Mar 192018
 
 March 19, 2018  Posted by at 9:32 am Finance Tagged with: , , , , , , , , , , , ,  


Ernest R. Ashton Evening near the Pyramids 1898

 

Facebook And Cambridge Analytica Face Mounting Pressure Over Data Scandal (G.)
Boris Johnson Ramps Up Anti-Russia Rhetoric (G.)
Why Default Rates Are Subdued Even As Corporate Debt Levels Hit Records (MW)
How Seriously is the Treasury Market Taking the Fed? (WS)
65% of Americans Save Little or Nothing (CNBC)
Developing Countries At Risk From US Rate Rise, Debt Charity Warns (G.)
Rising US Interest Rates May Damage Gulf Economies (MEE)
Kim Jong-Un Has Committed To Denuclearisation, Says South Korea (G.)
Kim Jong-Un Caught Off Guard by Trump’s Quick Agreement to Meet (BBG)
Japan: Embattled Shinzo Abe Blames Staff Over Land Sale Scandal (AFP)
Apple Is Secretly Developing Its Own Screens for the First Time (BBG)
Canadian Household Debt Hits Record $1.8 Trillion (CP)
German Interior Minister Wants More Internal EU Border Controls (DW)
Water Shortages Could Affect 5 Billion People By 2050 – UN (G.)

 

 

Facebook knows more about you than your friends and family do. No, really. But it can’t figure out -for years- that its data are being downloaded and used?! Yeah, I’ll buy that.

The real issue here should be what Facebook itself uses its -or should that be ‘your’- data for, and what intelligence services do with it.

Facebook And Cambridge Analytica Face Mounting Pressure Over Data Scandal (G.)

Facebook and that worked with Donald Trump’s election team have come under mounting pressure, with calls for investigations and hearings to explain a vast data breach that affected tens of millions of people. In Britain, the head of the parliamentary committee investigating fake news accused Cambridge Analytica and Facebook of misleading MPs after revelations in the Observer that more than 50m Facebook profiles were harvested and used to build a system that may have influenced voters in the 2016 presidential campaign. The Conservative MP Damian Collins said he would call the heads of both companies, Alexander Nix and Mark Zuckerberg, to give further testimony.

His intervention came after a whistleblower spoke to the Observer and described how the profiles, mostly of US voters, were harvested for Cambridge Analytica, in one of Facebook’s biggest ever data breaches. The disclosures caused outrage on both sides of the Atlantic; in the US, a state attorney general has called for investigations and greater accountability and regulation. There have been reports that Cambridge Analytica is trying to stop the broadcast of a Channel 4 News exposé in which Nix is said to talk unguardedly about the company’s practices. According to the Financial Times, reporters posed as prospective clients and secretly filmed a series of meetings, including one with the chief executive. The report is due to air this week.

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Very little credibility so far. From descriptions of the nerve agent, it would seem impossible that “..at least 38 people in Salisbury had been identified as having been affected by it..” and all lived to tell it. Is the whole Novichok story a fabrication? Know what, Boris? Why not show the proof you claim to have?!

Boris Johnson Ramps Up Anti-Russia Rhetoric (G.)

Boris Johnson will today seek to convince the EU foreign affairs council to join him in fresh condemnation of Russia after his explosive claims that Moscow has been creating and stockpiling nerve agent novichok and working out how to use it for assassinations. Scientists from the UN-backed Organisation for the Prohibition of Chemical Weapons arrive today to analyse samples of the agent used to poison the former spy Sergei Skripal and his daughter Yulia. The foreign secretary made his claims after Russian EU ambassador Vladimir Chizhov issued blanket denials and said British agents might have used their stockpiles at Porton Down.

As the row enters its third week, Johnson dismissed Chizhov’s comments, saying they were “not the response of a country that really believes it’s innocent”. On Sunday, Vladimir Putin, fresh from a profoundly unsurprising electoral victory, denied any such nerve agents existed and said the idea of carrying out such a killing during an election campaign would be “rubbish, drivel, nonsense”. The latest theory to gain prominence is that the Skripals were poisoned via his car’s ventilation system. The report, from ABC news in the US, came as counter-terrorism police renewed their appeal for sightings of Skripal’s burgundy BMW 320D saloon car on 4 March. ABC also reported that at least 38 people in Salisbury had been identified as having been affected by the nerve agent.

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Zero interest rates?!

Why Default Rates Are Subdued Even As Corporate Debt Levels Hit Records (MW)

U.S. corporate debt levels stand above crisis highs even as default rates among the most leveraged firms remain subdued. With an economy hitting its stride, it’s perhaps no surprise that the high-yield bond market is placid. The extent of the divergence between debt levels and defaults, however, is worrying to some analysts who feel rising corporate indebtedness will eventually catch out unwary investors and deflate the junk-bond market. But beyond complacency John Lonski at Moody’s Capital Market Research, argued that globalization and the tendency of U.S. businesses to hoard cash as reasons why corporate debt levels may no longer move in sync with default rates and credit spreads.

The high-yield default rate in the fourth-quarter of 2017 fell to 3.3%, even as U.S. nonfinancial-corporate debt ended in 2017 at 45.4% of GDP. This compares with a much higher default rate of 11.1% in the second quarter of 2009, with corporate debt levels at 45% of GDP. Granted, the current levels come with the economy in the eighth year of an expansion, while the second quarter of 2009 marked the final quarter of the longest and deepest U.S. recession since the Great Depression. The yield spread between high-yield bonds and safe government paper, as represented by the 10-year Treasury note narrowed to an average 3.63 percentage points in the fourth quarter of 2017, from an average 12.02 percentage points in the second quarter of 2009.

The tight credit spreads reflects that borrowing costs are still close to historic lows, and that investors are demanding minimum compensation for holding arguably the riskiest debt in the bond market. One answer “might be supplied by the ever increasing globalization of U.S. businesses where the more relevant denominator is not U.S. GDP, but world GDP” said Lonski. The fortunes of U.S. companies are now wove into the broader global economy. When commodity prices took a hit in 2015 and early 2016, crimping growth in China and other emerging markets, high-yield bonds were also slammed.

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If they keep up the forward guidance, everyone will sleep on. But will the yield spread sleep too?

How Seriously is the Treasury Market Taking the Fed? (WS)

Back in October 2015, the three-month Treasury yield was 0%. Many on Wall Street said that the Fed could never raise interest rates, that the zero-interest-rate policy had become a permanent fixture, like in Japan, and that the Fed could never unload the securities it had acquired during QE. How things have changed! On Friday, the three-month Treasury yield closed at 1.78%, the highest since August 19, 2008. When yields rise, by definition bond prices fall:

Back in October 2015, the three-month Treasury yield was 0%. Many on Wall Street said that the Fed could never raise interest rates, that the zero-interest-rate policy had become a permanent fixture, like in Japan, and that The Fed’s target range for the federal funds rate has been 1.25% to 1.50% since its last rate hike at the December FOMC meeting. In other words, the three-month yield is already above the upper limit of the Fed’s target range after the next rate hike. So the market has fully priced in a rate hike at the FOMC meeting ending March 21. And it’s also starting to price in another rate hike in June. In this rate-hike cycle, the Fed has engaged in policy action only at meetings that are followed by a press conference.

There are four of these press-conference meetings per year. The next two are this week and June. If, in this cycle, the Fed hike rates at an FOMC meeting that is not followed by a press conference – there are also four of them this year – it would be considered a “monetary shock” that the Fed decided to administer to the markets. It would be like a rate hike of 50 basis points instead of the expected 25 basis points. There would be a hue and cry in the markets around the world. But I think the Fed isn’t ready to spring that on the markets just yet. Maybe later. The two-year yield rose to 2.31% on Friday, the highest since August 29, 2008:

Back in October 2015, the three-month Treasury yield was 0%. Many on Wall Street said that the Fed could never raise interest rates, that the zero-interest-rate policy had become a permanent fixture, like in Japan, and that In past rate hike cycles, the two-year yield reacted faster to rate-hike expectations than the 10-year yield. This is happening now as well. The 10-year yield has its own dynamics that are not in lockstep with the Fed’s rate-hike scenario. On Friday, the 10-year yield closed at 2.85%, within the same range where it had been since late February, tantalizingly close to 3%:

Back in October 2015, the three-month Treasury yield was 0%. Many on Wall Street said that the Fed could never raise interest rates, that the zero-interest-rate policy had become a permanent fixture, like in Japan, and that [..] After the surge of the two-year yield, the difference between the two-year and the 10-year yield – the “two-10 spread” – has narrowed again. On Friday, it was at 54 basis points. In the chart below, note the narrowing at the end of last year to 50 basis points, then the mini-spike, as the 10-year yield surged faster than the two-year yield, and the recent fallback:

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Always the same braindead question: “What’s keeping Americans from saving?” We still don’t know?!

65% of Americans Save Little or Nothing (CNBC)

Despite a low unemployment rate and increasing wage growth, Americans still aren’t saving much. That’s according to a new survey from Bankrate.com, which found that 20% of Americans don’t save any of their annual income at all and even those who do save aren’t putting away a lot. Only 16% of survey respondents say that they save more than 15% of what they make, which is what experts generally recommend. A quarter of respondents report saving between 6 and 10% of their income and 21% say they sock away 5% or less.

At this rate, many people could be setting themselves up to fall short in retirement, Bankrate warns. “With a steady, significant share of the working population saving nothing or relatively little, it’s virtually guaranteed that they’ll be unable to afford a modest emergency expense or finance retirement,” says Mark Hamrick, senior economic analyst at Bankrate. “That amounts to a financial fail.” The economy might be prospering now, but that won’t last forever: “The party has to stop sometime, and when it does, employers will lay off workers,” the study says. In fact, Bankrate estimates that half of the American population won’t be able to maintain their standard of living once they stop working.

A report from GoBankingRates found similar results: Over 40% of Americans have less than $10,000 saved for when they retire. What’s keeping Americans from saving? “Expenses” was the No. 1 answer of 39% of respondents. Another 16% say they don’t have a “good enough job” to be able to save, which presumably means they aren’t earning enough. “The average American has less than $5,000 in a financial account, a quarter to a fifth of what you should have, and those aged 55 to 64 who have retirement savings only carry $120,000 — which won’t last long in the absence of paychecks,” the survey reports.

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How strong will this make the dollar?

Developing Countries At Risk From US Rate Rise, Debt Charity Warns (G.)

The expected rise in US interest rates will increase financial pressures on developing countries already struggling with a 60% jump in their debt repayments since 2014, a leading charity has warned. The Jubilee Debt Campaign said a study of 126 developing nations showed that they were devoting more than 10% of their revenues on average to paying the interest on money borrowed – the highest level since before the G7 agreement to write off the debts of the world’s poorest nations at Gleneagles, Scotland, in 2005. Five of the countries on the charity’s list – Angola, Lebanon, Ghana, Chad and Bhutan – were spending more than a third of government revenues on servicing debts.

Developing country debt moved down the international agenda following the Gleneagles agreement in which the G7 industrial countries agreed to spend £30bn writing off the debts owed to the International Monetary Fund and the World Bank by the 18 poor countries. But developing country debt is now once again being closely monitored by the IMF, which says 30 of the 67 poor countries it assesses are in debt distress or at risk of being so. Lending to developing countries almost doubled between 2008 and 2014 as low interest rates in the west led to a search for higher-yielding investments. A boom in commodity prices meant many poor countries borrowed in anticipation of tax receipts that have not materialised.

But the Jubilee Debt Campaign said the boom–bust in commodity prices was only one factor behind rising debt, pointing out that some countries were paying back money owed by former dictators, while others had been struggling with high debts for many years but had not been eligible for help. The campaign said developing countries were also vulnerable to a rise in global interest rates as central banks withdrew the support they have been providing since 2008. [..] The US Federal Reserve is expected to raise interest rates this week – with the financial markets expecting two or three further upward moves during 2018.

Tim Jones, an economist at the Jubilee Debt Campaign, said: “Debt payments for many countries have risen rapidly as a result of a lending boom and fall in commodity prices. The situation may worsen further as US dollar interest rates rise, and as other central banks reduce monetary stimulus. Debt payments are reducing government budgets when more spending is needed to meet the sustainable development goals.”

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A few economies that have not done well.

Rising US Interest Rates May Damage Gulf Economies (MEE)

[..]The latest available data shows that Oman, for instance, has a debt equivalent to 31.4% of their GDP for 2016, which is up from 4.9% in 2014, according to TradingEconomics.com. That jump in debt coincided with a fall in oil prices from more than $100 a barrel in mid-2014 to a low of $26 in early 2016. Rising rates also tend to increase costs for businesses, says Rosso. And the higher costs of borrowing ultimately means that fewer businesses that request loans from banks will receive the money they need. In short, growth in the available credit in the economy will slow. If we learned nothing else from the financial crisis of 2008-2009, it is that the world of business runs on credit. Slower credit growth usually means slower economic growth.

The base case is that among the countries with the dollar peg such as Saudi Arabia, UAE and Oman, the increased interest rates will likely drag on growth for their economies. The timing is really pretty bad for some of the countries involved. For instance, the Saudi economy shrank by 0.43% in the quarter ending September 2017, according to TradingEconomics.com. The prior quarter was worse; the economy sank 1.03%. Two quarters of negative growth is generally seen as a recession. Will the impact of rising rates push Saudi’s economy back into another recession? It’s hard to tell so far, but there is a risk. Similar problems seem likely for some other countries in the dollar-peg group.

The latest data from Oman is awful as well, although not as recent as that on Saudi Arabia. That economy contracted 14.1% in 2015, followed by another 5.1% decline in 2016. Likewise, the UAE has seen its growth steadily decline in each of the five years through 2016 from 6.9% to 3% most recently. That would not be bad for economic growth, but it is going in the wrong direction.

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That’s quite the statement.

Kim Jong-Un Has Committed To Denuclearisation, Says South Korea (G.)

South Korea’s foreign minister has said that North Korea’s leader has “given his word” that he is committed to denuclearization, a prime condition for a potential summit with President Donald Trump in May. Trump has agreed to what would be historic talks after South Korean officials relayed that Kim Jong-un was committed to ridding the Korean Peninsula of nuclear weapons and was willing to halt nuclear and missile tests. North Korea hasn’t publicly confirmed the summit plans, and a meeting place isn’t known. South Korea’s Kang Kyung-wha said Seoul has asked the North “to indicate in clear terms the commitment to denuclearization” and she says Kim’s “conveyed that commitment.” She told the CBS programme Face the Nation that “he’s given his word” and it’s “the first time that the words came directly” from the North’s leader.

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Only include this because it’s exactly what I said last week. Kim still hasn’t publicly agreed to meet.

Kim Jong-Un Caught Off Guard by Trump’s Quick Agreement to Meet (BBG)

U.S. President Donald Trump’s immediate willingness to meet Kim Jong Un for nuclear talks likely caught the North Korean leader by surprise, forcing him to consider his position before responding publicly, the South Korean foreign minister said. “We were all quite surprised by the readiness of that decision,” South Korea’s Kang Kyung-wha said on CBS’s “Face the Nation” Sunday. “It was an extremely courageous decision on the part of President Trump. We believe the North Korean leader is now taking stock.” Trump agreed to meet with Kim on March 8 after a briefing from South Korean officials.

The summit, expected to take place in a few months, would represent the first time a U.S. president has met a North Korean leader – either Kim or his father or grandfather – and is part of an overall strategy to dismantle that nation’s rapidly advancing nuclear weapons program. Pyongyang has already detonated what it described as a hydrogen bomb capable of riding an intercontinental ballistic missile to cities across the U.S., and Kim has threatened to use nuclear arms against Americans. The summit, if it occurs, will likely follow an already-scheduled meeting between Kim and South Korean President Moon Jae-in to take place in South Korea, at which denuclearization will also be discussed, Kang said.

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Yeah, Shinzo, the Russians did it.

Tyler earlier: “82% of Asahi poll respondents said Abe bears responsibility for the doctored documents relating to the Moritomo scandal”

Japan: Embattled Shinzo Abe Blames Staff Over Land Sale Scandal (AFP)

Japan’s embattled prime minister has hit back at critics over a favouritism and cover-up scandal that has seen his popularity plunge and loosened his grip on power. In a statement in parliament, Shinzo Abe stressed he had not ordered bureaucrats to alter documents relating to a controversial land sale. “I have never ordered changes,” he said. The scandal surrounds the 2016 sale of state-owned land to a nationalist operator of schools who claims ties to Abe and his wife Akie. The sale was clinched at a price well below market value amid allegations that the high-level connections helped grease the deal. The affair first emerged early last year, but resurfaced after the revelation that official documents related to the sale had been changed.

Versions of the original and doctored documents made public by opposition lawmakers appeared to show passing references to Abe were scrubbed, along with several references to his wife Akie and Finance Minister Taro Aso. Aso has blamed the alterations on “some staff members” at the ministry. But Jiro Yamaguchi, a politics professor at Hosei University in Tokyo, said the public was “not at all convinced” by this explanation. “Why was the land sold at a discount price? Without any political pressure, this could never happen, and voters are angry about it,” said Yamaguchi. The prime minister repeated an apology, saying he “keenly felt” his responsibility over the scandal that has “shaken people’s confidence in government administration.”

The affair is hitting Abe’s ratings hard, with a new poll in the Asahi Shimbun showing public support nosediving by 13 percentage points from the previous month to 31%. The figure is the lowest approval rating for Abe in the poll since his return to power at the end of 2012.

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A different kind of protectionism.

Apple Is Secretly Developing Its Own Screens for the First Time (BBG)

Apple is designing and producing its own device displays for the first time, using a secret manufacturing facility near its California headquarters to make small numbers of the screens for testing purposes, according to people familiar with the situation. The technology giant is making a significant investment in the development of next-generation MicroLED screens, say the people, who requested anonymity to discuss internal planning. MicroLED screens use different light-emitting compounds than the current OLED displays and promise to make future gadgets slimmer, brighter and less power-hungry. The screens are far more difficult to produce than OLED displays, and the company almost killed the project a year or so ago, the people say.

Engineers have since been making progress and the technology is now at an advanced stage, they say, though consumers will probably have to wait a few years before seeing the results. The ambitious undertaking is the latest example of Apple bringing the design of key components in-house. The company has designed chips powering its mobile devices for several years. Its move into displays has the long-term potential to hurt a range of suppliers, from screen makers like Samsung, Japan Display, Sharp and LG to companies like Synaptics that produce chip-screen interfaces. It may also hurt Universal Display, a leading developer of OLED technology. Display makers in Asia fell after Bloomberg News reported the plans. Japan Display dropped as much as 4.4%, Sharp tumbled as much as 3.3% and Samsung slid 1.4%.

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“$22,837 per person, not including mortgages…”

Canadian Household Debt Hits Record $1.8 Trillion (CP)

Canadians’ collective household debt has climbed to $1.8 trillion as an international financial group sounds an early warning that the country’s banking system is at risk from rising debt levels. Equifax Canada says consumers now owe $1.821 trillion including mortgages as of the fourth-quarter of 2017, marking a 6% increase from a year earlier. Although nearly half of Canadians reduced their personal liabilities, roughly 37% added to their debt to push the average amount up 3.3% to $22,837 per person, not including mortgages.

The fresh numbers come as an international financial group owned by the world’s central banks says Canada’s credit-to-GDP and debt-service ratios show early warning signs of potential risk to the banking system in the coming years. The latest report by the Bank for International Settlements says Canada’s credit-to-GDP gap and debt-service ratios have surpassed critical thresholds and are signalling red, pointing to vulnerabilities. The group, however, cautions that these indicators should not be treated as a formal stress test, but as a first step in a broader analysis.

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From Merkel’s own camp.

German Interior Minister Wants More Internal EU Border Controls (DW)

Germany should consider stepping up its border controls, German Interior Minister Horst Seehofer said on Sunday. “Not that many border points in Germany are permanently occupied,” Seehofer told German weekly newspaper Die Welt am Sonntag, adding: “We will now discuss whether that needs to change.” Seehofer also appealed for the suspension of the Schengen Agreement, which allows free movement within the EU bloc. “Internal border checks [between EU member states] must be in place so long as the EU fails to effectively control the external border,” he said, adding: “I don’t see it being able to do this in the near future.” The reintroduction of border controls is a prerogative of EU member states. Under EU rules they must remain an exception and respect the principle of proportionality.

Germany’s temporarily reintroduced border controls continue until May 12 and have been imposed on the land border with Austria and on flight connections from Greece because of the “security situation in Europe and threats resulting from the continuous secondary movements,” according to the European Commission. Seehofer’s comments follow EU demands in February that Germany and four other Schengen members – Austria, Denmark, Sweden and Norway – lift their border controls when the current agreed terms run out in May. [..] Seehofer is a member of the Christian Social Union (CSU), the Bavarian sister party of German Chancellor Angela Merkel’s conservative Christian Democrats (CDU).

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Waterwars in waterworld.

Water Shortages Could Affect 5 Billion People By 2050 – UN (G.)

More than 5 billion people could suffer water shortages by 2050 due to climate change, increased demand and polluted supplies, according to a UN report on the state of the world’s water. The comprehensive annual study warns of conflict and civilisational threats unless actions are taken to reduce the stress on rivers, lakes, aquifers, wetlands and reservoirs. The World Water Development Report – released in drought-hit Brasília – says positive change is possible, particularly in the key agricultural sector, but only if there is a move towards nature-based solutions that rely more on soil and trees than steel and concrete.

“For too long, the world has turned first to human-built, or ‘grey’, infrastructure to improve water management. In doing so, it has often brushed aside traditional and indigenous knowledge that embraces greener approaches,” says Gilbert Houngbo, the chair of UN Water, in the preface of the 100-page assessment. “In the face of accelerated consumption, increasing environmental degradation and the multi-faceted impacts of climate change, we clearly need new ways of manage competing demands on our freshwater resources.” Humans use about 4,600 cubic km of water every year, of which 70% goes to agriculture, 20% to industry and 10% to households, says the report, which was launched at the start of the triennial World Water Forum.

Global demand has increased sixfold over the past 100 years and continues to grow at the rate of 1% each year. This is already creating strains that will grow by 2050, when the world population is forecast to reach between 9.4 billion and 10.2 billion (up from 7.7 billion today), with two in every three people living in cities. [..] By 2050, the report predicts, between 4.8 billion and 5.7 billion people will live in areas that are water-scarce for at least one month each year, up from 3.6 billion today, while the number of people at risk of floods will increase to 1.6 billion, from 1.2 billion.

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Feb 132015
 
 February 13, 2015  Posted by at 10:15 am Finance Tagged with: , , , , , , , ,  


John M. Fox Garcia Grande newsstand, New York 1946

$9 Trillion Question: How Will The World Deal With A Fed Rate Rise? (Bloomberg)
One Big Fear With A Strong Dollar: A Stock Market Bubble (MarketWatch)
Another Disappointing US Retail Sales Report (Bloomberg)
Iceland: We Jail Our Bad Bankers And You Can Too (Reuters)
Greece Is Simply ‘Too Big To Fail’ (CNBC)
European Central Bank Throws Greece Lifeline Before Eurozone Talks (Guardian)
‘Grexit’ Would Be No Easy Ride For Austerity-Weary Greeks (Reuters)
Greece Agrees To Talk To Creditors In EU Debt Progress (Reuters)
Merkel Says EU Chiefs Await Greek Plan to Break Impasse (Bloomberg)
Greece, Germany Said to Offer Compromises on Aid Terms (Bloomberg)
Greece: Hanging Tough For Better Eurozone Deal? (Guardian)
UK Sliding Towards First Bout Of Negative Inflation In 55 Years (Guardian)
Japan Gets Ready to Fight (Bloomberg)
With Eye On Japan, China Plans Big Military Parades Under Xi (Reuters)
The Upside of Waste and Environmental Degradation (Charles De Trenck)
China Official Wants To Force Couples To Have Second Child (MarketWatch)
China’s Shale Ambition: 23 Times The Output In 5 Years (MarketWatch)
As US Oil Tanks Swell At Record Rate, Traders Ask: For How Long? (Reuters)
Opera: The Economic Stimulus That Lasts for Centuries (Bloomberg)
Le Monde’s Owner Lays Bare Fragility Of Press Freedom (Guardian)
What If The Government Locked Up Your Children? (SMH)
US ‘At Risk Of Mega-Drought Future’ (BBC)

“That’s the amount owed in dollars by non-bank borrowers outside the U.S., up 50% since the financial crisis..”

$9 Trillion Question: How Will The World Deal With A Fed Rate Rise? (Bloomberg)

When Group of 20 finance ministers this week urged the Federal Reserve to “minimize negative spillovers” from potential interest-rate increases, they omitted a key figure: $9 trillion. That’s the amount owed in dollars by non-bank borrowers outside the U.S., up 50% since the financial crisis, according to the Bank for International Settlements. Should the Fed raise interest rates as anticipated this year for the first time since 2006, higher borrowing costs for companies and governments, along with a stronger greenback, may add risks to an already-weak global recovery The dollar debt is just one example of how the Fed’s tightening would ripple through the world economy.

From the housing markets in Canada and Hong Kong to capital flows into and out of China and Turkey, the question isn’t whether there will be spillovers – it’s how big they will be, and where they will hit the hardest. “Liquidity conditions globally will start to tighten,” said Paul Sheard, chief global economist at Standard & Poor’s. “Emerging markets won’t be the only game in town. You will have a U.S. economy that is growing more strongly and also offering rising interest rates and a return on capital that is starting to vie for new investment opportunities around the world.” The broad trade-weighted dollar has strengthened 12.3% since June, and it’s forecast to advance further as the Fed tightens while the ECB starts buying sovereign debt and Japan extends record stimulus.

The stronger greenback will be the main channel through which the rest of the world feels the effects of a tighter Fed policy, according to Joseph Lupton at JPMorgan. “For the developed economies like Europe and Japan, I think it’s a positive – it’s getting their currency down and it’s supporting their economies,” said Lupton, who previously worked as a Fed economist. “For the emerging markets, it’s a little bit different, because this could set off a chain of very rapid, volatile moves downward in currencies that have inflation implications which are not as desirable.”

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Can the bubble get even bigger than it already is?

One Big Fear With A Strong Dollar: A Stock Market Bubble (MarketWatch)

The concerns that have kept U.S. stocks in check since the start of the year haven’t dissipated. But that hasn’t stopped the S&P 500 from marching to within shouting distance of an all-time high. The S&P rose 0.8% to 2,085.23 on Thursday on news of a cease-fire agreement between Ukraine and Russia, and is third a percentage point away from a record close reached Dec. 29, 2014. It isn’t the fundamentals that brought the markets to these lofty levels, as fourth-quarter earnings have been less than stellar. Moreover, 2015 earnings estimates have been dialed down. But some experts believe that the climb higher, driven by the strengthening dollar, can create a bubble in U.S. stocks. The dollar rose nearly 13% in 2014, and is up 4%, so far this year.

Conventional wisdom dictates that a stronger dollar hurts corporate profits of large companies, since 46.3% of revenues from S&P 500 listed companies are derived from overseas, according to Howard Silverblatt, senior analyst with S&P Dow Jones Indices. But a beefy buck also makes assets priced in dollars more attractive to foreign investors, which could spark a run-up in stock valuations. Wall Street strategists are forecasting that markets will rise between 5% to 9% by the end of the year. Most point to favorable conditions, such as economic growth, earnings growth, low interest rates, low inflation, share buybacks, and foreign demand as big market drivers.

Channing Smith, portfolio manager at Capital Advisors, is less optimistic. “We are already at the level where stocks are simply expensive. If markets rise from this level significantly due to foreign demand or lack of alternatives – this will form a bubble,” Smith said. Ed Shill, chief investment officer of QCI, describes this situation as a ‘melt-up’. He means stocks are approaching bubble territory. “Market can rise on the back of money flows, but fundamentals will catch up. We all know that air comes out of the bubble faster than it goes in, so those who think they can ride this wave should take note,” Shill warned.

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But nothing Bloomberg couldn’t spin.

Another Disappointing US Retail Sales Report (Bloomberg)

Americans eased up on purchases at retailers from department stores to clothing outlets in January, making for a disappointing start to the year after the strongest quarter of consumer spending since 2006. Retail sales fell 0.8%, mainly reflecting a slump in service station receipts as gasoline prices dropped, Commerce Department data showed Thursday in Washington. Purchases fell twice as much as the Bloomberg survey median forecast, and followed a 0.9% retreat in December. Sales excluding gasoline were little changed. The figures, which also showed weaker results at furniture chains and auto dealers, indicate Americans aren’t rushing out to spend the windfall from cheaper fuel. Faster job growth that generates bigger paychecks will probably ensure brighter days are in store for the nation’s retailers.

“Consumers are basically seeing all these positives but they’re being a little more prudent about how they spend,” said Michael Feroli, chief U.S. economist at JPMorgan in New York. “We’re not too concerned. Consumer spending is fine, it’s just not doing all that well given the very favorable fundamentals.” Stocks rose on optimism over a cease-fire agreement for Ukraine. The Standard & Poor’s 500 Index gained 1% to 2,088.48 at the close in New York. While another report showed jobless claims jumped by 25,000 to 304,000 last week, applications over the last four periods, a less-volatile measure, dropped to the lowest level since mid-November. The monthly average declined by 3,000 to 289,750 in the period ended Feb. 7, according to the Labor Department.

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It’s insane that it’s such an exception. Pitchforks’R’Us.

Iceland: We Jail Our Bad Bankers And You Can Too (Reuters)

Iceland’s Supreme Court has upheld convictions of market manipulation for four former executives of the failed Kaupthing bank in a landmark case that the country’s special prosecutor said showed it was possible to crack down on fraudulent bankers. Hreidar Mar Sigurdsson, Kaupthing’s former chief executive, former chairman Sigurdur Einarsson, former CEO of Kaupthing Luxembourg Magnus Gudmundsson, and Olafur Olafsson, the bank’s second largest shareholder at the time, were all sentenced on Thursday to between four and five and a half years. The verdict is the heaviest for financial fraud in Iceland’s history, local media said. Kaupthing collapsed under heavy debts after the 2008 financial crisis and the four former executives now live abroad.

Though they sometimes returned to Iceland to collaborate with the court investigation, none were present on Thursday. Iceland’s government appointed a special prosecutor to investigate its bankers after the world’s financial systems were rocked by the discovery of huge debts and widespread poor corporate governance. He said Thursday’s ruling was a signal to countries slow to pursue similar cases that no individual was too big to be prosecuted. “This case…sends a strong message that will wake up discussion,” special prosecutor Olafur Hauksson told Reuters. “It shows that these financial cases may be hard, but they can also produce results.”

Iceland struggled initially to appoint a special prosecutor. Hauksson, 50, a policeman from a small fishing village, was encouraged to put in for the job after the initial advertisement drew no applications. Nor have all of his prosecutions been trouble-free: two former bank executives were acquitted in one case, while sentences imposed on others have been criticized for being too light. However, Icelandic lower courts have convicted the chief executives of all three of its largest banks for their responsibility in a crisis that prosecutors said highlighted the operations of a club of wealth financiers in a country of just 320,000 people. They also convicted former chief executives of two other major banks, Glitnir and Landsbanki, for charges ranging from fraud and market manipulation.

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“Greece is too big to fail and the European Union will step in..”

Greece Is Simply ‘Too Big To Fail’ (CNBC)

Greece continues to be a sore spot for the global economy as the newly-elected government has made clear that it doesn’t plan to honor past agreements made with the European Union. Greece, France, the rest of the European Union, and a host of international banks have already agreed to write off a significant percentage of Greece’s debt as a way to stabilize the economy and keep Greece in the euro trade group. But now Greece says they want a different deal. This is obviously not a positive for Europe and does have the potential to destabilize global economics if Greece simply declines to pay their bills. Creditors will likely have to craft a revised repayment schedule tied not just to austerity, but also to growth.

Look for a new round of concessions; Greece recognizes that the appetite for more drama is very low among other member countries. Renegotiation might not be the preferred solution, but “too big to fail” lives. The politicians in Greece know that and despite the posturing by creditors, they know it as well. But here’s the important question: Will Greece and its renegotiations crash the global economy? No. It is important to recognize that the global economy and markets are pretty much under the assumption that Greece will continue to be a problem child for Europe. It is our view that there is an expectation that Greece is not going to follow through on their commitments and is likely priced into the global equity market.

Greece could make problems for the global economy and do their best to destabilize international banks. But I doubt that that intentional deed would be attempted. And, in the event it were to occur, it is likely governments would step in to provide support for impacted institutions. Perhaps governmental intervention sounds very familiar. Perhaps the recently announced quantitative easing program for €1 trillion announced by the European Central Bank sounds familiar as well. Europe is taking a page out of the United States’ playbook. Citigroup and AIG were too big to fail and the US government stepped in. Fannie Mae, Freddie Mac, GM and Chrysler were too big to fail and the US government stepped in. Like these examples, Greece is too big to fail and the European Union will step in as well.

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“Greece will not blackmail or be blackmailed.”

European Central Bank Throws Greece Lifeline Before Eurozone Talks (Guardian)

The European Central Bank has thrown Greece a lifeline to prevent Athens running out of money before crunch talks with European leaders. The extension of emergency funding to the Greek finance sector by the eurozone’s central bankers lifted the euro and gave Greece’s prime minister, Alexis Tsipras, a stronger hand before meetings with senior officials at the leaders summit in Brussels. Tsipras was scheduled to meet the German chancellor, Angela Merkel, in an attempt to hammer out a deal after he told her, following his election a little more than a fortnight ago, that he will lift draconian austerity measures, contravening the terms of the Greek bailout programme. Greece has failed so far to persuade European leaders that it needs more generous loan financing to alleviate poverty and to promote growth.

Talks earlier his week between eurozone finance ministers reached a deadlock after plans put forward by Athens for cheaper long-term loans were rejected. The ECB has come under pressure to allow Greece to access short-term lending facilities after it said the crisis-hit country no longer qualified for drawing on standard borrowing terms. Two sources familiar with the matter told Reuters that the provision of emergency liquidity assistance (ELA) by the Greek central bank would be authorised by the ECB as a temporary expedient. Arriving for his first EU summit, Tsipras said: “I’m very confident that together we can find a mutually viable solution in order to heal the wounds of austerity, to tackle the humanitarian crisis across the EU, and bring Europe back to the road of growth and social cohesion.”

But in a press conference later he added: “Greece will not blackmail or be blackmailed.” Merkel, vilified by the Greek left as Europe’s “austerity queen”, said Germany was prepared for a compromise and that finance ministers had a few more days to consider Greece’s proposals. “Europe always aims to find a compromise, and that is the success of Europe,” she said on arrival in Brussels. “Germany is ready for that. However, it must also be said that Europe’s credibility naturally depends on us respecting rules and being reliable with each other.”

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“The Greek economy was destroyed by the decision to anchor it to the euro…. It was a political decision but now it is not easy to leave..”

‘Grexit’ Would Be No Easy Ride For Austerity-Weary Greeks (Reuters)

“Grexit” would be sudden, sharp and probably conducted in the dark of night; if Greece were to quit the euro, it would also mark the beginning of a long, hard road – for some harder still than the one already traveled. The new leftist government wants to keep the country in the currency union, as do its euro zone counterparts. But if they fail to agree a deal to replace or extend a bailout program that expires on Feb. 28, Greece faces the risk of a euro exit – “Grexit” in market shorthand – forced by bankruptcy and default. Such a scenario would demand a rapid official response as remaining public confidence in the Greek economy evaporates. Capital controls would have to be imposed to stop an uncontrolled flight of cash abroad. They would come when banks and financial markets were closed.

Then the country would need a new currency, one that history suggests may initially be so weak that already cash-strapped Greeks and local businesses would lose much of their savings. This would be accompanied by a huge jump in inflation. For a while, at least, Grexit may bring worse pain to the Greeks than the austerity policies imposed by the EU and IMF, under which one in four workers is out of a job. A devaluation would make some sectors more competitive; Greek holidays, for instance, would be cheaper for foreign tourists, but life outside the euro could still be tougher. “The Greek economy was destroyed by the decision to anchor it to the euro…. It was a political decision but now it is not easy to leave, to recreate something new,” said Francois Savary, chief strategist Reyl Asset Management. “Do you think the 25% of Greeks in unemployment can find jobs in tourism? Do you think the unemployment rate will even remain at 25% (after Grexit)?”

Economists say leaving the euro would throw Greece into another deep recession, with a sharp drop in living standards and an even more severe fall in investment than now. There is no precedent for Grexit, although Iceland, Cyprus and Argentina suggest what might happen. Iceland has its own currency but imposed controls against capital flight in 2008 after the collapse of its overblown banking sector. Euro zone member Cyprus closed its banks for two weeks and also introduced capital controls during a 2013 crisis. Both countries still have some restrictions in place. Neither was planning on changing its currency, as Grexit would imply. For that, Argentina may offer some hints: after earlier defaulting, it ditched in 2002 a currency board system under which it pegged the peso to the dollar. The peso fell 70% in the next six months, while the percentage of people under the poverty line more than doubled.

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“I’m very confident that together we can find a mutually viable solution in order to heal the wounds of austerity, to tackle the humanitarian crisis across the EU..”

Greece Agrees To Talk To Creditors In EU Debt Progress (Reuters)

Greece agreed on Thursday to talk to its creditors about the way out of its hated international bailout in a political climbdown that could prevent its new leftist-led government running out of money as early as next month. Prime Minister Alexis Tsipras, attending his first European Union summit, agreed with the chairman of euro zone finance ministers, Jeroen Dijsselbloem, that Greek officials would meet representatives of the European Commission, the ECB and the IMF on Friday. “(We) agreed today to ask the institutions to engage with the Greek authorities to start work on a technical assessment of the common ground between the current program and the Greek government’s plans,” Dijsselbloem tweeted. This, he said, would pave the way for crucial talks between euro zone finance ministers next Monday.

The shift by Tsipras marked a potential first step towards resolving a crisis that has raised the risk of Greece being forced to abandon the euro, which could spark wider financial turmoil. A Greek official in Athens said it was a positive move towards a new financial arrangement with creditors. It came less than 24 hours after euro zone finance ministers failed to agree on a statement on the next procedural steps because Athens did not want any reference to the unpopular bailout or the “troika” of lenders enforcing it. Tsipras won election last month promising to scrap the €240 billion euro bailout, end cooperation with the “troika”, reverse austerity measures that have cast many Greeks into poverty and negotiate a reduction in the debt burden.

The procedural step forward came after the ECB’s Governing Council extended a cash lifeline for Greek banks for another week, authorizing an extra 5 billion euros in emergency lending assistance (ELA) by the Greek central bank. The council decided in a telephone conference to review the program on Feb. 18. Timing the review right after euro zone finance ministers meet again next week keeps Athens on a short leash. The ECB authorized the temporary funding expedient for banks last week when it stopped accepting Greek government bonds in return for liquidity. Arriving for his first European Union summit, Tsipras told reporters: “I’m very confident that together we can find a mutually viable solution in order to heal the wounds of austerity, to tackle the humanitarian crisis across the EU and bring Europe back to the road of growth and social cohesion.”

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“You make compromises when the advantages outweigh the disadvantages..”

Merkel Says EU Chiefs Await Greek Plan to Break Impasse (Bloomberg)

German Chancellor Angela Merkel said Greece will play a peripheral role in discussions at a European Union summit in Brussels Thursday, with leaders awaiting proposals on how to break a deadlock over the country’s future financing. Merkel, who arrived for the talks directly from Minsk, Belarus, where she helped negotiate a cease-fire in the Ukraine conflict, said that the deal struck between Russian President Vladimir Putin and Ukraine’s Petro Poroshenko would dominate, followed by a discussion of anti-terrorism efforts in light of the Paris attacks. Greece will play a role, “though only at the margins,” she said, adding that she looked forward to her first meeting with Greek Prime Minister Alexis Tsipras.

“All I can say is that Europe – and this is Europe’s success – is always about finding a compromise,” Merkel told reporters as she arrived for the summit. “You make compromises when the advantages outweigh the disadvantages. Germany is ready for that, but you also have to say that Europe’s credibility depends on us sticking to the rules and dealing with each other in a reliable way. We will see which proposals the Greek government will make.” The summit was a first opportunity for Merkel, the main proponent of austerity in return for international aid, to meet Tsipras after his election last month on a platform of ending the country’s bailout program.

The two were pictured shaking hands and exchanging pleasantries in English. Back in Athens, Greek bonds and stocks rose on the prospects of compromise in the standoff with the euro area even after finance ministers failed to bridge their differences in six hours of talks in Brussels that wound up early on Thursday. Finance chiefs are due to reconvene for another attempt on Monday. “We still have a few days, so today I’m just looking forward to the first meeting,” Merkel said.

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“I would like them to apply for the extension as soon as possible..”

Greece, Germany Said to Offer Compromises on Aid Terms (Bloomberg)

Greece is seeking a “new contract” with the euro area on how to continue its bailout, as talks resume and both sides signal willingness to compromise, according to government officials taking part in the talks. Greek Prime Minister Alexis Tsipras met his European Union peers at a summit for the first time Thursday and said afterwards he sees political will to agree on what happens after the current aid program expires this month. Greece’s goal remains a six-month bridge agreement that would lead to a new deal with euro-area authorities, he told reporters. German Chancellor Angela Merkel urged Greece to move swiftly with its next request, which she portrayed as a follow-on to the current bailout program. She said her first meeting with Tsipras was “very friendly” and cited ability to compromise as one of Europe’s strengths.

“I would like them to apply for the extension as soon as possible,” Merkel said at a news conference in Brussels. “And if the goal is to fulfill it by the end of February, then I’d like the intention to fulfill it to be announced soon.” Behind-the-scenes negotiations resumed in Brussels hours after euro-area finance ministers failed to reach a joint conclusion. Greek negotiators and officials from its euro-area creditors plan to meet in Brussels Friday to discuss the way ahead as they struggle to decide whether to call the arrangement an extension, a new program or a bridge deal, officials said. Germany won’t insist that all elements of Greece’s current aid program continue, said two officials in Berlin. As long as the program is prolonged, they said, Germany would be open to talking about the size of Greece’s budget-surplus requirement and conditions to sell off government assets.

Greece’s willingness to hold to more than two-thirds of its bailout promises shows that Greece is broadly prepared to stick to the program, the German officials said. Improving tax collection and fighting corruption will win German backing, and getting a deal will depend on Greece’s overall reform pledges. Greece is prepared to commit to a primary budget surplus, as long as it’s lower than the current 4% of GDP, according to Greek government officials. Tsipras’s coalition also might compromise on privatizations, one of the officials said. The officials asked not to be named because the deliberations are private and still in progress. Greece wants a “a new contract” in which “ our commitments for primary fiscal balances will be included and continuation of reforms,” Tsipras told reporters after the EU summit. “This also obviously needs to include a technical solution for a writedown on the country’s debt, so the country has fiscal room to return to growth.”

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“..the chances of both sides stumbling towards an outcome neither wants are high. And rising.”

Greece: Hanging Tough For Better Eurozone Deal? (Guardian)

It’s easy to see why Angela Merkel and François Hollande were so keen to get an agreement with Vladimir Putin over Ukraine. The eurozone is not really in good enough shape to cope with the aftershocks of one crisis let alone two. So, Germany and France wanted at least a temporary respite from the problems on Europe’s eastern borders before turning to the more pressing issue of Greece. On past form, a temporary respite is all that can be expected from Russia’s president. A failure to resolve the underlying issues in Ukraine has meant previous ceasefires have been brief. There is no reason to expect this one to be any different. Anna Stupnytska, a global economist at the fund manager Fidelity, thinks the west will eventually respond by toughening up sanctions against Moscow, and that that would lead to a full-blown economic crisis within two to three months.

Russia is potentially a much bigger threat to the EU than a Greek exit from the eurozone, she says. In the short-term though, it is Greece that commands the attention. Here, a game of chicken is taking place. The new Greek government wants its debt burden eased. It wants to be freed from its bailout programme. It wants to ditch many of the unpopular and painful policies that were forced on Athens in return for its economic bailout. Greece’s partners are prepared to offer the Syriza-led government a few concessions, but not nearly as many as required by the prime minister, Alexis Tsipras. Jens Weidmann, president of Germany’s Bundesbank, said that support would be possible only if previous agreements were kept. Germany was not alone in its opinion. Tsipras’s position has two weaknesses. Firstly, Greece’s financial position is getting worse.

Tax receipts undershot expectations in January and the banks are only being kept afloat thanks to the support of the European Central Bank. That support could be cut off at any time. Second, the eurozone is cheered by how relaxed the markets are at the prospect of Greece leaving. The Bank of England governor, Mark Carney, said on Thursday that a Grexit would affect the UK but not by nearly as much as it would have done when the euro was fighting for its life in 2012. Tsipras clearly thinks the rest of the eurozone is a lot more worried about a country leaving the single currency than it is letting on, and that Greece will get more by hanging tough. He may be right. There is still time to do a deal, and on past form, after the burning of much midnight oil, one will be done. But make no mistake, the chances of both sides stumbling towards an outcome neither wants are high. And rising.

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There’s that BS again: “..lower oil prices – which have more than halved since last summer – are expected to significantly boost consumer spending”. It would at best only shift consumer spending, it can’t possibly boost it.

UK Sliding Towards First Bout Of Negative Inflation In 55 Years (Guardian)

Britain is sliding towards its first bout of negative inflation in more than half a century, the Bank of England has said, but strong economic growth should stave off the threat of a deflationary spiral. The slump in oil prices and falling food prices is likely to push inflation to zero in the second and third quarters of 2015, probably dipping into negative territory for one or two months this spring, the Bank said in its February inflation report. But the Bank also revised up its forecasts for growth in 2016 and 2017, helping push sterling to a seven-year high against the euro, with one euro worth 73.71p. The pound also rose 1% against the dollar to $1.5388 as investors bet on a rate hike coming sooner than expected, later this year or in early 2016.

UK inflation was 0.5% in December, well below the Bank’s 2% target. Speaking as it published its latest quarterly inflation report, the Bank’s governor, Mark Carney, said: “It will likely fall further, potentially turn negative in the spring, and be close to zero for the remainder of the year.” The last time headline inflation was negative in Britain was March 1960, according to the closest comparable data from the Office for National Statistics. The Bank expects the slump in oil prices and falling food prices to keep inflation low in the short-term. However, lower oil prices – which have more than halved since last summer – are expected to significantly boost consumer spending. This in turn should fuel growth and push inflation higher over the medium term.

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Abe gets a lot of support from nationalistic fractions.

Japan Gets Ready to Fight (Bloomberg)

Japan’s shock, grief, and anger over the recent beheadings of two of its citizens by Islamic State has drawn into sharp focus the country’s ambivalence about the use of its military to protect its citizens and its interests. For decades, Japan was bound by its 1947 constitution to mobilize troops solely for self-defense. The country didn’t have the legal right to send armed troops abroad to protect its own people or back up allies who come under attack. Prime Minister Shinzo Abe is determined to change this Cold War arrangement, which was imposed by the U.S. during its postwar occupation of Japan. Today the country faces a far more complex set of threats than the Soviet invasion that it feared 70 years ago. Islamic State has pledged more attacks to punish Japan’s decision to extend $200 million in humanitarian aid to countries battling the extremists who hold sway over large sections of Syria and Iraq.

Japan has also verbally clashed with China in a territorial dispute over islands in the East China Sea. And on Feb. 7, North Korea announced it had tested an “ultraprecision” antiship rocket near Japan’s maritime border. “The world is now a pretty complicated place, and denying yourself a reasonable defense and cooperative logistics with your allies is placing yourself at greater risk,” says Lance Gatling, president of Nexial Research, an aerospace consultant in Tokyo. Abe, a defense hawk and the scion of a prominent political family, has embarked on an overhaul of national security strategy. In an historic step, his cabinet last year approved the exports of military equipment and conducted a legal review that concluded Japan had the right to deploy its military power abroad to protect its citizens and back up allies under attack.

In addition, the cabinet favored loosening limits on when Japan’s Self-Defense Forces could use deadly force during United Nations peacekeeping operations and international incidents near Japan that fall short of full-scale war. In April the Diet is expected to debate a package of bills from Abe’s coalition government that would create a legal framework for Japan’s Self-Defense Forces to project its power overseas like a normal military. Defense Minister Gen Nakatani said the country is considering expanding its air and sea patrols over the South China Sea to track Chinese vessels in the area. If the government’s efforts prevail, Japan will “contribute to regional and global security issues with less constraints on geographical limits,” says Tetsuo Kotani, a senior fellow with the Japan Institute of International Affairs.

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And China responds in kind. Scary.

With Eye On Japan, China Plans Big Military Parades Under Xi (Reuters)

Chinese troops are rehearsing for a major parade in September where the People’s Liberation Army (PLA) is expected to unveil new homegrown weapons in the first of a series of public displays of military might planned during President Xi Jinping’s tenure, sources said. China will hold up to four PLA parades in the coming years in the face of what Beijing sees as a more assertive Japan under Prime Minister Shinzo Abe, who wants to ease the fetters imposed on Tokyo’s defense policy by a post-war, pacifist constitution. The parades are also intended to show that Xi has full control over the armed forces amid a sweeping crackdown on military graft that has targeted top generals and caused some disquiet in the ranks, a source close to the Chinese leadership and a source with ties to the military told Reuters.

As military chief, Xi will review the parades and be saluted by PLA commanders during events expected to be broadcast nationwide. “Military parades will be the ‘new normal’ during Xi’s (two 5-year) terms,” the source with leadership ties said, referring to the phrase “xin changtai” coined by Xi to temper economic growth expectations in China. The frequency of the parades would be a break from recent tradition. Xi’s predecessors, Jiang Zemin and Hu Jintao, only held a military parade in 1999 and 2009 respectively to mark the founding of the People’s Republic in 1949. The military parade to be held on Sept. 3 in Beijing would mark the 70th anniversary of the end of World War Two. It would be Xi’s first since he took over as Communist Party and military chief in late 2012 and state president in early 2013.

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A long, comprehensive view of China. Very good.

The Upside of Waste and Environmental Degradation (Charles De Trenck)

Waste appeared good for China in a trickle down format. First it kept GDP growing at unprecedented long term growth rates of 8-9% (now 6-7%; even if we don’t believe these numbers fully). Second it contributed to the process of getting China from a country of 1.2bn people (1993) with some 72% living in rural areas to a country of 1.4bn people (2014) with the 53% living in urban areas we see today. Third, it contributed to China moving slowly from a “made in China” label which meant low cost items with a high component being “junk” to a “made in China” meaning middle quality products that can be quite decent at times. Today, China has also taken over many middle end products once labeled “Made in Japan” or “Made in S Korea” – and this side of industrialization has been called a victory.

But it has also led to a situation where now over 70,000+ officials (and counting…) have been investigated for corruption by President Xi Jinping’s Central Commission for Discipline and Inspection. There are over 85 million members in China’s Communist Party and it has been widely discussed that most of the corruption comes from there. Less discussed is the legacy of waste China’s younger generations will be left with to absorb (a challenge many other countries face to varying degrees as well). Waste during the last 25 years of hyper growth has manifested itself everywhere: raw materials consumption, metals, power generation, shipbuilding, residential buildings and shopping centers construction, and so many other sectors of the economy. Growth in other words has been overstated in the sense of over-production.

One consolation is that overproduction as a percent of production is likely a lot less today than in the early 90’s. But in absolute numbers the waste must be staggering. The worst stage was probably post 2008 when global growth belched and China was left in need of its own massive domestic stimulation policies (3). And the outlet for this waste was tens of thousands of enterprising businessmen mostly from the Communist Party who took advantage of every loophole or self-created opportunity for self-enrichment. The top tricks for moving these riches became Hong Kong, with cartloads of suitcases of cash going into over-priced HK property as well as other money centers around the world.

For corporates it was many questionable letters of credit opened for putative trade overseas, which netted nice commissions for round trip fund transfers. And senior executives at shipping companies, for instance, could enjoy side deals for ship orders booked overseas, and eventually shares for IPOs of their State-sponsored companies. This is all well known. But it remains misunderstood from the perspective of waste generation, degree and extent of corruption, and commodity prices.

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Megalomania.

China Official Wants To Force Couples To Have Second Child (MarketWatch)

After more than 30 years of imposing a one-child policy, China is facing a dilemma of rapid aging and serious gender imbalances. Now one of the nation’s birth-control officials is suggesting going the opposite way and forcing couples to have a second child. Despite the relaxation of one-child policy last year, the expected baby boom failed to appear. Under the new policy, couples may have a second child if either was an only child, but only 9% of eligible families had applied to do so as of the end of 2014, according to statistics from the national birth-control authority.

While forcing people to have children could prove more difficult than forbidding them to do so, this is exactly what Mei Zhiqiang, deputy head of the birth-control bureau in Shanxi province and a Standing Committee member of the province’s political advisory body, has suggested. “For the prosperity of our nation and the happiness of us and our children, we should make a serious effort to adjust the demographic structure and make our next generation have two children through policy and system design,” Mei said, according to various media reports. The decades-old one-child policy has skewed China’s population older, as well as resulted in far more boys than girls, due to some couples seeking to make sure their only child would be male.

The aging problem is weighing on China’s pension system, while the gender imbalance has made it hard for some men to find wives. As a result, Mei said in his proposal to the provincial political advisory body earlier this year, the mere relaxation of the one-child policy isn’t enough, and two-child policy should be enforced. The remarks have triggered public uproar in China, with the Shanghai-based Guangming Daily website publishing a commentary on Friday, referring to the idea as reflecting “a horrible mindset” and inspiring feelings of “ferocious [government] control.”

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“We have the ‘Beijing cold’. People go to the hospital, but medicine is no use, so they leave Beijing and stay for a few months outside to get better. That’s the Beijing cold.”

China’s Shale Ambition: 23 Times The Output In 5 Years (MarketWatch)

China is in the early stages of a fracking revolution, attempting to copy the rise in U.S. shale-gas production in an effort to combat unhealthy levels of pollution and meet a surge in energy demand. By 2020, China—the world’s largest energy consumer—aims to produce 30 billion cubic meters of shale-gas a year, up from the current level of 1.3 billion cubic meters, Chen Weidong, renowned energy expert and research chief at China National Offshore Oil Corp., or Cnooc, said at the International Petroleum Week conference on Wednesday. That would take fracking output from just 1% of all of China’s gas production to 15% in five years. “Last year, China drilled 200 new wells [bringing the total to 400], and we’ll add a few hundred a year for sure. No problem,” he said, confirming earlier government goals of reducing heavy dependence on coal, which accounts for about two-thirds of the country’s energy consumption.

The call for spicing up China’s energy mix with cleaner fuels comes as the capital, Beijing, battles with high levels of pollution, evidenced by frequent “orange” smog alerts. In January, pollution reached a level that was 20 times the limit recommended by the World Health Organization, prompting many people to wear masks. There is even a Twitter account called BeijingAir that sends out daily reports on the smog levels—on Wednesday it was “unhealthy for sensitive groups”. “Over the last 10 years, lung cancer in Beijing has increased 45%. So everybody knows that the first challenge for energy is a sustainability issue,” Chen said. “We have the ‘Beijing cold’. People go to the hospital, but medicine is no use, so they leave Beijing and stay for a few months outside to get better. That’s the Beijing cold.”

China has been planning for the shale-gas revolution since 2012, when the government declared it would start fracking its reserves—the largest in the world—and produce 60 billion to 80 billion cubic meters a year by 2020. However, that goal proved to be too ambitious and it was scaled back to 30 billion cubic meters in 2014 as the drilling conditions turned out to be more difficult than anticipated. “China has the biggest potential, but it’s one thing having the gas, another thing is what type of rocks, fractions, reservoirs, access to water. China has a massive water shortage,” said James Henderson, senior research fellow at the Oxford Institute for Energy Fracking uses large amounts of water in the process of releasing gas from the shale formations.

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“Once it’s full, the market will puke..”

As US Oil Tanks Swell At Record Rate, Traders Ask: For How Long? (Reuters)

Oil is flooding into U.S. storage tanks at an unprecedented rate, leading traders to wonder how long the hub in Cushing, Oklahoma, can keep absorbing its share of the global supply glut. About half the surplus crude accumulating in tanks across the United States is flowing into Cushing. If the build-up continues at the same rate, some industry officials and sources said, the tanks could reach maximum capacity by early April. Others suggest the flow might continue until July before it tests the limits of the dozens of steel-hulled storage tanks clustered in mid-Oklahoma.

Traders have been scrambling to secure space at Cushing so they can store oil purchased at current low prices and sell it in a year at a profit exceeding $11 a barrel because the oil market has been in a structure known as contango. In January, crude oil arriving by pipeline and rail into Cushing, the delivery point of the U.S. crude futures contract, jumped nearly 11 million barrels to nearly 42.6 million barrels, the largest monthly build since the U.S. Energy Information Administration began tracking the data a decade ago. On Thursday, data from energy information provider Genscape showed Cushing stocks rose a further 3.2 million barrels in the four days to Feb. 10, the biggest such increase ever.

Over the past 10 weeks, some 550,000 barrels per day (bpd) of crude have flowed into oil tanks across the United States, according to the EIA. That’s approximately one-quarter of the current global surplus estimated by OPEC. Whether it happens in April or July, the implications of full storage tanks are clear: The excess oil will spill over into the wider market, further pressuring global prices that have recently stabilized following a seven-month dive. The build-up in Cushing has made demand look more robust than it actually is, artificially supporting prices, say traders. “Once it’s full, the market will puke,” said one trader.

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Start singing!

Opera: The Economic Stimulus That Lasts for Centuries (Bloomberg)

Building an opera house to stimulate an economy may be an odd idea – though not necessarily a bad one. In fact, more than 200 years after they were built, opera houses in Germany may still be helping their local economies. That’s the conclusion of a new study by economists in Germany and the U.K. that found that cultural amenities such as a place to enjoy Wagner’s Ring Cycle are an important component in decisions by high-skilled workers about where to live. Clusters of skilled workers also have positive knock-on effects on the local economy because their productivity tends to increase the output of companies, boosting the efficiency and wages of less-skilled local employees, the authors said. “Innovators can foster each other’s creative spirit, learn from each other and become overall more productive,” said the paper, published by the Center for Economic Studies and Ifo Institute.

“This implies that once a city attracts some innovative workers and companies, its economy may change in ways that make it even more attractive to other innovators”. The economists studied 36 years of wage data in Germany and zeroed in on the baroque opera houses, built before 1800, which dot the country. They found that workers with high skills were drawn to such facilities. Furthermore, they estimated a 1 percentage-point increase in the share of high-skilled workers caused their wages to rise 1.1% and those of colleagues with few skills to increase by 1.4% The findings square with a 2013 McKinsey & Co. study of Germany which found high-skilled people named “cultural offerings and an interesting cultural scene” among the top five reasons for their location out of 15 possible choices “Our results suggest that ‘music in the air’ does indeed pay off for a location,” wrote the authors of the CES-Ifo paper.

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“It wasn’t for this that I allowed them to gain their independence.”

Le Monde’s Owner Lays Bare Fragility Of Press Freedom (Guardian)

AJ Liebling’s famous aphorism – “Freedom of the press is guaranteed only to those who own one” – cannot be said often enough. I imagine there are journalists in Paris saying something like this today. But if they are working for Le Monde, they will doubtless be saying it loudly and angrily, because one of the men who owns the newspaper has reminded the journalists that they are not as independent as they might have imagined. Pierre Bergé, president of Le Monde’s supervisory board and one of the wealthy businessmen responsible for saving the paper from bankruptcy in 2010, has attacked the editorial staff for publishing the names of HSBC clients who opened Swiss accounts, which may have been used to avoid tax.

In a radio interview, he accused the paper of “informing” on the clients, asking rhetorically: “Is it the role of a newspaper to throw the names of people out there?” And then came the comment that goes to the heart of the unceasing debate about private newspaper ownership: It wasn’t for this that I allowed them gain their independence. So what was it for, Monsieur Bergé? What does independence mean if you cannot use it? In what way is your intervention a statement of independence? The journalists, in condemning Bergé’s “intrusion into editorial content”, told him to stick to commercial strategy and leave the news to them. But that’s somewhat naive. The reason that people own newspapers, especially loss-making newspapers, is all about having influence over editorial content.

And one key part of that influence is to ensure that their mates, the wealthy élite, are protected from scrutiny. Note that Bergé, 84, and a co-founder of Yves Saint Laurent couture house, was not the only shareholder to protest. He was supported by Matthieu Pigasse, head of Lazard investment bank in Paris, who referred worryingly to the danger of the paper “falling into a form of fiscal McCarthyism and informing”. Bergé, Pigasse and the telecoms magnate Xavier Niel signed an agreement in 2010 to guarantee Le Monde’s editorial independence. The paper, in company with the Guardian, has played a leading role in revealing how HSBC’s Swiss private banking arm helped clients to avoid or evade billions of pounds in taxes. The Guardian, however, is truly independent because it is owned by a trust rather than a group of wealthy men.

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Abbott will be forced out soon.

What If The Government Locked Up Your Children? (SMH)

Tony Abbott has made insensitive comments about children in immigration detention and taken cheap political shots at the Human Rights Commission. On a day he also invoked the Holocaust to attack Labor’s jobs record (then quickly withdrew it), the Prime Minister’s outbursts surely cast further doubt on his judgment. For Mr Abbott to say he felt no guilt – “none whatsoever” – about children in detention will be seen by many as lacking empathy. Perhaps he should heed the heartfelt plea Foreign Minister Julie Bishop made in relation to the Bali nine pair on death row, and apply it to innocent asylum-seeker children locked up by Australia. “I ask others to place themselves just for a moment in the shoes of these young men,” Ms Bishop said of Andrew Chan and Myuran Sukumaran.

“They told me how it was virtually impossible to be strong for each other. How could anyone be failed to be moved?” Hear hear. But how, too, could Mr Abbott fail to be moved by the stories of abuse and despair endured by children in detention centres courtesy of successive Labor and Coalition governments? HRC president Gillian Triggs has implored all Australians to read the commission’s report, The Forgotten Children. Sadly, the moral price of deterring boat people has been to turn a blind eye to the harming of children. The Herald believes one child being exposed to danger in Australia’s care is one too many. Yet Mr Abbott’s response to the report was to accuse Professor Triggs of “a blatantly partisan politicised exercise and the human rights commission ought to be ashamed of itself”.

Later, he accused the HRC of a “transparent stitch-up”. Such vitriol is unbecoming of a prime minister and belittles the importance of protecting children. Given the boat people issue has been divisive for at least 15 years, the HRC report was always going to be politically sensitive. Nonetheless, the Herald believes Professor Triggs could have been more restrained as well. Her approach and language will hardly help attempts at a bipartisan solution. The number of children in detention has dropped sharply under the Abbott government and it deserves credit for that. What’s more, the commission should have acted sooner to investigate fully Labor’s policy.

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“The study suggests events unprecedented in the last millennium may lie ahead.”

US ‘At Risk Of Mega-Drought Future’ (BBC)

The American south-west and central plains could be on course for super-droughts the like of which they have not witnessed in over a 1,000 years. Places like California are already facing very dry conditions, but these are quite gentle compared with some periods in the 12th and 13th Centuries. Scientists have now compared these earlier droughts with climate simulations for the coming decades. The study suggests events unprecedented in the last millennium may lie ahead. “These mega-droughts during the 1100s and 1200s persisted for 20, 30, 40, 50 years at a time, and they were droughts that no-one in the history of the United States has ever experienced,” said Ben Cook from Nasa’s Goddard Institute for Space Studies.

“The droughts that people do know about like the 1930s ‘dustbowl’ or the 1950s drought or even the ongoing drought in California and the Southwest today – these are all naturally occurring droughts that are expected to last only a few years or perhaps a decade. Imagine instead the current California drought going on for another 20 years.” Dr Cook’s new study is published in the journal Science Advances, and it has been discussed also at the annual meeting of the American Association for the Advancement of Science.

There is already broad agreement that the American Southwest and the Central Plains (a broad swathe of land from North Texas to the Dakotas) will dry as a consequence of increasing greenhouse gases in the atmosphere. But Dr Cook’s research has tried to focus specifically on the implications for drought. His team took reconstructions of past climate conditions based on tree ring data – the rings are wider in wetter years – and compared these with 17 climate models, together with different indices used to describe the amount of moisture held in the soils.

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 November 13, 2014  Posted by at 11:57 am Finance Tagged with: , , , , , , , , ,  


John Collier Trucks on highway en route to Utica, New York Oct 1941

With Regret And Sadness We Announce The Death Of Money On Nov 16 2014 (Rapier)
Spreading Deflation Across East Asia Threatens Fresh Debt Crisis (AEP)
Gold Demand in China Slumps 37% Amid Drive to Root Out Graft (Bloomberg)
Carney-Yellen Neck-and-Neck on Being First to Raise Rates (Bloomberg)
Fed’s Dudley: Expectations For Mid-2015 Rate Lift-Off Reasonable (Reuters)
Abe Poised to Gamble Political Future on Snap Election (Bloomberg)
US Companies Now Stashing $2 Trillion Overseas (CNBC)
Barclays May Face Massive New Penalty Over Currency Rigging (Guardian)
Rig A Market, Go To Jail (Bloomberg ed.)
Fines Don’t Deter Bad Banks. So Ban Them From Trading (Guardian)
G-20 Stimulus Plans May Boost Growth by Extra 2.1%, OECD Says (Bloomberg)
China Slowdown Deepens as Leaders Said to Mull Cutting Growth Target (Bloomberg)
China’s Central Bank Resists Calls For Stimulus (FT)
Stockman: Central Banks Setting Up World for Bad Time (Bloomberg)
Cash-Burning Bets on Oil Rebound Surge in U.S. ETF Market (Bloomberg)
Saudi Oil Minister: There Is No ‘Price War’ (CNBC)
Oil Tankers Stream Toward China as Price Drop Sparks Boom (Bloomberg)
Russia-China Gas Accord to Pressure LNG in Canada, Australia (Bloomberg)
‘What’s Happening in Britain at the Moment Is Really Ugly’ (Spiegel)
Twilight of the Oligarchs (Dmitry Orlov)

Do take note.

With Regret And Sadness We Announce The Death Of Money On Nov 16 2014 (Rapier)

It is with regret and sadness we announce the death of money on November 16th 2014 in Brisbane, Australia.

In the musical Cabaret, Sally Bowles and the Emcee sing about money from the perspective of those witnessing its collapse in value in real terms in the great German hyperinflation of 1923. Less than a decade later, and a continent away, a young lawyer from Youngstown, Ohio noted on July 25th 1932 how money’s value could also fall in nominal terms:

“A considerable traffic has grown up in Youngstown in purchase and sale at a discount of Pass-Books on the Dollar Bank, City Trust and Home Savings Banks. Prices vary from 60% to 70% cash. All of these banks are now open but are not paying out funds.”
– The Great Depression – A Diary: Benjamin Roth (1932, first published 2009)

In Youngstown the bank deposit, an asset previously referred to as “money”, had fallen by up to 40% relative to the value of cash. The G20 announcement in Brisbane on November 16th will formalize a “bail in” for large-scale depositors raising the spectre that their deposits are, as many were in 1932, worth less than banknotes. It will be very clear that the value of bank deposits can fall in nominal terms. On Sunday in Brisbane the G20 will announce that bank deposits are just part of commercial banks’ capital structure, and also that they are far from the most senior portion of that structure. With deposits then subjected to a decline in nominal value following a bank failure, it is self-evident that a bank deposit is no longer money in the way a banknote is. If a banknote cannot be subjected to a decline in nominal value, we need to ask whether banknotes can act as a superior store of value than bank deposits? If that is the case, will some investors prefer banknotes to bank deposits as a form of savings? Such a change in preference is known as a “bank run.”

[UK] deposits larger than £85,000 will rank ahead of the bond holders of banks, but they will rank above little else. Importantly, both borrowings of the banks of less than 7 days maturity from other financial institutions and sums owed by banks in their role as counterparties to OTC derivatives will rank above large deposits. Large deposits at banks are no longer money, as this legislation will formally push them down through the capital structure to a position of material capital risk in any “failing” institution. In our last financial crisis, deposits were de facto guaranteed by the state, but from November 16th holders of large-scale deposits will be, both de facto and de jure, just another creditor squabbling over their share of the assets of a failed bank.

If we have another Lehman Brothers collapse, large-scale depositors could find themselves in the courts for years before final adjudication on the scale of their losses could be established. During this period would this illiquid asset, formerly called a deposit and now subject to an unknown capital loss, be considered money? Clearly it would not, as its illiquidity and likely decline in nominal value would make it unacceptable as a medium of exchange. From November 16th 2014 the large-scale deposit at a commercial bank is, at best, a lesser form of money, and to many it will cease to be money at all as its nominal value can fall and it could cease to be accepted as a medium of exchange.

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“Some 82pc of the items in the producer price basket are deflating in China. The figure is 90pc in Thailand, and 97pc in Singapore. These include machinery, telecommunications, and electrical equipment, as well as commodities.”

Spreading Deflation Across East Asia Threatens Fresh Debt Crisis (AEP)

Deflation is becoming lodged in all the economic strongholds of East Asia. It is happening faster and going deeper than almost anybody expected just months ago, and is likely to find its way to Europe through currency warfare in short order. Factory gate prices are falling in China, Korea, Thailand, the Philippines, Taiwan and Singapore. Some 82pc of the items in the producer price basket are deflating in China. The figure is 90pc in Thailand, and 97pc in Singapore. These include machinery, telecommunications, and electrical equipment, as well as commodities. Chetan Ahya from Morgan Stanley says deflationary forces are “getting entrenched” across much of Asia. This risks a “rapid worsening of the debt dynamic” for a string of countries that allowed their debt ratios to reach record highs during the era of Fed largesse. Debt levels for the region as a whole (ex-Japan) have jumped from 147pc to 207pc of GDP in six years.

These countries face a Sisyphean Task. They are trying to deleverage, but the slowdown in nominal GDP caused by falling inflation is always one step ahead of them. “Debt to GDP has risen despite these efforts,” he said. If this sounds familiar, it should be. It is exactly what is happening in Italy, France, the Netherlands, and much of the eurozone. Data from Nomura show that the composite PPI index for the whole of emerging Asia – including India – turned negative in September. This was before the Bank of Japan sent a further deflationary impulse through the region by driving down the yen, and before the latest downward lurch in Brent crude prices. The Japanese know what it is like to be on the receiving end. A recent study by Naohisa Hirakata and Yuto Iwasaki from the Bank of Japan suggests that China’s weak-yuan policy – a polite way of saying currency manipulation to gain export share – was the chief cause of Japan’s deflation crisis over its two Lost Decades.

The tables are now turned. China itself is now one shock away from a deflation trap. Chinese PPI has been negative for 32 months as the economy grapples with overcapacity in everything from steel, cement, glass, chemicals, and shipbuilding, to solar panels. It dropped to minus 2.2pc in October. The sheer scale of over-investment is epic. The country funnelled $5 trillion into new plant and fixed capital last year – as much as Europe and the US combined – even after the Communist Party vowed to clear away excess capacity in its Third Plenum reforms. Old habits die hard. Consumer prices are starting to track factory prices with a long delay. Headline inflation dropped to 1.6pc in October. This is so far below the 3.5pc target of the People’s Bank of China that it looks increasingly like a policy mistake. Core inflation is down to 1.4pc.

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So how does deflation link with gold? Ugly numbers, and certainly not all manipulation.

Gold Demand in China Slumps 37% Amid Drive to Root Out Graft (Bloomberg)

Gold demand in China shrank for a third quarter as slumping prices failed to boost the purchases of bars, coins and jewelry in the world’s biggest user and officials pressed on with a nationwide anti-graft campaign. Buying by Asia’s largest economy tumbled 37% to 182.7 metric tons in the three months to September from the same period in 2013 as last year’s price-driven surge in demand wasn’t repeated, the World Gold Council said in a report today. India was the only Asian economy tracked by the producer-funded group that bought more bullion than China as usage across the biggest consuming region contracted 15% to 473.4 tons. An anti-graft drive in China this year hurt demand for luxury goods including bullion, while volatility that sank to a four-year low damped interest in the metal as an alternative investment.

Banks including Goldman Sachs expect prices to extend losses, in part as the buying frenzy that accompanied gold’s drop into a bear market in April 2013 hasn’t been sustained. China surpassed India as the world’s largest gold user last year as prices retreated 28%. “The scale of 2013’s exceptional buying continued to overshadow the market,” the London-based council said in the quarterly report that surveys global demand patterns. “The quiet environment provided China’s notoriously price-savvy investors with a further reason to stay out of the market.” Jewelry consumption in China fell 39% to 147.1 tons in the quarter, while demand for bars and coins slid 30% to 35.6 tons, the council said. Usage in the nine months to September was 638.4 tons, according to Bloomberg calculations based on figures in quarterly WGC reports in May, August and today. Last year, mainland demand was a record 1,275.1 tons, according to the council at a briefing in Shanghai today.

“China’s jewelry market continued to normalize following last year’s rapid expansion,” the council said. “Chinese investment demand this year has paused to catch its breath. Fourth-quarter bar and coin demand is shaping up to be much the same – steady, but unremarkable.” Buying in Indonesia, Southeast Asia’s largest economy, plunged 45% in the period as the Presidential election in July created a degree of political instability, according to the council. Japan’s bullion purchases fell 45% as a new sales tax damped demand, while consumption in Thailand fell 42% amid the unstable political climate, it said.

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A lot of these ‘experts’ are going to get duped, and their clients hammered.

Carney-Yellen Neck-and-Neck on Being First to Raise Rates (Bloomberg)

Federal Reserve Chair Janet Yellen may just beat Bank of England Governor Mark Carney to the first interest-rate increase since the financial crisis. Investors extended bets yesterday on how long the BOE will keep its benchmark at a record-low 0.5% after officials cut their growth and inflation forecasts. Markets are now pricing in a quarter-point increase by November next year, Sonia forwards show. As recently as August, wagers were for around February. In the U.S., the Fed is seen acting by September. “This is almost going to be like a horse race to the finish line on who’s going to go first now, whereas only three or four months ago that wouldn’t have even been close,” said Andrew Goldberg, a global market strategist at JP Morgan Asset Management in London. “The key in both countries is going to be to see what happens in wages and because of that the U.S. is now in the lead.”

Presenting the BOE’s quarterly Inflation Report, Carney cited the “specter of economic stagnation” in the euro area, the biggest market for British exports, and said U.K. inflation could slow to below 1% within months. [..] “Whereas in the middle of the year the BOE was happy to go ahead of the Fed, now we’re in a world where the BOE will likely follow the Fed,” said Mike Amey, a fund manager at Pimco in London. Investors are betting the first rate increase from the Fed will come in 10 months, Morgan Stanley index data show. Policy makers have kept their benchmark target for overnight lending between banks in a range of zero to 0.25% since December 2008. “We are behind the Fed in terms of timing,” said Ian Winship, head of sterling bond portfolios at BlackRock the world’s biggest money manager with more than $4 trillion of assets. In the UK, “we’re looking at September or October for a full hike,” he said. “The impact of the disappointment we’ve had globally is having an impact on U.K. monetary policy.”

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Better do it when nobody expects it.

Fed’s Dudley: Expectations For Mid-2015 Rate Lift-Off Reasonable (Reuters)

Market expectations that U.S. interest rates will start to lift off sometime in mid-2015 are reasonable, New York Federal Reserve President William Dudley said on Thursday. Dudley, answering questions at a luncheon hosted by the United Arab Emirates central bank in Abu Dhabi, also said recent U.S. non-farm payrolls data had been very consistent with previous releases, and had not changed his policy outlook in any meaningful way. “What I can tell you is that we are making progress toward our objectives but there is considerable further progress still to go,” he said. “I think the market expectations that expect us to lift off sometime around the middle or somewhat later next year are reasonable expectations.”

Dudley said, however, that he could not give the likely timing for when the Fed would start raising interest rates, as it would depend on how the U.S. economy was evolving and how financial markets were reacting. “No, I cannot give you more specifics and the long answer is: because I do not know. It really depends on how the economy evolves and how we progress toward our objectives of maximum sustainable employment in the context of price stability.”

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I wouldn’t discount the option that Abe WANTS to lose an election, and save at least some face while the Japanese economy plummets further. If he’s not PM when the whip really comes down, he can claim innocence. Only, the opposition in Japan is so weakened it seems unlikely he can lose even if he tried. Either way, Japan is not a good place to be for the foreseeable future. A deepening deflationary recession, nationalist rhetoric and gun-slingering, the restart of nuclear plants in a shaky quaky setting, it doesn’t add up to a nice living environment.

Abe Poised to Gamble Political Future on Snap Election (Bloomberg)

Japanese Prime Minister Shinzo Abe is poised to gamble his political future on a plan to call a snap election next month, halfway into his current term. “It’s always risky to dissolve the house when you’re the prime minister,” said Robert Dujarric, director of the Institute of Contemporary Asian Studies at Temple University in Tokyo. “Unless you win a crushing victory, you have nowhere to go but down.” Abe is likely to go to the people on Dec. 14 after postponing an unpopular sales-tax increase slated for October 2015, according to people with knowledge of his plan, who asked not to be identified because they aren’t authorized to speak. Abe is less than two years into his four-year term and elections aren’t due until 2016.

For Abe, postponing the tax would buy him goodwill with voters, increasing his chances of winning a broader mandate to push through unpopular security legislation next year. The risk is that Abe’s strategy backfires and rather than increasing his majority in the lower house, his ruling Liberal Democratic Party loses seats. That would leave him vulnerable to a leadership challenge from within his own ranks. “It’s far from certain,” he will pick up support, said Koichi Nakano, professor of political science at Sophia University in Tokyo. “His government may end up with fewer seats, and he may even face calls to step down as prime minister as a result.” Chief Cabinet Secretary Yoshihide Suga yesterday denied reports that Abe told party leaders he planned to dissolve the Diet and delay the tax increase.

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” .. during the 2004 tax holiday “most of that cash was used to fund dividend payouts and share buybacks rather than to boost investment.” A Democratic congressional report indicated that the biggest companies receiving the benefits of $360 billion in repatriated funds actually cut a net 20,000 jobs”.

US Companies Now Stashing $2 Trillion Overseas (CNBC)

U.S. companies are for the first time holding more than $2 trillion overseas, according to an analysis that paints a bleak picture of whether that money will make its way home and the limited economic impact it would have even if it does. Corporate cash has hit $2.1 trillion, a sixfold increase over the past 12 years, Capital Economics said, citing its own database as well as that of Audit Analytics and other sources. There is no official total, but the firm also used regulatory filings that included “indefinitely reinvested foreign earnings” to glean the total sitting outside U.S. borders. “The latest signs suggest that, as business confidence improves in light of the continued economic recovery, U.S. firms are starting to hold less cash domestically,” Capital economists Paul Dales and Andrew Hunter said in a report for clients. “However, the foreign cash piles of the largest firms have almost certainly continued to grow.”

That total, while daunting in its own right, is now greater than the amount held on U.S. shores, which totals just under $1.9 trillion, according to the latest Federal Reserve flow of funds tally. Such numbers are bound to get attention in Washington, which for years has been debating so-called repatriation measures that would allow companies to bring their cash back home at drastically reduced tax rates. The new Republican-controlled Congress is expected to take up the issue quickly when it convenes in January. But the Capital analysis provides little optimism in that regard. Dales and Hunter pointed out that during the 2004 tax holiday “most of that cash was used to fund dividend payouts and share buybacks rather than to boost investment.” A Democratic congressional report indicated that the biggest companies receiving the benefits of $360 billion in repatriated funds actually cut a net 20,000 jobs, and that the holiday cost Treasury coffers $3.3 billion.

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“I don’t know if corruption is a strong enough word for it”.

Barclays May Face Massive New Penalty Over Currency Rigging (Guardian)

Barclays could face a huge new penalty for rigging currency markets after pulling out at the 11th hour from the settlement talks that led to £2.6bn of fines being slapped on six other big players in the currency markets. Barclays will not be eligible for the 30% discount on the fines handed to its rivals in exchange for settling early after its surprise move not to participate in the settlement with US and UK regulators. The bank, which was the first to be fined for rigging Libor in 2012, is reported not to have agreed to the settlement with the UK’s Financial Conduct Authority and the US commodity futures trading commission because of continuing talks with another US regulator. It was the only one of the banks involved in talks over the ground-breaking settlement that is also regulated by the New York State department of financial services (DFS), run by Benjamin Lawsky, the American attorney who has in the past taken a tough stance over wrongdoing at banks.

Barclays said it had considered a settlement with the FCA and the CFTC on terms similar to the other banks – Royal Bank of Scotland, HSBC, UBS, JP Morgan and Citigroup. “However, after discussions with other regulators and authorities, we have concluded that it is in the interests of the company to seek a more general coordinated settlement,” the bank said. [..] In Britain, UBS was handed the biggest fine, at £233m, followed by £225m for Citibank, JP Morgan at £222m, RBS at £217m and £216m for HSBC. In the US, the regulator fined Citibank and JP Morgan $310m (£196m) each, $290m (£184m) each for RBS and UBS, and $275m (£174m) for HSBC. The Swiss regulator – which also found issues with UBS’s metal trading – also punished the Swiss bank for having failed to investigate warnings of currency market manipulation. Another US regulator, the Office of the Comptroller of the Currency, also imposed fines on JP Morgan, Citi and Bank of America, taking the day’s tally to £2.6bn.

The banks face further fines from regulators whose investigations are continuing. The FCA and the CFTC published hundreds of pages of documents alongside their findings against five banks. Chatroom talk between traders showed them discussing information about their clients’ orders with names such as “3 musketeers” and the “A-team”. The City minister, Andrea Leadsom, said those who had done wrong “will not be back in a dealing room on a big salary”. She told BBC Radio 4’s Today programme: “It’s completely disgusting. I think taxpayers will be horrified … I don’t know if corruption is a strong enough word for it.”

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Well, there’s a plan.

Rig A Market, Go To Jail (Bloomberg ed.)

Regulators in the U.K., the U.S. and Switzerland have moved with impressive speed to extract about $4.3 billion from some of the world’s largest banks for their role in rigging global currency markets. Now comes the hard part: identifying and punishing the people who actually did the manipulating. The settlements with six banks – UBS, Citigroup, JPMorgan Chase, Bank of America, Royal Bank of Scotland and HSBC – paint a picture that has become depressingly familiar from previous market-manipulation scandals, ranging from commodities to interest rates. Foreign-exchange traders profited at their clients’ expense by abusing information about orders, and they conspired to influence London-based financial benchmarks that affected trillions of dollars in transactions and investments worldwide. The relevant transgressions went on from 2008 through late 2013, persisting even as some of the same banks were reaching settlements over the rigging of the London interbank offered rate, or Libor.

At least one more bank, Barclays, is still working on a deal with authorities. Details presented by regulators illustrate just how commonplace the manipulation of global benchmarks had become. Traders formed groups – with names such as “the players,” “the 3 musketeers” and “the A-team” – that focused on specific currencies. Using private chat rooms, they routinely shared information about their clients’ orders with the aim of pushing the WM/Reuters benchmark exchange rates, set at 4 p.m. London time, in the desired direction. “Hooray nice team work,” one trader wrote after an apparently successful attempt to “whack” the British pound. Misbehavior on such a scale could not have happened without the participation – or at least the willful blindness – of numerous actual people, most likely including senior managers. So it’s encouraging that the U.K. Serious Fraud Office and the U.S. Department of Justice are conducting criminal investigations, which the latter expects to result in charges sometime next year.

Unfortunately, the prosecutors won’t be able to build cases as strong as they could have been. They came late to the game, starting their investigations only after Bloomberg News published its first reports on the manipulation in 2013. Beyond that, London’s foreign-exchange markets have existed in a legal gray area, where no laws expressly prohibit manipulation.

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Ban them from trading and break them up. What are we waiting for?

Fines Don’t Deter Bad Banks. So Ban Them From Trading (Guardian)

The rigging of foreign exchange markets is a bigger scandal than Libor. It lacks the element of surprise since it is no longer news that some traders will lie and cheat when inadequately supervised. But that’s what makes it bigger. Forex-rigging continued to happen after the Libor scandal broke. Note the end-date of the investigations overseen by the UK’s Financial Conduct Authority (FCA) and the US’s commodities futures and trading commission: 15 October 2013. The deterrent impact of Libor seems to have been zero. What were these banks’ managements doing to honour their worthy words about cleansing the rotten culture in trading rooms? As FCA chief executive Martin Wheatley noted wearily, monitoring employees’ chat rooms “is not a complex thing to do”. Quite. The existence of potential conflicts of interest between a bank and its clients is obvious in currency markets. So too is the scope for collusion.

You do not have to be Sherlock Holmes to suspect that chat-room exchanges such as these might indicate dodgy practices: “how can I make free money with no fcking heads up”; “just about to slam some stops”; “lets double team em”. Yet this garbage was bandied about for years. Did managements really not know, or even suspect, something was wrong? Did they just turn a blind eye? Or did they take comfort in the false notion that the forex market is so big and so liquid that it would be impossible to rig? All possible explanations are alarming. In a rational world, the customers would move their business to firms with higher standards. That is not going to happen because investment banking is almost a closed shop. The five firms involved in today’s settlement plus Barclays, which is yet to settle, are six of the biggest banks in the world. But if fines (paid by shareholders anyway) don’t improve behaviour, and if bank managements can’t, or won’t, police their trading floors competently, what’s left?

Criminal convictions for fraudulent behaviour are one great hope – rightly so because the threat of time in jail is the surest way to concentrate minds on trading floors. We wait to see what the Serious Fraud Office delivers. But regulators must also look beyond endless fines. The FCA, we are told, considered imposing suspensions on the banks from trading forex on behalf of clients but decided against. Some of the offending acts were considered too ancient and there was a fear of disrupting a critical financial market. OK, but a three-month temporary ban on trading forex would improve behaviour faster than any fine. Managements would fear being sacked. Shareholders might wake up and demand proof of root-and-branch reform. Or big banks might break themselves up into easier-to-manage units. Heavy-handed? You bet, but six years after the financial crash, some of the world’s biggest banks are still out of control. In other fields, firms with shoddy practices fear the loss of their licence to operate. Big banks don’t, but should.

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The prediction nonsense takes on grotesque forms.

G-20 Stimulus Plans May Boost Growth by Extra 2.1%, OECD Says (Bloomberg)

Group of 20 economies will surpass their 2% additional growth target if stimulus plans are fully implemented, according to the OECD. Global GDP could expand by an additional 2.1% by 2018, OECD Secretary-General Angel Gurria said today in Brisbane, where the G-20 summit takes place this weekend. “The big ‘if’ is full implementation, and that’s not always something that one can assume,” he said in an interview. G-20 members have submitted plans to achieve the target of lifting the group’s collective GDP by an additional 2%, or more, over five years. Australian Treasurer Joe Hockey said at a meeting of finance ministers in September that measures proposed at that time by member economies had brought the G-20 about 90% of the way to achieving the target. “There is a heavy burden on the shoulders of leaders and finance ministers to deliver on the plan to grow economic growth right across the world, and therefore create jobs for millions and millions of people,” Hockey told reporters in Brisbane today.

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Beijing feeds its people the misery one bite at a time.

China Slowdown Deepens as Leaders Said to Mull Cutting Growth Target (Bloomberg)

China’s slowdown deepened in October as policy makers refrained from economy-wide stimulus, with industrial output and investment trailing estimates. Factory production rose 7.7% from a year earlier, the second weakest pace since 2009, a government report showed today. Investment in fixed assets such as machinery expanded the least since 2001 from January through October, and retail sales gains also missed economists’ forecasts last month. The government has kept to targeted steps to shore up the economy this year, rather than a broader response such as nationwide interest-rate cuts, to avert a repeat of a buildup in debt from the record 2008-2009 credit surge. With the focus instead on structural changes, leaders have discussed lowering their economic growth target for 2015.

“The data highlights downward pressure,” said Dariusz Kowalczyk, senior economist at Credit Agricole SA in Hong Kong. “It will encourage further monetary easing.” After the figures, reports spread of a fresh initiative by the central bank to target liquidity injections. The People’s Bank of China is gauging city commercial banks’ demand for funds to support lending to small enterprises, according to an official with knowledge of the matter. The PBOC didn’t immediately respond to requests for comment. Financial institutions in some provinces, including Jiangsu and Zhejiang, are submitting applications for collateralized central bank loans, according to the official. The PBOC will later decide the total size of the injections, which could run into tens of billions of yuan, the official said.

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After all, what good would it do?

China’s Central Bank Resists Calls For Stimulus (FT)

Even as Japan and the EU embark on fresh rounds of quantitative easing to ward off deflation, the People’s Bank of China (PBoC) is holding the line against major stimulus. China’s central bank is resisting a rising chorus appealing for more aggressive easing to arrest a slowdown in the economy. Instead it is taking a gritted-teeth approach that accepts short-term pain as the price of structural reform that will support sustainable long-term growth. At first glance calls for easing in China appear justified. Consumer price inflation remained mired near a five-year low in October, while the government’s purchasing managers’ index hit a five-month low. That followed growth in economic output in the third quarter that was the slowest since the financial crisis.

Yet a year after the Communist party revealed a landmark economic reform blueprint, the PBoC wants to avoid steps that would be viewed as undermining the effort to reduce the economy’s reliance on debt and investment to fuel growth. “The central bank has become wary of using its traditional monetary tools like cuts in the required reserve ratio and benchmark interest rates. They’ve basically shelved them,” says Wang Yingfeng, investment director at Shanghai Yaozhi Asset Management, which runs a bond fund. The shifting approach is in part a matter of style over substance. Even as it held off on a reserve ratio cut, in September and October the PBoC injected Rmb770 billion ($125 billion) into the banking system via a new monetary policy tool called the Medium-term Lending Facility.

That is more money than would have entered the system through a 0.5 percentage-point RRR cut, traditionally the central bank’s main tool for managing the money supply. But the low-key nature of these fund injections – which went unannounced at the time – allows the central bank to avoid sending a strong easing signal. “The PBoC can lower actual market rates by injecting liquidity without cutting bank benchmark rates,” Lu Ting, chief China economist at Bank of America-Merrill Lynch, wrote in a note last week. “Cutting rates is perceived as anti-reform and kind of politically incorrect.”

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” .. what does Bill Dudley and the rest of the Fed have wrong? They have wrong the idea that 2% inflation is going to accomplish anything. There is no historical or scholastic basis.”

Stockman: Central Banks Setting Up World for Bad Time (Bloomberg)

It has gotten worse. Much worse. The Bank Of Japan trumps all with massive accommodation. They try to reverse deflation and spur growth. That brings us to my chart of the year. This is from the team’s strategic. This is back to the Draghi speech of 2012. All you need to know is one of the banks, it is not like the others. The austerity of the ECB and everybody else has a punch bowl seal – filled to the brim. This is the method. None of this is in the textbook. This is monetary madness off the deep end. They started with 50%. They will be adding 80 trillion to the balance sheet. What is the purpose? To trash the yen. They have a process started that is going to up end – what does Bill Dudley and the rest of the Fed have wrong? They have wrong the idea that 2% inflation is going to accomplish anything. There is no historical or scholastic basis.

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All the world is no longer a stage as it was in Shakespeare’s day, it’s a casino.

Cash-Burning Bets on Oil Rebound Surge in U.S. ETF Market (Bloomberg)

While calling a bottom in oil is proving a tricky, and costly, exercise for contrarian investors, they are undeterred. After pouring the most money into funds that track oil prices in two years last month, investors are ramping up the bet even further this month, moving cash in at twice the October pace. The four biggest U.S. exchange-traded products tied to oil had 70.5 million shares outstanding yesterday, the most since May 2013, according to exchange data compiled by Bloomberg. More than 1 million shares in the ETFs are being created on average each day this month, the result of soaring demand.

The trade has gone terribly since investors first started adding to oil ETF positions at the start of October. West Texas Intermediate, the U.S. crude benchmark, has tumbled 15% over that time, swelling its selloff since a June peak to 28% as soaring U.S. output and a slowdown in global demand growth created a supply glut. “Price momentum is still negative, and yet someone is buying,” said Stoyan Bojinov, a Chicago-based analyst at ETF Database. “Either they are wrong and they are hoping for the reversal, or they are establishing a position while everybody else is still selling.” The inflows have almost been non-stop since Oct. 1, with more shares being added to the four biggest oil ETFs than redeemed on all but four days.

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It’s just business.

Saudi Oil Minister: There Is No ‘Price War’ (CNBC)

Saudi Arabia’s oil minister publicly knocked talk of an OPEC “price war” but did little in the way of clarifying what the cartel will do about falling prices.Ali al-Naimi, speaking in Mexico, said Saudi oil policy is not changing and has been stable for decades. He said the market, not Saudi Arabia, sets prices, and that the kingdom is doing what it can with other producers to ensure stability, according to Reuters.The oil market has become laser focused on the Nov. 27 OPEC meeting, and there is speculation its much-divided members will have to agree to cut production if they want to see the roughly 30% decline in prices start to reverse.Oil prices continued to grind lower Wednesday, with Brent crude futures falling further after Naimi spoke, breaking $80 per barrel for the first time since September, 2010. Brent ended the day at $80.38, down 1.6%, and U.S. West Texas Intermediate was also lower, falling more than 1% to $77.18 per barrel.

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Given its slowing economy, one should wonder if China now does with oil what it did with copper. With that economy set to keep slowing, that would mean much less Chinese demand for oil going forward, further pressuring prices..

Oil Tankers Stream Toward China as Price Drop Sparks Boom (Bloomberg)

Add oil shippers to the list of winners from this year’s collapse in crude. The price plunge has spurred China, the world’s second-biggest importer after the U.S., to accelerate bookings of oil cargoes. It will also shave almost $20 billion a year in fuel costs across the maritime industry if prices that dropped 18 percent since last November hold around current levels, according to data compiled by Bloomberg. While the oil slide is hurting nations from Saudi Arabia to Iran that depend on energy for revenues, companies including airlines and cement makers are benefiting as their fuel costs decline. Ship owners serving the industry’s benchmark Middle East-to-Asia trade routes are reaping the best returns from charters in years as the slump drives down the industry’s single biggest expense.

“We’ve seen the Chinese buying a lot from the Middle East and that’s really let rates cook,” Erik Stavseth, an analyst at Arctic Securities in Oslo whose recommendations on shippers returned 15 percent in the past year, said by phone Nov. 11. “With oil prices low going into winter, that’s likely to continue.” The number of supertankers sailing toward China’s ports matched a record on Oct. 17 and is still close to that level now. The increase reflects China taking advantage of falling prices to fill its Strategic Petroleum Reserve, according to Richard Mallinson, a London-based analyst at Energy Aspects Ltd.

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LNG is not a great business to be in. Upfront investment has been huge, and look now.

Russia-China Gas Accord to Pressure LNG in Canada, Australia (Bloomberg)

Russia’s move to broaden its energy ties to China is clouding the outlook for natural gas export projects on the drawing board in the U.S., Canada and Australia. Companies looking to approve liquefied natural gas plants in the next couple of years and start shipments at the end of the decade will probably experience delays, according to energy consultants Tri-Zen International Inc. Gas-supply agreements between Russia, the world’s largest energy exporter, and China, the biggest consumer, are adding to pressure on projects that are already facing increasing competition, rising costs and the prospect of lower prices.

“It’s just bad news generally” for LNG around the world, said Peter Howard, president of the Canadian Energy Research Institute. “It’s going to get really crowded.” China and Russia signed an initial gas accord two days ago, after a $400 billion deal earlier this year. The tie-up means that only one-in-20 proposed LNG projects targeting the 2020 market will be needed, while one-in-five seeking 2025 sales will be required, according to a Macquarie Group Ltd. report. “It’s not good news for projects hoping to get to a final investment decision in the next year or two,” Tony Regan, a consultant at Singapore-based Tri-Zen, said today. “Those developers will need to think about the post 2020 market.”

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Historical fiction writer Hilary Mantel (“The Assassination of Margaret Thatcher”) doesn’t like what she sees.

‘What’s Happening in Britain at the Moment Is Really Ugly’ (Spiegel)

SPIEGEL: How is the Britain of today different from the country you grew up in?

Mantel: I was born into a working class family in a village near Manchester. My grandmother worked as a weaver in a mill when she was 12, my mother at 14. That was what you did: As soon as you left school, you had to work in the mill. By the time I was a child, the mills were closing and I was lucky to get a government grant for university. In the years after the war, both big parties, Labour and the Conservatives, were becoming ever-more centrist, drawing together on a social democratic path — a period known as the postwar consensus. Maybe it couldn’t have lasted, but we perceive Ms. Thatcher as the person who knocked it down. Going to university is a seriously expensive business now.

SPIEGEL: It seems as though Britain today wants to retreat from the world, as though it has become war-weary, disinterested in global affairs and obsessed with immigration. Where does this come from?

Mantel: It’s a retreat into insularity, into a mood of harshness. When people feel they’re being mistreated, they lash out against people who are weaker than themselves, immigrants for example. What’s happening here at the moment is really ugly. The government portrays poor and unfortunate people as being morally defective. This is a return to the thinking of the Victorians. Even in the 16th century, Thomas Cromwell was trying to tell people that a thriving economy has casualties and that something must be done by the state for people out of work. Even back then, you saw the tide turning against this idea that poverty was a moral weakness. Who could have predicted that it would come back into style? It’s myth making on a grand scale, and it’s poisonous.

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Dmitry looks at the future.

Twilight of the Oligarchs (Dmitry Orlov)

Last week I published a brave prediction: “I see the political elites and their oligarch puppet-masters becoming endangered species in the United States before too long as the populace, including their own bodyguards, turns against them.” As usual, I made no attempt to specify what I mean by “before too long” because making predictions as to timing is a fool’s game. And, as usual, I got a flurry of emails expressing a wide range of rationalizations but all adding up to the same sentiment: “not any time soon.” Some people thought that the populace, consisting as it does of zombified overfed clowns addicted to Facebook and internet porn is unlikely to stage the revolution.

Others thought that the oligarchy will manage to manipulate financial markets, destroy one country after another in order to drain all remaining wealth out of the world and consume it, and by so doing manage to placate the populace with bread and circuses, well into the future. The bodyguards are unlikely to rebel, some said, because they are so well paid. Getting back to basics, it is a fairly obvious and increasingly well-recognized fact that the American empire, the empire of military bases, the Federal Reserve, the IMF and the World Bank, is on its way out. And it is a well-known fact about empires that when they fail those who held positions of power and privilege within them are quickly recycled into punching bags and pincushions. Oddly, nobody mentioned any of the mechanisms by which this transformation tends to take place, so I thought I’d mention them briefly.

First, when empires start falling apart, this is manifested in a few ways. One is loss of control over the periphery, as a shrinking pool of resources is used to shore up the center. Another is loss of control over the use of violence, as a wide variety of violent entrepreneurs enter the scene and the center is forced to play them against each other and make deals with them. And as the unraveling progresses, the violent entrepreneurs develop agendas of their own, which, inevitably, involve having the cooperation flow the other way: instead of cooperating with those formerly in charge, they demand that those formerly in charge start cooperating with them. And it is here that the scene turns bloody.

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