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The inbuilt and inevitable downfall of our formerly ‘rich economies’ in a nutshell: “Companies do not exist to create jobs. You don’t get rewarded for creating jobs..”

• This Labor Day, Let’s Acknowledge Why Our Job-Creation Machine Is Broken (MW)

It’s Labor Day weekend, and despite unemployment under 5% and nearly 15 million private-sector jobs created since February 2010, nobody’s celebrating. Workforce participation is stuck near historic lows, six million people are part-timers but want to work full time, and wage growth remains subdued. Both presidential candidates have talked a good game about jobs and the economy, but neither addresses the real problem. The U.S. job-creation machine—once the envy of the world—is broken, because American corporations cannot create steady, well-paying jobs here in the USA while also providing maximal returns to their investors, who are really in charge. So says Gerald Davis, a professor at the University of Michigan’s Ross School of Business, who has studied these issues for years.

A short piece he wrote late last year for Brookings and a new book, “The Vanishing American Corporation,” trace the big changes in American corporations from the job-rich giants of the post-World War II era to job killers now, because the mission of the corporation has changed radically. Corporations’ new, exclusive emphasis on shareholder value—enforced by executive-compensation packages in which equity comprised 62.2% of S&P 500 CEOs’ total compensation in 2015, according to Equilar—has pushed top executives to replace humans with robots, send jobs overseas or bring in lower-paid immigrants to do them here, hire part-time or temporary workers (or glorified day laborers and Uber “contractors”) instead of full-time ones, and lay off thousands of employees even when profits are soaring.

Cutting labor costs boosts earnings, which tends to push stock prices (and executive compensation) higher, and frees up cash for more “important” things like dividends or share buybacks. As of March, S&P 500 companies had bought back more than $2 trillion in stock over the last five years, making buybacks the biggest source of demand for stocks since 2009, HSBC estimated. That makes big pension funds and “activist” investors like Carl Icahn happy, but it’s bad news for the millions of Americans who still yearn for well-paying middle-class jobs that offer career advancement, decent health-care coverage, and retirement security. “Under our current conditions, creating shareholder value and creating good jobs are largely incompatible,” Davis wrote in his Brookings piece. “Corporations are ‘job creators’ only as a last resort.” “Companies do not exist to create jobs. You don’t get rewarded for creating jobs..”

Hollowing out.

• US Factory Orders Tumble For Longest Streak In History (ZH)

21 Months… US Factory Orders have decline year-over-year every month since October 2014 (the end of QE3). This is the longest period of decline in US history (since 1956) and has always indicated the US economy is in recession… While headlines will crow of 1.9% MoM gain (which missed expectations of a 2.0% rise), the trend is simply ugly: Year-over-year Factory Orders fell 3.5%. As Bloomberg also notes, there’s one key takeaway from the Commerce Department’s report Friday on U.S. factory orders. The value of unfilled orders dropped in July to the lowest level in two years, indicating producers are having an easier time meeting demand.

With soft sales, factories have little reason to add as many workers to their payrolls and may find it difficult to raise prices. Employment in manufacturing dropped 14,000 in August, the most in three months, another report from the Labor Department showed Friday. • Unfilled orders to all manufacturers fell 0.1% to $1.13 trillion, the lowest since June 2014, after a 0.9% slump. • Unfilled orders have increased just once since November. • Total factory orders rose 1.9% in July after a 1.8% drop. Just another WTF chart to ignore.

The whole economy turns to junk.

• Number Of Credit-Crimped US Companies Rises to 2009 Level, S&P Says (BBG)

You’d have to go back to the months following the financial crisis to find so many companies facing potentially ruinous debt problems. That’s according to the latest tally by S&P Global Ratings of “weakest link” issuers. S&P counted 251 with ratings at the low end of junk status and a negative outlook, the most since October 2009, when the total was 264. The issuers collectively have about $359 billion of debt outstanding, led by energy companies, according to S&P’s Sept. 1 report. “Weakest links maintain an important role as potential default indicators,” Diane Vazza, S&P’s head of global fixed income research, said in the report.

They’re almost 10 times more likely to miss payments than ordinary speculative-grade issuers, Vazza wrote, adding that 71 of 100 companies that defaulted this year had been previously tagged as weakest links. The oil and gas sector contributed 62 issuers, or about 25% of the total, as stress on commodities markets continues. Eight of the August additions were from that industry, including Chesapeake Energy and Hornbeck Offshore Services. Financial institutions followed with 34 issuers, or 14%. Other newcomers included Tesla Motors, Elon Musk’s cash-strapped electric-car maker, and Intelsat SA, the satellite operator that proposed a private bond exchange offer, which S&P labeled “a distressed restructuring and tantamount to default.”

S&P assembled the list based on the number of borrowers rated B- or lower with either negative outlooks or negative implications on Credit Watch that indicate a strong possibility of further downgrades. The number hit its record high of 300 issuers in April 2009. The U.S. speculative-grade corporate default rate grew to 4.8% in August after seven defaults, and is expected to reach 5.6% by June 2017, S&P said in a separate report. The U.S. speculative-grade default rate for energy issuers is 21.7% as of July 31, Vazza said.

The power of buybacks. “..the American economy has transformed from a system of value creation to one of value extraction.”

• US Exchanges Trade Fewest Stocks In 32 Years (ZH)

The number of common stocks traded on major U.S. exchanges are the fewest in three decades. As CNBC reports, “Currently, there are just 3,267 stocks in the University of Chicago’s CRSP data, and this is the lowest since 1984,” wrote longtime Jefferies equity strategist Steven DeSanctis. What’s behind this phenomenon? DeSanctis explains: “Between the lack of IPO activity, the pickup of M&A, and buybacks, the U.S. equity world is becoming smaller and smaller, and this could be one of many reasons why active managers are lagging behind their indexes. Companies may not want to come public due to the additional cost of Sarbanes-Oxley or the fact that the private market has become a bigger source of financing than it has been in the past.”

So whether it’s the total number of stocks or the amount of shares for each company outstanding, the stock market is shrinking. Or as Dark Bid’s Daniel Drew previously noted, The Stock Market Is Disappearing In One Giant Leveraged Buyout It’s easy to find critics and doomsayers who predict that the next stock market crash is just around the corner. They could be right, but another possibility is that the stock market itself will disappear entirely. Anyone who is familiar with mergers and acquisitions knows what happens when a company is being slowly acquired. The price climbs higher, slowly yet relentlessly. Liquidity evaporates as offers are lifted. If the price moves up too quickly, buy programs are canceled. The buyer waits until the froth dies down a little before resuming purchases.

Eventually, the bids reappear, and the process continues. Once the buyer acquires 5% of the company, a legal requirement is triggered: the SEC requires the buyer to file Schedule 13D, otherwise known as a “beneficial ownership report.” Once this report is filed, everyone can see the buyer, and the stock price will usually jump. This same process has been underway in the stock market over the last 6 years. The market is up well over 200%. Liquidity has evaporated in the S&P 500 futures market, and the central banks themselves are buying S&P 500 futures. Companies are spending nearly all of their profits on stock buybacks. All of this activity harms employees. William Lazonick discussed the negative effects in a Harvard Business Review article called “Profits Without Prosperity.” According to Lazonick, the American economy has transformed from a system of value creation to one of value extraction.

Please do it before the election.

• US Economy May Need Much Higher Interest Rates: Fed’s Lacker (R.)

The U.S. economy appears strong enough to warrant significantly higher interest rates, Richmond Federal Reserve Bank President Jeffrey Lacker said on Friday. Lacker, who is not a voting member of the U.S. central bank’s rate-setting committee this year, said he still favors raising rates sooner than later and that the Fed’s last policy meeting in July would have been a “good time” to tighten policy. Speaking to a group of economists in Richmond, Lacker argued that a range of economic analysis suggests the Fed’s benchmark overnight interest rate – the federal funds rate – is currently too low. “It appears that the funds rate should be significantly higher than it is now,” he said in the speech. He made his comments after the U.S. government reported a hiring slowdown in August that could effectively rule out a rate increase later this month.

While Lacker is not due to have a vote on policy until 2018, he does participate in discussions on interest rates. The Fed has appeared sharply divided between policymakers who favor rate increases soon and those who urge more caution. Those favoring caution appeared to get a boost on Friday when a report showed 150,000 U.S. jobs were created last month, fewer than expected. But Lacker said the weaker pace of hiring still left the job market on a strengthening path and the case for higher rates would only grow stronger unless job growth slowed “significantly in the months ahead.” He suggested there were increased risks in waiting to raise rates. “The way the data is playing out I think the longer we wait there is a material increase in risks that we run,” Lacker told reporters after his speech.

Pity. I’d love to see Draghi do a rate hike.

• US Economic Misery Finds Company, Just Not In a Rate Hike (BBG)

The Federal Reserve is expected, sooner or later, to raise its key interest rate for a second time since the financial crisis – a feat not in sight for other major developed-nation central banks. It’ll depend on if the economy is doing well, and policy makers may take comfort that the U.S. ranking has fallen in a gauge of economic misery. With the unemployment rate at 4.9% and inflation at 0.8%, the U.S. Misery Index score of 5.7 has improved since the financial crisis, though it lags behind Switzerland, Japan, the U.K. and New Zealand. All these nations’ central banks are poised to hold rates at record lows, or cut them further, according to surveys conducted by Bloomberg. The Misery Index is a simple calculation adding the rate of unemployment and inflation, with lower scores indicating a healthier economy.

But if you think the four countries that are beating out the U.S. in terms of misery are doing everything right, think again. Japan and Switzerland, both of which have brought their rates to negative levels in an attempt to boost lending, are suffering from deflation, which is helping bring down their Misery Index scores. New Zealand, though faring a bit better economically, is also expected to cut its central bank rate as inflation remains suppressed, and the U.K. will do so as policy makers attempt to counteract the fallout from Brexit.

All they have left is zeroes.

• ECB Throws Twelfth Zero at Inflation (BBG)

The European Central Bank has added a digit to its odometer to read 1,000,000,000,000. Euros, not kilometers. That’s the amount of excess liquidity now sloshing through the financial system – equivalent to almost €3,000 ($3,360) for each of the 340 million people in the 19-nation region. The money is created by the ECB through a program of quantitative easing and bank loans, and is aimed at bringing inflation closer to its goal of just under 2%. It’s labeled “excess” because it’s the amount over and above what’s immediately needed by the banking system to serve the economy. That’s why it’s inflationary. But no matter how often the money is lent to companies and households, at the end of each day it lands at the central bank where commercial institutions have their accounts.

And because the ECB’s stimulus package also includes a negative deposit rate of 0.4%, lenders are charged for that surplus cash. With excess liquidity passing €1 trillion as of Sept. 1, the ECB now makes more than €11 million a day in interest from the deposit facility alone. Though that’s just a fraction of the institution’s revenue. “Earnings related to QE are more decisive for net income,” said Michael Schubert, an economist at Commerzbank in Frankfurt. “It was the bigger factor in the past years.” There is no single profit and loss account for the 19 national central banks and the ECB; everyone publishes their own. Germany’s Bundesbank, which implements monetary policy in Europe’s largest economy, made €248 million last year from charging interest for deposits and nearly €2 billion from past and present asset-purchase programs.

Please make it stop!

• Any ECB Move Into Stocks Unlikely To Be Plain Sailing (R.)

The ECB may soon be forced to follow the Bank of Japan’s example and buy equities as part of any expanded stimulus programme, but it faces significant hurdles in helping all 19 euro zone members equally without distorting a key market for investors. The European Central Bank could run out of eligible bonds for its €1.7 trillion bond-buying scheme, meaning alternative options are on the table should it decide to loosen policy further to lift growth and inflation across the bloc. Analysts say these could include large-scale share buying, a policy that the BOJ has already adopted after it started purchasing equity exchange traded funds (ETFs) for its own quantitative easing scheme six years ago.

ETFs allow an investor to trade a range of assets, from a basket of stocks to government debt. ETFs, which offer a convenient way to purchase a broad basket of securities in a single transaction from an exchange, have risen in popularity with investors due to their simplicity and lower fees. But buying ETFs in the 19-nation euro zone would be far from simple for the ECB, both practically and politically. “How do you buy an index which favours all countries within the euro zone? Obviously the ECB doesn’t want to be seen favouring one market above another,” said Commerzbank economist Peter Dixon.

The BOJ doubled its ETF purchases in late July to an annual pace of 6 trillion yen ($58 billion). According to SPDR ETFs, the BOJ is now estimated to hold almost 50% of the total Japanese ETF market. Investments in Europe-listed ETFs are worth just over $500 billion, compared with nearly $200 billion in Japan and more than $2 trillion in the United States, according to consultancy firm ETFGI. Although the European ETF market is bigger than Japan’s, such a scheme would have to benefit 19 member states, from heavyweight Germany to much smaller Slovakia.

Washington should leave them alone.

• Retailers Seek US Government Help With Shipping Crisis (WSJ)

U.S. retailers, bracing for a blow as they stock up for the crucial holiday sales season, asked the government to step in and help resolve a growing crisis caused by the near-collapse of South Korea’s Hanjin Shipping , one of the world’s largest container shipping companies. “While the situation is still developing, the prospect of harm is significant and apparent,” Sandra Kennedy, president of the Retail Industry Leaders Association, wrote in a letter to the Department of Commerce and the Federal Maritime Commission. Hanjin’s recent bankruptcy filing “presents an enormous challenge to U.S. shippers,” she said, and “could have a substantial impact on consumers and the economy at large.”

The trade group is urging the U.S. to work with ports, cargo handlers and the South Korean government to resolve the widespread disruption in freight shipments caused by the Hanjin bankrupcy filing. A spokesman for the Retail Industry Leaders Association said they’re hoping the South Korean government could help provide clarity and speed to the bankruptcy proceedings, which are being considered by courts there. Hanjin handles about 7.8% of the trans-Pacific trade volume for the U.S. market, Ms. Kennedy’s letter said. Since the shipping company filed for bankruptcy protection in a Seoul court Wednesday, terminal operators, ports, cargo handlers, truckers and others have refused to handle its cargo, for fear they won’t get paid. That is causing turmoil at U.S. ports and beyond, said shippers, importers and freight forwarders.

There’s no maybe involved. The only way to finance Tesla was to agree to buy back its own second hand cars from lenders, or in other words: “..Tesla began providing “residual value guarantees” to those “leasing partners.”

• Tesla’s Cash Crunch Worse Than You Think (Fortune)

It’s well known that Tesla is deploying gigantic amounts of capital to boost sales from a projected 50,000 vehicles this year to half-a-million in 2018. That’s arguably the most ambitious goal in corporate America. To make it happen, Musk has grown Tesla’s asset base from $1.3 billion at the end of 2013 to $11.9 billion by June 30, following a $1.7 billion equity raise in the second quarter. Now, Tesla will need to accelerate its capital-raising program to fund the SolarCity deal. It’s absolutely typical for a startup racing to build new plants and R&D centers to burn a lot more cash than it generates. Investors and analysts are mostly optimistic, predicting that Tesla will in a few years exploit its heavy investment by generating big positive and fast-growing cash flows.

Hence, it’s crucial to examine the arc of Tesla’s cash flows to project when, and if, it will become profitable. As with its other pro-forma measures, Tesla’s version of cash from operations looks a lot better than the official numbers. So which is the right figure for investors? As it reported in its 10K for 2015, Tesla made a major concession to an important group of customers. The shift was aimed at strengthening a fast-growing business, sales of vehicles to banks that lease its model S and X vehicles to end-customers. In the past, Tesla simply sold the autos to its leasing customers, with no strings attached. The banks had no right to get money back from Tesla if, for example, the market for used electric vehicles dropped, forcing them to sell at lower-than-expected prices when the leases ended.

But starting in the fourth quarter of 2014, Tesla began providing “residual value guarantees” to those “leasing partners.” Those guarantees state that when the lease expires, typically after three years, the bank has the option of selling the car back to Tesla at a fixed, pre-determined price. Or, if the lessor chooses to sell the cars on its own and receives less than the guarantee amount, Tesla must cover the shortfall. Of course, customers have the option of buying the Model S or Model X for a fixed price at the end of the lease period, and if a customer does keep the car, Tesla’s liability ends. But if a customer decides not to buy, the bank can return the car to Tesla and pocket the guaranteed price, or sell the three-year old vehicle on the nascent green used car market. Either way, Tesla takes a big loss, and effectively returns a lot of the original “purchase” price, if rates for used S and X’s drop.

“..Australia’s real estate bubble, which is being held aloft by foreign capital..”

• Apartment Correction To Cause Australia-Wide Recession (SMH)

A “correction” in the apartment market could see sharp falls in all Australian home prices and a nationwide recession, a gloomy bank analyst report on the housing market warns. The report by analysts CLSA paints a “base case” scenario which says Australia’s housing cycle has “peaked,” with household debt now extending the country’s property bubble. The shift by big banks to tighten lending standards is likely to cause a “correction” and “crisis” in cheap apartments which will spread, leading to defaults among smaller developers and a sharp contraction in construction, CLSA says.

The “worst case” scenario foresees “dwelling prices falling sharply in all areas, eventually leading to a recession,” the report’s authors, respected former banking analyst Brian Johnson, and his colleagues say. “Issues of affordability and household debt are overextending Australia’s real estate bubble, which is being held aloft by foreign capital,” they say. “Our base case has the crisis starting with cheap apartments and later spreading to other flats in close proximity.” The authors put a “sell” recommendation on stocks of companies most likely to be affected by the crunch, including the country’s biggest bank CBA and listed property giant Lendlease. Another property player Mirvac would also be impacted, they said.

Mr Johnson and co. said they believe a correction in the housing market will start with settlement problems among apartment buyers, where purchasers who stumped up a 10% deposit simply walk away leaving developers to recoup the money or resell the unit. Under the “base case” scenario the contagion from falling apartment prices has a “muted” impact on single-family homes and is not enough to push the economy into recession. The risk of the “worst case” happening, which predicts sharp price falls and a recession, is increased because Australian household’s are holding debt that is at 122% of GDP and house prices are 12 times price to income ratios, the authors say.

No matter how the Apple case turns out, golden taxation days in Europe are over. Next up for scrutiny: Netherlands.

• Starbucks, Amazon Pay Less Tax Than A Sausage Stand, Austria Says (R.)

Multinationals like coffee chain Starbucks and online retailer Amazon pay less tax in Austria than one of the country’s tiny sausage stands, the republic’s center-left chancellor lamented in an interview published on Friday. Chancellor Christian Kern, head of the Social Democrats and of the centrist coalition government, also criticized internet giants Google and Facebook, saying that if they paid more tax subsidies for print media could increase. “Every Viennese cafe, every sausage stand pays more tax in Austria than a multinational corporation,” Kern was quoted as saying in an interview with newspaper Der Standard, invoking two potent symbols of the Austrian capital’s food culture.

“That goes for Starbucks, Amazon and other companies,” he said, praising the European Commission’s ruling this week that Apple should pay up to €13 billion in taxes plus interest to Ireland because a special scheme to route profits through that country was illegal state aid. Apple has said it will appeal the ruling, which Chief Executive Tim Cook described as “total political crap”. Google, Facebook and other multinational companies say they follow all tax rules. Kern criticized EU states with low-tax regimes that have lured multinationals – and come under scrutiny from Brussels. “What Ireland, the Netherlands, Luxembourg or Malta are doing here lacks solidarity towards the rest of the European economy,” he said.

He stopped short of saying that Facebook and Google would have to pay more tax but underlined their significant sales in Austria, which he estimated at more than 100 million euros each, and their relatively small numbers of employees – a “good dozen” for Google and “allegedly even fewer” for Facebook. “They massively suck up the advertising volume that comes out of the economy but pay neither corporation tax nor advertising duty in Austria,” said Kern, who became chancellor in May.

Always thought that ‘kills 99% of bacteria can’t be a good thing’. Without bacteria, there are no people.

• Antibacterial Soaps Banned In US Amid Claims They Do ‘More Harm Than Good’ (G.)

Antibacterial soaps were banned from the US market on Friday in a final ruling by the Food and Drug Administration, which said that manufacturers had failed to prove the cleansers were safe or more effective than normal products. Dr Janet Woodcock, director of the FDA’s center for evaluation and research, said that certain antimicrobial soaps may not actually serve any health benefits at all. “Consumers may think antibacterial washes are more effective at preventing the spread of germs, but we have no scientific evidence that they are any better than plain soap and water,” she said in a statement. “In fact, some data suggests that antibacterial ingredients may do more harm than good over the long term.”

Manufacturers had failed to show either the safety of “long-term daily use” or that the products were “more effective than plain soap and water in preventing illness and the spread of certain infections”. The new federal rule applies to any soap or antiseptic product that has one or more of 19 chemical compounds, including triclocarbon, which is often found in bar soaps, and triclosan, often in liquid soaps. It does not affect alcohol-based hand sanitizers and wipes, which the FDA is still investigating, or certain healthcare products meant specifically for clinical settings. The FDA has given manufacturers a year to change their products or pull them off shelves.

Debt Rattle August 28 2016

Aug 282016

August 28, 2016 Posted by Raúl Ilargi Meijer at 9:31 am Finance Tagged with: Brexit, cash, central banks, debt relief, EU, Greece, Hamptons, migrants, rate hike 8 Responses »

DPC On the beach, Coney Island 1907

• ‘If You’re Investing For The Long Term, You’re Crazy’ (MW)

• “The Next Time The World Comes To An End” – Jim Rogers (RV/ZH)

• The Housing Markets In The Hamptons, Aspen And Miami Are All Crashing (ZH)

• As Fed Nears Rate Hikes, Policymakers Plan For ‘Brave New World’ (R.)

• Coeure Says ECB May Need to Dive Deeper If Governments Don’t Act (BBG)

• BOJ’s Kuroda Says Ready to Ease as Jackson Hole Debates Options (BBG)

• The Sinister Side of Cash (Rogoff)

• The Thing About The EU That Drives So Many Up The Wall (Worstall)

• Greece PM Says EU Sleepwalking Toward Cliff, Wants Debt Relief By End 2016 (R.)

• Germany Expects ‘Up To 300,000’ Migrants This Year (BBC)

“We’re on the edge of a cliff right now. We have never been here before…”

• ‘If You’re Investing For The Long Term, You’re Crazy’ (MW)

Robert Kiyosaki, author of several best-selling books including “Rich Dad Poor Dad,” joined MarketWatch for a live interview on Facebook today. He offered up insights on making money, becoming an entrepreneur and even touched on politics. “The rich do not work for money. Most people do not understand that, because they’re taught to go to school and get a job for money. The rich don’t work for money. And one of the reasons for that is money is no longer money. One of the reasons for that is in 1971, President Nixon took the U.S. Dollar off the gold standard and basically screwed the world. It’s bad for the poor and middle class. As Bernie Sanders said, ‘wealth and income inequality is the greatest moral crisis facing America as well as the world today.’

The gap is growing between the rich and poor. The rich don’t work for money. If you went to school and got a job, and you’re saving money and investing in the stock market today, you’re going to lose.” “We’re on the edge of a cliff right now. We have never been here before. If you’re still saving money when interest rates are negative, you’ve got to be crazy. When you’re investing for the long-term in the stock market, where there is no connection between stock price and reality, you’re crazy.”

Jim Rogers is always interesting, and this 50 min interview is no exception. Zero Hedge has a lot of quotes from it.

• “The Next Time The World Comes To An End” – Jim Rogers (RV/ZH)

China is going to have problems too. It’s just the way the world works. In 2008, when the world fell apart, China had a lot money saved for a rainy day, and they started spending it when it started raining. This time, China has a lot of debt themselves. It’s amazing how much debt has built up in China in just a few years. And so this time, while China’s in better shape, or less bad shape than most of us, China’s got a lot of debt, and they’re not going to be able to help us like they did before. Beijing has said we’re going to let people go bankrupt, which I hope they do. They don’t do that in the West. The red Chinese, the communist Chinese are going to let people go bankrupt, because they’re good capitalists.

Americans won’t let anybody – and the Europeans won’t let anybody go bankrupt so they can save the world. But China has said they will let people go bankrupt. It’ll be a shock for the people who go bankrupt. It’ll be a shock for the world. But it will certainly be good for China, and for the world, if they do let mistakes get cleaned up. But it will mean that they will not be able to save us as much as they did before. So the next time the world comes to an end, it’s going to be a bigger shock than we expect.

Pretty big numbers.

• The Housing Markets In The Hamptons, Aspen And Miami Are All Crashing (ZH)

One month ago, we said that “it is not looking good for the US housing market”, when in the latest red flag for the US luxury real estate market, we reported that sales in the Hamptons plunged by half and home prices fell sharply in the second quarter in the ultra-wealthy enclave, New York’s favorite weekend haunt for the 1%-ers. Reuters blamed this on “stock market jitters earlier in the year” which damped the appetite to buy, however one can also blame the halt of offshore money laundering, a slowing global economy, the collapse of the petrodollar, and the drastic drop in Wall Street bonuses. In short: a sudden loss of confidence that a greater fool may emerge just around the corner, which in turn has frozen buyer interest.

We concluded this is just the beginning, and sure enough, several weeks later a similar collapse in the luxury housing segment was reported in a different part of the country. As the Denver Post reported recently, high-end sales that fuel Aspen’s $2 billion-a-year real estate market are evaporating, pushing Pitkin County’s sales volume down more than 42% to $546.45 million for the first half of the year from $939.91 million in the same period of 2015. [..] Ask a dozen market watchers why, and you’ll get a dozen answers. Uncertainty around the presidential election. Fear of Trump. Fear of Clinton. Growing trade imbalances with China. Brexit. Roller-coaster oil prices. Zika. Wobbling economies in South America. The list goes on. “People are worried about all kinds of stuff these days,” says longtime Aspen broker Bob Ritchie. “I’ve never seen anything like this before.”

[..] According to the latest report by the Miami Association of Realtors, the local luxury housing market is just as bad, if not worse, than the Hamptons and Aspen. The latest figures out of Miami this week showed residential sales are down almost 21% from the same time last year. But as bad as this double-digit decline may seem, it pales in comparison to what’s happening at the high end of the market. A closer look at transactions for properties of $1 million or more in July shows just 73 single-family home sales, representing an annual decline of 31.8%, according to a new report by the Miami Association of Realtors. In the case of condos in the same price range, the number of closed sales fell by an even wider margin: 44.4%, to 45 transactions.

There’s nothing in sight that would stop this madness. Looks like it will have to run its natural course.

• As Fed Nears Rate Hikes, Policymakers Plan For ‘Brave New World’ (R.)

Federal Reserve policymakers are signaling they could raise U.S. interest rates soon but they are already weighing new tools they may need to fight the next recession. A solid U.S. labor market “has strengthened” the case for the first rate increase since last December, Fed Chair Janet Yellen told a central banking conference in Jackson Hole, Wyoming. Several of her colleagues said the increase could come as soon as next month if the economy does well. Further rate hikes are expected to be few and far between as the U.S. central bank tries to balance a desire to fuel growth against worries it could overheat the economy.

But Fed officials at three-day conference that ended Saturday also said they need to consider new policy tools for use down the road, such as raising the inflation target or even Fed purchases of non-government-backed assets like corporate debt. Such ideas would test the limits of political feasibility and some would need congressional approval. The view within the Fed is that it could take effort to win over a public already skeptical of the unconventional policies the Fed undertook during the last crisis. Policymakers think new tools might be needed in an era of slower economic growth and a potentially giant and long-lasting trove of assets held by the Fed. And they are convinced the time to vet them is now, while rates look to be heading up.

“Central banking is in a brave new world,” Atlanta Fed President Dennis Lockhart said in an interview on the sidelines of the conference. At the center of the Fed’s discussions is its $4.5 trillion balance sheet, built up by bond-buying sprees to combat the 2007-09 recession but which has been criticized by many lawmakers. While policymakers have maintained the Fed should eventually reduce its bond holdings, Lockhart said some officials were closer to accepting that they needed to learn to live with them. “I suspect there are colleagues who are contemplating at least maybe a statically large balance sheet is just going to be a fact of life and be central to the toolkit,” he said.

The ECB should stop pretending it has a clue.

• Coeure Says ECB May Need to Dive Deeper If Governments Don’t Act (BBG)

European Central Bank Executive Board member Benoit Coeure said unconventional monetary policy may have to be used differently and more frequently if governments don’t act to boost the growth potential of euro-area economies. “We may see short-term rates being pushed to the effective lower bound more frequently in the event of macroeconomic shocks,” Coeure said Saturday in a speech at the U.S. Federal Reserve’s annual policy symposium in Jackson Hole, Wyoming. His remarks were posted on the ECB’s website. “We will fulfill the price stability mandate given to us,” Coeure said. “But if other actors do not take the necessary measures in their policy domains, we may need to dive deeper into our operational framework and strategy to do so.”

While slowing growth and inflation present difficulties for central banks around the industrialized world, the Frankfurt-based ECB has particular cause to urge pro-expansion measures by the 19 nations that use the euro. High unemployment, political spats and banking systems loaded with soured loans are hampering the region’s recovery from a debt crisis that started six years ago. “We face an exceptional situation where the real equilibrium rate is very low,” said Coeure. “All the monetary policy measures we have taken were a necessary response to this. They stabilized the euro-area economy and anchored medium-term price stability. But they were done on the assumption that low real rates would be temporary, because other policies would act in their fields of responsibility.”

The word ‘ease’ takes on whole new meanings by now.

• BOJ’s Kuroda Says Ready to Ease as Jackson Hole Debates Options (BBG)

Bank of Japan Governor Haruhiko Kuroda said he won’t hesitate to boost monetary stimulus if needed, reiterating a pledge during an annual policy retreat in Jackson Hole, Wyoming, at which central bankers stressed their need for backup from fiscal policy. “There is no doubt that there is ample space for additional easing in each of the three dimensions,” Kuroda said Saturday, referring to the BOJ’s package of asset buying, monetary-base guidance, and negative interest rates. “The bank will carefully consider how to make the best use of the policy scheme in order to achieve the price stability target,” he told the Federal Reserve Bank of Kansas City’s symposium.

Central bankers, struggling to spur persistently disappointing growth, gathered in the Grand Teton National Park to debate how best to tackle low inflation despite having already cut interest rates to near zero or, in some cases, below zero. They heard Fed Chair Janet Yellen on Friday describe future potential options to jump-start the economy, while saying that the case for a U.S. rate hike had strengthened. Even though the Bank of Japan is currently engaged in a review of its monetary-policy settings, due for completion in September, Kuroda’s comments underline his stance that the exercise won’t mean any reduction in stimulus despite growing doubts about its effectiveness. “One of the key elements of our policy is to push up inflation expectations to our price stability target and anchor them there,” Kuroda said. “The Bank of Japan will continue to carefully examine risks to activity and prices at each monetary policy meeting, and take additional monetary policy measures without hesitation.”

Wow. and I thought Rogoff was a reasonable smart man. Saying that cash causes crime is not smart. It’s nonsense.

• The Sinister Side of Cash (Rogoff)

When I tell people that I have been doing research on why the government should drastically scale back the circulation of cash—paper currency—the most common initial reaction is bewilderment. Why should anyone care about such a mundane topic? But paper currency lies at the heart of some of today’s most intractable public-finance and monetary problems. Getting rid of most of it—that is, moving to a society where cash is used less frequently and mainly for small transactions—could be a big help. There is little debate among law-enforcement agencies that paper currency, especially large notes such as the U.S. $100 bill, facilitates crime: racketeering, extortion, money laundering, drug and human trafficking, the corruption of public officials, not to mention terrorism.

There are substitutes for cash—cryptocurrencies, uncut diamonds, gold coins, prepaid cards—but for many kinds of criminal transactions, cash is still king. It delivers absolute anonymity, portability, liquidity and near-universal acceptance. It is no accident that whenever there is a big-time drug bust, the authorities typically find wads of cash. Cash is also deeply implicated in tax evasion, which costs the federal government some $500 billion a year in revenue. According to the Internal Revenue Service, a lot of the action is concentrated in small cash-intensive businesses, where it is difficult to verify sales and the self-reporting of income. By contrast, businesses that take payments mostly by check, bank card or electronic transfer know that it is much easier for tax authorities to catch them dissembling.

Though the data are much thinner for state and local governments, they too surely lose big-time from tax evasion, perhaps as much as $200 billion a year. Obviously, scaling back cash is not going to change human nature, and there are other ways to dodge taxes and run illegal businesses. But there can be no doubt that flooding the underground economy with paper currency encourages illicit behavior. Cash also lies at the core of the illegal immigration problem in the U.S. If American employers couldn’t so easily pay illegal workers off the books in cash, the lure of jobs would abate, and the flow of illegal immigrants would shrink drastically. Needless to say, phasing out most cash would be a far more humane and sensible way of discouraging illegal immigration than constructing a giant wall.

“.. the idea that we average peeps just shouldn’t worry our pretty little heads about complicated things like Europe.”

• The Thing About The EU That Drives So Many Up The Wall (Worstall)

Gus O’Donnell, who used to be the head of the civil service, has floated the idea that Britain won’t in fact leave the European Union after all. After a couple of years of negotiating about it we’ll end up with something that’s very like we have now and politicians will just settle for that. This, at root, is exactly what the whole dang vote in favour of Brexit, in favour of leaving, was about anyway. For it is, again, the idea that we average peeps just shouldn’t worry our pretty little heads about complicated things like Europe. We should allow our betters, our betters being those who had the good grace to go into the bureaucracy, to take care of everything for us. And that is actually the driving aim of the EU itself.

The entire point over the decades has been to take power away from the various peoples, and from politicians directly accountable to them, and place said power in the hands of an unelected and unaccountable bureaucracy in Brussels. And that’s to a very large extent, what the upsurge which led to Brexit was about. No, thanks, very much, but we’ll rule ourselves. And O’Donnell’s not doing himself any favours by repeating the idea from a purely British perspective. Being told that “The Man in Whitehall knows best” enrages Brits just as much as the idea that someone in Brussels does. Largely on the basis that we’ve all too much evidence pointing the other way. Thus this is somewhere between simply wrong and evidence of having an entirely tin ear:

”A former top civil servant says a British exit from the European Union is not inevitable, although voters backed that course in a June referendum.[..] But Gus O’Donnell, who was U.K. cabinet secretary from 2005 to 2011 and today sits in the House of Lords, says Britain could remain within a reformed EU following talks that would take “a very long time.” He’s actually going a bit further than that: “Lord O’Donnell of Clapham, the former Cabinet Secretary, says Britain might not really leave the EU. Perhaps the EU will now change in a way that makes it more appealing to British people, he suggests. And anyway, even if we do actually go through with the whole Brexit thing, not much will change because, when we come to really think about it, we’ll realise that all those rules and regulations that originated with the EU are actually OK so they should remain in place.”

There are indeed times when civil servants can be left to get on with things. Whether the forms for unemployment pay use Times Roman or Comic Sans would be a useful level of that sort of thing. But when the populace at large has been asked a simple question like “In or Out of the EU?” then that’s not something that the civil servants should be either second guessing nor gainsaying. That’s the exact thing about the EU that drives a significant portion of the population up the wall.

How much longer can Tsipras last? Or the EU for that matter?

• Greece PM Says EU Sleepwalking Toward Cliff, Wants Debt Relief By End 2016 (R.)

Greece said on Sunday the EU was “sleepwalking towards a cliff” by sticking to austerity rules that created huge inequalities among members, and it expected a debt relief deal for itself to be honored by end-2016 so that its economy could recover. Athens, facing a second bailout review entailing an unpopular loosening of labor laws in the autumn, is keen to show that painful tax rises and pension cuts as part of its 86-billion-euro bailout deal last year will bear fruit. “Greece has kept its part of the agreement and expects the same from its partners. We are not simply seeking, we are demanding and expecting specific measures that will render debt sustainable as part of the deal we are implementing,” Prime Minister Alexis Tsipras told the Sunday newspaper Realnews.

“This (debt relief) will be followed by reduced (budget) surpluses after 2018, which will open the way for the economy’s recovery,” he said. Greece has committed to attaining a primary budget surplus – excluding debt servicing costs – of 3.5% of economic output by 2018 as part of its third bailout package since 2010. The IMF, which has yet to decide whether it will fund the third bailout, has said that surplus targets of 3.5% beyond 2018 are not realistic for Greece and has pushed for softer fiscal goals to take part in the financing. Greece’s leftist-led government and the central bank also want lower primary surplus targets, arguing this will give Athens room to cut taxes and help the battered economy return to growth after a protracted recession.

The economy has shrunk by a quarter in six years and the jobless rate is 23.5%. Tsipras also told Realnews that the European Union was “sleepwalking towards a cliff” as the Stability Pact’s tough fiscal rules had engendered deep inequalities among member states. “Brexit will either awaken European leaderships or it will be the beginning of the end of the EU,” he said, referring to Britain’s June vote to leave the 28-nation bloc. He criticized Germany for acting as Europe’s “savings bank” with excessive surpluses, frozen wages and low inflation, at a time when the EU’s deficit-ridden southern members have broken all records for unemployment. “If Schaueble’s dogma for a multi-speed Europe and economic zones of low-cost labor is not abandoned, Europe will be brought to the brink of dissolution,” Tsipras was quoted by Realnews as saying.

As Hungary and Austria are throwing up more barriers.

• Germany Expects ‘Up To 300,000’ Migrants This Year (BBC)

Germany expects up to 300,000 migrants to arrive in the country, according to the head of Germany’s Federal Office for Migration and Refugees. Frank-Juergen Weise told the Bild am Sonntag paper (in German) his office would struggle if more people came. But he said he was confident the number of new arrivals would remain within the estimate. More than one million migrants from the Middle East, Afghanistan and Africa arrived in Germany last year. The German interior ministry says more than 390,000 people applied for asylum in the first six months of this year. It is not clear how many of these may have arrived in the country in 2015. Mr Weise said Germany would try to get as many of them on the job market as possible. But he said the migrants’ integration in German society “would take a long time and cost a lot”.

Debt Rattle December 17 2015

Dec 172015

December 17, 2015 Posted by Raúl Ilargi Meijer at 9:31 am Finance Tagged with: Baltic Dry, Fed, junk, liquidity, oil, rate hike, refugees 3 Responses »

Unknown Fed Ponders Interest Rates 1917

• Fed Raises Interest Rates, Citing Ongoing US Recovery (Reuters)

• Fed Removes Reverse Repo Cap to Ensure Control Over Rates (BBG)

• Fed May Have To Drain $1 Trillion In Liquidity To Push Rates 25 bps Higher (ZH)

• Fed Leaves China Only Tough Choices (BBG)

• The Fed By The Numbers – And Why They Are Wrong (Steve Keen)

• Baltic Dry Index Plunges to Fresh Record Low Amid China Steel Slump (BBG)

• This Junk Bond Derivative Index Is Saying Something Scary About Defaults (BBG)

• $100 Billion Evaporates as World’s Worst Oil Major Plunges 90% (BBG)

• EU Anti-Fraud Arm Investigating Loans to VW to Develop Cleaner Engines (BBG)

• Austria Started the Collapse in Great Depression. Will It Do so Again? (MA)

• US Humiliation Is Complete: Assad Can Stay (AP)

• IMF Recognizes Ukraine’s Contested $3 Billion Debt To Russia As Sovereign (RT)

• Earth’s Warmest November On Record By ‘Incredible’ Margin (WaPo)

• Even If The Global Warming Scare Were A Hoax, We Would Still Need It (AEP)

• 159,792 Reasons for EU’s Flummoxed Refugee Policy (BBG)

• World Bank, UN Urge Sea Change In Handling Of Syrian Refugees Crisis (Guardian)

• Dozens Of Refugees Missing After Boat Sinks Off Lesvos, 2 Confirmed Dead (AP)

A recovery built on ZIRP is not real.

• Fed Raises Interest Rates, Citing Ongoing US Recovery (Reuters)

The Federal Reserve hiked interest rates for the first time in nearly a decade on Wednesday, signalling faith that the U.S. economy had largely overcome the wounds of the 2007-2009 financial crisis. The U.S. central bank’s policy-setting committee raised the range of its benchmark interest rate by a quarter of a%age point to between 0.25% and 0.50%, ending a lengthy debate about whether the economy was strong enough to withstand higher borrowing costs. “With the economy performing well and expected to continue to do so, the committee judges that a modest increase in the federal funds rate is appropriate,” Fed Chair Janet Yellen said in a press conference after the rate decision was announced. “The economic recovery has clearly come a long way.”

The Fed’s policy statement noted the “considerable improvement” in the U.S. labour market, where the unemployment rate has fallen to 5%, and said policymakers are “reasonably confident” inflation will rise over the medium term to the Fed’s 2% objective. The central bank made clear the rate hike was a tentative beginning to a “gradual” tightening cycle, and that in deciding its next move it would put a premium on monitoring inflation, which remains mired below target. “The process is likely to proceed gradually,” Yellen said, a hint that further hikes will be slow in coming. She added that policymakers were hoping for a slow rise in rates but one that will keep the Fed ahead of the curve as the economic recovery continues. “To keep the economy moving along the growth path it is on … we would like to avoid a situation where we have left so much (monetary) accommodation in place for so long we have to tighten abruptly.”

The winners once again are money market mutual funds and broker-dealers. They profit whatever happens.

• Fed Removes Reverse Repo Cap to Ensure Control Over Rates (BBG)

The Federal Reserve removed the daily limit on aggregate borrowings through its overnight reverse repurchase facility, previously set at $300 billion, in a step designed to make sure the benchmark interest rate stays inside its new target range. The size of the facility will be “limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day,” the Fed said in a statement on Wednesday in Washington. The move came in conjunction with the Federal Open Market Committee’s decision to increase the target range for the federal funds rate by a quarter percentage point to 0.25% to 0.5%.

The Fed increased the interest it pays on overnight reverse repos to 0.25% from 0.05% to put a floor at the lower end of the range. It also raised the interest it pays on excess reserves held at the Fed to 0.5% from 0.25% to mark the upper end of the range. Fed reverse repos are conducted with money market mutual funds and broker-dealers and serve to drain excess liquidity from money markets. If investors offered to lend the Fed more money than the Fed was willing to borrow, the central bank wouldn’t be able to keep interest rates in its new target range. This happened in September 2014 on the final day of the quarter, driving rates below the Fed’s target range.

This is big in the background: “..by the time short term rates hit 1%, the Fed may have soaked up as much $4 trillion in liquidity.”

• Fed May Have To Drain $1 Trillion In Liquidity To Push Rates 25 bps Higher (ZH)

Two weeks ago, we cited repo-market expert E.D. Skyrm who calculated that moving general collateral higher by 25bps would require the Fed draining up to $800 billion in liquidity: “In 2013 on my website, I calculated that QE2 moved Repo rates, on average, 2.7 basis points for every $100B in QE. So, one very rough estimate moved GC 8 basis points and the other 2.7 basis points per hundred billion. In order to move GC 25 basis points higher, in a very rough estimate, the Fed needs to drain between $310B and $800B in liquidity.” That may be conservative. According to Citigroup’s latest estimate, the liquidity drain could be substantially greater. Here is the take of Jabaz Mathai

There will be a separate document from the NY Fed with details around the operational aspects of the liftoff. Of primary interest will be the size of the overnight reverse repo facility that the Fed will put in place to pull short rates higher. We don’t think it will be unlimited, but a size large enough that will keep short rates from falling below the 25bp floor – and the size could be as high as $1tn.

Putting this liquidity drain in context, the entire QE2 injected “only” $600 billion in liquidity in the span of many months, suggesting that as of tomorrow, the Fed may drain as much as 166% of its entire second quantitative easing operation overnight. Whether that liquidity is inert and can be easily released by banks, and more importantly, non-banks without resulting in any additional risk tremors is the first $640 billion question that the Fed is facing. The second, third and fourth? Assuming a linear relationship and another 3 rate hikes until the end of 2014, this means that by the time short term rates hit 1%, the Fed may have soaked up as much $4 trillion in liquidity. Here one thing is certain: a $1 trillion drain may not have a material impact when starting from a $2.6 trillion excess reserve base. $4 trillion, however, will leave a mark (the Fed’s entire balance sheet is $4.5 trillion) especially once the market starts to discount just how the rate hike plumbing takes place.

All of it true, except that it has nothing to do with the Fed.

• Fed Leaves China Only Tough Choices (BBG)

No one will blink if the Fed raises U.S. interest rates 50 basis points today, signaling an end to the cheap-money era. The U.S. central bank has telegraphed its move for months and while pockets of lingering weakness will spur some Fed watchers to challenge the decision, there’s little reason to believe such a small move will nudge the world’s biggest economy back into recession. A relatively easy decision for the Fed, however, is making life much harder for policymakers on the other side of the world. The People’s Bank of China has recently been burning through its $3.4 trillion stash of foreign-exchange reserves, spending nearly $100 billion a month to prop up the value of the yuan. Higher U.S. interest rates and a stronger dollar are sure to spur further capital outflows, especially given continued worries about the Chinese economy.

Chinese leaders seem willing to accept some mild depreciation while preparing for full liberalization of the yuan; in the future, the currency’s value may be determined against a basket of 13 currencies including the euro and yen, which would increase downward pressures. If the PBOC were to pull back now, however, the currency’s gentle glide could quickly turn into a nosedive. Given the dollar’s strength against emerging market currencies, a true free float could spark a devaluation of more than 30%. In that event, China would have few weapons at its disposal. In November, the yuan joined the IMF’s elite club of reserve currencies – a victory of great symbolic importance to Chinese leaders. If they imposed capital controls to halt the yuan’s downward slide, they’d suffer massive embarrassment, not to mention hard questions about their economic management skills.

China has little option but to continue muddling through, then, allowing the yuan to decline in value while working to moderate its pace. This certainly counts as currency “manipulation” in the eyes of Donald Trump and other presidential candidates. In this case, though, China isn’t defying the market so much as attempting to cushion market-driven dislocations. The dilemma highlights an uncomfortable truth: Unlike the Fed, whose rate hike is a classic low-risk decision, Chinese leaders today face only high-risk policy choices. And the best they can hope for in return is a degree of stability, not the go-go growth of earlier decades.

Previously, when China’s debt levels were low and the government was running large surpluses, investment opportunities were plentiful. Now credit is stretched. Fixed-asset overinvestment has left a capacity glut. Migration to cities is slowing, even as the working-age population has begun to decline. There are no more easy reforms. The changes China needs to implement – to stimulate competition, increase productivity, allocate capital more efficiently and spur innovation – all require wrenching sacrifices.

More debt is needed to achieve what the Fed wants, but paradoxically it will now get more expensive.

• The Fed By The Numbers – And Why They Are Wrong (Steve Keen)

2,3,4,5. Those are the 4 numbers you need to know to understand how The Fed thinks. Driven by its underlying model of the economy, The Fed thinks that the inflation rate should be 2%, the growth rate should be 3%, the Fed Funds Rate should be 4%, and the unemployment rate should be 5%. Then the economy is in what mainstream economists call “Equilibrium”, with all the key variables at their “Natural Rate”. Of course, it’s been some time since the economy has served up a set of numbers anything like that, but eight years after the economic crisis began, it’s sort of delivered on at least two of them: the unemployment rate is now spot on 5%, and the GDP growth rate is about 2.5%. Inflation remains the bugbear for The Fed (“why won’t it return to 2%?”), but today they are likely to bite the bullet and give the one variable they can control—the Federal Funds Rate—a slight nudge from its rock-bottom level of 0.25% up to 0.5%.

This is still a long way from The Fed’s 4% sweet spot, but after eight long years of near-zero, it is the first step—or so The Fed thinks—in a gradual return to “Equilibrium”. If only. The Fed will probably hike rates 2 to 4 more times—maybe even get the rate back to 1%—and then suddenly find that the economy “unexpectedly” takes a turn for the worse, and be forced to start cutting rates again. This is because there are at least two more numbers that need to be factored in to get an adequate handle on the economy: 142 and 6—the level and the rate of change of private debt. Several other numbers matter too—the current account and the government deficit for starters—but private debt is the most significant omitted variable in The Fed’s toy model of the economy.

These two numbers (shown in Figure 2) explain why the US economy is growing now, and also why it won’t keep growing for long—especially if The Fed embarks on a period of rate hiking. The economy is growing now because private credit is expanding at about 6% of GDP per year. This is a long way below the unsustainable rate of 15% per year that it hit just before the crisis began, but it’s enough to boost the economy a bit—and inflate asset markets a lot, since assets are what 90% plus of the borrowed money is actually spent on in the first instance. Unfortunately, that 6% rate of growth in GDP terms means that private debt is growing faster than nominal GDP—so the private debt to GDP ratio is rising once more (see Figure 3). And that can’t be sustained, because private debt is still very close to the levels that led to the last crisis. A growth rate at or below the growth rate of nominal GDP is sustainable. But a growth rate above that is not.

The dilemma this poses for The Fed—a dilemma about which it is blissfully unaware—is that a sustained growth rate of credit faster than GDP is needed to generate the magic numbers on which it is placing its current wager in favor of higher interest rates.

China steel output is falling too fast for even exports to keep up.

• Baltic Dry Index Plunges to Fresh Record Low Amid China Steel Slump (BBG)

The shipping industry’s most-watched measure of rates for hauling commodities plunged to a fresh record amid a persisting glut of ships and speculation weakening Chinese steel output could translate into declining imports of iron ore to make the alloy. The Baltic Dry Index fell 4.7% to 484 points, the lowest in Baltic Exchange data starting in January 1985. Rates for three of the four ship types tracked by the exchange retreated. China, which makes about half the world’s steel, is on track for the biggest drop in output for more than two decades, according to data compiled by Bloomberg Intelligence. Owners are reeling as China’s combined seaborne imports of iron ore and coal – commodities that helped fuel a manufacturing boom – record the first annual declines in at least a decade.

While demand next year may be a little better, slower-than-anticipated growth in 2015 has led to almost perpetual disappointment for rates, after analysts’ predictions at the end of 2014 for a rebound proved wrong. “It doesn’t help that Chinese steel production is about to see the most dramatic decline to the lowest in 20 years,” said Herman Hildan, a shipping-equity analyst at Clarksons Platou Securities in Oslo. “Demand growth is collapsing.” Rates for Capesize ships fell by between 13% and 15%, the Baltic Exchange’s figures showed. The ships are so-called because they can’t get through the locks of the Panama Canal and must instead sail through around South Africa or South America. Smaller Panamaxes, which can navigate the waterway, advanced 0.3% to $3,285 a day.

The two other vessel types that the Baltic Exchange monitors both declined. Owners are contending with a fleet whose capacity more than doubled over the past decade. At the end of last year, shipping analysts forecast rates for Capesize-class vessels would jump by about a third in 2015. By the start of this month, they were expecting a decline of about that magnitude.

“..high-yield spreads are currently pricing in a 2008-like market selloff over the next five years.”

• This Junk Bond Derivative Index Is Saying Something Scary About Defaults (BBG)

Here is the Markit CDX North America High Yield Index.

Here is the Markit CDX North America High Yield Index on drugs defaults.

Any questions? Probably. Citigroup analysts led by Anindya Basu point out that spreads on the CDX HY, as the index is known, are currently pricing in an expected loss of 21.2%, which translates into something like 22 defaults over the next five years if one assumes zero recovery for investors. That is a pretty big number once you consider that a total of 41 CDX HY constituents have defaulted since the index really began trading in 2005, equating to about 3.72 defaults per year. A big chunk of those defaults (17) occurred in 2009 in the aftermath of the financial crisis. What to make of it all? Actual recoveries during corporate default cycles tend to be higher than the worst-case scenario of 0%. In fact, they average somewhere in the 26% range, which would imply 29 defaults over the next five years instead of 41.

So what? you might say. The CDX HY includes but one default cycle, and those types of analyses tend to underestimate the peril of tail risk scenarios (hello, subprime crisis). Citi has an answer for that, too. Using spreads from the cash bond market going back to 1991, they forecast the default rate over the next 12 months to be something more like 5% to 5.5%. (For comparison, the rating agency Moody’s is currently forecasting a 3.77% default rate.) “CDX HY spread levels are pricing in about a 21% loss over a five-year period, whereas the highest we have ever seen over a five-year period is 14.2%, and that included 2009,” Basu said in an interview. “Of course, the spread level includes a spread risk premium over and above the ‘pure default’ risk. Even from that perspective, we believe the risk being priced in is too much.” In fact, Citi says “high-yield spreads are currently pricing in a 2008-like market selloff over the next five years.”

A lot more attention needs to be paid to ‘evaporating money’. Which is really just virtual wealth disappearing.

• $100 Billion Evaporates as World’s Worst Oil Major Plunges 90% (BBG)

Colombia is nursing paper losses of more than $100 billion after its oil boom fell short of expectations, wiping out 90% of the value of what was once Latin America’s biggest company. From being the world’s fifth-most valuable oil producer at its zenith in 2012, worth more than BP, state-controlled Ecopetrol now ranks 38th. Its market capitalization has fallen to $14.5 billion, down from its peak of $136.7 billion. “They just haven’t found oil, it’s as simple as that,” Rupert Stebbings, the managing director of equity sales at Bancolombia SA, said from Medellin. “The whole oil sector got massively over-bought, and people assumed that one day they’d hit an absolute gusher.”

As the army wrested back territory from Marxist guerrillas over the last decade and a half, opening up more land for exploration, the outlook was bright for the oil sector in Colombia, which borders Venezuela, the nation with the world’s largest reserves. Ecopetrol’s share price soared to “irrational levels” as investors bet on surging output that then failed to materialize, Stebbings said. With shares in the oil producer still high, the government opted in 2013 to sell a stake in electricity producer Isagen SA rather than Ecopetrol. Finance Minister Mauricio Cardenas, who sits on the board of Ecopetrol, said in an August 2013 interview that the government didn’t want to sell a further stake in the company because its growth prospects were better than Isagen’s. Since then, Isagen shares have risen 4.2%, while Ecopetrol’s have fallen 74%.

The Isagen stake sale has yet to take place due to a series of legal challenges. Over the past year, Ecopetrol shares are down 55% in dollar terms, the worst performance among global oil drillers with a market capitalization over $10 billion. The company’s original 2015 production target of 1 million barrels of oil equivalent was changed to 760,000 barrels. Ecopetrol’s growth in oil production since 2006 is among the world’s best, with a 24% success rate in exploration in 2014, the company said. The Kronos-1 and Orca-1 discoveries in the Colombian Caribbean “opened a new exploration frontier,” it said. Despite some bright spots, including the gas discoveries, exploration budget cuts along with already-meager reserves are worrying, said Corredores Davivienda equity analyst Francisco Chaves.

A story far from over. Even if VW apparently has gotten the go-ahead for its ‘fix-it’ proposal.

• EU Anti-Fraud Arm Investigating Loans to VW to Develop Cleaner Engines (BBG)

The European Union’s anti-fraud office OLAF is investigating loans Volkswagen received from the European Investment Bank to produce cleaner engines. The authorities picked up the issue after EIB chief Werner Hoyer said in October the lender was looking into the loans itself in light of the emissions scandal. The credits were granted to Volkswagen to help fund the development of cleaner engines. “The fact that OLAF is examining the matter does not mean that the persons or entities involved have committed an irregularity,” the authority said in an e-mailed statement Wednesday. “OLAF fully respects the presumption of innocence and the rights of defense of the persons and entities concerned by an investigation.”

The probe adds to the long list of investigations the company is facing in the wake of its disclosure in September that it cheated on pollution trials with its diesel cars. The carmaker installed software in some 11 million vehicles worldwide which lowered the level of nitrogen oxides emitted when it detected the car was being tested. VW hasn’t been informed of the probe and is “astonished that the authority goes public with this information without informing those subject to the issue,” company spokesman Eric Felber said in an e-mailed statement. VW has been talking to the EIB, the EU’s development bank, on the issue for months and has disclosed how the money was used, he said. Brussels-based OLAF is responsible for investigating fraud, corruption and evasion of taxes, duties and levies that contribute to the EU’s budget.

“Austrian banks are typically banks engaged in RELATIONSHIP banking rather than TRANSACTIONAL. Therefore, they rely on customer deposits short-term and lend long-term.”

• Austria Started the Collapse in Great Depression. Will It Do so Again? (MA)

In 1931, the sovereign debt crisis and banking system collapse began in Austria with the failure of Credit Anstalt, which was partly owned by the Rothschilds. The bank was forced to absorb another bank and a secret loan was created in London off the books to hide the insolvency to do the merger for political purposes. When that failed to be enough, the whole scam was exposed and a CONTAGION spread as people wondered what government had manipulated behind the curtain. Now the IMF has come out and stated that Austria’s banks need to increase their capital buffers urgently. The capital buffers in Austria are thin and cannot withstand a crisis. Furthermore, the banks are still active in politically and economically risky countries, which is typically carried out to increase profits.

In reality, the IMF led to the loans granted by the banks in Swiss francs, which caused many borrowers to lose 30% when the peg broke. In some Eastern European countries, the potential losses by a state arranged forced conversion of Swiss franc into local currencies could be massive. This is being done because the borrowers now owe 30% more than what they borrowed due to currency risk. This situation will not magically evaporate for they are private loans. The Austrian banks are typically banks engaged in RELATIONSHIP banking rather than TRANSACTIONAL. Therefore, they rely on customer deposits short-term and lend long-term. These are not big investment banks as in New York. They have lost a fortune because of the Swiss/euro peg collapse.

The three major banks are Erste Group, Raiffeisen Bank International (RBI), and UniCredit subsidiary Bank Austria. These are the biggest lenders in Eastern Europe as a whole who have gotten caught up in the currency nightmare. The RBI has recently announced their withdrawal from certain markets following a serious currency related loss that the bank has written in the past year for the first time. Bank Austria checked the sale of its branch business. This coming banking crisis is all currency related. It is, of course, thanks to Brussels and their irresponsible design of the euro. Politics and economics do not go together.

They will blame the bankers, but they will never blame government. Hence, this is why we can no longer afford career politicians for they will NEVER accept responsibility for screwing up the economy for political gain. The Clintons are responsible for removing ALL restriction from the Great Depression upon the banks. They then eliminated the right to declare bankruptcy on student loans. Yet, the press will NEVER ask Hillary anything about that or the fact that her biggest contributors are the banks in NYC.

The headline is Tyler Durden’s take. I second it.

• US Humiliation Is Complete: Assad Can Stay (AP)

U.S. Secretary of State John Kerry on Tuesday accepted Russia’s long-standing demand that President Bashar Assad’s future be determined by his own people, as Washington and Moscow edged toward putting aside years of disagreement over how to end Syria’s civil war. “The United States and our partners are not seeking so-called regime change,” Kerry told reporters in the Russian capital after meeting President Vladimir Putin. A major international conference on Syria would take place later this week in New York, Kerry announced. Kerry reiterated the U.S. position that Assad, accused by the West of massive human rights violations and chemical weapons attacks, won’t be able to steer Syria out of more than four years of conflict.

But after a day of discussions with Assad’s key international backer, Kerry said the focus now is “not on our differences about what can or cannot be done immediately about Assad.” Rather, it is on facilitating a peace process in which “Syrians will be making decisions for the future of Syria.” Kerry’s declarations crystallized the evolution in U.S. policy on Assad over the last several months, as the Islamic State group’s growing influence in the Middle East has taken priority. President Barack Obama first called on Assad to leave power in the summer of 2011, with “Assad must go” being a consistent rallying cry. Later, American officials allowed that he wouldn’t have to resign on “Day One” of a transition. Now, no one can say when Assad might step down.

Russia, by contrast, has remained consistent in its view that no foreign government could demand Assad’s departure and that Syrians would have to negotiate matters of leadership among themselves. Since late September, it has been bombing terrorist and rebel targets in Syria as part of what the West says is an effort to prop up Assad’s government. [..] The two countries also have split on Ukraine since Russia’s annexation of the Crimea region last year and its ongoing, though diminished, support for separatist rebels in the east of the country. The U.S. has pressed severe economic sanctions against Russia in response and has insisted that Moscow’s actions have left it isolated. That wasn’t the case on Tuesday.

“We don’t seek to isolate Russia as a matter of policy, no,” Kerry said. The sooner Russia implements a February cease-fire that calls for withdrawal of Russian forces and materiel and a release of all prisoners, he said, the sooner that “sanctions can be rolled back.” The world is better off when Russia and the U.S. work together, he added, calling Obama and Putin’s current cooperation a “sign of maturity.” “There is no policy of the United States, per se, to isolate Russia,” Kerry stressed.

IMF seems ready to pay Russia after all.

• IMF Recognizes Ukraine’s Contested $3 Billion Debt To Russia As Sovereign (RT)

The executive board of the IMF has recognized Ukraine’s $3 billion debt to Russia as official and sovereign – a status Kiev has been attempting to contest. Russia is to sue Ukraine if it fails to pay by the December 20 deadline. “In the case of the Eurobond, the Russian authorities have represented that this claim is official. The information available regarding the history of the claim supports this representation,” the IMF said in a statement. Russia asked the IMF for clarification on this issue after Kiev attempted to proclaim the debt was commercial and refused to accept Moscow’s terms for the debt’s restructuring. The December 2013 deal, which envisaged Moscow buying $15 billion worth of Ukrainian Eurobonds ($3 billion in the first tranche), was officially struck between Ukraine’s then-head of state President Viktor Yanukovich and President Vladimir Putin.

In spite of this fact, some Ukrainian and US officials have been making statements contesting the status of the deal. The sovereign status of the debt means Ukraine may have to declare default as early as December 20, when the deadline expires – unless Kiev responds to Moscow’s restructuring plan. The IMF’s decision automatically came into effect on Wednesday evening, as no objections to treating the debt as sovereign had been voiced, TASS reported. Putin had earlier ordered that a lawsuit be filed against Ukraine if it failed to pay its debt within a 10-day grace period following the deadline. Russian Prime Minister Dmitry Medvedev said last Wednesday that he didn’t believe Kiev was going to pay. “I have a feeling that they [Ukraine] will not return anything [to us] because they are crooks,” Medvedev said. “They refuse to return the money and our Western partners not only render us no help, they are actually hindering our efforts.”

Meanwhile, the IMF decided on Tuesday to change its strict policy prohibiting the fund from lending “to countries that are not making a good-faith effort to eliminate their arrears with creditors.” The decision was criticized by Moscow, as it will apparently allow the IMF to continue doing business as usual with Kiev even if it fails to pay its sovereign debt to Russia. “We are concerned that changing this policy in the context of Ukraine’s politically charged restructuring may raise questions as to the impartiality of an institution that plays a critical role in addressing international financial stability,” Russian Finance Minister Anton Siluanov wrote in a Financial Times opinion piece.

“..the Arctic, where temperatures were running anywhere from 4 to 10 degrees Celsius (7 to 18 degrees Fahrenheit) above average.”

• Earth’s Warmest November On Record By ‘Incredible’ Margin (WaPo)

Last month was the warmest November on record by an incredible margin, according to NASA measurements. The global average temperature for the month was 1.05 degrees Celsius, or about 1.9 degrees Fahrenheit, warmer than the 1951 to 1980 average. It’s also the second month in a row that Earth’s temperature exceeded 1 degree Celsius above average. It was just in October that our planet first exceeded the 1-degree benchmark in NASA’s records, dating to 1880. Prior to that, the largest anomaly was 0.97 degrees Celsius in January 2007. The recent measurements become even more significant in light of the recent Paris accord, in which 196 countries boldly agreed to limit the planet’s warming to “well below 2 degrees Celsius above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5 degree Celsius.”

The extraordinary warmth of October and November helped push this year well-past the 1-degree benchmark. We have known that 2015 is all but certain to be the warmest year on record, though we did not know by how much it would be. Given the November report, 2015 will eclipse last year as the warmest year on record by a huge margin. The Japan Meteorological Agency, which tracks the increasing global temperature, also concluded that last month was the warmest November on record since 1890, relative to the period from 1981 to 2010. El Niño played a large role in November’s — and the year’s — exceptional warmth. El Niño is an event marked by abnormally warm ocean temperatures in the equatorial Pacific.

The extent of the warm water is huge this year, stretching from the west coast of South America to past the international dateline, which divides the Pacific Ocean. As of November, temperatures in parts of this vast region were running as much as 4 degrees Celsius, or about 7 degrees Fahrenheit, above normal. But the Pacific Ocean wasn’t the warmest region of the globe in November — much of the warmth measured by NASA emanated from the Arctic, where temperatures were running anywhere from 4 to 10 degrees Celsius (7 to 18 degrees Fahrenheit) above average.

Ambrose sees climate change as a profit opportunity. That will never work. It will bring more problems than it solves. But in a world ruled by money even disaster looks like an opportunity.

• Even If The Global Warming Scare Were A Hoax, We Would Still Need It (AEP)

Chinese scientists have published two alarming reports in a matter of weeks. Both conclude that the Himalayan glaciers and the Tibetan permafrost are succumbing to catastrophic climate change, threatening the water systems of the Yellow River, the Yangtze and the Mekong. The Tibetan plateau is the world’s “third pole”, the biggest reservoir of fresh water outside the Arctic and Antarctica. The area is warming at twice the global pace, making it the epicentre of global climate risk. One report was by the Chinese Academy of Sciences. The other was a 900-page door-stopper from the science ministry, called the “Third National Assessment Report on Climate Change”. The latter is the official line of the Communist Party. It states that China has already warmed by 0.9-1.5 degrees over the past century – higher than the global average – and may warm by a further five degrees by 2100, with effects that would overwhelm the coastal cities of Shanghai, Tianjin and Guangzhou.

The message is that China faces a civilizational threat. Whether or not you accept the hypothesis of man-made global warming is irrelevant. The Chinese Academy and the Politburo do accept it. So does President Xi Jinping, who spent his Cultural Revolution carting coal in the mining region of Shaanxi. This political fact is tectonic for the global fossil industry and the economics of energy. Until last Saturday, it was an article of faith among Western climate sceptics and some in the fossil industry that China would never sign up to the COP21 accord in Paris or accept the “ratchet” of five-year reviews. They have since fallen back to a second argument, claiming that the deal is meaningless because China will not sacrifice coal-driven growth to please the West, and without China the accord unravels since it now emits as much CO2 as the US and Europe combined.

This political judgment was perhaps plausible three or four years ago in the dying days of the Hu Jintao era. Today it is clutching at straws. Eight of the world’s biggest solar companies are Chinese. So is the second biggest wind power group, GoldWind. China invested $90bn in renewable energy last year and is already the superpower of low-carbon industries. It installed more solar in the first quarter than currently exists in France. The Chinese plan to build six to eight nuclear plants every year, reaching 110 by 2030. They intend to lever this into worldwide nuclear dominance, as we glimpsed from the Hinkley Point saga. Home-grown energy is central to Xi Jinping’s drive for strategic security. China’s leaders know what happened to Japan under Roosevelt’s energy embargo in the late 1930s, and they don’t trust the sea lanes for supplies of coal and liquefied natural gas. Nor do they relish reliance on Russian gas.

Isabel Hilton from China Dialogue says the energy shift has reached a point where Beijing has a vested commercial interest in holding the world to the Paris deal. “The Chinese think they can dominate low-carbon technologies,” she said.

No, Bloomberg and EC, people fleeing warzones are not illegal immigrants. What’s illegal is calling them that.

• 159,792 Reasons for EU’s Flummoxed Refugee Policy (BBG)

Wanted: 159,792 beds, $2.4 billion, and incalculable amounts of political will. The bunks are for refugees, with the European Union having found new homes for a mere 208 out of a promised 160,000; the money is for humanitarian aid, with $3.7 billion delivered out of a pledged $6.1 billion; the political shortfalls will be on view at an EU summit in Brussels on Thursday. The refugee tide has strained Europe more than the debt crisis, overwhelming impoverished Greece, elevating the “immigrants out” slogan to official policy in much of eastern Europe, stoking the far right in the west, and allowing a growing cast of demagogues to equate the mostly Muslim refugees with Islamic State terrorists who killed 130 in a Paris rampage in November. As in the debt crisis, a reluctant Germany is the safety net.

The U.K. is sowing further disquiet as it pursues its own agenda of renegotiating the terms of its membership in the 28-nation bloc. “We have a difficult political landscape, which isn’t very conducive to putting decisions like refugee relocation into practice,” said Yves Pascouau, head of migration policy at the European Policy Centre in Brussels. New proposals such as the setup of a European Border and Coast Guard will come up at the two-day summit, but the focus is mainly on getting national leaders and EU bodies to do what they’ve pledged to do since migration shot to the top of the agenda early this year. “We need to speed up on all fronts,” EU President Donald Tusk said in a pre-summit letter to the leaders. The European Commission estimates that 1.5 million people crossed into Europe illegally between January and November, more than ever before.

Nothing about “stop the bombing”?!

• World Bank, UN Urge Sea Change In Handling Of Syrian Refugees Crisis (Guardian)

The World Bank and the UN refugee agency have called for a “paradigm shift” in the way the world responds to refugee crises such as the Syrian emergency, warning that the current approach is nearsighted, unsustainable and is consigning hundreds of thousands of exiled people to poverty. A new joint report from the bank and the UNHCR claims that 90% of the 1.7 million Syrian refugees registered in Jordan and Lebanon are living in poverty, according to local estimates. The majority of them are women and children. The refugees hosted in the two countries are particularly vulnerable as they cannot work formally and tend to be younger, less educated and have larger households.

The vast majority live in informal settlements rather than refugee camps, have few legal rights, and struggle to get access to public services because of the strains the unprecedented demand has put on the infrastructures of host countries. Although the report notes that current refugee assistance initiatives – such as the UNHCR cash assistance programme and the World Food Programme (WFP) voucher scheme – are “very effective”, it says that they are not a solution in themselves. “These programmes are not sustainable and cannot foster a transition from dependence to self-reliance,” say the study’s authors. “They rely entirely on voluntary contributions and, when funding declines, fewer of the most vulnerable refugees are able to benefit.

Moreover, social protection on its own does not foster a transition to work and self-reliance if access to labour markets is not available.” If refugees are to escape poverty, adds the report, they need to be economically integrated into local communities rather than merely offered short-term assistance.

It just keeps getting worse.

• Dozens Of Refugees Missing After Boat Sinks Off Lesvos, 2 Confirmed Dead (AP)

Greek and European border authorities have launched a search and rescue operation in the eastern Aegean Sea after reports that a boat carrying dozens of migrants sank off the island of Lesvos leaving two dead. The Greek coastguard says a helicopter, patrol boats and fishing boats are combing an area north of Lesvos for survivors, but no reliable information is yet available on how many people were on the boat and if anybody drowned. Boats from the European Frontex border agency were assisting. Greek state ERT TV said two people have been reported dead from Wednesday’s incident, and about 70 have been rescued.

Eat a live frog first thing in the morning, and nothing worse will happen to you the rest of the day.
– Mark Twain

Debt Rattle December 16 2015

Dec 162015

December 16, 2015 Posted by Raúl Ilargi Meijer at 8:58 am Finance Tagged with: arctic, butterfly, Fed, junk, oil, rate hike, refugees, selloff, Treasuries 2 Responses »

DPC Elephants in Luna Park promenade, Coney Island 1905

• Fed Weighs Merits Of Jumbo Portfolio In Post-Crisis Era (Reuters)

• This Is a Test of the Shadow Banking System (BBG ed.)

• Why High-Yield Debt Selloff Isn’t 2007 All Over Again. Or Is It? (BBG)

• Foreigners Sell A Record $55.2 Billion In US Treasuries In October (ZH)

• The Guy Who Warned About Libor Sees Fast-Money Financing as New Risk (Alloway)

• The Current Credit Crisis Might Be 35 Times Worse Than You Thought (Yahoo)

• Inside Oil’s Deep Dive (BBG)

• The Oil Market Just Keeps Tearing Up Draghi’s Inflation Forecasts (BBG)

• Emergency OPEC Meeting Aired As Russia Braces For Sub-$30 Oil (AEP)

• Italy Says Financial System Solid As Bank Rescue Furor Grows (Reuters)

• Thousands Of Jobs To Disapper At Greek Banks (Kath.)

• Hillary Clinton’s Chronic Caution On The Big Banks (Nomi Prins)

• When The World Turns Dark (Coppola)

• Vegetarian And ‘Healthy’ Diets May Actually Be Worse For The Environment (SA)

• Decline In Over 75% Of UK Butterfly Species Is ‘Final Warning’ (Guardian)

• Record High 2015 Arctic Temperatures Have ‘Profound Effects’ (Guardian)

• Far Fewer People Entering Germany With Fake Syrian Passports Than Claimed (AFP)

• EU Says Only 64 -Of 66,000- Refugees Have Been ‘Relocated’ From Greece (AP)

One conclusion only from things like this: they make it up as they go along. And then you can cite ‘experts’ all you want, but experts in what? Uncharted territory? That doesn’t make any sense.

• Fed Weighs Merits Of Jumbo Portfolio In Post-Crisis Era (Reuters)

Once the Federal Reserve lifts interest rates from near zero, likely this week, the focus will turn to the other legacy of the crisis-era policies: the Fed’s swollen balance sheet. The prevailing view is that the U.S. central bank’s $4.5 trillion portfolio, vastly expanded by bond purchases aimed at stimulating the economy, will have to shrink once rates are on their way up, and the Fed will just need to decide how quickly. Now, however, there is a new twist to the debate, with some policymakers and outside experts saying that there are reasons to keep the balance sheet big. Arguments in favor of a leaner pre-crisis era Fed portfolio have been well laid out. A smaller balance sheet would mark a return to “normal” policy, minimize the Fed’s impact on the allocation of credit across the economy, and help defuse political pressure from critics accusing the Fed of overextending its influence beyond its core monetary mandate.

As recently as September 2014, the Fed pledged to eventually “hold no more securities than necessary,” in its “normalization” plan, a level widely interpreted as close to its pre-crisis $900 billion size. Today as the long-anticipated rate lift-off draws close, the central bank appears to be warming to the idea of a sizeable balance sheet. A “permanently higher balance sheet … is something that we haven’t studied that much but I think needs a lot more thought,” John Williams, president of the San Francisco Fed, said last month. A big Fed portfolio could help stabilize financial markets by inducing banks to keep greater amounts of money in reserve, advocates say. It could also give the Fed a permanent policy tool with which to target sectors of the economy and certain parts of the bond market.

For example, the Fed could buy and sell certain assets to stimulate or cool the mortgage market or to affect longer-term borrowing costs, says Benjamin Friedman, former chairman of Harvard University’s economics department. Experts addressing a conference hosted by the Fed last month, said the central bank Fed could use the assets as a new “macro prudential” tool to deal with financial market bubbles – by cooling particular sectors with targeted asset trades – and ward off investor runs by letting ample bank reserves act as a buffer. And while the Fed is now replenishing its portfolio as bonds mature and plans to continue doing so for another year or so, policymakers have directed staff to examine alternatives and to consult outside experts, according to minutes of the Fed’s July meeting.

Apologists for shadow banking.

• This Is a Test of the Shadow Banking System (BBG ed.)

It’s hard to know how bad the latest turmoil in the market for risky corporate debt will become. Already, though, it offers some insight into what’s good – and what could be better – about the so-called shadow banking system. Over several years following the 2008 recession, in an effort to reap better returns amid extremely low interest rates, investors piled into higher-yielding debt issued by companies with relatively shaky finances. This is a classic example of shadow banking: People put their savings into various types of funds, which in turn provided hundreds of billions of dollars in financing to companies, largely bypassing traditional banks. Now, inevitably, the cycle is turning. Investors are fleeing from funds that focus on high-yield bonds, precipitating sharp price declines and presenting portfolio managers with the difficult task of finding buyers for securities that rarely trade.

As a result, some mutual funds, including one run by Third Avenue Management, have frozen withdrawals as they raise the necessary cash. Others may follow. So what does this tell us? For one, it suggests that shadow banking can play an important role in making the financial system more resilient. Unpleasant as Third Avenue’s troubles may be for its investors, the broader repercussions are limited. That’s in part because mutual funds can’t use nearly as much borrowed money, or leverage, as banks typically do. As a result, the funds are very unlikely to end up owing more than their assets are worth – a disastrous outcome that, if it happened at a large institution or at many smaller ones, could destabilize the entire financial system and necessitate taxpayer bailouts. That said, mutual funds aren’t alone in holding risky corporate debt.

Large quantities of loans and bonds, as well as derivative contracts linked to them, reside in various other nonbank institutions – such as hedge funds – that can be highly leveraged and also active in other markets, making them potential conduits for contagion. Regulators have a hard time knowing where the risks are concentrated in this truly shadowy realm, in large part because their areas of responsibility are fragmented and they lack incentives to share information. One obvious solution, in which Congress has unfortunately taken no interest, would be to give the Financial Stability Oversight Council more power to shed light on dark corners and more authority to mitigate emerging risks. Beyond that, regulators should make use of tools – such as limits on the amount of money that can be borrowed against securities – that reduce the likelihood of distress among all financial-market participants, no matter what form they take.

Keep rates low, and you get this.

• Why High-Yield Debt Selloff Isn’t 2007 All Over Again. Or Is It? (BBG)

Wall Street is having a 2007 flashback as a high-yield debt rout triggers nightmares of hard-to-trade assets plunging in value and funds halting redemptions. Jim Reid, a strategist at Deutsche Bank, wrote Monday that this month’s turmoil, including Third Avenue Management’s suspension of cash redemptions from a mutual fund that invested in high-yield debt, may be a harbinger of things to come. Berwyn Income Fund’s George Cipolloni said the similarities between markets now and those before the financial crisis are too big to ignore. Get a grip, traders and analysts say: This isn’t the making of another financial crisis – at least not yet. “I don’t see any systemic risks out of this,” said Fred Cannon, a KBW Inc. bank analyst, likening the current situation more to the popping of the Internet bubble than to the credit crunch that crippled the financial system.

“If this is a signal of a recession, then you have to believe any kind of downturn in the economy, as it relates to the large banks, will look a lot more like 2001 than 2008.” Funds run by Third Avenue and Stone Lion Capital Partners have stopped returning cash to investors after clients sought to pull too much money as falling energy prices contributed to poor performance this year. In 2007, funds at Bear Stearns and BNP Paribas halted redemptions after the value of their subprime-mortgage investments plummeted. That served as a precursor to bigger losses and liquidity issues at major banks that hobbled the global economy over the next two years. [..]

The number of junk-debt funds that promise investors quick access to their money has exploded since September 2008 as zero interest rates spurred demand for higher returns. There are now 35 U.S.-based high-yield exchange-traded funds with $43 billion under management, compared with three funds with $1.3 billion in 2008, according to data compiled by Bloomberg. The number of mutual funds has grown to 252 from 100 in 2008 and assets increased to $326 billion from $126 billion.

Oh, those Belgians.

• Foreigners Sell A Record $55.2 Billion In US Treasuries In October (ZH)

After several months of significant reserves liquidations by China (specifically by its Euroclear proxy “Belgium”) which tracked the drop in China’s reserves practically tick for tick, in October Chinese+Belgian holdings were virtually unchanged according to the latest TIC data, as China moderated its defense of its sliding currency. Of course, putting this in context still shows a China which has sold $600 billion of US paper since 2014, as this website was first to note over half a year ago.

And while we expect a prompt resumption of Treasury selling in the coming months following China’s recent aggressive devaluation of its currency, what was more notable in today’s TIC data was the consolidated total change of all foreign US Treasury holdings. As shown in the chart below, following an increase of $17.4 billion in September, foreign net sales of Treasuries hit an all time high of $55.2 billion, surpassing the previous record of $55.0 billion set in January. In absolute terms, October’s total foreign holdings by major holders declined to $6,046.3 trillion the lowest since the summer of 2014.

What is the reason? There are two possible explanations, the first being that foreigners are unloading US paper (ostensibly to domestic accounts) ahead of what they perceive an imminent Fed rate hike which would pressure prices lower, or more likely, the ongoing surge in the dollar and collapse in commodity prices continues to pressures foreign reserve managers to liquidate US Treasury holdings as they scramble to satisfy surging dollar demand domestically and unable to obtain this much needed USD-denominated funding, are selling what US assets they have. Should this selling continue or accelerate in the coming months and if it has an adverse impact on TSY yields, it may also force the Fed’s tightening hand if, as some expect, the liquidation of foreign reserves becomes a self-fulfilling prophecy and leads to a material drop in Treasury prices.

Fast money, shadow banking, call it what you want.

• The Guy Who Warned About Libor Sees Fast-Money Financing as New Risk (Alloway)

The cash that finances the U.S. economy is now coming from a spigot that is more prone to rapidly turning off in times of stress than the traditional banking system has been, according to the strategist who first brought attention to banks misstating key benchmark lending rates during the financial crisis in 2008. The warning from Scott Peng, head of global portfolio solutions at Secor Asset Management in New York, comes as investors, analysts, and regulators fret about the recent selloff in the corporate bond market, which the strategist includes in his definition of the so-called “shadow banking system” of nonbank financial intermediaries. Such shadow banking includes all private-sector funding that isn’t provided by deposit-taking banks, so it encompasses bond funds as well as hedge funds, insurance companies, and pension funds, according to Peng.

While rules imposed in the wake of the financial crisis have shored up the banking system, he argues that regulators have swapped one set of systemic risks for another. World Bank data show that the percentage of U.S. private-sector funding provided by banks has fallen to almost the lowest point since 1960, illustrating the growing importance of nonbank financing. “Since 2008, we’ve reformed the banking system by ring-fencing our banks with more regulatory and capital requirements,” Peng told us. “But our economy is now much more dependent on the fast-money shadow-bank financing—which is more fickle in terms of extending credit and can expand or contract much quicker.” Peng was among the first during the financial crisis to suggest that the London interbank offered rate, known as Libor, was understating borrowing costs.

As the then-head of U.S. interest rate strategy at Citigroup Global Markets in New York, Peng co-authored a note titled “Is Libor Broken?” in April 2008. The report, which led to a global focus on the risk that the benchmark was mispricing bank lending rates, said European banks were probably submitting lower-than-actual transacted rates to avoid “being perceived as a weak hand in a fragile market.” Peng predicts that the share of private financing coming from banks at the end of this year will hold close to the 20.6% level of December 2014, given that flows into bond funds have remained positive and bank lending hasn’t risen materially.

Gross issuance of investment-grade U.S. dollar-denominated corporate bonds reached $1.23 trillion through Nov. 20, up from $1.15 trillion in all of 2014, marking a fourth successive year of record sales. In the second quarter of this year, assets in hedge funds reached a record $2.97 trillion before slipping to $2.9 trillion, according to HFR.

All birds of the one same feather. Credit Suisse is the main protagonist.

• The Current Credit Crisis Might Be 35 Times Worse Than You Thought (Yahoo)

Last week, Third Avenue Focused Credit Fund suspended investor redemptions, and credit markets reacted violently. This was the first time mutual fund investors were similarly gated since the financial crisis of 2008. However, the $788.5 million Third Avenue fund might be the tip of the iceberg. According to data obtained by Yahoo Finance*, there are currently $27.2 billion in mutual fund assets that have suffered peak-to-valley losses over the last year greater than 10%. This amount is 35 times greater than the size of the Third Avenue fund, which suffered the third worse loss in the list of -34.5%. The two greatest losses bear a common name, which dominates the list: Credit Suisse. Total assets of $15.9 billion are represented by Credit Suisse named funds, or 59% of the $27.2 billion total.

The largest fund in the list is Credit Suisse Institutional International, which has total assets of $9.9 billion. According to Morningstar, it is currently managed by American Funds. When the time period of the analysis is extended to the peak of June 19, 2014, fund performance for the Credit Suisse named fund reflects a loss of -24.6%, which is roughly half of the -47.4% loss of the Third Avenue fund. Today, the Federal Open Market Committee commences a two day meeting and is widely expected to announce on Wednesday an interest rate increase of 25 basis points for its benchmark Federal Funds rate. Further rate hikes may exacerbate problems in the credit markets, as companies that rely on high yield financing would face difficulty obtaining new loans and rolling over existing loans.

Contagion in risk markets might be contained, according to Goldman Sachs. In a report dated December 11, Goldman said credit markets are simply sending a “false recession signal” similar to the events that unfolded in 2011. Nevertheless, the trend of withdrawals in the mutual fund sector continues. According to the latest data from Lipper, U.S. based stock funds suffered $8.6 billion in net outflows over the week ending December 9, which is the worst reading in four months. As assets are shifted around into year end, the trend is likely to continue.

History.

• Inside Oil’s Deep Dive (BBG)

All oil crashes aren’t equal. This week West Texas Intermediate prices dipped below $35 a barrel, the lowest they’ve been since the 2008 financial crisis – from which oil prices have yet to fully recover. Previous oil crashes resulted from economic crises that temporarily blunted demand. This time, robust energy reserves created by the shale gas and oil revolution in the U.S. have put OPEC on the defensive. Shale reserves appear plentiful and are cheap to produce, forcing OPEC’s de-facto leader, Saudi Arabia, to focus on maximizing its own oil output. With Congress open to lifting the export ban, the oil market could also be awash in unfettered U.S. crude exports. Commercial crude stockpiles were at 485.9 million barrels through Dec. 4, more than 120 million barrels above the five-year seasonal average.

Excess oil inventories may be with us through 2016, according to my Gadfly colleague Liam Denning – and may not truly normalize until 2017. As you can see from the chart, the current crash in oil prices isn’t quite as deep as in 1985 or 2008 (the ’08 plunge was saw prices tank 77% in just over 100 trading days). The current crash is also not yet as lengthy as the less severe 1997 plunge, which took nearly 500 trading days to reach bottom and only about 200 trading days to return to its previous peak (following the Asian financial crisis). What is distinct about the current price plunge is that it’s unclear whether a robust price recovery will even arrive again – and if it does how it might align with previous rebounds.

Central bank inflation targets are magic tricks meant to deceive.

• The Oil Market Just Keeps Tearing Up Draghi’s Inflation Forecasts (BBG)

The oil market doesn’t seem to care about Mario Draghi’s inflation target. Less than two weeks after the European Central Bank president unveiled a beefed-up stimulus program to push inflation back toward its 2% target, fresh falls in the price of crude may have already undermined his efforts. Analysts at Nomura and JPMorgan say Draghi’s December forecast of 1% average inflation in 2016 may be too ambitious. Charles St-Arnaud and Sam Bonney at Nomura have found that the 25% slump in the WTI oil benchmark since the end of October may already be casting its shadow over inflation next year. They’ve calculated the so-called base effects – the contribution of outsized price swings in one year to the following year’s annual inflation rate – that they see as likely to have an impact in 2016.

The oil-price drop we’ve just seen may halve the base effect in some months next year, they write. And that could keep a tight lid on gains in the headline inflation rate, now just at 0.1%. “A weaker base effect early next year means that headline inflation should remain lower than we estimated only a couple of weeks ago,” the analysts say in a note to clients. “Whereas before we saw eurozone inflation reaching 1% in early 2016, the weaker oil prices could mean that headline inflation only reaches 0.5% to 0.6%.” In its December round of staff forecasts, the ECB staff based their prediction of 1% inflation in 2016 and 1.6% in 2017 on an average price for Brent of $52.2 and $57.5, respectively. However, Brent is now below $40 a barrel. If that’s maintained, euro-area inflation won’t meet the 1% average forecast, writes JPMorgan’s Raphael Brun-Aguerre. And if it falls to $20, the euro-area would be in outright deflation, his projections show.

Ambrose is trying to convince us that demand is rising fast.

• Emergency OPEC Meeting Aired As Russia Braces For Sub-$30 Oil (AEP)

OPEC will be forced to call an emergency meeting within weeks to stabilize the market if crude prices fail to rebound after crashing to seven-year lows of $35 a barrel, two of the oil cartel’s member states have warned. Emmanuel Kachikwu, Nigeria’s oil minister and OPEC president until last week, said the group is still hoping that the market will recover by February as low prices squeeze out excess production from US shale, Russia and the North Sea, but nerves are beginning to fray. “If it [the oil price] doesn’t [recover], then obviously we’re in for a very urgent meeting,” he said. Indonesia has issued similar warnings over recent days, suggesting that the OPEC majority may try to force a meeting if Saudi Arabia’s strategy of flooding the market pushes everybody into deeper crisis.

The comments came as Brent crude plunged to $36.76 as the fall-out from OPEC’s deeply-divided meeting earlier this month continued. Prices are now within a whisker of their Lehman-crisis lows in 2008. West Texas crude dropped to $34.54 before rebounding in late trading. Lower quality oil is already selling below $30 on global markets. Basra heavy crude from Iraq is quoted at $26 in Asia, and poor grades from Western Canada fetch as little as $22. Iran’s high-sulphur Foroozan is selling at $31. The oil market is now in the grip of speculative forces as hedge funds take out record short positions and exchange-traded funds (ETFs) liquidate paper holdings, making it extremely hard to read the underlying conditions. Russian finance minister Anton Siluanov said his country is bracing for the worst. “There is no defined policy by the OPEC countries: it is everyone for himself, all trying to recapture markets, and it leads to the dumping that is going on,” he said.

“Everything points to low oil prices next year, and it’s possible that it could be $30 a barrel, and maybe less. If someone had told us a year ago that oil was going to be under $40, everyone would’ve laughed. You have to prepare for difficult times.” The rouble fell to 71 against the dollar, helping to cushion the blow for the Kremlin’s budget but also further eroding Russian living standards. Elvira Nabiulina, the head of Russia’s central bank, said the authorities are now preparing for an average price of $35 next year, a drastic cut even from the earlier emergency planning. Bank of America says OPEC is effectively suspended as Saudi Arabia wages a price war within the cartel against Iran, its bitter rival for geo-strategic dominance in the Middle East. This duel is complicated yet further by a parallel fight with Russia outside the bloc.

Mike Wittner, from Societe Generale, said the Saudis’ motive for floating a proposal at the OPEC summit for a 1m barrel per day (b/d) output cut if Russia, Iraq and others agreed to join in was tactical, chiefly in order to demonstrate to critics at home that no such deal could be forged. He said the strategy to flood the market was not taken lightly and has support from the “highest possible level”. Part of the goal is to discourage energy efficiency and deter investment in renewables. OPEC is not due to meet again until June 2016 but by then a string of its own members could be facing serious fiscal crises. Even Saudi Arabia is freezing public procurement and drawing up austerity plans to rein in a budget deficit near 20pc of GDP.

The kind of thing you shouldn’t have to say. Like when an owner of sports team goes public saying he ‘supports’ the coach. Never a good sign.

• Italy Says Financial System Solid As Bank Rescue Furor Grows (Reuters)

Economy Minister Pier Carlo Padoan said on Tuesday that Italy’s financial system remained solid as the government faced a mounting furor over the rescue of four banks that wiped out the savings of thousands of retail investors. Italy saved Banca Marche, Banca Etruria, CariChieti and CariFe at the end of November, drawing €3.6 billion from a crisis fund financed by the country’s healthy lenders. Tougher European Union rules on bank rescues aimed at shielding taxpayers meant shareholders and holders of junior debt were hit, unleashing protests against the government. “The government is doing everything in its powers to put the banks on the right path and to reinforce the banking system,” Padoan said in a radio interview, adding that “the institutions and the system remain solid.”

The government has “full confidence” in the Bank of Italy and market regulator Consob, he said. Italian authorities came under fire after it emerged that many ordinary Italians had been sold risky subordinated bonds that, in case of bankruptcy, only get repaid after ordinary creditors have been reimbursed in full. Around 10,000 clients of the four banks held some €329 million in such junior bonds, the Treasury said on Monday. Padoan said he did not know if the government would be weakened by the affair which has hit bank bonds and shares. Retail investors have rushed to sell junior bank bonds after one pensioner who lost his savings committed suicide.

Padoan gave his support to the Minister for Reforms Maria Elena Boschi, one of Italian Prime Minister Matteo Renzi’s closest allies, who faces a no-confidence motion in parliament tabled by the anti-establishment 5-Star Movement, over an alleged conflict of interests. Boschi’s father was vice-president of Banca Etruria (PEL.MI) until the bank was put under special administration by the Bank of Italy this year and Boschi herself was a shareholder. “I am sure that Boschi will come out of this extremely well,” Padoan said. The political backlash for Renzi is particularly damaging because the four rescued banks mainly operate in central Italian regions that are traditional strongholds of his center-left Democratic Party.

Thumbscrews. Why not just get Germans to run it openly?

• Thousands Of Jobs To Disapper At Greek Banks (Kath.)

Greece’s four main banks will have to reduce their employees by a total of 4,350 and shut down about 180 branches between them up to the end of 2017. These new reduction demands result from the derailing of the Greek economy generated by the prolonged uncertainty during 2015 which brought the country to the brink of exiting the eurozone. The job cut and the branch shutdown will have been included in the revised restructuring plans that National, Alpha, Piraeus and Eurobank have submitted to the European Commission’s competition authorities which were required after the four lenders underwent their latest recapitalization process.

The new wave of cuts comes on the back of the Greek banking sector’s major contraction over the last few years. According to data compiled by the Hellenic Bank Association, in 2009 Greece boasted 19 domestic banks, 36 foreign ones (mainly branches of major international lenders) and 16 cooperative banks. Nowadays there are just seven banks remaining (the four systemic ones plus Attica Bank, HSBC and Panellinia) and only five foreign banks with branches in Greece, and it seems like only three cooperative banks will survive, if they manage to collect the funds required for their recapitalization.

Stunning numbers: “..the Big Six banks collectively control 42% more deposits, 84% more assets and are hoarding 400% more cash then they were prior to the financial crisis..”

• Hillary Clinton’s Chronic Caution On The Big Banks (Nomi Prins)

Hillary Clinton has a knack for saying what she believes she needs to. But when it comes to fortitude and detail, actions speak louder than rhetoric — including the rhetoric she espoused Monday at the New School to describe her self-defined pro-growth, pro-fairness economic blueprint. Over many years, via her actions and omissions in positions of high public responsibility, Clinton has failed to demonstrate an interest in reforming the power structures that fortify themselves at the expense of America’s middle class. In pursuit of the presidency, Hillary is crafting her message to capture the attention of the center as well as the progressives. Yet by doing so, it all feels scripted and safe, straining the boundaries of credulity.

[..] Hillary Clinton came to New York City to make her case on fighting inequality and spurring growth. Yet when she speaks about inequality, she’s either ignoring or unaware of the bigger picture. The very power structure of Wall Street has become more concentrated and thus presents a greater risk to stability than ever before due to a series of deregulatory moves and bailouts under Presidents from both sides of the aisle.

Yes, several of Hillary’s checklist items are useful to “ordinary Americans.” Raising the minimum wage, trying to gain salary parity for both genders and “putting families first” with paid sick leave and widely available free pre-kindergarten are all noteworthy policy agendas. They become less meaningful when dropped with such little detail by someone who has been in politics for so long. By how much should we raise minimum wages? How do we get parity? What does it mean to put families first if corporate boards vote their chairs massive compensation packages, regardless of whether the firm invests in R&D or employees? Will we put CEOs in jail for presiding over felonious firms or tacitly support their eight-figure bonuses and incarcerate bankers that aren’t her friends down the totem pole as she suggests?

Further, what does it mean to reduce Wall Street risk when the Big Six banks collectively control 42% more deposits, 84% more assets and are hoarding 400% more cash then they were prior to the financial crisis, and when just 10 big banks control 97% of bank trading assets? Bold, fresh ideas that shake up the core of the American power concentration structure did not come from Hillary Clinton. Nor will they come from Jeb Bush or other Republican frontrunners. The only way to articulate policies that can work for America as a whole is to re-imagine America as a country of equal opportunity for all — and that means limiting the concentration of power of the few that, by virtue of donations, lobbying forces and elite alliances, dictates policies that reinforce their dominance.

Really nice from Frances.

• When The World Turns Dark (Coppola)

The Poor Law reformers of the 1830s believed that hard work is a virtue in and of itself, regardless of usefulness to society or financial benefit to those doing it: the workless are “moral defectives” who must be forced to work in order to correct the defects in their personalities. Thomas Malthus believed that public spending that supports the poor encourages them to breed: the poor must be condemned to a life of poverty and deprivation to discourage them from choosing to have children at state expense. The children of workless parents must be protected from their malign influence. The Mother’s lament resonates with all too many of today’s mothers: How shall I feed my children on so small a wage? How can I comfort them when I am dead? This is the creed of meanness and selfishness, lampooned by Dickens in “A Christmas Carol”.

It is the creed of the false gods of Hard Work and Saving. But we, cocooned by the belief that we are better than our ancestors, invoke these false gods and publish the creed anew. The morality of the workhouse has become the morality of the Daily Mail. In bringing back the “old religion”, we have set the poor and vulnerable against each other. Solidarity disintegrates; the poor fight each other for a share of a pot of money that is deliberately kept too small to meet all needs, and demand that others who might need a share too are kept out. “Close the borders”. “Stop immigration NOW”. “We can’t afford refugees”. These are the cries of those who fear that the arrival of others will mean that they lose even more. In Europe, the same harshness is evident, but on an even larger scale.

Here, it is not just the poor within countries who are fighting over scraps: the countries themselves are at each other’s throats, as harshness is imposed by stronger countries on weaker in support of the same twisted morality. Countries that struggle to compete for export markets are morally defective: they must be forced to compete through harsh treatment. Countries that attempt to give citizens a decent life instead of paying creditors must be forced into poverty and deprivation to discourage others from the same path. Governments must be supervised by technocrats to make sure they obey fiscal rules even at the cost of recession and high unemployment. The Oppressed cry out: “When shall the usurer’s city cease? And famine depart from the fruitful land?”

Worshipping the false gods of hard work and saving comes at a terrible price. The sacrifices those gods demand are the lives of those who do not – or cannot – live as they dictate. But as yet, there is no widespread challenge to their authority. People still believe the lie they tell: “There is no more money”. People used to believe the promise of the gods of borrowing and spending, “The money will never run out”. But their belief was shattered in the crash of 2008, when the debt edifice abruptly collapsed, causing widespread financial destruction. People not only stopped believing that promise, they also stopped believing in themselves. The terrible recession and ensuing long slump created an enormous confidence gap. Into this gaping hole stepped the old gods and their new lie.

Here goes controversy. Keep in mind: don’t shoot the messenger!

• Vegetarian And ‘Healthy’ Diets May Actually Be Worse For The Environment (SA)

Advocates of vegetarianism – including everybody’s favourite Governator – regularly point out how how harmful human consumption of meat is to the environment, but is opting for a fully vegetable-based, meat-free diet a viable way to cut down on energy use and greenhouse gas emissions? Nope – according to a new study by scientists in the US – or, at least, it’s not that simple. Researchers at Carnegie Mellon University (CMU) say that adopting the US Department of Agriculture’s (USDA) current recommendations that people incorporate more fruits, vegetables, dairy and seafood in their diet would actually be worse for the environment than what Americans currently eat. “Eating lettuce is over three times worse in greenhouse gas emissions than eating bacon,” said Paul Fischbeck, one of the researchers.

“Lots of common vegetables require more resources per calorie than you would think. Eggplant, celery and cucumbers look particularly bad when compared to pork or chicken.” If these findings seem surprising in light of what we know about the impact of meat on the environment, you’re probably not alone. You’re also not wrong – meat production does take a high toll on the environment. But what we need to bear in mind is that the energy content of meat is also high, especially when compared to the energy content of many vegetables, which is why going on a salad diet is great for your waistline. Consuming less energy content means less you in the long run. But what if you don’t want to lose weight? What if you just want to replace the same amount of energy you get from meat with energy from vegetables?

Well, then, to put it very simply, you need to eat a lot of vegetables. And when you contrast meat and vegetables on their impact per calorie as opposed to by weight, veggies suddenly don’t look quite so environmentally friendly. [..] The researchers acknowledge that their findings may be somewhat surprising in light of the zeitgeist over meat’s impact. “These perhaps counterintuitive results are primarily due to USDA recommendations for greater caloric intake of fruits, vegetables, dairy, and fish/seafood, which have relatively high resource use and emissions per calorie,” they write in Environment Systems & Decisions. But controversial as the findings may sound, comparing the respective impact of different foods based on their calorie content isn’t new or radical.

No-one’s listening. Flapping butterfly wings and all that.

• Decline In Over 75% Of UK Butterfly Species Is ‘Final Warning’ (Guardian)

More than three-quarters of Britain’s 59 butterfly species have declined over the last 40 years, with particularly dramatic declines for once common farmland species such as the Essex Skipper and small heath, according to the most authoritative annual survey of population trends. But although common species continue to vanish from our countryside, the decline of some rarer species appears to have been arrested by last ditch conservation efforts. “This is the final warning bell,” said Chris Packham, Butterfly Conservation vice-president, calling for urgent research to identify the causes for the disappearance of butterflies from ordinary farmland. “If butterflies are going down like this, what’s happening to our grasshoppers, our beetles, our solitary bees? If butterflies are in trouble, rest assured everything else is.”

While 76% of species are declining, prospects for a handful of the most endangered butterflies in Britain have at least brightened over the past decade, according to the study by Butterfly Conservation and the Centre for Ecology & Hydrology, with rare species responding to intensive conservation efforts. During the last 10 years, the population of the threatened Duke of Burgundy has increased by 67% and the pearl-bordered fritillary has experienced a 45% rise in abundance as meadows and woodlands are specifically managed to help these species. Numbers of the UK’s most endangered butterfly, the high brown fritillary, are finally increasing at some of its remaining sites in Exmoor and south Wales, showing the success of targeted conservation efforts there.

But The State of the UK’s Butterflies 2015 report cautions that such revivals still leave these vulnerable species far scarcer than they once were – the high brown fritillary has suffered a 96% decline in occurrence (meaning the sites at which it is present) since 1976, reflecting its disappearance from most of Britain. Other endangered butterflies, including the wood white (down 88% in abundance), white admiral (down 59% in abundance) and marsh fritillary have continued a relentless long-term decline.

Endangering walruses.

• Record High 2015 Arctic Temperatures Have ‘Profound Effects’ (Guardian)

The Arctic experienced record air temperatures and a new low in peak ice extent during 2015, with scientists warning that climate change is having “profound effects” on the entire marine ecosystem and the indigenous communities that rely upon it. The latest National Oceanic and Atmospheric Administration (Noaa) report card on the state of the Arctic revealed the annual average air temperature was 1.3C (2.3F) above the long-term average – the highest since modern records began in 1900. In some parts of the icy region, the temperature exceeded 3C (5.4F) above the average, taken from 1981 to 2010. This record heat has been accompanied by diminishing ice. The Arctic Ocean reached its peak ice cover on 25 February – a full 15 days earlier than the long-term average and the lowest extent recorded since records began in 1979.

The minimum ice cover, which occurred on 11 September, was the fourth smallest in area on record. More than 50% of Greenland’s huge ice sheet experienced melting in 2015, with 22 of the 45 widest and fastest-flowing glaciers shrinking in comparison to their 2014 extent. Not only is the ice winnowing away, it is becoming younger – Noaa’s analysis of satellite data shows that 70% of the ice pack in March was composed of first-year ice, with just 3% of the ice older than four years. This means the amount of new, thinner ice has doubled since the 1980s and is more vulnerable to melting. The report card – compiled by 72 scientists from 11 countries – noted sharp variations in conditions in the northern part of the Arctic compared to its southern portion.

The melting season was 30-40 days longer than the long-term average in the north but slightly below average in the south, suggesting that changes to the jet stream, causing colder air to whip across the southern part of the Arctic, are having an impact. Noaa said warming in the Arctic is occurring at twice the rate of anywhere else in the world – a 2.9C (5.2F) average increase over the past century – and that it is certain climate change, driven by the release of greenhouse gases, is the cause. “There is a close association between air temperature and the amount of sea ice we see, so if we reduce the temperature globally it looks like it will stabilize the Arctic,” said Dr James Overland, oceanographer at Noaa. “The next generation may see an ice-free summer but hopefully their decedents will see more ice layering later on in the century.”

German interior minister just completely made that up. And he’s still in his job?

• Far Fewer People Entering Germany With Fake Syrian Passports Than Claimed (AFP)

The proportion of people entering Germany with fake Syrian passports is far less than the 30% announced by the interior minister in September, the government has said. Germany has to date maintained an open-door policy for Syrians escaping their country’s bloodshed, giving them “primary protection” – the highest status for refugees. Among other benefits, this status includes a three-year residence permit and family reunification. The policy has sparked controversy, heightened after the interior minister, Thomas de Maizière, said in September that up to 30% of people were found coming into Germany with false Syrian passports and actually came from other nations.

He said the figures were based on estimates from people working on the ground. But in response to a question from the leftwing Die Linke party, the government said in a written note obtained by AFP late on Monday that only 8% of the 6,822 Syrian passports examined by authorities between January and October were actually found to be fake. Die Linke lawmaker Ulla Jelpke criticised the minister, saying: “Instead of looking into a crystal ball… the minister should lean towards facts and reality.” Germany is Europe’s top destination for refugees, most of whom travel through Turkey and the Balkans, and expects more than 1 million arrivals this year.

Epic.

• EU Says Only 64 -Of 66,000- Refugees Have Been ‘Relocated’ From Greece (AP)

Only 64 of the tens of thousands of refugees that Greece’s European Union partners should be taking to help lighten the country’s migrant burden have actually gone to other EU states. The EUs executive Commission also said on Tuesday that just one of the five “hotspot areas” on the Greek islands meant to register and fingerprint arriving migrants is operational. The hotspots are a key component of the EUs relocation plan to share 66,400 refugees in Greece with other EU nations over the next two years. The Commission noted that only nine of the 23 participating EU states have offered relocation places to Greece, almost three months after the scheme was launched.

Debt Rattle December 13 2015

Dec 132015

December 13, 2015 Posted by Raúl Ilargi Meijer at 9:54 am Finance Tagged with: Assange, bear, EU, junk bonds, Le Pen, oil, rate hike, refugees, steel 7 Responses »

Marion Post Wolcott “Center of town. Woodstock, Vermont. Snowy night” 1940

• Why A 0.25% Rate Hike Should Have Big Banks Nervous But Probably Won’t (Bern)

• “Coppock Guide” Signals A Bear Market Is At Hand (ZH)

• Junk-Bond Rout Deepens, Sends Shockwaves Through Stocks, Other Markets (WSJ)

• Junk-Bond Fund’s Demise Highlights SEC Mutual-Fund Worries (WSJ)

• China Steel Output Slumps to a One-Year Low as Prices Collapse (BBG)

• Missing Chinese Billionaire ‘Assisting Authorities in an Investigation’ (WSJ)

• US Senators Close in on Oil-Export Deal Amid Tax-Break Talks (BBG)

• EU Powerless to Stop Nationalist Ascendancy as Terror Fears Rise (BBG)

• French Vote for Regions as Main Parties Seek to Shut Out Le Pen (BBG)

• Julian Assange May Face Swedish Interrogation Within Days (Guardian)

• James Hansen, Father Of Climate Change Awareness: Paris Talks ‘A Fraud’ (Guar.)

• No Mention In Paris Of Refugees: Global Issues Live In Separate Boxes (Betts)

• The Athens Lawyer Who Became A Guardian To Refugee Camp Children (Guardian)

The fixed game.

• Why A 0.25% Rate Hike Should Have Big Banks Nervous But Probably Won’t (Bern)

Current excess reserves at the Fed earn interest – The big banks hold a lot of excess reserves at the Federal Reserve [Fed]. The current interest rate paid by the Fed on both required and excess reserves is 0.25%, or 25 basis points. The rate is subject to change by the Fed Board. No surprise that this policy was set forth in the Federal Reserve Regulatory Relief Act of 2006 which was scheduled to go into effect October 1, 2011. Also, no surprise was the advanced effective date of October 1, 2008 when relief for banks was imperative.

The current profit stream that banks count on – According to the St. Louis Fed, depository institutions (banks) held over $2.5 trillion in excess reserves at the Fed in November. At a mere 25 basis points in interest that $2.5 trillion in excess reserves earns big banks about $6.25 billion a year in risk-free revenue. All of that amount may not go directly to the bottom line, though. How much depends upon what interest rate the Fed charges banks to borrow those funds (the fed funds rate). The effective fed funds rate has ranged between 7 basis points and 16 basis points over most of the last five years. The average borrowing rate of big banks since January 1, 2015 has been 12.27 basis points, or 0.1227%.

The banks have earned about $5.73 billion so far in 2015 on excess reserves. The cost to borrow those reserves has been approximately $3.07 billion. The net income earned from those borrowed reserves is $2.66 billion in 2015 thus far. That works out to an average of $725 million per quarter in extra earnings just for borrowing the money and leaving it parked at the Fed. Now, this may not seem like much to you, but I would not mind getting in on that action.

What happens when the fed funds rate rises by 25 basis points? – Let’s be honest about the rate hike, okay? The current fed funds rate is officially set at between zero and 25 basis points. So, if the Fed raises the official fed funds rate to 25 basis point, if that is the actual outcome, then it really will not be raising the rate by a full 25 basis points. The increase will be something more like about 13 basis points over the actual rate since the beginning of the year. Now, if the Fed raises the official rate to between 25 basis points and 50 basis points, then the difference could be closer to 25 basis points. But, it still depends on where within that range the actual fed funds rate lands. If it lands closer to the minimum of the range then the increase is more like 13 to 15 basis points. If it lands in the middle, then we have an actual increase in rates of about 25 basis points as advertised.

I do not really expect the actual rate to rise much, if any, above the 25 basis points threshold. So, my expectation is for a real rate increase of about 15 basis points. But that would mean that the earnings by the big banks could fall to zero. Somehow I do not expect the big banks to take this lying down. I could be wrong, but I also expect another, less publicized change in rate policy by the Fed. If the fed funds rate increases to 25 basis points or more, then the “profits” earned by banks on excess reserves will evaporate into thin air and potentially turn into an expense. Unless…

If the Fed decides to raise the fed funds rate by 25 basis points to the range between 25 and 50 basis points the banks would either decide to reduce reserves (to avoid paying the Fed interest on borrowed funds) or the Fed would need to change the rate paid to depository institutions upward to 50 basis points. Banks would need to put that money to work at a higher level of risk or just pay off the loans from the Fed used to fund reserves. Most likely some of the excess reserves would be withdrawn and banks would attempt to make up the lost earnings by adding more risk to balance sheets. More risk in the financial system is not something we need right now. I do not think the banks really want to take on more risk at the moment either. And since the banks own the Fed, guess which route I expect the Fed to take?

Psychology.

• “Coppock Guide” Signals A Bear Market Is At Hand (ZH)

With Emerging Market currencies, bonds, and stocks collapsing, US corporate debt crashing, and carry trades unwinding everywhere (ahead of the $800 billion liquidity withdrawal that looms from next week’s 25bps hike from The Fed), it is no surprise that US equities are beginning to shudder (even the FANGs are not immune). But, as InvesTech Research notes, among its 6 compelling reasons to be cautious in 2016, the so-called Coppock Guide may be close to confirming that a bear market is at hand…:

In March 2015, the Coppock Guide was signaling that both primary and secondary momentum had peaked and this continues to be the case today. The Coppock Guide is a valuable tool to gauge the emotional state of a market index as it transitions from one psychological extreme to another. It was developed more than 50 years ago by Edwin S. Coppock and it measures momentum by taking a 10-month weighted moving total of a 14-month rate of change plus a 11-month rate of change of a market index. The Coppock Guide is typically most useful at market bottoms, when market indexes reverse sharply as psychology shifts. It signals a “Best Buy” opportunity when the index turns upward from below “0” (see black dashed lines). The last such buy signal came within 60 days after the March 2009 market bottom.

Early in a bull market, momentum runs high and often peaks early. For this reason, the Coppock Guide isn’t as effective in identifying market tops. In fact, the initial peak in the Coppock Guide was seen during the first 18 months of this lengthy bull market, with a secondary peak in March 2014. When a double-top occurs in an extended bull market without the Coppock falling below “0”, it signals that psychological excess could be at an extreme. And when that momentum finally peaks (see red dashed lines), it usually means a bear market isn’t far behind. This phenomenon was first observed by a market technician named Don Hahn in the late 1960s. Since 1929, there have been only eight instances of a double-top, and each one was followed by bear market losses of 30% or more.

It’ll be an interesting week.

• Junk-Bond Rout Deepens, Sends Shockwaves Through Stocks, Other Markets (WSJ)

U.S. junk bonds posted their steepest decline since 2011, intensifying fears that a six-year bull market in stocks and other risky assets is nearing an end. The largest high-yield exchange-traded fund, the $15 billion iShares iBoxx $ High Yield Corporate Bond ETF, dropped 2%, to close at $79.52, its lowest since July 2009. Friday’s trading volume of 53 million shares doubled a record set Tuesday. The retreat punctuated a day of heavy selling across markets, with the Dow Jones Industrial Average tumbling 310 points and U.S.-traded crude dropping 3.1%, to $35.62 a barrel. Oil’s 11% decline was its biggest weekly fall since March. Traders said much of Friday’s decline was triggered by the abrupt closure of a high-profile junk-bond mutual fund.

Investors in the Third Avenue Focused Credit Fund learned this week that they won’t get all their cash back for months or more, as Third Avenue liquidates the $789 million fund. The action crystallized long-standing fears about the vulnerability of the stock and bond markets to a broad shift in sentiment. The spreads between U.S. junk bonds and Treasury securities have widened sharply over the past week, underscoring investors’ sense that the risk of default by companies with high levels of debt is on the rise. The Federal Reserve is expected next week to raise interest rates for the first time since 2006, a development that traders said wasn’t a large part of Friday’s selloff but that has increased general market anxiety.

Some hedge funds are taking similar steps as Third Avenue. Hedge-fund firm Stone Lion Capital, a distressed-debt specialist, said it suspended redemptions in its credit hedge funds after many investors asked for their money back. Investors said it was a rare move in the hedge-fund industry since the financial crisis. This fall, Carlyle Group’s struggling Claren Road took a similar action. Some investors said that while they are concerned that falling commodity and junk-bond prices could point to economic turmoil ahead, U.S. consumer and jobs data have been mostly comforting. But even these investors said they are looking for ways to reconcile conflicting signs.

Never a ‘run’. Until now?!

• Junk-Bond Fund’s Demise Highlights SEC Mutual-Fund Worries (WSJ)

The demise of a Third Avenue junk-bond fund last week underscores financial regulators’ concerns about risks in mutual funds and highlights Washington’s urgency in trying to address those worries. Recently proposed rules are aimed at addressing the problems for investors exposed by the high-risk mutual fund’s struggles, but those regulations are unlikely to take effect until 2017 at the earliest. The Securities and Exchange Commission earlier this fall proposed new rules aimed at preventing the very types of problems that caused Third Avenue’s fund to essentially declare bankruptcy and bar investor withdrawals while it liquidates its high-yield Focused Credit Fund.

Those problems boiled down to the junk fund’s inability to raise sufficient cash to meet a sudden flood of investor redemptions without resorting to fire sales of its assets. The concern from regulators is that mutual funds and other asset managers fail to adequately foresee economic shocks, such as rising interest rates, which cause a fund to drop in value and prompt investors to bolt for the door. Widespread redemptions, in theory, could strain a fund’s ability to convert quickly assets into cash for redeeming shareholders, particularly during a crisis. “Nothing is more fundamental and important…than redeemability,” said SEC Commissioner Kara Stein in September. Ms. Stein’s remarks came as the SEC proposed, for the first time, to force fund managers to develop formal plans for their liquidity, or ability to easily buy and sell fund assets.

The measure also includes provisions aimed at dampening investor flight by allowing funds to charge fees to investors who bolt in periods of market stress. If those rules had been in place earlier, Third Avenue would have had to establish a “liquidity” plan and as part of it, set aside more assets that could be readily converted to cash. It may have faced charges for a poorly developed plan or for deviating from it. The fund industry has been quick to note that there hasn’t been a “run” on a long-term mutual fund in their 75 years of existence, through numerous interest-rate and market cycles. Large outflows from particular funds can occur, but never a “run” on the broader asset class.

“Exports climbed 22% to 102 million tons in the first 11 months [..]. That’s almost as much as Japan, the world’s second-biggest producer, made in the whole of last year..”

• China Steel Output Slumps to a One-Year Low as Prices Collapse (BBG)

Steelmakers in China reined in production last month as prices collapsed and the onset of winter in the largest producer curbed demand already hurt by a cooling economy. Crude steel output fell 1.6% to 63.32 million metric tons from a year earlier, according to data from the statistics bureau released Saturday. So far this year, production has dropped 2.2% to 738.38 million tons. China makes about half of the world’s steel. Demand in China is weakening as policy makers seek to steer Asia’s biggest economy away from investment-led growth to one driven by consumer demand and services. China’s steel sector contracted further last month, while an industry association said demand was shrinking at an unprecedented speed.

Determined to maintain output as growth cools, mills have flooded the world with exports, shipping more than 100 million tons this year. “The downtrend in steel output should continue as weak credit and demand conditions do not support expansion,” Huang Huiwen at Shanghai Cifco Futures said before the data was released. “Demand also goes into a seasonal lull, with some mills shutting for winter as construction slows.” As prices of some steel products slumped to records, mills in the country sought out overseas markets where their supplies may be sold at more competitive rates. Exports climbed 22% to 102 million tons in the first 11 months, according to customs data. That’s almost as much as Japan, the world’s second-biggest producer, made in the whole of last year, according to World Steel Association data.

One a week?!

• Chinese Billionaire Said to Be Assisting Authorities in an Investigation (WSJ)

Guo Guangchang became a billionaire by investing where China’s economy was going over the past two decades, pouring money into steel, property and finance while turning his gaze increasingly overseas. On Friday, Mr. Guo indicated authorities are holding him in connection with an investigation, a stark illustration of how Chinese business and finance is coming under intense scrutiny. After nearly two days of mystery over the whereabouts of the man who styles himself a Chinese Warren Buffett, a vague statement near midnight issued by his flagship investment conglomerate, Fosun International, said he is “assisting in certain investigations” by Chinese judicial authorities. The statement, which was signed by Mr. Guo, didn’t divulge his location, but said he is still able to participate in “major matters” before the company.

There was no indication of what the investigations were about or whether Mr. Guo could be implicated himself. Chinese investigators have broad powers to detain both suspects and potential witnesses even when they don’t face accusations of wrongdoing. A Chinese Foreign Ministry spokeswoman said Friday she had no information. Since a midyear stock-market crash exposed weaknesses in China’s financial system, authorities have detained senior stockbrokers, fund managers and bankers from a handful of the country’s top firms, saying little about the progress or findings of their investigations. About a dozen of the most senior people at the biggest brokerage, Citic Securities, have been held for questioning by authorities for months, and the firm says it is cooperating with investigations.

Jitters are particularly high in Shanghai, China’s largest city, where the biggest markets are based. In addition, the Communist Party’s antigraft agency put a vice mayor in Shanghai under official investigation last month, then named certain local brokerages, insurers, a private-equity firm and business schools as targets of its next inspections. With a proud mercantile tradition that has produced the largest regional economy in China, Shanghai has long celebrated business champions. And few stand taller than Mr. Guo, a 48-year-old with a steely focus on building asset values. A standard-bearer for private entrepreneurs, Mr. Guo’s personal fortune was estimated this year at $7.8 billion by Shanghai research firm Hurun Report, putting him at No. 17 on its list of China’s wealthiest people.

Perfect timing re: CON21.

• US Senators Close in on Oil-Export Deal Amid Tax-Break Talks (BBG)

Senate negotiators are nearing a deal to allow unfettered U.S. crude oil exports for the first time in 40 years, though differences remain on renewable-energy tax credits that Democrats are demanding in return, according to people close to the discussions. While any agreement could still collapse in the coming days – the deal faces opposition in the House – lawmakers are weighing the extension of solar and wind tax credits for as long as five years in exchange for lifting the crude-export restrictions, which were established to counter the energy shortages of the 1970s. Tax breaks are part of the discussion, though lawmakers are still negotiating the length of wind- and solar-energy tax extensions and whether they should be phased out, said a Senate Democratic leadership aide.

If agreed to and approved by Congress, repeal of the nation’s ban on most crude oil exports would mark the most significant shift in U.S. oil policy in more than a generation. Repeal, benefiting oil producers including ConocoPhillips, Hess Corp. and Continental Resources Inc., would come at a time when the industry is cutting jobs to deal with a global glut in crude oil and the lowest prices in seven years. Talks for a deal are under way as envoys from 195 nations reached an agreement to limit fossil-fuel pollution and curb the effects of climate change. Congress is considering lifting the export ban as part of either a package to extend expiring tax provisions or to finance the government through Sept. 30 before current funding authority expires Dec. 16.

Among the items being discussed are a 9% manufacturing tax credit for refiners and an extension of the U.S. Land Water Conservation Fund, according to at least three lobbyists close to the negotiations. Even if such a deal is struck by Republicans and Democrats in the Senate, House Democrats, who are vital to reaching an agreement, have suggested they won’t go along unless a provision for indexing the Child Tax Credit, which allows taxpayers to reduce federal income taxes for each qualifying child, is added to the mix. And it’s unclear whether House Republicans will support a deal if they assess that the price Democrats are seeking is too high.

The EU causes nationalism.

• EU Powerless to Stop Nationalist Ascendancy as Terror Fears Rise (BBG)

From Viktor Orban in the east to Marine Le Pen in the west, defiance of the European Union’s multilateral, multicultural, open-borders traditions is on the rise. But with issues like refugees and terrorism at the top of the agenda, there’s little the 28-nation EU can do about it. The popular clamor for security has strengthened the cult of the insular state that Orban champions in Hungary and Le Pen espouses in France. Europe’s multiple crises – first debt, then migration, now terrorism, all festering simultaneously – have put the established order on trial, from the former communist east to historically tolerant Sweden and EU-exit candidate Britain. The upshot is an existential threat that risks unpicking the union.

The collective blame lies with EU leaders for looking the other way, according to Sophie In ’t Veld, a Dutch member of the European Parliament, who says it is time to upgrade the bloc’s “very weak instruments” to enforce civil liberties and democratic due process. “People are beginning to lose faith in European integration,” In ’t Veld said in an interview on Thursday in Brussels. “We have all these wonderful values, and then it turns out that in practice they’re not being upheld.” The EU reached for literary heights to mark its eastern expansion on May 1, 2004, commissioning Nobel Prize-winning Irish poet Seamus Heaney to compose an ode to unity and inclusion: “On a day when newcomers appear, let it be a homecoming.”

That the newcomers didn’t feel at home became clear by 2010, when Orban returned as prime minister of Hungary and set out to build a more centralized state. Once a communist-era freedom fighter, Orban came to view democracy with its plurality of voices as a recipe for gridlock, for not getting things done. He championed the ideology of untrammeled majority rule – provided he had the majority – along with the rejection of multiculturalism in what he termed the “illiberal state.” Now Poland has elected a religiously tinged, anti-foreigner, anti-gay, family-values party, capturing the east’s discontent with the Europe it got after breaking free of Soviet domination. It has sought to pack Poland’s supreme court with party faithful, triggering a constitutional impasse.

Breakthroughs by anti-immigration parties across northwestern Europe – reaching an interim peak with the successes of Le Pen’s National Front in the first round of French regional primaries — showed that eastern Europe doesn’t have a patent on the more virulent strains of nationalism. The decisive runoff in France is on Sunday. The anti-European moment may pass, but for now, its originators are feeling vindicated. “The export of Western democracy has failed,” Orban said on Dec. 2, in remarks directed at the U.S. but applicable more broadly. “It’s time for realpolitik. The era based on the export of democracy and human rights is coming to an end.”

This election or the next one, she’ll get there. Thanks to the EU.

• French Vote for Regions as Main Parties Seek to Shut Out Le Pen (BBG)

French voters go to the polls Sunday to elect regional leaders in the last scheduled nationwide ballot before the next presidential contest in April 2017. President Francois Hollande, his predecessor Nicolas Sarkozy and the National Front’s Marine Le Pen are all jockeying for position in the race, which offers them the chance to establish regional bases and vaunt their credibility with an electorate battered by near-record unemployment and concerns over terrorism. Le Pen aims to build on the first-round result that showed her anti-euro, anti-immigrant party leading in the composite the national vote with prospects to win executive power in three of 13 regions for the first time. Sarkozy needs his party, The Republicans, to blunt her advance and show he has answers to France’s problems, while Hollande faces a judgment on his handling of the attacks that killed 130 in and around Paris one month ago.

“For many French voters, the stakes have changed,” said Jim Shields, a professor of politics at Aston University in Birmingham, England. “For years, elections have been fought on the question of who could best revitalize France’s ailing economy and bring down unemployment. Now, the paramount question is who can keep the French safe. That shift of priority plays to the advantage of the National Front.” Even so, as voters cast their ballots in the second-round runoff, Le Pen’s party is hobbled by its lack of allies from which it can draw fresh support. France’s two main parties are even working together in some districts to keep Le Pen out of power. Prime Minister Manuel Valls, a Socialist like Hollande, said on Friday that he was “convinced” his party’s supporters would engage in tactical voting to defeat Le Pen.

The latest polling suggests the National Front will fail to take either Nord-Pas de Calais-Picardie in the north or Provence-Alpes-Cote d’Azur in the south, both regions it looked set to take after the first round last Sunday. In the east, the party’s third target, the race is too close to call. Le Pen now looks to be losing her grip on the northern region that she is contesting personally. A BVA institute survey in Friday’s La Voix du Nord newspaper suggested she’ll lose out to the The Republic candidate, Xavier Bertrand, Sarkozy’s former labor minister. Marion Marechal Le Pen, the National Front leader’s niece, is also looking doubtful in the southern region.

They can’t frustrate their own laws forever.

• Julian Assange May Face Swedish Interrogation Within Days (Guardian)

The WikiLeaks founder, Julian Assange, may be questioned in London within days about alleged sexual offences after Ecuador indicated it had reached a bilateral deal with Sweden. Assange has been wanted for questioning by Swedish authorities since 2010, but was granted asylum by Ecuador and has been in the country’s London embassy for more than three years. In April, the activist said he consented to the Swedish prosecutor’s conditions for the interrogation procedure to take place in the Kensington embassy. The agreement refers specifically to Assange and Sweden’s intention to question him in London and will come into effect “in the coming days”, a statement from the Ecuadorian foreign ministry said.

Assange’s Swedish lawyer, Per Samuelson, told the Guardian that Sweden needed to formally approve the deal and he understood those discussions would take place on Thursday. Negotiations began in June this year between Ecuador’s acting foreign minister, Xavier Lasso, and the Swedish justice ministry’s international affairs chief, Anna-Carin Svensson. The Ecuadorian government statement said: “The agreement, without any doubt, is a tool that strengthens bilateral relations and facilitates, for example, the execution of such legal actions as the questioning of Mr Assange, isolated in the Ecuadorian embassy in London.”

The deal would ensure “the implementation and enforcement of national legislation and principles of international law, particularly those relating to human rights, to further the full exercise of national sovereignty in any event of legal assistance that may be required between Ecuador and Sweden”. The agreement would be the final step towards interviewing Assange in London, with a request to the UK for legal assistance having already been granted, according to previous statements from the Swedish prosecutor’s office. Assange sought refuge at the embassy in June 2012 after losing his final legal attempt to avoid extradition. Sweden’s director of public prosecutions, Marianne Ny, said in March this year that she would allow Assange to be interviewed in London if agreement could be reached with Ecuador.

Not sure about carbon pricing. The last attempt was a disgrace.

• James Hansen, Father Of Climate Change Awareness: Paris Talks ‘A Fraud’ (Guar.)

Mere mention of the Paris climate talks is enough to make James Hansen grumpy. The former Nasa scientist, considered the father of global awareness of climate change, is a soft-spoken, almost diffident Iowan. But when he talks about the gathering of nearly 200 nations, his demeanor changes. “It’s a fraud really, a fake,” he says, rubbing his head. “It’s just bullshit for them to say: ‘We’ll have a 2C warming target and then try to do a little better every five years.’ It’s just worthless words. There is no action, just promises. As long as fossil fuels appear to be the cheapest fuels out there, they will be continued to be burned.”

The talks, intended to reach a new global deal on cutting carbon emissions beyond 2020, have spent much time and energy on two major issues: whether the world should aim to contain the temperature rise to 1.5C or 2C above preindustrial levels, and how much funding should be doled out by wealthy countries to developing nations that risk being swamped by rising seas and bashed by escalating extreme weather events. But, according to Hansen, the international jamboree is pointless unless greenhouse gas emissions aren’t taxed across the board. He argues that only this will force down emissions quickly enough to avoid the worst ravages of climate change.

Hansen, 74, has just returned from Paris where he again called for a price to be placed on each tonne of carbon from major emitters (he’s suggested a “fee” – because “taxes scare people off” – of $15 a tonne that would rise $10 a year and bring in $600bn in the US alone). There aren’t many takers, even among “big green” as Hansen labels environment groups.

Refugees don’t make for the same kind of feel good fodder.

• No Mention In Paris Of Refugees: Global Issues Live In Separate Boxes (Betts)

While the United Nations climate change talks in Paris struggled to elicit credible commitments, notably missing from the debate was “environmental displacement” – people fleeing their homes on account of natural disaster. As temperatures and sea levels rise, and land-use patterns change, there will be significant consequences for human mobility within and across borders. However, public and media debate scarcely discussed the issue, and the only references in the Paris summit’s negotiated outcome document are vague to the point of meaninglessness. This absence is especially striking in a year in which refugees and migration have otherwise been so high on the political agenda. This political dissonance is of a piece with the compartmentalised way in which we approach many global issues.

During a frenzied summer, media coverage and political attention focused almost exclusively on refugees. Now, with saturation point reached, the circus has moved on. Climate change has, instead, become the de rigueur liberal issue of the day. Remarkably, the global focus on refugees was insufficient to influence the debate in Paris. When we shift our attention so dramatically, we risk missing important analytical connections and, with them, opportunities for meaningful solutions. To be clear, the so-called European refugee crisis was certainly not caused by climate change. But it is symptomatic of a global protection crisis, with climate change as one key component. That crisis is partly the result of numbers: there are more people displaced around the world than at any time since the second world war.

It is partly the result of political will: asylum is being undermined by governments around the world. However, it is above all a reflection of a growing gap between the contemporary nature of displacement and the institutions that govern forced migration. In the aftermath of the second world war, governments created the 1951 Convention relating to the Status of Refugees. It ensures that states have a reciprocal obligation towards people fleeing a well-founded fear of persecution. This framework was well adapted to the refugee movements of the 20th century. It continues to be relevant, but it leaves gaps.

Greece has many good souls.

• The Athens Lawyer Who Became A Guardian To Refugee Camp Children (Guardian)

Christina Dimakou is not yet 30, but she has four children, one of whom is 17. She shares neither a nationality nor a past with any of them. Two of them are from Syria: the 17-year-old girl fled Damascus after soldiers attempted to kidnap her and her brother, who escaped conscription; there’s a 10-year-old from Iran who longs to go to school for the first time; and a young girl from Afghanistan who has lost her family. For now Dimakou is their guardian. She cares for them within the confines of Moria, a makeshift hilltop camp for refugees on the Greek island of Lesbos. Her charges spend their days behind chain-linked fences where a discarded Minnie Mouse in a torn pink dress, caught in the razor wire, is the only indication that this is the children’s area.

More than 700,000 refugees have entered Europe through Greece this year, most of them wet and bedraggled arrivals on its eastern Aegean islands. Their coming has shaken Europe and changed the life of this determined lawyer. Instead of practising law in Athens, where she passed the bar exam, Dimakou has moved her life to an island now famous for the refugees who wash up on its shores. It’s a life with few of the trappings of the metropolitan middle class with whom she grew up. Her working outfit is an aid worker’s bib, her hair tied back. She shuttles between the crumbling neoclassical architecture of the port city of Mytilene and the crowded refugee reception centre at Moria in a battered Toyota loaded with translators and the dirt from a thousand strangers’ shoes.

She is one of only a dozen members of the guardianship network, a fledgeling programme run by the Athens-based charity Metadrasi, designed to help the countless lost children who have arrived alone. Some have been separated from their families while fleeing Syria, others have taken it upon themselves to strike out and find a new home for relatives who will follow later. Many of them have been told they carry their family’s only hope. To explain her decision Dimakou uses the allegory of the little boy and the starfish. Every day he would go to the beach and throw a few of the dying starfish he found back into the sea. When asked, in the face of the thousands of starfish that would wash up, whether he really made a difference, he would reply: “I make a difference to the ones I throw back.”

“I cannot save the world or make everything better,” Dimakou admits, “but I can affect the things around me. If everyone does this then the world becomes better. And we become better.” In legalese her starfish are known as “unaccompanied minors” and no one can be sure how many of them there are. It is the responsibility of officials from the Greek police and the European borders agency, Frontex, to ensure that all under-18s who arrive are taken into care if they are found to be without a parent or relative. The reality is that since the surge began earlier this year only a fraction of the true number of lost children have been caught in this shredded safety net.

Debt Rattle November 7 2015

Nov 072015

November 7, 2015 Posted by Raúl Ilargi Meijer at 9:33 am Finance Tagged with: care homes, China, credit, debt, jobs, overcapacity, rate hike, refugees, steel, VW Comments Off

Russell Lee Front of livery stable, East Side, New York City 1938

• US Looks Set For December Interest Rate Rise After Jobs Boost (Guardian)

• US Jobs Report: Workers Aged 25-54 Lose 35K Jobs, 55+ Gain 378K (Zero Hedge)

• Peter Schiff: It’s Going To Be A ‘Horrible Christmas’ (CNBC)

• US Consumer Credit Has Biggest Jump In History, Government-Funded (Bloomberg)

• Primary Dealers Are Liquidating Corporate Bonds At An Unprecedented Pace (ZH)

• Will China’s Consumers Step Up In 2016? (Bloomberg)

• China’s Demand For Cars Has Slowed. Overcapacity Is The New Normal. (Bloomberg)

• World’s Largest Steel Maker ArcelorMittal Loses $700 Million in Q3 (NY Times)

• Berlin Accomplices: The German Government’s Role in the VW Scandal (Spiegel)

• EU Asks Members To Investigate After VW Admits New Irregularities (Reuters)

• VW Says Will Cover Extra CO2 And Fuel Usage Taxes Paid By EU Drivers (Guardian)

• Goldman Sachs Dumps Stock Pledged By Valeant Chief (FT)

• New Countdown For Greece: A Bank Bail-In Is Looming (Minenna)

• UK Care Home Sector In ‘Meltdown’, Threatened By US Vulture Fund (Ind.)

• US Congress Proposes A Chilling Resolution On Social Security (Simon Black)

• Germany Imposes Surprise Curbs On Syrian Refugees (Guardian)

• Germany Receives Nearly Half Of All Syrian Asylum Applicants (Guardian)

• Sweden Feels The Refugee Strain (Bloomberg)

• Sweden Tells Refugees ‘Stay in Germany’ as Ikea Runs Out of Beds (Bloomberg)

• Greek Coast Guard: Five More Migrants Found Dead (Kath.)

We -should- know better than to trust US jobs reports.

• US Looks Set For December Interest Rate Rise After Jobs Boost (Guardian)

The US appears to be on course for its first interest rate rise in almost a decade next month after higher than expected job creation pushed the unemployment rate down to 5%. Non-farm payrolls – employment in all sectors barring agriculture – increased by 271,000 in October, according to official figures published on Friday, compared with 142,000 the previous month and above the 185,000 that economists polled by Reuters had expected. In September, the US Federal Reserve signalled that, barring a deterioration in the US economic recovery, it would raise rates from 0.25% at its December meeting. Janet Yellen, the head of the Federal Reserve, repeated her forecast a few days ago.

Analysts said the prospect of a rate rise was now almost certain, especially after figures from the US labor department also showed wages increased at a healthy 0.4% month on month. The dollar jumped by more than 1% to a seven-month high and benchmark US bond yields rose to their highest in five years as traders priced in a 72% chance of a move next month. Stock market futures on New York exchanges slipped as it became clearer that a long period of cheap borrowing costs was coming to an end. The rise in pay took the wage inflation rate to 2.5% year on year, the best annual wages boost since 2009, when it was falling in the aftermath of the financial crisis.

Growth in jobs occurred in industries including professional and business services, healthcare, retail, food services and construction, according to Tanweer Akram, a senior economist at Voya Investment Management. Rob Carnell, an analyst at ING Financial Markets, said: “While this does not guarantee a December rate hike from the Fed at this stage [there is one more labour report before the December 16 meeting], we feel that we would need to see a catastrophically bad November labour report for the Fed to sit on their hands again.”

And there we go again: it’s all a sleight of hand.

• US Jobs Report: Workers Aged 25-54 Lose 35K Jobs, 55+ Gain 378K (Zero Hedge)

After several months of weak and deteriorating payrolls prints, perhaps the biggest tell today’s job number would surprise massively to the upside came yesterday from Goldman, which as we noted earlier, just yesterday hiked its forecast from 175K to 190K. And while as Brown Brothers said after the reported that it is “difficult to find the cloud in the silver lining” one clear cloud emerges when looking just a little deeper below the surface. That cloud emerges when looking at the age breakdown of the October job gains as released by the BLS’ Household Survey. What it shows is that while total jobs soared, that was certainly not the case in the most important for wage growth purposes age group, those aged 25-54.

As the chart below shows, in October the age group that accounted for virtually all total job gains was workers aged 55 and over. They added some 378K jobs in the past month, representing virtually the entire increase in payrolls. And more troubling: workers aged 25-54 actually declined by 35,000, with males in this age group tumbling by 119,000! Little wonder then why there is no wage growth as employers continue hiring mostly those toward the twilight of their careers: the workers who have little leverage to demand wage hikes now and in the future, something employers are well aware of. The next chart shows the break down the cumulative job gains since December 2007 and while workers aged 55 and older have gained over 7.5 million jobs in the past 8 years, workers aged 55 and under, have lost a cumulative total of 4.6 million jobs.

Schiff always see some right signs, and then always finds it hard to interpret them.

• Peter Schiff: It’s Going To Be A ‘Horrible Christmas’ (CNBC)

The Grinch has nothing on Peter Schiff. On CNBC’s “Futures Now” Thursday, the contrarian investor said that while Americans are wrapping presents this holiday season, they should instead brace themselves for “a horrible Christmas” and possible recession. “I expect [job] layoffs to start picking up by the end of the year,” Schiff said, pointing to retailers as the first victim. “Retailers have overestimated the ability of their customers to buy their products. Americans are broke. They are loaded up with debt,” he said. “We’re teetering on the edge of an official recession,” and “the labor market is softening.” For Schiff, there is no one else to blame but the Federal Reserve.

As he sees it, the central bank’s easy money policies have created a bubble so big that any prick could send the U.S. economy spiraling out of control. And that makes the possibility of hiking interest rates slim to none. “The Fed has to talk about raising rates to pretend the whole recovery is real, but they can’t actually raise them,” said the CEO of Euro Pacific Capital. “[Fed Chair Janet Yellen] can’t admit that she can’t raise them because then she’s admitting the whole recovery is a sham and that the policy was a failure.” According to Schiff, the recent rally in the dollar is “the biggest bubble that the Fed has ever inflated” and “it’s the only thing keeping the economy afloat.”

The greenback hit a three-month high this week after Yellen said a December rate hike was a “live” possibility. “[The inflated dollar] is keeping the cost of living from rising rapidly and it’s keeping interest rates artificially low. It’s allowing the Fed to pretend everything is great,” Schiff said. “Eventually the bottom is going to drop out of the dollar and we are going to have to deal with reality,” he added. “That reality is we are staring at a financial crisis much worse than the one we saw in 2008.”

It’s all still built on debt, and increasingly so. The more ‘confident’ the consumer, the more willing (s)he’s to put her neck in a noose.

• US Consumer Credit Has Biggest Jump In History, Government-Funded (Bloomberg)

Borrowing by American households rose at a faster pace in September on increased lending for auto purchases and bigger credit-card balances. The $28.9 billion jump in total credit followed a $16 billion gain in the previous month, Federal Reserve figures showed Friday. Non-revolving debt, which includes funding for college tuition and auto purchases, rose $22.2 billion, the most since July 2011. Borrowing probably remained elevated in October in the wake of the strongest back-to-back months of motor vehicle sales in 15 years. Having made progress in restoring their balance sheets after the last recession, some households are more willing to finance purchases as the labor market continues to improve.

The median forecast of 31 economists surveyed by Bloomberg called for an $18 billion increase in credit, with estimates ranging from gains of $10 billion to $26 billion. The Fed’s consumer credit report doesn’t track debt secured by real estate, such as home equity lines of credit and home mortgages. The pickup in non-revolving credit in September followed a $12 billion increase the previous month. Revolving debt rose $6.7 billion, the biggest gain in three months, after a $4 billion advance, the data showed.

The biggest threat to US markets?

• Primary Dealers Are Liquidating Corporate Bonds At An Unprecedented Pace (ZH)

By now it is common knowledge that over the past two years the primary source of stock buying have been corporations themselves (recall Goldman’s admission that “buybacks have been the largest source of overall US equity demand in recent years”) with two consecutive years of near record stock repurchases. However, now that a December rate hike appears practically certain following the “pristine” October jobs report, suddenly the question is whether the recent strong flows into bond funds will continue, and generously fund ongoing repurchase activity. The latest fund flow report from BofA puts this into perspective

“The increase in interest rates is starting to impact US mutual fund and ETF flows. Hence, the inflow into the all fixed income category declined to +$0.96bn this past week (ending on October 4th) from a +$2.80bn inflow the week before… Outflows from government funds accelerated further to -$2.43bn this past week from -$1.73bn and -$1.00bn in the prior two weeks, respectively.”

But more concerning for corporations than even fund flows, which will surely see even bigger outflows now that both yields are spreads are set to blow out making debt issuance far less attractive to corporations whose cash flows continue to deteriorate, is what the NY Fed reported as activity by Primary Dealer, i.e., the most connected, “smartest people in the room” who indirectly execute the Fed’s actions in the public markets, in the most recent week. As the charts below show, the Primary Dealers aren’t waiting for the December announcement to express how they feel about their holdings of both Investment Grade and Junk Bond (mostly in the longer, 5-10Y, 10Y+ maturity buckets where duration risk is highest). Indeed, as of the week ended October 28, Primary Dealer corporate holdings tumbled across both IG and HY, plunging to the lowest level in years in what can only be called a rapid liquidation of all duration risk.

Investment Grade Bonds:

And Junk Bonds:

Why would dealers be liquidating their corporate bond portfolios at such a fast pace? For junk, the obvious answer is that with ongoing concerns around rising leverage, not to mention yields being dragged higher by the ongoing pain in the energy sector, this may be merely a proactive move ahead of even more selling. But for IG the answer is less clear, and the selling likely suggests fears that any December rate hike will see spreads blow out even further, and as a result dealers are cutting their exposure ahead of December.

Whatever the answer keep a close eye on this series: if Dealer net positions turn negative it will mean that the corporate buyback door is about to slam shut in a hurry as others begin imitating the ‘smartest and most connected traders in the room’, depriving corporations of their biggest source of stock buyback “dry powder.” In fact, taken to its extreme, if companies suddenly find it problematic to raise capital using debt, we may soon enter that phase of the corporate cycle best known by a spike in equity issuance, whose impact on stock price is just the opposite to that of buybacks.

Not a chance. They’re scared to bits.

• Will China’s Consumers Step Up In 2016? (Bloomberg)

)China’s practice of laying out five-year economic plans is a legacy of its Maoist past. And so, as the Communist Party has done since the 1950s, officials met in Beijing in October to hash out the plan to take the world’s second-biggest but now struggling economy from 2016 to 2020. Policymakers have two big goals. In 2016 they’ll continue to feature the consumer as the star of a hoped-for economic resurgence. They’ll also try to ensure by any means necessary that gross domestic product doesn’t slow rapidly, even if that involves injecting more credit into overleveraged, declining industries. China will target “medium-high economic growth,” the Party said in an Oct. 29 communiqué after meeting to discuss the new five-year plan.

Those two goals—fostering a consumer economy and giving GDP a short-term boost—are contradictory. Developing a consumption-driven economy means accepting growth below the 7%+ annual rise of recent years, which was achieved in part by state-run banks and local government finance companies giving enterprises cheap credit to build often unneeded factories and real estate developments. For many economists, it’s a no-brainer to switch to this slower-growing but more sustainable model, one that relies on a strong service sector and robust household consumption. The dramatic growth of the last 35 years has brought serious industrial overcapacity, a polluted environment, and declining productivity even as the workforce shrinks.

In October, days after the announcement that GDP rose in the third quarter at a rate of 6.9% from a year earlier, the slowest pace since 2009, the central bank cut rates for the sixth time in a year. It also lowered the amount of funds banks must hold in reserve, allowing them to make more loans. Economic planners have loosened curbs on borrowing by local officials and stepped up approvals of railway and costly environmental projects. Says Andrew Polk, senior economist at the Conference Board China Center for Economics and Business in Beijing: “Cutting interest rates and adding fiscal spending are temporary salves to much bigger problems. The leadership has very little power to stop the slide in growth into next year.”

In the first quarter of 2015, for the first time, service industries—including jobs from lawyers to tourist guides—made up a bit more than half of GDP. The service economy grew 8.4% in the first nine months; manufacturing, only 6%. “The answer to the question of whether China’s economy is sinking or swimming lies in its service sector,” wrote Capital Economics’ Mark Williams and Chang Liu in an Oct. 29 note. Service companies employ more people than manufacturers to generate the same amount of GDP. Not only are service workers more numerous, they’re also often better paid than factory hands. More Chinese with more money in their pockets should nurture consumption. To date, that’s been hard to engineer, with households socking away about 30% of disposable income, one of the world’s highest savings rates. Household consumption makes up only a little more than one-third of GDP. (In the U.S., consumption is almost 70% of the economy.)

Overcapacity is China’s 2016 key word.

• China’s Demand For Cars Has Slowed. Overcapacity Is The New Normal. (Bloomberg)

For much of the past decade, China’s auto industry seemed to be a perpetual growth machine. Annual vehicle sales on the mainland surged to 23 million units in 2014 from about 5 million in 2004. That provided a welcome bounce to Western carmakers such as Volkswagen and General Motors and fueled the rapid expansion of locally based manufacturers including BYD and Great Wall Motor. Best of all, those new Chinese buyers weren’t as price-sensitive as those in many mature markets, allowing fat profit margins along with the fast growth. No more. Automakers in China have gone from adding extra factory shifts six years ago to running some plants at half-pace today—even as they continue to spend billions of dollars to bring online even more plants that were started during the good times.

The construction spree has added about 17 million units of annual production capacity since 2009, compared with an increase of 10.6 million units in annual sales, according to estimates by Bloomberg Intelligence. New Chinese factories are forecast to add a further 10% in capacity in 2016—despite projections that sales will continue to be challenged. “The Chinese market is hypercompetitive, so many automakers are afraid of losing market share,” says Steve Man, a Hong Kong-based analyst with Bloomberg Intelligence. “The players tend to build more capacity in hopes of maintaining, or hopefully, gain market share. Overcapacity is here to stay.” The carmaking binge in China has its roots in the aftermath of the global financial crisis, when China unleashed a stimulus program that bolstered auto sales.

That provided a lifeline for U.S. and European carmakers, then struggling with a collapse in consumer demand in their home markets. Passenger vehicle sales in China increased 53% in 2009 and 33% in 2010 after the stimulus policy was put in place. But the flood of cars led to worsening traffic gridlock and air pollution that triggered restrictions on vehicle registrations in major cities including Beijing and Shanghai. Worse, the combination of too many new factories and slowing demand has dragged down the industry’s average plant utilization rate, a measure of profitability and efficiency. The industrywide average plunged from more than 100% six years ago (the result of adding work hours or shifts) to about 70% today, leaving it below the 80% level generally considered healthy. Some local carmakers are averaging about 50% utilization, according to the China Passenger Car Association.

And this is what China’s overcapacity leads to.

• World’s Largest Steel Maker ArcelorMittal Loses $700 Million in Q3 (NY Times)

ArcelorMittal, the world’s largest steel maker, on Friday reported a $700 million loss for the third quarter, blaming falling prices and competition from Chinese exports. In a news release, the company said that customers were hesitating to buy its products and that “unsustainably low export prices from China,” which produces far more steel than any other country, had hurt its bottom line. Lakshmi N. Mittal, the company’s chief executive, said in an interview on Friday that steel demand in the company’s main markets, Europe and North America, was healthy, but that low-cost Chinese steel was depressing prices. “The Chinese are dumping in our core markets,” Mr. Mittal said. “The question is how long the Chinese will continue to export below their cost.”

The company’s loss for the period compared with a $22 million profit for last year’s third quarter. ArcelorMittal, which is based in Luxembourg, also sharply cut its projection for 2015 earnings before interest, taxes, depreciation and amortization — the main measure of a steel company’s finances. The new estimate is $5.2 billion to $5.4 billion, down from the previous projection of $6 billion to $7 billion. On a call with reporters, Aditya Mittal, Mr. Mittal’s son and the company’s chief financial officer, said that a flood of low-price Chinese exports was the biggest challenge for ArcelorMittal in the European and North American markets. The company estimates that Chinese steel exports this year will reach 110 million metric tons, compared with 94 million tons last year and 63 million tons in 2013. ArcelorMittal produced 93 million metric tons of steel in 2014.

ArcelorMittal is one of several companies operating in the United States that have brought complaints against the dumping of Chinese steel. On Tuesday, the United States Commerce Department issued a preliminary ruling in those companies’ favor in one product category, saying it would impose tariffs of up to 236% on imports of corrosion-resistant steel from some Chinese companies, on the grounds that their products are subsidized by the government. “That clearly shows there is substance in the trade cases,” Lakshmi Mittal said.

Berlin fails. Having VW investigate itself is crazy.

• Berlin Accomplices: The German Government’s Role in the VW Scandal (Spiegel)

This week wasn’t just a bad one for the Volkswagen concern. The German government is also happy that it’s over. Berlin had painstakingly developed a damage control strategy in an effort to prevent the VW scandal from damaging the reputation of German industry as a whole. Top advisors to Foreign Minister Frank-Walter Steinmeier had even written a confidential letter to German diplomats around the world, providing guidelines for how they should go about defending “the Germany brand.” “The emissions scandal should be presented as a singular occurrence,” they wrote. “External communication” should focus “to the extent possible on preventing VW and the ‘Made in Germany’ brand from being connected.”

But then Monday arrived and the announcement by the Environmental Protection Agency in the United States that “VW has once again failed its obligation to comply with the law that protects clean air for all Americans.” In addition to the 11 million diesel vehicles whose emissions values were manipulated, additional models are also thought to have been outfitted with illegal software to cheat on emissions compliance tests, including the popular SUV Cayenne. That vehicle is manufactured by Porsche, the company that VW’s new CEO, Matthias Müller, used to lead before being hired to replace Martin Winterkorn, who was ousted when the VW scandal first broke. Then Tuesday arrived, and along with it the admission from Müller that VW had deceived even more of its customers.

The fuel consumption claims for more than 800,000 vehicles were manipulated, with the specified average mileage not even achievable in testing, much less in real-world conditions. The new scandal affects models carrying the company’s own environmental seal-of-excellence known as BlueMotion, a label reserved for “the most fuel efficient cars of their class,” as the company itself claims. It has now become clear that such claims are a fraudulent lie. And it shows that this scandal may continue to broaden before VW manages to get it under control.

Short version: nothing is happening. This is how the EU ‘runs’.

• EU Asks Members To Investigate After VW Admits New Irregularities (Reuters)

The European Commission has written to all 28 European Union member countries urging them to widen their investigations into potential breaches of vehicle emissions rules after Volkswagen (VOWG_p.DE) admitted it had understated carbon dioxide levels. Europe’s biggest motor manufacturer admitted in September it had rigged U.S. diesel emissions tests to mask the level of emissions of health-harming nitrogen oxides. In a growing scandal, the German company said on Tuesday it had also understated the fuel consumption – and so carbon dioxide emissions – of about 800,000 vehicles. In a letter seen by Reuters, the Commission said it was not aware of any irregularities concerning carbon dioxide values and was seeking the support of EU governments “to find out how and why this could happen”.

It said it had already contacted Germany’s Federal Motor Transport Authority (KBA), which is responsible for approving the conformity of new car types, and raised the issue with other national authorities at a meeting late on Thursday in Brussels. A Commission spokeswoman confirmed the letter, adding it asked national governments “to widen their investigations to establish potential breaches of EU law”. “Public trust is at stake. We need all the facts on the table and rigorous enforcement of existing legislation,” the spokeswoman said. With vehicle testing in the EU overseen by national authorities, the bloc’s executive body, the Commission, is reliant on each country to enforce rules.

This arrangement has come under fire from environmentalists because on-road tests have consistently shown vehicles emitting more pollutants than laboratory tests. Car manufacturers are a powerful lobby group in the EU, as a major source of jobs and exports. In an open letter on Friday, a group of leading investors urged the EU to toughen up testing of vehicle emissions to prevent a repeat of the VW scandal and the resulting hit to its shareholders. VW shares have plunged as much as a third in value since the crisis broke in September.

Do note this by Mary Nichols, head of the California Air Resources Board: “The case is “the biggest direct breach of laws that I have ever uncovered … This is a serious issue, which will certainly lead to very high penalties..”

• VW Says Will Cover Extra CO2 And Fuel Usage Taxes Paid By EU Drivers (Guardian)

Volkswagen has said it will foot the bill for extra taxes incurred by drivers after it admitted understating the carbon dioxide emissions of about 800,000 cars in Europe. In a letter to European Union finance ministers on Friday, seen by Reuters, Matthias Müller, the VW chief executive, asked member states to charge the carmaker rather than motorists for any additional taxes relating to fuel usage or CO2 emissions. The initial emissions scandal, which erupted in September when Volkswagen admitted it had rigged US diesel emissions tests, affecting 11m vehicles globally, deepened this week when VW said it had also understated the carbon dioxide emissions and fuel consumption of 800,000 vehicles in Europe. Analysts say VW, Europe’s biggest carmaker, could face a bill of up to €35bn for fines, lawsuits and vehicle refits.

To help meet some of the anticipated costs, VW has announced a €1bn programme of spending cuts. The head of VW’s works council said the announcement of the cuts had broken strict rules in Germany on consultation with workers and demanded immediate talks with company bosses. “Management is announcing savings measures unilaterally and without any foundation,” Bernd Osterloh said in an emailed statement. [..] Since the emissions revelations, VW has been criticised by lawmakers, regulators, investors and customers frustrated at the time it is taking to get to the bottom of a scandal that has wiped almost a third off the carmaker’s market value. Mary Nichols, the head of the California Air Resources Board, which is investigating VW in the US, told the German magazine WirtschaftsWoche: “Volkswagen is so far not handling the scandal correctly.

“Every additional gram of nitrogen oxide increases the health risks for our citizens. Volkswagen has not acknowledged that in any way or made any effort to really solve the problem.” The case is “the biggest direct breach of laws that I have ever uncovered … This is a serious issue, which will certainly lead to very high penalties,” Nichols added. The scandal has also piled pressure on European regulators, who have long been criticised by environmentalists on the grounds that on-road tests have consistently shown vehicles emitting more pollutants than official laboratory tests. In an open letter, a group of leading investors urged the EU to toughen up vehicle testing. But it faces a battle because carmakers have traditionally had a strong influence on policy in countries such as Germany, Europe’s biggest economy, where they are an important source of jobs and export income.

Now everyone else must jump ship too.

• Goldman Sachs Dumps Stock Pledged By Valeant Chief (FT)

Valeant said on Friday that Goldman Sachs had sold more than $100m-worth of shares in the struggling drugmaker, which had been pledged as collateral against a personal loan from the investment bank to the company’s chief executive. Goldman contacted Michael Pearson, Valeant’s chief executive, earlier this week and gave him 48 hours to pay off a $100m loan that he took out in 2013 after a precipitous decline in the company’s share price triggered a so-called margin call on the debt. After he failed to raise enough cash to pay off the loan, Goldman Sachs on Thursday morning dumped the entire block of just under 1.3m shares, held in Mr Pearson’s name, which were worth roughly $119.4m at the open of trading in New York on Thursday.

The sale of Mr Pearson’s pledged shares contributed to a rout in the company’s stock price on Thursday, during which its market value fell as much as 20%. Roughly 57m shares changed hands during the day, compared with a daily average of 4m over the past 12 months. The embarrassing announcement is the latest setback for Valeant and its high-profile hedge fund backers, who include Bill Ackman, Jeff Ubben and John Paulson. It comes after months of controversy surrounding the drugmaker’s reliance on high prices, aggressive sales techniques and debt-fuelled deal making. Goldman’s decision to terminate the loan to Mr Pearson underscores the impact of the rout in Valeant’s shares on his personal wealth. Mr Pearson owns roughly 9m shares, accounting for Goldman’s sale on Thursday. In August that stake was worth almost $2.4bn; as of Friday morning, the value had plummeted to $720m.

The EU’s criminal folly: “In the questionable strategy of EU bureaucrats, an increase in foreclosures should boost the banks’ assets and in this way should help to reduce the financial demands on the ESM bailout fund.”

• New Countdown For Greece: A Bank Bail-In Is Looming (Minenna)

The debt crisis may no longer be in the spotlight but the financial situation in Greece remains complex. Greek banks continue to survive at the edge of bankruptcy, kept afloat only by Emergency Liquidity Assistance (ELA) from the ECB and by still-enforced capital controls. After the August “agreement”, the Troika has promised the Greek government €25 billion for bank recapitalization, of which €10bn is in a Luxembourg account ready to be wired. The funds will be disbursed only if the government manages, before the 15th of November, to approve a long list of urgent reforms: the infamous list of the “48 points” that embraces tax increases, public spending cuts and the highly controversial pensions reform. It is obviously a tough task for the Tsipras government, even if September’s election victory gave him a solid mandate.

After a parliamentary marathon, it seems that the government has successfully passed some unpopular measures: the increase from 26% to 29% in income tax, the rise from 5% to 13% in the tax on luxury goods and the restoring of the tax on television advertisements. The process was not so smooth with the first steps in reforming pensions and slowdowns are on the horizon. Tsipras is also trying to gain time against the pressure of Brussels to modify the laws that still protect primary homeowners from foreclosure. According to some estimates, there are around 320,000 families in Greece that are not paying down their mortgages and obviously these bad loans are dead weights for the banking system. In the questionable strategy of EU bureaucrats, an increase in foreclosures should boost the banks’ assets and in this way should help to reduce the financial demands on the ESM bailout fund.

Anyway, the Greek government is still living for the day, and the Troika has noticed that only 19 of the mandatory 48 reforms have been approved so far. Brussels is unhappy with this situation and has sent a strong “signal” to the Tsipras government by delaying the last €2 billion tranche of loans. At end-October 2015, €13 billion has already been transferred to Greece; these cash inflows alone have allowed the government to guarantee payments of salaries and pensions and reduced the dangerous social tensions experienced in July. Moreover, part of these funds has been diverted to pay down the ECB and this could allow the QE programme to be extended to Greece as early as November. This would be an unexpected image success for Mr. Tsipras and would give breathing space to the banking system, where up to €15 billion of government bonds eligible for purchase by the ECB are still languishing.

2016 looks to be a watershed year for British care in general.

• UK Care Home Sector In ‘Meltdown’, Threatened By US Vulture Fund (Ind.)

The UK’s largest provider of care homes is preparing to sell scores of properties and slash its budget by millions to fend off an attack from a US vulture fund hoping to cash in on the UK elderly-care crisis. Four Seasons Health Care, which cares for thousands of residents, is facing a £500m-plus credit crunch after government spending cuts and financial engineering by City investors left it struggling to pay lenders. The little-known H/2 Capital Partners has been buying up the group’s debt in the hope that the current owners, Terra Firma, will cede control of the homes after finances were squeezed by local government funding cuts.

Martin Green, the chief executive of Care England, a trade group for elderly-care provision, said the Government needed to step in to stop speculative investors targeting the troubled industry. “If the Government does not fund the sector properly, people will come into it to make money rather than deliver care,” he warned. To stave off the hedge fund assault, Four Seasons is considering plans to make deep cuts to the money it spends refurbishing and developing care homes. [..] Unions are concerned that the funding crisis will force many elderly residents to move into NHS beds and have called on Chancellor George Osborne to deliver ringfenced funding to the social care sector in his spending review later this month.

“The sector is going through a slow-motion collapse and Four Seasons is part of that situation,” GMB national officer Justin Bowden said. “It’s in meltdown and there will be tens of thousands of our mums and dads who will have to be looked after.” The squeeze on funding has put Four Seasons’ owner Terra Firma in a bind as it tries to meet annual costs of about £110m a year. The buyout group, led by well-known dealmaker Guy Hands, bought Four Seasons in 2012 from Royal Bank of Scotland for £825m in a debt-fuelled takeover. Most of the takeover cash was borrowed using two loans sold on to investors – one worth £350m and the other £175m.

The care disaster will spread across the western world. It will get ugly and deadly.

• US Congress Proposes A Chilling Resolution On Social Security (Simon Black)

Officially, the US government is now $18.5 trillion in debt, and Social Security is the biggest financial sinkhole in America. Social Security’s various trust funds currently hold about $2.7 trillion in total assets; yet the government itself estimates the program’s liabilities to exceed $40 trillion. And Social Security’s second biggest trust fund, the Disability Insurance fund, will be fully depleted in a matter of weeks. The trustees who manage these massive funds on behalf of the current and future retirees of America are clearly concerned. In the 2015 report of the Social Security and Medicare Board of Trustees they state very plainly:

“Social Security as a whole as well as Medicare cannot sustain projected long-run program costs…”, and that the government should be “giving the public adequate time to prepare.” Wow. Now, we always hear politicians say that ‘Social Security is going to be just fine’. So this Board of Trustees must be a bunch of wackos. Who are these guys anyhow? The Treasury Secretary of the United States of America, as it turns out. Along with the Secretary of Health and Human Services. The Secretary of Labor. Etc. These are the folks who sign their name to the report saying that Social Security is going bust, and that Congress needs to give people time to prepare. And prepare they should.

The US Government Accountability Office recently released a report showing that tens of millions of Americans haven’t saved a penny for retirement; and roughly half of Baby Boomers have zero retirement savings. This means that there’s an overwhelming number of Americans pinning all of their retirement hopes on Social Security. Bad idea. In a recently proposed resolution, H. Res 488, Congress states point blank that Social Security “was never intended by Congress to be the sole source of retirement income for families.” Apparently they got the message from the Social Security Trustees and they want to start preparing people for the inevitable truth. This is no longer some wild conspiracy theory.

The Treasury Secretary is saying it. Congress is saying it. The numbers are screaming it: Social Security is going to fail. Ultimately this is a just another chapter in the same story– that government cannot be relied on to provide or produce, only to squander and fail. Sure, their intentions may be noble. But this level of serial incompetence can no longer be trusted, nor should we be foolish enough to believe that some new candidate can fix it. If you’re in your fifties and beyond, you’re probably going to be OK and at least get 10-15 years of benefits. If you’re in your 40s and below, you have to be 100% prepared to fend for yourself. Fortunately you have time to recover. Time to build. And time to learn.

The chaos only deepens.

• Germany Imposes Surprise Curbs On Syrian Refugees (Guardian)

Angela Merkel has performed an abrupt U-turn on her open-door policy towards people fleeing Syria’s civil war, with Berlin announcing that the hundreds of thousands of Syrians entering Germany would not be granted asylum or refugee status. Syrians would still be allowed to enter Germany, but only for one year and with “subsidiary protection” which limits their rights as refugees. Family members would be barred from joining them. Germany, along with Sweden and Austria, has been the most open to taking in newcomers over the last six months of the growing refugee crisis, with the numbers entering Germany dwarfing those arriving anywhere else.

However, the interior minister, Thomas de Maiziere, announced that Berlin was starting to fall into line with governments elsewhere in the European Union, who were either erecting barriers to the newcomers or acting as transit countries and limiting their own intake of refugees. “In this situation other countries are only guaranteeing a limited stay,” De Maiziere said. “We’ll now do the same with Syrians in the future. We’re telling them ‘you will get protection, but only so-called subsidiary protection that is limited to a period and without any family unification.’” The major policy shift followed a crisis meeting of Merkel’s cabinet and coalition partners on Thursday.

The chancellor won global plaudits in August when she suspended EU immigration rules to declare that any Syrians entering Germany would gain refugee status, though this stirred consternation among EU partners who were not forewarned of the move. Thursday’s meeting decided against setting up “transit zones” for the processing of refugees on Germany’s borders with Austria, but agreed on prompt deportation of people whose asylum claims had failed.

Until now Syrians, Iraqis and Eritreans entering Germany have been virtually guaranteed full refugee status, meaning the right to stay for at least three years, entitlement for family members to join them, and generous welfare benefits. Almost 40,000 Syrians were granted refugee status in Germany in August, according to the Berlin office responsible for the programme, with only 53 being given “subsidiary” status. That now appears to have ended abruptly. An interior ministry spokesman told the Frankfurter Allgemeine Zeitung: “The Federal Office for Migration and Refugees is instructed henceforth to grant Syrian civil war refugees only subsidiary protection.”

What happens when you fail to prepare.

• Germany Receives Nearly Half Of All Syrian Asylum Applicants (Guardian)

Germany has received nearly one in two of all asylum applications made by Syrians in EU member states this year. New figures released by the ministry of the interior on Thursday put the total number of asylum applications filed in Germany so far this year at 362,153, up 130% on January to October 2014. Nearly 104,000 of these applications were made by Syrians. This corresponds to about 47.5% of all requests for asylum submitted by Syrians in EU member states this year. Together with Germany, the countries that have received the most asylum applications from Syrians relative to their population sizes are Austria, Sweden and Hungary, with 1.3, 1.5, 2.7 and 4.7 applications per 1,000 people respectively. Europe’s next two biggest economies, France and Britain, on the other hand, have received only 0.03 and 0.02 applications from Syrians per 1,000 people respectively, according to Eurostat data.

Germany received 54,877 asylum applications in October alone, an increase of nearly 160% compared with the same month last year, according to the same figures. But the figure for formal asylum applications doesn’t reveal the full scale of the number of people Germany is absorbing. Filing the required paperwork takes time. The German interior ministry notes that the country registered 181,166 asylum seeker arrivals in October alone. Of these, 88,640 were from Syria, 31,051 from Afghanistan and 21,875 from Iraq. Between January and October, Germany registered the arrival of 758,473 asylum seekers, about a third of which (243,721) were from Syria. The country expects to receive more than a million asylum seekers this year. So far this year, 81,547 people have been granted refugee status in Germany, which represents just under 40% of all asylum decisions taken from January to October 2015.

Sweden’s been a light in a very opaque darkness, but…

• Sweden Feels The Refugee Strain (Bloomberg)

Sweden, which considers itself a humanitarian superpower, has long welcomed refugees, whether they be Jews escaping the Holocaust or victims of civil wars and natural disasters. Some 16% of its population is foreign-born, well above the U.S. figure of 13%. Since the 1990s the Scandinavian nation of 9.6 million has absorbed hundreds of thousands of migrants from the former Yugoslavia, the Middle East, and Africa. Still, Swedes have never experienced anything like the current influx. Some 360,000 refugees—mainly from Afghanistan, Iraq, and Syria—are expected to enter the country in 2015 and 2016, on top of the 75,000 who sought asylum last year. It’s as if North Carolina, which has about the same population as Sweden, sprouted a new city the size of Raleigh in three years.

In a sign that its hospitality may be wearing thin, the government announced on Oct. 23 that by next year it will end a policy of automatically granting permanent residency to most refugees. In the future, adults arriving without children will initially get only a temporary residence permit. The Swedish Migration Agency says that meeting refugees’ basic needs could cost the national government 60 billion kronor ($7 billion) in 2016. Local governments and private organizations will spend billions more. If the flow doesn’t subside, “in the long term our system will collapse,” said Foreign Affairs Minister Margot Wallström in an Oct. 30 interview with the daily Dagens Nyheter.

And Germany says ‘Stay in Austria’, and we’re off to the races…

• Sweden Tells Refugees ‘Stay in Germany’ as Ikea Runs Out of Beds (Bloomberg)

Europe’s refugee crisis is having such a major impact in Sweden that even Ikea is running out of beds. The Swedish furniture giant says its shops in Sweden and Germany are running short on mattresses and beds amid increased demand due to an unprecedented inflow of asylum seekers in the two countries. In Sweden, which along with Germany has been the most welcoming, the Migration agency had to let about 50 refugees sleep on the floor of its head office on Thursday night as it tries to find accommodation for the latest arrivals. “There are some shortages of bunk beds, mattresses and duvets” in some stores in Germany and Sweden, Josefin Thorell, an Ikea spokeswoman, said in an e-mailed response when asked whether the company had been affected by the biggest influx of migrants since World War II.

“If the situation persists we expect that it will be difficult to keep up and maintain sufficient supply,” Thorell said. Ikea has been supplying local authorities handling the refugee crisis. So far, 120,000 asylum seekers have arrived in Sweden this year and as many as 190,000 are expected to head to the country of 10 million people. Although Finance Minister Magdalena Andersson told reporters on Friday that the pressure on public finances “is not acute,” the Swedish government says it is no longer able to offer housing to new arrivals. “Those who come here may be met by the message that we can’t arrange housing for them,” Migration Minister Morgan Johansson told reporters. “Either you’ll have to arrange it yourself, or you have to go back to Germany or Denmark again.”

Meanwhile, ….

• Greek Coast Guard: Five More Migrants Found Dead (Kath.)

Greek authorities say the bodies of five more migrants have been found in the eastern Aegean Sea, which hundreds of thousands have crossed in frail boats this year seeking a better life in Europe. The coast guard said Friday that three men and a woman were found dead over the past two days in the sea off Lesvos. The eastern island is where most of the migrants head from the nearby Turkish coast, paying large sums to smugglers for a berth on overcrowded, unseaworthy vessels. The body of another man was found Thursday off the islet of Agathonissi. Well over half a million people have reached the Greek islands so far this year – a record number of arrivals – and the journey has proved fatal for hundreds.

Debt Rattle November 5 2015

Nov 052015

November 5, 2015 Posted by Raúl Ilargi Meijer at 9:08 am Finance Tagged with: Anonymous, deficit, earnings, Lesbos, Merkel, rate hike, refugees, shipping, VW 3 Responses »

Martha McMillan Roberts Three sisters at Cherry Blossom Festival, Washington, DC” 1941

• This Is the Worst U.S. Earnings Season Since 2009 (Bloomberg)

• U.S. Posts Record Deficit in Manufacturing Trade (Bloomberg)

• German Factory Orders Unexpectedly Drop for Third Straight Month (Bloomberg)

• America’s Labour Market Is Not Working (Martin Wolf)

• Yellen Signals Solid Economy Would Spur December Rate Hike (Bloomberg)

• David Stockman Explains How To Fix The World -In 7 Words- (Zero Hedge)

• The Bear Case for China Sees PBOC Following Fed to Zero Rates (Bloomberg)

• I’ll Eat My Hat If We Are Anywhere Near A Global Recession (AEP)

• VW Could Face Billions In Car Tax Repayments Over Latest CO2 Scandal (Guardian)

• VW Scandal Widens Again as India Says Vehicles Exceeded Emission Rules (BBG)

• Germany Ups Pressure On VW As Scandal Takes On New Dimension (Reuters)

• VW Emissions Scandal Still Obscured By A Cloud (Guardian)

• Germany To Retest VW Cars As Scandal Pushes Berlin To Act (Reuters)

• Basque Secessionists Follow Catalans In Push For Independence (Guardian)

• US Presses Europe To Take Steps To Reduce Greece’s Debt Burden (Bloomberg)

• Fannie, Freddie May Need To Tap Treasury, FHFA Director Says (MarketWatch)

• Maersk Line to Cut 4,000 Jobs as Shipping Market Deteriorates (WSJ)

• 2015 Million Mask March: Anonymous Calls For Day Of Action In 671 Cities (RT)

• Merkel Overwhelmed: Chancellor Plunges Germany Into Chaos (Sputnik)

• Merkel Reasserts Control as Rebellion Over Refugees Fades (Bloomberg)

• Rough Seas and Falling Temperatures Fail to Stop Flow of Refugees (NY Times)

• 800,000 ‘Illegal Entries’ To EU In 2015, Frontex Chief Says (AFP)

Not a freak incident, but a trend.

• This Is the Worst U.S. Earnings Season Since 2009 (Bloomberg)

This U.S. earnings season is on track to be the worst since 2009 as profits from oil & gas and commodity-related companies plummet. So far, about three-quarters of the S&P 500 have reported results, with profits down 3.1% on a share-weighted basis, data compiled by Bloomberg shows. This would be the biggest quarterly drop in earnings since the third quarter 2009, and the second straight quarter of profit declines. Earnings growth turned negative for the first time in six years in the second quarter this year. The damage is the biggest in commodity-related industries, with the energy sector showing a 54% drop in quarterly earnings per share so far in the quarter, with profits in the materials sector falling 15%. The picture is brighter for the telecom services and consumer discretionary sectors, with EPS growth of 23% and 19% respectively so far this quarter.

When compared with analyst expectations, about 72% of companies have beaten profit forecasts. That’s only because the consensus has been sharply cut in the past few months, Jeanne Asseraf-Bitton, head of global cross-asset research at Lyxor Asset Management says in a telephone interview. For the year as a whole, S&P 500 earnings are expected to fall 0.5%, data compiled by Bloomberg shows. For 2016, earnings growth is now seen at 7.9%, down from 10.9% in late July. Next year’s consensus is “still very optimistic,” Asseraf-Bitton says, citing the lack of positive catalyst seen for U.S. stocks in 2016 as well as the negative impact from the sharp slowdown in the U.S. energy sector. By contrast, the euro-zone is the only region worldwide where earnings are expected to “grow significantly” in 2015, according to a note from Societe Generale Head of European Equity Strategy Roland Kaloyan.

Lower oil prices hurt where they were ‘supposed’ to heal.

• U.S. Posts Record Deficit in Manufacturing Trade (Bloomberg)

The U.S. trade deficit in manufacturing hit a record $74.7 billion in September, according to an analysis of new Census Bureau data by RealityChek, a reliable blog on manufacturing and trade. That could become fodder for debate in the presidential election, where candidates have been arguing over the plight of American factory workers. The record was spotted by Alan Tonelson, founder of RealityChek. Spotting records involves searching through historical trade data, since the Census Bureau doesn’t make comparisons in its news releases. The swelling of the manufacturing trade deficit is more evidence that while the overall U.S. economy has recovered from the 2007-09 recession, the manufacturing sector continues to lag. While overall employment is up 3% since the start of the recession, in December 2007, manufacturing employment is down 10%.

According to Tonelson, the previous high for the manufacturing trade deficit was $73 billion in August. He says the U.S. appears headed for an annual record deficit in manufacturing. The Alliance for American Manufacturing noted that U.S. imports from China hit a record of $45.7 billion in September, and President Scott Paul said the inflow is “killing America’s manufacturing recovery.” Thanks to the lowest oil imports in a decade, the overall U.S. trade deficit shrank in September to $40.8 billion from $48 billion in August, according to the Census Bureau. But the one-month dip masks a rising trend. “A weakening global economy, soaring dollar, and global petro-recession with an associated inventory overhang are hurting exports and widening the deficit despite the improvement once expected with the big drop in oil prices,” Action Economics said in a statement.

It’s a global trend.

• German Factory Orders Unexpectedly Drop for Third Straight Month (Bloomberg)

German factory orders unexpectedly extended a series of declines in September amid a slump in demand for investment goods in the euro area, highlighting increasing risks for Europe’s largest economy. Orders, adjusted for seasonal swings and inflation, fell 1.7% from August, when they dropped 1.8%, data from the Economy Ministry in Berlin showed on Thursday. That’s the third consecutive decrease and compares with a median estimate of a 1% gain in a Bloomberg survey. Orders declined 1% from a year earlier. The Bundesbank said last month that an upward trend in economic activity in Germany continued in the third quarter, albeit less dynamically. While business confidence as measured by the Ifo institute fell in October for the first time in four months in response to weakening global trade, the slowdown in China in itself should only have a modest impact on the euro-area economy, according to the European Central Bank.

“Manufacturing orders are experiencing a hard time at the moment, which relates primarily to weak demand from outside the euro area,” the ministry said in the statement. “Domestic demand and from within the euro area continue to point moderately upward and supports manufacturing. Sentiment in the industry remains good.” Factory orders dropped 2.8% in the third quarter from the previous one, according to the report. Demand from within the country increased 0.3% and was up 0.9% for the euro area. Non-euro-area orders fell 8.6% in the July-to-September period. In September, orders for investment goods from the euro area fell 12.8%, reflecting a drop in demand for big-ticket items. Excluding bulk orders, demand fell 0.4%.

There are over 93 million Americans not in the labor force. How can you write about this issue and leave out that number? Wolf says ‘just’ 12% of US men “were neither in work nor looking for it.”

• America’s Labour Market Is Not Working (Martin Wolf)

In 2014, 12% — close to one in eight — of US men between the ages of 25 and 54 were neither in work nor looking for it. This was very close to the Italian ratio and far higher than in other members of the group of seven leading high-income countries: in the UK, it was 8%; in Germany and France 7%; and in Japan a mere 4%. In the same year, the proportion of US prime-age women neither in work nor looking for it was 26%, much the same as in Japan and less only than Italy’s. US labour market performance was strikingly poor for the men and women whose responsibilities should make earning a good income vital. So what is going on? The debate in the US has focused on the post-crisis decline in participation rates for those over 16. These fell from 65.7% at the start of 2009 to 62.8% in July 2015.

According to the Council of Economic Advisers, 1.6 percentage points of this decline was due to ageing and 0.3 percentage points due to (diminishing) cyclical effects. This leaves about a percentage point unexplained. Princeton’s Alan Krueger, former chairman of the council, argues that many of the long-term unemployed have given up looking for work. In this way, prolonged cyclical unemployment causes permanent shrinkage of the labour force. Thus unemployment rates might fall for two opposite reasons: the welcome one would be that people find jobs; the unwelcome one would be that they abandon the search for them. Happily, in the US, the former has outweighed the latter since the crisis. The overall unemployment rate (on an internationally comparable basis) has fallen by 5 percentage points since its 2009 peak of 10%.

In all, the proportion of the fall in the unemployment rate because of lower participation cannot be more than a quarter. Relative US unemployment performance has also been quite good: in September 2015 the rate was much the same as the UK’s, and a little above Germany’s and Japan’s, but far below the eurozone’s 10.8%. US cyclical unemployment performance has at least been decent by the standards of its peers, then. Yet as the 2015 Economic Report of the President notes, the UK experienced no decline in labour-force participation after the Great Recession, despite similar ageing trends to those in the US. Even on a cyclical basis, the decline in participation in the US is a concern. It is, however, the longer-term trends that must be most worrying. This is particularly true for the prime-aged adults.

Back in 1991, the proportion of US prime-age men who were neither in work nor looking for it was just 7%. Thus the proportion of vanished would-be workers has risen by 5 percentage points since then. In the UK, the proportion of prime-aged men out of the labour force has risen only from 6% to 8% over this period. In France, it has gone from 5 to 7%. So supposedly sclerotic French labour markets have done a better job of keeping prime-aged males in the labour force than flexible US ones. Moreover, male participation rates have been declining in the US since shortly after the second world war.

This nonsense keeps on going. Whoever follows it deserves what they get.

• Yellen Signals Solid Economy Would Spur December Rate Hike (Bloomberg)

Fed Chair Janet Yellen said an improving economy has set the stage for a December interest-rate increase if economic reports continue to assure policy makers that inflation will accelerate over time. “At this point, I see the U.S. economy as performing well,” Yellen said on Wednesday in testimony before the House Financial Services Committee in Washington. “Domestic spending has been growing at a solid pace” and if the data continue to point to growth and firmer prices, a December rate hike would be a “live possibility,” she said in response to a question from Representative Carolyn Maloney, a New York Democrat. The Federal Open Market Committee in its October statement said it will consider raising interest rates at its “next meeting,” citing “solid” rates of household spending and business investment.

“There are pretty good odds that the Fed will hike rates in December as long as employment perks back up and the unemployment rate slips further, which is what we are looking for,” said Mark Vitner, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “She is trying to keep the Fed’s options open in December.” No decision has yet been made on the timing of a rate increase, Yellen cautioned. Yellen appeared before the House Financial Services Committee to testify primarily on the Fed’s supervision and regulation of financial institutions. “What the committee has been expecting is that the economy will continue to grow at a pace that’s sufficient to generate further improvements to the labor market and to return inflation to our 2% target over the medium term,” she said.

But that wouldn’t make the 1% nearly as much money…

• David Stockman Explains How To Fix The World -In 7 Words- (Zero Hedge)

While we are used to David Stockman’s detailed and lengthy “nailing” of the real state of the world, the following brief clip of an interview with Fox Business, in which David explains how to ‘fix’ so many of our problems, can be summarized perfectly in just seven short words: “Replace The Fed with the free market.” Enjoy 4 minutes of refeshing honesty… as the Fox anchor just cannot fathom who or what would “control” rates if there was no Fed…

“He and colleagues at Fathom reckon its growth rate has slowed to about 3% a year..”

• The Bear Case for China Sees PBOC Following Fed to Zero Rates (Bloomberg)

Danny Gabay “bows to nobody” in his pessimism about China’s economy. Gabay, a former Bank of England economist, says the world’s second-biggest economy is barreling toward a hard landing. He and colleagues at Fathom reckon its growth rate has slowed to about 3% a year – less than half the official estimate of 6.9% for the year to the third quarter and the 6.5% the government is aiming for over the next five years. That means desperate measures are in store, he says. The People’s Bank of China will eventually follow its western counterparts by cutting its benchmark interest rate to zero from the current 4.35% and begin buying assets. Politicians will ease fiscal policy and step in to support banks. By cutting so deeply, the PBOC’s main rate will next year fall below that of the Fed for the first time since 2001.

It has already lowered its benchmark six times in a year and devalued the yuan by 3% against the dollar in August. “They will try to do it stone by stone, step by step,” says Gabay, a director and co-founder of Fathom. The authorities also will need to let the yuan slide further, probably by between 2% and 3% a quarter for the next two years and ultimately by about 25% overall to stop it from choking the economy even more. “The rope the Chinese have is currently around their neck and they need to let it go,” said Gabay. “It’s going to hurt.” Fathom’s case conflicts with that of Ma Jun, the PBOC’s chief economist. He said on Tuesday that some market participants are “too bearish” on the economy, where a recovery in property sales alongside recent stimulus should support expansion. The PBOC has repeatedly said it won’t need to do quantitative easing.

Underpinning Gabay’s pessimistic view is his argument that China is no special case and that its policy makers are no better equipped that those elsewhere to prop up a faltering economy. Like the U.S. and U.K. before it, China needs to face life with excess debt.
China’s total government, corporate and household debt load as of mid-2014 was equal to 282% of the country’s total annual economic output, according to McKinsey. “They will be no more adept at stopping an asset price bubble from bursting than the rest of us,” said Gabay. Its banks are now on perilous ground with non-performing loans totaling more than 20% of gross domestic product, more than the level witnessed in Japan in the 1990s before its economy entered deflation, according to Gabay. “We haven’t yet had the final shoe drop,” he said. “There could be a larger further fall in Chinese activity if we’re right and the banking system implodes.”

Ambrose notes the rise in money supply, but fully ignores that means nothing is it is not spent. A curious oversight.

• I’ll Eat My Hat If We Are Anywhere Near A Global Recession (AEP)

The damp kindling wood of global economic recovery is poised to catch fire. For the first time in half a decade of stagnation, government policy has turned expansionary in the US, China and the eurozone at the same time. Fiscal austerity is largely over. The combined money supply is surging. Such optimistic claims are perhaps hazardous, given record debt ratios in most areas of the world and given that we are six-and-a-half years into an aging economic cycle that might normally be rolling over at this stage. It certainly feels lonely. Citigroup’s Willem Buiter has issued a global recession alert. Professor Nouriel Roubini from New York University joined him this week, warning that the odds of a fresh slump have doubled to 30pc. Mr Roubini’s gloom is unsettling for me.

We saw the world in almost exactly the same way in the lead-up to the Lehman crisis, when it seemed obvious to both of us that sharply rising interest rates would prick the US housing bubble and the EMU credit bubble. This time I dissent. Years of fiscal retrenchment and balance sheet deleveraging have prevented the current global economic recovery from gathering speed, and have therefore stretched the potential lifespan of the cycle. The torrid pace of worldwide money growth over recent months is simply not compatible with an imminent crisis. A combined gauge of the global money supply put together by Gabriel Stein at Oxford Economics shows that the “broad” M3 measure grew by 8.1pc in August, and by almost as much in real terms. This is the fastest rate in 25 years, excluding the final blow-off phase of the Lehman boom.

The index has since fallen back slightly as the US settles down but the pattern is clear. It bears no relation to the monetary implosion in early to mid-2008 before the collapse of Fannie Mae and Freddie Mac, the twin mortgage giants that in turn brought down the banking system. It is, of course, possible that money signals have lost their meaning in our brave new world of zero rates and secular stagnation, but the current pace of growth would typically imply a flurry of economic activity over the following year or so. “It is a very benign picture for the world. We should see above trend growth over the next year,” said Tim Congdon from International Monetary Research. Mr Congdon said the expansion of broad money in China has accelerated to an annual pace of 18.9pc over the past three months, thanks in part to equity purchases by the central bank (PBOC), a shot of adrenaline straight to the heart – otherwise known as quantitative easing with Chinese characteristics.

The eurozone is no longer hurtling into a 1930s deflationary vortex. A trifecta of cheap money, cheap oil and a cheap euro have entirely changed the landscape, and now the European Central Bank seems curiously determined to push stimulus yet further by doubling down on QE. Central banks are strange animals, pro-cyclical by nature.

“VW has now lost €32.4bn, or 40% of its value,..”

• VW Could Face Billions In Car Tax Repayments Over Latest CO2 Scandal (Guardian)

Volkswagen could have to repay billions of pounds of tax credits to European governments after finding irregularities in the levels of carbon dioxide emitted by its cars. Shares in the embattled carmaker slumped by 10% on Wednesday, wiping €5bn off the value of the company, as analysts warned that the consequences of rigging CO2 and fuel consumption tests could be worse than the initial scandal around diesel emissions tests. VW has now lost €32.4bn, or 40% of its value, since admitting in September that it installed defeat devices into 11m diesel vehicles. The scandal is dragging down sales of new VW cars, according to industry figures due to be released in Britain on Thursday. Sales data for October from the Society of Motor Manufacturers and Traders is expected to show that VW sales fell by more than 8% year-on-year, with Seat and Skoda also down.

The latest admission about CO2 tests dramatically widens the scandal that VW is facing. Germany, Britain and other countries set vehicle tax rates based on their CO2 emissions. This means that if VW artificially lowered CO2 emissions during testing then its vehicles will have contributed far less in tax than they should have. VW has said that at least 800,000 cars are affected by the CO2 discovery and estimated the economic risks at €2bn. This works out at €2,500 per car, far more than the €609 per car put aside for the cost of the 11m cars involved in the diesel emissions scandal, which was €6.7bn in total. Analysts said these costs were likely to relate to repaying tax credits in Europe rather than customer compensation. [..]

VW could also face compensation claims from motorists over the misstatement of their vehicle’s fuel economy. According to BNP Paribas, the cost of compensation to governments and customers could reach €4bn, on top of the estimated €12bn cost of rigging nitrogen oxide tests. UBS said the total costs of the scandal, including legal claims, could reach €35bn. The discovery about the irregularities in CO2 data emerged from VW’s investigation into the diesel emissions scandal. This found that figures for CO2 and fuel consumption were set too low during CO2 tests. VW is yet to confirm which models are involved or how the misstatement occurred. The majority of the cars have a diesel engine, but petrol vehicles have been dragged into the scandal for the first time.

The whole world.

• VW Scandal Widens Again as India Says Vehicles Exceeded Emission Rules (BBG)

India sought a response from Volkswagen after probes into four car models showed diesel-fuel emissions exceeding permissible limits, and variations in results between on-road tests and those done in laboratories. Investigations into the Jetta, Vento, Polo and Audi A4 marques showed significant variations and about 314,000 vehicles are potentially affected, Ambuj Sharma, an additional secretary in India’s Heavy Industries Ministry, said in an interview in Mumbai. If cars have defeat devices that cheat tests, the matter would become criminal, he said.

Emissions exceeding India’s Bharat Stage IV standards were detected, and VW has 30 days to reply to the findings, Sharma said. The notice adds to Volkswagen’s woes after the automaker admitted in September to cheating U.S. pollution tests for years with illegal software, prompting a plunge in its shares and a leadership change. India’s standards for controlling pollution from exhaust fumes lag behind those in Europe by several years. The company said yesterday it will present its results on the diesel-engine emissions issue by the end of November, and that it’s co-operating fully with the Indian government.

Merkel is way late on this issue too.

• Germany Ups Pressure On VW As Scandal Takes On New Dimension (Reuters)

German officials stepped up the pressure on Volkswagen to clean up its act on Wednesday after it revealed it had understated the fuel consumption of some vehicles, opening a new front in the crisis at Europe’s biggest carmaker. The company said late on Tuesday it had understated the level of carbon dioxide emissions in up to 800,000 cars sold in Europe, and consequently their fuel usage. This means affected vehicles are more expensive to drive than their buyers had been led to believe. The revelations add a new dimension to a crisis that had previously focused on VW cheating tests for smog-causing nitrogen oxide emissions. They are the first to threaten to make a serious dent in the firm’s car sales since the scandal erupted as they could deter cost-conscious consumers, analysts said.

The latest admission provoked some of the strongest criticism yet from the German government of Volkswagen, which is part of an auto industry that employs over 750,000 people in the country, has been a symbol of German engineering prowess and dwarfs other sectors of the economy. Transport minister Alexander Dobrindt said the latest irregularities had caused “irritation in my ministry and with me”. Chancellor Angela Merkel’s spokesman, Steffen Seibert, said the carmaker had to take steps to prevent this happening again. “VW has a duty to clear this up transparently and comprehensively,” he added. “It’s important (for VW) to create structures to avoid such cases.” The latest revelations, which led to Volkswagen adding €2 billion to its expected costs from the scandal, are also the first time gasoline cars have been drawn into the scandal.

It’s becoming a valid question: can VW survive this?

• VW Emissions Scandal Still Obscured By A Cloud (Guardian)

The surprise is that Volkswagen’s shares fell only 10% as the cheating affair deepened in several ways. First, the scandal now covers emissions of carbon dioxide, or CO2, not only nitrogen oxide. Second, some petrol engines are now involved. Third – perhaps most importantly for shareholders who hope VW can recover quickly – the company still seems incapable of giving a straightforward account of what its own investigation has uncovered. Tuesday evening’s statement contained the obligatory expressions of regret and commitment to transparency. Indeed, Matthias Müller, the executive shoved into the hot seat in the first week of the crisis, opted for pomposity overdrive. “From the very start I have pushed hard for the relentless and comprehensive clarification of events,” he declared.

“We will stop at nothing and nobody. This is a painful process, but it is our only alternative. For us, the only thing that counts is the truth.” What, though, did VW actually say beyond the confession that “based on present knowledge” 800,000 vehicles have been affected? Almost nothing. Were cheat devices attached to the vehicles, or were real CO2 emissions disguised by other means? How many petrol cars are affected? Does the phrase “present knowledge” mean most cars in VW’s fleet are in the clear, or that they haven’t yet been examined for CO2? And, since the word “irregularities” is so vague, how severely wrong is the published CO2 data? None of these issues were addressed. A little reticence is understandable while investigations continue but it is not unreasonable to expect VW to explain why it can’t answer questions that would occur to most readers of its statement.

More disgracefully from the point of view of shareholders, the company failed to explain how it derived its estimate that the latest revelations will cost “approximately €2bn”. Does that figure merely cover tax credits that now would appear to have been unfairly earned? Analysts assume so, in which case there could also be a wave of claims from consumers who were encouraged to buy VW vehicles on the basis of bogus claims about fuel efficiency. Analysts at Exane BNP Paribas, for example, added €4bn for recall and compensation costs for customers. That assumption sounds fair. The point, though, is that VW ought to be able to say what its €2bn covers and what it doesn’t.

They should have done this two months ago, when the scandal broke.

• Germany To Retest VW Cars As Scandal Pushes Berlin To Act (Reuters)

Germany is to retest all Volkswagen car models to gauge their genuine emissions levels after new revelations from the carmaker six weeks into its biggest-ever corporate scandal pushed the government to act. Expressing his “irritation” with one of Germany’s biggest employers, Transport Minister Alexander Dobrindt said on Wednesday that all current models sold under the VW, Audi, Skoda and Seat brands – with both diesel and petrol engines – would be tested for carbon dioxide and nitrogen dioxide emissions. As the crisis deepened, VW said it had told U.S. and Canadian dealers to stop selling recent models equipped with its 3.0 V6 TDI diesel engine, while the Moody’s agency downgraded the firm’s credit rating.

The German government’s announcement followed a VW statement on Tuesday that it had understated the level of carbon dioxide emissions in around 800,000 cars sold mainly in Europe, and consequently their fuel usage. This means affected vehicles are more expensive to drive than their buyers had been led to believe. The revelations added a new dimension to a crisis that had previously focused on how Europe’s biggest carmaker cheated in U.S. tests on diesel cars for emissions of nitrogen oxide, which cause smog. Previously the government had said it would review only nitrogen dioxide emissions from VW diesel cars.

“We all have an interest that everything at VW is turned over and reviewed,” Dobrindt said, adding that the government wanted to force the company to pay the extra car taxes which would be incurred by the higher CO2 emissions levels. VW is Europe’s biggest motor manufacturer, employing over 750,000 people in Germany, and has been a symbol of the nation’s engineering prowess.

Basque independence is not that strong now, but Catalunya may change that.

• Basque Secessionists Follow Catalans In Push For Independence (Guardian)

As the central government in Madrid squares off against secessionists in Catalonia, separatists in another Spanish region have begun formally laying the groundwork for their own push for independence. EH Bildu, a leftwing pro-independence party in the Basque country, has submitted a bill to the regional parliament that it hopes will pave the way for consultations to be held in the region. “The aim is to put the political, economic and social future of the Basque country in the hands of its citizens,” EH Bildu’s spokesman, Hasier Arraiz, said as he presented the legislation. The bill mirrors that passed by the Catalan parliament last year, which aimed to create legal cover for a consultation on independence in the region. Spain’s constitutional court suspended the regional law, but Catalonia pressed ahead with the consultation, rebranding it as a symbolic referendum.

The Catalan leader, Artur Mas, and two associates are under investigation for disobedience, abuse of power and obstruction of justice over their actions. Basque separatists have shied away from specifically mentioning independence, but they referred several times to Catalonia as they presented their bill. “It’s time to confront the state democratically. They are doing it in Catalonia and we want to do it in the Basque country,” Arraiz said. The Basque bill has little chance of being passed, because EH Bildu holds only 21 of the 75 seats in the Basque parliament. Its actions, however, confirmed worries in Madrid that any concessions made to secessionists in Catalonia may have to be extended to separatist movements across the country.

Regurgitated ‘news’.

• US Presses Europe To Take Steps To Reduce Greece’s Debt Burden (Bloomberg)

The US is pressing euro-area countries to agree to an overhaul of Greece’s debt to give private-sector investors confidence that the nation’s borrowing burden is sustainable, a US Treasury official said. Europe needs to take action to lower Greece’s overall debt levels, said the official, who asked not to be identified because discussions are in progress. Participation by the European Bank for Reconstruction and Development would also be helpful to restore financial stability in Greece, the official said. The EBRD, which was created to help central and eastern European countries after the Cold War, could lend staff and contribute technical expertise to help the Greek banking system get on firmer footing, according to the official.

Lowering interest rates and extending maturities can ease Greece’s debt burden, and the US and IMF have stopped short of calling for writing down the principal of the loans. Many euro-area nations have indicated that would be a “red line,” while indicating they might agree to better servicing terms. The US call to reduce Greece’s debt burden echoes the position taken by the IMF, which has said it won’t offer new money to Greece unless the euro area commits to a formal debt operation. The US is the largest shareholder in the Washington-based IMF, which lends to countries that run into balance-of-payments troubles. Germany and other creditor nations say bringing the IMF on board is an essential element of the €86 billion bailout that the currency bloc approved in August.

The bailout loans Greece has amassed over its three rescues are the focus in the debt-relief talks, since Greece’s private- sector debt was already restructured in early 2012. Greece’s borrowing outlook gained a boost over the weekend, when the European Central Bank found that capital shortfalls at the four biggest banks won’t require all of the money set aside for financial-sector assistance within the aid program. The banks need €14.4 billion, of which €10 billion is expected to come from the rescue coffers. The European Stability Mechanism said on Saturday that this means Greece won’t draw down the full bailout amount, since it doesn’t appear to need another 15 billion euros that had been earmarked for bank aid if needed. The banks are expected to raise 4.4 billion euros from private-sector sources.

Greek government officials say the EBRD, which took bank stakes in Cyprus, has indicated its willingness to take part in the Greek banks’ search for fresh capital. The EBRD is actively looking at the recapitalization plans of the Greek banks with a view to determining whether we can play a role in the process over the next few weeks, said Axel Reiserer, a spokesman for the London-based development bank. The EBRD has recently established a presence in Greece and is now building relationships and exploring options for investments, Reiserer said. The EBRD handles project finance and does not provide budget support or financial aid.

Time warp.

• Fannie, Freddie May Need To Tap Treasury, FHFA Director Says (MarketWatch)

Fannie Mae and Freddie Mac are at risk of needing an injection of Treasury capital after the latter reported its first quarterly loss in four years, the director of the Federal Housing Finance Agency said Tuesday. FHFA Director Mel Watt issued a statement following mortgage-finance company Freddie Mac’s $475 million third-quarter loss, its first quarterly loss in four years. “Volatility in interest rates coupled with a capital buffer that will decline to zero in 2018 under the terms of the senior preferred stock purchase agreements with Treasury will likely make both Enterprises increasingly susceptible to the possibility of quarterly losses that could result in draws going forward,” Watt said. Freddie Mac said its loss was driven by interest rate changes that soured the value of derivatives it holds.

Watt, in his statement, pointed out that Freddie Mac didn’t report a decline in the credit quality of credit-related losses. The status of Fannie Mae and Freddie Mac has been left in limbo since the government took them under conservatorship in 2008. Efforts to reform the companies have stalled in Congress. But Treasury Secretary Jack Lew and his deputies have pushed back against the idea of privatizing Fannie Mae and Freddie Mac. So-called recap and release could raise the possibility of another bailout, the Treasury says. Freddie Mac has paid $96.5 billion to the U.S. Treasury in dividends. It won’t make any payments to the Treasury for the third quarter, but it won’t have to draw, either, due to the $1.8 billion in reserves.

This is big. When the supply chain of the global economy starts sputtering, look out below.

• Maersk Line to Cut 4,000 Jobs as Shipping Market Deteriorates (WSJ)

The world’s biggest container-ship operator is altering course, slashing jobs and canceling or delaying orders for new vessels after years weathering a sharp downturn in the container-shipping market. Danish conglomerate A.P. Møller-Maersk A/S said Wednesday its Maersk Line container-shipping unit would cut 4,000 jobs from its land-based staff of 23,000. It is also canceling options to buy six Triple-E vessels, the world’s largest container ships, to cope with the deepest market slump in the industry since the 2009 global financial crisis. Maersk said it would also push back plans to purchase eight slightly smaller vessels. The decision to halt its fleet expansion represents a significant U-turn for the company, which had been investing heavily amid the downturn.

Counting on its market-share dominance and deep pockets, it aimed to expand as smaller competitors retrenched. But after issuing a surprise profit warning last month, Maersk signaled it, too, was no longer immune to a combination of slowing global growth and massive container ship overcapacity on many routes. The conglomerate said it would cut its annual administration costs by $250 million over the next two years and would cancel 35 scheduled voyages in the fourth quarter. That is on top of four regularly scheduled sailings it canceled earlier in the year. Maersk has already ordered 27 vessels this year, including 11 Triple-E behemoths, which can carry in excess of 19,000 containers. “Given weaker-than-expected demand, this will be enough for us to grow in line with our ambitions over the next three years or so,” said Maersk Line Chief Executive Søren Skou.

The Triple-E orders were placed at South Korean yard Daewoo Shipbuilding and included a nonbinding option to order six more ships. Maersk officials said that under the terms of the deal, the Danish company isn’t subject to any damages for canceling the option. DSME wasn’t immediately available for comment. Although such options aren’t included in the order books of shipbuilders until they become solid orders, a move like Maersk’s represents a psychological blow for the global shipbuilding industry as well. Ships like the Triple-E go for more than $150 million each, and orders for them have helped cushion the blow for dwindling orders for other ship types.

Remember remember the 5th of November. Today Anonymous promised to ‘unveil’ 1000 American KKK members.

• 2015 Million Mask March: Anonymous Calls For Day Of Action In 671 Cities (RT)

Tens of thousands of activists disguised as Guy Fawkes are expected to the flood streets of over 671 cities as the Anonymous-led Million Mask March sweeps the globe. The hacktivist group and its followers will protest censorship, corruption, war and poverty. For the fourth year in a row the “Anonymous army,” as the group likes to call its activists, will rise up and take part in rallies and protests from Sydney to Los Angeles and Johannesburg to London. Hiding their faces behind stylized ‘Anonymous’ masks popularized by the “V for Vendetta” movie, they will come forward to make their voices heard. The Million Mask March is also about letting “various governments” know that “the free flow of information” will never be stopped.

“We now face a dilemma unfamiliar to any previous human civilization, we face this dilemma not simply as a community, nor a nation; rather collectively as a planet. We have something no previous generation has ever had, the internet,” Anonymous said in its 2015 promo video for the Million Mask March. Social media has been their major megaphone calling on people to unite in a global move. Just like last year, London expects one of the most massive marches on its streets. According to the demonstration’s page on Facebook, 18,000 people are going to join the Anonymous-inspired march. “The government and the 1% have played their hand, now it is time to play ours,” a Facebook statement reads. This year’s dress code for the London’s Million Mask March calls for “white judicial wigs, black robes & Anonymous masks for Order of Public Court.”

Activists will start gathering by the Ecuadorian Embassy “to free Robin Hood [Julian Assange]” at 9 am. The Metropolitan Police is bracing for 2015’s Million Mask March with thousands of extra police. Law enforcement will be on stand-by in case activists attack businesses or cause damage to property. Potential targets have been warned. The 2014 Million Mask March in London was marked by scuffles between activists and police. Meanwhile in Washington, the Million Mask March is expected to be attended by 25,000 people, according to Facebook’s number of “going” at the time of publication. Activists plan to meet by the Washington monument not far from the Capitol building and march towards the White House.

Note how this piece is 180º different from the next one.

• Merkel Overwhelmed: Chancellor Plunges Germany Into Chaos (Sputnik)

Merkel’s recent statements about the need to keep German borders open in order to prevent military conflicts in Europe is causing panic and anxiety among the German population, DWN wrote. According to the newspaper, Merkel’s actions have surprised political observers as well, some of whom say that the German Chancellor is “overwhelmed” and that her era will soon come to an end. The author argued that Merkel’s statements about the possibility of a military conflict are causing fear and panic among Germans. “A warning of a war in Europe expressed by the German Chancellor in public is irresponsible,” the article said, adding that in this context Merkel’s statements about the need to keep the borders open sound confusing and ridiculous.

“The reaction of all ordinary people to such a threatening statement would be that they would want the borders to be closed quickly,” the author wrote. The situation in the country is extremely critical. There is aggression and a tense atmosphere between various groups in refugee camps that may lead to an explosion anytime. Some refugees do not view the German authorities as an obstacle and do not take into account the local legislation when initiating violent clashes. “Will Merkel send the Bundeswehr to the camps? The police have already called the Bundeswehr during violent clashes because otherwise they would lose control,” the newspaper wrote.

According to the newspaper, the catastrophic situation has its roots in Merkel’s irresponsible policy of open doors towards all refugees and migrants. Now at a time when the influx of newcomers is still increasing and the country’s authorities are completely overwhelmed, the situation may come out of control any time. Germany and other European countries have been struggling to resolve the refugee crisis for many months, but without much success. Hundreds of thousands of undocumented migrants continue to flee their home countries in the Middle East and North Africa to escape violence and poverty.

Her power is more important than refugees’ lives.

• Merkel Reasserts Control as Rebellion Over Refugees Fades (Bloomberg)

German Chancellor Angela Merkel may have defused one of the biggest bust-ups of her third-term coalition after quelling a political revolt from her Bavarian allies over her handling of the refugee crisis. A nascent deal reached this week indicates Merkel is reasserting her control over the domestic political drift Germany has witnessed recently amid coalition sniping that put her chancellorship in question. While she has said many external factors will determine whether the flow of refugees can be stemmed – from government action in Turkey to a diplomatic solution to end the war in Syria – Merkel can also take heart from the latest polling that suggests her party’s sliding support has halted.

“There were some threats, but Merkel treated it quite calmly,” said Manfred Guellner, head of Berlin-based pollster Forsa, adding that her party’s poll numbers have probably reached the bottom. “As far as power brokers in Berlin are concerned, nobody at the moment wants to risk the coalition in any serious way.” The chancellor struck the agreement with her chief internal critic, Bavarian Premier Horst Seehofer, removing his threat of unilateral action to halt the influx of refugees. Merkel and Seehofer will meet Thursday with Sigmar Gabriel – head of junior coalition partner, the Social Democrats – to hammer out a final deal. All three have signaled in the last two days that they’re aiming to put the dispute behind them. “We will see if we can find common ground,” Merkel told reporters Wednesday in Berlin.

“If we don’t find an agreement, we have to continue negotiating. That wouldn’t be the first time, but everybody wants us to find a logical solution.” [..] Seehofer, the chairman of the Bavarian sister party of Merkel’s Christian Democrat Union, was assuaged by the chancellor’s commitment to reduce the number of refugees. Merkel said that would involve a series of measures including a political agreement with Turkey to protect that country’s border and a resolution of the civil war in Syria, rather than shutting Germany’s frontier or setting upper limits on those who can come in. “No country in the world can accommodate a limitless flow of refugees,” Seehofer said earlier this week, responding to the numbers of refugees arriving in Bavaria from Austria, issuing the biggest challenge yet to Merkel’s open-door policy.

Speaking to business leaders in Dusseldorf Wednesday evening, Merkel reiterated the need to cut the number of asylum-seekers and tackle the refugee crisis at its source in Syria, warning that a restoration of border controls within the European Union would hit the free movement of goods and people. “We probably need a European border guard, agreements with our neighbors and a fair distribution” of refugees in Europe, the chancellor said. “That means we need a change to the existing asylum system, but a change that strengthens Europe and not a change that weakens Europe.”

“..people will keep coming as long as the smugglers tell them to come, and the smugglers will keep attempting trips as long as the people are coming..”

• Rough Seas and Falling Temperatures Fail to Stop Flow of Refugees (NY Times)

The rubber dinghy rolled perilously on the waves and twisted sideways, nearly flipping, as more than three dozen passengers wrapped in orange life vests screamed, wept and cried frantically to God and the volunteers waiting on the rocky beach. Khalid Ahmed, 35, slipped over the side into the numbing waist-high water, struggled to shore and fell to his knees, bowing toward the eastern horizon and praying while tears poured into his salt-stiff beard. “I know it is almost winter,” he said. “We knew the seas would be rough. But please, you must believe me, whatever will happen to us, it will be better than what we left behind.” The great flood of humanity pouring out of Turkey from Syria, Afghanistan, Iraq and other roiling nations shows little sign of stopping, despite the plummeting temperatures, the increasingly turbulent seas and the rising number of drownings along the coast.

If anything, there has been a greater gush of people in recent weeks, driven by increased fighting in their homelands – including the arrival of Russian airstrikes in Syria — and the gnawing fear that the path into the heart of Europe will snap shut as bickering governments tighten their borders. “Coming in the winter like this is unprecedented,” said Alessandra Morelli, the director of emergency operations in Greece for the United Nations High Commissioner for Refugees. “But it makes sense if you understand the logic of ‘now or never.’ That is the logic that has taken hold among these people. They believe this opportunity will not come again, so they must risk it, despite the dangers.”

The surge means that countries throughout the Balkans and Central Europe already under intense logistical and political strain will not find relief — especially Germany, the destination of choice for many of the refugees. Hopes that weather and diplomacy would ease the emergency are unfounded so far, putting more pressure on financially strapped and emotionally overwhelmed governments to quickly find more winterized shelter. The influx also underscores the European Union’s failure to reach a unified solution to the crisis, leaving places like Lesbos struggling to deal with huge numbers of desperate people and raising questions about what will happen not just this winter, but in the spring and beyond.

Early this week, the number of people who had crossed into Greece from Turkey hit 600,000, after having passed 500,000 only a few weeks earlier. Both migrants and relief workers shrug when asked how far into the winter people will try to make the treacherous crossing. “Some of the smugglers, they tell the people who call them, ‘Yes, there will be more trips, you should come,’ and so the people keep coming,” said Abu Jawad, a 28-year-old Palestinian Syrian who works as a broker for Turkish smugglers, recruiting passengers from the crowds in Izmir, Turkey, and other coastal cities. “So what I think is that people will keep coming as long as the smugglers tell them to come, and the smugglers will keep attempting trips as long as the people are coming,” he said.

Leggeri should be fired from framing the issue this way. But he won’t, because this is Europe’s new normal, this is how politics wants is framed. Still, under international law people fleeing war zones cannot be labeled ‘illegal’.

• 800,000 ‘Illegal Entries’ To EU In 2015, Frontex Chief Says (AFP)

Migrants have made some 800,000 “illegal entries” to the European Union so far this year, the head of the bloc’s border agency Frontex said in an interview with German newspaper Bild published Wednesday. Warning that the influx of migrants has probably not yet “reached its peak,” Fabrice Leggeri called for European states to detain unsuccessful asylum seekers so they can be “rapidly” sent back to their countries of origin. “EU states must prepare for the fact that we still have a very difficult situation ahead of us in the coming months,” added Leggeri. Last month, Frontex said that 710,000 migrants had entered the EU in the first nine months of the year but cautioned that many people had been counted twice. The agency said on October 13 that “irregular border crossings may be attempted by the same person several times.”

“This means that a large number of the people who were counted when they arrived in Greece were again counted when entering the EU for the second time through Hungary or Croatia,” explained the agency. According to the most recent figures from the UN refugee agency, more than 744,000 people have made the perilous journey across the Mediterranean this year, the majority to Greece. On Wednesday, the first set of 30 migrants was due to leave Athens for Luxembourg under an EU plan to redistribute people throughout the 28-member bloc in order to ease pressure on countries like Greece and Italy. The bloc hopes to transfer some 160,000 people under the plan.

Debt Rattle September 17 2015

Sep 172015

September 17, 2015 Posted by Raúl Ilargi Meijer at 9:48 am Finance Tagged with: Abenomics, China, Fed, immigration, New Zealand, oil, rate hike, refugees, Turkey 2 Responses »

NPC Newsstand with Out-of-Town Papers, Washington DC 1925

• Europe Faces Several Decades Of Heavy Immigration (NY Times)

• The Growth of Refugee Inc. (WSJ)

• Refugees Face Tear Gas, Water Cannons As They Cut New Paths Through Europe (WaPo)

• Turkey Threatens To Oust Refugees Camped Near Greek Border (Guardian)

• Bulgaria Sends Troops To Guard Border With Turkey (Reuters)

• The German Town Offering Refugees Work For €1 An Hour (Bloomberg)

• Fed Decision-Day Guide: Zero Hour for Moves on Rates, Dot Plot (Bloomberg)

• QE’s Cost: Fed Exit May Hit Economy Faster Than in Past Cycles (Bloomberg)

• World Bank Fears ‘Perfect Storm’ As Fed Weighs First Rate Hike Since 2008 (AFP)

• China Stocks Sink in Late Trade With Volatility at 18-Year High (Bloomberg)

• Japan Rating Cut by S&P as Abe Falls Short of Early Promise (Bloomberg)

• Goldman Sees 15 Years of Weak Crude as $20 U.S Oil Looms (Bloomberg)

• Shale Oil’s Retreat Threatens to Leave US Short on Natural Gas (Bloomberg)

• Macquarie: Emerging Markets Not Facing 1997-Style Crisis, But Worse (Bloomberg)

• The African Nations Most Exposed to China’s Slump (Bloomberg)

• Jeremy Corbyn’s QE For The People Is Exactly What The World May Soon Need (AEP)

• Ukraine Bans Journalists Who ‘Threaten National Interests’ From Country (Guardian)

• New Zealand Blocks Farm Purchase By Chinese Firm (BBC)

• Look Out New Zealand, Here Comes Another Act of God (Bloomberg)

“..a wave of migration that makes current debates about accepting hundreds of thousands of asylum seekers seem irrelevant..”

• Europe Faces Several Decades Of Heavy Immigration (NY Times)

European leaders probably don’t want to hear this now, as they frantically try to close their borders to stop hundreds of thousands of desperate migrants and asylum seekers escaping hunger and violence in Africa and the Middle East. But they are dealing with the unstoppable force of demography. Fortified borders may slow it, somewhat. But the sooner Europe acknowledges it faces several decades of heavy immigration from its neighboring regions, the sooner it will develop the needed policies to help integrate large migrant populations into its economies and societies. That will be no easy task. It has long been a challenge for all rich countries, of course, but in crucial respects Europe does a particularly poor job.

Perhaps it’s not surprising, as a recent report by the OECD found, that it is harder for immigrants to get a job in EU nations than in most other rich countries. But that doesn’t explain why it is also harder for their European-born children, who report even more discrimination than their parents and suffer much higher rates of unemployment than the children of the native-born. Rather than fortifying borders, European countries would do better to improve on this record. The benefits would be substantial, for European citizens and the rest of the world. Over the summer, as Hungary hurried to lay razor wire along its southern border and E.U. leaders hashed out plans to destroy smugglers’ boats off the coast of North Africa, the United Nations Population Division quietly released its latest reassessment of future population growth.

Gone is the expectation that the world’s population will peak at 9 billion in 2050. Now the U.N. predicts it will hit almost 10 billion at midcentury and surpass 11 billion by 2100. And most of the growth will come from the poor, strife-ridden regions of the world that have been sending migrants scrambling to Europe in search of safety and a better life. The population of Africa, which has already grown 50% since the turn of the century, is expected to double by 2050, to 2.5 billion people. South Asia’s population may grow by more than half a billion. And Palestine’s population density is expected to double to 1,626 people per square kilometer (4,211 per square mile), three times that of densely populated India.

Over the next several decades, millions of people are likely to leave these regions, forced out by war, lack of opportunity and conflicts over resources set in motion by climate change. Rich Europe is inevitably going to be a prime destination of choice. “With Africa’s population likely to increase by more than three billion over the next 85 years, the EU could be facing a wave of migration that makes current debates about accepting hundreds of thousands of asylum seekers seem irrelevant,” wrote Adair Turner, the former chairman of Britain’s Financial Services Authority and now chairman of the Institute for New Economic Thinking.

Quite a story.

• The Growth of Refugee Inc. (WSJ)

The annual report in 2013 from a multibillion-dollar London private-equity firm that counts a French pastry baker and a Dutch shoemaker among its holdings touted a new opportunity with “promising organic and acquisitive growth potential.” That investment was the management of refugee camps. “The margins are very low,” said Willy Koch, the retired founder of the Swiss company, ORS Service, which runs a camp in Austria that overflowed this summer with migrants who crossed from the Balkans and Hungary. “One of the keys is, certainly, volume.” Since early 2014, more than a million people have claimed asylum in the EU. Germany alone is preparing for at least 800,000 asylum-seekers this year. The surge, experts say, amounts to the biggest movement of people in Europe since World War II.

The crisis has produced harrowing tales of tragic deaths and lives in upheaval. It is also giving shape to an industry that everyone from small Greek shop owners to some of America’s biggest pension funds are benefiting from: the business of migration. In many ways, private companies are increasingly defining the European migration experience. In some cases, the companies see potential to win favor with a future group of European consumers, a welcome jolt amid the Continent’s economic doldrums. In other cases, they are stepping in to help provide services that governments can’t or won’t. At times they have provoked protests from advocacy groups who accuse them of cutting corners in order to profit from human misery. Some of the businesses, in turn, say they are sensitive to the risks of working with vulnerable people, and they argue that neither governments nor charities can meet on their own the huge range of demands resulting from the tide of migrants now arriving in Europe.

“Because of our involvement it is a better service run more efficiently,” said Guy Semmens, partner at Geneva-based private-equity firm Argos Soditic, which previously invested in ORS. There are also profits to be made. In Germany, Air Berlin was paid some $350,000 last year operating charter flights to deport rejected asylum seekers on behalf of the government. In Sweden, the government paid a language-analysis firm $900,000 last year to verify asylum-seekers’ claims of where they were from. In Athens, a Western Union branch has been disbursing €20,000 a day to migrants, reaping fees on each transaction. “I’m making at least twice the money I was making last year,” said Mohammed Jafar, the Afghanistan-born owner of the branch. “I wouldn’t make this in any other country in Europe.”

Let’s see Hungary attract tourists after this.

• Refugees Face Tear Gas, Water Cannons As They Cut New Paths Through Europe (WaPo)

Refugees blazed a new pathway through Europe on Wednesday, with hundreds hiking through cornfields to reach welcoming Croatia even as others faced tear gas and water cannons from Hungarian police determined to turn them away. The contrasting scenes along the Serbian border highlighted both the make-or-break resolve of the asylum seekers and the growing friction facing Europe, which has failed to create a coordinated policy for the unprecedented influx of economic migrants and war refugees from the Middle East, Africa, Afghanistan and Pakistan. “We hit a stone and we flow around it”, said Arazak Dubal, 28, a computer programmer from Damascus, who had been on the road for 18 days.

He and his three companions reached Belgrade only to discover on Facebook and WhatsApp that the Hungarian border was closed to refugees. “So I went to Google Maps, and here we are”, said Dubal, huffing in the hot afternoon as he trudged across the farm fields. A two-hour drive to the northeast -along Serbia’s frontier with Hungary- the route was slammed shut. Just steps from Hungary, thousands of people spent the night in the wet grass on the Serbian side of the border. Hours later, hundreds tried to punch through the cordon of razor wire and riot police massed near the Serbian border town of Horgos. But they ran headlong into security forces≠ who unleashed tear gas and pepper spray to drive them back. Some refugees were swatted by batons and crumpled to the ground in pain.

“Open the door! the refugees yelled as they hurled water bottles and debris at riot police. Nearby, children screamed for their missing parents. Water cannons sprayed crowds on the Serbian side, forcing refugees to retreat to a squalid squatters camp that took root just after Hungary closed the border Tuesday. There were no major injuries, but some refugees were treated by Serbian authorities for respiratory problems from the tear gas and at least one migrant had a leg injury, AP reported. It was the first major clash between security force and migrants since police used stun grenades to stop refugees from crossing into Macedonia from Greece almost a month ago “We fled wars and violence and did not expect such brutality and inhumane treatment in Europe”, said Amir Hassan, who was drenched from a water cannon and tried to wash tear gas from his eyes, according to AP.

“Turkey is hosting approximately 2 million refugees..”

• Turkey Threatens To Oust Refugees Camped Near Greek Border (Guardian)

Turkish authorities have announced that hundreds of refugees who have set up camp on a main road at Edirne near the Greek border will be forcibly removed in three days if they refuse to leave. Many others are holding out at Istanbul’s main bus station in the hope of reaching northern Europe by land rather than risk the perilous sea journey. Bus services from the main terminal in Istanbul to cities on the Greek and Bulgarian borders were suspended last week, prompting several hundred refugees, most of them Syrians, to take to the road in an attempt to reach the European Union on foot. In the small green spaces around the bus terminal, some refugees have set up camp, with families trying to shelter smaller children against the sun with blankets and jackets.

Renas, 25, a Syrian-Kurdish construction worker from Qamishli, said he had no other hope than trying to reach Europe to claim asylum. “We are running away from a war and from the oppression of [Syrian president] Bashar [al-Assad]. There is nothing in Syria anymore, no jobs, no life, no future. In Turkey life is very difficult, because we are not allowed to work and there are no jobs here.” Turkey is hosting approximately 2 million refugees, the largest such population in the world. But increasingly difficult living and working conditions, as well as the impossibility of claiming asylum in the country, has led a growing number of people to try to reach Europe via smugglers’ routes.

Renas said he did not want to risk the dangerous journey by sea. “I have several relatives who drowned on their way to Greece,” Renas said. “These boats are nothing but floating death traps, they are not safe at all.” On Tuesday at least 22 people drowned off the Turkish coast after their boat capsized. Most refugees have resorted to paying smugglers to take them from the Turkish coast to Greek islands after authorities cracked down on the routes from Turkey to Greece and Bulgaria via the land borders.

All together now!

• Bulgaria Sends Troops To Guard Border With Turkey (Reuters)

Bulgaria is sending more soldiers to strengthen controls along its border with Turkey and avoid a refugee influx that has overwhelmed its neighbours, Defense Minister Nikolay Nenchev said on Wednesday. “There is a change in the situation in the past few days and it is hard to predict where the refugee wave will head…so we are standing ready,” Nenchev told public BNR radio. Fifty soldiers have been sent to the border and a further 160 could be deployed by the end of Thursday. The Bulgarian army could send up to 1,000 troops to back up border police if needed, he added.

Bulgaria took the measures after reports that hundreds of mostly Syrian refugees have spent the night in the open near the Turkish border with Greece, which is also very close to Bulgarian-Turkish border. Bulgaria is a member of the European Union but not the border-free Schengen Area. About 660 migrants have tried to cross the Bulgarian-Turkish border in the past 25 hours but have returned voluntarily after they had seen that the border was well-guarded, the chief secretary of the interior ministry Georgi Kostov, told reporters. Bulgaria is a member of the European Union but not the border-free Schengen Area.

“.. the maximum allowed for new arrivals. ..”

• The German Town Offering Refugees Work For €1 An Hour (Bloomberg)

Anas Al-Asadi spent three months and €6,000 making his way from his home in Damascus to Germany, braving the frigid waters of the Mediterranean aboard leaky, overcrowded ships on three separate occasions, culminating in a rescue by the Italian Coast Guard and finally a bus across the Alps. For the next four months, he was bored stiff. Then the 26-year-old got a job through a municipal program in Pfungstadt, a German town 25 miles south of Frankfurt, where he landed in February. The work wasn’t exactly challenging for Al-Asadi, who had been an attorney in Syria, and it certainly wasn’t well paid. His employer was a local youth club, since private companies are barred from hiring people without work permits, and he earned just €1 per hour, the maximum allowed for new arrivals.

But he says even simply vacuuming and sorting library books helped him better understand German culture and forced him to learn the language. “I was just sitting there sleeping, eating, doing nothing,” said Al-Asadi, who has since gotten asylum and just started working as a waiter in a local cafe. “I asked if I could do something – anything.” The town of 24,000 is home to more than 100 refugees seeking to start the formal asylum process and 50 others who have been granted residency, with more sure to come. The best way to integrate them, local officials say, is to help them find work, even if it’s odd jobs at community centers.

2 pm EDT.

• Fed Decision-Day Guide: Zero Hour for Moves on Rates, Dot Plot (Bloomberg)

Here’s what to look for when the Federal Open Market Committee releases its policy statement along with quarterly economic projections at 2 p.m. Thursday in Washington, and Federal Reserve Chair Janet Yellen holds a press conference at 2:30 p.m. he FOMC will weigh the impact on the U.S. outlook from slowing growth overseas and falling stock prices, as committee members determine whether to end almost seven years of near-zero interest rates. Economists are close to evenly divided on the outcome, with 59 of 113 surveyed by Bloomberg expecting the Fed to stand pat “It is a very finely balanced question,” said Jonathan Wright, a professor at Johns Hopkins University in Baltimore and a former economist at the central bank’s Division of Monetary Affairs. “It is close to a 50-50 call.”

While economic data have been “pretty compelling,” investors are skeptical the FOMC will want to move in the face of recent financial turbulence, said Stephen Stanley at Amherst Pierpont Securities. The FOMC’s forecasts of the benchmark fed funds rate, revealed in dot-filled charts representing each official’s projections, may suggest a more gradual pace of tightening over the next few years than was suggested in June, said Michael Hanson at Bank of America. “The most important thing investors will try to ascertain is the pace of hikes going forward,” he said. “Yellen has emphasized that it is not liftoff that matters but it is the pace of tightening and we will get some additional information on that.”

New tricks, never tested, eyes wide shut and costing trillions.

• QE’s Cost: Fed Exit May Hit Economy Faster Than in Past Cycles (Bloomberg)

Yellen and her colleagues on the Federal Open Market Committee wrap up a two-day meeting on Thursday to debate whether to increase the benchmark federal funds rate, which they have held near zero since late 2008. If and when they do move, it won’t be like before, and they’ll be using new tools to lift rates higher. In the past, the central bank kept the fed funds rate at or near the target chosen by policy makers by injecting or draining bank reserves from the system via the New York Fed’s trading desk. The amounts of cash involved were small and the Fed was pretty good at hitting its desired rate. Not anymore. Three rounds of so-called quantitative easing from 2008 to 2014, in which the Fed bought bonds to support the economy, has swamped banks with cash –deposited with them by investors who sold bonds to the Fed.

That added $2.6 trillion of reserves in excess of requirements to banks’ accounts held at the Fed. It also boosted the size of the Fed’s own balance sheet to $4.5 trillion, a five-fold increase from pre-crisis levels. [..] With so much cash and little need for banks to borrow in the fed funds market, the Fed has lost the ability to lift the funds rate in the way that it did before the crisis. It has also decided for now against selling the bonds back to investors, which would shrink its own balance sheet and extinguish the excess reserves. Instead, Fed officials designed new tools to help the central bank raise rates without reducing its balance sheet, which it hopes to slowly shrink over years by letting the bonds it now holds mature, without reinvestment. Officials say they expect to phase out reinvestments sometime after liftoff.

Their main innovation, an overnight reverse repurchase agreement facility, is a powerful solution, but heavy usage may cause problems for banks trying to comply with new regulations installed in the wake of the financial crisis, said Zoltan Pozsar at Credit Suisse. The facility promises to drain reserves from the banks by encouraging investors to withdraw the deposits created when they sold bonds to the Fed, and place the cash in money-market mutual funds. Through overnight reverse repos, the Fed can borrow the cash from money funds at a specified rate and post securities as collateral, unwinding the trades the next day. In effect, the Fed will be borrowing back the money it created to buy the bonds while cutting out the middlemen in the banking system.

No doubt there. But is that so bad?

• World Bank Fears ‘Perfect Storm’ As Fed Weighs First Rate Hike Since 2008 (AFP)

The U.S. Federal Reserve opened a two-day meeting Wednesday to weigh a historic interest rate increase amid calls for it to move gingerly as world economic growth slows. The World Bank has warned developing economies to prepare for more capital and currency market turmoil while the OECD urged the Fed to move slowly and make its policy plans clear, whatever it decides. Most analysts saw the Fed again putting off the long-awaited increase to the benchmark federal funds rate, which has been locked at 0-0.25% since the 2008 crisis, giving the world a massive supply of cheap dollars. While U.S. growth has been strong, still-weak inflation and the recent China-driven turmoil in global markets “most likely mean that the FOMC will leave rates unchanged at this week’s meeting,” said Harm Bandholz of UniCredit.

The Fed has not raised rates in more than nine years, and what would probably amount to an increase of 0.25 percentage point would represent a momentous break with the extraordinary crisis stance it has adopted since the 2008-2009 recession. It would begin what is expected to be a slow series of rate hikes toward a “normal” monetary policy stance of around 3% in the next two years. But it would also make the dollar more expensive and hike borrowing costs for developing economies around the world. The policy-setting Federal Open Market Committee, led by Fed Chairwoman Janet Yellen, will announce a decision at 1800 GMT Thursday. Yellen will then address the media, with analysts saying her justification will be as crucial to markets as the decision itself.

Zero faith in Beijing left. This could get very ugly very fast.

• China Stocks Sink in Late Trade With Volatility at 18-Year High (Bloomberg)

China’s stocks sank in the last 30 minutes of trading in thin volumes as traders tested the limits of state support amid the biggest price swings since 1997. The Shanghai Composite Index slid 2.1% to 3,086.60 at the close, wiping out an advance of as much as 1.7%, as material and drug companies slumped. The benchmark gauge jumped 4.9% on Wednesday in a last-hour rally – the hallmark of state-backed fund buying – after falling dropped 6.1% in the first two days of the week. Volatility is surging and turnover is slumping on concern government intervention will fail to shore up the world’s second-largest stock market amid signs of a deeper economic slowdown.

Price swings have been exacerbated by state investigations into market manipulation as well as the Federal Reserve’s interest-rate meeting this week. “The market is becoming increasingly volatile as state support has caused confusion to the market and investors,” said Li Jingyuan, head of securities investment at Shanghai Zhaoyi Asset Management. “Information on state buying isn’t transparent and it seems that the national team doesn’t have a clear strategy and tactics. So you see a volatile market as investors don’t follow state buying.”

Abenomics’ third arrow turns out to be a downgrade.

• Japan Rating Cut by S&P as Abe Falls Short of Early Promise (Bloomberg)

Standard & Poor’s cut Japan’s long-term credit rating one level to A+, saying it sees little chance of the Abe government’s strategy turning around the poor outlook for economic growth and inflation over the next few years. The move comes just a day after the Bank of Japan refrained from boosting record asset purchases, betting there will be a resumption in growth and inflation. That’s left the onus on Prime Minister Shinzo Abe and his Cabinet to consider a fiscal stimulus package to boost what evidence indicates is a lackluster recovery in the second half of the year so far. “We believe that the government’s economic revival strategy – dubbed “Abenomics” – will not be able to reverse this deterioration in the next two to three years,” S&P said in a statement. “Economic support for Japan’s sovereign creditworthiness has continued to weaken.”

Japan’s problems are mounting, with inflation near zero, the economy contracting last quarter and debt rising as the population ages. The IMF estimates public debt will increase to about 247% of gross domestic product next year. Japan’s sovereign debt yield and bond risk have stayed low as the Bank of Japan pushes on with its unprecedented asset purchases. The benchmark 10-year government bond yield was at 0.37% on Wednesday, after touching a record low of 0.195% in January. Credit-default swaps insuring Japan’s sovereign notes have dropped 30 basis points this year to 37 basis points, according to data provider CMA. “The government’s fiscal reform plan released in June lacked details and specifics, making it look unreliable on how to ensure fiscal sustainability,” said Masaki Kuwahara at Nomura in Tokyo, who said the downgrade wasn’t a surprise after a cut by Moody’s in December.

“Today’s downgrade is a message that the government will need to have a more credible fiscal reform plan.” Toshihiro Uomoto, a credit strategist at Nomura, said the risk now is that overseas investors will take a more critical view of Abenomics. “Japan is trying to escape from deflation, but it’s not succeeding,” he said. “The perception is that the Bank of Japan’s policy isn’t having as much of an impact as it was originally aiming for.” Japan is now rated lower than China and South Korea – two of its key economic rivals – by S&P. South Korea was lifted one level to AA- on Tuesday, with S&P citing the nation’s sound fiscal position and relatively strong economic performance.

Take out the zombie capital and restructure. Only way forward.

• Goldman Sees 15 Years of Weak Crude as $20 U.S Oil Looms (Bloomberg)

A glut of crude may keep oil prices low for the next 15 years, according to Goldman Sachs. There’s less than a 50% chance that prices will drop to $20 a barrel, most likely when refineries shut in October or March for maintenance, Jeffrey Currie, head of commodities research at the bank, said in an interview in Lake Louise, Alberta. Goldman’s long-term forecast for crude is at $50 a barrel, he said. Goldman cut its crude forecasts earlier this month, saying the global surplus of oil is bigger than it previously thought and that failure to reduce production fast enough may require prices to fall near $20 a barrel to clear the glut. Prices may touch that level when stockpiles are filled to capacity, forcing producers in some areas to cut output, Currie said Wednesday.

“When we think of the longer term oil price, yes we put it at $50 a barrel,” he said. “However the risks are to the downside given what’s happening in the other commodity markets and the macro markets more broadly.” Lower iron ore, copper and steel prices as well as weaker currencies in commodity-producing countries have reduced costs for oil companies, according to Currie. The world is shifting from an “investment phase” of a 30-year commodity cycle to an “exploitation phase,” with shale fields as an important source of output, he said.

Rest of the world will keep pumping all out.

• Shale Oil’s Retreat Threatens to Leave US Short on Natural Gas (Bloomberg)

The retrenchment in drilling for U.S. oil is threatening to leave a different market short: natural gas. “The impacts of oil rig counts extend beyond oil: the outlook for U.S. natural gas is critically dependent on the outcome of this balancing act in U.S. oil rigs,” Anthony Yuen, a strategist at Citigroup Inc. in New York, said in a report to clients Wednesday. “If the oil market remains oversupplied and oil-rig counts fall, the decline in associated gas production would leave the market short of gas.” Associated gas is the gas that comes out of oil wells along with the crude. Supplies of this byproduct from fields including the Bakken formation in North Dakota and the Eagle Ford in Texas may fall by about 1 billion cubic feet a day next year as drillers idle rigs in response to the collapse in oil prices, Yuen said.

That’s about 7% of U.S. residential gas demand. The U.S. Energy Information Administration has already forecast that shale gas production will drop in October for the fourth straight month, a record streak of declines. U.S. oil has lost half its value in the past year amid a worldwide glut of crude. Drillers have responded by sidelining almost 60% of the country’s oil rigs since Oct. 10. Crude producers in the lower 48 states may have to keep the number of working rigs low for a while longer to balance the global market, Yuen said. A recovery in the rig count may “exacerbate the current oversupplied environment” and weaken prices, he said.

Back 100 years?!

• Macquarie: Emerging Markets Not Facing 1997-Style Crisis, But Worse (Bloomberg)

If the 1997 Asian financial crisis was a heart attack for emerging markets, the current situation is akin to chronic cardiovascular disease, according to Macquarie analysts led by Viktor Shvets and Chetan Seth. In 1997, speculative attacks against the Thai baht forced the country to float and devalue its currency in a move that was swiftly followed by the Philippines, Malaysia, Singapore, and Indonesia. Then came a massive decline in Hong Kong’s stock market that led to losses in markets around the globe. While parallels exist between 1997 and the current emerging market selloff (notably in the form of a stronger dollar, which makes it more expensive for emerging-market countries to finance their debts, plus lower commodity prices and slowing trade), the Macquarie analysts reckon the current situation might actually be worse.

Instead of sharp heart attack (a la 1997), it is far more likely that EM economies and markets would face an extended period that can be best described as a “chronic disease”, with limited (if any) cures or exits, punctuated by occasional significant flare-ups (short of an outright heart attack). In many ways it is likely to be a far more painful and insidious process. In the meantime, any signs of significant strain (either at a country or corporate level) could easily freeze up the emerging market universe.

The crux of their argument is that despite the difficulties of 1997, its effects were mitigated by rising global leverage, liquidity, and trade shortly thereafter. This time around, those factors might not be there.

[A c]ombination of excessively loose monetary policies (particularly post 2000 bursting of dot-com bubble) and China’s integration into global trade systems has enabled both EMs and DMs to recover quickly. This does not describe the environment facing EMs and DMs over the next five to ten years. The combination of long-term structural shifts (primarily driven by the grinding deflationary progress of the Third Industrial Revolution, which first became apparent in early 1990s but matured into a global phenomenon over the last decade), is aggravated by the more recent impact of overleveraging and associated overcapacity.

“If you are at the top of the list in terms of dependence on China and your economy is not well diversified, there are a bunch of negative things which can fall like dominoes..”

• The African Nations Most Exposed to China’s Slump (Bloomberg)

China’s slowdown is rippling across Africa and these three nations are the most exposed, relying on demand from the Asian economy for almost half their exports: Republic of Congo, Angola and Mauritania. Oil accounts for the bulk of Angola’s and Congo’s exports, damaging their prospects after crude prices plunged 55% since the beginning of June last year to below $50 a barrel. The price of iron ore, which makes up more than 40% of Mauritania’s exports, has dropped by almost a third in the past year. The three nations each shipped more than 45% of their exports in 2014 to China, data from the IMF shows. “For countries like Angola, which basically only has one commodity, there is a huge knock when prices fall and less oil is being exported to China,” Christie Viljoen at NKC African Economics, said.

“It’s a case of when things are good, it’s really good, but when it turns bad, it’s really bad.” Angola, Africa’s second-largest oil producer after Nigeria, has been forced to devalue its currency twice since June and has slashed its budget by a quarter following a slump in revenue. Congo’s fiscal deficit almost doubled to 8.5% of gross domestic product in 2014 from the previous year and in May Finance Minister Gilbert Ondongo cut $500 million of spending from the 2015 budget to bring it down to $4.5 billion. Reliance on a single commodity and exposure to one country for the bulk of exports is a double-whammy. China’s slowdown means weaker currencies and higher import prices for these African nations, which in turn feeds into more pressure on their exchange rates and a run down of central bank reserves, said Viljoen.

“If you are at the top of the list in terms of dependence on China and your economy is not well diversified, there are a bunch of negative things which can fall like dominoes,” he said. While South Africa is the continent’s single biggest exporter to China – with shipments totaling $45 billion in 2014 – its exports are more diversified and destined to a wider range of countries. China buys 37% of South Africa’s goods, followed by the European Union at 20%. Commodities such as gold, platinum and iron ore still make up the bulk of exports at just over half, though vehicle shipments have grown in importance to reach 13% of the total, according to data from the South African Revenue Service.

Ambrose is confused.

• Jeremy Corbyn’s QE For The People Is Exactly What The World May Soon Need (AEP)

There are many good reasons to gasp at Jeremy’s Corbyn’s planned assault on capital, but his enthusiasm for “People’s QE” is not one of them. Overt monetary financing of deficits – the technical term – is exactly what the world will need if the global economy tips into another recession with interest rates already at zero and debt ratios stretched to historic extremes. Governments that do not have such a contingency plan in place to combat a potential deflationary shock from East Asia should be hauled before their respective parliaments to account for their complacency. HSBC’s chief economist, Stephen King, argues such drastic measures may be our last resort in a “Titanic” world with few lifeboats left, if anything goes wrong. He is not alone in the City of London.

“A pervasive sense that the financial elites pulled a blinder – while austerity is for little people – explains in part why Mr Corbyn has suddenly stormed into the limelight, and why the US socialist Bernie Sanders has so upset the Democratic primaries” Jeremy Lawson, from Standard Life, gave his blessing to radical action this week, arguing central banks should be willing to fund fiscal stimulus directly, and even inject money “directly into household bank accounts” if need be. Mr Corbyn’s ideas are a variant of “helicopter money”, the term coined by Milton Friedman, the doyen of monetary orthodoxy, lest we forget. Friedman did not, of course, mean that banknotes should be dropped from the sky, though they could be in extremis, but rather that central banks have the means to create money to fund tax cuts, or to cover state spending, until the economy comes back to life.

We cannot revert to plain vanilla forms of quantitative easing at this stage. The various rounds of QE by the US Federal Reserve and the Bank of England after the Lehman crisis were assuredly better than nothing. They averted a depression. But little more can be extracted from pulling down long-term interest rates by a few more basis points. The trade-off between risk and reward has, in any case, turned negative. Much of the money has leaked into asset booms, greatly enriching the “haves”, with a painfully slow trickle-down to the rest of society. A pervasive sense that the financial elites pulled a blinder – while austerity is for little people – explains in part why Mr Corbyn has suddenly stormed into the limelight, and why the US socialist Bernie Sanders has so upset the Democratic primaries.

This is not a criticism of the Anglo-Saxon central banks. The public would not have accepted avant-garde QE or helicopter money at the time. The Fed’s Ben Bernanke faced impeachment calls by hard-liners in Congress even as it was. He did what was humanly possible. Yet if we have to do QE again – and right now the US and the UK are preparing to tighten, so it is not imminent – it would surely be better to inject the money directly into the veins of the real economy.

Journalists from BBC, El Pais, Die Zeit, RT and more. In total nearly 400 individuals from France, Greece, Israel, Spain, Italy, USA, Russia, Poland, Switzerland, Germany, the UK and several other countries..

• Ukraine Bans Journalists Who ‘Threaten National Interests’ From Country (Guardian)

President Petro Poroshenko has banned two BBC correspondents from Ukraine along with many Russian journalists and public figures. The long-serving BBC Moscow correspondent Steve Rosenberg and producer Emma Wells have been barred from entering the country, according to a list published on the presidential website on Wednesday. The decree says those listed were banned for one year for being a “threat to national interests” or promoting “terrorist activities”. BBC cameraman Anton Chicherov was also banned, along with Spanish journalists Antonio Pampliega and Ángel Sastre, who went missing, presumed kidnapped, in Syria in July. The list targeted people involved in Russia’s 2014 annexation of Crimea and the aggression in eastern Ukraine, Poroshenko said, referring to the conflict with Russia-backed rebels that has continued in certain hotspots this year despite a February ceasefire.

Andrew Roy, the BBC’s foreign editor, said: “This is a shameful attack on media freedom. These sanctions are completely inappropriate and inexplicable measures to take against BBC journalists who are reporting the situation in Ukraine impartially and objectively and we call on the Ukrainian government to remove their names from this list immediately.’ The reason for the BBC correspondents’ ban was not clear, but media coverage of the conflict with the rebels – whom the authorities and local media often call “terrorists” – has been a sensitive subject. Russian television has covered the Ukrainian crisis in a negative light, frequently referring to the new Kiev government as a “fascist junta”, while international media has focused on civilian casualties and the use of cluster munitions in populated areas by both sides.

One moment of clarity.

• New Zealand Blocks Farm Purchase By Chinese Firm (BBC)

New Zealand’s government has blocked the $56m (£36m) purchase of a local farm by Chinese firm Shanghai Pengxin. The government said it was not satisfied that the sale of the Lochinver farm would be of substantial benefit to the country, which is a key requirement for a big land purchase. The surprise move comes after the body that oversees bids for sensitive assets in New Zealand had approved the sale. There have been growing concerns about foreign land ownership in New Zealand. Those fears were stoked after Shanghai Pengxin New Zealand, which is a unit of the Chinese parent firm Shanghai Pengxin, bought 16 dairy farms in the country in 2011. China is New Zealand’s biggest market for many dairy and meat products. Dairy products are also New Zealand’s biggest export.

The Chinese firm said in a statement that it was “surprised and extremely disappointed with the decision and will be considering our options”. The 13,800-hectare Lochinver farm is located in North Island and is used to breed sheep, as well as cattle for beef and dairy products. The Chinese government has encouraged its companies to look to overseas markets to meet the demands of its growing consumer class. Stevenson Group, the company selling the farm, said it was also disappointed by the outcome after a 14-month process. “We are unclear as to why this property is different to the many others that have been approved through the Overseas Investment Office process, given the obvious benefits both to the farm and to Stevenson Group,” it said in a statement.

El Niño.

• Look Out New Zealand, Here Comes Another Act of God (Bloomberg)

As if a sharp fall in the price of milk, New Zealand’s biggest export, wasn’t bad enough, the country is now bracing for a summer drought that could further hurt farmers and raise the risk of recession. The most severe El Nino weather pattern in at least 18 years is brewing and set to bring dry winds and below-average rainfall to the South Pacific nation in the months ahead. That will play havoc with dairy farmers and other agricultural producers that together account for a third of New Zealand’s export earnings. While no economists are yet forecasting a recession, central bank Governor Graeme Wheeler last week said if the El Nino is severe and continues into the middle of 2016, a contraction could be the result. The National Institute of Water & Atmospheric Research says soil moisture levels are already falling in eastern regions and there is an elevated risk of drought later in the summer amid signs the weather event may be the worst since 1998.

New Zealand’s economy, while among the world’s most developed, is particularly vulnerable to nature turning against it. The country suffered its most recent recession in 2010 after an earthquake struck the city of Christchurch, while the two previous economic contractions in 2008 and 1998 coincided with severe droughts and slumps in financial market sentiment. Agriculture and food processing industries make up about 9% of the nation’s GDP, making the economy sensitive to climate swings and global demand. “Over history, to get into recession we need to have multiple shocks,” said Nathan Penny, an economist at ASB Bank Ltd. in Auckland. “A drought makes us vulnerable, and if we got a drought plus say a shock from China then that would make a recession quite possible.”

Debt Rattle September 14 2015

Sep 142015

September 14, 2015 Posted by Raúl Ilargi Meijer at 9:21 am Finance Tagged with: BIS, border control, China, EM, Fed, Germany, Greece, Highwayman, rate hike, stocks 1 Response »

DPC Wall Street and Trinity Church, New York 1903

• China Stocks Decline Most in Three Weeks (Bloomberg)

• China’s Not The Only One Selling FX Reserves (CNBC)

• BIS Fears Emerging Market Maelstrom As Fed Tightens (AEP)

• BIS Sees Central Banks Following Fed’s Lead (WSJ)

• Fischer’s 2014 Why-Wait Wisdom Points to Fed Liftoff This Week (Bloomberg)

• Why Asia Shouldn’t Fear the Fed (Pesek)

• Eurogroup President: Greece Can Choose to be Either North or South Korea (GR)

• Germany Reinstates Controls At Austrian Border (Guardian)

• Germany Border Crackdown Deals Blow To Schengen System (Guardian)

• German Border Controls Cause Traffic Jams (AP)

• Hungary Empties Migrant Camp as Military Arrives (Bloomberg)

• On German Moral Leadership (Yanis Varoufakis)

• Equity Markets And Credit Contraction (Macleod)

• Write-Downs Abound for Oil Producers (WSJ)

• Nothing Appears To Be Breaking (Golem XIV)

• No Pay Rise? Blame The Baby Boomers’ Gilded Pension Pots (Guardian)

• The Highwayman (Jeff Thomas)

Shenzhen down 6.7%.

• China Stocks Decline Most in Three Weeks (Bloomberg)

China’s stocks slumped the most in three weeks as data over the weekend added to concern the economic slowdown is deepening and traders gauged the level of state support for equities. The Shanghai Composite Index slid 2.7% to 3,114.80 at the close, paring earlier declines of 4.7%. About 12 stocks fell for each that rose on the gauge, led by technology and consumer companies. The Hang Seng China Enterprises Index trimmed a 1.4% gain to 0.1% at 3:03 p.m. in Hong Kong. Industrial output missed economists’ forecasts, while investment in the first eight months increased at the slowest pace since 2000. The Shanghai Composite has tumbled 40% from its June high to erase almost $5 trillion in value on mainland bourses as leveraged investors fled amid concerns valuations weren’t justified given dimming growth outlook.

China’s government spent 1.5 trillion yuan ($246 billion) trying to shore up its stock market since the rout began three months ago through August, according to Goldman Sachs. “Investors continue to be nervous and are trying to avoid being caught in another correction,” said Gerry Alfonso at Shenwan Hongyuan in Shanghai. Government funds appear to be “staying out” of equities to try to discourage investors from relying on interventions, he said. Industrial output rose 6.1% in August from a year earlier, missing the 6.5% estimate. Fixed asset investment excluding rural households climbed 10.9% in the first eight months versus the 11.2% median projection of economists surveyed by Bloomberg. Five interest-rate cuts since November and plans to boost government spending have yet to revive an economy mired in a property slump, overcapacity and factory deflation.

We never presumed as much.

• China’s Not The Only One Selling FX Reserves (CNBC)

Look out world—China’s not the only central bank in town selling its currency reserves to cope with a tumultuous global economy. With crude prices having shed more than half their value over the past year, oil producing economies are feeling the sting of cheaper oil. More importantly, Saudi Arabia—OPEC’s largest member and the world’s top oil producer—bears watching as oil stays below $50 and a global glut depresses oil prices, analysts say. Even before China surprised markets by announcing a record drawdown of its foreign currency denominated assets, Saudi Arabia had already begun selling its reserves to plug a hole in its budget and support its flagging currency, the riyal. In February and March, the world’s largest oil exporter saw net foreign assets drop by more than $30 billion, the biggest two- month drop on record.

These asset sales are important because Saudi holds one of the world’s largest reserve caches—and such sales put downward pressure on the U.S. dollar and upward pressure on Treasury bond rates. “The drop in oil prices, more so than volatility per se, have contributed to a decline in oil exporters’ reserves globally,” said Rachel Ziemba at Roubini Global Economics, including members of the Gulf Cooperation Council (GCC) and other Middle East economies. “Across the 11 oil exporters I track, reserves fell by over $200 billion over the last year,” she added, even adjusting for changes in other FX holdings such as euros. According to Ziemba, Libya, Algeria and Iraq are also likely to eventually sell some FX assets, as are Bahrain and Oman. Wealthier Gulf nations have sizable FX assets, thus allowing them more time.

“France has suffered the worst deterioration of any major country in the developed world, with total non-financial debt levels spiralling upwards by 75 percentage points to 291pc, overtaking Britain at 269pc for the first time in decades. ”

• BIS Fears Emerging Market Maelstrom As Fed Tightens (AEP)

Debt ratios have reached extreme levels across all major regions of the global economy, leaving the financial system acutely vulnerable to monetary tightening by the US Federal Reserve, the world’s top financial watchdog has warned. The Bank for International Settlements said the wild market ructions of recent weeks and capital outflows from China are warning signs that the massive build-up in credit is coming back to haunt, compounded by worries that policymakers may be struggling to control events. “We are not seeing isolated tremors, but the release of pressure that has gradually accumulated over the years along major fault lines,” said Claudio Borio, the bank’s chief economist. The Swiss-based BIS said total debt ratios are now significantly higher than they were at the peak of the last credit cycle in 2007, just before the onset of global financial crisis.

Combined public and private debt has jumped by 36 percentage points since then to 265pc of GDP in the the developed economies. This time emerging markets have been drawn into the credit spree as well. Total debt has spiked 50 points to 167pc, and even higher to 235pc in China, a pace of credit growth that has almost always preceded major financial crises in the past. Adding to the toxic mix, off-shore borrowing in US dollars has reached a record $9.6 trillion, chiefly due to leakage effects of zero interest rates and quantitative easing (QE) in the US. This has set the stage for a worldwide dollar squeeze as the Fed reverses course and starts to drain dollar liquidity from global markets. Dollar loans to emerging markets (EM) have doubled since the Lehman crisis to $3 trillion, and much of it has been borrowed at abnormally low real interest rates of 1pc. Roughly 80pc of the dollar debt in China is on short-term maturities.

These countries are now being forced to repay money, though they do not yet face the sort of ‘sudden stop’ in funding that typically leads to a violent crisis. The BIS said cross-border loans fell by $52bn in the first quarter, chiefly due to deleveraging by Chinese companies. It estimated that capital outflows from China reached $109bn in the first quarter, a foretaste of what may have happened in August after the dollar-peg was broken. China and the emerging economies were able to crank up credit after the Lehman crisis and act as a shock absorber, but there is no region left in the world with much scope for stimulus if anything goes wrong now. The venerable BIS – the so-called ‘bank of central bankers’ – was the only global body to warn repeatedly and loudly before the Lehman crisis that the system was becoming dangerously unstable.

It has acquired a magisterial authority, frequently clashing with the IMF and the big central banks over the wisdom of super-easy money. Mr Borio said investors have come to count on central banks to keep the game going but engenders moral hazard and is ultimately wishful thinking. “Financial markets have worryingly come to depend on central banks’ every word and deed,” he said. A disturbing feature of the latest scare over China is a “shift in perceptions in the power of policy”, a polite way of saying that investors have suddenly begun to question whether the emperor is wearing any clothes after all following the botched intervention in the Shanghai stock market and the severing of the dollar exchange peg in August.

The BIS ‘house-view’ is that the global authorities may have put off the day of reckoning by holding interest rates below their ‘natural’ or Wicksellian rate with each successive cycle but this merely stores up greater imbalances, drawing down prosperity from the future and stretching the elastic further until it snaps back. At some point, you have to take your bitter medicine.

Will they have any choice?

• BIS Sees Central Banks Following Fed’s Lead (WSJ)

When officials at the U.S. Federal Reserve decide to raise interest rates, they will likely be setting in train a sequence of events that will lead to higher borrowing costs around the world, according to research published Sunday by the Bank for International Settlements. Economists at the consortium of central banks looked at the relationship between the short-term interest rates set by the Fed and policy rates in 22 developing economies, as well as eight smaller developed countries since 2000. The economies studied by the BIS economists were chosen partly because they are “well integrated in the global financial system,” and therefore would be more likely to be affected by Fed policy than a broader sample. They found a very close correlation between changes in policy rates, up to 63%.

Using statistical techniques, they then established that much of that had nothing to do with the fact that central banks were facing similar circumstances, that is to say, either a strengthening or weakening of the global economy. “We find that interest rates in the U.S. affect interest rates elsewhere beyond what similarities in business cycles or global risk factors would justify,” they wrote. They speculated that central banks in the countries surveyed change their policies to adjust to Fed moves for two possible reasons. In the years following the financial crisis, the BIS economists hypothesize that other central banks may have eased policy even when their domestic economies didn’t need additional stimulus to avoid an appreciation of the national currency, which could have damaged exporters.

Alternatively, they may have cut their own interest rates to avoid large inflows of short-term capital searching for higher returns than those available in the U.S., which could have threatened financial stability. “In both cases, monetary authorities would aim to avoid large interest rate differentials against the rates prevailing in the U.S.,” the economists wrote. While the Fed was easing policy during much of the period covered by the study, the BIS economists concluded there is evidence of similar “spillovers” when the Fed tightens policy, although it cautioned the scale of the response could be smaller or larger when the Fed does start to raise its short-term interest rate. “It might well be that spillovers are not fully symmetrical: for instance, policy makers might tolerate exchange rate depreciations or short-term capital outflows better than appreciations and inflows,” they wrote. “Or they might be even more sensitive about them.”

“If you wait that long, you will be waiting too long.”

• Fischer’s 2014 Why-Wait Wisdom Points to Fed Liftoff This Week (Bloomberg)

Stanley Fischer offered a word to the wise in 2014 that resonates today as he and other Federal Reserve officials face their toughest decision in years – the benefits of waiting can be overrated. Slowing economic growth abroad and volatile stock prices at home are prompting some U.S. central bankers to rethink whether now is the best time for the first interest-rate increase since 2006. One option, says former Fed Vice Chairman Donald Kohn, would be to put off a move at this week’s meeting to get a clearer view of the outlook. Investors seem to agree, putting a 70% chance of no move on Sept. 17. Yet Fischer cautioned in a speech just three months before taking over as the Fed’s No. 2 official in June 2014 that waiting carries its own difficulties.

In his view, the situation is always unclear and monetary policy takes time to affect the economy. “Don’t overestimate the benefits of waiting for the situation to clarify,” he said. Harking back to his time as head of Israel’s central bank from 2005 to 2013, Fischer recalled telling his advisers he had put off a “very difficult” decision on rates until the following month when the situation would be less uncertain. His then deputy, Meir Sokoler, commented, “It is never clear next time; it is just unclear in a different way.” Fischer, whom Fed Chair Janet Yellen has said she relies on in mapping out policy, made a similar point much more recently. “There is always uncertainty and we just have to recognize it,” he told CNBC television on Aug. 28. Asked if the Fed should delay an increase until it had an “unimpeachable case” that a move was warranted, Fischer replied, “If you wait that long, you will be waiting too long.”.

One of many silly theories out there. One thing’s clear: nobody knows. But they’re afraid to say it out loud.

• Why Asia Shouldn’t Fear the Fed (Pesek)

In 2008, Asian economies had good reason to race to decouple from the struggling West. The collapse of Lehman Brothers and subsequent contagion sent export-dependent countries in search of a more reliable customer. Not surprisingly, they latched onto China. That switch now looks like a bad bet. China’s economy is sputtering, its stocks are nose-diving and officials in Beijing appear ill-equipped to maintain the world’s second-biggest economy as a stable, dependable trading partner. There’s an obvious contradiction in developing nations relying so overwhelmingly on another emerging economy, and a highly unbalanced one at that. No doubt many in the region are now wishing they could decouple from China, too.

Asia may be able to do just that soon, argues Bloomberg Industries economist Tamara Henderson, thanks to the approach of the Federal Reserve’s first tightening cycle in a decade. “Just as Asia decoupled from the U.S. in the wake of the global financial crisis, benefiting from China’s extraordinary stimulus at the time, Fed hikes may allow Asia to decouple from China,” she writes in a recent report. However contrarian, the idea that the dreaded taper may be good for Asia has merit. It’s hard to remember a moment since 2008 when markets were more panicked and central bankers so on edge. The conventional wisdom is that a Fed rate hike will send shockwaves around the world, sucking money back to the U.S. and driving fragile nations to the IMF for help. Such fears, however, lack perspective.

For all the risks, Asia’s fundamentals are comparatively sound. Financial systems are stronger, transparency greater and currency reserve hoards big enough to avoid another 1997-like meltdown. At the same time, higher U.S. rates are an indication that the world’s biggest economy – and customer – is humming again. “The start of a rate hike cycle sends an important signal: it is time to be confident about the world’s largest economy,” Henderson argues. “The Fed appreciates this and global investors will eventually, too.”

The blind arrogance of unelected power threatening entire countries.

• Eurogroup President: Greece Can Choose to be Either North or South Korea (GR)

On Friday, during an interview with a Dutch TV network ,Eurogroup President Jeroen Dijsselbloem presented the choice he believes Greece must make. “Ultimately, it is up to Greece whether it will become North or South Korea: absolute poverty or one of the richest countries in the world,” he said. The Eurogroup president spoke on the corrupt and inefficient Greek governments that have ruled for decades and noted that it will take a different and honest government for Greece to recover. Dijsselbloem also recognized that the implementation of the third bailout’s agreed reforms will be very tough.

Dijsselbloem also issued a warning to all the sides involved in the Greek bailout. Prior to Saturday’s unofficial Eurogroup meeting on Greece, he noted that the work of the third Greek bailout must continue. Greek politics are currently captivated by the September 20 elections. The Eurogroup President noted that both the international creditors and Greece must move forward with the necessary actions, despite the elections. Creditors should prepare the evaluation of the bailout, which according to reports will take place in October, while Greece must continue to prepare for the implementation of the program.

Bye bye Mama Merkel. The troubles start now.

• Germany Reinstates Controls At Austrian Border (Guardian)

Germany introduced border controls on Sunday, and dramatically halted all train traffic with Austria, after the country’s regions said they could no longer cope with the overwhelming number of refugees entering the country. Interior minister, Thomas de Maizière, announced the measures after German officials said record numbers of refugees, most of them from Syria, had stretched the system to breaking point. “This step has become necessary,” he told a press conference in Berlin, adding it would cause disruption. Asylum seekers must understand “they cannot chose the states where they are seeking protection,” he told reporters.

All trains between Austria and Bavaria, the principal conduit through which 450,000 refugees have arrived in Germany this year, ceased at 5pm Berlin time. Only EU citizens and others with valid documents would be allowed to pass through Germany’s borders, de Maizière said. The decision means that Germany has effectively exited temporarily from the Schengen system. It is likely to lead to chaotic scenes on the Austrian-German border, as tens of thousands of refugees try to enter Germany by any means possible and set up camp next to it. German police began patrolling road crossing points with Austria at 5.30pm on Sunday. These checks may be rolled out to the borders with Poland and the Czech Republic.

Chancellor Angela Merkel agreed the details in a conference call on Saturday with her Social Democrat coalition partners. The Czech Republic said separately that it would boost controls on its border with Austria. The emergency measures are designed to give respite to Germany’s federal states who are responsible for looking after refugees. There is also discussion inside the government about sending troops to the road and rail borders with Austria to reinforce security, Der Spiegel reported.

It will not recover in its present shape.

• Germany Border Crackdown Deals Blow To Schengen System (Guardian)

Germany’s decision to re-establish national border controls on its southern frontier with Austria deals a telling blow to two decades of open travel in the 26-nation bloc known as the Schengen area. The abrupt move to suspend Schengen arrangements along the 500-mile border with Austria will shock the rest of the EU and may spur it towards a more coherent strategy to deal with its migration crisis. Yet there will be little sympathy for Berlin from Hungary, Italy or Greece, which are bearing the brunt of the mass arrivals of people from Syria, Iraq, Eritrea and Afghanistan. The German decision came as EU interior ministers prepared to meet for a crucial session on the issue. There are deep splits over Brussels’ campaign, backed by Berlin, to establish a new compulsory quota system to distribute asylum seekers across the EU on a more equitable basis.

Thomas de Maizière, the German interior minister, announced that while Austria was the focus of the new border controls, all of Germany’s borders would be affected. As the EU’s biggest country straddling the union’s geographical centre, Germany is the lynchpin of the Schengen system. It borders nine countries. Without Germany’s participation, Schengen faces collapse. It was the second unilateral decision by the German government in a fortnight. Previously, without telling Brussels, Budapest or Vienna in advance, Berlin announced that given the concentration of refugees in Hungary it was waiving European rules known as the Dublin regulations, which stipulate that people must be registered and lodge their asylum applications in the first EU country they enter.

The decision prompted a sudden surge into German of Syrians looking for safe haven. It elicited huge praise for Germany’s humane approach, but ultimately it has proven unmanageable. Sunday’s decision to suspend the open borders reverses that move. It will create a backlog of people in Austria and Hungary, with the latter also introducing a stiff new closed-borders regime, effectively criminalising most new arrivals as illegal migrants. Reports from a camp on the Hungarian-Serbian border at the weekend described a military operation, with helicopters constantly buzzing overhead and police and dogs patrolling a razor-wire border fence. A lack of running water and lavatories in the camp made for wretched conditions.

It’ll get worst, first, in Hungary. But let’s hope the media will be on all of it. Don’t allow the cops and soldiers and politicians to hide.

• German Border Controls Cause Traffic Jams (AP)

Controls on Germany’s border with Austria have led to traffic jams at crossings. Authorities in Bavaria said there was a roughly 3-kilometer (2-mile) tailback Monday on the A8 highway at Bad Reichenhall, near the Austrian city of Salzburg, news agency dpa reported. Regional broadcaster Bayerischer Rundfunk reported a 6-kilometer (nearly 4-mile) queue on the A3 highway near Passau. Germany introduced temporary border controls on Sunday evening to slow the influx of immigrants arriving from Hungary via Austria. Train services from Austria to Germany resumed Monday morning after being halted Sunday. The section between Salzburg and the German border town of Freilassing initially remained closed because of reports of people on the track, but police said they found no one.

European Union interior ministers meet for emergency migration talks on Monday a day Germany reintroduced controls at its border with Austria to stem the continuing flow of refugees. The ministers will try to narrow a yawning divide over how to share responsibility for thousands of migrants arriving daily and ease the burden on frontline states Italy, Greece and Hungary. Their talks in Brussels will focus on distributing 160,000 refugees over the next two years. The arrival of around 500,000 migrants so far this year has taken the EU by surprise and it has responded slowly. The ministers will confirm the distribution of an initial 40,000 refugees, but this scheme was conceived in May and some nations still do not plan to do their full share before year’s end.

“The country has also made illegal border entry a crime punishable by prison terms.”

• Hungary Empties Migrant Camp as Military Arrives (Bloomberg)

Hungarian police cleared a major migrant camp by the Serb border, transporting families to an unknown location on buses and making way for soldiers who arrived at the site, Index news website reported, citing its correspondent on the scene. Hungary’s government is deploying soldiers by the Serbian border starting this week to reinforce a razor-wire fence meant to keep out the tens of thousands of undocumented migrants who stream into the EU each week. The country has also made illegal border entry a crime punishable by prison terms.

Idle hopes.

• On German Moral Leadership (Yanis Varoufakis)

Kant’s practical Reason demands that we should undertake those actions which, when generalised, yield coherent outcomes. For example, lying cannot be a rational choice because, if universalised, if everyone were to lie all the time, trust in what others say would disappear and language would lose its coherence. True enough, many people refrain from lying because of the fear that they will be found out. But Kant does not consider such instrumental reasons for not lying as fully rational. In his mindset, the rational and the moral merge when we develop a capacity to act on the so-called categorical imperative: of acting in a universalisable manner independently of the consequences. For the hell of it, in plainer language.

Taking refugees in is such a universalisable act. You do not take them in because of what you expect to gain. The fact that you may end up with great gains is irrelevant. The warm inner glow of having done the ‘right’ thing, the boost to aggregate demand, the effect on productivity – all these are great repercussions of one’s Kantian rationality. They are not, however, the motivation. One’s rational acts, according to Kant, are not to be determined by expected gain, that instrumental ‘utility’ that depends on what others do and on a number of contingencies. There is no strategy here. Just the application of the deontological reasoning which requires that we should act upon ‘universalisable’ rules.

There is, of course, no way that one can prove empirically that German solidarity to the refugees was of the Kantian type, and not some instrumental attempt to feel better about themselves, to show up other Europeans, to improve the country’s demographics. Be that as it may, I do not buy these cynical, instrumental accounts. Having observed so many Germans perform countless acts of kindness toward refugees shunned by other Europeans, I am convinced that something akin to Kantian reasoning is at work. I say “something akin to Kantian reasoning” because full Kantian behaviour is neither observed in Germany nor necessarily desirable. There are times when good people need to lie (for instance when skinheads interrogate you on the whereabouts of a black person they are chasing) and there are several realms where German attitudes are far from consistent with Kantian thinking.

Indeed, this summer there was a second occasion when Europe harmed its integrity and damaged its soul: It happened on 12th and 13th July when the leader of a small European country, Greece, was threatened with expulsion from the Eurozone unless he accepted an economic reform program that no one truly believes (not even Chancellor Merkel) can alleviate my country’s long standing economic collapse, and the hopelessness that goes along with it. On that occasion no universalisable principle was in play, the result being that a proud nation was forced to surrender to an illogical economic program for which everyone in Europe, including Germany, will pay a price.

This is not the place to recount the vagaries of Greece’s never-ending crisis. And nor is there a need since its underlying cause has nothing to do with Greece: the real reason Greece has been imploding, while Berlin and the troika are insisting on a ‘reform’ program that pushes the country deeper into a black hole and keeps it hopelessly unreformed, is that the German government has not yet decided what it wants to do with the Eurozone.

“The bald fact that equity markets have now lost upside momentum and appear to be at risk of a self-feeding collapse will be viewed by central bankers with increasing alarm.”

• Equity Markets And Credit Contraction (Macleod)

There is one class of money that is constantly being created and destroyed, and that is bank credit. Bank credit is created when a bank lends money to a customer; it becomes money because the customer draws down this credit to deposit in other bank accounts and to pay creditors. It is not money that is created by a central bank; it is money that is created out of thin air by commercial banks to lend. Its contraction comes about when it is repaid, or if a customer defaults. The recent sharp fall in equity markets is leading to two levels of contraction of bank credit. Brokers’ loans to speculating investors are being unwound from record levels, notably in China and also in the US where in July they hit an all-time record of $487bn.

Then there is the secondary effect, likely to kick in if there are further falls in equity prices, when equities held as loan collateral are liquidated. This is when falling stock prices can be so destructive of bank credit, and as the US economist Irving Fisher warned in 1933, a wider cycle of collateral liquidation can ensue leading to economic depression. Fear of an escalating debt liquidation cycle is always a major concern for central bankers, so ensuring the secondary effect described above does not occur is their ultimate priority. Macroeconomic policy is centred on ensuring that bank credit grows continually, so since the Lehman crisis any tendency for bank credit to contract has been offset by central banks creating money.

The bald fact that equity markets have now lost upside momentum and appear to be at risk of a self-feeding collapse will be viewed by central bankers with increasing alarm. For this reason many investors believe that a bear market will never be permitted, and the combined weight of central banks, exchange stabilisation funds and sovereign wealth funds will be investing to support the markets. There is some evidence that this is the direction of travel for state intervention anyway, so state-sponsored buying into equity markets is a logical next step.

The risk to this line of reasoning is if the authorities are not yet prepared to intervene in this way. When the S&P 500 Index halved in the aftermath of the last financial crisis, the subsequent recovery appeared to occur without significant US government buying of equities. Instead the US government might continue to rely on more conventional monetary remedies: more quantitative easing, reversing current attempts to raise interest rates, and perhaps attempting to enforce negative interest rates as well. If, in the future, state jawboning accompanying these measures does not stop the bear market from running its course, the next round of quantitative easing will have to be far larger than anything seen so far.

Kept barely ailve only by the grace of an accounting time-lag.

• Write-Downs Abound for Oil Producers (WSJ)

U.S. oil-and-gas producers have written down the value of their drilling fields by more in 2015 than any full year in history, as the rout in commodity prices makes properties across the country not worth drilling. A group of 66 oil and gas producers have taken impairment charges totaling $59.8 billion through June, according to a tally by energy consultancy IHS Herold Inc. That tops the previous full-year record of $48.5 billion set in 2008, IHS says. In 2008, oil prices plummeted from above $140 a barrel at midyear to below $37 by year-end as the financial system’s near collapse sent the global economy into recession. The drop was steep but relatively short-lived as growing demand from China and other emerging economies was expected to suck up global supplies.

Now, with China’s economy sputtering and U.S. production at its highest level in decades, prices aren’t expected to return to the $100 level of recent years any time soon. Write-downs, or impairments, are taken by companies when the value of assets falls below the value on its books. For energy fields, that can mean that the price of leasing land, drilling and installing pipelines exceed the worth of whatever oil and gas is unearthed. Anadarko, Chesapeake. and Devon Energy are among the large energy companies that have taken multibillion-dollar impairments this year, while dozens of smaller companies have made proportionally large write-downs.

Writing down assets can shrink the pool of oil-and-gas reserves that are used as collateral for loans. Because many oil-and-gas producers spend more than they make selling commodities, abundant credit is crucial to them being able to keep going. These companies’ shares are often valued on forecast production growth more than current profitability. This year’s impairment tally is certain to grow, even if oil prices buck forecasts and move higher. U.S. securities regulators require exploration-and-production companies to value drilling properties and reserves according to energy prices over the previous 12 months.

That means the formulas used to calculate their value at the end of June still included prices from the second half of last year, before oil prices had made much of their descent to their current price around $45 a barrel. “There’s a disconnect between the 12-month average and reality,” said IHS analyst Paul O’Donnell. “There will be pricing impairments for the next two quarters, at least.” Prices used to determine asset values at the end of June were $71.50 a barrel for oil and $3.40 a million British thermal units for natural gas, IHS says. That compares with U.S. crude prices of $59.47 a barrel and $2.83 for natural gas on June 30. The consultancy expects the prices used at year-end to determine asset value will be around $50.50 and $2.80, respectively.

Tick tock.

• Nothing Appears To Be Breaking (Golem XIV)

Some time in the recent past we crawled inside our machine, closed the last hatch to the outside behind us, and then forget there was an outside. Our leaders are the worst of us. They are the lords of the machine and they are sure outside there is only chaos. We must all save the machine. Their power and wealth demands it. And yet they do not know how.

“Something Happened” but “Nothing appears to be breaking”. So said JPM’s chief economist Bruce Kasman. He was refering to the recent extreme ‘turbulence’ on the stock markets and the continuing drop in global market values. All I can say is that only a person who lives resolutely in a linear world, despite it being over a 100 years since we discovered that our world in not linear but non-linear, could say such a thing. In a linear world effects tend to follow their causes quickly and clearly. When things are non-linear, however, effects can surface long after and far away from their cause. Mr Kasman, I suspect, held his breath, waited for everything to fall down and after a couple of days, when they didn’t he concluded nothing had broken after all.

He looked at the on-going trend in events and saw they were much as before the inexplicable ‘turbulence’ and concluded that all was as before and the ‘turbulence’ was just ‘one of those things’. He could be right. But I doubt it. Ours is a non-linear world and we should remember that. Think back to August 9th 2007. That was the day when PNB Paribas suddenly closed three large sub-Prime mortgage finds. The world at large had not even heard of sub-prime. To little fanfare the ECB pumped €95 billion in to the markets to steady nerves. It was not enough. The next day, August 10th The ECB pumped in another €156 billion, the FED injected $43 Billion and the BoJ a trillion Yen.

Five days later Countrywide Financial haemorrhaged 13% of it value. 16 days later Ameriquest the largest specialist sub-prime lender in the US collapsed and on September 14th there was a bank run on Norther Rock. It was a turbulent time. And then do you know what happened? Nothing. Something had happened but nothing appeared to be broken. The linear pundits went about their crooked business. Six whole months later Bear Stearns collapsed. Its a non-linear world. And I think we are going to be reminded … again.

Generational warfare just around the corner.

• No Pay Rise? Blame The Baby Boomers’ Gilded Pension Pots (Guardian)

Workers expecting Britain’s economic recovery to fill out their pay packets are in for a nasty surprise. While the UK’s collective national income is expected to grow by more than 2% a year until at least 2020, the share distributed in wages is going to be less than many hope. As much as onepercentage point could continue to be knocked off annual pay rises because firms need to plug holes in the pension pots of retired staff, according to a report. The blame lies with the retired baby boomer and their employers who failed to ensure enough funds went into their final salary schemes during their working lives. The deficit-ridden schemes must now be filled from company cashflows, denying today’s workers a proportion of the forecast wage rises.

The day that average wages regain their pre-crash peak is now expected in the middle of 2017, but the Resolution Foundation points out that the pensions effect will continue to be felt in pay packets for years to come. Economists have failed to make the connection between private pension scheme deficits and workers’ current wages, according Jon Van Reenan – an economics professor at the London School of Economics and a leading expert on the labour market. Brian Bell, an associate professor at Oxford University consulted by the report’s author, said the huge sums involved would deepen the already growing inequality between generations. Maybe this should not come as a surprise after more than a decade watching those who own assets – mostly the over 55s – ringfence their booty from anyone planning to tax it or allow the market to diminish its value.

It is well known that a major prong of the rescue operation following the banking crash – the Bank of England’s £375bn quantitative easing scheme – was designed to generate bank lending, pumping fresh money into the economy. In practice it did more to support the stock market and help stop property values tumbling. Baby boomers had successfully lobbied in the early noughties to protect their final salary pension payouts, even when it was obvious they were becoming unaffordable. It was never fair that one generation could secure its own pensions knowing everyone else would be left with a pittance in old age – as companies rushed to ditch their final salary-linked schemes – but we did not know it would also mean people sacrificing wage rises.

Land of the crazies.

• The Highwayman (Jeff Thomas)

The Highwayman has a romantic image as a bold, 18th-century scallywag who would ride up to a coachload of aristocrats on his horse, shouting, “Stand and deliver!” Having relieved the aristocrats of their purses, he would gallop off. Today, the Highwayman is being revived in a big way in the US. But, far from being a scofflaw, he is, in fact, the law. He wears a badge and the law protects him in his roadside robberies. The revival is the result, in part, of both the defunding of police departments (creating a demand for law enforcement departments to seek money from other sources) and the encouragement of the federal government for an overall expansion of the police state. The legal justification for such highway robbery is the police practice of civil forfeiture, which has been on the books for decades.

Civil forfeiture allows law enforcement to seize property (including cash, cars, and even homes) without having to prove the owners are guilty of a crime. In many cases, drivers are not charged with any crime at all, not even a traffic citation. In fact, one Florida sheriff has noted that the best targets are those who are obeying the speed law. He knows whereof he speaks, having seized over $6.5 million on the highways of Florida. (Quite an advance on the size of the purses seized by the 18th-century highwayman.) Typically, police stop a car and make the usual request to see license and registration. If the driver asks why he was stopped, a vague explanation may be offered by the officer, or he may simply ignore the question, then demand a search of the car or the driver’s person.

The officer then seizes cash and other valuables as potential “evidence” of a crime (suspected drug dealing is a common accusation). In some cases, police threaten drivers that, if they are not cooperative, their children may be taken by Child Protective Services. The burden of proof is on the driver. In order to regain his possessions, he must prove his innocence in a court. However, in most cases, no charges are made, so there is no court case to try. Whether charges are made or not, law enforcement agencies are entitled to keep 100% of the forfeiture proceeds. Although they are required to keep records on forfeiture, in many cases, police departments avoid or even refuse to provide such information when requested.

Debt Rattle September 9 2015

Sep 092015

September 9, 2015 Posted by Raúl Ilargi Meijer at 9:00 am Finance Tagged with: bonds, China, dollar, emerging economies, EU, Fed, futures, Japan, mafia, rate hike, refugees 2 Responses »

DPC St. Catherine Street, Montréal, Québec 1916

• Japan Shares Jump Most in Seven Years (WSJ)

• Bond Market Sends Fed All-Clear to Raise Interest Rates (Bloomberg)

• World Bank Economist Warns Fed Hike Could Harm Emerging Economies (WSJ)

• Deutsche Bank: The U.S. Dollar Rally Is “Rotating, not Ending” (Bloomberg)

• Market Volatility Has Changed Immensely (Tracy Alloway)

• China Just Killed the World’s Biggest Stock-Index Futures Market (Bloomberg)

• Perfect Storm Continues To Hammer EM Currencies (BNE)

• China Slowdown Hits Major African Economies Hard (WSJ)

• Boom, Bust And Broken Trust Mark The Ages Of Finance (John Kay)

• Germany To Receive More Than 800,000 Refugees This Year (Reuters)

• Europe’s Alarming Lack Of Unity Over Refugees Could Break Up The EU (Ind.)

• Concern Over Burgeoning Trade In Fake And Stolen Syrian Passports (Guardian)

• Citi: Capital Markets Now Control Oil Prices (Tracy Alloway)

• China Intends To Oust Dollar From Oil Trade (RT)

• Obscure Hedge Fund Is Buying Tens of Billions of Dollars of US Treasurys (WSJ)

• Yet Another Measure Of Risk In Junk-Bond Market Flashing Red (MarketWatch)

• The City’s Stranglehold Makes Britain An Oh-So-Civilised Mafia State (Monbiot)

• Majority of Greeks Say Adopting Euro Has Harmed Country (Gallup)

• EU Nations Must Support UN Sovereign Debt Restructuring Proposals (19 Economists)

• Russia Demands Answers As Bulgaria, Greece Deny Syria Flights (AFP)

• How Europe Crushed Greece (Yanis Varoufakis)

• Can Hobbits Save New Zealand? (CNBC)

With a graph that offers perspective.

• Japan Shares Jump Most in Seven Years (WSJ)

Stocks in Japan jumped the most in more than seven years on Wednesday, shaking off unease about slowing growth in China amid a tentative rebound in Chinese stocks. The Nikkei Stock Average jumped 7.7%, or 1343.43, to 18770.51, marking the benchmark’s biggest daily percentage gain since October 2008. In point terms, it was the biggest gain since January 1994. A broad rally for shares and currencies comes after markets in the region fell Tuesday on weak Chinese trade data that had stoked concerns about a further slowdown in the world’s second-largest economy. Japanese stocks hit a seven-month low Tuesday. But on Wednesday, investor sentiment toward China took a positive turn.

China’s finance ministry said Tuesday evening that the country would roll out a “more forceful” fiscal policy to stimulate economic growth, which it said faced downward pressure. The Ministry of Finance said in a statement that it would allocate more funds to support some infrastructure projects and implement tax cuts for small businesses. It also said it would accelerate the approval process for duty-free stores to boost construction. “Authorities [have] released a slew of policies aimed at rebuilding investor confidence by introducing mid-to-long term market-regulating measures,” said Jacky Zhang, an analyst at BOC International.

Optimism that China was taking steps to help its economy gave the Shanghai Composite Index a 1.7% boost and sent the Hang Seng Index 3% higher. “Any signal that [China’s] government is going to do more to support growth is going to help sentiment,” especially measures on top of monetary easing, added Bernard Aw, market analyst at IG. Beijing has approved nearly 200 billion yuan of infrastructure projects since July, according to an article by state-owned Securities Daily Wednesday.

The Fed is in a bind. Not hiking rates would mean losing credibility after all the talk about it, and it would signal they don’t think the US economy is all that strong, after all the talk about that. Mind you, if it does raise rates, it will be on the back of made-up numbers, but that’s all we have left for the US, as for China.

• Bond Market Sends Fed All-Clear to Raise Interest Rates (Bloomberg)

Janet Yellen has the fixed-income market just where she wants it: ripe for the first increase in U.S. interest rates since 2006. Just about every indicator is telling the Federal Reserve Chair a move at next week’s policy meeting would cause government bonds little disruption. Her guidance has money markets pricing an extraordinarily slow pace of tightening, volatility metrics show no signs of panic, and forwards indicate benchmark rates will remain contained. Differences between shorter- and longer-term yields are flashing a positive signal for the economy. A green light from Treasuries is vital to avoid derailing the recovery that Yellen has nurtured because they help determine borrowing costs for businesses and consumers. Acting decisively now may even lend investors greater confidence in the outlook for growth.

“The debt markets have priced in a lot and it’s now time for the Fed to take advantage of that,” said Peter Tchir at Brean Capital, which has clients ranging from hedge funds and pension funds to money managers specializing in fixed-income markets. “The 10-year Treasury is at a very comfortable point, with forwards showing even a Fed hike won’t move yields much higher,” Tchir said. “Once we get through the first increase, and see the economy can do fine, it will remove the looming worry.” Bond investors have had plenty of time to get comfortable with the idea that interest rates are going to rise from near zero. As long ago as March, the Fed introduced the possibility of a move in 2015.

Policy makers said more recently they intended to act before year-end, assuming continued improvement in the labor market, as they were confident inflation would move back toward their 2% goal. With the unemployment rate at a seven-year low, futures trades are pricing in a 30% likelihood of an increase this month and 59% odds of a tightening before Dec. 31. The Fed will announce its next policy decision on Sept. 17. Even when the Fed does move, communication tools such as officials’ estimates for the future evolution of interest rates and Yellen’s own press conference may help assuage market nerves. “It’s not only about the move itself, it’s also about the statement,” said Christoph Kind at Frankfurt Trust. If “the Fed makes clear that there is a lot of time until the next hike, then there might be some relief and that could be good news.”

But does the Fed care? Surely emerging markets are not part of its mandate?!

• World Bank Economist Warns Fed Hike Could Harm Emerging Economies (WSJ)

The Federal Reserve should hold off raising rates at its policy-setting meeting later this month until global economies are stronger, Kaushik Basu, chief economist at the World Bank, said in a newspaper interview published Tuesday. An increase in rates at the Fed’s meeting next week would risk creating “panic and turmoil” in emerging markets, and would lead to “fear capital” leaving those nations along with swings in their currencies, Mr. Basu told the Financial Times. “I don’t think the Fed lift-off itself is going to create a major crisis but it will cause some immediate turbulence,” he told the newspaper. With the world economies “looking so troubled,” he said, “if the U.S. goes in for a very quick move in the middle of this, I feel it is going to affect countries quite badly.”

Where the Fed can find fodder to raise rates despite all predictions that it won’t.

• Deutsche Bank: The U.S. Dollar Rally Is “Rotating, not Ending” (Bloomberg)

Depending on which index you look at, King Dollar either gave back ground in August’s market turmoil or continued to grind higher. The most commonly cited U.S. dollar index, the DXY, retreated over the course of the month, while the Federal Reserve’s broad trade-weighted dollar index rose to its highest level since September 2003. The euro and the yen account for more than a 70% weighting in the DXY, while the broad trade-weighted dollar index, as the name suggests, tracks the greenback’s value relative to a greater array of foreign currencies. The yen and euro both gained, while stock markets tumbled, as investors unwound the popular bets made against these currencies, which also benefited from safe-haven flows.

“Fed rate expectations adjusted more than [European Central Bank] and [Bank of Japan] QE expectations (markets delayed Fed hikes but didn’t price-in more ECB/BoJ easing),” wrote researchers at Deutsche Bank, who expect the U.S. dollar to recoup its recent losses against those currencies over the next six months. The Chinese yuan, which is included in the trade-weighted dollar index but not the DXY, was devalued during the month. These two factors are at the heart of the gap between the two dollar indexes in August. And this divergence, according to Deutsche, reinforces that the U.S. dollar “upcycle” that began in 2011 is “rotating, not ending: from developed markets, to commodity foreign exchange, and now to China and Asia foreign exchange.”

Meanwhile, Goldman Sachs’s Aleksandar Timcenko and Kamakshya Trivedi have pointed out that the broad gains made by the U.S. dollar were much more a function of weakness in the other part of the currency pairs. They looked at emerging market currencies more generally, seeking to isolate how much of those foreign exchange moves over the past month could be attributed only to a U.S. dollar factor. They found that “the degree of focus on the USD factor in emerging market foreign exchange markets has waned substantially over the past month, and is near the lowest levels of the year.” Issues specific to emerging markets, they concluded, have been in the driving seat for the past month.

“..the explosion in the popularity of volatility trading is now feeding on itself..”

• Market Volatility Has Changed Immensely (Tracy Alloway)

On Aug. 24, as global markets fell precipitously, one thing was shooting up. The Chicago Board Options Exchange’s Volatility Index, the VIX, briefly jumped to a level not seen since the depths of the financial crisis. Behind the scenes, however, its esoteric cousin, the VVIX, did one better. For years, the VIX has been Wall Street’s go-to measure for expected stock market volatility. Derived from the price of options on the S&P 500, the volatility index has evolved into an asset class of its own and now acts as a benchmark for a host of futures, derivatives and exchange-traded products to be enjoyed by both big, professional fund managers and ‘mom and pop’ retail investors.

The dramatic events of last month underscore the degree to which the explosion in the popularity of volatility trading is now feeding on itself, creating booms and busts in implied volatility. Even as the VIX reached a post-crisis intraday high, the VVIX, which looks at the price of options on the VIX to gauge the implied volatility of the index itself, easily surpassed the levels it reached in 2008. Analysts, investors and traders point to two market developments that have arguably increased volatility in the world’s most famous volatility index, beginning with the rise of systematic strategies.

Such strategies fall under a host of names including commodity trading advisers (CTAs), volatility overlays, dynamic hedging and risk parity*, though it’s worth noting that many types of buy-side players have been dabbling in such techniques as they seek to boost returns in an era of historically low interest rates and suppressed market moves. When there’s a sudden spike in volatility, as there was last month, the price of near-term VIX futures rises. Meanwhile, volatility players – notably hedge funds and CTAs – scramble to buy protection as they either seek to hedge or cover short positions, causing a feedback loop that encourages near-term futures to rise even more.

A biggie.

• China Just Killed the World’s Biggest Stock-Index Futures Market (Bloomberg)

Add the world’s biggest stock-index futures market to the list of casualties from China’s interventionist campaign to stop a $5 trillion equity rout. Volumes in the country’s CSI 300 Index and CSI 500 Index futures sank to record lows on Tuesday after falling 99% from their June highs. Ranked by the World Federation of Exchanges as the most active market for index futures as recently as July, liquidity in China has dried up as authorities raised margin requirements, tightened position limits and started a police probe into bearish wagers. While trading in Chinese equities has also slumped amid curbs on short sales and an investigation into computer-driven orders, the tumble in futures volumes may cause even greater damage because of their central role in the investment strategies of domestic hedge funds and other institutional money managers.

A failure to revive the market would undercut the government’s own efforts to attract professional investors to local stock exchanges, where individuals still account for more than 80% of trades. “It is further evidence that the Chinese authorities are not yet ready to commit to freely trading markets,” said Tony Hann at Blackfriars Asset Management. “Fully functioning developed financial markets in China will take many years.” Chinese policy makers, intent on ending a selloff that has eroded confidence in their management of the economy, are targeting the futures market because selling the contracts is one of the easiest ways for investors to make large wagers against stocks.

It’s also a favored product for short-term speculators because the exchange allows participants to buy and sell the same contract in a single day. In the cash equities market, there’s a ban on same-day trading. Yet futures are also a popular tool among sophisticated investors with longer-term horizons. For hedge funds, they provide an easy way to adjust exposure to market swings. And large institutions use them to make cost-effective asset-allocation changes. As an example, selling index futures might be cheaper than unloading a large block of shares – an order that could put downward pressure on prices. A sustained slump in liquidity may spur some institutional investors to “give up hedging in futures, unwind futures positions and reduce their stock positions,” said Dai Shenshen at SWS Futures in Shanghai.

There are lots of them.

• Perfect Storm Continues To Hammer EM Currencies (BNE)

The Belarusian ruble was the world’s worst performing currency last week, hitting a record low against the dollar on August 28. A combination of market jitters over China’s economy and rising geopolitical tensions has had damaging consequences for many emerging market (EM) currencies, with the Turkish lira also hitting historic lows against the dollar. The Belarusian currency has been following the Russian ruble’s downward spiral, hit by a slump in oil prices and emerging market sell-offs. The Turkish lira also weakened to an all-time low and Turkish stocks fell on September 7 after the Kurdistan Workers’ Party (PKK) killed 16 soldiers in a single attack on September 6 in the conflict-riven southeast of the country.

The teetering Turkish currency combined with the unrest has rattled investors, causing more concerns over security ahead of the November snap election. The political uncertainty emerged after June’s inconclusive parliamentary elections kept the local currency under pressure. Falling as much as 1.29% in early trading following news of the attack on September 7, the lira weakened beyond the psychological barrier of TRY3 to the dollar. Shares dropped 1.28% on the back of the sharp decline in the lira. The lira has tumbled more than 20% this year against the dollar, making it one of the worst performing currencies on the EM landscape.

Concerns about the local currency are amplified by the prospects of a US interest rate increase later this year. Investors are also unnerved by the Turkish central bank’s reluctance to raise interest rates to defend the currency. Falling commodity prices and economic slowdowns in trading partner nations mean that Belarus and Turkey are not alone in their currency crises, with nearly all currencies in the former Soviet space taking a hit over the last month. China’s renminbi devaluation and the resultant crash in commodity prices have had a huge impact in emerging market sentiment across the globe, breeding anxiety in investors and hitting currency markets hard.

“The country hasn’t prepared itself by developing in other areas.” Channel New Zealand, Australia et al.

• China Slowdown Hits Major African Economies Hard (WSJ)

As the global oil-price slump passed its one-year anniversary in June, Angola’s President José Eduardo dos Santos booked a trip to Beijing. The long-serving autocrat hoped fresh loans and investment from China, Angola’s top trading partner, would buoy his country’s oil-dependent economy through choppy waters, according to financiers who do business with his government. On a weeklong visit, he signed a deal for China to build a $4.5 billion hydroelectric dam and a series of other projects. “China and Angola are good brothers and long-lasting strategic partners,” China’s President Xi Jinping said during meetings with Mr. dos Santos at the Chinese capital’s Great Hall of the People.

Now, Angola’s economic links to Beijing illustrate a broader problem across Africa: Nations that tied their fortunes to China find themselves hostage to its economy’s turbulence. President Xi is straining to arrest an economic slowdown in China, and that is aggravating a painful correction for oil-rich Angola, Beijing’s top African trading partner. Angolan importers are struggling to pay for critical items like medicine and grain. Moody’s Investors Service last week said rising government debt has put Angola at risk of a rating downgrade. Since January, the country’s kwanza currency has shed a quarter of its value against the U.S. dollar.

“Without the Chinese, there’s no money,” said one Angola-based financier, who said he feared retribution from Mr. dos Santos, whose family controls much of the economy. “The country hasn’t prepared itself by developing in other areas.” While forging closer economic ties with China, Angola and others also sought to consolidate their political power and aspire to Beijing’s state-led growth model. But those that bet on China’s demand for their oil and iron ore are realizing Beijing might not always be buying—and might not be able to teach them how to hang on to power indefinitely, either.

History rhymes.

• Boom, Bust And Broken Trust Mark The Ages Of Finance (John Kay)

In 1776, Adam Smith warned of the dangers of limited liability. Company directors were “the managers of other people’s money”. They could not be expected to watch over it with the “anxious vigilance” that partners would apply to their own cash. “Negligence and profusion,” Smith concluded, “must always prevail.” The South Sea bubble and other scandals of the early 18th century provided the background to Smith’s observation. For the next 150 years, corporate organisation was viewed with deep suspicion. But the huge capital requirements of rail transport paved the way for the extension of the limited liability model, which capped shareholders’ losses when their companies could not pay their debts. Still, partnership (which offers no such protection) remained the norm in finance.

The failure in 1866 of Overend Gurney, the iconic British banking collapse of the 19th century, happened just a year after its incorporation. When the House of Baring faced collapse in 1890, the Bank of England co-ordinated a rescue, but the partners were ruined. Louis Brandeis, a progressive lawyer who became a distinguished Supreme Court Justice, borrowed Smith’s “other people’s money” as the title of his excoriation of American finance sector at the beginning of the 20th century. Brandeis’s concern was the intermingling of industry and finance that was characteristic of America’s “gilded age”. It had allowed JP Morgan and Andrew Carnegie, Henry Clay Frick and John D Rockefeller to create a self-reinforcing cycle of economic and political power.

That power, Brandeis stressed, was acquired with the savings of the American public. The progressive backlash led by Brandeis and hostile journalists — the “muckrakers”, such as Ida Tarbell and Upton Sinclair — enjoyed some success in exposing the excesses of capitalism. The great industrialists of the interwar era, such as Alfred Sloan and Henry Ford, treated finance with disdain. Smith was not alone in warning that those who staked other people’s money would not treat it as carefully as their own: “When I speak of high finance as a harmful factor in recent years, I am speaking about a minority which includes the type of individual who speculates with other people’s money.” This was President Franklin Roosevelt in 1936.

The Wall Street crash and the introduction of securities regulation imposed new discipline on finance and its relationship to business. That worked for 50 years. But when Barings failed again in 1995, the organisation had become a limited company. The wealth of managers who supervised “rogue trader” Nick Leeson survived the crash; their business did not.

“I think it’s clear to all of us that the number won’t stay at 800,000..”

• Germany To Receive More Than 800,000 Refugees This Year (Reuters)

More than 800,000 refugees will come to Germany this year, the state premier of Germany’s biggest state, North Rhine-Westphalia, said on Tuesday. “I think it’s clear to all of us that the number won’t stay at 800,000,” Hannelore Kraft said, adding that this government forecast was three weeks old. She also pointed to an influx of 20,000 over the weekend. “So that the number will need to be revised upwards,” she said.

Germany says it can take in 500,000 refugees per year for years (and it will have taken closer to a million by the end of this year – 100,000 in August alone). On the other hand, France has announced it will take 24,000 refugees, and Britain 20,000 over five years (20,000 arrived in Europe just over the weekend). Other European nations refuse any refugees, and Finland, just to name an example, has so far put its quota at 800. Meanwhile, EC president Juncker prepares a grand plan to ‘resettle’ 160,000 refugees, which can’t be far from the number that arrive in one single month.

How long do you think the EU will continue to exist?

• Europe’s Alarming Lack Of Unity Over Refugees Could Break Up The EU (Ind.)

A three-year-old refugee child drowns while trying to reach the safety of a muddled and largely unwelcoming EU. Syrian refugee families are herded on and off trains in Budapest. Other refugees have their arms marked with identity numbers by Czech police. Razor-wire fences are built in Hungary – and in Calais. Germany (stiff, unyielding Germany) says: “Never mind the rules. Let them all come in.” So does Sweden. Some East European countries say: “Only Christian refugees are welcome; and not too many of those please.” Italy and Greece, swamped by refugees, demand more help from their partners. France and Austria vacillate. Spain says that it has problems enough. Britain tries, as usual, to make and play by its own rules. North vs south; east vs west; Britain vs the rest; German leadership or German dominance.

The refugee crisis is like a diabolical stress test devised to expose simultaneously all the moral and political fault lines of the European Union. The EU was born out of calamity. Over the last six decades, its policies have often been forged by resolving conflicts between member states. And yet this crisis seems more profound, more acute, more tangled, more poisonous, than any that has gone before. It is not about currencies or net contributions or farm subsidies but about the core issues of common humanity and solidarity that the EU claims to epitomise. The refugee crisis coincides with, and threatens to complicate, other existential challenges: Greek debt and the survival of the eurozone; EU reform and Britain’s in/out referendum next year. “The world is watching us,” the German Chancellor Angela Merkel said last week.

“If Europe fails on the refugee question, its close bond with universal human rights will be destroyed, and it will no longer be the Europe we dreamed of.” Open continental borders, one of the greatest of EU achievements, may be destroyed, Chancellor Merkel warned, unless the crisis is rapidly resolved. It is absurd to blame the EU for being “divided”. All the countries in Europe, and many political parties and many families, are split on how we should respond to the greatest refugee crisis on our continent for 70 years. There are no easy answers. The problem will grow even larger in the months and maybe years ahead. How could the EU not also be divided? Some of the divisions reflect genuine and honourable divergences in analysis and strategy, in geography or economic strength. Other statements hint at darker forces of extreme nationalism and racial intolerance. Disagreement is one thing. Irreconcilable differences are another.

Brilliant side effect.

• Concern Over Burgeoning Trade In Fake And Stolen Syrian Passports (Guardian)

When Mohamed paid an Afghan smuggler several hundred euros to drive him and his friends from Thessaloniki to the Greek-Macedonian border in July, he thought the money was all the smuggler would want. Instead, once on road the driver feigned a problem with the engine and persuaded the Syrians to leave the car on the pretext of avoiding detection by the police. “And then he stole our passports,” said Mohamed. Mohamed and his friends are the latest victims of a burgeoning trade in Syrian identity documents. Though most European nations have been slow to welcome more than a few Syrian refugees, the well-known preferential treatment Syrians receive within the German and Swedish asylum system has turned their passports into desired accessories for other immigrants who otherwise would not be likely qualify as refugees.

The head of the European border agency, Frontex, said this week that Arabs from outside Syria were buying counterfeit Syrian passports. Fabrice Leggeri told a French television channel that the appeal to buyers lay in how “they know Syrians get the right to asylum in all the member states of the European Union”. It’s a trade that is concerning not just Frontex, but Syrian refugees themselves, who feel that it may harm their own chances of asylum or at least slow their applications down. Hashem Alsouki, whose quest for refuge in Sweden was profiled by the Guardian earlier this year, said: “The situation with the passports is very worrying, and it might be the reason why my application for asylum is taking a long time. The officials have to spend more time working out if someone is a genuinely a Syrian citizen.”

Shale can only survive on credit.

• Citi: Capital Markets Now Control Oil Prices (Tracy Alloway)

From the concrete canyons of Lower Manhattan to the shale basins of West Texas, a new report from Citigroup underscores the degree to which Wall Street has financed the U.S. oil boom, with analysts warning that the slow grind of lower oil prices could spell tough times ahead for shale producers and their creditors. Cash-hungry shale producers have relied on a mix of bond sales and loans to finance capital-intensive gas explorations, with the interplay between the two types of financings now under the spotlight as oil companies face an intensifying credit crunch. “The shale sector is now being financially stress-tested by low prices, exposing shale’s dirty secret: many shale producers outspend cash flow and thus depend on capital market injections to fund ongoing activity,” Citi analysts wrote in research published on Tuesday.

Shale financing has zoomed into focus as U.S. oil companies embark on the latest round of semiannual discussions with lenders, known as the “redetermination of the borrowing base.” The discussions take place twice a year, in April and October, and involve shale producers and banks renegotiating the worth of oil assets securing credit facilities. With the price of crude now down 59% from its 2013 peak of $110 a barrel, October redeterminations are likely to crimp the amount of funding available to shale companies. The Citi analysts expect this year’s redeterminations to result in a 5% to 15% reduction in the borrowing base, which could in theory help spur the long-awaited shakeout in U.S. shale as producers either have to find fresh capital, merge with competitors, or simply shutter their businesses.

When it comes to the latter option, Citi argues that capital markets now wield unrivaled influence on who lives and who dies as investors choose how and at what price to fund shale producers. The wrinkle, however, is that shale companies may hang on for dear life as long as possible, thanks to perverse incentives in their corporate structure. “In an additional twist of capital markets’ influence on supply, incentives created by the capital markets may actually slow the supply rationalization for some producers in a classic case of ‘risk shifting,'” said the Citi analysts.

Brent is grossly overrated as a benchmark.

• China Intends To Oust Dollar From Oil Trade (RT)

China is planning to launch its own oil benchmark in October, similar to Brent and WTI, striving for a more important role in establishing crude prices. Unlike the Western benchmarks, the Chinese contracts will be nominated in the yuan, not the US dollar. Shanghai International Energy Exchange sent a draft futures contract to market players in August, Reuters reported quoting sources. Oil futures will be the first Chinese contract to permit direct participation of foreign investors. However, this is not the first step for greater oil market openness in China. In July, Beijing allowed private companies to import crude.

Previously importing was only done by state-run majors such as Sinopec, China National Petroleum Corporation and China National Offshore Oil Corporation, the Xinhua news agency reported. A Shanghai-based contract will compete in the crude futures market, which is worth of trillions of dollars and is dominated by two contracts, London’s Brent, seen as the global benchmark, and WTI, the key U.S. price. North Sea, Brent oil was first developed in the 1970s. The ICE Brent futures contract was developed in 1988. With an approximate output of only 1 million barrels per day, this blend is considered a benchmark and its contracts are now used to set prices for roughly 2/3 of the world’s oil. China is one of the world’s largest oil buyers. Nearly 60% of its oil consumption comes from imports.

Casino.

• Obscure Hedge Fund Is Buying Tens of Billions of Dollars of US Treasurys (WSJ)

A little-known New York hedge fund run by a former Yale University math whiz has been buying tens of billions of dollars of U.S. Treasury debt at recent auctions, drawing attention from the Treasury Department and Wall Street. Element Capital Management, led by trader Jeffrey Talpins, has been the largest purchaser in dozens of government-bond auctions over the past 10 months, people familiar with the matter said. The buying is part of an apparent effort by the fund to use borrowed money to exploit small inefficiencies in the world’s most liquid securities market, a strategy that is delivering sizable profits, said people close to the matter. Mr. Talpins is an intense and reserved trader formerly at Citigroup and Goldman Sachs.

He is known for a tenacious style that can grate on rivals and once tested the patience of former Federal Reserve Chairman Ben Bernanke. Element has been the largest bidder in many of the 62 Treasury note and bond auctions between last November and July, these people said. At many recent auctions, some of which involved sales of more than $30 billion of debt, Element purchased about 10% of the issue, these people said. That is an unusually large figure, analysts said. Element’s activity has raised questions because the cumulative purchases far exceed the hedge fund’s $6 billion in assets under management.

Treasury officials, who frequently meet with large auction participants, have asked Element about its activity, said someone close to the matter. “Their buying is eyebrow-raising,” said a trader who once worked for a firm that deals in government securities and witnessed Element’s bidding. These primary dealers often know the identity of other auction bidders. Element “never shared its strategy, but we often asked,” the trader said.

More casino.

• Yet Another Measure Of Risk In Junk-Bond Market Flashing Red (MarketWatch)

Yet another measure of risk in the U.S. junk-bond market is flashing an alarming signal. Moody’s Investors Service said its Covenant Quality Index deteriorated to its worst level on record in August from July, blowing past the previous record low set in November 2014. The index measures the degree of protection afforded to holders of junk, or high-yield, bonds sold by North American issuers. Covenants are provisions that aim to protect the credit quality of an issuer over time as a way to safeguard the bondholder’s investment. For the issuer, they are the strings attached to a deal that regulate its behavior and prevent it from further increasing its risk profile.

The Moody’s index uses a three-month rolling average covenant quality score that is weighted by each month’s total bond issuance. The scale runs from 1.0 to 5.0, where a lower score is a sign of stronger covenant quality, and a higher score is the opposite. The index rose to 4.53 in August from 4.37 in July and 4.42 in November 2014. It is now a full 116 basis points weaker than its best-ever score of 3.37 set in April 2011. “Single-month record weak scores in June and July drove the CQI to 4.53 in August for its worst score to date,” Moody’s analysts wrote in a report.

No doubt about it.

• The City’s Stranglehold Makes Britain An Oh-So-Civilised Mafia State (Monbiot)

It is not just that the very rich no longer fall while the very poor no longer rise. It’s that the system itself is protected from risk. Through bailouts, quantitative easing and delays in interest-rate rises, speculative investment has been so well cushioned that – as the Guardian economics editor, Larry Elliott, puts it – financial markets are “one of the last bastions of socialism left on Earth”. Public services, infrastructure, the very fabric of the nation: these too are being converted into risk-free investments. Social cleansing is transforming central London into an exclusive economic zone for property speculation. From a dozen directions, government policy converges on this objective. The benefits cap and the bedroom tax drive the poor out of their homes.

The forced sale of high-value council houses creates a new asset pool. An uncapped and scarcely regulated private rental market turns these assets into gold. The freeze on council-tax banding since 1991, the lifting of the inheritance tax threshold, and £14bn a year in tax breaks for private landlords all help to guarantee stupendous returns. And for those who wish simply to sit on their assets, the government can help here too, by ensuring there are no penalties for leaving buildings empty. As a result, great tracts of housing are removed from occupation. Agricultural land has proved an even better punt for City money: with the help of capital gains, inheritance and income tax exemptions, as well as farm subsidies, its price has quadrupled in 12 years.

Property in this country is a haven for the proceeds of international crime. The head of the National Crime Agency, Donald Toon, notes that “the London property market has been skewed by laundered money. Prices are being artificially driven up by overseas criminals who want to sequester their assets here in the UK.” It’s hardly surprising, given the degree of oversight. Private Eye has produced a map of British land owned by companies registered in offshore tax havens. The holdings amount to 1.2m acres, including much of the country’s prime real estate. Among those it names as beneficiaries are a cast of Russian oligarchs, oil sheikhs, British aristocrats and newspaper proprietors. These are the people for whom government policy works – and the less regulated the system that enriches them, the happier they are.

Offer Greece a safe way out and people will vote for it.

• Majority of Greeks Say Adopting Euro Has Harmed Country (Gallup)

As the Greek debt crisis came to a head again earlier this summer, it’s no surprise that leaders in more solvent eurozone countries expressed doubts about Greece’s participation in the monetary union — but these doubts are also widespread among Greeks themselves. A majority of adults in the country -55%- said in a poll conducted May 14-June 16 that they think converting from the Greek drachma to the euro in 2001 has harmed Greece, while one-third (34%) said the common currency has benefited the country. The situation in Greece reached a critical point on June 30 -shortly after the survey was completed- when Greece became the first developed country to default on a loan payment to the IMF. In a July 5 referendum, Greeks resolutely voted against an extension of the country’s second eurozone bailout, in protest against the new austerity measures it would have carried.

Greeks’ doubts about the euro reflect the effects of austerity measures over the past five years, including higher taxes and deep cuts in public spending, that many economists say have contributed to the country’s sharp economic contraction and soaring unemployment. Whether Greece would have been better off had it never joined the euro remains a matter of debate, however, as the country saw increased economic growth and a much-improved inflation rate through most of the 2000s. Greeks are less likely to harbor doubts about their country’s membership in the European Union. In fact, responses to this question are essentially the inverse of those regarding eurozone participation: 54% of Greeks say EU membership benefits the country, while 35% believe the opposite.

The EU has a much longer history than the euro, and Greece has been a member since 1981; thus, a much larger proportion of the Greek population is too young to remember a time when the country wasn’t an EU member. That generational difference may be reflected in the finding that the Greeks aged 60 and older are somewhat less likely to feel EU membership is a benefit (48%) than those younger than 60 (56%). While Greeks are less likely to say EU membership harms the country than they are to say the same about participation in the euro, the finding that about one-third overall feel this way is remarkable in light of the fervor with which many southern and eastern European countries have pursued membership over the past 20 years.

Piketty, Varoufakis, Steve Keen etc. And yes, the world is in dire need of international restructuring laws. They could protect Greece from Brussels, for one thing.

• EU Nations Must Support UN Sovereign Debt Restructuring Proposals (19 Economists)

On September 10, the United Nations General Assembly will vote on nine principles concerning the restructuring of sovereign debts. Abiding by such principles would have avoided the pitfalls of the Greek crisis, in which political representatives gave in to creditor demands despite their lack of economic sense and their disastrous social impact. This public interest resolution must be supported by all European states and brought into the public debate. The Greek crisis has made clear that individual states acting alone cannot negotiate reasonable conditions for the restructuring of their debt within the current political framework, even though these debts are often unsustainable over the long term.

Throughout its negotiations with creditor institutions, Greece faced a stubborn refusal to consider any debt restructuring, even though this refusal stood in contradiction to the IMF’s own recommendations. At the UN in New York exactly one year ago, Argentina, with the support of the 134 countries of the G77, proposed creating a committee aimed at establishing an international legal framework for the restructuring of sovereign debts. This committee, backed up by experts of the UNCTAD, today submits to vote nine principles that should be respected when restructuring sovereign debt: sovereignty, good faith, transparency, impartiality, equitable treatment, sovereign immunity, legitimacy, sustainability and majority restructuring.

In recent decades, a debt market has emerged that states are constrained to submit to. Argentina, standing at the forefront of these efforts, has been fending off “vulture funds” ever since it restructured its debt. These funds recently succeeded in freezing Argentina’s assets in the United States through the intervention of the American courts. Yesterday Argentina, today Greece, and tomorrow perhaps France as well: any indebted country can be blocked from restructuring its debt in spite of all common sense. Establishing a legal framework for debt restructuring, allowing each state to solve its debt problems without risking financial collapse or the loss of its sovereignty, is a matter of great urgency in promoting financial stability.

Key qeustion: could Russia mess up Syria even worse than “we” have done?

• Russia Demands Answers As Bulgaria, Greece Deny Syria Flights (AFP)

Moscow on Tuesday demanded answers from Greece and Bulgaria after Sofia banned Russian supply flights to Syria from its airspace and Athens said it had been asked by Washington to do the same. “If anyone – in this case our Greek and Bulgarian partners – has any doubts, then they, of course, should explain what the problem is,” deputy foreign minister Mikhail Bogdanov told the Interfax news agency. “If we are talking about them taking some sort of restrictive or prohibitive measures on the Americans’ request, then this raises questions about their sovereign right to take decisions about planes from other countries – Russia in particular – crossing their air space,” he said. “We explain where our planes are flying to, and what their purpose and their cargo is,” he added.

He said that ferrying cargo, which included humanitarian and military aid, through the airspace of a third party – as well as obtaining permission to do so – should be a routine procedure. “We’ve never had any problems before,” he said. Washington has expressed concern following reports suggesting Moscow may be boosting military support to Syrian President Bashar al-Assad and had sent a military advance team to the war-torn country. Earlier on Tuesday, NATO member Bulgaria confirmed it had refused permission late last night for an unspecified number of Russian aircraft to cross its airspace. Greece said on Monday that Washington had asked it to ban Russian supply flights to Syria from its airspace. It said it was examining the US request but gave no further details. Moscow has dismissed US concerns about its alleged Syria buildup, saying its military aid to the Assad regime was nothing out of the ordinary.

Advice from Larry Summers? C’mon, Yanis…

• How Europe Crushed Greece (Yanis Varoufakis)

[..] Mr. Schäuble felt that accepting an alternative plan for Greece’s recovery, in place of the troika’s program, would weaken Germany’s hand vis-à-vis the French. Thus little Greece was crushed while the elephants tussled. We had such a plan. In March, I undertook the task of compiling an alternative program for Greece’s recovery, with advice from the economist Jeffrey Sachs and input from a host of experts, including the former American Treasury Secretary Larry Summers, and the former British chancellor of the Exchequer Norman Lamont. Our proposals began with a strategy for debt swaps to reduce the public debt’s burden on state finances. This measure would allow for sustainable budget surpluses (net of debt and interest repayments) from 2018 onward.

We set a target for those surpluses of no more than 2% of national income (the troika program’s target is 3.5%). With less pressure on the government to depress demand in the economy by cutting public spending, the Greek economy would attract investors of productive capital. As well as making this possible, the debt swaps would also render Greek sovereign debt eligible for the European Central Bank’s quantitative easing program. This in turn would speed up Greece’s return to the money markets, reducing its reliance on loans from European institutions. To generate homegrown investment, we proposed a development bank to take over public assets from the state, collateralize them and so create an income stream for reinvestment.

We also planned to set up a “bad bank” that would use financial engineering techniques to clear the Greek commercial banks’ mountain of nonperforming loans. A series of other reforms, including a new, independent I.R.S.-like tax authority, rounded out our proposals. The document was ready on May 11. Although I presented it to key European finance ministers, including Mr. Schäuble, as the Greek Finance Ministry’s official plan, it never received the endorsement of our own prime minister. The reason? Because the troika made it abundantly clear to Mr. Tsipras that any such document would be seen as a hostile attempt to backtrack from the conditions of the troika’s existing program. That program, of course, had made no provision for debt restructuring and therefore demanded cripplingly high budget surpluses.

No. Sorry.

• Can Hobbits Save New Zealand? (CNBC)

As New Zealand’s dairy industry – a key pillar of the economy – crumbles under the pressure of a supply glut and slowing demand out of China, tourism in the land of hobbits is picking up some of the slack. But, this won’t be sufficient to reverse the slowdown in growth in the once “rock star” economy, say analysts, flagging the likelihood of further monetary easing as soon as this week. “With very low dairy prices and confidence falling sharply, New Zealand’s economy is slowing from the rapid pace of growth recorded in 2014,” said Paul Bloxham and Daniel Smith, economists at HSBC. Dairy products are the country’s biggest export earner, totaling 12 billion New Zealand dollars ($7.5 billion) in the year to June 30. However, this was down almost a quarter compared to the same period a year earlier, reflecting the slump in global diary prices.

Dairy prices sank to a 12-1/2-year low in August as the slowdown in China, the Middle East and other emerging markets damped on demand for protein and other producers stepped up production. [..] Weakness in the dairy sector not only hurts farm incomes, it has implications for the broader economy, say economists. “Low prices will reduce farm incomes, with many farmers facing negative cash-flow for the second season in a row. More worryingly, the malaise in the dairy sector appears to be spreading to other sectors,” said Bloxham and Smith. “Confidence has fallen sharply in the agricultural sector, but has also declined to varying degrees across all other business sectors.”

Lucky for New Zealand, as demand for its milk product cools, it is enjoying an uptick in inbound tourists, many of them inspired by the highly successful The Lord of Rings films trilogy shot in the country. Arrivals have also flocked from China – the country’s second largest visitor market after Australia. Over 315,000 mainland tourists traveled to the country between August 2014 and July 2015, up 30% on year, according to Tourism New Zealand. [..] tourism is set to overtake dairy as New Zealand’s biggest export earner as visitor arrivals continue to set new records, according to analysts.

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