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Central Banks Are Crack Dealers and Faith Healers

Mar 102015
 
 March 10, 2015  Posted by at 11:18 am Finance Tagged with: , , , , , , , , , , ,  11 Responses »


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

The entire formerly rich world is addicted to debt, and it is not capable of shaking that addiction. Not until the whole facade that was built to hide this addiction must and will come crashing down along with the corpus itself.

Central banks are a huge part of keeping the disease going, instead of helping the patient quit and regain health, which arguably should be their function. In other words, central banks are not doctors, they’re crack dealers and faith healers. Why anyone would ever agree to that role for some of the world’s economically most powerful entities is a question that surely deserves and demands an answer. But no such answer is forthcoming.

Instead, we all pretend Yellen, Kuroda and Draghi are in fact curing us of our ailments. Presumably because that feels better. That our health deteriorates in the process is simply ignored and denied. But then, that’s what you get when you allow for a bunch of shaky goalseeked economic rules to be taken as some sort of gospel. People one thought leeches healed too, or bloodletting, exorcism, burning at the stake, you name it. Same difference, just a few hundred years later.

What’s happening today is that central bankers start to find that their goalseeked ideas are no longer working. What might work for one may backfire for another. That this might be the direct result of their own mindless policies will never even cross their minds. And so they will continue making things worse, until that facade they operate on cannot hold any longer.

The EU started its braindead QE program yesterday. If it gets to purchase the entire €1.14 trillion in bonds it aims for, that will be a bad thing. If it doesn’t, that will be an arguably worse thing. Draghi should have stayed away from this heresy, but it’s too late now: the die is cast.

Why banks and funds would sell their long maturity bonds, with a relatively high yield, to him, is not clear. On the other hand, that many funds will compete with the ECB for the few bonds that are available, is clear. Draghi simply attempts to turn the sovereign bond market into casino with zero price discovery. Whether he will succeed in that is not clear. To get it done, though, he will have to make some very peculiar moves. That again is clear. Durden:

Presenting The Buyers Of Over 100% Of New German And Japanese Bond Issuance

Back in December, when the total amount of annual ECB Q€ was still up in the air and and consensus expected a lowly €500 billion annual monetization number, we calculated that based on Germany’s capital key contribution of about 26%, the ECB would monetize some €130 billion of German gross issuance, or about 90% of the total scheduled issuance for 2015. Subsequently, the ECB announced that the actual amount across all ECB asset purchasing programs, will be some 44% higher, or €720 billion per year (€60 billion per month). So what does that mean for the revised bond supply and demand across two of the most important developed markets?

Well, we already know that the Bank of Japan will monetize 100% or just over of all Japanese gross sovereign bond issuance (source). As for Germany, on a run-rate basis, and assuming allocation based on the abovementioned capital key, it means that for the next 12 month period, assuming no major funding changes in Germany, the ECB will swallow more than a whopping 140% of gross German [Bund] issuance! Or, said otherwise, the entities who will buy more than all gross German and Japanese issuance for the next 12 months, are the ECB and the Bank of Japan, respectively.

This also means that to fulfill its monthly purchase mandate, the ECB will have to push the price to truly unprecedented levels (such as the -0.20% yield across the curve discussed previously, or even lower) to find willing sellers. That said, please don’t tell your average Hinz and Kunz that more than all German bond issuance in 2015 will be monetized. It will bring back some very unpleasant memories.

Japan’s Abenomics are a huge failure, and so it looks like another double or nothing is in the offing. They’ll keep doing it until they can’t, because that’s their whole repertoire. Though it is a little weird to see Bill Pesek, and BoJ chief Kuroda, claim that Japan’s QE failed because it wasn’t big enough. Seen Japanese debt numbers lately, Bill? Not big enough yet?

Three Reasons Japan Will Get More Stimulus

With annualized growth of 1.5% between October and December after two straight quarters of contraction, Japan is hobbling out of recession far more slowly than hoped. A third dose of quantitative easing is almost certain. Here are three reasons why.

First, the initial rounds of QE weren’t potent enough. “In order to escape from deflationary equilibrium, tremendous velocity is needed, just like when a spacecraft moves away from Earth’s strong gravitation,” Kuroda recently explained. “It requires greater power than that of a satellite that moves in a stable orbit.”

Although the Bank of Japan managed to lower the value of the yen by more than 20% beginning in April 2013, that clearly hasn’t provided enough of a boost to the economy.

Maybe you can’t boost the 20-year coma the Japanese economy has been in by hammering the currency? Just a thought, Bill. And sure, Kuroda’s spacecraft metaphor is mighty cute, but what tells you economies are just like rocket ships? I like this piece from Deutsche Welle much better:

Central Bank Blues

On Monday the European Central Bank begins its long-anticipated program to buy sovereign bonds on secondary bond markets – i.e. previously issued government bonds held by institutional investors like banks or insurance funds. In central bankers’ jargon, this is called “quantitative easing,” or QE. The ECB’s plan is to pump €60 billion euros into the financial markets each month, by trading central bank reserve money (a form of electronic cash) for bonds. That’s set to continue until at least September 2016, which means at least €1.1 trillion will be put into the hands of investment managers – who will have to find some alternative investments to make with the money.

On Thursday last week, at the ECB’s governing board meeting in Nicosia on Cyprus, the central bank revised its projections for both GDP growth and inflation in the eurozone upward: The inflation rate is projected to go up to 0.7% for this year, and GDP growth from 1.0 to 1.5%. But are the new projections just a case of whistling in the dark? There are in fact serious doubts as to whether the ECB will actually be able to meet its targets, or if, instead, the bond-purchasing program will have effects that will make a structural recovery of the eurozone more difficult.

For a start, many observers doubt whether the ECB will even be able to find willing sellers for €60 billion a month of bonds. Sovereign bonds – especially those of the core eurozone member states, like Germany – may soon become rather scarce on secondary markets. Neither domestic banks and insurance funds, nor foreign central banks, will have much incentive to sell their government bond holdings to the ECB. The older bonds with long maturities and decent interest rates, in particular, will probably be held rather than sold. Moreover, experts question whether a flood of central bank reserve money, pumped into the hands of players in secondary financial markets, can generate a stimulus at all.

It probably won’t lead to any boost in their lending activities to real-economy businesses or households, for two reasons: First, banks have recently been obliged to increase their core capital reserves – the amount of shareholders’ money, including retained earnings, which is available to cover possible loan losses – and they’re still adjusting their balance sheets accordingly. That means they’re being cautious about lending.

That’s the basic question, isn’t it? “..whether a flood of central bank reserve money, pumped into the hands of players in secondary financial markets, can generate a stimulus at all.” But how do we answer it? Lots of people will want to point to the ‘success’ story of the US and the Fed, but there’s no way we can have any confidence in the numbers coming from the US. As for the EU and Japan, the failures are more obvious, but that may be because they’re less skilled in ‘massaging’ the data. All in all, the evidence, if it exists at all, is flimsy at best.

Oh, and then there’s China:

China’s ‘Money Garrote’ May Choke Us All

In this new era of all-powerful central banks, it is hard for investors to look past who will be next to take out the big gun of quantitative easing. This week, all eyes are on the ECB, which follows the Bank of Japan as the latest of the major monetary-policy makers to embark on its own aggressive bond-buying program. In contrast, China appears to be entering a “new normal” era, in which its central bank only has a pea-shooter [..] the benchmark money-supply growth target of 12% was the lowest in decades. Another part of China’s new normal is not just lower growth, but also an era where the central bank is no longer able to magically speed its money-printing presses.

Conventional wisdom holds that the People’s Bank of China (PBOC) has a gargantuan monetary arsenal, given that the country has the world’s largest stash of foreign reserves at $3.89 trillion [..] according to some analysts, this reserve accumulation is merely a byproduct of another form of quantitative easing. Rather than strength, its size indicates just how staggeringly large China’s domestic credit expansion has become in recent decades. According to strategist Albert Edwards at Société Générale, such foreign-reserve accumulation — which typically takes place in emerging markets — is equivalent to quantitative easing.

The PBOC’s historic mass-printing of money to buy foreign currency and depress the yuan’s value is little different from what the Federal Reserve and others have done, Edwards said. [..] the recent reversal in such reserve accumulation points to a significant turning point in monetary conditions. Indeed, Joe Zhang, author of “Inside China’s Shadow Banking System,” argues that China’s credit expansion has in fact been far more aggressive than the QE attempted in the U.S. or Europe.

Zhang, a former PBOC official, calculated that China’s money supply is already 372% of what it was at the beginning of 2006. And if you add up official data between 1986 and 2012, China’s benchmark M2 money supply has grown at a compound rate of 21.1%. While 7% economic growth is slow for China compared to the double-digit rates of the past, such data makes 12% money-supply growth looks positively measly. Another reason to believe that China is at the tail end of a huge monetary expansion is found in a recent study by McKinsey. They estimated that total credit in China’s economy has quadrupled since 2008, reaching 282% of GDP.

But now the conditions that enabled this debt habit have turned. Edwards argues that foreign-exchange accumulation by central banks is the key measure of global liquidity to pay attention to — and it is currently in free-fall. [..] while markets are focusing on the ECB’s easing announcement, they are missing this Chinese liquidity garrote that is strangling the global economy. Data from the IMF shows that central-bank foreign-reserve accumulation has been declining rapidly. China is at the center of this, with a $300 billion annualized decline over the last six months

The stress point for China is now its currency, which has fallen to a 28-month low against the dollar. The dilemma facing the PBOC is how to keep growth and liquidity sufficiently strong, while also maintaining its loose currency peg to a resurgent dollar. As China defends its currency regime, it must do the opposite of printing new money: using foreign reserves to buy yuan, contracting the money supply in the process.

The People’s Bank of China is a crack dealer with a client that no longer can afford its fix. Or perhaps it’s more accurate to say that all central banks are now crack dealers with such clients, and the PBOC is the first one that’s forced to admit it. And it now looks as if perhaps it can’t win back its market without spoiling it. And that is all about the dollar. A lot is about the dollar, and the looming shortage of them. And there’s nothing (central) banks can do. Not that they won’t try, mind you. Durden:

The Global Dollar Funding Shortage Is Back With A Vengeance

[..].. one can be certain that the current fx basis print around – 20 bps will most certainly accelerate to a level never before seen, a level which would also hint that something is very broken with the financial system and/or that transatlantic counterparty risk has never been greater. Unlike us, JPM hedges modestly in its forecast where the basis will end up:

.. different to previous episodes of dollar funding shortage such as the ones experienced during the Lehman crisis or during the euro debt crisis, the current one is not driven by banks. It is rather driven by the monetary policy divergence between the US and the rest of the world. This divergence appears to have created an imbalance in funding markets and a shortage in dollar funding. It is important to monitor how this dollar funding shortage and issuance patterns evolve over time even if the currency implications are uncertain.

And to think the Fed’s cheerleaders couldn’t hold their praise for the ECB’s NIRP (as first defined on these pages) policy. Because little did they know that behind the scenes the divergence in Fed and “rest of the world” policy action is leading to two things: i) the fastest emergence of a dollar shortage since Lehman and ii) a shortage which will be arb[itrage]ed to a level not seen since Lehman, and one which assures that over the coming next few months, many will be scratching their heads as to whether there is something far more broken with the financial system than merely an arbed way by US corporations to issue cheaper (hedged) debt in Europe thanks to Europe’s NIRP policies.

If and when the market finally does notice this gaping dollar shortage (as is usually the case with the mandatory 3-6 month delay), the Fed will once again scramble to flood the world with USD FX swap lines to prevent the global dollar margin call from crushing a matched synthetic dollar short which according to some estimates has risen as high as $10 trillion.

Until then, just keep an eye on the Fed’s weekly swap line usage, because if the above is correct, it is only a matter of time before they are put to full use once again. Finally what assures they will be put to use, is that this time the divergence is the direct result of the Fed’s actions…

And then, again with Tyler, we return to Albert Edwards:

“Ignore This Measure Of Global Liquidity At Your Own Peril”

With all eyes squarely on the ECB as Mario Draghi prepares to flood the EMU fixed income market with €1.1 trillion in new liquidity starting Monday, Soc Gen’s Albert Edwards reminds us that “another type of QE” is drying up thanks largely to the relative strength of the US dollar. The printing of currency to buy US dollar denominated assets in an effort to prop up “mercantilist export-led growth models [is] no different to the Fed’s QE,” Edwards says, explicitly equating EM FX intervention with the asset purchase programs employed by the world’s most influential central banks in the years since the crisis. Via Soc Gen:

Clearly when the dollar is declining sharply, global FX intervention accelerates as the Chinese central bank, for example, needs to debauch its own currency at the same rate. Conversely, when the dollar rallies strongly, as is the case now, FX intervention rapidly dries up and can even reverse, exerting a massive monetary tightening on emerging economies,

.. and ultimately the entire over-inflated global financial complex… The swing in global foreign exchange reserves is one key measure of the global liquidity tap being turned on and off, with the most direct and immediate effect being felt in emerging economies.

The bottom line is that in a world of over-inflated asset values, the strength of the dollar is resulting is a rapid tightening of global liquidity as emerging economies (and indeed the Swiss) stop printing money to buy the US dollar. This should be seen for what it is a clear tightening of global liquidity. Traditionally these periods of dollar strength are highly disruptive to emerging markets and often end in the weakest links blowing up the entire EM and commodity complex and sometimes much else besides! Investors ignore this at their peril.

So: the ECB has started doing its painfully expensive uselessness , the Fed refuses to do anymore and even threatens to derail the whole idea by hiking rates, both Japan and its central bank are so screwed after 20 years of having an elephant sitting on their lap for afternoon tea that nothing they do makes any difference anymore even short term, and China is faced with the riddle that what it thinks it should do to look better in the mirror mirror on the Great Wall, only makes it look old and bitter.

But as Edwards rightly suggests, the first bit of this battle will be fought in, and lost by, the emerging markets. And there will be nothing pretty about it. They’re all drowning in dollar denominated loans and ‘assets’, and it gets harder and more expensive all the time to buy dollars as all this stuff must be rolled over. And the game hasn’t even started yet.

Debt Rattle March 7 2015

Mar 072015
 
 March 7, 2015  Posted by at 11:28 am Finance Tagged with: , , , , , , ,  4 Responses »


Wyland Stanley Bulletin press car: Mitchell auto at Yosemite National Park 1920

• A Fair Hearing For Sovereign Debt (Stiglitz/Guzman)
• Berlin Alarmed by Aggressive NATO Stance on Ukraine (Spiegel)
• Week of Milestones for US Stocks Spoiled by Fed Rate Anxiety (Bloomberg)
• Dear Janet Yellen: We’re Nowhere Close To Full Employment (MarketWatch)
• ‘A Conspiracy Of Silence’: HSBC, Guardian And The Defrauded British Public (ML)
• Almost 100 Families Evicted Daily In Spain (RT)
• It Might Be Time To Panic About Greek Government Bonds (John Dizard)
• Greek And German Bruisers Limber Up For ‘Rumble In The Eurozone’ (AFP)
• Europe Holds ‘Noose Around Greek Necks’ Says PM Tsipras (Telegraph)
• Time For Greece To Plan Its Exodus From The Euro (MarketWatch)
• Greece Sends Proposals, But No Decision Due At Monday’s Eurogroup (Kathimerini)
• Cash-Strapped Greece Repays First Part Of IMF Loan Due In March (Reuters)
• Greece Wants Immediate Talks With Troika On Bailout, Eyes Follow-up Deal (Reuters)
• The Noise From Brazil? An Economy On The Brink (Guardian)
• Brazil Supreme Court Clears Probe of Top Lawmakers Amid Petrobras Scandal (WSJ)
• Petrobras Has a $13.7 Billion Yard Sale (Bloomberg)
• RBS Top Bankers Received Millions Despite £3.5 Billion Loss (Guardian)
• EU To Hold Immigrants At Bay With Third-Country Asylum Centers (RT)
• ISIS Generates Up To $1 Billion Annually From Trafficking Afghan Heroin (RT)

“..simple modifications like contract amendments will not overcome the system’s deficiencies.”

• A Fair Hearing For Sovereign Debt (Stiglitz/Guzman)

Last July, when United States federal judge Thomas Griesa ruled that Argentina had to repay in full the so-called vulture funds that had bought its sovereign debt at rockbottom prices, the country was forced into default, or “Griesafault”. The decision reverberated far and wide, affecting bonds issued in a variety of jurisdictions, suggesting that US courts held sway over contracts executed in other countries. Ever since, lawyers and economists have tried to untangle the befuddling implications of Griesa’s decision. Does the authority of US courts really extend beyond America’s borders? Now, a court in the UK has finally brought some clarity to the issue, ruling that Argentina’s interest payments on bonds issued under UK law are covered by UK law, not US judicial rulings.

The decision – a welcome break from a series of decisions by American judges who do not seem to understand the complexities of global financial markets – conveys some important messages. First and foremost, the fact that the Argentinian debt negotiations were pre-empted by an American court – which was then contradicted by a British court – is a stark reminder that market-based solutions to sovereign-debt crises have a high potential for chaos. Before the Griesafault, it was often mistakenly assumed that solutions to sovereign-debt repayment problems could be achieved through decentralised negotiations, without a strong legal framework. Even afterwards, the financial community and the IMF hoped to establish some order in sovereign-bond markets simply by tweaking debt contracts, particularly the terms of so-called collective-action clauses (which bind all creditors to a restructuring proposal approved by a supermajority).

But simple modifications like contract amendments will not overcome the system’s deficiencies. With multiple debts subject to a slew of sometimes-contradictory laws in different jurisdictions, a basic formula for adding the votes of creditors – which supporters of a market-based approach have promoted – would do little to resolve complicated bargaining problems. Nor would it establish the exchange rates to be used to value debt issued in different currencies. If these problems are left to markets to address, sheer bargaining power, not considerations of efficiency or equity, will determine the solutions. The consequences of these deficiencies are not mere inconveniences. Delays in concluding debt restructurings can make economic recessions deeper and more persistent, as the case of Greece illustrates.

Read more …

Finally some sense?

• Berlin Alarmed by Aggressive NATO Stance on Ukraine (Spiegel)

It was quiet in eastern Ukraine last Wednesday. Indeed, it was another quiet day in an extended stretch of relative calm. The battles between the Ukrainian army and the pro-Russian separatists had largely stopped and heavy weaponry was being withdrawn. The Minsk cease-fire wasn’t holding perfectly, but it was holding. On that same day, General Philip Breedlove, the top NATO commander in Europe, stepped before the press in Washington. Putin, the 59-year-old said, had once again “upped the ante” in eastern Ukraine – with “well over a thousand combat vehicles, Russian combat forces, some of their most sophisticated air defense, battalions of artillery” having been sent to the Donbass. “What is clear,” Breedlove said, “is that right now, it is not getting better. It is getting worse every day.”

German leaders in Berlin were stunned. They didn’t understand what Breedlove was talking about. And it wasn’t the first time. Once again, the German government, supported by intelligence gathered by the Bundesnachrichtendienst (BND), Germany’s foreign intelligence agency, did not share the view of NATO’s Supreme Allied Commander Europe (SACEUR). The pattern has become a familiar one. For months, Breedlove has been commenting on Russian activities in eastern Ukraine, speaking of troop advances on the border, the amassing of munitions and alleged columns of Russian tanks. Over and over again, Breedlove’s numbers have been significantly higher than those in the possession of America’s NATO allies in Europe. As such, he is playing directly into the hands of the hardliners in the US Congress and in NATO.

The German government is alarmed. Are the Americans trying to thwart European efforts at mediation led by Chancellor Angela Merkel? Sources in the Chancellery have referred to Breedlove’s comments as “dangerous propaganda.” Foreign Minister Frank-Walter Steinmeier even found it necessary recently to bring up Breedlove’s comments with NATO General Secretary Jens Stoltenberg. But Breedlove hasn’t been the only source of friction. Europeans have also begun to see others as hindrances in their search for a diplomatic solution to the Ukraine conflict. First and foremost among them is Victoria Nuland, head of European affairs at the US State Department. She and others would like to see Washington deliver arms to Ukraine and are supported by Congressional Republicans as well as many powerful Democrats.

Indeed, US President Barack Obama seems almost isolated. He has thrown his support behind Merkel’s diplomatic efforts for the time being, but he has also done little to quiet those who would seek to increase tensions with Russia and deliver weapons to Ukraine. Sources in Washington say that Breedlove’s bellicose comments are first cleared with the White House and the Pentagon. The general, they say, has the role of the “super hawk,” whose role is that of increasing the pressure on America’s more reserved trans-Atlantic partners.

Read more …

Not too much sense, though.

• EU To Prepare Possible New Sanctions On Russia Over Ukraine (Reuters)

Britain’s foreign minister said on Friday the European Union would prepare possible new sanctions on Russia for its involvement in the Ukraine conflict that could be imposed quickly if the Minsk ceasefire agreement is broken. Both Kiev and pro-Russia separatists have accused each other of violence since last month’s peace deal that calls for heavy weapons to be withdrawn from the frontline in east Ukraine. “The European Union will remain united on the question of sanctions, sanctions must remain in place until there is full compliance (with the Minsk agreement),” Philip Hammond said. “We will prepare possible new sanctions, which could be imposed quickly if there is further Russian aggression or if the Minsk agreement is not complied with,” he said.

Hammond also said Britain does not have immediate plans to supply Kiev with weapons, but it is “not ruling anything out for the future” as the situation in east Ukraine remains “dynamic”. At a joint conference with his British counterpart in Warsaw, Polish Foreign Minister Grzegorz Schetyna said new sanctions could be imposed if, for example, separatists attack Ukraine’s port city of Mariupol, but a move such as excluding Russia from the SWIFT payments system was an extreme option. “(Exclusion) from SWIFT is the ‘nuclear’ option, this is an extreme option and there is a long list of sanctions that may be used before that,” he said. “Also, the truth is that it is a ‘double-edged sword’.”

Read more …

What comes up…

• Week of Milestones for US Stocks Spoiled by Fed Rate Anxiety (Bloomberg)

The specter of the Federal Reserve raising interest rates spoiled a week of milestones for U.S. equities. The Standard & Poor’s 500 Index capped a sixth year of the bull market, the Nasdaq Composite Index topped 5,000 for the first time in 15 years and Apple Inc., the world’s largest company by market value, gained admission to the Dow Jones Industrial Average. None of that stopped benchmarks from notching their worst week since January, as concern mounted that the monetary stimulus that helped equities triple from March 2009 will soon end, after a surge in hiring fueled speculation the Fed will raise borrowing costs this year.

The S&P 500 lost 1.6% in the five days, trimming its gain in 2015 to 0.6%, worst among 24 developed-nation markets. “It’s definitely been a week of milestones,” Russ Koesterich, the New York-based chief investment strategist at BlackRock, said in a phone interview. “People are obviously taking a pause as valuations aren’t cheap. This is all about rates. The ultra-dovish view that it won’t happen until next year is much less likely.” The S&P 500 tumbled 1.4% in the final session of the week after data showed employers added 295,000 workers to payrolls in February, more than forecast, and the unemployment rate dropped to 5.5%, the lowest in almost seven years.

The jobless rate has now reached the Fed’s range for what it considers full employment, keeping policy makers on course to raise interest rates this year as persistent job growth sets the stage for a pickup in wages. Three rounds of Fed bond-buying and near-zero interest rates have helped the S&P 500 rally more than 200% since its bear-market low on March 9, 2009. The current bull market, lasting almost 2,200 days, is about two months away from overtaking the 1974-1980 run as the third longest since 1929. The gauge hasn’t had a 10% drop since 2011.

Read more …

She doesn’t care. She wants the narrative, not reality.

• Dear Janet Yellen: We’re Nowhere Close To Full Employment (MarketWatch)

The unemployment rate fell to 5.5% in February, dropping to a level that some might call “full employment.” The Federal Reserve has said that, in the long run, the unemployment rate can’t go much below 5.2% to 5.5% without fostering a lot of unwanted inflation. With the February report, we’ve crossed that line. Already, the Fed is under a lot of pressure to raise interest rates this summer to make sure inflation doesn’t get too high. The February jobs report adds to that pressure. There’s just one problem: Inflation isn’t too high, and there’s no sign that inflation will suddenly accelerate. In fact, the main concern right now is that the inflation rate is too low. The Fed has long operated under a theory that there’s a limit to how low unemployment can safely go. This rate is known as the “non-accelerating inflation rate of unemployment,” or NAIRU.

The Fed has pegged this number at 5.2% to 5.5%. The argument goes like this: At low levels of unemployment, companies can’t find the workers they need without offering more pay. Once companies get into a bidding war for skilled workers, everyone’s pay goes up. And to pay those wages, companies need to raise their selling prices. Voilà! Inflation. It’s a tidy argument that might have made a lot of sense in 1979, but in today’s economy, there’s no sign that the labor market is so tight that wages are being bid up, even though lots of policy makers and private-sector economists are positive that inflationary wages are coming any day now, that they are right around the corner, just you wait. They’ve been saying that for months.

Here are the facts. According to the Bureau of Labor Statistics, average hourly earnings (wages) for all private-sector workers are up 2% in the past 12 months, about the same wage growth we saw last year and the year before that and the year before that. Average hourly wages for the 80% of workers who aren’t supervisors are up 1.6% in the past year, down from the 2.5% growth reported a year ago. The Employment Cost Index, which is a little more sophisticated than the average hourly wages report, tells a similar story: Wages and benefits are up 2.3% in the past year, up from 2% in the year before that. The ECI shows a little acceleration in compensation, but Fed Chair Janet Yellen has said that workers’ compensation can grow at about 3% to 4% without engendering any inflationary pressures. We’re still a long way from there.

Does anyone really think we’re close to full employment today? Officially, there are 8.7 million people who were actively searching for work last month, plus another 6.5 million people who didn’t look last month but who say they want a job. Plus another 6.6 million who want to work full-time but can only get a part-time job. That’s nearly 22 million people who are unemployed or underemployed. They deserve a shot at a job that pays a living wage. The Fed should think about them, rather than pay attention to a phantom inflation problem.

Read more …

Go Nafeez!

• ‘A Conspiracy Of Silence’: HSBC, Guardian And The Defrauded British Public (ML)

The corporate media have swiftly moved on from Peter Oborne’s resignation as chief political commentator at the Telegraph and his revelations that the paper had committed ‘a form of fraud’ on its readers over its coverage of HSBC tax evasion. But investigative journalist Nafeez Ahmed has delved deeper into the HSBC scandal, reporting the testimony of a whistleblower that reveals a ‘conspiracy of silence’ encompassing the media, regulators and law-enforcement agencies. Not least, Ahmed’s work exposes the vanity of the Guardian’s boast to be the world’s ‘leading liberal voice’.

Last month, the corporate media, with one notable exception, devoted extensive coverage to the news that the Swiss banking arm of HSBC had been engaged in massive fraudulent tax evasion. The exception was the Telegraph which, as Oborne revealed, was desperate to retain advertising income from HSBC. But now Ahmed reports another ‘far worse case of HSBC fraud totalling an estimated £1 billion, closer to home’. Moreover, it has gone virtually unnoticed by the corporate media, for all the usual reasons. According to whistleblower Nicholas Wilson, HSBC was ‘involved in a fraudulent scheme to illegally overcharge British shoppers in arrears for debt on store cards at leading British high-street retailers’ including B&Q, Dixons, Currys, PC World and John Lewis. Up to 600,000 Britons were defrauded.

Wilson uncovered the crimes while he was head of debt recovery for Weightmans, a firm of solicitors acting on behalf of John Lewis. But when he blew the whistle, his employer sacked him. He has spent 12 years trying to expose this HSBC fraud and to help obtain justice for the victims. The battle has ‘ruined his life’, he said during a brief appearance on the BBC’s The Big Questions, the only ‘mainstream’ coverage to date.

Read more …

Europe’s recovery symbol.

• Almost 100 Families Evicted Daily In Spain (RT)

At least 95 families were evicted every day in Spain in 2014, fresh statistics say as Spaniards struggle to meet mortgage payments. Home foreclosures have become a stark symbol of the 7-year economic crisis, with 2014 seeing a further rise in numbers. The number of foreclosures on all types of residences, including holiday homes, offices and farms, reached 119,442 last year, almost 10% higher than in 2013, according to data from the National Statistics Institute. Foreclosure procedures on main residences rose to 34,680 families in 2014, an increase of 7.4% over the previous year.

Andalusia, Catalonia and Valencia were the worst-affected regions. Evictions have become a symbol of the economic crisis Spain has been struggling with since 2008. Most of them were connected to mortgages taken out during property booms in 2006 and 2007. The situation has provoked nationwide protest. Campaigners often rally outside homes in an attempt to prevent residents from having to spend the night in the street. They are calling on the country’s authorities to make more housing available, or allow vacant housing following developers’ bankruptcies to be used.

Read more …

“The problem with taxing the shipowners is that it would take only 24 hours for them to reflag their entire fleet..”

• It Might Be Time To Panic About Greek Government Bonds (John Dizard)

Judging by the prices of Greek government bonds, the investing community seems to have overcome its blind, unreasoning panic about the Syriza-led government that took office in January. In the past five weeks, the 10-year benchmark yield has dropped from a peak of about 11.2% to just over 9.5%. This is good. Blind, unreasoning panic is wrong. I think it might be time for open-eyed, reasoned panic about traded Greek Government bonds. They might look cheap compared to negative yield German bonds, or zero yield GDF Suez bonds, but they will get even cheaper later this year. If you own them, sell them. Bond investors have been lulled too quickly by the truce declared between Greece and its European creditors.

Not that Greece will necessarily default on the already-haircut issues held by the private sector. The principal payments will not be due for another eight years or so, and the interest payments are not very burdensome. Those bonds are now governed by English law, which makes them rather more enforceable than the old “local law” Greek debt. The Syriza cabinet recognises these facts. The problem is that the Greek government will run out of cash to pay its operating expenses in full by the summer, or even sooner, and neither the Europeans nor anyone else will give them enough new money to pay its bills. That means the Syriza cabinet will have to tell public sector employees and pensioners that part of their income will be paid in (transferable) IOUs, which will plunge to a steep discount.

The leaders can blame Germans, oligarchs, neoliberal economists or Martians, but a lot of their core supporters will be unhappy, and quite open about their feelings. The eurogroup political leadership and the eurocracy are prepared for this. Their recent civil exchange of letters represents a truce, not a peace. The eurogroupies know that there is no mutually acceptable deal to be had with the Syriza government. So their silent intention is to negotiate with the next government, whoever that might be, after the Greek government is forced to call for an early election. Things have to get pretty bad for that to happen; after all, Syriza just won fair and square less than two months ago, and their policies are supported by a majority of the Greek public. Bad enough for those 9.5% yields to look a bit thin on a risk-adjusted basis. And they will.

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Greece does good cop bad cop pretty well.

• Greek And German Bruisers Limber Up For ‘Rumble In The Eurozone’ (AFP)

They are both tough men of a certain age used to getting their way. In one corner stands Wolfgang Schaeuble, the dry 72-year-old German Finance Minister and self-appointed guardian of the European Union’s fiscal orthodoxy. And at the opposite end of Europe’s austerity divide glowers former Communist Panagiotis Lafazanis, Greece’s obdurate new energy and output minister. Schaeuble and Lafazanis, 63, have not yet sat down together around a negotiating table in Brussels, but a clash between them is unavoidable nonetheless as Athens and Berlin square up for another bail-out showdown. Lafazanis is responsible for some of Greece’s main state companies that were slated to be privatized under the rescue plan agreed with the EU and the International Monetary Fund.

These include dominant electricity provider PPC, state gas distributor DEPA and leading refiners HELPE. State stakes in all three were to be sold to private investors as part of the Greece’s bail-out deal until January, when the new hard-left Syriza government pulled the plug on the plan. “No privatisation will be held in the energy sector – neither at PPC, nor at DEPA nor at HELPE,” Lafazanis said at the time. When electricity workers were given a pay rise this week – to general consternation – the ministry did not object. Schaeuble, however, insists on the new Greek government honoring the country’s existing pledges, and he has castigated Syriza for making promises they cannot afford to keep.

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Juncker will need to act.

• Europe Holds ‘Noose Around Greek Necks’ Says PM Tsipras (Telegraph)

Greece’s prime minister has accused the ECB of holding a noose around the country’s neck as his government rushes to assure creditors it can avert bankruptcy this month. Speaking in an interview with Der Spiegel magazine, Alexis Tsipras appealed to the ECB to alleviate pressure on the cash-strapped country. The ECB “is still holding the rope which we have around our necks” said Mr Tsipras, referring to the central bank’s reluctance to resume ordinary lending to Greek banks at a meeting in Cyprus on Thursday. The central bank has also rebuffed Greek appeals to raise the limit on short-term debt issuance, as it faces €6.5bn in payments over the next three weeks. Should the ECB continue to resist Greek pleas for assistance, “the thriller we saw before February 20 will return” warned Mr Tsipras, referring to the market turmoil which gripped the country as it carried out protracted negotiations with its creditors.

Greece made its first €300m payment to the International Monetary Fund on Friday. It faces another €1.2m in loan redemptions to the Fund before the end of the month. But the government is scrambling to find the funds it needs to meet its obligations to creditors in March. Athens is not due to receive €7.2bn of bail-out money before April. ECB president Mario Draghi said a collateral waiver on Greek bonds would only be reinstated once “a successful completion of the bail-out review be put in place”. Greek banks are having to rely on an a form of expensive emergency funding to stay afloat as capital has rushed out of the country. Ahead of a meeting of European ministers on Monday, Greece’s Yanis Varoufakis submitted an 11-page list of reforms his government intends to carry out to unlock the vital cash it needs from its creditors.

The proposals include measures to fight tax evasion using students, tourists and housekeepers as undercover tax inspectors. The “rock-star” finance minister also made an appearance on the cover of the Greece’s Esquire magazine for March. Following the ECB’s hostility to Greece’s woes, Mr Tsipras asked to meet with the European Commission’s Jean-Claude Juncker but was turned down, according to a Greek government source. A meeting between the two could now take place next week to “discuss how Greece will utilise European funds to address the humanitarian crisis and unemployment”, said a Syriza spokesman. Amid fears that the country will not come good on its election promises, Mr Varoufakis has promised his Leftist government has “alternative plans” to plug its financing gap over the next 21 days. “We go into the negotiations with optimism, with especially good preparation”, said the finance minister.

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Be sure the plan is there. They just can’t talk about it.

• Time For Greece To Plan Its Exodus From The Euro (MarketWatch)

Greece must now plan on a way to exit the euro if it is to have any chance of staying. This is not a conundrum; it is the way negotiation works. The new government of Prime Minister Alexis Tsipras was forced to backtrack last month on its election pledges to get its foreign debt reduced and reverse austerity because it had no plausible alternative to European Union intransigence on extending the bailout. The only viable alternative would be to exit the euro, default on the debt and suffer the consequences, and Athens was not ready to do that. This “Plan B” cannot be a bluff and at this point it is better than even odds it will be the plan Greece will have to follow.

Tsipras and his finance minister, Yannis Varoufakis, have so far argued in their “Plan A” that Greece can stay in the euro, but pinned that belief on Germany and other EU members being reasonable. Germany — as well as the European Commission, the European Central Bank, and the International Monetary Fund — made it amply clear in the initial round of negotiations that they have no intention of being reasonable in the way Tsipras and Varoufakis believe they should. It was always a fairly delusional assumption that German leaders would suddenly see the light and embrace an enlightened Keynesian solution to the economic and social crisis in Greece. Berlin and Brussels remain pitiless and more convinced than ever of the rightness of their destructive neoliberal policies.

The only way Greece can regain its sovereignty — which is essentially what Tsipras’s Syriza party pledged to voters in its rise to power — is to reclaim its sovereign rights, and especially control of its currency and banking system. The consequences of defaulting on the country’s debt would be dramatic, but relatively short-lived compared to the guaranteed long-term misery of the EU austerity program.

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Finance ministers are out of their league, they need third-party advisers.

• Greece Sends Proposals, But No Decision Due At Monday’s Eurogroup (Kathimerini)

Greece submitted to Eurogroup chief Jeroen Dijsselbloem Friday an outline of seven reform proposals to form the basis for discussion at Monday’s meeting of eurozone finance ministers, but the signs from Brussels are that Athens is no closer to securing the release of its next tranche of bailout funding. The 11-page document sent by Finance Minister Yanis Varoufakis sets out several proposals that have already been made public as well as some that were only made known Friday. The suggestion that caused the most surprise was to fight tax evasion by enlisting non-professional inspectors, including tourists, on a two-month basis during which they would collect audiovisual data that could be used to target evaders. Varoufakis also outlined plans to activate a fiscal council to generate budget savings and update licensing of gaming and lotteries to boost state revenues by an estimated €500 million.

He also gave details of the government’s plan to ease the social impact of the crisis, which will cost some €200 million, and to introduce a new payment plan for tax debtors, which the coalition estimates could raise €3 billion in revenues. In his letter to Dijsselbloem, Varoufakis calls for technical discussions regarding the proposals to begin as soon as possible. “We envisage that… the majority of the items on our first list can be further specified as soon as possible so that the resulting agreement can be ratified by the Eurogroup, and Greece’s Parliament, and become the basis for the review,” wrote the Greek finance minister, who added that the government proposes all technical discussions and fact-finding or fact-exchange sessions should take place in Brussels.

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It’s about what comes after.

• Cash-Strapped Greece Repays First Part Of IMF Loan Due In March (Reuters)

Greece repaid on Friday the first €310 million instalment of a loan from the International Monetary Fund that falls due this month, as it scrambles to cover its funding needs. Prime Minister Alexis Tsipras’s newly elected government must pay a total of €1.5 billion to the IMF this month, but it is rapidly depleting its cash. The payments fall due over two weeks starting on Friday. The next three instalments are due on March 13, 16 and 20. “The payment of €310 million has been made, with a Friday value date,” a government official told Reuters, requesting anonymity. The Tsipras government has said it will make the payments, but uncertainty has been growing over Greece’s cash position. It faces a decline in tax revenues, while aid from EU/IMF lenders remains on hold until Athens completes promised reforms.

Athens sent an updated list of reforms to Brussels on Friday, before a meeting of euro zone finance ministers on Monday, a Greek government official said. The list expanded on an earlier set of proposals, he said. The reforms include measures to fight tax evasion and red tape and facilitate repayment of tax and pension fund arrears owed by millions of Greeks, the official said. It also proposes a “fiscal council” to generate savings for the state. In the letter to the Eurogroup, Greek Finance Minister Yanis Varoufakis says Athens aims to save €200 million by cuts in public-sector spending, offseting an estimated €200 million cost to tackle what it calls the country’s “humanitarian crisis.” It also aims to collect €500 million in extra revenues annually from new gaming licences and taxing online gaming operators.

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Keep up the pressure, see if they make mistakes.

• Greece Wants Immediate Talks With Troika On Bailout, Eyes Follow-up Deal (Reuters)

Greece asked euro zone countries on Friday for an immediate start of technical talks with international creditors on the first batch of reforms that would help conclude its current bailout programme and allow the disbursement of more loans. The request marks a softening of Greece’s stance. Until now, it has rejected talks with the three institutions that have supervised it so far on implementing reforms. But Greece, which faces loan repayments over the coming weeks and months, is running out of cash and needs more euro zone credit to avoid bankruptcy. If it concludes the bailout, which means implementing reforms the previous government had agreed to, but which the current government rejects, it could get €1.8 billion of loans remaining from the existing 240 billion-euro bailout.

It would also be eligible to get €1.9 billion that the ECB made in profits on buying Greek bonds. And Greek banks would again become eligible to finance themselves at the ECB’s open market operations. “I am now writing to you … to convey the Greek government’s view that it is necessary to commence immediately the discussions between our technical team and that of the institutions,” Greek Finance Minister Yanis Varoufakis said in a letter to the chairman of euro zone finance ministers, Jeroen Dijsselbloem. Varoufakis proposed that discussions with the institutions take place in Brussels – avoiding the connotation of a loss of sovereignty that visits to Athens by Troika representatives over the past five years have had for the Greek public.

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Bye bye Rousseff.

• The Noise From Brazil? An Economy On The Brink (Guardian)

The more you look at Brazil’s fundamentals, the more shaky the country looks. And we are not talking about the defensive prowess of David Luiz here. It is the country’s economic backline that risks tumbling down like a set of dominoes. When a Latin American economy is in trouble a good place to start is its inflation rate. Brazil’s is today running at 7.5%. While this is nowhere near the 2,000-3,000% of the early 1990s, when the price of everything went up several times a week, it is far higher than the central bank’s mid-point target of 4.5%. On Wednesday, in an effort to bring inflation down, Brazil’s central bank raised interest rates to 12.75%, a six-year high.

The problem is that the country is hiking interest rates – and trying to curb high prices – at a time in which its economy is on the brink of recession. Between 2002 and 2008, Brazil’s economy expanded at 4% a year. It has since averaged less than 2%. GDP is expected to contract 0.5% this year. High inflation makes matters worse in at least two ways. First, high prices hinder shoppers’ purchasing power. The Economist calculates that about half of the country’s growth over the past decade was driven by consumption. A drop in purchases will not only dampen economic prospects but would lead to a recession that would freeze the pay of millions because the minimum wage is linked to GDP and inflation.

Elsewhere, salaries in both the public and private sector have grown above GDP for the past decade and are now unlikely to keep pace with inflation. Tax hikes and fare rises will not help either. It is therefore not surprising that consumer confidence is at its lowest since records began in 2005. Second, next to rising prices, the real is sinking. Despite the rate increase, Brazil’s currency hit R$3 to the US dollar on Wednesday for the first time in more than a decade. This puts further pressure on prices: the cost of imported goods goes up – more bad news for shoppers.

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Cats in a sack.

• Brazil Supreme Court Clears Probe of Top Lawmakers Amid Petrobras Scandal (WSJ)

A corruption dragnet that has jailed dozens of executives and erased billions from Brazil’s state-controlled oil giant has now snared some of the nation’s top lawmakers, deepening a crisis that is weighing on South America’s largest economy. Brazil’s Supreme Court on Friday gave the go-ahead to federal prosecutors to investigate close to 50 politicians, including Senate President Renan Calheiros and Eduardo Cunha, head of the Chamber of Deputies, as part of a widening corruption probe of Petróleo Brasileiro S.A., known as Petrobras. Both men are members of the PMDB party, Brazil’s largest and a key partner in President Dilma Rousseff ’s effort to pass austerity measures to narrow a yawning budget gap. With the economy skidding and Brazil in danger of losing its investment-grade sovereign rating, the investigation could push top legislators away from strict measures and toward populism.

“What’s going to prevail is the survival instinct,” said Ricardo Ismael at Rio’s Pontifical Catholic University. “The big problem I think is with the economy because the government was really counting on fast votes from Congress, so they could share the cost of the fiscal adjustment.” Fear that fallout from the scandal would threaten budget cuts has weighed on Brazil’s stocks and currency. The IBOVESPA stock index declined by 3.1% this week, while the real plunged about 7%. On Tuesday, hours after rumors emerged that his name was on “Janot’s list,” Mr. Calheiros torpedoed an executive order from Ms. Rousseff that would have raised payroll taxes to fill government coffers. Local press characterized the move as retaliatory, though it followed a period of heightened tension between the two politicians. The attorney general is independent of the government.

“What happened this week is that the risks, which were already there, became more visible,” says Carlos Melo, a professor at São Paulo business school Insper. “After Renan´s move, it is clear the government will not be able to push any kind of fiscal adjustment through Congress without negotiating first.” In practice, analysts say, that stretches the odds of the government meeting its 1.2% target for the primary budget surplus, seen by many as a make-or-break goal in the effort to avoid a sovereign downgrade. Prosecutors say the PMDB, Ms. Rousseff’s Workers’ Party, and other government-aligned parties suggested executives to run major divisions at Petrobras.

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“The devourers of capitalism had become the devourers of Petrobras.”

• Petrobras Has a $13.7 Billion Yard Sale (Bloomberg)

Staggered by $135 billion in debt and scandal, Brazilian state-run oil giant Petroleo Brasileiro SA has announced plans to offload some $13.7 billion in assets. Officials claim this is not a plan to raffle the jewel of the government crown. Instead think fire sale, a maneuver to raise cash and keep creditors at bay. The move plays like a scene in a script coming full circle. Luiz Inacio Lula da Silva once joked that back in the 1990s, when he was still the country’s ranking lefty and not its president, “people trembled” whenever he passed by the door of the Sao Paulo stock exchange. “There goes that devourer of capitalism,” they’d say.

Yet scarcely more than a decade later, Lula, a self-described “walking metamorphosis,” was at Bovespa as president of Brazil, hosting the feast as the state-run oil giant went on the bloc in one of the world’s biggest public stock offerings. “Capitalization,” he beamed in 2010, “is one of the safeguards the government has to assure that this wealth doesn’t get lost to the labyrinths of waste and dubious interests.” Tell that to prosecutor general Rodrigo Janot, who just handed the Supreme Court a list of 54 lawmakers and government officials suspected of looting the country’s flagship multinational for political gain. So labyrinthine is waste and corruption that the new management – the old one resigned in disgrace – has yet to file the 2014 balance sheet, which is one reason why Moody’s Investor Services recently downgraded Petrobras paper to junk.

The fire sale Petrobras is planning may prove difficult. With crude prices slumping, it’s a buyer’s market for rigs and refineries. Meanwhile, the ruling Working Party and union rank and file, who see a plot to privatize Petrobras by stealth, have called for a mass protest March 13 to defend the company and roll back austerity measures announced by Lula’s successor, President Dilma Rousseff. Leading the charge, strangely enough, is Lula himself, who exhorted companheiros to stand up to bottom-feeding “neoliberals.” This was wagging the dog. It’s not the market-friendly opposition that threatens Brazil’s biggest brand, but repeated government attempts – first by Lula, then Rousseff — to suspend the basic rules of economic gravity. The devourers of capitalism had become the devourers of Petrobras.

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New normal.

• RBS Top Bankers Received Millions Despite £3.5 Billion Loss (Guardian)

Royal Bank of Scotland paid 128 of its top bankers more than €1m (£720,000) in 2014, a year when it reported its seventh consecutive year of losses since being bailed out by the taxpayer and was punished by regulators for rigging foreign exchange markets. Three bankers, whose identities are protected because only the pay deals of boardroom directors have to be published, received up to €6m. The disclosures are likely to reignite the controversy over the pay handed out by the bank, which has incurred losses on a par with the £45bn ploughed in by taxpayers to prevent it going bust. None of the 79% stake has yet to been sold off although George Osborne has promised to sell it as “quickly as we can” if he remains chancellor after the 7 May election.

Chief executive Ross McEwan was paid £1.8m in salary, pension and benefits in 2014 and was handed £1.5m in shares to buy him out of his previous employer in Australia when he was recruited to run the retail bank. He was awarded £1.5m of shares under a long-term plan that will pay out in the future. The pay of the New Zealander, though, was eclipsed by a number of colleagues. The newly recruited finance director Ewen Stevenson received £3.1m after being bought out of his previous employer, Credit Suisse, and Rory Cullinan, who runs the non-core division of the bank, received £2.2m from bonuses handed out in previous years. Cullinan, who has been promoted to help wind down the investment banking arm, cashed in £1.2m of shares and was awarded £2m in a new pay deal.

The bank published share payouts and awarded to the members of the executive management team who do not sit on the board. When share awards to McEwan and Stevenson are included, eight senior managers were awarded shares worth £11m which will payout in the future. In total more than £5m of shares were cashed in from previous years. The bank said the 128 paid more than €1m compares with 149 a year ago when the staff who have relocated to the US through its Citizens Financial arm, in the process of being floated in the US stock market, are included.

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Too little too late.

• EU To Hold Immigrants At Bay With Third-Country Asylum Centers (RT)

Opening processing centers in transit countries in the hope that it will curb the number of illegal immigrants is Brussels’ answer to the inflow of refugees, who risk their lives to cross the Mediterranean in search of a better life. The measure is part of the new European Agenda on Migration, which will be published later in mid-May. At a media conference this week, Dimitris Avramopoulos, the European Commissioner for Migration and Home Affairs, said amending the way the EU deals with illegal immigration is an urgent issue that requires complex solutions. “When presenting a comprehensive European Agenda on Migration we have to think about all dimensions of migration – this is not about quick fixes; this is about creating a more secure, prosperous and attractive European Union,” he said.

Last year, over 276,000 people entered the EU illegally, which is 155% more than in 2013, according the EU borders agency Frontex. Some 220,000 arrived via the Mediterranean, with at least 3,500 and possibly more than 4,000 people dying en route. The passage is considered the most dangerous in the world. “We need to be effective, as Europeans, on the immediate response and at the same time to address the root causes, starting from the crises spreading at our borders, most of all in Libya,” said EU foreign policy chief Federica Mogherini. “That’s why we are increasing our work with origin and transit countries to provide protection in conflict regions, facilitate resettlement and tackle trafficking routes.”

Establishing processing centers in countries like Niger, Egypt, Turkey or Lebanon represents a U-turn in EU policies as the idea is gaining traction among the more affected members. Southern European countries including Italy and Malta are among those members of the union that pay the greatest price dealing with the inflow. France and Germany also favor the idea. Strong opposition to the idea remains among national governments less eager to welcome refugees from countries like Libya and Syria on their soil, such as Denmark and the UK. Part of the reluctance is because some EU members don’t want to relinquish authority over immigration policies to Brussels.

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How’s the CIA supposed to make a living now?

• ISIS Generates Up To $1 Billion Annually From Trafficking Afghan Heroin (RT)

Drug money is a massive source of profit for ISIS, who makes up to $1 billion annually from sales throughout its conquered lands, according to the Russian Federal Drug Control Service (FSKN). “The area of poppy plantations is growing. This year, I think, we’ll hear news about a record-high poppy harvest, therefore a high yield of opium and heroin. So this issue should be raised not only in Moscow, but also in the UN in general, because this is a threat not only to our country, but also European security. Over the past five years the Balkan route has been split – heroin traffic now also goes through Iraqi territory,” TASS quotes FSKN head Viktor Ivanov as saying. What makes profits especially huge is that, despite not operating in Afghanistan, large quantities of poppy are being transported through those parts of Iraq the Islamic State (IS, formerly ISIS) controls.

To Ivanov, this makes possible a “huge financial sponsorship.” “According to our estimates, IS makes up to $1 billion annually on Afghan heroin trafficked through its territory,” he added. The FSKN in November said that the sale of Afghan heroin in Europe could generate upwards of $50 billion for the militants. What’s more, over half of Europe’s heroin now comes from the IS, according to Ivanov. Indeed, drug money has been high on the IS’s list of profit generators, together with oil and conquest. A recent report by the Financial Action Task Force talked of how the IS has been branching out into all manner of finance-generating activities, though it is the reliance on oil that makes them a truly unique terrorist group, unlike others before it.

It remains unclear whether IS can hold its drugs though, let alone run a smuggling business. One British ex-soldier who joined the Peshmerga Kurdish fighters in November 2014 to fight the IS describes the majority of Islamist militants as a disorganized bunch of “office workers and villagers” on drugs. “They do not have a choice, and they don’t have any information, or even any clear leadership. Many of them are heavily involved in taking drugs they are so terrified,” Jamie Read said.

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Price Discovery and Emerging Markets

Jan 092015
 
 January 9, 2015  Posted by at 10:48 pm Finance Tagged with: , , , , , ,  5 Responses »


DPC Boston and Maine Railroad depot, Riley Plaza, Salem, MA 1910

I got to admit, Paris and Charlie have thrown me off a bit. Can’t be just me who noticed how well the French CAC 40 was doing since Charlie Hebdo got shot, can it? Up some 2%, I don’t quite recall, Wednesday, the day of the attack, and 3.59% yesterday. Doesn’t that strike you as odd? It did me. It’s maybe the perfect example of how alienated the financial world has become from the real world, from you and me. And it doesn’t even surprise us anymore, it doesn’t hardly seem worth mentioning anymore. But I thought I’d do just that: mention it. The CAC 40 lost 1.9% today, but still.

“Fed bullish” said yesterday’s headlines. Of course they did. But France? What have traders in Paris seen in the killings and blood stains that made them so jubilant they got all the way to +3.59%? And where are the ethics hiding in that number? I see no ethics. Should we accept that the financial part of our world has none? That it’s a kind of a parallel universe? That it doesn’t reflect anything that happens to us, and ours?

Today the equally jubilant US jobs report has the Dow down almost a full 1%. Maybe nobody believes anything anymore, any more than the financial world reflects the real one. And maybe nobody cares anymore either. We just go about our days knowing that jobs reports are nonsense, that price discovery has been put six feet under, and that if we’re really smart, we can still make money off of other people’s misery. And isn’t that what Darwin said the purpose of life is? Or was that Ayn Rand? I’m sorry, Charlie threw me off a bit.

Still, we did rediscover price discovery, to an extent, didn’t we? We found out what oil is worth, and even more what it’s not. And I have a hunch that that will lead to more ‘discoveries’. And that they will come from emerging markets – since we can’t seem to be able to be honest about our own, they will have to do it for us. They will, in spectacular fashion. As I wrote 3 weeks ago:

The Biggest Economic Story Going Into 2015 Is Not Oil

.. in the wake of the oil tsunami, which is a long way away from having finished washing down our shores, there’s the demise of emerging markets. And I’m not talking Putin, he’ll be fine. It’s the other, smaller, emerging countries that will blow up in spectacular fashion, and then spread their mayhem around. The US dollar will keep rising more or less in and of itself, simply because the Fed has ‘tapered QE’, and much of what happened in global credit markets, especially in emerging markets, was based on cheap and easily available dollars. There’s now $85 billion less of that each month than before the taper took it away in $10 billion monthly increments. The core is simple.

This is not primarily government debt, it’s corporate debt. But it’s still huge, and it has not just kept emerging economies alive since 2008, it’s given them the aura of growth. Which was temporary, and illusionary, all along. Just like in the rest of the world, Japan, EU, US. And, since countries can’t – or won’t – let their major companies fail, down the line it becomes public debt.

One major difference from the last emerging markets blow-up, in the late 20th century, is size: emerging markets today are half the world economy. And we can all imagine what happens when you blow up half the global economy … [..]

This is the lead story as we go into 2015 two weeks from today. Oil will help it along, and complicate as well as deepen the whole thing to a huge degree, but the essence is what it is: the punchbowl that has kept world economies in a zombie state of virtual health and growth has been taken away on the premise of US recovery as Janet Yellen has declared it.

It doesn’t even matter whether this is a preconceived plan or not, as some people allege, it still works the same way. The US gets to be in control, for a while, until it realizes, Wile E. shuffle style, that you shouldn’t do unto others what you don’t want to be done unto you. But by then it’ll be too late. Way too late.

As I wrote just a few days ago in We’re Not In Kansas Anymore , there’s a major reset underway. We’re watching, in real time, the end of the fake reality created by the central banks. And it’s not going to be nice or feel nice. It’s going to hurt, and the lower you are on the ladder, the more painful it will be.

But that’s just me. The revered Jim O’Neill has his own take on the issue:

BRICs Will Be Cut to ICs if Brazil and Russia Don’t Shape Up

Brazil and Russia’s membership of the BRICs may expire by the end of this decade if they fail to revive their flagging economies, according to Jim O’Neill, the former Goldman Sachs chief economist who coined the acronym. Asked if he would still group Brazil, Russia, India and China together as emerging market powerhouses as he did in 2001, O’Neill said in an e-mail “I might be tempted to call it just ’IC’ or if the next three years are the same as the last for Brazil and Russia I might in 2019!!”

The BRICs were still booming as recently as 2007 with Russia expanding 8.5% and Brazil in excess of 6% that year. The bull market in commodities that helped propel growth in those nations has since ended[..] China growing at 7% will add about $1 trillion nominally to global output every year, O’Neill said. When measured by purchasing power parity, China’s growth adds twice as much as the U.S.’s, he said. India expanding at 6% will add twice as much as the U.K. in those terms, he said.

“Their consumption is increasingly key for global consumption and which markets were amongst the world’s strongest in 2014? China and India both were up significantly,” he said. “So many investors are herd like, they probably have already forgotten the BRIC’s but it is silly. They are the most important influence in the world.”

Hmm. Sure, Russia and Brazil are already tanking, but China is in a much less comfy spot than Jim seems to believe. That’s not just me, the analyst team at Bank of America think so too:

Analysts Fear China Financial Crisis

A credit crunch in China is “highly probable” this year as slowing economic growth prompts a surge in bad debts, Bank of America Merrill Lynch predicts. Chinese president Xi Jinping this week trumpeted the “new normal” referring to slower growth as the government tries to rein in the credit boom – which has led to a debt pile of $26 trillion [..] BoAML: “Few countries that had grown debt relative to GDP as fast as China did over the past few years escaped from a financial crisis in the form of significant currency devaluation, major banking sector recap, credit crunch and/or sovereign debt default (often a combination of these).”

The analysts believe that the government has unlimited resources to bail out banks and other organisations as the debts are mostly in renminbi, and the country’s central bank can always print more money. They argue: “We suspect that the most likely scenario for China is a bad debt surge as growth slows, followed by a credit crunch in the shadow banking sector as investors become risk averse, and followed by a major financial system recap engineered by the government [..]

The US investment bank’s research report– “To focus on the three Ds: Deflation, Devaluation and Default” – notes that China had to pump money into the banking sector to the tune of 15% of GDP in the mid 2000s after a smaller debt surge in the late 1990s. [..] China will publish 2014 growth figures on 20 January that are set to miss the government’s economic target for the first time since 1998. Economists forecast the country grew 7.3%, below the target of 7.5%, with growth likely to slow further this year.

The central bank can ‘always print more money’? Is that so? And if it is, what would the effect be? What has money printing done in the west, other than paint an illusion? And what else could it possibly achieve in China? Shouldn’t Beijing simply adapt to the fact that as world markets shrink, so does its domestic and international growth potential? For that matter, how far removed from its published growth numbers are the data Xi and Li find on their breakfast plate every morning? If consumer inflation numbers – as silly a parameter as it is – prints 1.5%, how can GDP still grow by 7%? And how can it when producer prices are actually deflating? How does that work, and how does it rhyme? It’s perhaps not impossible in theory, but come on…

China Factory-Gate Deflation Deepens on Commodity Price Fall

China’s factory-gate prices extended a record stretch of declines, with the sharpest drop in two years in December, suggesting room for further monetary easing. The producer-price index slumped 3.3% from a year earlier[..] The slide has yet to be fully reflected in consumer prices, which rose 1.5%, matching the median estimate. Tumbling oil and metal prices have extended the run of producer-price declines to a record 34 months, adding to deflationary pressures worldwide as China’s export prices drop.

“The oil price drop is one factor, but the more important factor of the PPI decline is the weakness of the global economy – look at Europe and Japan,” said Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong. “With trade and other inflation transmission methods, the whole world is facing disinflation pressure.” Factory-gate prices of oil and gas slumped 19.7% from a year earlier in December, while coal tumbled 12.2% and ferrous metals 19%, according to a statement on the NBS website.

What is supposed to have China grow at 7% or more today? It can’t be the west, Europe is shrinking, Japan is suffocating and America is fooling itself. It can’t be other emerging economies, they’re all in various stages of trouble. So it would have to be domestic. But have you seen Chinese housing numbers and other data recently? No 7% growth there.

China’s Deflation Risks May Be Rising

China’s consumer inflation ticked up slightly in December, keeping price increases for the year well below the government ceiling, but a further slide in factory prices raised new concerns over weak demand in the world’s second-largest economy. [..] The consumer-price index gained 1.5% year-over-year in December compared with a 1.4% increase in November [..]

In December, the producer-price index, which measures prices at the factory gate, slipped 3.3% from a year ago for its 34th month in a row of declines, with the fall accelerating from the 2.7% drop in November. For 2014 as a whole, the producer-price index fell 1.9%. Excess capacity, particularly in heavy industry, has been blamed for much of the drop. [..] Economic growth in the third quarter of last year was 7.3%, the poorest showing in over five years.

Emerging economies are no longer emerging. Vanishing would be a better term. And it’s going to get worse, fast. Because of the Fed, and the dollar. And interest rates on at least $1 trillion in bonds.

$6 Trillion Of EM Dollar Bonds Pummeled By Rising $, Falling Commodities

The soaring U.S. dollar is squeezing companies in emerging markets from Brazil to Thailand that now face higher costs on roughly $1 trillion in bonds sold to investors before the greenback’s surge. For 2014, the dollar is on track to gain more than 7% compared with a group of emerging-market currencies [..] it is causing particular pain at firms in emerging markets that issued bonds in dollars instead of local currency. The dollar’s rise means it costs more to make regular bond payments and pay off outstanding bonds as they mature. “The investor community is becoming very much one-way or crowded toward retrenching to the U.S.,” says Nikolaos Panigirtzoglou, global markets strategist at JP Morgan.

In 2014, companies in emerging markets issued a record-high $276 billion of dollar-denominated bonds [..] Such sales soared after the financial crisis as borrowers took advantage of rock-bottom interest rates set by the Federal Reserve and other central banks. Countries also have flocked to dollar-denominated bonds, saddling those governments with higher debt-service costs as the dollar rises.

Overall, companies and sovereign-debt issuers have $6.04 trillion in outstanding bonds, up nearly fourfold since the 2008 financial crisis [..] Many emerging markets also are being pummeled by falling prices for commodities such as oil and slower economic growth. Bond markets in emerging-market countries recently suffered one of their worst selloffs since the financial crisis [..]

The Indonesian rupiah, Chilean peso, Brazilian real and Turkish lira are near multiyear lows. Mexico’s central bank bought pesos earlier this month to keep the depreciating currency from pushing the economy into a funk. [..] More pressure will come if the Fed raises interest rates next year for the first time since 2006.

The stronger dollar also pushes the cost of new borrowing higher. Prices for bonds issued by Russia’s TMK, one of the world’s largest pipe makers, that are due in 2018 are down by more than 30% since late October. [..] Top officials at the IMF and the BIS have warned that the exchange-rate turmoil could lead to corporate defaults and asset-price busts around the globe. [..] overall investments in emerging markets by outsiders have grown so huge that it would be hard during a jolt for investors to sell without pushing those markets sharply lower [..].

Just you wait till the Fed hikes rates. There’ll be mayhem in the streets, all around the globe. And Wall Street banks are going to make a killing. Which is why the Fed WILL raise rates. From Fed oracle/media whisperer/bullhorn Jon Hilsenrath:

Could Lower 10 Year Yields Spark A More Aggressive Fed?

If lower long-term rates are a reflection of investors pouring money into U.S. dollar assets, flows that could spark a U.S. asset price boom, it might prompt the Fed to push rates higher sooner or more aggressively than planned. The latter interpretation is less conventional, but it is one that New York Fed President William Dudley made at length in a speech in December. He argued the Fed had the wrong reaction to lower long rates in the 2000s, a mistake that might have contributed to the housing boom that ended disastrously.

Here is a key passage: During the 2004-07 period, the (Fed) tightened monetary policy nearly continuously, raising the federal funds rate from 1% to 5.25% in 17 steps. However, during this period, 10-year Treasury note yields did not rise much, credit spreads generally narrowed and U.S. equity price indices moved higher. Moreover, the availability of mortgage credit eased, rather than tightened.

As a result, financial market conditions did not tighten. As a result, financial conditions remained quite loose, despite the large increase in the federal funds rate. With the benefit of hindsight, it seems that either monetary policy should have been tightened more aggressively or macroprudential measures should have been implemented in order to tighten credit conditions in the overheated housing sector.

Mr. Dudley’s conclusion was that the pace of the Fed’s short-term interest rate moves this time around ought to be dictated in part by whether the rest of the financial system is moving with or against the Fed’s intentions when it decides it ought to start restraining credit creation:

When lift-off occurs, the pace of monetary policy normalization will depend, in part, on how financial market conditions react to the initial and subsequent tightening moves. If the reaction is relatively large—think of the response of financial market conditions during the so-called “taper tantrum” during the spring and summer of 2013—then this would likely prompt a slower and more cautious approach. In contrast, if the reaction were relatively small or even in the wrong direction, with financial market conditions easing—think of the response of long-term bond yields and the equity market as the asset purchase program was gradually phased out over the past year—then this would imply a more aggressive approach.

…a stronger dollar and rising – albeit volatile – stock prices suggest the U.S. is attracting foreign capital which could charge up U.S. financial conditions and prompt an early or more aggressive Fed move.

The Fed – and its media handlers – are setting up the case for rate hikes. As everyone claims they wpouldn’t dare. A 5% GDP growth print makes little sense at best when Japan is sinking and Europe is rudderless, but it’s accepted as gospel. So is today’s jobs report, which is as flimsy as its predecessors once you lift the veil. There is no critical journalism left in the US, and the rest of the world isn’t doing much better in that regard.

But then things like a 50%+ drop in oil prices happen. Which at some point will lead more people to wonder what the real numbers are. For emerging nations, those numbers will not be pretty for 2015. They’re going to feel like they’re being thrown right back into the Stone Age. And they’re not going to like that one bit, and look for ways to express their frustration. Volatility is not just on the rise in the world of finance. It also is in the real world that finance fails to reflect. At some point, the two will meet again, and Wall Street will mirror Main Street. It will make neither any happier. But it’ll be honest.

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