Aug 052016
 
 August 5, 2016  Posted by at 9:46 am Finance Tagged with: , , , , , , , , , ,  


G.G. Bain Three-ton electric sign blown into Broadway, New York. 1912

New Tool for Central Banks: Buying Corporate Bonds (WSJ)
UK Interest Rate Cut Is A ‘Hammer Blow’ For Workplace Pensions (G.)
UK Labor Market Enters “Freefall” After Brexit Vote (R.)
China Regulator Tells Banks to Evergreen Loans of Troubled Companies (ET)
For Europe’s Elite the Party Lives On After Brexit (BBG)
Tsipras Eyes Southern EU Alliance To Back Debt Deal (Kath.)
The 60-Year Decay of American Politics (Bacevich)
US Unlikely To Extradite Imam Turkey Blames For Coup (CNBC)
How Europe Is Getting Rich by Fueling Its Own Terror Epidemic (TAM)
War Or Peace: The Essential Question For American Voters On November 8th (RI)

 

 

Maybe we need to remind ourselves from time to time that we do NOT have functioning markets. Central banks buying up corporate bonds is of course about as distorting for markets as it comes.

We will yet take debt to its inevitable conclusion.

New Tool for Central Banks: Buying Corporate Bonds (WSJ)

Central banks have a new favorite tool for boosting lackluster growth: corporate-debt purchases. Two months after the ECB started buying corporate bonds, the Bank of England said Thursday that it would adopt a similar strategy. It will buy as much as £10 billion ($13.33 billion) of U.K. corporate debt starting in September as part of a larger package of stimulus measures, including £60 billion of additional government-bond purchases. The move, investors and analysts say, is likely to drive down borrowing costs even further around the globe for large companies already benefiting from ultralow interest rates.

But the decision again raises concerns about possible side effects of unconventional monetary policies, including excessive risk taking by investors, and faces substantial skepticism from investors who doubt such programs meaningfully address the global economy’s core deficiencies, centering on soft demand for goods and services. Already this year, negative-interest-rate policies and aggressive bond buying by central banks in Japan and Europe have helped create trillions of dollars of negative-yielding government bonds. That in turn has driven down corporate-bond yields, leading to robust debt issuance among companies in the U.S., if not all developed countries.

In the U.S., the average yield of investment-grade corporate bonds was 2.85% Wednesday, compared with 3.67% at the end of 2015, according to Barclays data. The average spread to Treasury yields also has shrunk, to 1.48 percentage points from 1.72. Companies have issued $519.2 billion of investment-grade corporate bonds this year, just below their pace at this time last year when issuance ultimately reached a record $794.6 billion, according to Dealogic.

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Wait till the stock market crashes, that’s when pensions will be hit.

UK Interest Rate Cut Is A ‘Hammer Blow’ For Workplace Pensions (G.)

Pension savers could be big losers from the Bank of England rate cut, as critics warned of a “hammer blow” to workplace schemes and forecast that pension payouts would fall to record lows. Within minutes of the Bank’s decision to cut the base rate to 0.25%, yields on government bonds, otherwise known as gilts, dived to all-time lows. Companies that still offer final salary pension schemes will as a result see the cost of maintaining them soar. Hymans Robertson, a pensions consultancy, said the rate cut meant a £70bn increase in the amount company schemes needed to meet their commitments to scheme members, to a total of £2.4trn. “To put this in context, UK GDP currently stands at £1.8trn. This has pushed the aggregate UK [company scheme] deficit up to £945bn – the worst it has ever been,” it said.

Companies will have to find the money to fill the gap in their pension schemes, or like most already have, close them to new members. In extreme cases, some may attempt to redraw pension contracts to cap their future liabilities. Patrick Bloomfield of Hymans Robertson said: “Pension schemes are being hit hard by recent events, but we need to remember that the impact will not be felt equally by all … There are schemes with robust funding plans that don’t take more risk than they need to, which will be able to weather this. The gap between pension schemes that hedged their risks and those that haven’t is starker than ever before.”

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A forced reset is not necessarily a bad thing.

UK Labor Market Enters “Freefall” After Brexit Vote (R.)

Britain’s labour market entered “freefall” after the vote to leave the European Union, with the number of permanent jobs placed by recruitment firms last month falling at the fastest pace since May 2009, a survey showed on Friday. The monthly report from the Recruitment and Employment Confederation (REC) showed starting salaries for permanent jobs rose in July at the slowest pace in more than three years. Overall, the survey added to evidence that business confidence and activity slowed sharply after the June 23 vote to leave the European. “The UK jobs market suffered a dramatic freefall in July, with permanent hiring dropping to levels not seen since the recession of 2009,” said REC chief executive Kevin Green. “Economic turbulence following the vote to leave the EU is undoubtedly the root cause.”

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Different countries have different ways of hiding their debt.

China Regulator Tells Banks to Evergreen Loans of Troubled Companies (ET)

On the surface, China is talking the reform talk. But is it also walking the walk? There are many examples to demonstrate it isn’t. The most recent one is a directive from the China Banking Regulatory Commission (CBRC) to not cut off lending to troubled companies and evergreening bad loans. This first reported by The Chinese National Business Daily on Aug. 4. “A Notice About How the Creditor Committees at Banks and Financial Institutes Should Do Their Jobs” tells banks to “act together and not ‘randomly stop giving or pulling loans.’ These institutes should either provide new loans after taking back the old ones or provide a loan extension, to ‘fully help companies to solve their problems,’” the National Business Daily writes.

“It’s big news. A couple of weeks ago they were threatening Liaoning Province to cut off all lending to them if they didn’t tighten loan standards,” said Christopher Balding, a professor of economics at Peking University in Shenzen. “This is a pretty significant turn-around for them to do and it indicates how significant the problem is.” The official reform narrative is espoused in this Xinhua piece which claims China has to reform because there is no Plan B. “Supply-side structural reform is also advancing as the country moves to address issues like industrial overcapacity, a large inventory of unsold homes and unprofitable ‘zombie companies.’” Clearly resolving the bad debt of zombie companies is not high on the priority list.

Goldman Sachs complained in a recent note to clients that companies can default on payments and often nothing happens. The investment bank notes that companies like Sichuan Coal default on payments of interest and principal for weeks or months and then maybe pay creditors later. The company in question defaulted on 1 billion yuan ($150 million) worth of commercial paper in June but made full payments later during the summer, a somewhat arbitrary process. Another case is Dongbei Special Steel, which missed at least five payments on $6 billion of debt since the beginning of the year, but has done nothing to resolve the problem. This is why creditors wrote an angry letter to the local government to help resolve the issue.

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Why the EU can’t be reformed.

For Europe’s Elite the Party Lives On After Brexit (BBG)

Europe’s political elite may have missed the Brexit memo. Six weeks since U.K. voters rebuked the ruling class by choosing to leave the European Union, the region’s establishment has reacted by carrying on as before. The revolving door of former policy makers joining the finance industry has spun again, with European Commission President Jose Manuel Barroso signing up with Goldman Sachs and former Bank of England Governor Mervyn King joining Citigroup. Meanwhile departed Prime Minister David Cameron is facing criticism for nominating numerous aides for honors, including his wife’s stylist.

The perception of elite coziness risks further disenfranchising those backing Brexit, and peers across the continent who share the feeling of being left behind by the powerful and wealthy in the era of globalization and financial crises. A potential upshot is more support for populist parties that tap into alienation such as the U.K. Independence Party or France’s National Front. “Anything that doesn’t show government or public institutions in a good light merely confirms some of the attitudes that probably contributed to the Brexit vote,” said Chris Roebuck, a visiting professor at London’s Cass Business School. For some voters, “there is a group of people out there who aren’t normal people like you or me, who have benefited since the financial crisis – because they’re an elite.”

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Tsipras already lost the ‘fight’. Beppe Grillo may lead such an alliance, not Tsipras.

Tsipras Eyes Southern EU Alliance To Back Debt Deal (Kath.)

Prime Minister Alexis Tsipras is planning to forge an alliance with the leaders of other countries in Southeastern Europe in a bid to bolster Greece’s bid for a debt restructuring and lower the primary surplus targets set by creditors. Tsipras is expected to explore the prospects for such an alliance at a meeting of European socialist heads of state scheduled to take place in Paris on August 25, particularly with Italian Prime Minister Matteo Renzi and French President Francois Hollande. The meeting had originally been planned for May 20 in Rome but was postponed after an Egyptian passenger plane crashed in the Mediterranean. The Greek premier’s aim, according to sources, is to arrange a subsequent meeting in Athens, probably on September 9, and in any case before a scheduled European Union leaders’ summit on September 16, to further explore the prospect of forming a Southeastern European alliance.

Tsipras and Renzi had agreed at their last meeting on the sidelines of an EU summit on June 28 on the need for southern states to create their own growth-focused agenda, compared to the austerity prescribed by Northern European countries. At the time, Hollande and Portuguese Prime Minister Antonio Costa had appeared open to the prospect of such an alliance. In Athens, sources close to Tsipras believe the time is right to pursue the creation of a strong southern “axis” to counter the stance of countries in Northern Europe. The idea of a united front of Southern European countries was first mooted by leftist SYRIZA before the general elections of January 2015 that brought it to power.

At the time, Tsipras thought Athens would attract the solidarity of Southern European countries in SYRIZA’s rhetoric against austerity and that those countries would stand by Greece in its negotiations with international creditors. That solidarity did not transpire then. However, sources close to Tsipras believe the current situation is potentially more beneficial for Athens as the protracted imposition of austerity on Greece and elsewhere has increased the pressure on countries in Southern Europe. Athens is also hopeful about forming a common front on another crucial issue that has divided Southern and Northern European countries: the ongoing refugee crisis. Indications by Turkey that it might not honor a migrant deal with the EU have fueled concerns in Greece that a slowed migrant influx could pick up again.

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Nostalgia. “And don’t kid yourself that things really can’t get much worse. Unless Americans rouse themselves to act, count on it, they will.”

The 60-Year Decay of American Politics (Bacevich)

Presidential campaigns today are themselves, to use Boorstin’s famous term, “pseudo-events” that stretch from months into years. By now, most Americans know better than to take at face value anything candidates say or promise along the way. We’re in on the joke — or at least we think we are. Reinforcing that perception on a daily basis are media outlets that have abandoned mere reporting in favor of enhancing the spectacle of the moment. This is especially true of the cable news networks, where talking heads serve up a snide and cynical complement to the smarmy fakery that is the office-seeker’s stock in trade. And we lap it up. It matters little that we know it’s all staged and contrived, as long as — a preening Megyn Kelly getting under Trump’s skin, Trump himself denouncing “lyin’ Ted” Cruz, etc., etc. — it’s entertaining.

This emphasis on spectacle has drained national politics of whatever substance it still had back when Ike and Adlai commanded the scene. It hardly need be said that Donald Trump has demonstrated an extraordinary knack — a sort of post-modern genius — for turning this phenomenon to his advantage. Yet in her own way Clinton plays the same game. How else to explain a national convention organized around the idea of “reintroducing to the American people” someone who served eight years as First Lady, was elected to the Senate, failed in a previous high-profile run for the presidency, and completed a term as secretary of state? The just-ended conclave in Philadelphia was, like the Republican one that preceded it, a pseudo-event par excellence, the object of the exercise being to fashion a new “image” for the Democratic candidate.

The thicket of unreality that is American politics has now become all-enveloping. The problem is not Trump and Clinton, per se. It’s an identifiable set of arrangements — laws, habits, cultural predispositions — that have evolved over time and promoted the rot that now pervades American politics. As a direct consequence, the very concept of self-government is increasingly a fantasy, even if surprisingly few Americans seem to mind.

At an earlier juncture back in 1956, out of a population of 168 million, we got Ike and Adlai. Today, with almost double the population, we get — well, we get what we’ve got. This does not represent progress. And don’t kid yourself that things really can’t get much worse. Unless Americans rouse themselves to act, count on it, they will.

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Can’t see US handing Gulen over on a platter, but Turkey is not done demanding his head. And many others.

US Unlikely To Extradite Imam Turkey Blames For Coup (CNBC)

U.S. officials weren’t likely to extradite Fethullah Gulen, an imam Turkey blames for plotting the recent failed coup, The Wall Street Journal reported Thursday, citing people familiar with the discussion. Those people said the evidence presented so far by Turkey wasn’t convincing and U.S. officials were also concerned about Turkish officials’ threatening public statements, which made the fairness of his potential treatment questionable, the report said. Gulen, who lives in Pennsylvania, has denied wrongdoing, the report said.

Separately, Reuters reported that Turkey’s President Tayyip Erdogan pledged on Thursday to cut off revenues from businesses tied to the 75-year-old Gulen, which include schools, firms and charities. Even before the failed coup, authorities in Turkey had seized Islamic lender Bank Asya, closed media businesses and arrested businessmen on accusations of funding the imam’s movement, Reuters reported. The failed coup, which took place on July 15, left more than 230 dead. Since then, more than 60,000 people across various branches of government have been detained, suspended or put under investigation, Reuters reported. That’s spurred concerns Erdogan was cracking down on all dissent.

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“68 flights that took place within 13 months transported weapons and ammunition to the Middle East, including to NATO member Turkey, which in turn “funnelled arms into brutal civil wars in Syria and Yemen.”

How Europe Is Getting Rich by Fueling Its Own Terror Epidemic (TAM)

Though Europe does not have the rates of gun violence the United States continues to grapple with, European governments have made over a billion euros by fueling gun violence in the Middle East and North Africa. A report conducted by a team of reporters from the Balkan Investigative Reporting Network (BIRN) and the Organized Crime and Corruption Reporting Project (OCCRP) found a group of European nations has been funneling arms into the Middle East region since 2012, making at least 1.2 billion euros in the process. According to the report, 68 flights that took place within 13 months transported weapons and ammunition to the Middle East, including to NATO member Turkey, which in turn “funnelled arms into brutal civil wars in Syria and Yemen.”

The report also notes that these flights make up only a small portion of the 1.2 billion euros in arms deals between Europe and the Middle East since 2012. The report’s conclusions are horrifying, to say the least. The report states: “Arms export licenses, which are supposed to guarantee the final destination of the goods, have been granted despite ample evidence that weapons are being diverted to Syrian and other armed groups accused of widespread human rights abuses and atrocities.” Considering Europe is battling a continually rising terrorist threat, they seem to be going about tackling this issue the wrong way. Surely the best way to counter terrorism is to cease funding it in the first place.

One astounding aspect of the report is that the lucrative war-profiteering business involves nations the world would not usually regard as overly-interested in war. The countries contributing to the rising terror threat, as identified by the report, are Bosnia and Herzegovina, Bulgaria, Croatia, the Czech Republic, and Romania, among others. This report adds to the already glaring problem of European countries making billions of dollars off the death and destruction of Middle Eastern civilian life. The Stockholm International Peace Research Institute (SIPRI) found the United Kingdom was second only to the United States in arms sales, making up 10.4% of the total $401 billion worth of arms sold around the world for the 2014 period.

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Trump for Peace. We have 3 months left to get used to that.

War Or Peace: The Essential Question For American Voters On November 8th (RI)

In matters of substance as opposed to character assassination that both parties’ candidates have engaged in freely, what separates the candidates and makes it worthwhile to register and vote on November 8th is the domain of international relations. This, as a general rule, is the only area where a president has free hands anyway, whatever position his party holds in the Congress. Here the choice facing voters is stark, I would say existential: do we want War or Peace? Do we want to pursue our path of global hegemony, which is bringing us into growing confrontation with Russia, meaning a high probability of war, (the policy of Hillary Clinton), or do we want a harmonious international order in which the U.S. plays its role at the board of governors, just like other major world powers (the policy of Donald Trump).

Let me go one step further and explain what “war” means, since it is not something that gets much attention in our media, whereas it is at the top of the news each day in Russia. “War” does not mean Cold War-II, a kind of scab you can pick to indulge a pleasure in pain that is not life threatening. War means what our military like to call “kinetics” to mask the horror of it all. It means live ammunition, ranging from conventional to thermonuclear devices that can devastate large swathes of the United States if we play our hand badly, as would likely be the case for reasons I explain below should Hillary and her flock of Neocon armchair strategists take the reins of power in January 2017.

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Mar 102016
 
 March 10, 2016  Posted by at 9:56 am Finance Tagged with: , , , , , , , , ,  


William Henry Jackson Tunnel 3, Tamasopo Canyon, San Luis Potosi, Mexico 1890

IMF Says World At Risk Of ‘Economic Derailment’ (BBC)
Whole Of Europe Risks Spinning Into Crisis If Leaders Mishandle Brexit (AEP)
This Is Jeff Gundlach’s Favorite -& Scariest- Chart (ZH)
“However It Takes” #Draghi (BM)
Senior European Bankers Voice Concerns Over ECB Cut (FT)
Markets Betting On Near-Zero Interest Rates For Another Decade (Reuters)
What’s In A Growth Target? For China, Hope And Simple Math (WSJ)
China To Allow Commercial Banks To Swap Bad Debt For Equity Stakes (Reuters)
Albany Can Solve the World’s Sovereign Debt Crisis (BBG)
Germany Needs 470,000 Immigrants Per Year For Next 25 Years (GM)
Record Number Of African Rhinos Killed In 2015 (Guardian)
Syrians Under Siege: ‘We Have No Children Any More, Only Small Adults’ (G.)
Did Michel Foucault Predict Europe’s Refugee Crisis? (Baele)
Refugees At Border Should Move To Camps, Says Greek Minister (AP)
Conditions At Idomeni Refugee Camp Worsen By The Day (Kath.)
Five Iranians, Afghans Drown Trying To Reach Greece (Reuters)

And the IMF worked hard to get it there.

IMF Says World At Risk Of ‘Economic Derailment’ (BBC)

The IMF has warned that the global economy faces a growing “risk of economic derailment.” Deputy director David Lipton called for urgent steps to boost global demand. “We are clearly at a delicate juncture,” he said in a speech to the National Association for Business Economics in Washington on Tuesday. “The IMF’s latest reading of the global economy shows once again a weakening baseline,” he warned. The comments come after weaker-than-expected trade figures from China showing that exports in February plunged by a quarter from a year ago. With the world’s second largest economy often referred to as as “the engine of global growth”, weaker global demand for its goods is read as an indicator of the general global economic climate. The IMF has already said it is likely to downgrade its current forecast of 3.4% for global growth when it releases its economic predictions in April.

Last month, the international lender had warned that the world economy was “highly vulnerable” and called for new efforts to spur growth. In a report ahead of last month’s Shanghai G20 meeting, the IMF said the group should plan a co-ordinated stimulus programme as world growth had slowed and could be derailed by market turbulence, the oil price crash and geopolitical conflicts. In his Washington speech, Mr Lipton said “the burden to lift growth falls more squarely on advanced economies” which have fiscal room to move. “The downside risks are clearly much more pronounced than before, and the case for more forceful and concerted policy action, has become more compelling.” “Moreover, risks have increased further, with volatile financial markets and low commodity prices creating fresh concerns about the health of the global economy,” he added. The downbeat picture is one that has continuing ramifications for businesses and industries that bet on China’s growth story.

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“..the whole of Europe is sitting on a bed of nitroglycerin..”

Whole Of Europe Risks Spinning Into Crisis If Leaders Mishandle Brexit (AEP)

[..] Personally, I find talk about “retaliation” against Britain to be a little odd, though I do not rule it out. Any such madness would risk a political crisis in Denmark and Sweden, and ultimately spread to Germany. British withdrawal would be a thunderous shock to the EU project. The immediate imperative for Europe’s leaders at that point would be to patch things up and ensure a velvet divorce as quickly as possible to stop the crisis spinning out of control. France’s Marine Le Pen likens Brexit to the collapse of the Berlin Wall. “It will be the beginning of the end. If Britain knocks down part of the wall, it s finished, it’s over, she said. Whether she is right or wrong depends on the statecraft of Angela Merkel, Francois Hollande, Mateo Renzi and Poland’s Beata Szydlo. A report this week by Morgan Stanley spells out the grim price Europeans will pay if they mishandle this event.

Foreign investors would start to withdraw their $8.3 trillion of investments in the eurozone. There might be a bond run with Spain in the firing line. The bank’s base case for Brexit is that the MSCI Europe index of equities will fall 15pc-20pc, and 0.7 percentage points will be knocked off growth by late 2017. Its “high stress” scenario is a stock market crash of up to 30pc, a tightening in financial conditions by 200 basis points, severe contagion, and a 2pc blow to GDP that pushes the eurozone into recession, with “growing concerns around the sustainability of the entire European project”. Whether the eurozone could withstand a fresh shock of this force is an open question. The region already has one foot in deflation, with toxic effects on debt dynamics. Public debt ratios are massively higher than they were at the top of the last credit cycle in 2008, and pushing safe limits of 133pc of GDP in Italy and 129pc in Portugal.

The hysteresis effects of mass unemployment have done lasting damage to economic dynamism, lowering the eurozone’s speed limit for a decade to come. There is no fiscal union, and no genuine banking union. Little has been done to make monetary union viable. The ECB is running low on ammunition. Populist movements are simmering everywhere. I do not wish to gloss over the risks to the UK. These are real and have been widely aired, emphatically by the Bank of England recently. My point is that the whole of Europe is sitting on a bed of nitroglycerin. It is a fair bet that EU leaders would refrain from reprisals that would make their crisis infinitely worse, but it is only a bet. No level of folly can ever be excluded in the march of human affairs.

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“These lines will converge..”

This Is Jeff Gundlach’s Favorite -& Scariest- Chart (ZH)

According to DoubleLine’s Jeff Gundlach, this is his favorite chart – backing his persepctive that equity markets have “2% upside and 20% downside) from here. In his words: “These lines will converge…” It should be pretty clear what drove the divergence, and unless (and maybe if) The Fed unleashes another round of money-printing (or worse), one can’t help but agree with Gundlach’s ominous call.


Chart: Bloomberg

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“We don’t want to play any more.” Sounds nice, but a ton of bankers, investors etc. MUST play.

“However It Takes” #Draghi (BM)

Never has an ECB meeting been so eagerly anticipated, and yet so confused. In October’s meeting, we expected nothing. Instead we got that “things have changed” about “going into further negative territory”. Sell the Euro! Buy Euribors! In December’s meeting, we expected everything. But we thought we didn’t. So we got a market that was overly short of Euros/long of Euribors and forced to exit. Buy the Euro! Sell Euribors! In January’s meeting, we didn’t want to listen. But we had to, because this time Draghi didn’t leave it to the Q&A to deliver his own thoughts. He managed to shoehorn some kind of consensus towards further easing into the actual statement: ‘we decided to keep the key ECB interest rates unchanged and we expect them to remain at present or lower levels for an extended period of time’. Sell the Euro a bit! Buy Euribors a bit more!

Now the time has come. It’s the March meeting and they can present new staff forecasts as they indicate just how much lower, and for how much longer, the stimulus can continue. Are we buying or selling everything? There was an important step between 3 and 4, however, and that was the impact of the Bank of Japan moving into negative rates, as well as the ongoing cumulative bout of fear subsuming the markets. In February, we all decided that lower interest rates might not actually be very good for the banking system. Which is a bit of a shame, given that the banks are the transmission mechanism by which those super-stimulative rates are supposed to super-stimulate the economy. This now leaves us in this position:
• October: We forgot that Draghi always over-delivers!
• December: No, we didn’t, and EUR/USD has its biggest upmove of the year
• January: No, we were wrong again, he does want to over-deliver, here he is putting in his fresh order for a kitchen sink
• March: We don’t want to play any more.

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Don’t think the ECB is done blowing bubbles.

Senior European Bankers Voice Concerns Over ECB Cut (FT)

Some of Europe’s most senior bankers have warned the European Central Bank of the dangers of negative interest rates ahead of a widely anticipated cut at the bank’s policy meeting on Thursday. The ECB is expected to cut its deposit rate by 10 basis points to minus 0.4% as it takes further action in its struggles to lift persistently low inflation and boost economic growth back to normal levels. Bank leaders are alarmed by the crippling effect on their profits of negative rates which they cannot pass on to ordinary customers, adding to concerns about the fragility of financial stability in some parts of the eurozone. But any attempt by the ECB to shield lenders from the effects of negative rates could weaken the policy and open the central bank to claims that it is engaged in a beggar-thy-neighbour devaluation.

Andreas Treichl, chief executive of Austria’s Erste Bank, told the Financial Times that another cut could encourage financial bubbles, hurt economic growth and create “social disparity” by penalising savers. José García Cantera, Santander’s chief financial officer, added that the banks that would take the biggest hit to their profits if rates were cut again were those least able to bear it. Last week, Sergio Ermotti, UBS chief executive, warned that excessively low rates were prompting banks to extend too many risky loans because they “don’t know what to do” with deposits. The industry hopes to lay out concrete evidence of the detrimental impact negative rates are already having in mid-April, when the European Banking Federation will present the results of a review into how its members are being affected.

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Nobody oversees 10 years in this climate.

Markets Betting On Near-Zero Interest Rates For Another Decade (Reuters)

World markets may have recovered their poise from a torrid start to the year, but their outlook for global growth and inflation is now so bleak they are betting on developed world interest rates remaining near zero for up to another decade. Even though the U.S. Federal Reserve has already started what it expects will be a series of interest rate rises, markets appear to have bought into a “secular stagnation” thesis floated by former U.S. Treasury Secretary Larry Summers. The idea posits that the world is entering a peculiarly prolonged period in which structurally low inflation and wage growth – hampered by aging populations and slowing productivity growth – means the inflation-adjusted interest rate needed to stimulate economic demand may be far below zero.

As there’s likely a lower limit to nominal interest rates just below zero – because it’s cheaper to hold physical cash and bank profitability starts to ebb – then even these zero rates do not gain traction on demand. For all the debate about the accuracy of that view, it’s already playing out in world markets, with long-term projections from the interest rate swaps market showing developed world interest rates stuck near zero for several years. Take overnight interest rate swaps. They imply ECB policy rates won’t get back above 0.5% for around 13 years and aren’t even expected to be much above 1% for at least 60 years. Japan’s main interest rate won’t reach 0.5% for at least 30 years, they suggest, and even U.S. and UK rates are set to remain low for years. It will be six years before U.S. rates return to 1%, and a decade until UK rates reach that level.

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Poetry in motion: “In China, you can see it visibly”, she said.”

What’s In A Growth Target? For China, Hope And Simple Math (WSJ)

What’s in an economic growth target? When it comes to China, not all that much. That the government has a passion for setting targets is well-established; the nation’s top economic planning agency lists 59 in the appendix of its annual report to China’s parliament, of which it says it only undershot in four categories last year. Given that, one might assume that the policymakers of Beijing arrive at their numbers through reams of Excel sheets and several lecture-hall chalkboards worth of mathematical formula. Not so, according to Wu Xiaoling, deputy director of China’s congressional finance and economy committee. Ms. Wu is a former deputy governor of the central bank, the former head of its foreign-exchange regulator, and a respected thinker in China’s financial policy circles.

In explaining China’s current monetary policy, which is trying to strike a balance between providing enough money for growth without sparking another round of debt bingeing, Ms. Wu walked reporters through the steps the government takes to build its target for M2, the broadest measurement of money, capturing all the cash, savings and deposits flowing through an economy. M2 is an indicator that economists watch not just for its sheer size in China, but also because it s driving an accumulation of debt at twice the speed that the world’s second-largest economy is growing. M2’s growth is the result of deliberate government policy. Last year, it set a goal of 12%; the actual expansion came in at 13.3%. This year, Beijing is setting an expansion in the money supply by 13%. How did the officials arrive at these numbers? It begins, Ms. Wu says, with China s’all-important indicator: its economic growth target.

Last year, the gross domestic product expansion target was 7%. This year, as growth slows, the government has lowered the target to a range of 6.5% to 7%. That target is the minimum that would enable Beijing to accomplish a lofty government goal to double household income per capita between 2010 and 2020. The central bank then takes that GDP target and tacks on its expectations of consumer price inflation -3% both this and last year- and “then we add 2% or 3% points to take into account ‘uncertainty'”, Ms. Wu said earlier this week. The final sum becomes the government’s goal of monetary expansion for the year: 12% last year, and 13% this year, since the central bank this year chose to use the upper bound of the GDP growth range for its planning purposes. The nub of China’s M2 growth strategy isn t unique. Economists have long theorized that monetary supply can have a strong correlation with economic growth; managing M2 is therefore potentially a key way that central banks influence economic growth.

The problem, as Ms. Wu also acknowledged, is that an unbridled reliance on monetary expansion often drives debt and inflation. “In China, you can see it visibly”, she said. “Property prices have risen a lot since 2009.” The other major problem for China is that such an expansion in money supply is coinciding with a period of currency weakness fueled by worries over its economic slowdown and the ability of China s leaders to manage it that has led to an unprecedented rundown of its foreign-exchange reserves. Economists look at the correlation between broad money and foreign reserves for clues to how likely an economy is exposed to the risk of capital flight. The higher the M2-to-reserves ratio or conversely, the lower the reserves-to-M2 ratio the higher the likelihood of capital flight. In China s case, the reserves-to-M2 measurement is currently about 15%, which is about as low as Indonesia s when the Asian financial crisis struck in 1997. Indonesia saw capital flight, a plummeting currency and civil unrest.

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Until truly nobody knows what anything is worth anymore. Just nationalize everything that smells bad.

China To Allow Commercial Banks To Swap Bad Debt For Equity Stakes (Reuters)

China’s central bank is preparing regulations that would allow commercial banks to swap non-performing loans of companies for stakes in those firms, two sources with direct knowledge of the new policy told Reuters. The sources, who spoke on condition of anonymity, said the release of a new document explaining the regulatory change was imminent. On paper, the move would represent a way for indebted corporates to reduce their leverage, reducing the cost of servicing debt and making them more worthy of fresh credit. It would also reduce NPL ratios at commercial banks, reducing the cash they would need to set aside to cover losses incurred by bad loans. These funds could then be freed up for fresh lending for investment in the new wave of infrastructure products and factory upgrades the government hopes will rejuvenate the Chinese economy.

The sources said the new regulations would be promulgated with special approval from the State Council, China’s cabinet-equivalent body, thus skirting the need to revise the current commercial bank law, which prohibits banks from investing in non-financial institutions. In the past Chinese commercial banks usually dealt with NPLs by selling them off at a discount to state-designated asset management companies. The AMCs would turn around and attempt to recover the debt or resell it at a profit to distressed debt investors. The sources did not have further detail about how the banks would value the new stakes, which would represent assets on their balance sheets, or what ratio or amount of NPLs they would be able to convert using this method. Official data from the China Banking Regulatory Commission shows Chinese banks held NPLs and “special mention” troubled loans in excess of 4 trillion yuan ($614.04 billion) at the end of 2015.

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Paul Singer won’t let them.

Albany Can Solve the World’s Sovereign Debt Crisis (BBG)

In recent years, many countries – including Greece, Argentina and Ukraine – have found themselves indebted beyond their ability to pay. Argentina may now be on the brink of resolving a decade-long dispute with some of its creditors, but its predicament highlights a fundamental problem of sovereign debt. Unlike individuals and corporations, countries cannot use bankruptcy laws to restructure unsustainable debt. They are forced to try to separately renegotiate each of their debt contracts, which often fails because it requires unanimity. Although attempts have been made to try to bypass this requirement by including so-called collective action clauses in sovereign debt contracts, many contracts still lack them. Furthermore, most collective action clauses only bind a party to the particular contract that includes it.

The parties to any given sovereign debt contract, therefore, can act as holdouts in any debt restructuring plan that requires the parties to all of the country’s other debt contracts to agree to it. Recent judicial decisions interpreting New York law, which governed the relevant Argentine debt contracts, have made sovereign debt restructuring even harder; they allow “vulture funds” to extract ransom money by buying debt claims to block the ability of majority creditors to reach a settlement. These decisions broadly threaten New York’s dominance as the law that governs sovereign debt contracts. Yet New York has the unique ability not only to preserve its dominance but also to help solve the sovereign debt crisis. Because around half the world’s sovereign debt contracts are governed by New York law, the state could pass a measure to amend the voting requirements under those contracts.

For example, contracts that now require unanimity for revisions could be amended to allow changes that are approved by at least a supermajority of similarly situated creditors (even if those creditors’ claims arise under different debt contracts); such a law would overcome the major hurdle to sovereign debt restructuring. That, in turn, would give struggling nations the real prospect of equitably restructuring their debt to sustainable levels, thereby lowering sovereign borrowing costs and increasing creditor confidence by reducing uncertainty. This is a financially powerful opportunity for New York. Never before has a U.S. state had the power to influence the international community to such an extent. Being that New York City is the world’s financial center and home of the United Nations headquarters, it is fitting that circumstances have endowed the state with this power. Enactment of such a measure would also reinforce New York’s legitimacy as the governing law for future sovereign debt contracts.

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Try tell that to the right wing.

Germany Needs 470,000 Immigrants Per Year For Next 25 Years (GM)

German Chancellor Angela Merkel continues to receive both praise and criticism for her decision last year to open Germany’s doors to hundreds of thousands of the migrants arriving on Europe’s shores. ‘It goes without saying that we help and accommodate people who seek safe haven with us,’ she declared. However, while recent immigration has added enough people to offset any natural population shrinkage as a result of increasing death rates compared to birth rates, the next few decades are still likely to see the country’s increasingly elderly population go into a steady decline. Destatis, Germany’s national statistics office, estimates that the number of Germans between the ages of 20 and 66 is expected to shrink by a quarter – around 13 million people – between 2013 and 2040, while the number of people over 67 is expected to rise from 15.1 million to 21.5 million over the same time.

‘The shrinking of the population has consequences,’ explains Stephan Sievert, researcher at the Berlin Institute for Population and Development. ‘It has repercussions on the economy, on social security, and on infrastructure. A more gradual, incremental shrinking would be preferable to a rapid decline. The more time you have to adjust to the new situation, the more time you have to adapt the functioning of your society.’ Destatis confirms that immigration cannot be expected to make up this shortfall. It concludes that the country would require an estimated 470,000 immigrants ready to join the workforce every year between now and 2040 to prevent a significant demographic shift, a rate which the current unprecedented period of high immigration cannot be expected to sustain.

‘It’s not necessarily about the number of people, it’s about what they bring to the table,’ continues Sievert. ‘What kind of qualifications do they have? Can they find employment? Can they relieve some of the burden on the social security systems that increasingly more people are getting money out of than people are paying in to?’ He also raises the issue of where immigrants might settle spatially; whether they could help revive rural parts of the country where populations are dwindling. ‘It’s a different question to whether or not this would be desirable,’ he adds. ‘To have immigration on the scale that could make up for these losses, we’d be talking about more than half a million every year, and that doesn’t make the task of integration any easier.’

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The animal man truly is.

Record Number Of African Rhinos Killed In 2015 (Guardian)

A record number of rhinos were killed by poachers across Africa last year, driven by demand in the far east for their horn. The number slaughtered in their heartland in South Africa, which has four-fifths of the continent’s rhino, dipped for the first time since the crisis exploded nearly a decade ago. But increases in the number of rhino poached in Nambia and Zimbabwe offset the small signs of hope in South Africa, leading to a record 1,338 to be killed continent-wide. A total of 5,940 have been poached since 2008. Conservationists said it was possible that a clampdown by authorities in South Africa, where ministers have stepped up efforts against an illegal trade that they say threatens the tourism industry, have led to organised criminals moving their operations.

“They [poachers] operate like an amoeba so if you push in one place they expand elsewhere. What you may be seeing is a response at the regional level, where increased pressure in South Africa makes it more difficult for operatives to operate, having a response elsewhere,” said Mike Knight, chair of the respected International Union for the Conservation of Nature’s African rhino specialist group.

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The legacy of the ‘developed’ world.

Syrians Under Siege: ‘We Have No Children Any More, Only Small Adults’ (G.)

Sick children dying as lifesaving medicine waits at checkpoints, youngsters forced to survive on animal feed and leaves, and families burning their mattresses just to find something to keep them warm. Schools moving underground for shelter from barrel bombs, the crude, explosive-filled and indiscriminate crates that fall from the sky and are so inaccurate that some observers have said their use is a de facto war crime. The wounded left to die for lack of medical supplies, anaesthetics, painkillers and chronic medicine; children dying of malnutrition and even rabies due to the absence of vaccines, while landmines and snipers await anyone trying to escape. The scenes are not from second world war death camps or Soviet gulags.

They are the reality of life for more than a million Syrians living in besieged areas across the war-torn nation, according to a report by Save the Children. Tanya Steele, the charity’s chief executive, said: “Children are dying from lack of food and medicines in parts of Syria just a few kilometres from warehouses that are piled high with aid. They are paying the price for the world’s inaction.” At least a quarter of a million children are living in besieged areas across Syria, Save the Children estimates, in conditions that the charity describes as living in an open-air prison. The report is based on a series of extensive interviews and discussions with parents, children, doctors and aid workers on the ground in besieged zones.

It illustrates with startling clarity the brutality with which the conflict in Syria is being conducted, five years into a revolution-turned-civil-war that has displaced half the country and killed more than 400,000 people. The suffering of people in besieged areas in Syria is also an indictment of the failure of the international community to bring an end to the crisis. Less than 1% of them were given food assistance in 2015 and less than 3% received healthcare. Rihab, a woman living in eastern Ghouta near Damascus, which has been besieged by Bashar al-Assad’s regime, was quoted as saying: “Fear has taken control. Children now wait for their turn to be killed. Even adults live only to wait for their turn to die.”

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Nice theory, though maybe a little farfetched.

Did Michel Foucault Predict Europe’s Refugee Crisis? (Baele)

In March 1976, philosopher Michel Foucault described the advent of a new logic of government, specific to Western liberal societies. He called it biopolitics. States were becoming obsessed with the health and wellbeing of their populations. And sure enough, 40 years later, Western states are prodigiously promoting healthy food, banning tobacco, regulating alcohol, organizing breast cancer checks, and churning out information on the risk probabilities of this or that disease. Foucault never claimed this was a bad trend—it saves lives after all. But he did warn that paying so much attention to the health and wealth of one population necessitates the exclusion of those who are not entitled to—and are perceived to endanger—this health maximization program. Biopolitics is therefore the politics of live and let die.

The more a state focuses on its own population, the more it creates the conditions of possibility for others to die, “exposing people to death, increasing the risk of death for some people.” Rarely has this paradox been more apparent than in the crisis that has seen hundreds of thousands of people seeking asylum in Europe over the past few years. It is striking to watch European societies investing so much in health at home and, at the same time, erecting ever more impermeable legal and material barriers to keep refugees at bay, actively contributing to human deaths. The conflict in the Middle East is a deadly war. Most estimates suggest 300,000 have been killed in Syria alone. The conflict has shown us some of the most gruesome practices that war can produce, including the gassing of several thousands of civilians in Damascus in 2013.

Extremist groups such as the Islamic State display unimaginable levels of violence. They have beheaded people with knives or explosives, burned people locked in cages, crucified people, thrown people from the tops of buildings, or more recently exploded people locked in a car (a child supposedly detonated the bomb). This violence has been exported to Europe. Some of the biggest Syrian cities now look pretty much like Stalingrad in 1943. Inevitably, people escape—just like, for example, the Belgians who fled their country in the first years of World War I (250,000 to the UK alone, with up to 16,000 individuals arriving per day). This emigration is inevitable simply because normal life has become impossible in most parts of the country—and it will continue for almost as long as there are people living in this war-torn region. Jordan—a country just short of 10 million inhabitants—currently hosts more than a million refugees. Turkey hosts almost two million.

Faced with this disaster in its neighbourhood, what do the EU and its member states do? Exactly what Foucault predicted. Germany apart, they compete in imagination to design policies making sure refugees don’t arrive, and send ever-clearer deterrent signals. Austria has unilaterally fixed quotas on the number of asylum seekers that will be accepted at its border each day, effectively leaving bankrupt Greece to handle the burden of the influx alone. A week previously, French prime minister Manuel Valls announced that France and Europe “cannot accept more refugees.” His country originally agreed to receive 30,000 refugees over two years. To put that in perspective in terms of population size, if France was a village of 2,200 inhabitants, it would accept no more than a single person over that time.

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Makes sense, but most won’t want to. Greek government indicates it wants to start moving people out of Idomeni as per Sunday. Reports of dozens of sick children.

Refugees At Border Should Move To Camps, Says Greek Minister (AP)

Greece’s public order minister says refugees living in a squalid camp at the country’s border with Former Yugoslav Republic of Macedonia (FYROM) must accept that the border is shut and move to organized facilities. Nikos Toskas says the country can provide better conditions in other camps within 10-20 kilometers (6-12 miles) of the Idomeni crossing, where up to 14,000 people live in a waterlogged tent city. Toskas told state ERT TV Wednesday that Greece can offer “no serious support” to such a large number of people gathered in one spot. He said authorities will hand out fliers telling refugees seeking to reach central Europe that “there is no hope of you continuing north, therefore come to the camps where we can provide assistance.” More than 36,000 transient refugees and migrants are stuck in financially struggling Greece.

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42,000 refugees stuck in Greece today. One week from now, it’ll be over 60,000.

Conditions At Idomeni Refugee Camp Worsen By The Day (Kath.)

Refugees were still flowing into the Idomeni border camp in northern Greece Wednesday, despite the complete border closure by authorities in the Former Yugoslav Republic of Macedonia over the last few days, while torrential rain has made conditions even worse. “The situation is stifling as more people are arriving daily on foot,” the coordinator of the Hellenic Red Cross in northern Greece, Despina Filipidaki, told Kathimerini on Wednesday. “The biggest problem is that the bad living conditions are worsening the health problems,” she added. According to the latest estimates, more than 12,000 refugees are camped there in deplorable conditions while a further 3,050 are at Piraeus port, bringing the total number of migrants throughout Greece to 35,945.

Government sources told Kathimerini that the total cost of managing the crisis has risen to 278 million euros but that EU assistant funds are on the way. Giorgos Kyritsis, spokesman for the Coordinating Body for the Management of Migration, reiterated Wednesday that the main priority is to eventually evacuate Idomeni and “transfer people to structures affording better living conditions.” But, he said, it won’t be an easy task to convince the refugees. Nor will it be easy to overcome the reaction of locals in other areas where shelters are being erected.

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No comment anymore.

Five Iranians, Afghans Drown Trying To Reach Greece (Reuters)

Five migrants, including a baby, hoping to reach Europe via Greece drowned when their speedboat capsized off the Turkish coast, Dogan News Agency said on Thursday. The Turkish Coast Guard rescued nine people after they called for help late on Wednesday and recovered five bodies, it said. The group, comprised of Afghans and Iranians, were trying to reach the Greek island of Lesvos in the Aegean Sea. The EU has offered Turkey billions of euros in aid to curb illegal migration. Under a draft deal struck on Monday, Turkey agreed to take back all irregular migrants in exchange for more funding, faster visa liberalisation for Turks, and a speeding up of Ankara’s long-stalled EU membership talks. The aim is to discourage illegal migrants and break the grip of human smugglers who have sent them on perilous journeys across the Aegean. But migrants have continued to try to cross from Turkey’s coast in recent days.

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Oct 242015
 
 October 24, 2015  Posted by at 10:03 am Finance Tagged with: , , , , , , , , , , ,  


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

China Cuts Interest Rates, Reserve Ratios to Counter Slowdown (Bloomberg)
China Interest Rate Cut Fuels Fears Over Ailing Economy (Guardian)
Why The Chinese Rate Cut Will Not Slow China’s Economic Decline (Coward)
Reactions To Rate Cut: “China Is Getting More And More Desperate” (Zero Hedge)
China Takes ‘Riskiest’ Step by Ending Deposit-Rate Controls (Bloomberg)
Draghi’s Signal Adds $190 Billion to Negative-Yield Universe (Bloomberg)
Eurozone Crosses Rubicon As Portugal’s Anti-Euro Left Banned From Power (AEP)
Italy ex-PM Monti: Ignoring Greek Referendum A Violation Of Democracy (EurActiv)
Rare Metals: The War Over the Periodic Table (Bloomberg)
$6.5 Billion in Energy Writedowns and We’re Just Getting Started (Bloomberg)
Greece’s Creditors Demand Further Reform (La Tribune)
Investment Grade Ain’t What It Used to Be in Nervous Bond Market (Bloomberg)
An All Too Visible Hand (WSJ)
EU Negotiators Break Environmental Pledges In Leaked TTIP Draft (Guardian)
Populist, Pernicious and Perilous : Germany’s Growing Hate Problem (Spiegel)
Germany To Push For Compulsory EU Quotas To Tackle Refugee Crisis (Guardian)
Worried Slovenia Might Built Fence To Cope With Migrant Crisis (Reuters)

This cannot end well.

China Cuts Interest Rates, Reserve Ratios to Counter Slowdown (Bloomberg)

China’s central bank cut its benchmark lending rate and reserve requirements for banks, stepping up efforts to cushion a deepening economic slowdown. The one-year lending rate will drop to 4.35% from 4.6% effective Saturday the People’s Bank of China said on its website on Friday. The one-year deposit rate will fall to 1.5% from 1.75%. Reserve requirements for all banks were cut by 50 basis points, with an extra 50 basis point reduction for some institutions. The PBOC also scrapped a deposit-rate ceiling. The expanded monetary easing underscores the government’s determination to meet its 2015 growth target of about 7%. Moderated consumer inflation and a deeper slump in producer prices have given policy makers room for further easing.

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If growth numbers were anywhere near the IMF’s predictions, China wouldn’t be cutting rates.

China Interest Rate Cut Fuels Fears Over Ailing Economy (Guardian)

China fuelled fears that its ailing economy is about to slow further after Beijing cut its main interest rate by 0.25 percentage points. The unexpected rate cut, the sixth since November last year, reduced the main bank base rate to 4.35%. The one-year deposit rate will fall to 1.5% from 1.75%. The move follows official data earlier this week showing that economic growth in the latest quarter fell to a six-year low of 6.9%. A decline in exports was one of the biggest factors, blamed partly by analysts on the high value of China’s currency, the yuan. The rate cut sent European stock markets higher as investors welcomed the boost from cheaper credit in China, together with the hint of further monetary easing by the European Central Bank president, Mario Draghi, on Thursday.

Investors were also buoyed by the likelihood that the US Federal Reserve would be forced to signal another delay to the first US rate rise since the financial crash of 2008-2009 until later next year. The FTSE 100 was up just over 90 points, or 1.4%, at 6466, while the German Dax and French CAC were up almost 3%. The People’s Bank of China’s last rate cut in August triggered turmoil in world markets after Beijing combined the decision with a 2% reduction in the yuan’s value. Shocked at the prospect of a slide in the Chinese currency, investors panicked and sent markets plunging. Some economists have warned that the world economy is about to experience a third leg of post-crash instability after the initial banking collapse and eurozone crisis.

The slowdown in China, as it reduces debts and a dependence for growth on investment in heavy industry and property, will be the third leg. World trade has already contracted this year with analysts forecasting weaker trade next year. The IMF in July trimmed its forecast for global economic growth for this year to 3.1% from 3.3% previously, mainly as a result of China’s slowing growth. The Washington-based fund also warned that the weak recovery in the west risks turning into near stagnation. At its October annual meeting, it said growth in the advanced countries of the west is forecast to pick up slightly, from 1.8% in 2014 to 2% in 2015 while growth in the rest of the world is expected to fall from 4.6% to 4%.

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“The continued and dramatic slowing of the Chinese economy in the years ahead is baked in the cake.”

Why The Chinese Rate Cut Will Not Slow China’s Economic Decline (Coward)

Today the Peoples Bank of China cut the benchmark interest rate by .25% and lowered banks’ reserve requirements by .5%. The measure is supposed to spur growth and make life a little easier on debt-ridden Chinese companies. In the immediate term it may give a slight boost to the economy, but there is no chance this measure, or others like it, will keep the Chinese economy from slowing much further in the years ahead. Let us explain… The continued and dramatic slowing of the Chinese economy in the years ahead is baked in the cake. For the last decade Chinese growth has been fueled by investment in infrastructure (AKA fixed capital formation). In an effort to sustain a high level of growth massive and unprecedented investment in fixed capital was carried out and fixed investment has now become close to 50% of the Chinese economy.

On the flip side, consumption as a% of GDP has shrunk from about 46% of GDP to only 38% of GDP. Most emerging market countries run with fixed investment of around 30-35% of GDP and with consumption accounting for about 40-50% of GDP – exactly the opposite dynamic of the Chinese economy. China has run into a ceiling in terms of the percentage of the economy accounted for by fixed investment and now fixed investment must shrink to levels more appropriate for China’s stage of economic development. This necessarily implies a slowing of the Chinese economy from what the government says is near 7% to something closer to 2-4%, and that is in the optimistic scenario in which consumption growth picks up the pace to mitigate the slowdown in investment.

This is why cuts in rates mean practically nothing for China’s long-term economic prospects. In the short-term rate cuts may postpone corporate bankruptcies by allowing companies to refinance debt at lower rates. Rate cuts may also make housing more affordable, on the margin. But these are cyclical boosts that act as tailwinds to China’s economic train.

No amount of wind, save a hurricane, is going to keep the train from slowing. As a reminder, it has not been working…

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“..easing shows China is “getting more and more desperate” and that “things are really bad there.”

Reactions To Rate Cut: “China Is Getting More And More Desperate” (Zero Hedge)

To say that China, which a few days ago reported GDP of 6.9% which “beat” expectations and which a few hours ago reported Chinese home prices rose in more than half of tracked cities for the first time in 17 months, stunned everyone with its rate cut on Friday night, meant clearly for the benefit of US stocks, as well as the global commodity market, is an understatement: nobody expected this. As a result strategists have been scrambling to put China’s 6th rate cut in the past year (one taking place just ahead of this weekend’s Fifth plenum) in context. Here are the first responses we have seen this morning. First, from Vikas Gupta, executive vice president at Arthveda Fund Management, who told Bloomberg that “China rate cut will spur fund flows to EMs.” He adds that “the move rules out U.S. rate increase this yr; Fed’s “hands are getting tied” concluding that “easing shows China is “getting more and more desperate” and that “things are really bad there.”

While there is no debate on just how bad things in China are, one can disagree that the Fed’s hands are tied – after all the Fed’s biggest “global” concern was China. The PBOC should have just taken that concern off the table. The second reaction comes from Citi’s Richard Cochinos: “Bottom line: Impacts of China rate announcements on the G10 are falling. Investors remain cautious ahead of this weekend’s announcements, and what policy cuts imply for the region. One day after a dovish ECB, China cuts interest rates by 25bp and RRR cut by 50bps. Accommodative policy begets accommodative policy it seems. Our economics team has been expecting further policy accommodation out of China, the issue was just a matter of timing.

Unlike other major central banks, the PBOC doesn’t announce policy on a set schedule – but this doesn’t mean there isn’t a pattern to it. Before today, it had announced cuts to the RRR or interest rate six times in 2015 – the last being on 25 August. So today was a surprise in terms of action, but not completely unexpected. We prefer to see the easing can be seen in the larger picture of China adjusting to weaker growth in a systematic and controlled manner, rather than a reaction to a new economic shock.”

This view helps explain the muted reaction in the G10. So far, AUDUSD (0.27%) and USDJPY (0.18%) have borne the bulk of price action, but we note price action so far is muted relative to April, June or August. Clearly stimulus is beneficial to both Japan and Australia – but we are cautious not to sound too optimistic. Today’s rate cut comes ahead of this weekend’s Fifth plenum, and previous ones haven’t been sufficient to reverse the economic slowdown. Additionally, this weekend it has been expected GDP targets for the next 5-years will be announced (currently at 7%, but broadly expected to fall), along with other fiscal plans and goals. Without knowing the full baseline of what China expects and is working towards, it is difficult to chase price action. The main drivers of EM Asia lower has been poor growth and trade in the region – hence we main cautious. Policy adjustments now could be a way to soften the impact of further weak economic growth.

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Will adding more leverage save Beijing?

China Takes ‘Riskiest’ Step by Ending Deposit-Rate Controls (Bloomberg)

China scrapped a ceiling on deposit rates, tackling what the central bank has called the “riskiest” part of freeing up the nation’s interest rates. The move came as the central bank cut benchmark rates and banks’ reserve requirements to support a faltering economy. The changes take effect on Saturday, the People’s Bank of China said in a statement on Friday. Scrapping interest-rate controls boosts the role of markets in the economy, part of efforts by Premier Li Keqiang to find new engines of growth. While officials must be on guard for any excessive competition for deposits that could increase borrowing costs for companies or lead to lenders going bust, weakness in the economy may be mitigating the risks.

Ending the ceiling is an important milestone but comes in the wake of “a tremendous amount of deposit-rate liberalization over the last several years,” especially in the shape of wealth management products, according to Charlene Chu at Autonomous Research Asia. Wealth products issued by Internet firms are increasingly siphoning away deposits, making rate controls less effective and adding urgency to accelerating reform, the central bank said in a question-and-answer statement after the move. History shows that the best time to deregulate rates is when they’re being cut and inflation is easing, it said. The risks may not be as high as they would’ve been two or three years ago, because competition for deposits has cooled, with weaker demand for funding and a decline in banks’ willingness to lend, Chu, formerly of Fitch Ratings, said ahead of the PBOC announcement. Banks aren’t fully using the deposit-rate flexibility that they already have, she said.

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Remember that Draghi et al have no idea what the effect of negative rates will be. None. All they have is theories.

Draghi’s Signal Adds $190 Billion to Negative-Yield Universe (Bloomberg)

With his confirmation that policy makers had discussed cutting the region’s deposit rate, Mario Draghi extended the euro area’s negative yield universe by $190 billion. Those comments by the ECB chief on Thursday sparked a rally that left yields on German sovereign securities at less than zero for as long as six years. Across the currency bloc, the value of securities issued by governments at negative yields rose to $1.57 trillion, from $1.38 trillion before Draghi’s comments. That’s equivalent to about a quarter of the market. German and French two-year yields set fresh record-lows Friday, while their longer-dated peers pared weekly gains. Draghi also said the ECB will re-examine its quantitative-easing plan in December.

“This is certainly an exceptional environment,” said Christian Lenk at DZ Bank in Frankfurt. “We have to admit that the discussion about the deposit rate being cut further came as a surprise. It takes the curve very much into negative territory. In the time being the short-end looks a bit artificial.” Germany’s two-year yield was little changed at minus 0.32% as of 9:58 a.m. London time, after earlier reaching a record-low minus 0.348%. The price of the 0% security maturing September 2017 was at 100.605% of face value. French two-year yields dropped to a record minus 0.292% on Friday, also below the current level of the deposit rate, which is at minus 0.20%. There are about $752 billion of securities in the euro region with yields below that rate, making them ineligible for the ECB’s €1.1 trillion bond-buying plan

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Next major Brussels headache: “Public debt is 127pc of GDP and total debt is 370pc, worse than in Greece. Net external liabilities are more than 220pc of GDP.”

Eurozone Crosses Rubicon As Portugal’s Anti-Euro Left Banned From Power (AEP)

Portugal has entered dangerous political waters. For the first time since the creation of Europe’s monetary union, a member state has taken the explicit step of forbidding eurosceptic parties from taking office on the grounds of national interest. Anibal Cavaco Silva, Portugal’s constitutional president, has refused to appoint a Left-wing coalition government even though it secured an absolute majority in the Portuguese parliament and won a mandate to smash the austerity regime bequeathed by the EU-IMF Troika. He deemed it too risky to let the Left Bloc or the Communists come close to power, insisting that conservatives should soldier on as a minority in order to satisfy Brussels and appease foreign financial markets. Democracy must take second place to the higher imperative of euro rules and membership.

“In 40 years of democracy, no government in Portugal has ever depended on the support of anti-European forces, that is to say forces that campaigned to abrogate the Lisbon Treaty, the Fiscal Compact, the Growth and Stability Pact, as well as to dismantle monetary union and take Portugal out of the euro, in addition to wanting the dissolution of NATO,” said Mr Cavaco Silva. “This is the worst moment for a radical change to the foundations of our democracy. “After we carried out an onerous programme of financial assistance, entailing heavy sacrifices, it is my duty, within my constitutional powers, to do everything possible to prevent false signals being sent to financial institutions, investors and markets,” he said. Mr Cavaco Silva argued that the great majority of the Portuguese people did not vote for parties that want a return to the escudo or that advocate a traumatic showdown with Brussels.

This is true, but he skipped over the other core message from the elections held three weeks ago: that they also voted for an end to wage cuts and Troika austerity. The combined parties of the Left won 50.7pc of the vote. Led by the Socialists, they control the Assembleia. The conservative premier, Pedro Passos Coelho, came first and therefore gets first shot at forming a government, but his Right-wing coalition as a whole secured just 38.5pc of the vote. It lost 28 seats. The Socialist leader, Antonio Costa, has reacted with fury, damning the president’s action as a “grave mistake” that threatens to engulf the country in a political firestorm. “It is unacceptable to usurp the exclusive powers of parliament. The Socialists will not take lessons from professor Cavaco Silva on the defence of our democracy,” he said.

Mr Costa vowed to press ahead with his plans to form a triple-Left coalition, and warned that the Right-wing rump government will face an immediate vote of no confidence. There can be no fresh elections until the second half of next year under Portugal’s constitution, risking almost a year of paralysis that puts the country on a collision course with Brussels and ultimately threatens to reignite the country’s debt crisis. The bond market has reacted calmly to events in Lisbon but it is no longer a sensitive gauge now that the ECB is mopping up Portuguese debt under quantitative easing. Portugal is no longer under a Troika regime and does not face an immediate funding crunch, holding cash reserves above €8bn. Yet the IMF says the country remains “highly vulnerable” if there is any shock or the country fails to deliver on reforms, currently deemed to have “stalled”. Public debt is 127pc of GDP and total debt is 370pc, worse than in Greece. Net external liabilities are more than 220pc of GDP.

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“Europe has steadily departed from its principal founding goals, democracy, human rights and freedoms and the prosperity of its people and its societies..”

Italy ex-PM Monti: Ignoring Greek Referendum A Violation Of Democracy (EurActiv)

By disregarding the resounding ‘No’ of the recent Greek referendum, Europe clearly violated democracy, said the former Italian premier, Mario Monti. At the “Regaining Public Trust in Europe” event organised this week in Brussels by Friends of Europe, Zoe Konstantopoulou, the former speaker of the Greek Parliament, strongly criticized the EU institutions for the unfolding humanitarian crisis in Greece. “Would you trust the EU if they told you that your vote or the court decisions in your countries do not matter?”, Konstantopoulou wondered. Zoe Konstantopoulou served as a speaker of the Greek parliament under the first term of Syriza coalition government and was a close ally of the Greek premier, Alexis Tsipras.

But shortly after the deal agreed on between Athens and its international creditors this summer, Konstantopoulou resigned from Syriza, and joined the newly established leftist Popular Unity party led by former energy minister Panagiotis Lafazanis. In the recent snap election in Athens, Popular Unity did not manage to enter the Greek parliament, scoring below the required 3% threshold. Konstantopoulou and Monti had a vivid dialogue during the panel discussion. The former Greek lawmaker was quite critical of the EU, and said that at times when the democratic principles of the EU are shaken, “it is our duty to speak clearly and honestly”.

“Europe has steadily departed from its principal founding goals, democracy, human rights and freedoms and the prosperity of its people and its societies,” she stressed. Konstantopoulou noted that “Greeks have been sacrificed and crucified for more than 5 years now, to pay a debt which has been evaluated to be wholly unsustainable ever since 2010 to the knowledge of the IMF and the EU.” “And it was baptised as public, although it was initially private, involving private banks in Germany, France and Greece,” she added.

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Must. Read. Whole. Article.

Rare Metals: The War Over the Periodic Table (Bloomberg)

A little past 9:30 on the morning of Sept. 7, 2010, a Japanese Coast Guard vessel in the East China Sea spots a Chinese fishing trawler off the coast of islands, known as Senkaku in Japanese and Diaoyu in Chinese. The Japanese have little tolerance for such incursions in the Senkakus, which they annexed in 1895 after the Sino-Japanese War. But recently China has asserted claims to these islands extending hundreds of years earlier. The island dispute is wrapped up in a morass of misunderstanding and oneupmanship, with an eye toward the rich seabed resources nearby. When you ask Japanese officials about the territorial dispute, they will look at you as if it is almost insulting to answer the question. “It’s our land,” one government official told me, as if an American diplomat had been asked if Hawaii is part of the US.

On that morning, the Japanese vessel pulls alongside the smaller Chinese trawler and blares messages to the crew in Chinese from loudspeakers: “You are inside Japanese territorial waters. Leave these waters.” Videos from the day show that instead of leaving, the Chinese boat bends toward the stern of the Japanese cutter, hitting it and then sailing on. Forty minutes later, the same captain veers into another Japanese coast guard ship. Tokyo has managed previous incursions with little fanfare. However, the newly elected Democratic Party of Japan detained the trawler’s crew and captain. It planned to put the captain on trial. China retaliated by detaining four Japanese citizens.

Then, on Sept. 21, Japanese trading houses informed its Ministry of Economy, Trade and Industry that China was refusing to fill orders for rare-earth elements – a set of 17 different, obscure rare metals. What seemed like a battle over seabed resources became a new conflict, one that is potentially far larger, a War over the Periodic Table. Japanese officials and manufacturers were frightened. These elements – essential materials in Japan’s high-tech industry, well known for its high quality components – were virtually all produced in China. Beijing never acknowledged an export ban or said it would use the rare-metal trade as a political weapon. But no other country reported such delays. And Beijing never explained why all 32 of the country’s rare-earth exporters halted trade on the same day.

Restricting these exports was an astute move if Beijing’s goal was to escalate the political conflict between the two countries without the use of force. Tokyo worried that rare earths were just the beginning of what China might withhold because China is also the leading global producer of 28 advanced metals also vital to Japanese industry. Bowing to Beijing’s pressure, Tokyo quickly released the Chinese captain. But the damage to Japan and the rare-earth market had only just begun. Prices for rare earths started to climb, some as much as 2,000% over the next year and a half. Prices have since returned to lower levels, and China changed its export regime after being found in violation of global trade rules last year. But the lessons from this episode have not yet been fully realized as a fundamental market instability remains. A little perspective is in order.

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It’s already much much more.

$6.5 Billion in Energy Writedowns and We’re Just Getting Started (Bloomberg)

The oil and gas industry’s earnings season is barely underway, and already there’s been $6.5 billion in writedowns. On Thursday, Freeport-McMoRan reported a $3.7 billion charge for the third quarter, while Southwestern Energy – which has a market value of $4.5 billion – booked $2.8 billion. And that’s just the beginning. Barclays estimated in an Oct. 21 analysis that there could be $20 billion in charges among just six companies. Southwestern’s writedown was double Barclays’ forecast. Oil prices have tumbled 44% in the past year, and natural gas is down 35%, making the write-offs a foregone conclusion from an accounting standpoint. The companies use an accounting method that requires them to recognize a charge when estimates of future cash flow from their properties falls below what the companies spent buying and developing the acreage. The predictions of future cash flow have fallen along with prices.

Since it’s no secret oil and gas prices have plunged, “the majority of write-offs are typically non-events,” said Barclays’ analysts led by Thomas R. Driscoll in the report. Southwestern’s shares have declined 64% in the past year, and Phoenix-based Freeport-McMoRan’s are down 61%. Barclays predicted ceiling-test impairments for Apache, Chesapeake Energy , Devon Energy, Encana and Newfield. All five companies are scheduled to report third-quarter results in November. “Many companies will have writedowns as the price of oil is about half of where it once was and gas is also down,” Timothy Parker at T. Rowe Price said in an e-mail. “However, it won’t generally hurt the companies because very few have debt covenants that are linked to book value, which the writedowns affect.”

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The troika wants to evict Greeks from their homes.

Greece’s Creditors Demand Further Reform (La Tribune)

The European institutions and the IMF are increasing their demands on Greece, despite the recent reforms adopted by the Greek parliament. Athens can hardly afford to resist. Our partner La Tribune reports. Discussions between Greece and its creditors are tense, despite the major reforms accepted by the Greek parliament, the Vouli, on Monday (19 October). The talks between Greece and the new institutional ‘quartet’ began on Wednesday (21 October). The old troika of the Commission, the ECB and the IMF has been joined by the European Stability Mechanism (ESM). On Wednesday afternoon, Olga Gerovasili, a spokesperson for the Greek government, spoke of a “very hard battle” with the institutions.

At the heart of this battle are the Greek banks, which were severely weakened by the massive withdrawal of deposits in the first half of this year. Added to this is the increasing cost of debt. According to the Bank of Greece, in 2014 this represented 34% of the total deposits held by all the Hellenic banks put together. This figure has risen since 2014, and will continue to rise as Greek GDP contracts in 2015 and 2016. Fewer deposits mean more toxic debt: the Greek banking system needs a bailout. The Greek government says it needs a recapitalisation fund of €25 billion. But the creditors clearly hope to provide only the bare minimum. As the supervisor of the process, the ECB plans to carry out an asset quality review (AQR) to determine exactly how much money the banks need before bailing them out.

But the conditions attached to this bailout may create a raft of other problems. Greece’s creditors are now demanding that borrowers who cannot afford to repay their loans be evicted from their homes. The vacated properties would then be sold in order to settle the exact payment due on each loan. Up to now, households with modest incomes have been protected from eviction as long as their main residence was worth less than €250,000; a measure that has helped to keep many families hit by unemployment off the streets. But the creditors want this limit lowered so more bank loans can be recovered in this way. Olga Gerovasili said that the government was “fighting to maintain the protection of main residences”.

A similar issue arose in Cyprus last year. The Cypriot parliament refused to implement the tougher eviction conditions demanded by the troika, and the ECB responded by excluding Cyprus from its quantitative easing programme. The troika then froze all transfers to Nicosia, pushing the island to the verge of bankruptcy. Under pressure from the government, the parliament finally accepted the demand to make evictions easier to carry out.

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Where and why debt deflation starts: “Companies have increased leverage massively, and that is starting to catch up..”

Investment Grade Ain’t What It Used to Be in Nervous Bond Market (Bloomberg)

After six years of a credit boom in which investors distinguished less and less between ratings, rewarding companies across the spectrum with favorable borrowing costs, the market is becoming more discriminating. Fear of low growth, which has largely been focused on the riskiest of energy companies, is spilling over to other industries and into the lower rungs of investment grade as the strength of balance sheets comes back into focus. Just being investment grade, it seems, isn’t good enough anymore. “The chickens are coming home to roost,” said Freddie Offenberg at Andres Capital Management. “Companies have increased leverage massively, and that is starting to catch up, especially given the worries in the economy.” Earnings for Standard & Poor’s 500 companies contracted 1.7% last quarter, the most since 2009.

And more than half of companies in the index that reported earnings this quarter have disappointed analysts’ sales expectations. The credit-ratings companies have noticed: There have been 1.6 investment-grade companies upgraded for every one downgraded so far this year, compared with last year’s 3.5-1 ratio. “It’s not time to panic, but the market is paying closer attention to performance and quality, and rightly so,” said David Leduc at Standish Mellon Asset Management. Companies like Fossil are paying nearly half a percentage point more for their debt since May, based on secondary prices of comparable securities, according to Bank of America Merrill Lynch Indexes. Companies with the best balance sheets, such as Microsoft and Johnson & Johnson, only pay 0.05 percentage point more.

Among companies that have had to pay up in debt markets is Hewlett-Packard. The Baa2 rated computer maker sold $14.6 billion of bonds on Sept. 30 that yielded half apercentage point more than the average for bonds with similar ratings and maturities in the secondary market, according to Bank of America Merrill Lynch index data. That’s not good news for companies that still need to raise debt to finance $356 billion of takeovers that are expected to be completed by the end of the year. This includes Charter Communications, which is attempting to complete its $55.1 billion takeover of Time Warner Cable with the lowest investment-grade rating from S&P and Fitch Ratings, and a junk rating from Moody’s Investors Service.

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“On the basis of its record, the financial system as constituted in the years 1900-1913 must be considered to have been successful to an extent rarely equalled in the United States.”

An All Too Visible Hand (WSJ)

When Woodrow Wilson signed the Federal Reserve Act into law in 1913, the dollar was defined as a weight of gold. You could exchange the paper for the metal, and vice versa, at a fixed and statutory rate. The stockholders of nationally chartered banks were responsible for the solvency of the institutions in which they owned a fractional interest. The average level of prices could fall, as it had done in the final decades of the 19th century, or rise, as it had begun to do in the early 20th, without inciting countermeasures to arrest the change and return the price level to some supposed desirable average. The very idea of a macroeconomy—something to be measured and managed—was uninvented. Who or what was in charge of American finance? Principally, Adam Smith’s invisible hand.

How well could such a primitive system have possibly functioned? In “The New York Money Market and the Finance of Trade, 1900-1913,” a scholarly study published in 1969, the British economist C.A.E. Goodhart concluded thus: “On the basis of its record, the financial system as constituted in the years 1900-1913 must be considered to have been successful to an extent rarely equalled in the United States.” The belle epoque was not to be confused with paradise, of course. The Panic of 1907 was a national embarrassment. There were too many small banks for which no real diversification, of either assets or liabilities, was possible. The Treasury Department was wont to throw its considerable resources into the money market to effect an artificial reduction in interest rates—in this manner substituting a very visible hand for the other kind.

Mr. Lowenstein has written long and well on contemporary financial topics in such books as “When Genius Failed” (2000) and “While America Aged” (2008). Here he seems to forget that the past is a foreign country. “Throughout the latter half of the nineteenth century and into the early twentieth,” he contends, “the United States—alone among the industrial powers—suffered a continual spate of financial panics, bank runs, money shortages and, indeed, full-blown depressions.” If this were even half correct, American history would have taken a hard left turn. For instance, William Jennings Bryan, arch-inflationist of the Populist Era, would not have lost the presidency on three occasions. Had he beaten William McKinley in 1896, he would very likely have signed a silver-standard act into law, sparking inflation by cheapening the currency. As it was, President McKinley signed the Gold Standard Act of 1900, which wrote the gold dollar into the statute books.

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Well, that’s a surprise…

EU Negotiators Break Environmental Pledges In Leaked TTIP Draft (Guardian)

The EU appears to have broken a promise to reinforce environmental protections in a leaked draft negotiating text submitted in the latest round of TTIP talks in Miami.. In January, the bloc promised to safeguard green laws, defend international standards and protect the EU’s right to set high levels of environmental protection, in a haggle with the US over terms for a free trade deal. But a confidential text seen by the Guardian and filed in the sustainable development chapter of negotiations earlier this week contains only vaguely phrased and non-binding commitments to environmental safeguards. No obligations to ratify international environmental conventions are proposed, and ways of enforcing goals on biodiversity, chemicals and the illegal wildlife trade are similarly absent.

The document does recognise a “right of each party to determine its sustainable development policies and priorities”. But lawyers say this will have far weaker standing than provisions allowing investors to sue states that pass laws breaching legitimate expectations of profit. “The safeguards provided to sustainable development are virtually non-existent compared to those provided to investors and the difference is rather stark,” said Tim Grabiel, a Paris-based environmental attorney. “The sustainable development chapter comprises a series of aspirational statements and loosely worded commitments with an unclear dispute settlement mechanism. It has little if any legal force.” The document contains a series of broadly sympathetic statements about the importance of conservation and climate action.

But it offers no definitions of what core terms – such as “high levels of protection” for the environment or “effective domestic policies” for implementing them – actually mean. Last year, more than a million people across Europe signed a petition calling for the Transatlantic Trade and Investment Partnership (TTIP) talks to be scrapped. Their concern was that multinationals could use the treaty’s investor-state dispute settlement (ISDS) provisions to sue authorities in private tribunals, not bound by legal precedent. In one famous case, Lone Pine launched an unresolved $250m suit against the state of Quebec after it introduced a fracking moratorium, using ISDS provisions in the North American Free Trade Agreement (Nafta).

US officials maintain that few such cases are ever likely to be brought under the TTIP, which could wipe away tariffs in the world’s largest ever free trade deal. However, environmental cases accounted for 60% of the 127 ISDS cases already brought against EU countries under bilateral trade agreements in the last two decades, according to Friends of the Earth Europe. Europe’s taxpayers paid out at least $3.5bn to private investors as a result.

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Seen this before: “..a shift in norms that will be difficult to get back under control.”

Populist, Pernicious and Perilous : Germany’s Growing Hate Problem (Spiegel)

Germany these days, it seems, is a place where people feel entirely uninhibited about expressing their hatred and xenophobia. Images from around the country show a level of brutalization that hasn’t been witnessed for some time, and attest to primitive instincts long believed to have been relegated to the past in Germany. The examples are as myriad as they are shocking, and include the bloody attack in Cologne as well as the mock gallows for Angela Merkel and her deputy Sigmar Gabriel carried by a demonstrator at a Pegida rally in Dresden on Oct. 12.

But they also include the abuse shouted at the German chancellor when she visited a refugee hostel in Heidenau near Dresden in August, where she was called a “slut” and other insults, or the placards held aloft by demonstrators on the first anniversary of the Pegida rallies listing the supposed “enemies of the German state” – Merkel, Gabriel and their “accomplices.” The lack of inhibition when it comes to vicious tirades took on a whole new scale on Monday, when Turkish-born German author and Pegida supporter Akif Pirincci, said there are other alternatives in the refugee crisis, but “the concentration camps are unfortunately out of action at the moment.”

There have been more than twice as many attacks on refugee hostels during the first nine months of this year as in the whole of 2014. The rising tide of hatred is now reaching the politicians many hold responsible for the perceived chaos besetting Germany. The national headquarters of Merkel’s conservative Christian Democratic Union (CDU) party in Berlin fields thousands of hate mails every week. As the architect of the “we can do it” policy of allowing masses of refugees into the country, Chancellor Merkel is their primary target. Within the SPD, it is General Secretary Yasmin Fahimi, whose father is Iranian. “Open the doors to the showers, fire up the ovens. They’re going to be needed,” read one recent anonymous mail addressed to her.

The hatred comes in many forms. It’s expressed on the streets and on the Internet. Sometimes it’s loud. Other times it’s unspoken. It eminates from every class and every section of society. According to studies conducted by Andreas Zick, the respected head of the Institute for Interdisciplinary Research on Conflict and Violence at the University of Bielefeld, who has been researching German prejudices against different groups for many years, almost 50% of Germans harbor misanthropic views. Zick warns of a shift in norms that will be difficult to get back under control.

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Rinse and repeat?!

Germany To Push For Compulsory EU Quotas To Tackle Refugee Crisis (Guardian)

Germany is to push for more ambitious and extensive common European policies on the refugee crisis, according to policymakers in Berlin, with compulsory and permanent EU quotas for sharing probably hundreds of thousands of people to be brought to Europe directly from the Middle East. New European powers replacing some national authority over border control, and the possible raising of a special EU-wide levy to fund the new policies are also on Berlin’s agenda. The plans, being prepared in Berlin and Brussels, are certain to trigger bitter resistance and major clashes within the EU. Berlin backs European commission plans to make the proposed scheme “permanent and binding”. But up to 15 of 28 EU countries are opposed.

The plans will not apply to the UK as it is not part of the EU’s passport-free Schengen zone and has opted out of EU asylum policy, saying it will not take part in any proposed European refugee-sharing schemes. Angela Merkel, appears determined to prevail, as she grapples with a crisis that will likely define her political legacy. The German chancellor is said to be angry with the governments of eastern and central Europe who are strongly opposed to being forced to take in refugees. She is said to resent that these EU member states are pleading for “solidarity” against the threats posed by Russia and Vladimir Putin while they resist sharing the burdens posed by the refugee crisis. EU government leaders agreed last month to share 160,000 asylum seekers already inside the EU, redistributing them from Greece and Italy over two years.

But the decision had to be pushed to a majority vote overruling the dissenters, mainly in eastern Europe, with the Hungarian prime minister, Viktor Orban, accusing Merkel of “moral imperialism” by forcing the issue. It is highly unusual in the EU for sensitive issues of such deep national political impact to be settled by majority voting. But Berlin appears prepared to go there if no consensus can be reached. The opponents of quotas insist last month’s decision was a one-off. But according to policymakers in Berlin, Merkel now wants to go much further, shifting the emphasis of burden-sharing from redistribution of refugees inside the EU to those collecting en masse in third countries, notably Turkey where more than two million Syrians are hosted.

Under one proposal being circulated in Berlin, the EU would strike pacts with third countries such as Turkey agreeing to take large but unspecified numbers of refugees from them directly into Europe. In return the third country would need to agree on a ceiling or a cap for the numbers it can send to Europe and commit to keeping all other migrants and refugees, and accommodate them humanely. This effectively means Europe will be financing large refugee camps in those third countries, which will also be obliged to take back any failed asylum seekers returned from Europe.

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Foreign cops on sovereign territory?

Worried Slovenia Might Built Fence To Cope With Migrant Crisis (Reuters)

Slovenia said it will consider all options, including fencing off its border with Croatia, if European leaders fail to agree a common approach to the migrant crisis as thousands stream into the ex-Yugoslav republic. Migrants began crossing into Slovenia last Saturday after Hungary closed its border with Croatia. The Slovenian Interior Ministry said that a total of 47,000 had entered the country since Saturday, including some 10,000 in the past 24 hours. A Reuters cameraman said about 3,000 people broke the fence at the border crossing at Sentilj and walked in to Austria on Friday morning. Slovenian officials said the country is too small and does not have enough resources to handle such large numbers of people. Prime Minister Miro Cerar accused Croatia of transporting too many people too quickly to Slovenia.

When asked if there was the possibility of building a fence on the border, Cerar told Slovenian state TV: “We are considering also those options.” “At first we are seeking a European solution. If we lose hope on the European level, if we do not get enough on Sunday … then all options are possible as that would mean that we are on our own,” Cerar said. Several European leaders are due to meet in Brussels on Sunday under the auspices of the European Commission to discuss the latest developments in the migrant crisis, Europe’s biggest since World War. [..] According to Slovenia’s interior ministry, the cost of fencing off the 670-km long border with Croatia would be about €80 million. Slovenia has asked for the EU for assistance and officials said Austria, Germany, Italy, France, Hungary, the Czech Republic, Slovakia and Poland offered to send police reinforcements.

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Feb 032015
 
 February 3, 2015  Posted by at 11:56 am Finance Tagged with: , , , , , , , , ,  


DPC City Hall subway station, New York 1904

US Consumer Spending Declined in December by Most in Five Years (Bloomberg)
US Household Spending Tumbles Most Since 2009 (Zero Hedge)
Q1 Energy Earnings Shocker: Then And Now (Zero Hedge)
Exxon Revenue, Earnings Down 21% From YoY, Sales Miss By $5 Billion (Zero Hedge)
BP Hit By $3.6 Billion Charge, Cuts Capex On Oil Prices (CNBC)
Greece Finance Minister Varoufakis Unveils Plan To End Debt Stand-Off (FT)
Germany Will Have To Yield In Dangerous Game Of Chicken With Greece (AEP)
The Truth About Greek Debt Is Far More Nuanced Than You Think (Telegraph)
Greece Standoff Sparks Ire From US, UK Over Economic Risks (Bloomberg)
Varoufakis Is Brilliant. So Why Does He Make Everyone So Nervous? (Bloomberg)
Greece’s Damage Control Fails to Budge Euro Officials (Bloomberg)
What is Plan B for Greece? (Kenneth Rogoff)
Why The Bank Of England Must Watch Its Words (CNBC)
More Than 25% Of Euro Bond Yields Are Negative, But … (MarketWatch)
Draghi’s Negative-Yield Vortex Draws in Corporate Bonds (Bloomberg)
China Debt Party Nears The End Of The Road (MarketWatch)
Global Deflation Risk Deepens As China Economy Slows (Guardian)
Canada Mauled by Oil Bust, Job Losses Pile Up (WolfStreet)
Aussie Gets Crushed – How Much More Pain Lies Ahead? (CNBC)

But don’t worry: nothing Bloomberg can’t spin: “Consumers are in a good mood coming into 2015, and we think that’s likely to continue..”

US Consumer Spending Declined in December by Most in Five Years (Bloomberg)

Consumer spending fell in December as households took a breather following a surge in buying over the previous two months. Household purchases declined 0.3%, the biggest decline since September 2009, after a 0.5% November gain, Commerce Department figures showed Monday in Washington. The median forecast of 68 economists in a Bloomberg survey called for a 0.2% drop. Incomes and the saving rate rose. Consumers responded to early promotions by doing most of their holiday shopping in October and November, leading to the biggest jump in consumer spending last quarter in almost nine years. For 2015, a pick-up in wage growth will be needed to ensure households remain a mainstay of the expansion as the economy tries to ward off succumbing to a global slowdown.

“Consumers are in a good mood coming into 2015, and we think that’s likely to continue,” said Russell Price, a senior economist at Ameriprise, who correctly forecast the drop in outlays. “The prospects for 2015 look very encouraging.” Stock-index futures held earlier gains after the report. Projections for spending ranged from a decline of 0.6% to a 0.2% gain. The previously month’s reading was initially reported as an increase of 0.6%. For all of 2014, consumer spending adjusted for inflation climbed 2.5%, the most since 2006. Incomes climbed 0.3% in December for a second month, the Commerce Department’s report showed. The Bloomberg survey median called for a 0.2% increase. November’s income reading was revised down from a 0.4% gain previously reported. While growth in the world’s largest economy slowed in the fourth quarter, consumption surged, with household spending rising at the fastest pace since early 2006, a report from the Commerce Department last week showed.

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Recovery.

US Household Spending Tumbles Most Since 2009 (Zero Hedge)

After last month’s epic Personal Income and Spending data manipulation revision by the BEA, when, as we explained in detail, the household saving rate (i.e., income less spending ) was revised lower not once but twice, in the process eliminating $140 billion, or some 20% in household savings… there was only one possible thing for household spending to do in December: tumble. And tumble it did, when as moments ago we learned that Personal Spending dropped in the month of December by a whopping 0.3%, the biggest miss of expectations since January 2014 and the biggest monthly drop since September 2009!

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“By December 31, the estimated growth rate fell to -28.9%. Today, it stands at -53.8%.” Just a little off.”

Q1 Energy Earnings Shocker: Then And Now (Zero Hedge)

Here is what Factset has to say about forecast Q1 energy earnings: “On September 30, the estimated earnings growth rate for the Energy sector for Q1 2015 was 3.3%. By December 31, the estimated growth rate fell to -28.9%. Today, it stands at -53.8%.” Just a little off. This is what a difference 4 months makes.

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“XOM did the best with margins and accounting gimmickry it could under the circumstances..”

Exxon Revenue, Earnings Down 21% From YoY, Sales Miss By $5 Billion (Zero Hedge)

Moments ago, following our chart showing the devastation in Q1 earning forecasts, Exxon Mobil came out with its Q4 earnings, and – as tends to happen when analysts take a butcher knife to estimates – beat EPS handily, when it reported $1.56 in EPS, above the $1.34 expected, if still 18% below the $1.91 Q4 EPS print from a year earlier. A primary contributing factor to this beat was surely the $3 billion in Q4 stock buybacks, with another $2.9 billion distributed to shareholders mostly in the form of dividends. Overall, XOM distributed $23.6 billion to shareholders in 2014 through dividends and share purchases to reduce shares outstanding.

This number masks the 29% plunge in upstream non-US earnings which were smashed by the perfect storm double whammy of not only plunging oil prices but also by the strong dollar. Curiously, all this happened even as XOM actually saw its Q4 worldwide CapEx rise from $9.9 billion a year ago to $10.5 billion, even though capital and exploration expenditures were $38.5 billion in the full year, down 9% from 2013. However, while XOM did the best with margins and accounting gimmickry it could under the circumstances, there was little it could do to halt the collapse in revenues, which printed at $87.3 billion, well below the $92.7 billion expected, and down a whopping 21% from a year ago. And this is just in Q4 – the Q1 slaughter has yet to be unveiled!

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Set to get much worse.

BP Hit By $3.6 Billion Charge, Cuts Capex On Oil Prices (CNBC)

BP revealed plans to cut capital expenditure (capex) on Tuesday, after it was hit by tumbling oil prices and an impairment charge of $3.6 billion. “We have now entered a new and challenging phase of low oil prices through the near- and medium-term,” said CEO Bob Dudley in a news release. “Our focus must now be on resetting BP: managing and rebalancing our capital program and cost base for the new reality of lower prices while always maintaining safe, reliable and efficient operations.” BP reported a replacement-cost loss of $969 million for the fourth quarter of 2014, after taking a $3.6-billion post-tax net charge relating to impairments of upstream assets given the fall in oil prices. On an underlying basis, replacement cost profit came in at $2.2 billion, above analyst expectations of $1.5 billion.

In the news release, BP said it was “taking action to respond to the likelihood of oil prices remaining low into the medium-term, and to rebalance its sources and uses of cash accordingly.” The company said that organic capex was set to be around $20 billion in 2015, significantly lower than previous guidance of $24-26 billion. Capex for 2014 came in at $22.9 billion, lower than initial guidance of $24-25 billion. “In 2015, BP plans to reduce exploration expenditure and postpone marginal projects in the Upstream, and not advance selected projects in the Downstream and other areas,” said the company.

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“Attempting to sound an emollient note, Mr Varoufakis told the Financial Times the government would no longer call for a headline write-off of Greece’s €315bn foreign debt. Rather it would request a “menu of debt swaps..”

Greece Finance Minister Varoufakis Unveils Plan To End Debt Stand-Off (FT)

Greece’s radical new government unveiled proposals on Monday for ending the confrontation with its creditors by swapping outstanding debt for new growth-linked bonds, running a permanent budget surplus and targeting wealthy tax-evaders. Yanis Varoufakis, the new finance minister, outlined the plan in the wake of a dramatic week in which the government’s first moves rattled its eurozone partners and rekindled fears about the country’s chances of staying in the currency union. After meeting Mr Varoufakis in London, George Osborne, the UK chancellor of the exchequer, described the stand-off between Greece and the eurozone as the “greatest risk to the global economy”.

Attempting to sound an emollient note, Mr Varoufakis told the Financial Times the government would no longer call for a headline write-off of Greece’s €315bn foreign debt. Rather it would request a “menu of debt swaps” to ease the burden, including two types of new bonds. The first type, indexed to nominal economic growth, would replace European rescue loans, and the second, which he termed “perpetual bonds”, would replace European Central Bank-owned Greek bonds. He said his proposal for a debt swap would be a form of “smart debt engineering” that would avoid the need to use a term such as a debt “haircut”, politically unacceptable in Germany and other creditor countries because it sounds to taxpayers like an outright loss. But there is still deep scepticism in many European capitals, in particular Berlin, about the new government’s brinkmanship and its calls for an end to austerity policies.

“What I’ll say to our partners is that we are putting together a combination of a primary budget surplus and a reform agenda,” Mr Varoufakis, a leftwing academic economist and prolific blogger, said. “I’ll say, ‘Help us to reform our country and give us some fiscal space to do this, otherwise we shall continue to suffocate and become a deformed rather than a reformed Greece’.” [..] Mr Varoufakis said the government would maintain a primary budget surplus — after interest payments — of 1 to 1.5% of gross domestic product, even if this meant Syriza, the leftwing party that dominates the ruling coalition, would not fulfil all the public spending promises on which it was elected. Mr Varoufakis also said the government would target wealthy Greeks who had not paid their fair share of taxes during the nation’s six-year economic slump. “We want to prioritise going for the head of the fish, then go down to the tail,” he said.

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“The creation of the euro was a terrible mistake but breaking it up would be an even bigger mistake. We would be in a world where anything could happen:”

Germany Will Have To Yield In Dangerous Game Of Chicken With Greece (AEP)

Finland’s governor, Erkki Liikanen, was categorical. “Some kind of solution must be found, otherwise we can’t continue lending.” So was the ECB’s vice-president Vitor Constancio. Greece currently enjoys a “waiver”, allowing its banks to swap Greek government bonds or guaranteed debt for ECB liquidity even though these are junk grade and would not normally qualify. This covers at least €30bn of Greek collateral at the ECB window. “If we find out that a country is below that rating – and there’s no longer a (Troika) programme – that waiver disappears,” he said. These esteemed gentlemen are sailing close to the wind. The waiver rules are not a legal requirement. They are decided by the ECB’s governing council on a discretionary basis. Frankfurt can ignore the rating agencies if it wishes. It has changed the rules before whenever it suited them.

The ECB may or may not have good reasons to cut off Greece – depending on your point of view – but let us all be clear that such a move would be political. A central bank that is supposed to be the lender of last resort and guardian of financial stability would be taking a deliberate and calculated decision to destroy the Greek banking system. Even if this were to be contained to Greece – and how could it be given the links to Cyprus, Bulgaria, and Romania? – this would be a remarkable act of financial high-handedness. But it may not be contained quite so easily in any case, as Mr Osborne clearly fears. I reported over the weekend that there is no precedent for such action by a modern central bank. “I have never heard of such outlandish threats before,” said Ashoka Mody, a former top IMF official in Europe and bail-out expert. “The EU authorities have no idea what the consequences of Grexit might be, or what unknown tremors might hit the global payments system. They are playing with fire.

The creation of the euro was a terrible mistake but breaking it up would be an even bigger mistake. We would be in a world where anything could happen. “What they ignore at their peril is the huge political contagion. It would be slower-moving than a financial crisis but the effects on Europe would be devastating. I doubt whether the EU would be able to act in a meaningful way as a union after that.” In reality, the ECB cannot easily act on this threat. They do not have the political authority or unanimous support to do so, and historians would tar and feather them if they did. The ground is shifting in Paris, Rome and indeed Brussels already. Jean-Claude Juncker, the European Commission’s president, yielded on Sunday, accepting (perhaps with secret delight) that the Troika is dead. French finance minister Michel Sapin bent over backwards to be accommodating at a meeting with Mr Varoufakis. There is no unified front against Greece. It is variable geometry, as they say in EU parlance.

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“if Greece were to measure its debt using corporate accounting standards, which take account of interest rates and maturities, its debt burden could be lower than 70pc of GDP.”

The Truth About Greek Debt Is Far More Nuanced Than You Think (Telegraph)

“Greek debts are unsustainable” Greece’s debts are, as a proportion of GDP, higher than most countries in the eurozone. But, by the same measure, the interest rates it pays on those debts are among the lowest in the currency bloc; the maturities on its loans are the longest. Eurozone countries calculate their debt according to the Maastricht definition, which means that a liability is valued in the same way whether it is due to repaid tomorrow or in 50 years’ time. Greece’s debts are 175pc of GDP under this definition. Some people have calculated that if Greece were to measure its debt using corporate accounting standards, which take account of interest rates and maturities, its debt burden could be lower than 70pc of GDP.

Greece’s debts might actually be a distraction from bigger issues. One is the requirement that, under the bailout conditions, Greece must run a primary surplus of 4.5pc of GDP. Another is the so-called fiscal compact, which requires EU governments with debts of more than 60pc of GDP to reduce the excess by one-twentieth a year. Are Greece’s debts unsustainable? Maybe and maybe not. Are these targets unattainable? Probably.

“The eurozone can withstand ‘Grexit’ now” This rather depends on what you mean by “withstand”. It is certainly true that the eurozone is in a better financial position to deal with Greece quitting or being ejected from the euro than when the last crisis flared up in 2012. It now has a rescue fund and has embarked on a quantitative easing programme. Even as yields on Greek sovereign debt have shot up in recent weeks, those in Spain, Portugal and Italy have stayed at or near record lows, suggesting the markets believe the potential fallout from Greece won’t spread to other southern European countries.

It is less clear that the eurozone could handle the existential threat posed by a Grexit. Membership of the currency bloc would no longer by irrevocable. The markets would scent blood. And the political and diplomatic repercussions are almost impossible to predict: Would it subdue or embolden the various anti-austerity and anti-euro factions that are gaining ground elsewhere in the region? Would it help foster an Orthodox alliance between Greece and Russia? Does Brussels really want to find out?

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“Calling the meeting with Osborne a “breath of fresh air,” Varoufakis said: “we are highly tuned into finding common ground and we already have found it.”

Greece Standoff Sparks Ire From US, UK Over Economic Risks (Bloomberg)

U.S. and British leaders are expressing frustration at Europe’s failure to stamp out financial distress in Greece and the risk it poses to the global economy. U.K. Chancellor of the Exchequer George Osborne, whose government faces voters in three months, became the latest critics, following comments by Britain’s central banker, Mark Carney, and U.S. President Barack Obama. “It’s clear that the standoff between Greece and the euro zone is fast becoming the biggest risk to the global economy,” Osborne said after meeting Greek Finance Minister Yanis Varoufakis in London. “It’s a rising threat to our economy at home. Varoufakis travels to Rome Tuesday, along with Prime Minister Alexis Tsipras, in a political offensive geared to building support for an end to German-led austerity demands, a lightening of their debt load and freedom to increase domestic spending even as they rely on bailout loans.

Tsipras, who went to Cyprus on Monday, also heads to Brussels and Paris. Calling the meeting with Osborne a “breath of fresh air,” Varoufakis said, “we are highly tuned into finding common ground and we already have found it.” Osborne’s comment came a day after Obama questioned further austerity. “You cannot keep on squeezing countries that are in the midst of depression,” he said on CNN. “When you have an economy that is in freefall there has to be a growth strategy and not simply an effort to squeeze more and more out of a population that is hurting worse and worse.” Greece’s economy has shrunk by about a quarter since its first bailout package in 2010. Tsipras was elected Jan. 25 promising the end the restrictions that have accompanied the aid that has kept it afloat.

The premier issued a conciliatory statement on Jan. 31, promising to abide by financial obligations after Varoufakis said the country won’t take more aid under its current bailout and wanted a new deal by the end of May. Before his appointment as finance minister, he advocated defaulting on the country’s debt while remaining in the euro. The Greek finance minister told bankers in London he wants the country’s “European Union-related” loans to be restructured, leaving debt to the IMF and the private sector intact. “A priority for them is to address the high level of debt,” said Sarah Hewin, head of research at Standard Chartered, who was at the meeting. “They’re looking to restructure EU bilateral loans and ECB loans and leave IMF and private-sector debt alone. At the moment, they’re working at a broad case without being specific on how this restructuring will take place.”

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“Varoufakis knows as much about this subject “as anyone on the planet,” Galbraith says. “He will be thinking more than a few steps ahead” in any interactions with the troika.”

Varoufakis Is Brilliant. So Why Does He Make Everyone So Nervous? (Bloomberg)

Yanis Varoufakis, Greece’s new finance minister, is a brilliant economist. His first steps onto the political stage, though, didn’t seem to go very smoothly. Before joining the Syriza-led government, Varoufakis taught at the University of Texas and attracted a global following for his blistering critiques of the austerity imposed on Greece by its international creditors. Among his memorable zingers: Describing the Greek bailout deal as “fiscal waterboarding” and comparing the euro currency to the Hotel California, as in, “You can check out any time you like, but you can never leave.” His social-media followers seem to love the fiery rhetoric—but investors and European Union leaders are clearly less enthusiastic. Greek stock and bond markets tanked on Jan. 30 after Varoufakis said the new government would no longer cooperate with representatives of the troika of international lenders who’ve been enforcing the bailout deal.

At an awkward Jan. 30 meeting with Jeroen Dijsselbloem, head of the Eurogroup of EU finance ministers, Varoufakis appeared to make things worse by calling for a conference on European debt. “This conference already exists, and it’s called the Eurogroup,” an obviously irritated Dijsselbloem told reporters afterwards. The reaction from Berlin was even frostier, with Finance Minister Wolfgang Schaeuble saying Germany “cannot be blackmailed” by Greece. Prime Minister Alexis Tsipras appeared to be scrambling to contain the damage. “Despite the fact that there are differences in perspective, I am absolutely confident that we will soon manage to reach a mutually beneficial agreement, both for Greece and for Europe as a whole,” he said on Jan. 31. But Varoufakis stayed on the offensive, with blog posts accusing news media organizations of inaccurate reporting and a BBC interview in which he blasted an anchorwoman for “rudely” interrupting him. “He may need some tips on how to handle himself on TV,” Steen Jakobsen, chief investment officer at Denmark’s Saxo Bank, wrote.

Is this really the guy Greece is counting on to negotiate a better deal with its creditors? Yes—and Varoufakis’s admirers say he shouldn’t be underestimated. “Yanis is the most intense and deep intellectual figure I’ve met in my generation,” says James K. Galbraith, an economist at the University of Texas who has worked closely with him. “Yanis knows far more about the current situation than some of the people he will be negotiating with,” adds Stuart Holland, an economist and former British Labour Party politician who has co-authored a series of papers with Varoufakis on the euro zone debt crisis. What’s more, Varoufakis’s academic specialty is game theory, the study of strategic decision-making in situations where people with differing interests try to maximize their gains and minimize their losses. Varoufakis knows as much about this subject “as anyone on the planet,” Galbraith says. “He will be thinking more than a few steps ahead” in any interactions with the troika.

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“It’s clear that the stand-off between Greece and the euro zone is fast becoming the biggest risk to the global economy..”

Greece’s Damage Control Fails to Budge Euro Officials (Bloomberg)

Greek Prime Minister Alexis Tsipras’s damage-control efforts calmed investors while failing to budge European policy makers on his week-old government’s key demands. Officials in Berlin, Paris and Madrid rejected the possibility of a debt writedown raised by Greece’s anti-bailout coalition, as they held out the prospect of easier repayment terms, an offer that has been on the table since November 2012. Greek stocks and bonds rebounded following a conciliatory statement issued by the premier Saturday. He promised to abide by financial obligations, a prelude to a tour of European capitals, after Finance Minister Yanis Varoufakis had prompted concern of a looming cash crunch by saying the country won’t take more aid under its current bailout and wanted a new deal by the end of May.

“The weekend statements sound less absurd than the noises from Athens last week,” Holger Schmieding, chief economist at Berenberg Bank in London, wrote in a note today. “However, the ideas of the new Greek government remain far removed from reality.” The Athens Stock Exchange index jumped 4.6%, led by Eurobank Ergasias. The yield on 10-year notes fell 22 basis points to 10.9% at 5:30 p.m. in Athens. Varoufakis was in London today, meeting Chancellor of the Exchequer George Osborne and then investors in sessions organized by Bank of America and Deutsche Bank.

“It’s clear that the stand-off between Greece and the euro zone is fast becoming the biggest risk to the global economy,” Osborne said in a statement after their talks. “It’s a rising threat to our economy at home.” Tsipras was in Cyprus before trips to Rome, Paris and Brussels, with Berlin not yet on the agenda. German Chancellor Angela Merkel wants to duck a direct confrontation and isolate him, a German government official said. In Nicosia, Tsipras repeated his finance chief’s call for an end to the committee that oversees the Greek economy. Dismantling the troika, which includes representatives of the European Commission, ECB and IMF, is “timely and necessary,” Tsipras said.

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“They might be right; then again, back in 2008, US policy makers thought that the collapse of one investment house, Bear Stearns, had prepared markets for the bankruptcy of another, Lehman Brothers. We know how that turned out.”

What is Plan B for Greece? (Kenneth Rogoff)

Financial markets have greeted the election of Greece’s new far-left government in predictable fashion. But, though the Syriza party’s victory sent Greek equities and bonds plummeting, there is little sign of contagion to other distressed countries on the eurozone periphery. Spanish 10-year bonds for example, are still trading at interest rates below those of U.S. Treasuries. The question is how long this relative calm will prevail. Greece’s fire-breathing new government, it is generally assumed, will have little choice but to stick to its predecessor’s program of structural reform, perhaps in return for a modest relaxation of fiscal austerity.

Nonetheless, the political, social, and economic dimensions of Syriza’s victory are too significant to be ignored. Indeed, it is impossible to rule out completely a hard Greek exit from the euro (“Grexit”), much less capital controls that effectively make a euro inside Greece worth less elsewhere. Some eurozone policy makers seem to be confident that a Greek exit from the euro, hard or soft, will no longer pose a threat to the other periphery countries. They might be right; then again, back in 2008, US policy makers thought that the collapse of one investment house, Bear Stearns, had prepared markets for the bankruptcy of another, Lehman Brothers. We know how that turned out.

True, there have been some important policy and institutional advances since early 2010, when the Greek crisis first began to unfold. The new banking union, however imperfect, and the European Central Bank’s vow to save the euro by doing “whatever it takes,” are essential to sustaining the monetary union. Another crucial innovation has been the development of the European Stability Mechanism, which, like the International Monetary Fund, has the capacity to execute vast financial bailouts, subject to conditionality. And yet, even with these new institutional backstops, the global financial risks of Greece’s instability remain profound. It is not hard to imagine Greece’s brash new leaders underestimating Germany’s intransigence on debt relief or renegotiation of structural-reform packages. It is also not hard to imagine eurocrats miscalculating political dynamics in Greece.

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“‘The question’ said Humpty Dumpty, ‘is which is to be master? The words or the girl?”

Why The Bank Of England Must Watch Its Words (CNBC)

Once upon a time, it was only Alice who vanished down a rabbit hole into Wonderland. Nowadays, we’re all falling in head-first – thanks to a bunch of central bankers. But as we’re down here, in this inverted quantitative easing (QE) world, Mark Carney, governor of Britain’s central bank, should probably heed the words of Humpty Dumpty who warned Alice that she’d only gain control of reality if she became “master of words.” In Alice’s looking-glass reality, and maybe ours too, sense has become nonsense and nonsense sense – and not just because of asset bubbles. “‘The question’ said Humpty Dumpty, ‘is which is to be master?'” The words or the girl?

All central bankers worry about being imprisoned by their own words. But it will be preoccupying Carney’s thoughts more than ever as the Bank of England prepares its historic move to publish the minutes alongside the rate setting committee’s decision, due to begin in August. The frenzied over-analysis of the U.S. Federal Reserve’s choice of words could not have escaped his attention, with its decision to drop the phrase “considerable time” dominating newspaper columns and analysts notes. One economist complained privately that his job had morphed from monetary policy to structural linguistics.

Back in March 2011, Jean-Claude Trichet, the then president of the ECB got hemmed in by his own verbal signaling. Ironically, it was one of his favourite catch phrases: “strong vigilance”. It eventually forced his hand into making an ill-advised rate hike from 1% to 1.25% despite a deteriorating economic climate, duly sending the euro zone into recession. Of course, the ECB’s current boss, Mario Draghi, understands Humpty Dumpty’s lesson about making words perform the exact meaning one wants, though €1.1 trillion of QE and a crisis in Greece might now fully test “whatever it takes”.

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“Government bond yields typically fall near the beginning of central-bank led programs intended to boost shaky economies, like the ECB’s bond-buying program, due to a shortage of bonds available to meet the central bank’s demand.”

More Than 25% Of Euro Bond Yields Are Negative, But … (MarketWatch)

More than a quarter of eurozone bonds have negative yields — meaning investors are essentially paying for the privilege of lending money to a European sovereign government — but several analysts are betting that those yields will soon return to normal. The exact number of negative yielding sovereign bonds is 27%, according to Tradeweb data based on Monday’s closing rates. “We’re hoping that this is roughly the peak,” said David Keeble, head of fixed-income strategy at Crédit Agricole. “There’s certainly no reason to keep them in negative territory after five year [bonds].” So why are sovereign bond yields negative? Government bond yields typically fall near the beginning of central-bank led programs intended to boost shaky economies, like the ECB’s bond-buying program, due to a shortage of bonds available to meet the central bank’s demand.

But after two or three weeks, the effects of this stimulus programs should begin to take hold, Keeble said, resulting in stronger economic data. This in turn should whet the market’s appetite for risky assets like equities while safe investments like bonds fall out of favor. Keeble added that his prediction is contingent on the European Central Bank keeping monetary policy steady. “We’re not going to get any more rate cuts from ECB and i don’t think we’re going to see anymore QE,” Keeble added. In its latest forecast on eurozone bond yields, published Monday, Bank of America Merrill Lynch said they expect the yield on five-year eurozone bonds to fall from negative 0.05% to negative 0.10% in the second quarter, before rising in the third and fourth quarters.

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Price discovery urgently needed.

Draghi’s Negative-Yield Vortex Draws in Corporate Bonds (Bloomberg)

Credit markets are being so distorted by the European Central Bank’s record stimulus that investors are poised to pay for the privilege of parking their cash with Nestle. The Swiss chocolate maker’s securities, which have the third-highest credit ranking at Aa2, may be among the first corporate bonds to trade with a negative yield, according to Bank of America strategist Barnaby Martin. Covered bonds, which are bank securities backed by loans, started trading with yields below zero at the end of September. With the growing threat of falling prices menacing the euro-area’s fragile economy, some investors are calculating it’s worth owning Nestle bonds, even with little or no return. That’s because yields on more than $2 trillion of the developed world’s sovereign debt, including German bunds, have turned negative and the ECB charges 0.2% interest for cash deposits.

“In the same way that bunds went negative, there’s nothing, in theory, to stop short-dated corporate bond yields going slightly negative as well,” Martin said. “If investors want to park some cash, the problem with putting it in a bank or money market fund is potential negative returns, because of the negative deposit rate policy of the ECB.” Vevey-based Nestle SA’s 0.75% notes due October 2016 were quoted to yield 0.05% today, according to data compiled by Bloomberg. It isn’t the only company with short-dated bond yields verging on turning negative. Roche, the world’s largest seller of cancer drugs, issued €2.75 billion of bonds with a coupon of 5.625% in 2009. The notes, which mature in March 2016, pay 0.09%, Bloomberg data show. “The current yield is market-driven,” Nicolas Dunant, head of media relations at Basel, Switzerland-based Roche, said in an e-mail. “The bond has traded up because it has become increasingly attractive for investors in the current low-rate environment.”

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The end of omnipotence.

China Debt Party Nears The End Of The Road (MarketWatch)

Despite an interest-rate cut late last year, China’s economy has got off to a slow start, with weak factory and service-sector readings. The typical response to such data is to expect more monetary stimulus. But have we reached the point where rate cuts are no longer able to lift China’s debt-heavy economy? As China enters its third year of slowing growth, there is growing concern the debt reckoning cannot be kicked down the road any longer. Credit has been growing faster than the economy for six years, and there has always been a recognition this cannot continue indefinitely. Experience elsewhere would suggest countries coming off a multi-year, debt-fueled expansion could expect an inevitable hangover.

This would include everything from bad debts, bankruptcies and asset write-downs, together with currency weakness and perhaps a dose of austerity to restore order to finances. For China, however, we are led to expect a different economy — one where, even in a down cycle, you don’t get recessions but growth that only changes gear from double-digit to “just” 7%. While naysayers warn China’s debt binge is an accident waiting to happen, it never quite does: The bond market and shadow-banking sector have not experienced any meaningful defaults, nor has the banking system seen anything more than a limited increase in non-performing loans. China’s property market might look a lot like bubbles in the U.S., Spain or Japan at different times in history, yet here the ending is again benign, with a gentle plateauing of prices.

But elsewhere, it is possible to find evidence that an abrupt China slowdown is underway. In various global hard-commodity markets – where Chinese demand was widely acknowledged to have lifted prices in everything from iron ore to copper in the boom years — a major reversal is underway. A collection of industrial commodities has now reached multi-year lows. This suggests a lot of folk in China are already facing a hard landing. Signs are accumulating that the financial economy is now getting to a moment of reckoning. At home, slower growth puts added pressure on servicing corporate debt as profitability weakens. Overseas, tighter credit as the Federal Reserve retreats from quantitative easing means hot-money flows are no longer providing a boost to liquidity and are instead reversing.

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“The slide in global oil prices and inflation has turned out to be even bigger than anticipated..”

Global Deflation Risk Deepens As China Economy Slows (Guardian)

The risk of global deflation looms large for 2015 as surveys of China’s mammoth manufacturing sector showed excess supply and insufficient demand in January drove down prices and production. While the pulse of activity was livelier in Japan, India and South Korea, they shared a common condition of slowing inflation. “The slide in global oil prices and inflation has turned out to be even bigger than anticipated,” said David Hensley, an economist at JP Morgan, and central banks from Europe to Canada to India have responded by easing policy. “What is now in the pipeline will help extend the near-term impulse from energy to economic growth into the second half of the year.” A fillip was clearly necessary in China where two surveys showed manufacturing struggling at the start of the year.

The HSBC/Markit Purchasing Managers’ Index (PMI) inched a up a fraction to 49.7 in January, but stayed under the 50.0 level that separates growth from contraction. More worryingly, the official PMI – which is biased towards large Chinese factories – unexpectedly showed that activity fell for the first time in nearly 30 months. The reading of 49.8 in January was down from 50.1 in December and missed forecasts of 50.2. The report showed input costs sliding at their fastest rate since March 2009, with lower prices for oil and steel playing major roles. Ordinarily, cheaper energy prices would be good for China, one of the world’s most intensive energy consumers, but most economists believe the phenomenon is a net negative for Chinese firms because of its impact on ultimate demand.

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Canada joins the currency war: “The Bank of Canada surprised the dickens out of everyone by cutting the overnight interest rate by 25 basis points.”

Canada Mauled by Oil Bust, Job Losses Pile Up (WolfStreet)

Ratings agency Fitch had already warned about Canada’s magnificent housing bubble that is even more magnificent than the housing bubble in the US that blew up so spectacularly. “High household debt relative to disposable income” – at the time hovering near a record 164% – “has made the market more susceptible to market stresses like unemployment or interest rate increases,” it wrote back in July. On September 30, the Bank of Canada warned about the housing bubble and what an implosion would do to the banks: It’s so enormous and encumbered with so much debt that a “sharp correction in house prices” would pose a risk to the “stability of the financial system”.

Then in early January, oil-and-gas data provider CanOils found that “less than 20%” of the leading 50 Canadian oil and gas companies would be able to sustain their operations long-term with oil at US$50 per barrel. “A significant number of companies with high-debt ratios were particularly vulnerable right now,” it said. “The inevitable write-downs of assets that will accompany the falling oil price could harm companies’ ability to borrow,” and “low share prices” may prevent them from raising more money by issuing equity. In other words, these companies, if the price of oil stays low for a while, are going to lose a lot of money, and the capital markets are going to turn off the spigot just when these companies need that new money the most. Fewer than 20% of them would make it through the bust.

To hang on a little longer without running out of money, these companies are going on an all-out campaign to slash operating costs and capital expenditures. The Canadian Association of Petroleum Producers estimated that oil companies in Western Canada would cut capital expenditures by C$23 billion in 2015, with C$8 billion getting cut from oil-sands projects and C$15 billion from conventional oil and gas projects. However, despite these cuts, CAPP expected oil production to rise, thus prolonging the very glut that has weighed so heavily on prices (a somewhat ironic, but ultimately logical phenomenon also taking place in the US). Then on January 21 – plot twist. The Bank of Canada surprised the dickens out of everyone by cutting the overnight interest rate by 25 basis points. So what did it see that freaked it out?

A crashing oil-and-gas sector, deteriorating employment, and weakness in housing. A triple shock rippling through the economy – and creating the very risks that it had fretted about in September. “After four years of scolding Canadians about taking on too much debt, the Bank has pretty much said, ‘Oh, never mind, we’ve got your back’, despite the fact that the debt/income ratio is at an all-time high of 163 per cent,” wrote Bank of Montreal Chief Economist Doug Porter in a research note after the rate-cut announcement. Clearly the Bank of Canada, which is helplessly observing the oil bust and the job losses, wants to re-fuel the housing bubble and encourage consumers to drive their debt-to-income ratio to new heights by spending money they don’t have.

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As predicted, Australia joins the currency race to the bottom.

Aussie Gets Crushed – How Much More Pain Lies Ahead? (CNBC)

With the Reserve Bank of Australia (RBA) leaving the door open to further rate cuts, the only way forward for the Australian dollar is down, say strategists. The Aussie plunged 1.9% against the U.S. dollar to $0.7655 on Tuesday after the central bank cut its benchmark cash rate by 25 basis points to a fresh record low of 2.25%. It was the currency’s biggest once-day loss since mid-2013, according to Reuters. “75 cents seems the natural progression point from here – I would expect that over the next two weeks if not sooner,” Jonathan Cavenagh, a currency strategist at Westpac told CNBC. “Beyond that, we’ll see how things unfold. If we see another rate cut, the Aussie could definitely be trading in the low-70 cent range,” he said.

The central bank struck a dovish tone in its policy statement highlighting below-trend growth and weak domestic demand in the economy, giving rise to expectations of additional easing. It also said the Aussie remained above fundamental value and that a lower exchange rate is needed to achieve balanced growth. In December, RBA Governor Glenn Stevens told local media that he would prefer to see the currency at $0.75 – levels not seen since early 2009. The Austrian dollar has already suffered a 26% decline against the U.S. dollar over the past two years, weighed by weak commodity prices and a stronger greenback. Paul Bloxham, chief economist for Australia and New Zealand at HSBC also expects the currency to come under further selling pressure. He forecasts the currency will head towards $0.70 going into 2016.

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Nov 232014
 
 November 23, 2014  Posted by at 11:30 am Finance Tagged with: , , , , , , , , ,  Comments Off on Debt Rattle November 23 2014


Hans Behm Windy City tourists at Monroe Street near State 1908

China’s Surprise Rate Cut Shows How Freaked Out The Government Is (Quartz)
The End of China’s Economic Miracle? (WSJ)
Hugh Hendry: “A Bet Against China Is A Bet Against Central Bank Omnipotence” (MW)
Central Banks in New Push to Prime Pump (WSJ)
Forget What Central Bankers Say: Deflation Is The Real Monster (Observer)
“I Am 100% Confident That Central Banks Are Buying S&P Futures” (Zero Hedge)
UK Chancellor Haunted By Deficit And £1.45 Trillion Debt Pile (Telegraph)
Junk Bonds Whipsawed as Trading Drought Rattles Investors (Bloomberg)
Pension Funds Lambaste Private-Equity Fees (WSJ)
Sun Sets On OPEC Dominance In New Era Of Lower Oil Prices (Telegraph)
Google Break-Up Plan Emerges From European Parliament (FT)
European Season of Political Discontent Rung In by UKIP (Bloomberg)
The Curse Of Black Friday Sales (NY Post)
UK Retailers Pin Hopes On American Shopping Extravaganza (Independent)
Don’t Prick The Christmas Spending Bubble, It Keeps Capitalism Alive (Observer)
Food Banks Face Record Demand As Low-Income Families Look For Help (PA)
Russia FM Lavrov Accuses West Of Seeking ‘Regime Change’ In Russia (Reuters)
Rapper May Face 25 Years In Prison Over ‘Gangsta Rap’ Album (RT)
We Need A New Law To Protect Our Wildlife From Critical Decline (Monbiot)

“The push that came to shove might have been the grim October data, which showed industrial output, investment, exports, and retail sales all slowing fast. Those data suggest it will be much harder to get anywhere close to the government’s 2014 target of 7.5% GDP growth .. ”

China’s Surprise Rate Cut Shows How Freaked Out The Government Is (Quartz)

Earlier [this week], the People’s Bank of China slashed the benchmark lending rate by 40 basis points, to 5.6%, and pushed down the 12-month deposit rate 25 basis points, to 2.75%. Few analysts expected this. The PBoC—which, unlike many central banks, is very much controlled by the central government—generally cuts rates only as a last resort to boost growth. The government has been rigorously using less broad-based ways of lowering borrowing costs (e.g. cutting reserve requirement ratios at small banks, and re-lending to certain sectors). The fact that the government finally cut rates suggests that these more “targeted” measures haven’t succeeded in easing funding costs for Chinese firms. The push that came to shove might have been the grim October data, which showed industrial output, investment, exports, and retail sales all slowing fast.

Those data suggest it will be much harder to get anywhere close to the government’s 2014 target of 7.5% GDP growth, given that the economy grew only 7.3% in the third quarter, its slowest pace in more than five years. But wait. Isn’t the Chinese economy supposed to be losing steam? Yes. The Chinese government has acknowledged many times that in order to introduce the market-based reforms needed to sustain long-term growth and stop piling on more corporate debt, it has to start ceding its control over China’s financial sector. Things like, for instance, setting the bank deposit rate artificially low, which generally punishes savers to benefit state-owned enterprises (SOEs). But clearly, the economy’s not supposed to be decelerating as fast as it is. Tellingly, it’s been more than two years since the central bank last cut rates, when the economic picture darkened abruptly in mid-2012, the critical year that the Hu Jintao administration was to hand over power to Xi Jinping.

The all-out push to boost growth that followed made 2013 boom, but also freighted corporate balance sheets with dangerous levels of debt. But this could only last so long; things started looking ugly again in 2014. Up until now, attempts to buoy the economy have mainly focused on helping out small non-state companies, says Mark Williams, chief economist at Capital Economics, in a note. Often ineligible for state-run bank loans, small firms have mostly been paying steep rates for shadow financing. Since the benchmark rate cut affects official loans given out by mostly state-run banks, today’s cut will mainly benefit SOEs, hinting that the authorities “apparently feel larger firms are now in need of support too,” writes Williams. In addition, lowering the amount banks charge for capital makes them less likely to lend. Though that should in theory be offset by the lowering of the deposit rate, savers have been shunting their money into higher-yielding wealth management products, making deposits increasingly scarce.

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“I could see empty apartment buildings stretching for miles, with just a handful of cars driving by. It made me think of the aftermath of a neutron-bomb detonation.”

The End of China’s Economic Miracle? (WSJ)

On a trip to China in 2009, I climbed to the top of a 13-story pagoda in the industrial hub of Changzhou, not far from Shanghai, and scanned the surroundings. Construction cranes stretched across the smoggy horizon, which looked yellow in the sun. My son Daniel, who was teaching English at a local university, told me, “Yellow is the color of development.” During my time in Beijing as a Journal reporter covering China’s economy, starting in 2011, China became the world’s No. 1 trader, surpassing the U.S., and the world’s No. 2 economy, topping Japan. Economists say it is just a matter of time until China’s GDP becomes the world’s largest. This period also has seen China’s Communist Party name a powerful new general secretary, Xi Jinping , who pronounced himself a reformer, issued a 60-point plan to remake China’s economy and launched a campaign to cleanse the party of corruption.

The purge, his admirers told me, would frighten bureaucrats, local politicians and executives of state-owned mega companies—the Holy Trinity of vested interests—into supporting Mr. Xi’s changes. So why, on leaving China at the end of a nearly four-year assignment, am I pessimistic about the country’s economic future? When I arrived, China’s GDP was growing at nearly 10% a year, as it had been for almost 30 years—a feat unmatched in modern economic history. But growth is now decelerating toward 7%. Western business people and international economists in China warn that the government’s GDP statistics are accurate only as an indication of direction, and the direction of the Chinese economy is plainly downward. The big questions are how far and how fast. My own reporting suggests that we are witnessing the end of the Chinese economic miracle.

We are seeing just how much of China’s success depended on a debt-powered housing bubble and corruption-laced spending. The construction crane isn’t necessarily a symbol of economic vitality; it can also be a symbol of an economy run amok. Most of the Chinese cities I visited are ringed by vast, empty apartment complexes whose outlines are visible at night only by the blinking lights on their top floors. I was particularly aware of this on trips to the so-called third- and fourth-tier cities—the 200 or so cities with populations ranging from 500,000 to several million, which Westerners rarely visit but which account for 70% of China’s residential property sales. From my hotel window in the northeastern Chinese city of Yingkou, for example, I could see empty apartment buildings stretching for miles, with just a handful of cars driving by. It made me think of the aftermath of a neutron-bomb detonation—the structures left standing but no people in sight.

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“China’s had a decade which has been very, very similar to that of the US in the 1920s.”

Hugh Hendry: “A Bet Against China Is A Bet Against Central Bank Omnipotence” (MW)

Merryn Somerset Webb: That brings us, I guess, to China. You were one of the first to point out the native problems in China. Your rather amazing video wandering around empty housing estates, etc, which I think was pretty well watched. What’s your view now?

Hugh Hendry: I think my view would surprise you. Before I surprise you, I would like to seek legitimacy of my view by telling you that I have made money. It’s been my most successful profit centre in the year to date, and we’ve made over 5% trading in China-related macro themes. In terms of surprising you, I am more sanguine about China. Actually I’ve been rather impressed by their policy responses over the last two years. When I look at China, China has got two components. It’s got this manic investment gross capital formation and in something which has been deepening these global deflationary fears, because they kept expanding over capacity industries such as cement and steel and undermining prices in the rest of the world. That in itself lowers these inflation figures below Central Bank targets. It becomes reflexive and then the central bank says “Crikey, I’ve got to be radical here. I’ve got to buy equities”. So there’s been that going on.

On the other hand, there’s been a robbing Peter to pay Paul, and China’s had a decade which has been very, very similar to that of the US in the 1920s. The US, people forget this, but Liaquat Ahamed – I’ve just destroyed his name, forgive me, but the Lords of Finance author – I reread it recently and I was very taken by the notion of how mean the Fed had been in the 1920s. Again, I say it to you with cathartic crisis, the response of the rest of the world is to be long dollars invested in America and that was certainly the case in the 1920s. But America was recovering nicely from the Great War and it had this incredible productivity revolution. There was great demand for credit and so it was fine on its own.

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What can you expect from Jon Hilsenrath?

Central Banks in New Push to Prime Pump (WSJ)

Two major central banks moved Friday to pump up flagging global growth, sending stock markets soaring but raising new questions about the limitations of a seven-year effort to use monetary policy to address economic problems. The People’s Bank of China announced a surprise reduction in benchmark lending and deposit rates, the first cuts since 2012, after other measures to boost faltering growth fell short. Hours later, European Central Bank President Mario Draghi said the bank might take new measures to boost inflation, now near zero, his strongest signal yet that the ECB is getting closer to buying a broader swath of eurozone bonds.

The moves came less than two weeks after the Bank of Japan said it would ramp up its own securities-purchase program known as quantitative easing, or QE, as the Japanese economy fell into recession. The twin steps Friday, half a world apart, sent global stock prices sharply higher, bolstered the U.S. dollar and boosted oil prices. The Shanghai Composite Index rose 1.4%, while Germany’s DAX index jumped 2.6%. The Dow Jones Industrial Average finished up 0.51%, and at 17810.06 is now closing in on the 18000 threshold that has never been surpassed. The Nikkei rose 0.3%. Amid the flurry of central bank activity, the dollar was the winner among global currencies, rising 0.27% against a broad index of other currencies to put it up 9% for the year.

Though the moves toward easier money in Europe and Asia are good for investors, they come with multiple risks. They could perpetuate or spark asset bubbles, or stoke too much inflation if taken too far. Also, they don’t address structural problems that policy makers in each economy are struggling to fix. The steps, particularly in Europe, represent a subtle endorsement of the Federal Reserve’s easy-money approach to postcrisis economics, but come as the U.S. central bank shifts its own low-interest-rate policies. The Fed last month ended a six-year experiment with bond purchases, and it has begun talking about when to start raising short-term interest rates as the U.S. economy improves, though those discussions are early and rate increases are likely months away, at the earliest.

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“Even low inflation can be damaging, particularly if it breeds the expectation that outright deflation will follow. If people expect prices to fall, they are encouraged to hold off spending.” Makes you wonder about Christmas sales.

Forget What Central Bankers Say: Deflation Is The Real Monster (Observer)

The European Central Bank might like to update its website – specifically, its educational video to teach teenagers about the importance of keeping prices in check. In it, a spotted, fanged, snarling “inflation monster” floods money into the marketplace, making vivid the perils of prices rising too quickly. Near the end of the cartoon a much smaller, smiling, pink creature makes a brief appearance – the “deflation monster”. Fear of inflation is understandable in a continent that saw devastating hyperinflation last century – a shock seen by some as pivotal in the rise of Hitler. But look around the eurozone now and the bigger threat is deflation. Even in the UK, inflation is well below the Bank of England’s target and the central bank expects it to fall further over coming months.

Oil prices have been falling, as have other commodity prices. In Britain a supermarket price war is pushing food prices down further still. Wages are barely budging and a price freeze for energy bills should also help to keep inflation low this winter. The Bank fully admits it failed to forecast this significant drop below the government-set 2% target for inflation. Governor Mark Carney used the Bank’s latest forecasts earlier this month to warn of “some pretty big disinflationary forces”, largely coming from abroad. He predicted inflation would fall even further, to below 1% over the next six months. If it does, he will face the unenviable task of being the first governor since BoE independence in 1997 to write a letter to the chancellor explaining why inflation is so low.

All of the 14 letters written until now have been because inflation missed the target too far in the other direction, overshooting by more than 1 percentage point. Aside from the awkwardness of the Dear George moment, there are very real reasons why Carney is saying the Bank needs to get inflation back to target. The inflation monster may be scary, but the deflation monster is by no means harmless. Even low inflation can be damaging, particularly if it breeds the expectation that outright deflation will follow. If people expect prices to fall, they are encouraged to hold off spending. Economic stagnation and rising unemployment can follow.

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Why would anyone doubt that?

“I Am 100% Confident That Central Banks Are Buying S&P Futures” (Zero Hedge)

I have been an independent trader for 23 years, starting at the CBOT in grains and CME in the S&P 500 futures markets long ago while they were auction outcry markets, and have stayed in the alternative investment space ever since, and now run a small fund. I understand better than most I would think, the “mechanics” of the markets and how they have evolved over time from the auction market to ‘upstairs”. I am a self-taught, top down global macro economist, and historian of “money” and the Fed and all economic and governmental structures in the world. One thing so many managers don’t understand is that the markets take away the most amounts of money from the most amounts of people, and do so non-linearly.

Most sophisticated investors know to be successful, one must be a contrarian, and this philosophy is in parallel. Markets will, on all time scales, through exponential decay (fat tails, or black swans, on longer term scales), or exponential growth of price itself. Why was I so bearish on gold at its peak a few years back for instance? Because of the ascent of non-linearity of price, and the massive consensus buildup of bulls. Didier Sornette, author of “Why Stock Markets Crash”, I believe correctly summarizes how Power Law Behavior, or exponential consensus, and how it lead to crashes. The buildup of buyers’ zeal, and the squeezing of shorts, leads to that “complex system” popping. I have traded as a contrarian with these philosophies for some time.

The point here is, our general indices have been at that critical point now for a year, without “normal” reactions post critical points in time, from longer term time scales to intraday. This suggests that many times, there is only an audience of one buyer, and as price goes up to certain levels, that buyer extracts all sellers. After this year and especially this last 1900 point Dow run up in October, and post non-reaction, that I am 100% confident that that one buyer is our own Federal Reserve or other central banks with a goal to “stimulate” our economy by directly buying stock index futures. Talking about a perpetual fat finger! I guess “don’t fight the Fed” truly exists, without fluctuation, in this situation. Its important to note the mechanics; the Fed buys futures and the actual underlying constituents that make up the general indices will align by opportunistic spread arbitragers who sell the futures and buy the actual equities, thus, the Fed could use the con, if asked, that they aren’t actually buying equities.

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“Public sector net debt, excluding public sector banks, was £1.45 trillion in October, and now represents almost 80pc of UK gross domestic product. Britain’s debt pile has increased by almost £100bn over the past year alone .. ”

UK Chancellor Haunted By Deficit And £1.45 Trillion Debt Pile (Telegraph)

The Government’s ability to reduce the deficit this year and tame Britain’s huge debt mountain is in doubt, despite a slight fall in borrowing last month. Public sector net borrowing, excluding public sector banks, fell to £7.7bn in October, from £7.9bn in the same month a year ago. The deficit was also in line with economists’ expectations. While an across-the-board rise in tax receipts, including a 1.5pc increase in income tax to £10.5bn in October, helped to reduce borrowing last month, the deficit remains £3.7bn – or 6pc – higher this year than in 2013. The Office for Budget Responsibility had forecast a 7pc increase in income tax receipts this year, which are currently down 0.4pc compared with the same period in 2013, at £81.5bn. Income from VAT and stamp duties increased by 4.9pc and 3.6pc, to £10.3bn and £1.3bn respectively in October, while corporation tax payments also edged up, despite weak oil and gas revenues.

The OBR is expected to revise up the Government’s borrowing forecasts on December 3, when the Chancellor will present the Autumn Statement. This will reduce the likelihood of any big tax giveaways before the next election. Samuel Tombs at Capital Economics said: “This year’s poor borrowing figures limit the Chancellor’s room for manoeuvre and undermine his argument that the public finances can be restored to a sustainable position after the next election through spending cuts alone.” Robert Chote, the chairman of the OBR, said last month that the Government was likely to miss its income tax targets this year as weak pay growth and a surge in low paid jobs means the Treasury rakes in less revenue than predicted. A Treasury spokesperson said borrowing remained “in line with the Budget forecast” and stressed that the Government would continue to take steps to “build a resilient British economy”.

The Treasury and OBR expect a “sizeable” increase in income tax receipts from self-employed workers in January 2015 as distortions related to the reduction of the top rate of tax unwind. Economists were sceptical that any January boost would make up the current shortfall. Michael Saunders, chief UK economist at Citibank, expects the deficit to overshoot the OBR’s forecast by £13bn this fiscal year, taking borrowing up to £100bn this year. “The tax and benefit reforms of the last 15 years have proved very successful in boosting employment and workforce participation, but also have eroded the extent to which economic recovery generates a fiscal windfall,” he said. The size of Britain’s debt pile also continued to balloon in October. Public sector net debt, excluding public sector banks, was £1.45 trillion in October, and now represents almost 80pc of UK gross domestic product.

Britain’s debt pile has increased by almost £100bn over the past year alone, and the Treasury is expected to pay almost £1bn a week in debt interest payments this year. Debt interest payments are now close to the Goverment’s combined transport and defence budget, with payments expected to rise to £75bn in 2018-19.

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Noted this before: as capital fless junk bonds, big bad things can happen.

Junk Bonds Whipsawed as Trading Drought Rattles Investors (Bloomberg)

Junk bond investors have a bad case of the jitters. Every bit of bad news is whipsawing prices, with bonds tumbling as much as 50% in a single day. “We’ve seen some flash crashes in the market,” said Henry Craik-White, analyst at ECM Asset Management. “If you get caught on the wrong side of a name, you can get severely punished in this market.” Investors are rattled because they’re concerned that a lack of liquidity in the bond market will make it impossible for them to sell holdings in response to negative headlines. Trading dropped about 70% since 2008, with a corporate bond that changed hands almost five times a day a decade ago now only being sold once a day on average, according to Royal Bank of Scotland. Alarms started ringing in September with the collapse of British retailer Phones 4u after Vodafone and EE refused to renew contracts. The retailer shut its business and sought creditor protection on Sept. 15, sending the company’s payment-in-kind bonds down to 1.9 pence on the pound, according to data compiled by Bloomberg.

A month later, notes of Spanish online travel service EDreams Odigeo fell 57% in one afternoon when Iberia Airlines and British Airways said they were withdrawing tickets from the company’s websites. The 10.375% bonds almost fully recovered the following trading day when the airlines reinstated the tickets. Abengoa’s debt plunged as much as 32% last week amid investor confusion about how the Spanish renewable energy company accounted for $632 million of green bonds. The Seville-based company’s 8.875% notes dropped to 74 cents on the euro from 107 cents in two days and rebounded to 95 cents after Abengoa held a conference call to reassure bondholders.

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” .. a Dutch pension fund for nurses and social workers that she invests for paid more than €400 million (about $500 million) to private-equity firms in 2013..”

Pension Funds Lambaste Private-Equity Fees (WSJ)

Pension-fund managers from the Netherlands to Canada, searching for new ways to invest, lambasted private-equity executives at a conference in Paris this week for charging excessive fees. Ruulke Bagijn, chief investment officer for private markets at Dutch pension manager PGGM, said a Dutch pension fund for nurses and social workers that she invests for paid more than €400 million (about $500 million) to private-equity firms in 2013. The amount accounted for half the fees paid by the PFZW pension fund, even though private-equity firms managed just 6% of its assets last year, she said. “That is something we have to think about,” Ms. Bagijn said.

The world’s largest investors, including pension funds and sovereign-wealth funds, are seeking new ways to invest in private equity to avoid the supersize fees. Some investors are buying companies and assets directly. Others are making more of their own decisions about which funds to invest in, rather than giving money to fund-of-fund managers. Big investors are also demanding to invest alongside private-equity funds to avoid paying fees. Jane Rowe, the head of private equity at Ontario Teachers’ Pension Plan, which manages Can$141 billion (US$124.4 billion), is buying more companies directly rather than just through private-equity funds. The plan invests with private-equity firms including Silver Lake Partners and Permira, according to its annual report. Ms. Rowe told executives gathered in a hotel near Place Vendome in central Paris that she is motivated to make money to improve the retirement security of Canadian teachers rather than simply for herself and her partners.

“You’re not doing it to make the senior managing partner of a private-equity fund $200 million more this year,” she said, as she sat alongside Ms. Ruulke of the Netherlands and Derek Murphy of PSP Investments, which manages pensions for Canadian soldiers. “You’re making it for the teachers of Ontario. You know, Derek’s making it for the armed forces of Canada. Ruulke’s doing it for the social fabric of the Netherlands. These are very nice missions to have in life.”

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That’ one cute graph. But any article that quotes Yergin is dead in the water.

Sun Sets On OPEC Dominance In New Era Of Lower Oil Prices (Telegraph)

It wouldn’t be the first time that a meeting of OPEC has taken place in an atmosphere of deep division, bordering on outright hatred. In 1976, Saudi Arabia’s former oil minister Ahmed Zaki Yamani stormed out of the OPEC gathering early when other members of the cartel wouldn’t agree to the wishes of his new master, King Khaled. The 166th meeting of the group in Vienna next week is looking like it could end in a similarly acrimonious fashion with Saudi Arabia and several other members at loggerheads over what to do about falling oil prices. Whatever action OPEC agrees to take next week to halt the sharp decline in the value of crude, experts agree that one thing is clear: the world is entering into an era of lower oil prices that the group is almost powerless to change This new energy paradigm may result in oil trading at much lower levels than the $100 (£64) per barrel that consumers have grown used to paying over the last decade and reshape the entire global economy.

It could also trigger the eventual break-up of OPEC, the group of mainly Middle East producers, which due to its control of 60pc of the world’s petroleum reserves has often been accused of acting like a cartel. Even worse, some experts warn that a prolonged period of lower oil prices could reshape the entire political map of the Middle East, triggering a new wave of political uprisings in petrodollar sheikhdoms in the Persian Gulf, which depend on the income from crude to underwrite their high levels of public spending and support less wealthy client states in the Arab world. “We are now entering a new era in world oil and we will have lower prices for some time to come,” says Daniel Yergin, the Pulitzer prize-winning author of The Quest: Energy Security and the Remaking of the Modern World. “Oil was really the last commodity in the super-cycle to remain standing.” Mr Yergin spoke exclusively to The Sunday Telegraph ahead of what is being called the most important gathering of OPEC in more than 20 years.

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Don’t think the Financial Times finds it a good idea.

Google Break-Up Plan Emerges From European Parliament (FT)

The European parliament is poised to call for a break-up of Google, in one of the most brazen assaults so far on the technology group’s power. The gambit increases the political pressure on the European Commission, the EU’s executive arm, to take a tougher line on Google, either in its antitrust investigation into the company or through the introduction of laws to curb its reach. A draft motion seen by the Financial Times says that “unbundling [of] search engines from other commercial services” should be considered as a potential solution to Google’s dominance. It has the backing of the parliament’s two main political blocs, the European People’s Party and the Socialists.

A vote to effectively single out a big US company for censure is extremely rare in the European parliament and is in part a reflection of how Germany’s politicians have turned against Google this year. German centre-right and centre-left politicians are the dominant force in the legislature and German corporate champions, from media groups to telecoms, are among the most vocal of Google’s critics. Since his nomination to be the EU’s digital commissioner, Germany’s Günther Oettinger has suggested hitting Google with a levy for displaying copyright-protected material; has raised the idea of forcing its search results to be neutral; and voiced concerns about its provision of software for cars.

Google has become a lightning rod for European concerns over Silicon Valley, with consumers, regulators and politicians assailing the company over issues ranging from its commercial dominance to its privacy policy. It has reluctantly accepted the European Court of Justice’s ruling on the right to be forgotten, which requires it to consider requests not to index certain links about people’s past. The European parliament has no formal power to split up companies, but has increasing influence on the commission, which initiates all EU legislation. The commission has been investigating concerns over Google’s dominance of online search for five years, with critics arguing that the company’s rankings favour its own services, hitting its rivals’ profits.

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Eh, no. UKIP did not start this.

European Season of Political Discontent Rung In by UKIP (Bloomberg)

Some 16,867 voters in southeast England ushered in a season of European political tumult that in an extreme scenario could lead to Britain exiting the European Union, Greece quitting the euro or Catalonia seceding from Spain. Victory by the anti-EU U.K. Independence Party in a British parliamentary contest was fueled by the same sense of economic injustice and antagonism to politics-as-usual that will unsettle Europe in coming months. It also gave a flavor of the potential fallout, as the pound fell against most of its 16 major peers. “The markets have a lot to worry about,” Edmund Phelps, a Nobel Prize-winning economist at Columbia University in New York, said in an interview before the British vote. “It’s possible that we could see a swing toward the extreme right, and one must wonder what ramifications this would have for the European Union and the euro area.”

Since Greece’s runaway debt convulsed the euro region in 2010, Europe has avoided doomsday storylines like the breakup of the EU, the euro or a member state. Whether those risks were banished or merely deferred will become clearer in the next rounds of political jousting. Early elections are beckoning in Greece, Catalonia, Italy and Austria, and that’s before scheduled ballots including in the U.K. in May, Portugal in September or October and in Spain at year’s end. The re-emergence of political risk in Europe is cited by Royal Bank of Scotland Plc analysts including Alberto Gallo as among the “top trades” for 2015. Europeans rehearsed the revolt in last May’s European Parliament balloting, upping the vote count of anti-establishment parties to about 30% from 20%. The motley groups failed to form a cohesive force and mainstream parties retained control. Protest parties are now set to consolidate gains at the national level.

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I’ll pay plastic, please.

The Curse Of Black Friday Sales (NY Post)

After a tough 2014, nervous retailers couldn’t afford to wait for the traditional day after Thanksgiving to pull the trigger on holiday shopping discounts. So retail titans from Amazon to Walmart — and nearly every store in between — have been stretching the selling season with Black Friday discounts that started the day after Halloween. Macy’s, JCPenney and Toys R Us, which started opening on Thanksgiving a couple of years ago, are opening earlier than ever for Turkey Day 2014. Retail experts say the hysterical bombardment of deals both online and in stores all November long shows just how ineffective — and dysfunctional — the Black Friday business model has become. Just 28% of shoppers are expected to hit the stores the day after Thanksgiving this year, according to a survey released last week from Bankrate.com.

“Retailers know that big pop, the big Black Friday day — it’s not working,” said Bankrate.com analyst Jeanine Skowronski. Black Friday used to be the day retailers’ profit ledgers entered the black for the year. Now it’s known for chaos, stampeding crowds and deals that can be found with less hassle online or some other time. As shoppers struggle with stagnant wages and high food prices, stores are fighting to win their limited discretionary dollars and turn a profit amid all the price-cutting. Add to that, on Black Friday, picketers will be outside 1,600 Walmart stores, calling for higher wages and full-time jobs for those who want them. “Personally, I never go to a store on Black Friday—there’s no need to,” said Edward Hertzman, publisher of Sourcing Journal.

“A better sale is probably just around the corner, especially on seasonal merchandise.” Since the 2008 Black Friday trampling death of a Long Island Walmart employee by a mob of shoppers, the post Turkey Day doorbuster sales have been notorious for attracting dangerous crowds. This year, Walmart and other stores are staggering deals and trying new strategies to keep the crowds less dangerous. Stores began extending Black Friday to try to bounce back from the recession. Now, however, they have trained consumers to expect a constant stream of price cuts, and are jockeying for first place in a fiercely competitive race. The discounts may help stores reach the forecast of up to 4% revenue growth for the 2014 holiday season, but margins will suffer.

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Have they incorporated Alibaba’s Singles Day yet? How about if we have one ‘special’ event every week? Would they all shop like crazy?

UK Retailers Pin Hopes On American Shopping Extravaganza (Independent)

Black Friday begins on Monday. If that’s the sort of sentence that elicits a double-take, I can only apologise — and say, blame the Americans. Ever a nation to milk something for all it’s worth and a bit more, the US has turned the day after Thanksgiving, when retailers cut their prices, into a week-long extravaganza. So Amazon will begin its “Black Friday Deals Week” promotions from 8am on Monday, with “lighting deals” every 10 minutes and lasting until stocks run out. The climactic day will still be Friday, and this year, more than ever, Britain will be swamped with discounts online and in the High Street. Visa Europe is forecasting that £360,000 will be spent every minute, or £6000 per second on its cards next Friday.

Once the preserve of Amazon, which in 2010 brought the phenomenon of the day after Thanksgiving as the day for retailers to offer big bargains, it’s now become one of the most important dates in the retail calendar. Friday is already set to become the biggest online shopping day in the UK. [..] In the US, Black Friday got its name from Philadelphia, where the police had to cope with the collision of shoppers heading for the sales and American football fans going to the annual Army v Navy fixture. It quickly acquired another interpretation, as the day when stores moved from being in the red to the black. UK retailers are crossing their fingers and hoping that the second meaning comes true.

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So all we need to do is cut our holiday shopping?

Don’t Prick The Christmas Spending Bubble, It Keeps Capitalism Alive (Observer)

Global capitalism, as a system, simply doesn’t work. Russell Brand’s new book provides the proof. As does my new book. And the hundreds of other new books that are just out. And the Sainsbury’s advert. And all the current adverts for booze and perfume, chocolates and jewels, supermarkets and computer games. The gaudy, twinkly proof is going up all around us as the last of the leaves come down. It’s called Christmas. [..]

Christmas is an annual bubble – an irrational buying fever that’s actually scheduled. We know it will come and, like all bubbles, we know it will end. Unlike most bubbles, we also know precisely when it will end. The huge signs advertising a collapse in prices are already stacked in department stores’ stockrooms as the final spasm of Christmas Eve top-whack spending is taking place. At this time of year, the invisible hand gets delirium tremens – possibly from the number of drinks the invisible mouth is sticking away. Looked at with a Scrooge-like economist’s hat on (gift idea for an accountant!), this makes no sense. Millions of people are each buying hundreds of things they don’t need – often luxuries they can scarcely afford – and at a time when such items’ prices are artificially inflated because everyone else is also buying them.

Wait a couple of weeks and jumpers with reindeer on, chocolates in stocking-shaped presentation packs and sacks of brussels sprouts will be going for a song. The rational economic choice, even for an alcoholic gourmand who likes wearing jewels, would be to schedule a knees-up for 10 January. And, as every shopkeeper will tell you, a huge sector of our economy depends on this. Our already beleaguered high streets would be wastelands without it, the hellish out-of-town malls exist primarily to harness this “golden quarter” of spending. The capitalist dream that western economies aspire to live is sustained by a crazy retail spike caused by a bastardised form of religious observance.

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And now, after three pieces on shopping crazes, here’s your moment of zen:

Food Banks Face Record Demand As Low-Income Families Look For Help (PA)

Growing numbers of people on low incomes are turning to food banks to survive, new research has revealed. Almost 500,000 adults and children were given three days’ food in the first six months of the current financial year – a record – the Trussell Trust reported. The charity said the number of adults being referred to one of its 400 food banks had increased by 38% compared with the same period last year. Problems with social security were the biggest trigger for going to a food bank, but more than a fifth blamed low income. In the six months to September, 492,641 people were given three days’ food and support, including 176,565 children, compared with 355,982 during the same period in the previous year.

Trussell Trust chief executive David McAuley said: “Whilst the rate of new food banks opening has slowed dramatically, we’re continuing to see a significant increase in numbers helped by them. “Substantial numbers are needing help because of problems with the social security system but what’s new is that we’re also seeing a marked rise in numbers of people coming to us with low income as the primary cause of their crisis. “Incomes for the poorest have not been increasing in line with inflation and many, whether in low-paid work or on welfare, are not yet seeing the benefits of economic recovery. “Instead they are living on a financial knife-edge where one small change in circumstances or a life shock can force them into a crisis where they cannot afford to eat.”

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“He said that when international sanctions had been used against other countries such as Iran and North Korea, they had been designed not to harm the national economy.”

Russia FM Lavrov Accuses West Of Seeking ‘Regime Change’ In Russia (Reuters)

Foreign Minister Sergei Lavrov accused the West on Saturday of trying to use sanctions imposed on Moscow in the Ukraine crisis to seek “regime change” in Russia. His comments stepped up Moscow’s war of words with the United States and the European Union in their worst diplomatic standoff since the Cold War ended. “As for the concept behind to the use of coercive measures, the West is making clear it does not want to force Russia to change policy but wants to secure regime change,” Tass news agency quoted Lavrov as telling a meeting of the advisory Foreign and Defence Policy Council in Moscow. He said that when international sanctions had been used against other countries such as Iran and North Korea, they had been designed not to harm the national economy.

“Now public figures in Western countries say there is a need to impose sanctions that will destroy the economy and cause public protests,” Lavrov said. His comments followed remarks on Thursday in which President Vladimir Putin said Moscow must guard against a “colour revolution” in Russia, referring to protests that toppled leaders in other former Soviet republics. Western sanctions have limited access to foreign capital for some of Russia’s largest companies and banks, hit the defence and energy industries, and imposed asset freezes and travel bans on some of Putin’s allies.

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Move over, Pussy Riot?!

Rapper May Face 25 Years In Prison Over ‘Gangsta Rap’ Album (RT)

Brandon Duncan has no criminal record, but could face a life sentence of 25 years in prison as prosecutors say his latest album lent artistic motivation for a recent string of gang-related shootings. San Diego County prosecutors have charged Duncan, 33, with nine felonies connected to a wave of gang-related shootings in the California city. Although the musician has not been charged with discharging or providing firearms in the recent shootings, prosecutors say his musical lyrics encourage gang behavior. Duncan’s latest album, entitled “No Safety,” features a photograph of a revolver with bullets on the cover. The gangsta rapper, who is being held on $1 million bail, is scheduled to head to court in December. If found guilty of felony charges, Duncan could serve a life sentence of 25 years in prison, his lawyer said. San Diego police say Duncan is a gang member, who goes by the name TD.

In 2000, California, faced with an increase in gang-related violence, passed Proposition 21, which takes aim at individuals “who actively participates in any criminal street gang with knowledge that its members engage in or have engaged in a pattern of criminal gang activity.” Prosecutors, citing a section of the law, argued that Duncan, through his music and gang affiliations “willfully promotes, furthers, or assists in any felonious criminal conduct by members of that gang.” “We’re not just talking about a CD of anything, of love songs. We’re talking about a CD (cover)… There is a revolver with bullets,” said Deputy District Attorney Anthony Campagna, as quoted by the Los Angeles Times. Duncan’s lawyer, Brian Watkins, disputes the claim, saying the prosecution’s use of an obscure California law is “absolutely unconstitutional” and impedes his client’s First Amendment right to the freedom of speech.

“It’s no different than Snoop Dogg or Tupac,” Watkins, naming other rappers known for their controversial lyrics, said. “It’s telling the story of street life.” “If we are trying to criminalize artistic expression, what’s next, Brian De Palma and Al Pacino?” said Watkins, in reference to the 1983 movie “Scarface” directed by De Palma and starring Pacino.

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“Our living wonders, which have persisted for millions of years, are disappearing in the course of decades.”

We Need A New Law To Protect Our Wildlife From Critical Decline (Monbiot)

One of the fears of those who seek to defend the natural world is that people won’t act until it is too late. Only when disasters strike will we understand how much damage we have done, and what the consequences might be. I have some bad news: it’s worse than that. For his fascinating and transformative book, Don’t Even Think About It: why our brains are wired to ignore climate change, George Marshall visited Bastrop in Texas, which had suffered from a record drought followed by a record wildfire, and Sea Bright in New Jersey, which was devastated by Hurricane Sandy. These disasters are likely to have been caused or exacerbated by climate change.

He interviewed plenty of people in both places, and in neither case – Republican Texas or Democratic New Jersey – could he find anyone who could recall a conversation about climate change as a potential cause of the catastrophe they had suffered. It simply had not arisen. The editor of the Bastrop Advertiser told him: “Sure, if climate change had a direct impact on us, we would definitely bring it in, but we are more centred around Bastrop County.” The mayor of Sea Bright told him: “We just want to go home, and we will deal with all that lofty stuff some other day.” Marshall found that when people are dealing with the damage and rebuilding their lives they are even less inclined than they might otherwise be to talk about the underlying issues.

In his lectures, he makes another important point that – in retrospect – also seems obvious: people often react to crises in perverse and destructive ways. For example, immigrants, Jews, old women and other scapegoats have been blamed for scores of disasters they did not create. And sometimes people respond with behaviour that makes the disaster even worse: think, for instance, of the swing to Ukip, a party run by a former banker and funded by a gruesome collection of tycoons and financiers, in response to an economic crisis caused by the banks. I have seen many examples of this reactive denial at work, and I wonder now whether we are encountering another one. The world’s wild creatures are in crisis. In the past 40 years the world has lost over 50% of its vertebrate wildlife. Hardly anywhere is spared this catastrophe. In the UK, for example, 60% of the 3,000 species whose fate has been studied have declined over the past 50 years. Our living wonders, which have persisted for millions of years, are disappearing in the course of decades.

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