years ago, there was no natural reproduction of wild Chinese sturgeon in 2013, according to a report published by the Chinese Academy of Fishery Sciences. No eggs were found to have been laid by wild sturgeons in an area in central China’s Hubei province, and no young sturgeons were found swimming along the Yangtze toward the sea in August, the month when they typically do so.

“No natural reproduction means that the sturgeons would not expand its population and without protection, they might risk extinction,” Wei Qiwei, an investigator with the academy, told China’s official Xinhua news agency on Saturday. The fish is classed as “critically endangered” on the International Union for the Conservation of Nature’s “red list” of threatened species, just one level ahead of “extinct in the wild”. Only around 100 of the sturgeon remain, Wei said, compared with several thousand in the 1980s. Chinese authorities have built dozens of dams – including the world’s largest, the Three Gorges – along the Yangtze river, which campaigners say have led to environmental degradation and disrupted the habitats of a range of endangered species. Many sturgeon have also been killed, injured by ship propellers or after becoming tangled in fishermen’s nets.

Debt Rattle Sep 5 2014: We Live In A New World, But We Don’t Want To

Sep 052014

September 5, 2014 Posted by Raúl Ilargi Meijer at 2:32 pm Finance Tagged with: changes, Economics, inflation, new world, power, velocity of money 14 Responses »

Arthur Rothstein ‘Fruit tramps’ living in tents, Yakima, Washington July 1936

Looking around us today, it would – or at least could – seem obvious that we live in a new world. Which we don’t recognize – as being new – because we don’t want that world. We instead want more of what we used to know, with icing and a cherry on top. We want to go back, not forward, though we don’t phrase or see it that way. The underlying issue is that the ‘forward’ we do want is not available, and we have no problem fooling ourselves into believing we can still achieve it.

We want a world controlled by America, with Europe as a sort of hunchbacked sibling obediently limping in its footsteps. That is familiar, and that feels safe. Like it was in days gone by, went things seemed to go well for us. We want what we had back then, we just want more of it. We want growing economies, and better lives for our kids than we had, just like our parents did. When there’s a crisis, we want it solved, so we can return to what we had, and add to it.

Because we so obviously and one-dimensionally want this and only this, it’s very easy for those who try, to make us do whatever it is they like, as long as they hold forth the promise of delivering our ideal world of more of the same and then some. There’s no-one who promises a world of less, or a world that is genuinely new, not just in name, who stands a chance of being taken serious, much less of being voted into office.

There’s not an economist who doesn’t promise a return to growth, or to prosperity, if only some model (s)he believes in is followed. More stimulus, less stimulus, the ideas and theories and models seem to run the gamut, but actually they’re all the same. They’re goal-seeked. Economics as a whole, as a field, is. There are no theories that seek not to return us to growth. As if eternal growth is a natural law or a god given right.

We are already paying a huge price for having these contorted and convoluted images presented and sold to us as real, and for us to buy into them. In Japan, Shinzo Abe is busy unleashing an economic Fukushima upon his people, just so their country can return to growth. In China, the amounts of credit with which markets are flooded just so the illusion of growth can be maintained are stupendous.

Europe can’t wait for its crisis to be finally over, so more of the same, plus a bunch of added gadgets, is there for everyone to grab onto. In the US, the media-induced consensus is that the return to growth has already been realized. Hail the centra; bankers. More of the same, in various stages of ‘development’, can be seen in many other countries across the globe. All geared towards additional growth, towards hopes and dreams.

But everywhere, save perhaps in a few very poor places, the illusion of growth can only be bought with debt. And debt, how ironic, is the opposite of growth once there is too much of it. So they just have us believe there’s no such thing as too much.

A report from two St. Louis Fed economists this week blames low inflation levels in the US on ‘consumers’ hoarding money. With 40+ million Americans on food stamps, they could think of nothing else than a local version of Ben Bernanke’s insane notion of ‘excessive savings’ in China holding back the world economy.

Without even considering the option that people simply don’t have money to hoard. That they instead are buried in debt. That the money pumped into the system only reaches the top part of it, and gets stuck there. If people don’t spend, it must be because they have tons of cash sitting in their mattresses, not that they don’t have it. A sadder picture of the state of economics could not be painted. What even more sad is that these are the kind of yokels who determine economic policy.

We don’t stand a chance. At first, I liked to see them address velocity of money in their inflation ideas, but then found they had no idea what it was or meant. US velocity of – base- money is at a record low. People are not spending. The same goes for Japan and Europe. But that’s not because people are wallowing in endless piles of cash. It’s because they’re at the end of the line.

A somewhat related piece has PIMCO bond manager Bill Gross explain how it all works according to the book he talks:

Two variables figure in the monetary straitjacket Gross describes: credit creation and credit velocity. The former must constantly expand at a high enough rate to pay interest on previously issued liabilities so as not to trigger the need for the sale of existing assets. If the current rate on outstanding debt in the U.S. is 4.5%, the Fed should target credit expansion of at least 4.5% per year.

Nevertheless, credit expansion has averaged just 2% for the past 5 years and only 3.5% in the past year. U.S. underachievement in credit creation is to blame for today’s economic stagnation, where the economy struggles to reach 2% real GDP growth.

A second variable of monetary policy is the velocity of money. Gross says no central banker knows how fast money should be changing hands in the economy and must therefore only dial the level up or down cautiously in order to avert a credit collapse.

But as a general rule, he writes, “the projected return on financial assets (relative to their risk) must be sufficiently higher than the return on today’s or forward curve levels of cash (overnight repo), otherwise holders of assets sell longer-term maturities and hold dollar bills in a mattress — lowering velocity and creating a recession/debt delevering.”

Now you know: The US doesn’t create enough additional debt. That’s why the economy is doing so poorly. Where is other times the economy was founded and built on production, on people working and producing things, it’s now debt that makes it tick.

And since people don’t have money, contrary to what the St. Louis Fed guys claim, they will need to borrow, says Gross. But they don’t. Not even at historically low rates. And if people don’t have money, and don’t borrow, they don’t spend, and you’re not going to get either growth or inflation.

By the way, why inflation at certain levels has achieved such a mantra-like status is beyond me, certainly in the way it’s supposed to be manipulated by central bankers. I always thought a central bank’s main task was to make sure just enough ‘money’ was in circulation in an economy to let it function. Not to set a goal for inflation levels. Which undoubtedly is why they predictably always fail to achieve whatever goal it is they set.

Of course, as per Bill Gross just now, central bankers must tamper in a similar way with the velocity of money (consumer spending) and ‘dial the level up or down cautiously’. As if Bernanke can make Americans spend more, or less, as and when he sees fit. How crazy do ideas get? Is that mere wishful thinking, is it goal seeking, or is it an elementary lack of intelligence?

It’ll take us forever and a day to pay down our debts and achieve some, any, kind of growth again. But that should not be the end of the world, it’s merely a transition to a new world, which has already dawned (just not on us).

We’re in a new world, one without – economic -growth, but we see it through old eyes, and it’s ruled through old politics. If we don’t recognize the dangers of that discrepancy in time, we’re going to enter an era – we may already have – of many more botched western interventions like the ones in Ukraine and Iraq. Where our leaders, who always were power hungry to begin with, turn out to be blood thirsty as well, when it comes to re-establishing the power structures of old, which belong in times gone by, and which will never come back.

The task of – central – governments, central bankers, and certainly alliances like NATO, should be to make sure as few people get hurt in this transition as possible. They should be the keepers of the peace, and the protectors of the weak as well as the natural environment in their part of the world. So far, they’re 180º off in every single respect.

As long as we insist on seeing the world through our old eyes, focused on growth and on more of whatever we feel we need even more of, we will continue to pick the leaders who promise us that. That may have been sort of fine 50 years ago, but in today’s world it can only lead to destruction, bloodshed, poverty and misery.

We’ve seen our world change, and we’ve failed to keep to up with the changes. We don’t want to be content with less, no matter how much we already have. What we possess has become our self-image, and the one we portray upon the world. But be careful: it we don’t change that, fast, it’ll lead us to places we don’t want to go.

• Draghi Sees Almost $1 Trillion Stimulus as QE Fight Waits (Bloomberg)

Mario Draghi signaled at least €700 billion ($906 billion) of fresh aid for his moribund economy and left a fight with Germany over sovereign-bond purchases for another day. Pledging to “significantly steer” the European Central Bank’s balance sheet back toward the €2.7 trillion of early 2012 from 2 trillion euros now, the ECB president yesterday announced a final round of interest-rate cuts and a plan to buy privately owned securities. His mission: to revive inflation in the 18-nation euro area. Fully-fledged quantitative easing as deployed in the U.S. and Japan wasn’t enacted amid a split on the 24-member Governing Council, with Bundesbank President Jens Weidmann opposing the new stimulus and others seeking more. The latest round of measures pushed the euro below $1.30 for the first time since July 2013 and sent European bond yields negative. The steps “probably reflect that President Draghi does not have unanimity, or a large enough majority for quantitative easing,” said Andrew Bosomworth, portfolio manager at PIMCO. and a former ECB economist.

“The ECB is ready to do more if more is needed.” The ECB’s fresh monetary easing may help encourage companies and households to spend rather than save. It could also attract greater participation in a targeted lending program for banks that was unveiled in June and starts this month. Banks can borrow from the ECB for as much as four years at a small premium to the benchmark rate. The rate cuts mark the bottom line for conventional monetary policy. Declaring that the ECB can now reduce them no more, Draghi committed to buying so-called asset-backed securities and covered bonds in the hope that will funnel cash into an economy which stalled in the second quarter and where lending has been shrinking for more than two years.

Don’t worry, someone’ll issue more.

• Bond Drought Seen Challenging Draghi’s ABS Stimulus Plan (Bloomberg)

To appreciate the challenge Mario Draghi faces reviving Europe’s ailing economy by buying asset-backed securities, listen to Frank Erik Meijer. As head of ABS at Aegon Asset Management, which oversees €240 billion ($311 billion), Meijer says it takes him about three months to buy 1 billion euros of securities. “The number that’s circulating the market is €500 billion, but where is he going to get it from?” said Meijer, who is based in The Hague. “Existing bonds are unavailable so he might have to ask banks to create new ones.” The European Central Bank president’s plans are being greeted with skepticism by investors who have seen the €1.2 trillion market contract more than 40% since 2010 as regulators cracked down on the debt blamed for deepening the financial crisis. The securities are also typically bought by pension funds, insurers and banks who hold them until maturity.

Draghi said yesterday the ECB will buy a broad portfolio of “simple and transparent securities” that will include ABS and covered bonds as he seeks to free up bank balance sheets and stimulate lending. While declining to disclose the size of the program, he said it would have a “sizable” impact and details would be revealed after policy makers meet in October. “The news is clearly positive but the ECB will have to be careful not to alienate the existing investor base in ABS,” said Patrick Janssen, a fund manager at London-based M&G Investments, which oversees €21 billion of ABS. “There is a risk of us being crowded out.” The ECB is aware of the possibility of pushing investors from the market as it buys bonds. In a March paper, the bank’s researchers found that the U.S. Federal Reserve’s so-called quantitative easing program forced investors out of those sectors where the central bank had intervened.

Crazy. And damaging. Ireland and other broke nations should not borrow for free, and then do just that at breakneck speed. It’ll break their necks.

• Draghi’s Bond Rally Means Bailed-Out Ireland Can Borrow for Free (Bloomberg)

Four years ago, Ireland had to be bailed out by its European Union partners. Today investors are paying to lend it money. Ireland joined nations from Germany to Austria and Finland as its two-year note yield dropped below zero for the first time. Irish 10-year bond rates also dropped to record lows along with Italy’s after European Central Bank policy makers yesterday cut their key interest rate and signaled at least €700 billion ($906 billion) of aid to support the flagging euro-zone economy. A report today confirmed the region’s economic recovery ground to a halt in the second quarter. Negative yields reflect “ECB policy but also reflect a mounting belief in the lack of positive prospect for the European economy,” said Luca Jellinek, head of European rates strategy at Credit Agricole SA’s investment banking unit in London. “This is good news for the periphery.”

• Draghi Reaches The Dead-End Of Keynesian Central Banking (Stockman)

Europe is not growing much because most of its economies have been crushed under a mountain of debt, taxes, welfarism and statist dirigisme. Yet somehow the foolish pettifogger running the ECB thinks that driving the cost of money to the “lower bound” (i.e. zero) will help overcome these insuperable—and government made—barriers to prosperity. Yet in today’s financialized economies, zero cost money has but one use: It gifts speculators with free COGS (cost of goods sold) on their carry trades. Indeed, today’s 10 basis point cut by the ECB is in itself screaming proof that central bankers are lost in a Keynesian dead-end. You see, Mario, no Frenchman worried about his job is going to buy a new car on credit just because his loan cost drops by a trivial $2 per month, nor will a rounding error improvement in business loan rates cause Italian companies parched for customers to stock up on more inventory or machines.

In fact, at the zero bound the only place that today’s microscopic rate cut is meaningful is on the London hedge fund’s spread on German bunds yielding 97 bps—-which are now presumably fundable on repo at 10 bps less.Needless to say, when your only tool is a hammer, everything looks like a nail. And when you are a Keynesian with a hammer, it is presumed that nothing much was hammered before yesterday. That is to say, the whole mindless drive by the ECB toward the zero bound, which Draghi pointedly claimed to have achieved this morning, presumes that balance sheets—–the accumulated record of past actions—don’t matter. Instead, its all about the credit “flow” today and tomorrow. Accordingly, lower interest rates—no matter how trivial the change—are ritualistically presumed to stimulate more borrowing in the real economy, and therefore more spending, income and virtuous circle of Keynesian growth.

It lost a lot more just in falling share prices today.

• BP Found Grossly Negligent In Gulf Spill, Costs To Top $50 Billion (Bloomberg)

BP acted with gross negligence in setting off the biggest offshore oil spill in U.S. history, a federal judge ruled, handing down a long-awaited decision that may force the energy company to pay billions of dollars more for the 2010 Gulf of Mexico disaster. U.S. District Judge Carl Barbier held a trial without a jury over who was at fault for the catastrophe, which killed 11 people and spewed oil for almost three months into waters that touch the shores of five states. “BP has long maintained that it was merely negligent,” said David Uhlmann, former head of the Justice Department’s environmental crimes division. He said Barbier “soundly rejected” BP’s arguments that others were equally responsible, holding “that its employees took risks that led to the largest environmental disaster in U.S. history.” The case also included Transocean and Halliburton , though the judge didn’t find them as responsible for the spill as BP. Barbier wrote in his decision today in New Orleans federal court that BP was “reckless,” while Transocean and Halliburton were negligent.

He apportioned fault at 67% for BP, 30% for Transocean and 3% for Halliburton. U.K.-based BP, which may face fines of as much as $18 billion, closed down 5.9% to 455 pence in London trading. “The court’s findings will ensure that the company is held fully accountable for its recklessness,” U.S. Attorney General Eric Holder said. “This decision will serve as a strong deterrent to anyone tempted to sacrifice safety and the environment in the pursuit of profit.” The ruling marks a turning point in the legal morass surrounding the causes and impact of the disaster. Four years of debate and legal testimony have centered on who was at fault and how much blame each company should carry. BP is “subject to enhanced penalties under the Clean Water Act” because the discharge of oil was the result of its gross negligence and willful misconduct, Barbier held. BP said it “strongly disagrees” with the decision and will challenge it before the U.S. Court of Appeals in New Orleans.

Yup.

• BP Ruling ‘Wakeup Call’ as Risks Mount in Oil Search (Bloomberg)

A U.S. judge’s watershed ruling means the final cost to BP Plc for the 2010 Gulf oil spill may eclipse $50 billion, wiping out years of profits and highlighting the risks of drilling as the industry pushes into more dangerous areas such as deeper waters and ice-bound Arctic fields. Yesterday’s court decision that BP acted with gross negligence in the Gulf of Mexico disaster may hamstring the company financially as the industry’s search for resources becomes more expensive and dangerous. Companies including Exxon Mobil and Shell are also facing increasing pressure to show investors they can still grow as production declines. As producers scour the globe for oil and natural gas, the ruling shows they’ll be held accountable for mistakes that may be inevitable given the complexity of the work, said Edward Overton, professor emeritus at Louisiana State University’s department of environmental sciences in Baton Rouge.

While the judge has yet to rule on how much oil was spilled, a key factor in determining additional fines, millions of barrels of crude from the well harmed wildlife and fouled hundreds of miles of beaches and coastal wetlands. If $50 billion isn’t “a wakeup call to do it right, to slow down, to make sure all your i’s are dotted and t’s are crossed in terms of safety — not just for BP but also for the industry — I don’t know what is,” he said. The companies have little choice in the chase for big, new discoveries as access to resources continues to be limited. Exxon, BP, Shell, Chevron Corp. and Total SA earned more than $1 trillion in total profit during the past decade, almost all of which has been spent in the search for new pools of oil and natural gas.

Since 2004, the five companies have tripled capital spending and their combined output has fallen by 1.4 million barrels a day, according to data compiled by Bloomberg. Problems have arisen as companies drill deeper and in more perilous conditions. Shell last week submitted a plan for drilling in Alaska’s Arctic, after a vessel ran aground in 2012. The ultra-deep Davy Jones well in the Gulf, among the most expensive ever drilled, has yet to produce what operator Freeport-McMoRan Copper & Gold Inc. has said may be trillions of cubic feet of gas. The complexity of deep drilling or navigating Arctic waters means that further accidents may be inevitable, said Ed Hirs, an energy economist at the University of Houston. “People may say this will never happen again, but it probably will, although it will happen in a different way,” said Hirs, who also founded his own production company. “It happened again in space travel, which is similar in complexity and scale.”

Not going to happen.

• ‘Bold Action’ Needed On Europe Unemployment (CNBC)

European employment targets are “unrealistic” and “bold action” is needed to boost job creation, according to a report published by the Ambrosetti Forum ahead of the open of its international economics conference. About 5.6 million jobs have been lost across the 28 countries that belong to the European Union (EU) since the global financial crisis of 2008, Ambrosetti’s economists say. “The economic crisis produced growing unemployment levels in the EU, which now requires bold action from policymakers to boost labor demand as well as to implement labor market structural reforms,” the economists wrote in their “Labor market scenario in Europe” report. Europe’s high unemployment, low price rises and stagnant growth is likely to be a hot topic at this year’s Ambrosetti Forum—the annual get-together of heads of states, top business people and academics at Lake Como in Italy.

The Organization of Economic Co-operation and Development warned this week that unemployment in its member countries will remain well-above pre-crisis levels until 2016 at the earliest. Unemployment averaged 10.3% across the EU in July—the same as in June. Nearly one-quarter (24.5%) of Spaniards were unemployed during the month, along with 12.6% of Italians and 11.5% of Irish citizens. With statistics like these in mind, the Ambrosetti report’s authors cast doubt on the likelihood of the EU meeting its target of creating 20 million new jobs by 2020. “This seems a particularly unrealistic target for Spain, Italy and France: they need to create 4.4 million, 2.5 million and 2 million new jobs respectively,” they wrote.

Break it will.

• Fears Resurface Over Europe Breakup (CNBC)

On Thursday morning, the European Central Bank surprised markets with a raft of stimulative measures including cuts in interest rates and the commencement of asset purchases. The news sent the euro currency much lower, but currency expert Boris Schlossberg of BK Asset Management identifies another reason why the euro could call even further: fresh concerns over a European Union breakup. ECB president Mario Draghi, in announcing the measures, mentioned that the vote was not unanimous. The strongest economy in the eurozone, Germany, is widely expected to have dissented. “It’s a very, very tenuous union in many ways, and we see the conflict come to the forefront anytime we have these issues,” Schlossberg said Thursday on CNBC’s “Futures Now.”

At this point, German unease over ECB stimulus “could become a very, very serious problem,” he said. “We’ll be watching the conflict very carefully in the fall and into the winter to see just how serious the Germans are in their opposition to this move.” Ironically, Schlossberg notes that it was the very reticence of the Germans that forced the ECB into action. The central bank is “the only institution within the eurozone that is able to act in concert. There is is simply no other way for Europeans to stimulate growth, because they have all these disparate governments with different points of view.” But while Schlossberg expects the euro/dollar to fall all the way to 1.2850, he does note that it is “extremely oversold,” and could bounce in the near-term.

• European Businesses Call For No More Sanctions (RT)

The Association of European Businesses has urged the governments of the European Union and Russia to protect foreign investors from any “further retaliatory measures.” The Moscow-based lobby group represents the interests of more than 600 European businesses in Russia, and has written a letter to all 28 heads of state and governments of the EU, as well to the Russian and Ukrainian leadership stressing that among its members “are global companies with businesses in sectors which would be directly affected by these measures.” The group has requested a meeting with European Commission President Jose Manuel Barroso in Kiev next week. “The introduction of such measures could lead to a serious decline in production and jobs, affecting not only manufacturers, but also suppliers and retailers working in these sectors,” the letter, published Thursday, reads. The lobby group says it’s politically neutral, but is interested in keeping business between the two functional.

“All this would harm not only the business of the companies concerned, but also fiscal revenues through the loss of tax and duty payments,” the letter said. Sanctions are putting a brake on business activity in Europe which is plugged into the Russian economy. Trade between Russia and the EU is $440 billion and thousands of companies do regular day-to-day business in Russia. The EU has imposed three rounds of sanctions against Russian individuals and business, most recently expanding the blacklist to include sanctions against key industries- energy, banking, and weapons. Russia retaliated with an embargo on agriculture products from the EU, which could cost $6.6 billion per year in lost exports. EU ministers will meet on Friday to discuss new sanctions against Russia for its perceived role in the Ukraine conflict.

• UK Says New Russian Sanctions Could Be Lifted If Ceasefire Holds (Reuters)

Britain’s Foreign Secretary Philip Hammond said on Friday the West would push ahead with new sanctions against Russia over the crisis in Ukraine but said these could be lifted should a proposed ceasefire take hold. NATO demanded on Thursday that Moscow withdraw its troops from Ukraine, and the European Union and the United States are preparing a new round of economic sanctions against Russia for its incursion. “There will be another step up of the pressure today when the EU meets in Brussels to decide on the next round of sanctions,” Hammond told Sky News from Wales where NATO leaders are meeting. “Our economies are fundamentally more robust and resilient than the Russian economy and if Russia ends up in an economic war with the West, Russia will lose.”

However, he said measures against Russia could be eased if a proposed ceasefire between Ukraine and pro-Russian rebels expected to be agreed later on Friday takes hold. “If there is a ceasefire, if it is signed and if it is then implemented, we can then look at lifting sanctions off but … there is a great degree of scepticism about whether this action will materialise, whether the ceasefire will be real,” Hammond told BBC TV. “We can always take the sanctions off afterwards, I don’t think we want to be distracted from our determination to impose further sanctions in response to Russia’s major military adventure into Ukraine.”

Exactly.

• ‘West Should Take Responsibility for Escalating Ukrainian Crisis’ (RIA)

Western leaders meeting at this week’s NATO summit are almost wholly responsible for the ongoing crisis in Ukraine, Jan Oberg, co-founder of the Sweden-based Transnational Foundation for Peace and Future Research, told RIA Novosti on Friday. “The US, NATO and European Union carry at least 80% of the responsibility for Ukraine’s crisis due to the foreign-provoked regime change in Kiev and the EU ultimatum to Ukraine about either joining the EU or the eastern Customs Union,” Oberg said. “And over the longer term – because of NATO’s expansion from the Baltic republics to Tbilisi.

These policies lack statesmanship, are reckless in the perspective of promises given to ex-Soviet president Mikhail Gorbachev when the old Cold War ended and can be seen only as provocative in the eyes of Russia,” he added. NATO leaders gathered in Wales on Thursday, September 4, for two days of talks focused on Ukraine and the rapid rise of Islamic extremists in Iraq and Syria. They have criticized Russia, calling its influence on the conflict in eastern Ukraine “destabilizing.”

The battle for financial control.

• Russia Sees Serious Threat In FATCA (RT)

Russia’s financial system is “threatened” by America’s new tax law that demands foreign banks report on all American citizens’ banking activities, the Russian Federal Financial Monitoring Service said Thursday. The head of the financial monitoring authority Yury Chikhanchin likened the one-sided data exchange to turning Russian banks into spies for the Americans. “Essentially, our financial institutions are becoming tax informants for the American economy. As similar systems start spreading to other countries, they can bring serious risks to our financial system,” Chikhanchin said at a banking forum in Sochi. FATCA requires foreign banks to provide information on American clients, who have over $10,000 in deposits, to the US Internal Revenue Service (IRS). If a bank does not comply; it can be subject to a 30% fine. Before client information is sent to America, it will pass through the Central Bank of Russia and other local financial or government agencies, which still have the right to keep the information private.

On June 30, just before the deadline, Russia signed a law that allows Russian banks to share the tax data of American clients with US tax authorities, but participation isn’t mandatory. The law simply gives Russian banks the ability to work with FATCA, but does not deem it obligatory. In Russia, only 10% of capital in the financial system is owned by foreigners or foreign entities. Participating Russian banks had to register by May 5, 2014. The Russian financial watchdog believes the American tax law is itself a form of sanctions. The head of the authority believes that such mechanisms can exist, but should be multilateral. Originally Russia planned a bilateral information exchange with the US over FATCA after the law was passed in 2010 but the US Treasury Department suspended negotiations with Russia in March 2014 over the Ukrainian conflict.

Yikes.

• Obviously Not A Bubble (Zero Hedge)

Via John Hussman… no bubble, no consequences…

• Dallas Fed Chief Repeats Gross Portrayal Of Yellen As ‘Hindu Goddess’ (MW)

Dallas Fed President Richard Fisher knows a good phrase or two when he hears one. So at a speech in front of the U.S.-India Chamber of Commerce and Ambassador S. Jaishankar, Fisher of course trotted out this description of Federal Reserve Chairwoman Janet Yellen’s speech at Jackson Hole, Wyo. on the labor market.

Bill Gross, one of our country’s preeminent bond managers, made a rather pungent comment about our efforts. He noted that President Harry Truman “wanted a one-armed economist, not the usual sort that analyzes every problem with ‘on the one hand, this, and on the other, that.’” Gross claimed that Fed Chair (Janet) Yellen, in her speech given recently at the Fed’s Jackson Hole, Wyo., conference, introduced so many qualifications about the status of the labor market that “instead of the proverbial two-handed economist, she more resembled a Hindu goddess with a half-dozen or more appendages.”

In keeping with the theme of the night, Fisher also pointed out — in calling Texas a job-creating juggernaut — that the term juggernaut is derived from the word Jaganmatha, a title of Krishna. Fisher repeated his concern about the central bank’s policy, saying “we have overshot the mark” on interest rates.

NZ should focus on feeding itself, not the Chinese.

• New Zealand Greens See Road to Ruin in Rivers of Milk (Bloomberg)

New Zealand Prime Minister John Key sees milk and oil driving economic growth for years to come. The Green Party says he’s running a “pollution economy” that’s destroying the country’s clean-green brand. The debate about the future shape of New Zealand’s economy is at the heart of the campaign for the Sept. 20 election, in which the Greens could prove pivotal in denying Key a third term in office. The ruling National Party’s growth plan relies on increasing export earnings from the dairy and fossil-fuel industries, which generate more than NZ$18 billion ($15 billion) a year and employ 60,000 people. Oil prospectors scouring marine sanctuaries and cow urine polluting rivers are at odds with New Zealand’s “100% Pure” tourism pitch and the pristine scenery depicted in the Lord of the Rings and Hobbit movies. “We’re doing exactly the wrong thing,” Greens co-leader Russel Norman said in an interview. “People want food that is clean, green and safe. New Zealand has a great opportunity to provide that. Instead, we’re pursuing a pollution economy.”

New Zealand’s 180,000 kilometers (112,000 miles) of rivers are a vital source of water for the dairy industry, which has expanded from pastures in the North Island’s Waikato region into the rolling hills and patchwork plains of the South Island. The number of cows has almost doubled in the past 20 years to 4.8 million. Effluent from the animals has discolored waterways, while the nitrogen from their urine is soaking through the soil to contaminate groundwater, spoil rivers and choke lakes with algal bloom, a parliamentary report said last year: “The large-scale conversion of more land to dairy farming will generally result in more degraded fresh water”. “New Zealand does face a classic economy versus environment dilemma.” Norman, 47, says dairy farming focused on volume is destroying New Zealand’s environmental credentials and hurting the industry itself. “It’s very shortsighted to maximize production of milk powder,” he said. “We need to accept we’re never going to feed the world and focus on selling to people who want high-value products. The long-term future of dairying is dependent on protecting the brand.”

I know I say this a lot, but: Not surprised.

• Secret Network Connects Harvard Money to Payday Loans (Bloomberg)

Alex Slusky was under pressure to put the money in his private-equity fund to work. The San Francisco technology financier had raised $1.2 billion in 2007 to buy and turn around struggling software companies. By 2012, investors including Harvard University were upset that about half the money hadn’t been used, according to three people with direct knowledge of the situation. Three Americans on the Caribbean island of St. Croix presented a solution. They had built a network of payday-lending websites, using corporations set up in Belize and the Virgin Islands that obscured their involvement and circumvented U.S. usury laws, according to four former employees of their company, Cane Bay Partners VI LLLP. The sites Cane Bay runs make millions of dollars a month in small loans to desperate people, charging more than 600 percent interest a year, said the ex-employees, who asked not to be identified for fear of retaliation.

Slusky’s fund, Vector Capital IV LP, bought into Cane Bay a year and a half ago, according to three people who used to work at Vector and the former Cane Bay employees. One ex-Vector employee said the private-equity firm didn’t tell investors the company is in the payday-lending business, where borrowers repay loans out of their next paychecks. Vector’s investment in Cane Bay shows the continuing allure of the payday-loan business, even after most states from California to New York restricted or banned it to protect consumers. The crackdown has driven borrowers online. Internet payday lending in the U.S. has doubled since 2008 to $16 billion a year, with half made by lenders based offshore or affiliated with American Indian tribes who say state laws don’t apply to them, according to John Hecht, an analyst at Jefferies Group LLC in San Francisco.

Debt Rattle Aug 4 2014: Debt and Energy, Shale and the Arctic

Aug 042014

August 4, 2014 Posted by Raúl Ilargi Meijer at 7:36 pm Energy, Finance Tagged with: arctic, credit, power, Shale, Shell 8 Responses »

Jack Delano Migratory farm worker from Florida in her Sunday clothes July 1940

I know I’ve talked about it more than once lately, but at least for now I don’t think it can be said enough. The world energy situation is much worse than you have been, and are being, led to believe. Even if you do understand the principle that underlies peak oil (by no means a given).

I’ve also repeatedly made the point that the real energy predicament is the real driver behind recent geopolitical events, notably Ukraine. Which is not to say that Libya, Iraq, Gaza or the South China Sea are not, just the Ukraine seems fresher and a more overt play for fossil resources. But let’s stay away from politics today – much as we can -.

The Daily Telegraph gives a podium to Tim Morgan, former global head of research at inter-dealer money broker Tullett Prebon, to present his view of the shale industry. Morgan draws the same conclusion that we at The Automatic Earth drew years ago – only now it’s news … -, and wrote about on numerous occasions.

See for instance Get ready for the North American gas shock , Fracking Our Future , Shale Gas Reality Begins to Dawn , Shale Is A Pipedream Sold To Greater Fools , The Darker Shades Of Shale . And that’s just a sample.

I may like to think that we have over time demolished shale as a viable energy industry so rigorously that nothing should need to be said it anymore. But no, it needs to be repeated by ever more well-placed individuals before it sinks in. So be it.

That conclusion is, shale is about money, not energy. And as such it is a huge money drain. It’s not an asset, it’s a sinkhole. As I cited only last week, the US shale industry lost over $110 billion per year over the past 5 years. That’s half a trillion dollars down the waste hole. In cheap credit. Who’s going to pick up that tab?

In essence, shale, and hence fracking, is nothing more, or less, than the purest form of land speculation. Location, location, location. The only thing that appears to make it stick out from other forms of land speculation is its utterly destructive character. It smells of desperation no matter what direction the wind comes from.

Money broker Morgan focuses on Britain and its ill-fated shale dreams:

Shale Gas: ‘The Dotcom Bubble Of Our Times’

[..] hardly anyone seems to have asked the one question which is surely fundamental: does shale development make economic sense? My conclusion is that it does not. That Britain needs new energy sources is surely beyond dispute. Between 2003 and 2013, domestic production of oil and gas slumped by 62% and 65% respectively, while coal output decreased by 55%. Despite sharp increases in the output of renewables, overall energy production has fallen by more than half. [..]

Those who claim that Britain faces an energy squeeze are right, then. But those who claim that the answer is using fracking to extract gas from shale formations are guilty of putting hope ahead of reality. The example held up by the pro-fracking lobby is, of course, the US, where fracking has produced so much gas that the market has been oversupplied, forcing gas prices sharply downwards.

The trouble with this parallel is that it is based on a fundamental misunderstanding of the US shale story. We now have more than enough data to know what has really happened in America. Shale has been hyped (“Saudi America”) and investors have poured hundreds of billions of dollars into the shale sector. If you invest this much, you get a lot of wells [..]. If a huge number of wells come on stream in a short time, you get a lot of initial production. This is exactly what has happened in the US.

The key word here, though, is “initial”[..] Compared with “normal” oil and gas wells, where output typically decreases by 7%-10% annually, rates of decline for shale wells are dramatically worse. It is by no means unusual for production from each well to fall by 60% or more in the first 12 months of operations.

All this is old fodder for our readership. If anything, that 60% decline in the first year of a typical well is greatly underestimated.

Faced with such rates of decline, the only way to keep production rates up (and to keep investors on side) is to drill yet more wells. This puts operators on a “drilling treadmill”, which should worry local residents just as much as investors. Net cash flow from US shale has been negative year after year, and some of the industry’s biggest names have already walked away. The seemingly inevitable outcome for the US shale industry is that, once investors wise up, and once the drilling sweet spots have been used, production will slump, probably peaking in 2017-18 and falling precipitously after that. The US is already littered with wells that have been abandoned, often without the site being cleaned up.

2017-18? I doubt the US shale industry’s will make it in one piece that long. My bet would be investors will run for cover before.

Meanwhile, recoverable reserves estimates for the Monterey shale – supposedly the biggest shale liquids play in the US – have been revised downwards by 96%. In Poland, drilling 30-40 wells has so far produced virtually no worthwhile production. In the future, shale will be recognised as this decade’s version of the dotcom bubble. In the shorter term, it’s a counsel of despair as an energy supply squeeze draws ever nearer. [..]

The dotcom bubble may be, or seem to be, a somewhat fitting metaphor for shale, but I’m thinking much more along the lines of Klondike, and any other kind of gold rush. Plus the ghost towns they all left behind.

And it’s by no means just shale where our fossil fuel supplies get squeezed. The problems Big Oil is drowning in are much broader. Take, for instance, the Arctic. It’s starting to look a lot like shale, only in a much harsher climate. That even the billions of Big Oil are no match for. Oilprice.com has this:

More Oil Companies Abandoning Arctic Plans, Letting Leases Expire

After years of mishaps and false starts, some oil companies are giving up on drilling in the Arctic. Many companies have allowed their leases on offshore Arctic acreage to expire, according to an analysis by Oceana that was reviewed by Fuel Fix. Since 2003, the oil industry has allowed the rights to an estimated 584,000 acres in the Beaufort Sea to lapse.

It wasn’t supposed to happen this way. The oil industry was once enormously optimistic about drilling for oil in the Beaufort and Chukchi Seas, off the north coast of Alaska. The U.S. Geological Survey estimated in a 2008 study that offshore Alaska holds almost 30 billion barrels of oil and 221 trillion cubic feet of natural gas.

In July 2012, Shell temporarily lost control of its Noble Discoverer rig, which almost ran aground. Shell’s oil spill response ship also failed inspections, which delayed drilling. Shell ultimately had to throw in the towel for the year as the summer season drew to a close. Finally, on December 31, Shell’s Kulluk ship ran aground as the company was towing it out of Alaskan waters. The events forced Shell to take a step back, and the company announced in February 2013 that it would suspend its drilling campaign for the year. It hasn’t returned.

[..] … earlier this year, a court issued a critical setback to the oil company, ruling that the Interior Dept. didn’t follow the law in an earlier Arctic auction. In response to the ruling, Shell’s new CEO Ben van Beurden cancelled drilling for yet another year. “This is a disappointing outcome, but the lack of a clear path forward means that I am not prepared to commit further resources for drilling in Alaska in 2014,” he said.

Van Beurden has also embarked upon a $15 billion two-year divestment program, with the intention of shedding higher cost assets around the world in an effort to improve Shell’s financial position, which had deteriorated in recent quarters due to high-cost “elephant projects.” That would suggest that the Arctic program could get the axe.

Big Oil, Shell, Exxon, Total, BP and others, are desperate for additional reserves. Exxon’s output fell 5.7% last year. If these companies let options expire that they paid millions for, something’s wrong. In simple terms: they can’t get to the resources at a price that’s economically viable.

The Oilprice article is based on this from FuelFix. And while we’re at it, let’s delve a bit deeper, so at the end of the day we understand what is happening as best we can.

Oil Companies Forfeit Arctic Drilling Rights

Oil companies that locked up more than 1.3 million acres of the Beaufort Sea for drilling in 2007 have since relinquished nearly half that territory. The industry’s appetite for tapping those Arctic waters may be waning even as the Obama administration plans to auction off more of the area. Oil companies have ceded rights to drill on roughly 584,000 acres[..]

… all but seven of the 141 still-active oil and gas leases in the Beaufort Sea along Alaska’s northeast coast are partly or completely held by a single firm, Shell [..] “Nearly half of the leases purchased in the 2003 to 2007 lease sales have been allowed to expire as company after company decides to forgo or delay activities in the U.S. Arctic Ocean …

Still on Tuesday, the Obama administration took the first formal steps to do precisely that, inviting oil companies, environmentalists, Alaska residents and other stakeholders to weigh in on what parts of the U.S. Beaufort Sea should be open for leasing during a 2017 auction. The Interior Department’s Bureau of Ocean Energy Management also has asked for public input on what coastal waters – from California and Alaska to the Gulf of Mexico – should be available for leasing from 2017 to 2022. [..]

Interior Department officials have stressed they want to balance any future oil development in the Arctic with preservation of the area’s unique ecosystem and subsistence fishing in the region. So far, the ocean energy bureau is continuing to work on the Chukchi Sea sale, even without a single specific industry nomination for territory that should be sold off. The agency was flooded with maps and other data suggesting areas that should be off limits from local communities and conservation groups.

Administration officials have suggested they are looking for ways to get more input from oil companies as they decide whether to hold the Chukchi Sea auction or cancel it. [..]

But oil companies have struggled to tap the potential lurking under those remote and icy waters — vividly illustrated by the series of mishaps that befell Shell as it drilled exploratory wells in the Chukchi and Beaufort seas two years ago. A specialized, first-of-its-kind oil spill containment system was not ready on time, engines discharged more air pollution than authorities had permitted to be released and the company’s Kulluk drilling unit ended up beached on a rocky Alaskan island’s shore on Dec. 31, 2012. [..]

Many of the forfeited Beaufort Sea oil leases documented by Oceana may have simply been allowed to expire — the likely fate for 39 blocks sold for $9 million in a 2003 auction. Others may have been relinquished early. Industry representatives say the decline in active Beaufort Sea oil leases represents a natural release of acreage based on individual company’s decisions about what they believe to be the most promising prospects.

Arctic oil exploration is also an expensive proposition that may be tough for even well-capitalized companies to justify amid an onshore drilling boom.

Shell has 100% ownership of 406,283 leased Beaufort Sea acres and 40% ownership in an additional 310,573 acres where leases are jointly held with ENI and Repsol. Outside of Shell and BP’s close-to-shore operations, ENI and Repsol are the only other companies holding active Beaufort Sea leases, about 23,861 acres’ worth. That’s a big contrast from 2007, when seven companies held active leases in the Beaufort Sea, including France’s Total, Canada’s EnCana Corp., Armstrong Oil and Gas, and Conoco.

While there seems to be a subtle way to blame the greens for the giant mishaps in there, the overall message is clear: it just can’t be done. It’s not viable at present prices. And before you dream away about the industry benefits of $200 oil, don’t forget that if prices were to go up substantially, a lot less people would be able to afford them. Catch 22.

Someone may still try at some point in the – increasingly desperate – future, but by then oil and gas won’t be anywhere near the industry it is today, and has been for 50-100 years. The money won’t be there, not on the supply side, and not on the demand side.

Obviously, the issue with that is fossil fuels give nations and societies, as well as corporations and individuals, power. Energy=power.

We presently, each of us in the west, have 200+ energy slaves at our disposal night and day, provided by coal, oil and gas. As a group, we maintain our domination over the rest of the world by applying the energy provided by oil fossil fuels to our defense against ‘others’, and to attacking them where we see fit.

If we stop doing that, if we run out, we risk being overrun. To prevent that from happening, we will attempt to grab, and hold on to, to as much as we can from what is left. But so do the ‘others’.

Arctic and shale are about the only ‘new’ sources of oil and gas we have, or had, and the Saudi’s won’t be able to make up for the difference. Not even close.

What is happening at this very moment in the shale industry and in the Arctic is like a big angry bull waving a bright red flag and waiting to have a go at the torero (that would be us).

The only possible way to go from here is to lower your energy demand, and your reliance on the energy demand of your society, as much as you can. 90% is a good and viable number to go for. If you don’t, you will be swept up in the biggest and deadliest battle ever.

The westworld will be hit hard and bloody by a financial collapse well before the energy war comes, and it’s therefore not much use right now to focus on energy, but in the end it’s really the same battle. It’s a very primitive fight for power. That’s what we do when push comes to shove. You too.

• Shale Gas: ‘The Dotcom Bubble Of Our Times’ (Telegraph)

Public opinion has been divided very starkly indeed by the government’s invitation to energy companies to apply for licences to develop shale gas across a broad swathe of the United Kingdom. On the one hand, many environmental and conservation groups are bitterly opposed to shale development. Ranged against them are those within and beyond the energy industry who believe that the exploitation of shale gas can prove not only vital but hugely positive for the British economy. Rather oddly, hardly anyone seems to have asked the one question which is surely fundamental: does shale development make economic sense? My conclusion is that it does not. That Britain needs new energy sources is surely beyond dispute. Between 2003 and 2013, domestic production of oil and gas slumped by 62pc and 65pc respectively, while coal output decreased by 55pc.

Despite sharp increases in the output of renewables, overall energy production has fallen by more than half. A net exporter of energy as recently as 2003, Britain now buys almost half of its energy from abroad, and this gap seems certain to widen. The policies of successive governments have worsened this situation. The “dash for gas” in the Nineties accelerated depletion of our gas reserves. Labour’s dithering over nuclear power put replacement of our ageing reactors at least a decade behind schedule, and a premature abandonment of coal has taken place alongside an inconsistent, scattergun approach to renewables. Those who claim that Britain faces an energy squeeze are right, then. But those who claim that the answer is using fracking to extract gas from shale formations are guilty of putting hope ahead of reality. The example held up by the pro-fracking lobby is, of course, the United States, where fracking has produced so much gas that the market has been oversupplied, forcing gas prices sharply downwards.

The trouble with this parallel is that it is based on a fundamental misunderstanding of the US shale story. We now have more than enough data to know what has really happened in America. Shale has been hyped (“Saudi America”) and investors have poured hundreds of billions of dollars into the shale sector. If you invest this much, you get a lot of wells, even though shale wells cost about twice as much as ordinary ones. If a huge number of wells come on stream in a short time, you get a lot of initial production. This is exactly what has happened in the US. The key word here, though, is “initial”. The big snag with shale wells is that output falls away very quickly indeed after production begins. Compared with “normal” oil and gas wells, where output typically decreases by 7pc-10pc annually, rates of decline for shale wells are dramatically worse. It is by no means unusual for production from each well to fall by 60pc or more in the first 12 months of operations alone.

• Oil Companies Abandoning Arctic Plans, Letting Leases Expire (OilPrice)

After years of mishaps and false starts, some oil companies are giving up on drilling in the Arctic. Many companies have allowed their leases on offshore Arctic acreage to expire, according to an analysis by Oceana that was reviewed by Fuel Fix. Since 2003, the oil industry has allowed the rights to an estimated 584,000 acres in the Beaufort Sea to lapse. It wasn’t supposed to happen this way. The oil industry was once enormously optimistic about drilling for oil in the Beaufort and Chukchi Seas, off the north coast of Alaska. The U.S. Geological Survey estimated in a 2008 study that offshore Alaska holds almost 30 billion barrels of oil and 221 trillion cubic feet of natural gas. Shell Oil has been the leader in the Arctic, venturing into territory where other oil companies were unwilling to go. It promised billions of dollars in revenue and enhanced energy security. But it ran into a seemingly endless series of accidents and setbacks.

In 2009, the Department of Interior approved Shell’s drilling plan. But the following summer, a court suspended Shell’s lease until the offshore regulators could conduct a more thorough scientific review. After providing more detail, Shell received another go-ahead, with high expectations for drilling in the summer of 2012. But that proved to be a fateful year for Shell’s Arctic campaign. In July 2012, Shell temporarily lost control of its Noble Discoverer rig, which almost ran aground. Shell’s oil spill response ship also failed inspections, which delayed drilling. Shell ultimately had to throw in the towel for the year as the summer season drew to a close. Finally, on December 31, Shell’s Kulluk ship ran aground as the company was towing it out of Alaskan waters. The events forced Shell to take a step back, and the company announced in February 2013 that it would suspend its drilling campaign for the year. It hasn’t returned.

This is how badly bernanke f***ed up the US economy.

• US Banks Braced For $1 Trillion Deposit Outflows (FT)

US banks are steeling themselves for the possibility of losing as much as $1tn in deposits as the Federal Reserve reverses its emergency economic policies and raises interest rates. JPMorgan Chase, the biggest US bank by deposits, has estimated that money funds may withdraw $100bn in deposits in the second half of next year as the Fed uses a new tool to help wind down its asset purchase programme and normalise rates. Other banks including Citigroup, Bank of New York Mellon and PNC Financial Services have also said they are trying to gauge the potential effect of the Fed’s exit on institutional or retail depositors who might choose to switch to higher interest accounts or investments. “There are investors, traders and sellside analysts that are very concerned about it,” said one top-10 investor in several large US banks.

An outflow of deposits would be a reversal of a five-year trend that has seen significant amounts of extra cash poured into banks thanks to the Fed flooding the financial system with liquidity. These deposits, which act as a cheaper source of funding, have helped banks weather the aftermath of the financial crisis. Now the worry is that such deposit funding may prove fleeting as the Fed retreats. Banks might have to pay higher rates on deposits to retain customers – potentially hitting their profits and sparking a price war for client funds. SNL Financial estimates that US banks have collectively increased their deposits by 23% over the past four years, at the same time that their cost of deposit funding has dropped to a 10-year low. “You essentially have frictionless non-interest bearing deposits funding much of the banking system today,” said Peter Atwater, former JPMorgan banker and president of research firm Financial Insyghts. “There’s no financial incentive to stay.”

• Half-Trillion-Dollar Exodus Magnifying US Bill Shortage (Bloomberg)

One of the biggest winners in the push to make money-market funds safer for investors is turning out to be none other than the U.S. government. Rules adopted by regulators last month will require money funds that invest in riskier assets to abandon their traditional $1 share-price floor and disclose daily changes in value. For companies that use the funds like bank accounts, the prospect of prices falling below $1 may prompt them to shift their cash into the shortest-term Treasuries, creating as much as $500 billion of demand in two years, according to Bank of America Corp. Boeing Co., the world’s largest maker of planes, and the state of Maryland are already looking to make the switch to avoid the possibility of any potential losses. With the $1.39 trillion U.S. bill market accounting for the smallest share of Treasuries in six decades, the extra demand may help the world’s largest debtor nation contain its own funding costs as the Federal Reserve moves to raise interest rates.

“Whether investors move into government institutional money-market funds or just buy securities themselves, there will be a large demand” for short-dated debt, Jim Lee, head of U.S. derivatives strategy at Royal Bank of Scotland Group Plc’s capital markets unit in Stamford, Connecticut, said in a telephone interview on July 28. “That will lower yields.” He predicts investors may shift as much as $350 billion to money-market funds that invest only in government debt. During the past five years, America has enjoyed some of the lowest financing costs in its history as the Fed held its benchmark rate close to zero and bought trillions of dollars in bonds to restore demand after the credit crisis.

Based on prevailing Treasury bill rates, it costs the U.S. just 0.02% to borrow for three months as of 1:13 p.m. today in Tokyo. In the five decades prior to 2008, the average was more than 5%. Now, with traders pricing in a 58% chance the Fed will raise its overnight rate by July, speculation is building that borrowing costs are bound to increase. That’s made finding buyers for the nation’s debt securities even more important. The sweeping rule changes in the money-market fund industry may help provide that demand. Since 1983, money-market funds have been permitted to keep share prices at $1, meaning a dollar invested can always be redeemed for a dollar.

Right facts, wrong logic.

• That Plunge In Stocks Is Just The Beginning (MarketWatch)

If the ups and downs of the past week have taught investors anything, it’s that there are cracks in this 5 1/2-year-old bull market. The lesson for investors? Tread carefully. Stocks took a tumble as a raft of economic data sparked fears the Federal Reserve could speed up its timetable for raising interest rates. The S&P 500 took its biggest weekly hit in more than two years, losing 2.7%. The Dow Jones Industrial Average, meanwhile, sliced through its 50-day moving average and erased the gains that had tenuously built up this year. “It reminded people that the stock market can actually go down. It seems like a lot of people had forgotten,” said Mike O’Rourke, chief market strategist at JonesTrading.

This past week saw a number of economic indicators: a robust 4% expansion in second-quarter GDP suggested a resurgence in economic activity, while a jump in a highly-watched wage index was a sign that employee earnings, the holy grail of labor market growth, was finally picking up. Even Friday’s soft jobs report didn’t undo the worries about the Fed. Indeed, investors should expect more volatility, not less, as the Fed moves closer to rate hikes, analysts say. The central bank is generally expected to begin raise its key lending rate in the middle of next year. “Every time we see data really heat up, it will really spook investors and keep a cap on the equity market for the time being.” said O’Rourke.

A great example of how the world of finance risks missing out on ‘external’ factors driving policy. This guy once worked at the NY Fed, now owns an economic research company, and says “We all have to do what the Fed does: Watch the data on economic activity, labor markets, costs and prices.” I think the Fed looks at other things too, and so should ‘we’.

• A Wild Card In Fed’s Rate Hike Timing (CNBC)

The U.S. economy is leaking. Europe’s self-flagellants are happy about that. Suffering from excessive fiscal retrenchment and corrosive sanctions, they see a path to salvation in exports to America. Asia’s trade surplus runners also hope that their 5.4% increase in exports to the U.S. during the first five months of this year will continue – and that they will get bigger as American domestic demand picks up speed and leaks out to the rest of the world. What’s the leak? In the first half of this year, America’s trade deficit subtracted 1.14 percentage points from its economic growth. And that is the time when the U.S. economy just managed to eke out a 1% increase in its gross domestic product (GDP). The American financial community – and, apparently, some governors of the U.S. Federal Reserve (Fed) advocating an early interest rate increase – are blissfully oblivious to the trade deficit speed bumps. They are obsessing instead with non-issues. What are these?

Inflationary capacity pressures, of which there are no signs in American wages, unit labor costs or on factory floors. In spite of that, market operators see tightening credit conditions and the Fed’s alleged confusion about the technical aspects of liquidity withdrawals. It all seems like a trading case is being built to take equity prices down. That may well happen, but if it does I believe that would be a good buying opportunity. The reason is simple. A sustained decline of equity prices can only happen if the Fed is determined to cool down an overheated economy driven by excessive capacity pressures in labor and product markets. We are nowhere near that point. The Fed is now contemplating a gradual “normalization” of its policies after a long period of rescuing its badly damaged financial system and managing the recovery from the Great Recession – under conditions of a pronounced fiscal tightening since 2010. Nothing at the moment suggests that the Fed should rush that “normalization” process. And it is reassuring to see no signs that the Fed is about to do that.

If people don’t get deeper into debt, the economy is bad. We live upside down. Ever feel that blood rushing to your head?

• Paltry Credit-Card Debt Growth Signals Restrained Consumer (MarketWatch)

Jobs growth has been solid of late, and manufacturing sentiment has been strong. But the lack of wage growth has been apparent, and one manifestation of that has been the paltry growth of credit-card debt. The latest data on consumer credit is due out Thursday. Non-revolving debt like auto and student debt has been growing gangbusters. But you have to squint to see the rise in credit-card debt. Data from the Labor Department showed hourly wages growing at just a 2% year-on-year clip , even though some survey data point to better wage acceleration than that. Another measurement of wage costs, the somewhat cumbersome unit labor costs, comes Friday.

“Incomes are only growing so much,” said Josh Shapiro, chief economist at MFR. “[Consumers] are not going to go two-fisted on credit-card and auto debt.” “A lot of people were wiped out,” added Chris Christopher, an economist at IHS Global Insight. “There aren’t as many credit cards out there.” This reticence to spend aggressively is reflected in consumer-sentiment data . Richard Curtin, the chief economist for the University of Michigan consumer sentiment survey, says current readings should support consumer spending growth of 2.5% this year. That would be the highest rate since 2006 but still below the median growth rate of 3.5% for the last 50 years.

Oh loevely, more MBS under another name.

• Banks Burdened With Compliance Costs Outsource Home Loans (Bloomberg)

As banks lose money on mortgages and retreat from the business, PHH Corp. is rushing to cash in. PHH, the biggest U.S. outsourcer of home loans, processes and originates mortgages on behalf of small banks and some of the world’s largest financial firms, including Morgan Stanley and HSBC Holdings Plc. PHH Chief Executive Officer Glen Messina is so convinced he can make money where others can’t that in July he sold the company’s cash-producing fleet management unit and plans to plow the proceeds into mortgages.

Lenders are backing away from home loans as an array of new regulations in the aftermath of the housing crash push up compliance costs. Banks lost an average $194 a mortgage in the first quarter, according to the Mortgage Bankers Association. The losses may spur banks to increase outsourcing of home loans by $180 billion a year while keeping their brand name on the mortgage, Messina said on a July 8 call with analysts. “The biggest banks have the resources to implement the new regulations, but if you’re a smaller bank or a wealth manager, it may not make sense to invest in all that infrastructure,” said Bose George, a mortgage analyst at Keefe, Bruyette and Woods Inc. in New York. “The risks are too high for companies to lend without a very high level of compliance expertise.”

Without hypothecation, what is China?

• Legal Fight Chills China Metal Trade After Qingdao Fraud Probe (Reuters)

As global banks and trading houses fire off lawsuits over their estimated $900 million exposure to a suspected metal financing fraud in China, the tangled legal battle to recoup losses is set to drag on for years and hinder a swift recovery in metal trade. HSBC is the latest bank to launch legal action since Chinese authorities started a probe into whether the firm at the center of the allegations, Decheng Mining, used fake warehouse receipts to obtain multiple loans. Several banks had already ditched their commodity trading divisions due to low returns. The scandal, centered on the eastern port of Qingdao, means those remaining in the commodity financing business will have to consider their future, or at least bring in new controls on lending requirements.

It has also acted as a warning over murky business practices in China and highlighted the difficulties of navigating the Chinese legal system for foreign companies, some of which have since frozen new financing business. “In the next six to twelve months, the impact would likely be reduced appetite for lending on metal collateral,” said Daniel Kang, Asia head of basic materials equity research at JP Morgan. “Copper imports may come under pressure in the second half, partly related to smaller traders going bankrupt.” [..] With multiple claimants, cross-country jurisdictions, involvement of state-owned entities and a separate corruption probe into Chen Jihong, the chairman of Decheng’s parent firm, the lawsuits stemming from the alleged fraud are unlikely to be wrapped up soon.

“The problem is that court judgments attained outside of China are not recognized on the mainland. Companies cannot simply take the judgments into China and have Chinese courts freeze assets,” said William McGovern, a lawyer at Kobre & Kim who specializes in international commercial disputes. Firms may also try to recoup losses via arbitration, as China recognizes international arbitration awards, but that process typically takes at least two to three years. “The other question is, where are the assets?,” said McGovern. “Obtaining an arbitration award against a fraudulent entity is only valuable if the defendant’s assets can be located and seized to satisfy the judgment.” In the Qingdao case, a problem for some Western banks trying to retrieve cash is that their contracts were signed with global warehousing firms acting as collateral managers, leaving them no direct way of claiming in Chinese courts.

Is that a bomb ticking in the background?

• China Swap Rate Rises as PBOC Expresses Credit Growth Concern (Bloomberg)

China’s one-year interest-rate swaps rose for the first time in three days after the central bank expressed concern over credit expansion. The People’s Bank of China warned that credit and money supply have increased rapidly and indicated it will refrain from broader monetary easing to support growth, according to its Aug. 1 quarterly policy statement. “It’s inappropriate to rely on aggressive expansion of credit to solve structural problems,” the report said, adding that targeted monetary policies such as selective cuts in banks’ reserve ratios will undermine the role of markets in the long run.

The cost of one-year swaps, the fixed payment needed to receive the floating seven-day repurchase rate, climbed one basis point, or 0.01 percentage point, to 3.78% as of 4:10 p.m. in Shanghai, according to data compiled by Bloomberg. The rate climbed by a total of 35 basis points in June and July, after sliding for five months in a row. “It’s very likely the PBOC will slow the pace of monetary easing in the future,” Xu Gao, chief economist at Everbright Securities Co. in Beijing, wrote in a research note yesterday. “Although the central bank has done some targeted easing in the second quarter under pressure to stabilize growth, the remarks in this report seem to contain more elements of concern.”

Not if they’re broke.

• Mervyn King: New Stress Tests Are European Banks’ ‘Last Chance’ (CNBC)

The upcoming European banking asset quality review will represent the sector’s “last chance” to prove its credibility, former Bank of England Governor Mervyn King told CNBC. The European Central Bank (ECB) plans to publish the results of the review of 128 bank balance sheets in late October and will assess the actions banks have taken to strengthen their capital positions. “Financial markets will be looking very carefully in the autumn at whether the statements made about the capital positions of different banks are really credible and a lot hangs on this,” King told CNBC following his keynote speech at the Diggers and Dealers 2014 conference in Kalgoorlie on Monday. “The previous stress tests for banks in Europe didn’t really convince markets of their seriousness – and this is a really last chance for Europe to put in place a really credible set of tests on the financial worthiness of all the banks in Europe,” he added.

European authorities have conducted regular bank ‘stress tests’ since 2009, designed to increase the sector’s resilience to another economic downturn and restore investor confidence, but the 2014 round has been billed as the toughest. ECB President Mario Draghi earlier this year sounded a warning that some of the banks were likely to fail. King, who was governor of the BOE from 2003 to 2013, told CNBC it’s paramount for banks to take an honest and transparent approach. “What will be disappointing is if the review comes up with very reassuring answers about the banking system that markets clearly don’t believe,” he said. “This is a time when honesty is absolutely vital. Transparency and honestly; facing up to problems on bank balance sheets; [and] injecting new capital, is the only way forward from now on and it will be a test of Europe to see whether it’s willing to do that,” he added.

A bail-in really, Cyprus style, with shareholders and subordinated bondholders wiped out.

• Portugal Uses $6.6 Billion In EU Funds To Bail Out Espírito Santo (Guardian)

Portugal injected almost €5bn into Banco Espírito Santo on Sunday night to stave off the collapse of the country’s biggest bank following a series of financial scandals. Carlos Costa, governor of the Bank of Portugal, said the bank’s healthy businesses would be spun off into a “good” bank, while its toxic assets would be hived off into a “bad” bank. The bailout plan, which was agreed with Brussels, was sparked by the far bigger than expected €3.5bn (£2.8bn) net loss reported last week by the bank. The loss wiped out its capital buffers and sent its shares falling by more than 75% before the stock was suspended on Friday. Espírito Santo is expected to be delisted from the Lisbon stock exchange, meaning that shareholders will be wiped out. Costa said the injection of money would come mostly from Portugal’s international bailout, which made €6.4bn available for bank recapitalisation through a fund set up by Portugal in 2012.

The fund is aimed at limiting the political fallout from using taxpayers’ money to prop up a bank at a time when Portugal is only just emerging from a deep economic downturn. Pedro Passos Coelho, the prime minister, had pledged that taxpayers would not be called on to bail out failing banks. The “bad” bank will hold the troubled assets, mostly related to its exposure to the Espírito Santo family, which has faced difficulties after financial irregularities were uncovered at one of its array of holding companies last year. An audit ordered by the Portuguese central bank earlier this year discovered material irregularities at the Luxembourg-registered ESI, part of the empire.

HFT is too powerful already.

• ‘Flash Boys’ and the Speed of Lies (Katsuyama)

In the last few months, I have had a strange and interesting experience. In early April, I found myself the main character in Michael Lewis’s book “Flash Boys.” It told the story of a quest I’ve been on, with my colleagues, to expose and to prevent a lot of outrageous behavior in the U.S. stock market. Many of us had worked at big Wall Street firms or inside stock exchanges, and many of us believed something was amiss in the market. But it took the better part of five years to discover exactly how the market had been organized to benefit financial intermediaries, rather than the investors, the companies or the economy it was meant to serve. Only after looking at a flurry of market innovations – 40-gigabit cross-connects, esoteric order types, microwave towers – did we understand that the market’s focus was less about capital formation and more about giving certain market participants an advantage over others. In the end, we felt that the best way to solve these problems was to build a stock market of our own, which we did.

After the book, our stock market, IEX Group Inc., became a topic of discussion – some positive, some negative, some true and some false. Fair enough. If you’re in the spotlight and doing something different, you should take the heat along with the light. It’s for this reason that we have done our best to resist responding publicly to misinformation about our company – even when we read memos circulated inside banks that “Michael Lewis has an undisclosed stake in IEX” (he does not); that “brokers own stakes in IEX” (they don’t); or articles in the Wall Street Journal that said we let “broker-dealers jump to the front of the trading queue,” putting retail investors and mutual funds at a disadvantage (in reality, all orders arrive at IEX via brokers, including those from traditional investors). Our hope in staying quiet was that the truth would win out in the end. But in recent weeks, the misinformation campaign has hit a new high (or low), and on one particularly critical matter, we feel compelled to set the record straight.

I call bull.

• Denmark Breaks Debt Trap of World’s Most Indebted Households (Bloomberg)

Denmark’s efforts to stop the world’s most indebted households from building up more debt are starting to pay off as amortization rates improve. The Danish Mortgage Bankers’ Federation says issuance of interest-only loans — criticized by the central bank and rating companies for posing a threat to financial stability – has now peaked. Danske Bank A/S, Denmark’s biggest lender, also estimates the share of non-amortizing loans is set to decline. “The trend is broken now,” Jan Oestergaard, a senior analyst at Danske in Copenhagen, said in a phone interview. “Depending on how interest rates move going forward, I think we’ll see a lower share of interest-only loans.”

Interest-only mortgage bonds, which give borrowers a grace period of as long as 10 years on principal payments, made up 56% of Denmark’s $500 billion mortgage bond market at the end of June. The International Monetary Fund said in January the securities risk destabilizing the country’s home finance market, the world’s largest per capita. The Organization for Economic Cooperation and Development has urged Denmark to design policy to reduce gross household debt, which topped 300% of disposable incomes last year — a rich-world record. The Danish government is grappling with how to cut issuance of interest-only loans. A new set of rules for the mortgage market could include a limit. The guidelines “will be published in the fall,” Kristian Vie Madsen, deputy director at the FSA, said in an e-mailed reply to questions.

Why am I starting to think all US sales numbers come together like this?

• GM Props Up Sales Numbers With ‘Creative’ Discounts To Dealers (AP)

As General Motors tackles a safety crisis, a look its numbers from June show just how intent the company is on keeping new-car sales on the rise during a record spate of safety recalls. The Detroit automaker has recalled nearly 30 million cars and trucks this year, including some models that had barely rolled off the assembly line. Yet sales have been resilient, up 3.5% through the first seven months of the year. In mid-June, however, the automaker was headed for a year-over-year monthly sales decline, according to data compiled by automotive research firms. Then, on June 20, GM asked dealers to buy more cars, and it threw in another $1,000 in discounts per vehicle, five dealership representatives told The Associated Press. The company finished the month with a 1% gain.

The dealers said they were asked to buy the cars for a rental program, one that provides loaner cars for people whose vehicles are being serviced. When they buy the cars for the program, GM counts them as a retail sale. It’s a longstanding practice used by nearly all automakers to boost sales results. At GM, though, the incentive was unusually generous and came as GM executives try to steer the company through the worst safety crisis in its history, including the recall of 2.6 million small cars with defective ignition switches tied to at least 13 deaths. The company has allayed investor fears by saying that recalls have actually helped sales by bringing in customers who see vastly improved new models. “Clearly the timing seems a little suspicious,” said Jesse Toprak, senior analyst for the Cars.com website who predicted on June 22 that GM sales would be down 7% for the month, compared with a 2% decline for the rest of the industry. “Retail numbers at that point did not show any kind of strength.” The industry eked out a 1.2% gain for the month.

Would Washington ever let GM go under, again? No way. they got a free pass.

• GM Recall Help Site As Defective As Its Ignition Switches (USA Today)

Federal safety regulators say that not only are General Motors ignition switches defective, so is GM’s website for determining if you are driving one of the defective cars. People who use the GM “VIN look-up” site are told their cars aren’t part of an active recall if the repair parts aren’t yet available, even when the cars are, in fact, being recalled. VIN is the vehicle identification number. GM and other automakers maintain websites that allow owners to check for recalls by plugging in their vehicle’s VIN. The National Highway Traffic Safety Administration said late Friday that it “determined that owners of some recalled GM vehicles are receiving incorrect and misleading results” using the automaker’s VIN look-up system. NHTSA said it told GM to fix the system and tell owners about the problem. “Consumers who have used GM’s tool and found no recall should recheck,” NHTSA said. GM spokesman Greg Martin said Friday night, “We are aware of NHSTA’s inquiry on the VIN look-up issue. We are making the necessary changes to our website.”

He said that people who are unsure if they got the right answer from the website “should call the customer care numbers listed on our website.” Starting Aug. 20, NHTSA is requiring all automakers to provide a free online tool that lets car owners search for recalls using the VIN. Many automakers already do so. NHTSA said in its statement that it was alerted to the faulty GM VIN look-up system by Sen. Barbara Boxer, D-Calif. Boxer has been especially tough on GM and its CEO, Mary Barra, at Senate subcommittee hearings, accusing the automaker of a cover-up for not disclosing sooner that millions of its vehicles had ignition switches with a potentially fatal flaw. GM documents show that the switch problem was noticed in 2001, but nothing was done to fix it until engineer Ray DeGiorgio, since fired by GM, tried to improve the switch quietly in 2006, under the guise of fixing a different switch problem.

Not terribly new info for Automatic Earth readers, but worth repeating.

• Public Pension Funds Making Big Bets On Hedge Funds (NPR)

Public pension funds have been doing something new in recent years — investing in hedge funds. Hedge funds are often secretive investment firms led by supposedly supersmart fund managers. Though, sometimes they implode spectacularly — think Long-Term Capital Management. Another prominent firm, Galleon Group, recently got shut down for rampant insider trading. Those may be rare examples, but one thing that’s true about nearly all hedge funds is that they charge high fees. And some experts are questioning whether public pension funds should be investing this way. Ten years ago, public pension funds stayed away from hedge funds. Maybe hedge funds seemed too pricey or opaque or exotic. After all, public pension funds invest money so they can afford to keep sending checks to retired schoolteachers, police officers and firefighters. “They didn’t have anything in hedge funds,” says David Kotok, the chief investment officer at Cumberland Advisors. He advises public pension funds on their investments.

Hedge funds claim to be able to provide a good return — while protecting the investor if, say, the stock market crashes. That’s why they’re called “hedge” funds — as in hedging your bets. And in recent years more pension funds have invested in them. But Kotok says, “our concern has been that in some cases this seems to have become a fad.” If it is a fad, it’s a very expensive one. Hedge funds generally charge what’s called “2 and 20.” Every year, they take 2% of all the money you have invested with them plus 20% of any profits. If they lose money, they still get the 2%. For public pension funds that invest billions of dollars, those are very steep fees. They’re more than 10 times the percentage cost of a typical stock market index fund. In recent months many hedge funds have cut those fees a bit, under pressure from investors. Some surveys have found the hedge funds willing to take 1.6% and 18% of profits. Those fees are still much higher than other investment options. “The fees are extraordinarily high,” says Julia Bonafede, the president of Wilshire Consulting.

Both she and Kotok advise their public pension fund clients not to invest in hedge funds. Kotok says that over time, the odds are too slim that returns will justify those high fees. “We think that a high-cost structure works against the investor,” he says. Still, some pension funds have been plowing money into hedge funds. “What has happened since the financial crisis is you’ve seen a huge flow of assets into hedge funds,” Bonafede says. Most public pension funds are not investing heavily in hedge funds, according to data from Wilshire. But some of the funds definitely are. The Teacher Retirement System of Texas is investing 10% of its money in hedge funds. The state of New Jersey’s pension system is investing around 12%. For the Ohio school’s pension fund, it’s 15%.

• Snowden, Greenwald Reveal Scale Of US Aid To Israel (RT)

The turmoil gripping the Middle East is a direct result of the provision of cash, weapons and surveillance to Israel by the US, the latest Snowden leak illustrates. Obama’s “helpless detachment” is just for show, the Intercept’s Glenn Greenwald writes. In a bold examination, the former Guardian journalist reveals the amazing contrast between what the United States says publicly, and what it does behind the curtain. This involves President Barack Obama’s apparent heartbreak over the Middle Eastern region, as well as the American love for publicly listing Israel as a threat to regional peace at a time when billions of dollars’ worth of its weaponry and intelligence were being supplied to the Jewish state since the 1960s. Greenwald has published his analysis of the latest leaked Edward Snowden document, wherein it’s explained just how false the notion that the US is a bystander to the Middle Eastern crisis really is. In fact, “the single largest exchange between NSA and ISNU is on targets in the Middle East which constitute strategic threats to US and Israeli interests,” the leaked paper reveals.

“The mutually agreed upon geographic targets include the countries of North Africa, the Middle East, the Persian Gulf, South Asia, and the Islamic republics of the former Soviet Union. Within that set of countries, cooperation covers the exploitation of internal governmental, military, civil and diplomatic communications; and external security/intelligence organizations.” One of the “key priorities” of this cooperation is “the Iranian nuclear development program, followed by Syrian nuclear efforts, Lebanese Hizbullah plans and intentions, Palestinian terrorism, and Global Jihad.” The paper talks about “targeting and exploiting” these. It goes on to show that both intelligence services have liaison officers in each other’s embassies, enjoy a “cryptanalytic” partnership, and that Israel has direct access to the highest American military technology. Greenwald supplements this with proof of millions in emergency US funds stockpiled in the Middle East, which Israel can use for its own strategic purposes by simply writing a request.

Say a little prayer.

• More Than 100 Health Workers Have Been Infected By Ebola (Reuters)

Jenneh became a nurse in Sierra Leone 15 years ago with the hope of saving lives in one of the world’s poorest countries. Now she fears for her own after three of her colleagues died of Ebola. Health workers like Jenneh are on the frontline of the battle against the world’s worst ever outbreak of the deadly hemorrhagic fever that has killed 729 people in Sierra Leone, neighboring Liberia, Guinea and Nigeria so far. With West Africa’s hospitals lacking trained staff, and international aid agencies already over stretched, the rising number of deaths among healthcare staff is shaking morale and undermining efforts to control the outbreak.

More than 100 health workers have been infected by the viral disease, which has no known cure, including two American medics working for charity Samaritan’s Purse. More than half of those have died, among them Sierra Leone’s leading doctor in the fight against Ebola, Sheik Umar Khan, a national hero. “We’re very worried, now that our leader has died from the same disease we’ve been fighting,” said Jenneh, who asked for her real name not to be used. “Two of my very close nursing friends have also been killed … I feel like quitting the profession this minute.”

[..] like other carers, she is worried the fabric of the yellow full-body suits used to protect workers on isolation wards is too flimsy to block the virus. “Improper personal protective gear is a serious issue here,” she said. World Health Organization (WHO) experts strongly deny there is any problem with the protective equipment. They point to a chronic lack of experienced staff that is forcing health workers to cut corners in the arduous daily task of decontaminating wards and treating patients. The WHO launched an urgent appeal for hundreds more trained medical personnel on Thursday as part of a $100 million drive to bring the outbreak under control. It said it was seeking ways to safeguard scarce medical workers from infection.

• US Spy Plane Intercepted By Russian Jet Invades Swedish Airspace (RT)

US officials have confirmed Swedish media reports of a mid-July incident in which an American spy plane invaded Sweden’s airspace as it was evading a Russian fighter jet. The maverick plane was spying on Russia when it was intercepted. The incident, which happened on July 18, went public last Wednesday after a classified document from Sweden’s Defense Ministry was leaked to the press. The plane, a Boeing RC-135 Rivet Joint, entered Sweden’s airspace after permission to do so was denied by traffic control, Svenska Dagbladet (SvD) newspaper said. It passed from the east over the island of Gotland and flew more than 200km over 90 minutes before leaving. The aerial incursion was caused by a Russian fighter jet, which scrambled from a base in the exclave Kaliningrad Region and approached the American reconnaissance plane.

Neither party involved in the incident confirmed or denied it, but a source in the US military told CNN on weekend that it indeed happen. The source said the plane was conducting an electronic eavesdropping mission on the Russian military when the latter locked on to the aircraft with a radar station and sent at least one jet to intercept it. The quickest path of escape was through Swedish airspace, which was what the spy plane pilot did despite the Swedes’ objection. The source said similar incidents may happen in future, a fact which the US officials made known to Sweden. The CNN report didn’t elaborate on how it was perceived by Sweden, a country that is not even a member of NATO and maintains a non-alliance stance.

Debt Rattle Jul 25 2014: The Big Energy = Power Battle Is Coming

Jul 252014

July 25, 2014 Posted by Raúl Ilargi Meijer at 4:41 pm Finance Tagged with: battle, energy, EU, power, Ukraine, US 11 Responses »

DPC The Flatiron Building, NY 1903

I don’t really want to keep talk about Ukraine, but it’s too hard to avoid. Besides, it’s not the same story anymore that it was when the week began, since the economic war vs Putin and Russia is now escalating. For reasons that have nothing to do with the plane crash, though they may seem to, a fact that completely seems to escape 999 out of 1000 people.

We still don’t know who shot that plane (we’re not even sure anyone did), and the longer is takes to get evidence for who did it, the more likely it is that such evidence will be tainted and/or fabricated.

That’s undoubtedly why the western media simply bypass the need for evidence, which is worrisome on multiple fronts. The “logic” behind it seems to go something like this: Russia is involved in the plane crash because it has been involved in east Ukraine after the Maidan coup ousted Yanukovych, by supporting – in undefined ways – the Russian speaking population and ‘rebels’.

The problem is that if you follow that logic, the west, too, is involved in the crash, since the EU and US have very actively supported the other side in the domestic Ukraine conflict. That would leave only the “but we are on the good side”, or even “God is on our side” defense (not that the west feels it needs to defend itself). But “good side” or “God’s side” are not arguments that hold up in for instance a legal environment: you’re either involved or you’re not.

So if, being the west, you want to put the blame for MH17 on the Russians, bypass the need for evidence, and accuse them on the grounds of “indirect involvement”, you’re also at the same time implicating yourself. You can’t escape the fact that your actions may have contributed to the disaster. And I don’t understand why western politicians and journalists fall into that trap, and why the population falls so easily and eagerly with them.

What’s more, as long as there is no evidence on the table, it’s at least as likely that the Ukraine army – or CIA or Blackwater – shot the plane as it is that the rebels did. It is as simple as that. The move to isolate Russia and Putin which has evolved over the past week, evidence be damned, makes clear that those operating on “our side” may well have had a lot more motive to shoot down a passenger plane than the ‘rebels’ did. And that they have a political agenda: those sanctions were not all drawn up on a rainy afternoon. .

After all, as we see now, it is the perfect excuse to blame and isolate Putin. Well, it’s of course not 100% perfect, since there’s no evidence, but if you shout loud enough and often enough, and you sufficiently play to people’s fear and anger, who needs perfection or even evidence? You only need to “implant” the suspicion and let it start fermenting.

Reuters quotes Dutch PM Mark Rutte today as saying:

“There’s an easy way out for Russia: to distance themselves from the separatists, and stop arming them.”

.. and that is really beyond reason. Rutte, like everyone else involved, knows that this would mean Kiev can continue murdering its own women and children with impunity. And that’s even assuming there would be evidence that Russia arms the rebels; all we have to date is hearsay and innuendo.

What Europe and the US should be doing right now, and that would be an easy thing to do, is to tell Kiev to stop shooting its own people, and go sit around a table with with all parties, including Kiev, Russia and the people east Ukrainians choose to represent them. Until that happens, if ever, we must look at the west’s actions with huge suspicion. There’s an easy way out for the west, and they’re not taking it.

Who would represent Kiev in such negotiations is not clear, since it has no government anymore, not even the US/EU handpicked one. It would be good to see someone investigate why the government resigned yesterday. And what, if anything, the resignation has to do with the plane crash. Russian media report:

“We can say with confidence that this intention reveals a wish to avoid responsibility for the troubles and misfortunes that were brought upon the people of Ukraine with his help, for the crimes that were committed by the authorities,” Irina Yarovaya, Chair of the State Duma (lower house of the Russian parliament) Security Committee, told ITAR-TASS. In her opinion, “the crimes that were committed over this time with Yatsenyuk’s direct participation are appalling”.

As far as the – additional – sanctions are concerned that the EU is supposed to announce, Reuters says:

… restrictions on Russian access to European financial markets, defence and energy technology and equipment useful for both defence or civilian purposes. [..] Under proposals put forward by the Commission, the EU would target state-owned Russian banks vital to financing Moscow’s faltering economy. Under the proposal, European investors would be banned from buying new debt or shares of banks owned 50% or more by the state.

Of course, in an integrated global economy, it is possible for one party to hurt another financially, presumably even hard. But demanding that Russia step aside and gives ‘leaders’ in Kiev time and space to execute the burning and nuking of all Russian speaking Ukrainians which several of them have openly spoken about, is a road to nowhere.

Proposed EU Sanctions Threaten To Shut Russia Out Of The Financial System

Here is the EU sanctions document under furious debate today, courtesy of our Brussels correspondent, Bruno Waterfield. Note the heading “Non paper”. It is leaked, not authorised. This is a menu of options. It requires unanimous backing of the 28 ambassadors. Any one country can veto it. Cyprus may find it too much to swallow, and will need a lot of sugar to help it go down. The MICEX index of stocks in Moscow rallied in the mid-morning session and is level for the day. The state-owned banks VTB and Sberbank scarcely missed a beat. Investors are clearly calculating that nothing will come of this.

The measures come into force only if Russia continues to help the rebels and funnel militants across the border (which in reality no longer exists). Still, I hope these investors have good political intelligence in Brussels, London, Paris, Berlin, and Washington, because this looks a little cavalier to me – rather like those who continued to buy the dips even after the Austro-Hungarian Empire issued its ultimatum to Serbia in July 1914. The document makes clear that the aim is to force Russian banks into the arms of the state, bleeding the Russian budget and reserves. This really is “tier III” level. It hammers the whole financial system.

In short, this is a financial war based on hearsay and humbug, which the US and EU can only start and continue if they keep their people angry enough, and therefore misinformed enough. That may not turn out to be as easy as they think today. It may depend on what Russia can show and tell the western media.

It may also depend on reactions in the west to fast rising energy prices. Which, if these sanctions are voted in (not certain by any means), seem inevitable. The US and its short term shale riches may feel fine about that (something that may come to haunt them), but for Europe the consequences could be devastating, and as rapidly as the sanctions hit Russia’s economy.

My guess is Brussels’ bureaucrats have been fooled into believing that they can beat Russia and take over – much of – its energy wealth. That does not look smart at all, but then these people never were. They know how to squeeze Greece and Italy, and the success there has gone to their heads. But as soon as they would even get close to Russia’s oil and gas – which I don’t think they will -, the US would step in and take it away from them. That’s how powers are divided in today’s world. As I said earlier this week, best remember who your friends are.

The US can’t wage a physical war against Russia, it wouldn’t dare. But it can try and coax the Brussels fat old boys into a battlefield here and there. We have entered what should be regarded as a next phase not just in the Ukraine situation (and my, did that plane crash come in handy), but a next phase in geopolitics as a whole. All parties know that there will be a battle, either today or tomorrow, over – fossil – energy. And all are preparing for that battle, moving pawns across the board, planting ideas in people’s heads that will make them easy to direct when the time comes.

This I understand. But I still have trouble accepting that it must desecrate the lives and dignity of the innocent 298 people on board a crashed plane, thousands in east Ukraine, thousands more just recently in Gaza, God knows how many in Syria and Iraq. Perhaps that simply means I’m not ready for what’s to come.

• Proposed EU Sanctions Threaten To Shut Russia Out Of The Financial System (AEP)

Here is the EU sanctions document under furious debate today, courtesy of our Brussels correspondent, Bruno Waterfield. Note the heading “Non paper”. It is leaked, not authorised. This is a menu of options. It requires unanimous backing of the 28 ambassadors. Any one country can veto it. Cyprus may find it too much to swallow, and will need a lot of sugar to help it go down. The MICEX index of stocks in Moscow rallied in the mid-morning session and is level for the day. The state-owned banks VTB and Sberbank scarcely missed a beat. Investors are clearly calculating that nothing will come of this.

The measures come into force only if Russia continues to help the rebels and funnel militants across the border (which in reality no longer exists). Still, I hope these investors have good political intelligence in Brussels, London, Paris, Berlin, and Washington, because this looks a little cavalier to me – rather like those who continued to buy the dips even after the Austro-Hungarian Empire issued its ultimatum to Serbia in July 1914. The document makes clear that the aim is to force Russian banks into the arms of the state, bleeding the Russian budget and reserves. This really is “tier III” level. It hammers the whole financial system. Basically they say there is no way for Russia to get around this if the EU and the US work together. I broadly agree, though it depends on what China does. It takes three to tango, these days.

Those arguing that sanctions do not work or are a feeble instrument are mostly drawing on pre-globalisation 20th-century views. They seem unaware of the new arsenal of financial measures that have been fine-tuned over the last decade that can bring countries to their knees in an integrated world system. Does that mean Putin will yield? Not necessarily, but that is an entirely different issue. He may indeed risk vast economic damage to his own country

Longer than you think.

• How Long Can Russia Go Without Selling Bonds? (CNBC)

Even before tougher sanctions against Russia hit the books, the country is facing potential hits as investors turn their backs on its financial assets. “With access to foreign capital likely to become more restrictive, the pick-up in investment needed to revive Russia’s ailing economy is starting to look ever more unlikely,” Neil Shearing, chief emerging markets economist at Capital Economics, said in a note Thursday. Russia also faces the risk that threats of further sanctions could spur more capital outflows, he said. Following the crash of Malaysia Airlines Flight MH17, believed to be downed by a surface-to-air missile, in territory controlled by pro-Russian separatists last week, both the U.S. and the EU are weighing sweeping new sanctions against Russia. The proposals include a potential ban on all Europeans purchasing any new debt or stock from the country’s largest banks, but not on Russian sovereign debt, according to a Financial Times report.

Some investors have already taken concerns over sanctions to heart. Nomura closed out its positions in the local bond market and Russian credit, with some losses expected, the bank said in a note earlier this week. “We now expect the story to shift to sovereign risk from stagflation and disinflation as investors assess whether they should be invested in Russia at all,” Nomura said. It believes the risk of “level three” sanctions, which would expand the number of affected companies and the scope of restrictions, has risen significantly and could be a systemic concern. According to Societe Generale, ratcheting up to level three would likely tip Russia’s already weak economy into a full-blown recession. In the second quarter, Russia’s economy grew just 1.2% from a year earlier, and is forecast to expand just 0.5% for the full year, the bank said in a note this week.

“The ongoing climate of uncertainty is already coming at a high cost,” with $74.4 billion exiting this year and foreign direct investment sharply down, Societe Generale said. To be sure, Capital Economics doesn’t expect the government itself to face much difficulty balancing its checkbook, despite canceling nine bond auctions so far this year, including one this week due to “unfavorable market conditions.” While Russia had a small budget deficit of 0.5% of gross domestic product (GDP) last year, it’s likely to balance the books this year as a weaker ruble raised the local currency value of its U.S. dollar-denominated oil revenues, Shearing said. The real concern is with Russia’s companies and banks, which face around $83 billion in external debt repayments by the end of the year, he noted. “Unlike the government, most firms do not have large external assets to fall back on,” he said, but he noted the government may step in to assist any systemically important companies.

It’ll keep on cutting forecasts.

• IMF Cuts 2014 Global Forecast After Slowdowns in China, US (Bloomberg)

IMF Cuts 2014 Global Forecast After Slowdowns in China, U.S. The International Monetary Fund lowered its outlook for global growth this year as expansions weaken from China to the U.S. and military conflicts raise the risk of a surge in oil prices. The world economy will advance 3.4% in 2014, the IMF said, less than its 3.6% prediction in April and stronger than last year’s 3.2%. Next year growth will be 4%, compared with an April forecast for 3.9%, the fund said. “Global growth could be weaker for longer, given the lack of robust momentum in advanced economies” even as interest rates stay low, the IMF said in an update to its World Economic Outlook report. “Monetary policy should thus remain accommodative in all major advanced economies.”

The IMF report reflected a world rattled by geopolitical risks that have risen since April, including the potential for “sharply higher oil prices” because of recent Middle East unrest. Growth in emerging markets is projected to be 4.6% this year, compared with an April forecast for 4.9%, the IMF said. China’s economy is seen growing 7.4% this year, less than the 7.5% forecast in April, the IMF said. Next year, growth in the world’s second-largest economy with slow further, to 7.1%, the Washington-based fund said, less than its forecast in April for 7.3% growth. Among developing economies, the biggest reduction in forecasts was for Russia’s growth, which was downgraded to 0.2% from 1.3% estimated previously amid capital flight caused by its involvement in the conflict in Ukraine.

It’s going to go BOOM soon.

• Draghi Safety Net Becomes Blindfold to Risk as Bonds Soar (Bloomberg)

Two years since European Central Bank President Mario Draghi’s historic promise to defend his currency bloc, there are signs bond investors are growing too complacent under his protection. While Draghi’s pledge, backed up with unprecedented policy action, held the euro region together, recent price moves suggest it also immunized investors against risk. The average yield on bonds from Europe’s most-indebted nations touched a record low yesterday, even after the downing of a passenger plane over Ukraine, an escalation of conflict in Gaza and financial woes at Portugal’s Espirito Santo Group. “It’s been an exercise in central banks desensitizing markets,” Marc Ostwald, a strategist at ADM Investor Services International Ltd. in London, said in a July 23 phone interview. “It’s a dictated complacency because globally there is a huge amount of liquidity. Everyone views everything as a localized problem.”

Bond markets show Draghi’s July 26, 2012 pledge to do “whatever it takes” to protect the euro was the turning point in the region’s debt crisis. The day before the message, delivered in a speech in London, Spanish 10-year bond yields had surged to a euro-era record 7.751%, above the 7% level that pushed the Greek, Irish and Portuguese governments to seek international aid. Those words, which were followed with an emphatic “and believe me, it will be enough,” and backed up with a series of unprecedented stimulus measures from the ECB, fueled a rally in the bonds of Europe’s most-indebted nations that cut Spanish 10-year borrowing costs to a record 2.529% and allowed Greece, Ireland and Portugal to regain access to capital markets.

Talk about disconnect.

• New US Home Sales Collapse 20% As Builder Sentiment Surges (Zero Hedge)

New Home Sales in June plunged to 406k vs 504k in May (remember that 504k print was the catalyst for ‘weather’ is over and the market to surge: it somehow was magically revised lower by more than 10% to only 442K) Now that has soaked in, consider this is equal lowest sales print since September 2013 (and Dec 2012) and the biggest miss since July 2013. The last 3 months of exuberance have all been revised significantly lower as follows: March: 410K to 408K; April: 425K to 408K; May: 504K to 442K What is even more troubling in the “survey” vs “reality” world is this collapse in sales when NAHB Sentiment surged to near cycle highs.

We all have, really.

• Pity The Japanese: They’ve Been Turned Into Keynesian Lab Rats (Alhambra)

I have little doubt that the most perverse aspect of orthodox economics is the idea of monetary neutrality. Taken as nothing more than an article of faith, monetary practitioners use the principle as cover to undertake drastic and blunt intrusions into markets and economies, with no guilt over having done so because they can simply invoke neutrality and proclaim some other “mysterious” and convoluted culprit. Usually, however, it never gets that far since accountability typically fails to get beyond “the benefits outweigh any potential short-run disruptions.” There is nothing by way of empiricism to prove neutrality, since it entirely depends upon semantics and definitions. But we have a grand experiment with almost pure “laboratory” conditions with which to see neutrality fail spectacularly. Unfortunately, the Japanese people are forced to be the unwitting lab rats, though without the “benefit” of having been given the placebo instead.

Churchill was right in that democracy is the worst form of government except all others that have been tried, but I’m not so sure how central banks fit into that calculation, which is particularly dubious where neutrality is uncovered as simple academic make-believe. The primary premise of yen devaluation, purposeful and heavy intervention, was exports, exports, exports. More than a full year into the tenth and largest QE episode, Japan’s once salvationary trade machine, the Japan Inc of lore, is but a figment of past imagination. What little room Japan had left for a possible re-entry into economic health has been squandered, taken asunder by the very same yen intentions that were unequivocally believed to be the solution. And now Japan faces utter impoverishment as exports decline (not expand), imports accelerate (not decline) and real wages collapse.

If more debt no longer leads to more GDP, game’s up.

• China’s Detour on Highway to Default (Bloomberg)

Odd as it may sound, the fact that Huatong Road & Bridge Group dodged a default on July 23 is bad news. Until Wednesday, markets had been buzzing about the possibility the Shanxi-based builder might become the second mainland company in four months to renege on a bond payment. Then, Huatong beat the odds, repaying all principal and interest on a $65 million bond. How? Some aggressive fundraising, along with a little help from local government bodies. According to press reports, municipal officials intervened to prevent the company’s collapse. Two immediate worries spring to mind. One, China’s moral-hazard bubble continues to swell as public officials insulate companies from the effects of bad business decisions. For all the talk of epochal reform in China, there’s still no price to pay for questionable borrowing and lending. Two, local government debt is growing even as Communist Party leaders pledge to reduce public liabilities.

A key pillar of President Xi Jinping’s plan to avoid a Japan-like bad-loan crash is reining in credit and the opaque shadow-banking industry. The effort includes dissuading local governments from risking their own defaults should growth markedly undershoot Beijing’s 7.5% target. But as Bloomberg News reported on July 15, more and more regional governments are upping stimulus efforts to help Beijing meet that goal. Northern Hebei province alone is pumping a fresh $193 billion into areas including railways, energy and housing. A more recent Bloomberg analysis shows that as of July 23, 20 of 25 provinces and provincial-level cities reported a pickup in growth in the first half of the year. Some of the gain, of course, is the result of central-government stimulus: expedited railway spending and tax cuts. Most of it reflects local fiscal pump-priming, funded by untold billions of dollars of fresh debt.

The People’s Bank of China has also eased curbs on bank lending and distanced itself from a November projection that the economy might experience an unwinding of debt. Credit outstanding rose to 206% of gross domestic product last quarter from 202% in January-to-March. Beijing’s talk of downshifting to a “new normal” to rebalance the economy toward services is belied by July’s surge in manufacturing to an 18-month high. The big worry is that we just don’t know how bad China’s debt profile really is. As of June 2013, local government debt had swelled to about $3 trillion. Given efforts since then to meet growth targets, it’s a pretty safe assumption that the figure is now considerably higher – and poised to rise further.

Might just as well be 2015.

• ‘Perfect Storm’ To Hit China Economy In 2016 (CNBC)

Recent positive data from China may have allayed some doubts about the state of the economy, but PNC Financial Services Group is staying cautious, warning of a “perfect storm” that could surface in two years’ time. “Several problems long on China’s back burner are likely to come to a head by 2016,” Stuart Hoffman, chief economist at Financial Services Group wrote in a report this week, citing challenges including a weakening credit market, a slowdown in corporate reinvestment of earnings and a correction in the all-important housing market. These headwinds could slow Chinese real GDP (gross domestic product) growth to around 6.0% in 2016, the slowest since 1990, the firm noted. China’s economy expanded 7.5% in the second quarter, a touch above expectations of and rising from 7.4% in the first three months of the year, as the government’s targeted stimulus measures began to pay off.

The so-called perfect storm could unfold with a dramatic slowdown in the flow of credit for investment, especially from non-traditional lenders like trust companies, as corporate credit quality deteriorates, the report said. “If trust credit does indeed dry up, Chinese borrowers will struggle to roll over their loans and could be pushed into default, throwing even more sand into the gears of financial intermediation,” Hoffman said. Reduced credit would then reinforce a sharp slowdown in capital expenditures, PNC said, noting that spending in labor-intensive manufacturing sector has already slowed amid rising labor costs and an appreciating currency. “And Chinese private businesses with idle funds are unable to invest in more attractive opportunities in the domestically-oriented service sector [because] regulatory barriers protect state-owned business from private competition,” he added. Any major correction in the country’s housing market, an important pillar of the economy which affects more than 40 other sectors, could exacerbate events.

300 million people moved in China in 20 years. Guinness Book of Records.

• Skyscraper Mania Grips China as Ambitions Trump Economy (Bloomberg)

The eastern Chinese city of Suzhou isn’t even the biggest in Jiangsu province, yet it’s joining a national rush for the sky with what’s slated to become the world’s third-tallest building. By 2020, China may be home to six of the world’s 10 highest skyscrapers, including Suzhou’s 700-meter (2,297-foot) Zhongnan Center. Developers finished 37 structures higher than 200 meters, or about 50 stories, in China last year, the most in the world, according to the Chicago-based Council on Tall Buildings and Urban Habitat, a non-profit organization that maintains the world’s largest free database on tall buildings. China is witnessing a skyscraper boom, with lesser-known cities like Suzhou vying to erect ever-bigger structures and counting on the prestige and potential commercial benefit those mega-buildings may bring.

Construction has been fueled by a tripling in property values since 1998 and government policy that moved 300 million people – almost the entire population of the U.S. – into cities since 1995. “What’s happening in China is similar to what happened in the U.S. 80 to 100 years ago, on a different scale,” Antony Wood, the council’s executive director, said in an interview in Shanghai. “Cities are competing both within China and also globally for attention and for the appearance that they are first-world.” The council says Suzhou’s will be the world’s third-tallest building when it’s done in 2020. Other Chinese cities planning or building skyscrapers that could join the world’s tallest include Shenyang in the northeast, Wuhan, along the Yangtze River, and Tianjin, a metropolis 68 miles (109 kilometers) southeast of Beijing that’s planning a replica of Manhattan.

China’s China.

• Ethiopia Becomes China’s China in Global Search for Cheap Labor (Bloomberg)

Ethiopian workers strolling through the parking lot of Huajian Shoes’ factory outside Addis Ababa last month chose the wrong day to leave their shirts untucked. Company President Zhang Huarong, just arrived on a visit from China, spotted them through the window, sprang up and ran outside. The former People’s Liberation Army soldier harangued them loudly in Chinese, tugging at one man’s aqua polo shirt and forcing another’s shirt into his pants. Nonplussed, the workers stood silently until the eruption subsided. Shaping up a handful of employees is one small part of Zhang’s quest to profit from Huajian’s factory wages of about $40 a month -– less than 10% the level in China. “Ethiopia is exactly like China 30 years ago,” said Zhang, 55, who quit the military in 1982 to make shoes from his home in Jiangxi province with three sewing machines and now supplies such brands as Nine West and Guess?. “The poor transportation infrastructure, lots of jobless people.”

Almost three years after Zhang began his Ethiopian adventure at the invitation of the late Prime Minister Meles Zenawi, he says he’s unhappy with profits at the Dongguan Huajian Shoes Industry Co. unit, frustrated by “widespread inefficiency” in the local bureaucracy and struggling to raise factory productivity from a level he says is about a third of China’s. Transportation and logistics that cost as much as four times those in China are prompting Huajian to set up its own trucking company. And the use of four languages in the plant — Ethiopia’s national language, Amharic; the local tongue, Oromo; English and Chinese — further complicates operations, Zhang says.

• America’s Dumbest Move Yet: Seizing A Foreign Bank (Simon Black)

Ten dark suited men entered the premises of FBME bank in Cyprus on Friday afternoon and took it hostage. It must have looked like a scene from the Matrix. And given the surrealism of how this conflict is escalating, maybe it was. The men were from the Central Bank of Cyprus (CBC). And they commandeered FBME because an obscure agency within the US government recently issued a report accusing the bank of laundering money. It just so happens that FBME… and Cyprus in general… is where a lot of wealthy Russians hold their vast fortunes. Bear in mind, there has been no proof that any crime was committed. There was no court hearing. No charges were read. It wasn’t even the government of Cyprus who accused them of anything. There was just a generic report penned by some bureaucrat 10,000 miles away.

Funny thing—when HSBC got caught red-handed laundering funds for a Mexican drug cartel last year, the US government gave them a slap on the wrist. HSBC got off with a fine. Yet when the US government merely hints that FBME could be laundering money, the bank gets taken over at gunpoint. Welcome to warfare in the 21st century. It’s not about battleships and ground troops anymore. This time the adversaries are battling each other using what ultimately affects everyone: money. And on this battlefield the US doesn’t really have many options.

• US banks still form the nucleus of the global financial system, but this is quickly being replaced.
• Just last week the BRICS nations met in Fortaleza, Brazil to launch the origins of a brand new, non-US financial system.
• The US is still the largest economy in the world, but will likely lose this status to China by the end of the year.
• The US dollar is still the most widely used currency in global trade, but even America’s closest allies (Canada, Western Europe) recognize that the time has come to move beyond the dollar.

So while the US is still running around and barking at others, it is quickly losing its capacity to bite.

Greenspan.

• Bubbles Are Caused By Central Bankers, Not “Human Nature” (Stockman)

Alan Greenspan just cannot give up the ghost. During his baleful 18-year reign, the Fed was turned into a serial bubble machine—and thereby became a clear and present danger to honest free market capitalism and an enemy of the 99% who do not benefit from the Wall Street casino and the vast inflation of financial assets which it has enabled. His legacy is a toxically financialized economy that has extracted huge windfall rents from main street, and left it burdened with overwhelming debts and sharply reduced capacity for gains in real living standards and breadwinner jobs. Yet after all this time Greenspan still insists on blaming the people for the economic and financial havoc that he engendered from his perch in the Eccles Building. Indeed, posturing himself as some kind of latter day monetary Calvinist, he made it crystal clear in yesterday’s interview that the blame cannot be placed at his feet where it belongs:

I have come to the conclusion that bubbles, as I noted, are a function of human nature.

C’mon. The historical record makes absolutely clear that Greenspan panicked time and again when speculation reached a fevered peak in financial markets. Instead of allowing the free market to cleanse itself and liquidate reckless gamblers employing too much debt and too many risky trades, he flooded Wall Street with liquidity and jawboned the speculators into propping up the casino. Within months of his August 1987 arrival, for example, he panicked on Black Monday and not only inappropriately flooded with liquidity a Wall Street that was rife with rotten speculation and a toxic product called “portfolio insurance”, but also intervened directly to garrote the markets attempt at self-correction.

In that context he sent his henchman, Gerald Corrigan who was head of the New York Fed, down to Wall Street to break arms and bust heads in an effort to insure that firms continued to trade with each other and extend credit where their own risk control managers appropriately wanted to cancel credit lines to insolvent counter-parties. Then and there, the Greenspan “put” was born, and the stock market was en route to becoming a Fed-driven casino rather than an honest venue for real price discovery.

Not to me: these people see how poor Europe really is.

• Scale Of Fall In German Business Climate A Surprise (Reuters)

The scale of decline in the German business mood in July came as a surprise, Ifo economist Klaus Wohlrabe said on Friday, as tensions in Ukraine and the Middle East coincided with easing economic momentum after a strong first quarter. “Tensions are weighing on the mood in general,” he said, adding that the influence of the conflicts in the Middle East and Ukraine could not be measured in concrete terms. The Munich-based Ifo think tank’s business climate index, based on its survey conducted July 4 to 24, fell to a nine-month low of 108.0 from 109.7, data showed on Friday.

Why Germans are richer: they don’t like debt.

• German Thrift Damps Lending as Cheap Money Is Distrusted (Bloomberg)

Demand for mortgages in Germany is being tempered by concerns that recent home-price increases can’t be sustained. Bundesbank President Jens Weidmann said last month that the first signs of a housing bubble may be appearing. Finance Minister Wolfgang Schaeuble said on June 19 that excessive liquidity is leading to “dangerous” developments in the market. Prices in Germany’s largest cities, including Berlin, Hamburg and Munich, have risen more than 30% in the past five years, according to data compiled by Berlin-based research firm Bulwiengesa AG. Across Germany, prices have risen by an average of 5.7% per year since 2009, when the market began climbing for the first time since 1994. The price gains have been fueled by record-low interest rates that make it cheaper than ever to buy a home and not much more expensive than renting, according to Michiel Goris, chief executive officer of Munich-based Interhyp AG, Germany’s biggest online mortgage broker.

Low rates have also slashed returns for bonds and savings accounts, making real estate investment a more attractive alternative. The growing caution among buyers means that mortgage lending may decline this year amid circumstances similar to those that sparked borrowing sprees in other European markets. German banks probably will provide €197 billion of new mortgages in 2014 if lending continues at the current pace, according to data compiled by Interhyp. That would be 0.5% less than in 2013, when there was a 3% increase from the previous year. The value of all outstanding German mortgages was €1.16 trillion in May, the highest level since 1998, according to data compiled by the Bundesbank. A lack of lending growth would maintain Germans’ comparatively low level of indebtedness. Private household debt equals about 93% of net disposable income in the country, compared with about 325% in Denmark, 150% in the U.K and 151% in the U.S., according to data compiled by the OECD.

House of cards.

• Third Espírito Santo Company Seeks Creditor Protection (WSJ)

Espírito Santo Financial Group SA, which holds 20% of Portuguese lender Banco Espírito Santo SA, has filed for creditor protection in Luxembourg, becoming the third company in the group to do so in less than two weeks. “Espírito Santo Financial Group SA has asked the Luxembourg courts for controlled management following the company’s conclusion that it is unable to meet its obligations under its commercial paper program and obligations associated with the company’s stand-alone debt obligations,” it said in a statement.

Espírito Financial Group’s shares have been halted from trading since July 10, when the company said it was assessing the impact of troubles at Espírito Santo International SA, which owns 49% of the financial group. Espírito Santo International, which was found to be in serious financial condition by an audit ordered by the country’s central bank, filed for creditor protection last week. Its main unit, Rioforte Investments SA, filed for protection this week. Espírito Santo Financial Group has said its exposure to Espírito Santo entities, including Espírito Santo International and Rioforte totaled €2.35 billion ($3.16 billion).

Time for more cheap loans?

• London House Prices Stagnate as Survey Sees Rapid Cooling (Bloomberg)

London house prices stagnated in July, the first month with no growth since December 2012, as demand plunged and properties took longer to sell, Hometrack Ltd. said. The survey of real-estate agents showed values were unchanged in the capital in July after increasing 0.5% in June. Higher-value markets in the west and southwest slid, taking the number of postcodes registering declines to 11%. Areas recording price gains slumped to 12.1% from 40.6% in June. London had propelled U.K. house prices over the past year and today’s data add to evidence that measures to cool the market are working. The Bank of England introduced measures in June to limit riskier mortgages and new rules came into force in April requiring tougher mortgage-affordability tests.

“Seasonal factors always lead to a slowdown in demand and market activity in the summer months, but it is clear that there are bigger forces at work with a pronounced loss of momentum in the London housing market,” said Richard Donnell, director of research at Hometrack. The slowdown is “in part due to warnings from the Bank of England and others of a possible house-price bubble,” he said. The rate of growth in London peaked at 1.1% in February, the data showed. In July, homes took an average 4.3 weeks to sell, up from 2.7 weeks in March. The slowdown will probably “linger” as the market in the capital “cools rapidly,” the report said. Across England and Wales, prices grew 0.1% in July, compared with an increase of 0.3% in June. That makes this the slowest month since February 2013. The number of new buyers registering with estate agents fell 0.9%.

Lovely. This is from Bloomberg of all places.

• U.S. Tortures, Poland Pays (Bloomberg)

The Council of Europe today found the U.S. guilty of torture, illegal detention and administering unfair trials – and made Poland pay the penalty. That, in effect, is what happened at the council’s judicial arm, the European Court of Human Rights. The U.S. wasn’t on trial, of course, because it isn’t subject to the court’s jurisdiction. Poland, however, is. Call it the cost of being a loyal U.S. ally. The case concerned two suspected terrorists the U.S. picked up – Abd al-Rahim al-Nashiri in Dubai and Zayn al-Abidin Muhammad Husayn in Pakistan – and took on a tour of so-called black rendition sites that ended with Guantanamo Bay, Cuba.

Poland was among several European countries suspected of facilitating the air flights and providing detention locations at which the Central Intelligence Agency, alone, conducted the questioning. The seven judges, who included a Pole, found that the Polish authorities did indeed help the CIA, should have known the men would be tortured and denied the right to a fair trial, and did nothing to prevent these things from happening. The judges also found that the Polish courts and authorities had failed to properly investigate the case against their own government. Remedying the failures of national authorities to police themselves is a big part of what the court in Strasbourg, France, does.

The facts of the two cases were pretty clear. Some were acknowledged in an excised CIA document released by the U.S. government in 2009. The men were “high-value detainees,” Al-Nashiri suspected of carrying out the assault on the USS Cole in Yemen in 2000 and Husayn of helping to plan the Sept. 11 attacks. Both were subjected to “enhanced interrogation techniques.” The court ordered Poland to pay 100,000 euros ($135,000) in damages to each of the two, who remain imprisoned in Guantanamo. The U.S. is unlikely ever to submit to the jurisdiction of such a supra-national court — that’s one reason it has declined to join the International Criminal Court in the Hague. Anyway, it wouldn’t qualify for the Council of Europe unless the organization changed its criteria.

What can you do but get out? It will turn – back – into a desert.

• NASA Study Finds Dramatic Loss Of Underground Water In Western US (Telegraph)

The water crisis in the south west of the US is likely to worsen according to a new study carried out by the American space agency and University of California. Research has found that the Colorado River Basin, the prime source of water in the region, is being sucked dry. Only last week California announced daily fines of $500 for residents who water their lawns with nearly four fifths of the state being classified as being under “extreme” and “exceptional” drought conditions. The Colorado River is the only major river in the southwestern US, with the basin supplying water to 40 million people in seven states and irrigating around four million acres of farmland. In California, the basin is a key source of water for Los Angeles and San Diego. The new study is the first to look at the role of groundwater in the parched region and has been carried out against a backdrop of a severe drought dating back to 2000. A series of monthly measurements have shown that over nine years the Colorado River Basin lost nearly twice as much water as Lake Mead, Nevada – the country’s largest reservoir.

“This is a lot of water to lose. We thought that the picture could be pretty bad, but this was shocking,” said Stephanie Castle, a water resources specialist at the University of California, Irvine. Jay Famiglietti, the senior water cycle scientist at the Jet Propulsion Laboratory in Pasadena, warned the findings have long term implications for the entire region. “The Colorado River Basin is the water lifeline of the western United States,” he said. “With Lake Mead at its lowest level ever, we wanted to explore whether the basin, like most other regions around the world, was relying on groundwater to make up for the limited surface-water supply. “We found a surprisingly high and long-term reliance on groundwater to bridge the gap between supply and demand. “Combined with declining snowpack and population growth, this will likely threaten the long-term ability of the basin to meet its water allocation commitments to the seven basin states and to Mexico.”

UPDATE: an ebola infected woman was taken out of a hospital in Sierra Leone this afternoon by her family. It seems a matter of time before the disease spreads ot other continents.

• Liberian Man Being Tested For Ebola In Lagos, Nigeria (Reuters)

A Liberian man in his 40s is being tested for the deadly Ebola virus in Nigeria’s commercial capital of Lagos, a megacity of 21 million people, the Lagos State Health Ministry said on Thursday. Ebola has killed 632 people across Guinea, Liberia and Sierra Leone since an outbreak began in February, straining a string of weak health systems despite international help. This would be the first recorded case of one of the world’s deadliest diseases in Nigeria, Africa’s biggest economy and most populous nation, with 170 million people and some of Africa’s least adequate health infrastructure.

• Japanese Monkeys’ Abnormal Blood Linked To Fukushima Disaster (Reuters)

The scientists compared 61 monkeys living 70km (44 miles) from the the Fukushima Daiichi nuclear power plant with 31 monkeys from the Shimokita Penisula, over 400km (249 miles) from Fukushima. The Fukushima monkeys had low blood counts and radioactive caesium in their bodies, related to caesium levels in the soils where they lived. No caesium was detected in the Shimokita troop. Professor Shin-ichi Hayama, at the Nippon Veterinary and Life Science University in Tokyo, told the Guardian that during Japan’s snowy winters the monkeys feed on tree buds and bark, where caesium has been shown to accumulate at high concentrations. “This first data from non-human primates — the closest taxonomic relatives of humans — should make a notable contribution to future research on the health effects of radiation exposure in humans,” he said. The work, which ruled out disease or malnutrition as a cause of the low blood counts, is published in the peer-reviewed journal Scientific Reports.

White blood cell counts were lowest for immature monkeys with the highest caesium concentrations, suggesting younger monkeys may be more vulnerable to radioactive contamination. Hayama noted: “Abnormalities such as a decreased blood cell count in people living in contaminated areas have been reported from Chernobyl as a long-term effect of low-dose radiation exposure.” But other blood measures did not correlate with caesium levels, which vary with the seasons. Prof Geraldine Thomas, at Imperial College London, said the Chernobyl studies were not “not regarded as scientifically validated” and that the correlations between the caesium and low blood counts in the Fukushima study were not statistically strong.

Debt Rattle Mar 24 2014: How Charles Ponzi Met His Maker

Mar 242014

March 24, 2014 Posted by Raúl Ilargi Meijer at 7:23 pm Finance Tagged with: China, Ponzi, power, Putin 4 Responses »

Werner Wolff Sidewalk sign, New York City August 1963

Obama has apparently asked Chinese President Xi Jinping for help in “restraining” Putin, but China has filed a lawsuit against Ukraine in a London court for the return of a $3 billion loan linked to spot and forward purchases of grain for future delivery to China. Obama talked to Xi man to man at a nuclear safety summit in The Hague where everyone who’s someone in high power circles (well, the public ones) is being dined and feted as we speak. Except for Putin.

What good discussing nuclear safety is without the no. 2 nuclear power on the planet is a good question that nobody seems in a hurry to answer. That idea maybe seems to be to isolate Putin so much he’ll start to feel lonely and come begging to be allowed back into the party. Just for the fun of it, he declared sanctions against 22 Canadians. Who are probably all at that summit. Which costs the Netherlands $150 million or so for two days, disrupts traffic and daily life for millions of people, and won’t have any tangible results because the US saves those for 2016 in Washington. They’re going to have to invite Vladimir back by then, or look even more useless.

Xi Jinping has other issues than Ukraine on his mind. China manufacturing numbers fell, again, and it’s getting harder to come up with yet another piece of positive spin. If Xi can lock in a good deal with Putin over gas delivery, he’s going to take it. The trouble between east and west is sweet sweet music to his ears. Russia and China share a very long border, and neither have a border with the US. What’s not to understand? it’s not as if Obama can afford to declare sanctions against China.

But Xi’s biggest headache must be, as the WSJ reported, that China’s real estate market is in trouble. A first developer in Changzou has started cutting prices on some of its projects, and people are livid. Ironically, the developer, Wharf Ltd., stated to WSJ that “China’s housing market has already become very market-based, price adjustment according to market changes is a normal market behavior … “. And that is about as ‘be careful what you wish for’ as it comes. Because China’s housing market is nowhere near normal market behavior, but Wharf Ltd. is getting it there. In economic times that are nowhere near as hopeful and giddy and the sky is the limit anymore as they were when most Chinese “investors” bought all their empty properties.

Of course, Wharf Ltd. is very aware of the risks involved in lowering its prices, so the company must be desperate, have scores of properties that are not selling, and trying to catch a last lifeline. And if that is true for Wharf Ltd., there is no way it’s not equally true for who knows how many of its peers. And all the tens of millions of investors will now scrutinize market prices. And wait before they buy. Or not buy at all. This is how bubbles burst, and how Charles Ponzi met his maker. It’s a blueprint for how to make demand and prices fall. And in China, anger is real anger, not the pussyfootin’ way Americans and Europeans accept their fate and their losses.

Xi must be so scared of what could happen. And it’s funny that while the shadow banking system played -and still plays – a large role in building the China housing bubble, and Xi has a hard time reining it in just because it’s so huge, Europe is actually talking about re-establishing a shadow banking system in order to get its economy going again, complete with a return to the trade in asset backed securities. That’s like saying alcohol really screwed up my life, but boy, was it good while it lasted. So barman, fill ‘er up! Ah, Europe, the birthplace of civilization…

As long as all those dozens of leaders remain in charge that are now nuclear summitting in The Hague, having flown in on their private Jumbo jets with dozens or even hundreds of staff in tow, we will never solve any of out problems. Because these people are interested only keeping that life and those lifestyles going as long as they can. If it takes shadow banking, or calling in the local mob, or it takes victimizing their own people, or even sending them into war, the vast majority of leaders may hesitate, but it won’t be for long. It’s not going to work out great for all of them, but they’re going to give it their best shot and die trying. Power’s addictive even before you have it. Could it be that money is too?

• Angry Chinese Homeowners Vent Frustrations After Price Cuts

Groups of angry homeowners put up banners and demanded their money back after Hong Kong-listed property developer Wharf Ltd. cut prices on new homes in an eastern Chinese city, in the latest sign of stress in the nation’s property market. Around 20 homeowners picketed outside a property showroom in Changzhou Saturday, demanding to meet executives of the developer. They said they wanted their money back after prices at the project, called Phoenix Lake Garden, were cut by as much as 16%, according to the protesters.

Meanwhile, there was also a small disturbance at a second project called Ambassador House in the same city after the same developer cut prices there. According to property agency Soufun Holdings, Wharf cut prices of 20 apartments in the project to 8,200 yuan ($1,317) per square meter, down from the average 11,000 yuan per square meter it recorded in recent months.

“Wharf, give us justice. Return us our hard earned money,” read one of the banners, held up on bamboo poles outside the Phoenix Lake Garden showroom of a project for mid- to high-end apartments and villas. “We aren’t speculators. We just want an explanation from the developer,” said one 35-year-old home buyer, who said he had bought an apartment and gave his surname as Wu. “This is very unfair.”

Others said that as many as 100 people who had bought homes at the project had vented their frustrations outside the showroom over the past week. Asked about the incidents, Wharf officials in Beijing didn’t comment directly on the disturbances. “China’s housing market has already become very market-based, price adjustment according to market changes is a normal market behavior,” Wharf said in a statement to The Wall Street Journal. The price adjustment at Phoenix Lake Garden is focused on selling off inventory, Wharf added.

After a four-year campaign by the government to cool spiraling property prices, rises in home prices are starting to slow and in some smaller cities they are weakening. Growth in average housing prices in 70 Chinese cities moderated in February for the second-straight month though they were still nearly 9% higher compared with a year ago. But weaker economic growth, slower home sales and rising volumes of unsold houses have convinced developers in a number of cities to cut prices to raise cash quickly.

The drop in newer home prices hasn’t gone down well. Furniture at the showroom of Wharf’s Ambassador House was knocked over and the wooden stands for advertisements for the homes were flung on top of a model of the project. Outside the Phoenix Lake Garden showroom, Mr. Wu said he bought a 120-square-meter apartment in December, for 730,000 yuan. Prices are now 610,000 yuan for a similar apartment in the same tower, he said. “If prices are now cut, does it mean the property developer would cut corners?” he added.

Mr. Wu said he found out about the price cuts from text messages on March 14 from the sales team announcing them and asking if he wanted to buy another apartment. “I’ve been here every day since March 15, and no representative from the developer has spoken to us yet,” he said.

Wharf isn’t the first developer in recent weeks to cut prices in Changzhou, a third-tier city located halfway between Shanghai and Nanjing. Guangzhou- based Agile Property cut prices of its luxury apartments in Agile-Star River project earlier this month. Agile said at that time it was a temporary sales promotion. Property developers say privately there isn’t enough transparency in land sales and land use, which sometimes give rise to overbuilding in many smaller cities.

• Obama Seeks Allies, China Support As Ukraine Exits Crimea

U.S. President Barack Obama sought support from European allies and China on Monday to isolate Russia over its seizure of Crimea, and Ukraine told its remaining troops to leave the region after Russian forces overran one of Kiev’s last bases there. Obama, who has imposed tougher sanctions on Moscow than European leaders over its takeover of the Black Sea peninsula, will seek backing for his firm line at a meeting with other leaders of the G7 – a group of industrialized nations that excludes Russia, which joined in 1998 to form the G8.

Since the emergency one-hour G7 meeting on the sidelines of a nuclear security summit in The Hague was announced last week, President Vladimir Putin has signed laws completing Russia’s annexation of the region. White House officials accompanying Obama expressed concern on Monday at what they said was a Russian troop buildup near Ukraine and warned that any further military intervention would trigger wider sanctions than the measures taken so far.

In what has become the biggest East-West confrontation since the Cold War, the United States and the European Union have imposed visa bans and asset freezes on some of Putin’s closest political and business allies. But they have held back so far from measures designed to hit Russia’s wider economy. “Europe and America are united in our support of the Ukrainian government and the Ukrainian people,” Obama said after a meeting with Dutch Prime Minister Mark Rutte. “We’re united in imposing a cost on Russia for its actions so far. Prime Minister Rutte rightly pointed out yesterday the growing sanctions would bring significant consequences to the Russian economy.”

He also discussed the crisis at a private meeting with Chinese President Xi Jinping, whose government has voiced support for Ukraine’s territorial integrity but refrained from criticizing Russia. The West wants Beijing’s diplomatic support in an effort to restrain Putin.

• China Manufacturing Gauge Falls as Slowdown Deepens (Bloomberg)

China’s manufacturing industry weakened for a fifth straight month, according to a preliminary measure for March released today, deepening concern the nation will miss its 7.5% growth target this year. The Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics dropped to 48.1, compared with the 48.7 median estimate of 22 analysts surveyed by Bloomberg News and February’s final 48.5 figure. Numbers above 50 signal expansion.

Chinese stocks rebounded from initial losses on speculation that weakening growth will prompt policy makers to reconsider their aversion to broad stimulus measures. Leaders face a balancing act of reining in credit expansion that’s fueled the risk of loans going bad, while averting an economic slump that raises the odds of higher unemployment.

“The old growth engine is losing steam,” said Chen Xingdong, chief China economist at BNP Paribas SA in Beijing, whose estimate of 48.0 was one of the three closest to the result. While a new engine is powering up, including opening up some industries dominated by state-owned enterprises, if its speed “can’t compensate for the loss of the old one, a third power is needed — the power of policy,” said Chen, who previously worked for the World Bank.

China’s benchmark Shanghai Composite Index fell as much as 0.2% after the report before rebounding to rise 0.7% at 1:42 p.m. local time. The Australian dollar was up 0.1% at 90.87 U.S. cents after falling earlier today on the data, while the yuan climbed for a second day as the central bank strengthened the reference rate. The manufacturing report, known as the Flash PMI, is typically based on 85% to 90% of responses to surveys sent to purchasing managers at manufacturers. The final reading will be released April 1.

On the same day, the National Bureau of Statistics and China Federation of Logistics and Purchasing will publish their own survey of purchasing managers at about 3,000 manufacturing companies. The official gauge’s February reading was 50.2, an eight-month low and down from January’s 50.5.

The PMIs have increasingly become a barometer of China’s economy for global investors. One advantage is that they’re among the first gauges for each month, as government reports on trade, industrial output and retail sales typically are released several weeks later. China won’t use large-scale fiscal stimulus to spur investment and will focus on the quality of growth, Finance Minister Lou Jiwei said yesterday at a forum in Beijing, according to a transcript posted on Sina.com. The nation will pay more attention to the environment and reduce overcapacity, Lou was cited as saying.

• China Takes Sides, Sues Ukraine For $3 Billion Loan Repayment (Zero Hedge)

It is widely known that Russia is owed billions by Ukraine for already-delivered gas (as we noted earlier, leaving Gazprom among the most powerful players in this game). It is less widely know that Russia also hold $3b of UK law bonds which, as we explained in detail here, are callable upon certain covenants that any IMF (or US) loan bailout will trigger. Russia has ‘quasi’ promised not to call those loans. It is, until now, hardly known at all (it would seem) that China is also owed $3bn, it claims, for loans made for future grain delivery to China. It would seem clear from this action on which side of the ‘sanctions’ fence China is sitting.

Via RBC Ukraine (Google Translate),

In 2012, The State Food and Grain Corporation and the Export-Import Bank of China agreed to provide Ukrainian corporation loan of $3 billion, which was planned to be on the spot and forward purchases of grain for future delivery to China.

Minister of Agrarian Policy and Food of Ukraine Igor Schweich confirmed that China has filed a lawsuit against Ukraine in a London court for the return of a loan of $3 billion.

The Ukraine minister disagrees with China’s case:

… “filed false information that there are no claims to us from China. According to the contract have different interpretations, different interpretations, which led to the treatment of the Chinese side in court Gaft who works in London. Registered dispute between the parties exists,” – said Minister told reporters. According to him, the parties agreed to take the following week a representative of the Chinese corporation for the possibility of peaceful settlement of the dispute.

“We, for our part, will do their steps to ensure that the other party or retract its announcement, or we found another way to a peaceful settlement,” – he said. According to Schweich, a meeting will be held on March 26.

Ukraine appears to claim that these loans were made by the previous administration

The Minister added that the main problem lies in the fact that some leaders of PJSC “State Food and Grain Corporation of Ukraine” incorrect information. “These people are now removed during the protest,” – said Schweich, noting that China “is relevant to understand.”

In February 2014. the current Prime Minister of Ukraine Yatsenyuk said that “location $ 3 billion is not found.”

While China has been relatively quiet in the background – though abstaining from the UN vote was a clear signal of relative support for Russia – this is a meaningful step in the direction of pressure against the West, as yet again, any bailout funds would flow straight to either Russia (gas bills or callable bonds) or China (agriculture loans).

• NSA Spied on Chinese Government and Networking Firm Huawei (Spiegel)

The American government conducted a major intelligence offensive against China, with targets including the Chinese government and networking company Huawei, according to documents from former NSA worker Edward Snowden that have been viewed by SPIEGEL and the New York Times. Among the American intelligence service’s targets were former Chinese President Hu Jintao, the Chinese Trade Ministry, banks, as well as telecommunications companies.

But the NSA made a special effort to target Huawei. With 150,000 employees and €28 billion ($38.6 billion) in annual revenues, the company is the world’s second largest network equipment supplier. At the beginning of 2009, the NSA began an extensive operation, referred to internally as “Shotgiant,” against the company, which is considered a major competitor to US-based Cisco. The company produces smartphones and tablets, but also mobile phone infrastructure, WLAN routers and fiber optic cable — the kind of technology that is decisive in the NSA’s battle for data supremacy.

A special unit with the US intelligence agency succeeded in infiltrating Huwaei’s network and copied a list of 1,400 customers as well as internal documents providing training to engineers on the use of Huwaei products, among other things.

According to a top secret NSA presentation, NSA workers not only succeeded in accessing the email archive, but also the secret source code of individual Huwaei products. Software source code is the holy grail of computer companies. Because Huawei directed all mail traffic from its employees through a central office in Shenzhen, where the NSA had infiltrated the network, the Americans were able to read a large share of the email sent by company workers beginning in January 2009, including messages from company CEO Ren Zhengfei and Chairwoman Sun Yafang.

• West Poked Russian Bear With A Stick Until It Finally Swiped Back (RT)

Sophie Shevardnadze: David Speedie from the Carnegie Council for Ethics and International Affairs, welcome to our show.

SS: When Americans are saying that they are concerned about Ukraine – and they seem generally concerned, President Obama, John Kerry – they all come up with the statements saying that they are very worried about what’s going on in Ukraine, about its future…Do you think they really hold the Ukrainian happiness close to heart, or does it really all come down to confronting Russia at the end?

DS: That’s a good, important question – but perhaps there is an unfortunate answer. I think if one wants to be charitable, it would be a bit of both, there is genuinely a sense of concern for Ukraine; of course there’s also a not-insubstantial Ukrainian-American population in the voting public who must be taken into account. I think there is at least a recognition that Ukraine is a very important country. An American scholar described it as “keystone in the arch,” part of the essential foundation of Europe. We all hope that, again, Ukraine enjoys a good future relationship with Russia and with Europe.

So I think there is a genuine concern for Ukraine, but it’s not based on pragmatic consideration of Ukraine’s history with Russia – culturally, historically, demographically and all the other ways. And then of course, again, I have to say this, the history of the post Cold-War period is a history of poking, if one may say, at the Russian bear, until he strikes back, and that’s what happened over Ukraine. This is not the first incident – from the bombing of Serbia, from expansion of NATO, from the rebuff on the missile defense – this is not the first time that the Russian interests have certainly not been taken into account, to put it charitably, and perhaps one could go as far as to say there is at least a faction in the US that has a certain interest in beating Russia.

SS: The whole Euromaidan movement started when President Yanukovich declined to sign an EU association treaty on economic grounds. Now, after all the chaos, almost 100 lives lost, the economic part of the treaty is being dropped. What was it all about? Was it all for nothing?

DS: I’ve always wondered that the economics of this whole conversation – as we know, the first offer from the EU was sort of derisorily received by Yanukovich, I think it was one billion, and that was regarded as, of course, totally inadequate, and that’s when he went to Moscow, and then, I think, the stakes were raised. President Putin came back with a 15 billion package, the Europeans have since matched that. In terms of great game of poker, they saw the hand of the Russians and threw 15 billion in. And Ukrainians, I think, have said, that that doesn’t really cover it, Ukraine needs at least 35 to 40 billion …

I mean, various levels here: first of all, Ukraine as part of the EU that…as we know, there’s so many forgotten sidebar stories to this: the EU is having its own sort of soul searching at this point in time, there is significant opposition, typically in the form of the right-wing movements throughout Europe, to the whole European idea. The eurozone is in crisis, countries like Greece and Portugal, Spain, to some extent, Italy, are kind of the sick men of Europe at this point in terms of inclusion in the eurozone. Quite why Europeans would want to add Ukraine to that mix at this point would seem to be more of a political than an economic decision, and then the question is begged as to whether it is a good political decision for Ukraine. I have to say that most people, my guess would be, if they could turn the clock back a month to the events before Maidan, I think that most sides could agree that an unfortunate chain of events were set in motion, that, again, may have consequences that may be difficult to control.

• IMF Chief Lagarde Expects Ukraine Package In ‘Days’ (MarketWatch)

The head of the International Monetary Fund says she expects Ukraine and the IMF to finish a short-term financing plan within “days,” The Wall Street Journal reported Sunday. Speaking in Beijing, IMF Managing Director Christine Lagarde said such a plan is needed to stabilize Ukraine’s economy, but didn’t give details about either the package’s size or what conditions the IMF may demand. Lagarde made the comments in response to questions from students at Tsinghua University in Beijing.

Meanwhile, U.S. aid to Ukraine is high on the congressional agenda when lawmakers return to Washington Monday. Separate Senate and House bills both back $1 billion in loan guarantees for Ukraine, but lawmakers are divided over including IMF reforms in the aid package. The White House has been urging Congress to approve a shift of $63 billion from an IMF crisis fund to the institution’s general accounts, which would make good on a commitment from 2010. Senate Democrats support that move, but some Republicans say the IMF changes cost too much. House Speaker John Boehner has said the money for the IMF isn’t necessary to help Ukraine. The Senate plans to hold a procedural vote on Monday on the Ukraine aid legislation, including the IMF funding.

• Germany Inc. on Edge as EU Steps Up Response to Crimea (Bloomberg)

As the European Union steps up its response to Russian president Vladimir Putin’s annexation of Crimea, German companies are urging caution lest sanctions harm their business ties — and Europe’s shaky economic recovery.

The EU’s biggest economy has a lot riding on Russia. Volkswagen AG, Siemens AG, and HeidelbergCement AG are among the largest foreign investors there, the economic linchpin of a relationship nurtured by successive Berlin governments. Retailer Metro AG sells groceries to Russians, Adidas AG clothes the national soccer team, and Deutsche Lufthansa AG flies to more Russian cities than any other western European carrier.

U.S. President Barack Obama visits Europe this week, where he will confer with allies on further measures to deter Russia. Western officials have expressed concern about Russian troop movements near the Ukrainian border, which could worsen the crisis, U.K. Foreign Secretary William Hague wrote in The Sunday Telegraph yesterday. The EU on March 21 expanded the list of people subject to visa bans and asset freezes in response to Russia’s annexation of the Crimea to 51 individuals.

There will likely be opposition to tightening the screws too much. Gernot Erler, German Chancellor Angela Merkel’s coordinator for relations with Russia, told Bloomberg News last week that harsh sanctions would be counterproductive and unlikely to convince Putin to change course. “We hope that politicians really think about the impact sanctions will have,” said Ulrich Ackermann, chief international economist at the VDMA, an association of 3,100 German machine makers, including Siemens and VW. “It’s important that they weigh what the effect will be not only on the country you want to hit, but also on the country that’s imposing the sanctions.”

Among the large countries that use the euro, Germany sends the highest proportion of its exports to Russia, about 3.3%, Morgan Stanley (MS) analysts said in a March 20 research note. Bilateral trade between the two countries hit €77 billion ($106 billion) last year, and German investment in Russia totals €20 billion, according to the German Association of Chambers of Industry and Commerce.

Those close ties distinguish Germany from its European partners and, especially, the U.S., according to Bernd Scheifele, Chief Executive Officer of concrete producer HeidelbergCement AG.
“The greatest risk is if the Americans play power games — since they have very limited trade with Russia they could very well do so,” Scheifele told reporters on March 19. “If the Russian state has no money, then all infrastructure and construction projects come to a standstill.”

• EU’s Plans For Growth To Bring Shadow Banking In From The Cold (Reuters)

European Commission proposals due to be published on Thursday on how to fund long-term investments to boost Europe’s economies brings the start of a rehabilitation for the image of “shadow banking”, the largely unregulated market-based provision of credit which lay at the heart of the financial crisis. The EC plans envisage engineering a fundamental shift in how the continent raises money for investment in infrastructure like roads and technology while at the same time moving away from an over-reliance on banks for fuelling growth in the economy.

A core element involves reviving securitization or the bundling of loans into interest-bearing bonds, a market which was fatally wounded by its central role in the financial crisis seven years ago when bonds which packaged up subprime U.S. home loans became untradeable. Now the market for asset backed securities, currently has 650-700 billion euros worth of bonds in circulation, half its pre-crisis size. This shrinkage, coupled with banks being wary of lending as they rebuild their capital buffers, makes it harder than ever to seed economic growth in Europe.

In the immediate aftermath of the financial crisis regulators called for a tough crackdown on the $71 trillion global shadow banking sector that also includes debt market repurchase agreements, securities lending, money market investment funds and some hedge funds. But with the worst of the crisis now over, government attention has turned to growth and with it the regulatory mood music has also changed.

Policymakers are thinking twice about imposing new rules on one of the few sources of funding that can plug a gap left by retreating banks and the EU plans are a major milestone in this change of tack. “It’s a sign that regulators believe one aspect of shadow banking – securitization – is something to be encouraged and not discouraged, but they need to foster private sector involvement,” said David Covey, head of strategy for European asset-backed securities at Nomura bank.

Last week a top regulator said efforts by global supervisors to revive securitization will be intensified with proposals due soon, a step welcomed by bankers who say clarity on rules is key to encouraging investors to return to the market. “If there is regulatory uncertainty, it’s very damaging,” Covey said.

The EC estimates that a trillion euros is needed in long term finance for transport, energy and telecoms up to 2020 to boost competitiveness and jobs and hopes that by encouraging market-based financing it can reduce the continent’s reliance on banks for raising up to 70% of funds for the economy. Some European policymakers look to the United States, where markets instead fund about 70% of the economy, as a model to emulate. “There is no single action or ‘magic bullet’ which will revolutionize the financing landscape in one go; rather a range of different responses is required in parallel,” the EC said in a draft of the proposals seen by Reuters last month.

• ‘50% youth unemployment in Spain fuels radicalization of protests’ (RT)

Most of the protesters in Spain are peaceful, but there is an increase in radicalization, especially among young people, which is understandable due to the high level of youth unemployment, trader and portfolio manager Felix Moreno told RT.

On March 22, tens of thousands of Spaniards rallied in Madrid for a so-called ‘Dignity March’ against EU-imposed austerity measures. The protest was peaceful in general, though later on some protesters switched to violence, starting to throw stones and bottles at the large numbers of riot police and attacked cashpoints and hoardings. The main demands of the protesters are an end to the so-called Troika-style cuts in Spain, more jobs and affordable housing.

RT: We’ve seen protests in Spain and other crisis-hit countries going on for years, yet nothing seems to change. So what’s the point of anyone complaining?

Felix Moreno: To perfectly honest, it’s necessary for people to speak out because the government has had it very easy so far. The previous government made such a mess of it. Most people had a lot of patience and hope that this command was going to change this direction. Unfortunately, they haven’t [anymore] and I think we are starting to see the beginnings of the sea change in public opinion against this government.

RT: We’ve also seen a change in tactics as well. Last night in Madrid it was the police who received most of the injuries. Maybe there are some better ways for the people to get their voices heard than attacking the security forces?

FM: [Almost] all of the protesters are peaceful, but there is an increase in radicalization, especially among the young people, and this is understandable. But hopefully the silent and peaceful majority will prevail. Even though the anger keeps some building up because as you said there is over 50 percent youth unemployment in Spain and those people are getting very angry.

RT: The protesters are blaming the so-called Troika of the IMF, the European Central Bank and the EU for many of the country’s problems. But isn’t it really their own government that’s landed them in this mess? Who is to be blamed?

FM: Well, definitely the Troika, the IMF and the EU have had an influence on the government policy, but the ultimate decision has lied with government in Madrid because they did have choice of how to balance the budget. They could have radically cut spending in sectors which are not directly beneficial or directly affect the welfare of the people and they’ve made a choice to keep the public sector just as big but cut in the most basic necessities: they’ve cut education spending, they’ve cut health spending and above all, they’ve increased taxes. It’s not said very much, but there has been more than 50 tax increases within the past two years since the government came to power and that’s a direct opposition to what they promised in their electoral program

RT: Have these massive tax increases been advertised on the Spanish media?

FM: The Spanish media has talked about it quite a bit but they have made much more noise about the cuts. In fact, that’s been three times as much revenue impact through tax increases than through cuts.

RT: Of course, austerity takes its toll on ordinary people but what’s the alternative to get out of the crisis?

FM: Of course, the government’s own economic experts came out with a report two years ago with real alternatives to it and then they did exactly the opposite of what they’ve actually published in their own books. What they said was “Two thirds of the cuts should be through reduction in government spending and privatization of the public companies and one third in tax increases.” They’ve done the exact opposite. They have increased VAT, which is a tax that most impacts the poorest, and they’ve cut spending in the most sensitive sectors. They have not reduced headcount in public, in government workers, they have not reduced spending of government companies and obviously they bailed out the banks.

If they could have the money used to bail out the banks and used it to save the weakest in the population, the public unrest would have been much, much less, the situation would have been much easier. Obviously, they had to let banks fail to do that and they were ready to do that.

• Buy Sheep, Avoid Goats of Emerging Markets (A. Gary Shilling)

Since the start of 2014, investors have fretted over emerging markets. And they should. Early in this economic recovery, investors repelled by low returns in the developed world leaped for the stocks and bonds of emerging markets, whose markets promised faster growth. In 2009 and 2010, emerging economies grew much faster than the U.S. did; stock prices rose 46% annually, more than twice the gains of U.S. equities. Hot money flowed in, but so did foreign direct investment, which is harder to extract. Last year, foreign direct investment in the developing world grew 6%, to a record $759 billion, or 52% of the global total.

In their indiscriminate rush into emerging markets, though, investors forgot two important points: First, without exception, these economies depend primarily on exports for growth, which means the developed economies, especially the U.S., must be capable of buying their goods. And second, not all emerging markets are alike. On the first point, the developing world’s export growth model, which worked well in the 1980s and ’90s, won’t be viable for four more years or so while the U.S. continues to deleverage. Europe, meanwhile, has emerged from recession, but its economic growth will probably remain subdued at best.

The decline in the U.S. household saving rate from 12% in the early 1980s to 2% in the mid-2000s drove growth in the U.S. and the global economy. During the savings drought, consumer spending grew one-half percentage point a year faster than disposable (after-tax) income and added about half a percentage point to growth in real gross domestic product. Now all that is moving in reverse: Households are pushed to save by uncertainty over stock portfolios, exhausted home equity and the lack of retirement assets held by postwar babies.

The overseas effects of this reversal are powerful. For every one percentage point rise in U.S. consumer spending, American imports — the rest of the world’s exports — have risen 2.9 percentage points a year, on average. So when Americans stop spending, the rest of the world suffers.

• Ignore George Osborne’s Hollow Boasting (Independent)

The Chancellor opened his Budget speech in the House of Commons last Wednesday as follows: “I can report today that the economy is continuing to recover – and recovering faster than forecast. We set out our plan. And together with the British people, we held our nerve. We’re putting Britain right.”

The question for us to consider here is whether that is true. Let’s not forget that Mr Osborne lost the much-hallowed, but still not restored AAA credit rating that he told everyone in 2010 was a central plank of his plan. So to cut through all the hyperbole and taunting, I want to put this all in context.

I present a little evidence on GDP per capita in the first chart. This is up from £5,971 in Q2 2010, when the Coalition took office, to £5,997 per quarter in Q3 2013, which is the latest data we have. So GDP per person living in the UK rose by 0.4% in total over these 14 quarters, or by an average of 0.028% a quarter. This compares with an average growth of 0.71% a quarter over the 41 quarters from Q1 1998-Q1 2008 under Labour. So growth under Labour was 25 times higher than under Mr Osborne. Real GDP per capita remains 6.4% below its level in Q1 2008, which inevitably will not be restored before the May 2015 election.

So much for all the claims of victory; the war has been lost.

• Pollution in Beijing Triggers New Warnings to Avoid Outdoors (Bloomberg)

Pollution in Beijing rose to nearly 10 times levels considered safe by the World Health Organization, triggering warnings to avoid outdoor activity. The concentration of PM2.5 — the small particles that pose the greatest risk to human health — hit 242 in the Chinese capital as of 3 p.m., a U.S. Embassy monitor said. The WHO recommends 24-hour exposure to PM2.5 levels of less than 25.

High pollution levels prompted Premier Li Keqiang to say earlier this month the government would “declare war” on smog by closing some coal-fired furnaces and removing high-emission vehicles from the road. In a speech today, International Monetary Fund Managing Director Christine Lagarde said bad air quality, water shortages and desertification pose a “serious risk to the next stage of China’s development.” “As with many countries around the world, China’s economic success came at a price — increasing inequality and increasing environmental damage,” Lagarde told the China Development Forum.

Last week, the city’s meteorological bureau said Beijing plans to allocate 20 million yuan ($3.2 million) on “weather modification efforts” — chiefly creating rain — to ease smog. Earlier today, a preliminary measure showed China’s manufacturing industry weakened for a fifth straight month in March. Speaking at a briefing on March 8, Vice Environmental Protection Minister Wu Xiaoqing said China has paid a heavy environmental price for its growth in gross domestic product.

• Creationists Demand Equal Airtime On Neil deGrasse Tyson’s ‘Cosmos’ (HuffPo)

Creationist groups have made yet another complaint about Neil deGrasse Tyson’s “Cosmos: A Spacetime Odyssey.” Since the show debuted on FOX this month, creationists have not kept quiet about the science documentary series. What’s the problem now? While some have shunned the reboot of Carl Sagan’s 1980 PBS series altogether, other creationists now have made a request: equal airtime.

Appearing on “The Janet Mefferd Show” on Thursday, Danny Faulkner of Answers In Genesis voiced his complaints about “Cosmos” and how the 13-episode series has described scientific theories, such as evolution, but has failed to shed light on dissenting creationist viewpoints. He said: “I was struck in the first episode where [Tyson] talked about science and how, you know, all ideas are discussed, you know, everything is up for discussion –- it’s all on the table — and I thought to myself, ‘No, consideration of special creation is definitely not open for discussion, it would seem.'”

Tyson recently addressed providing balance when it comes to discussing science. In an interview with CNN, the astronomer criticized the media for giving “equal time” to those who oppose widely accepted scientific theories. “I think the media has to sort of come out of this ethos that I think was in principle a good one, but doesn’t really apply in science. The ethos was, whatever story you give, you have to give the opposing view, and then you can be viewed as balanced,” Tyson said, adding, “you don’t talk about the spherical earth with NASA and then say let’s give equal time to the flat-earthers.”

“Cosmos,” broadcast by FOX and National Geographic, covers a broad range of content from Earth’s place in the universe to the origin of life. However, the documentary series’ focus on Darwin’s theory of evolution has stirred the most controversy. An Oklahoma TV station faced backlash shortly after the first episode aired when a YouTube user posted a video of the FOX affiliate’s abrupt transition from “Cosmos” to a news promo, cutting out a part of the show when Tyson mentions evolution. While some speculated that the placement of the promo was intentional, TV station KOKH explained in a tweet that the interruption was accidental.

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