Nov 242016
 
 November 24, 2016  Posted by at 9:49 am Finance Tagged with: , , , , , , , , , , ,  2 Responses »


Kennedy and Johnson Morning of Nov 22 1963

Another Election Year, Another Bunch Of Fake Growth Numbers (John Rubino)
China Vows To Defend Trade Rights In Face Of Trump Tariff Threats (R.)
IMF: Chinese Banks Disguise A Massive Amount Of Bad Debt (BI)
The ‘Ownership Society’ Came And Went – A Long Time Ago (MW)
How (Slightly) Higher Mortgage Rates Maul Housing Bubble 2 (WS)
‘Brexit Will Blow £59 Billion Hole In UK Public Finances’ (G.)
Pro-Brexit Lawmakers Attack Fiscal Watchdog’s Gloomy Outlook (BBG)
Capital Flight From Italy (Reinhart)
Jill Stein Raises Over $2 Million To Request US Election Recounts (G.)
Bernie Sanders Should Visit Trump Sooner Rather Than Later (NYDN)
Merkel Warns Against Fake News Driving Populist Gains (AFP)
Putin: EU Resolution Equating RT to ISIS A ‘Degradation Of Democracy’ (R.)
US Navy’s New $4 Billion Stealth Warship Breaks Down – Again (ZH)
Greece Wants To Conclude EU/IMF Review, Won’t Accept ‘Irrational’ Demands (R.)
Greek Businesses Move Abroad To Escape Austerity (R.)

 

 

“So why the approximately $1.8 trillion surge in government borrowing? Because a robustly-healthy economy was necessary to help the party in power stay in power.”

Another Election Year, Another Bunch Of Fake Growth Numbers (John Rubino)

Some pretty good economic reports have energized various parts of the financial markets lately. Consumer spending is up, GDP is exceeding expectations and even factory orders, that perennial downer, popped this morning. In response the dollar is soaring and interest rates are at breaking out of their multi-decade down-channel. The economy is clearly recovering, implying a return to normality. Right? Nah, it’s just the usual election year illusion. When the presidency is at stake the party in power always pumps up spending in an attempt to put people back to work and create the impression of a well-run country whose leaders deserve more time in the spotlight. After the election, spending returns to trend and the resulting bad news gets buried in “political honeymoon” media coverage.

How do we know this year is following the script? By looking at the federal debt. If the government is borrowing more than usual and (presumably) spending the proceeds, then it’s likely that the economy is getting a bit more than its typical diet of stimulus. So here you go: Note that after seven years of massive increases, the federal debt plateaued in 2015, which is what you’d expect in the late stages of a recovery. With full employment approaching and asset prices high, there should be plenty of tax revenues flowing in and relatively few people on public assistance, so the budget should be trending towards balance. Well, more people are working this year than last, and stock, bond and home prices all rose in the first half of the year. So why the approximately $1.8 trillion surge in government borrowing? Because a robustly-healthy economy was necessary to help the party in power stay in power.

This is a huge jump in government debt, even by recent standards. And its impact is commensurately large, accounting for a big part of the “growth” seen in recent months. But it’s also unsustainable. You don’t double a government’s debt in a single decade (from an already historically high level) and then keep on borrowing. At some point an extreme event or policy choice will put an end to the orgy. Either the markets impose discipline through a crisis of some sort, or the government adopts a policy of currency devaluation or debt forgiveness. And – in a nice ironic twist – the people who did the insanely-excessive borrowing are leaving town, to be replaced by folks who will inherit something unprecedented, with (apparently) no clear idea of what’s coming or what will be necessary in response.

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Protectionism and globalism in one.

China Vows To Defend Trade Rights In Face Of Trump Tariff Threats (R.)

China will defend its rights under WTO tariff rules if US president-elect Donald Trump moves toward executing his campaign threats to levy punitive duties on goods made in China, a senior trade official has said. Zhang Xiangchen, China’s deputy international trade representative, also told a news conference in Washington on Wednesday that a broad consensus of academics, business people and government officials have concluded that China is not manipulating its yuan currency to gain an unfair trade advantage, as Trump has charged. “I think after Mr Trump takes office, he will be reminded that the United States should honour its obligations as a member of the WTO,” Zhang said through an interpreter. “And as a member of the WTO, China also has the right to ensure its rights as a WTO member.”

Trump has said China is “killing us” on trade and that he would take steps to reduce the large US goods trade deficit with China, including labelling Beijing as a currency manipulator soon after he takes office and levying duties of up to 45% on Chinese goods to level the playing field for US manufacturers. Trump said on Monday he will formally exit the 12-country TPP trade deal in January. China is not a signatory to the TPP. Zhang, who spoke at the closing news conference for a two-day technical meeting of US and Chinese trade officials in Washington, was not specific on what steps China would take to protect its rights under WTO rules. The global trading body prohibits members from unilaterally raising tariffs above levels that they have committed to maintain.

China’s state-run Global Times newspaper last week warned that a 45% Trump tariff would paralyse US-China bilateral trade. “China will take a tit-for-tat approach then. A batch of Boeing orders will be replaced by Airbus. US auto and [Apple] iPhone sales in China will suffer a setback, and US soybean and maize imports will be halted,” the newspaper warned.

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Shadow securities. US redux.

IMF: Chinese Banks Disguise A Massive Amount Of Bad Debt (BI)

China’s banks are disguising bad debts by turning them into “securitized packages” rather than writing them down as non-performing loans, according to the IMF. The “untradeable debt” comes from China’s “shadow credit” world, which has generated a massive amount of credit that has the potential to become suddenly illiquid. The debts consist of interbank loans in “a structure potentially susceptible to rapid risk transmission and destabilizing liquidity events,” the IMF says. The amount of “shadow credit” grew 48% in 2015, to RMB 40 trillion ($580 billion), the IMF says, “equivalent to 40% of banks’ corporate loans and 58% of GDP.” If any of this sounds familiar, that’s because it is. It’s similar in principal to the way American banks disguised bad mortgages inside securitized packages before the Great Financial Crisis of 2007-2008.

Back then, US mortgage providers gave out too many loans to people who couldn’t repay them. On its own, that should not have been a problem. A mortgage default only hurts the bank that made the loan. But banks bundled together packages of those mortgages and sold them as “mortgage-backed securities” to other institutions. Bad mortgages were mixed in with good ones, making it impossible for investors to judge their quality. When it became obvious that some of these packages were toxic, no one wanted to buy any them. The market became suddenly illiquid. And the credit derivative hedges and leveraged bets layered upon them magnified the problem throughout the entire banking system, creating the financial collapse that plunged most of the world into recession.

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It was always just a fabricated dream.

The ‘Ownership Society’ Came And Went – A Long Time Ago (MW)

Of all the aftereffects of the housing bust and financial crisis, the steady decline in the homeownership rate might be among the most pernicious. Homeownership is traditionally one of the best means into the middle class, and it’s still popularly equated with the American Dream. But in a presentation last week, St. Louis Federal Reserve economist William Emmons demonstrated that homeownership has been losing ground for decades. What’s more, Emmons showed that higher ownership rates were likely coaxed along by government policies and national priorities appropriate for a certain moment in history and unsustainable beyond that. After the Depression, Emmons noted, New Deal policies “laid the foundation” for a huge increase in homeownership.

Those policies included the creation of a government financial system, such as the Federal Housing Administration, Fannie Mae, and the Federal Home Loan Banks. But just as important was the return of millions of service members from World War II, rising incomes and a prosperous economy, a national push for a country full of suburban single-family homes and highways to connect them all, as well as a national process of Americans “sorting themselves out” by race and class into the broad geographic outlines that would persist for decades. That meant the U.S. enjoyed robust growth – until it didn’t. Not only was there little room left to grow, but other changes began to influence ownership, Emmons said. Americans began to age, pushing off marriage, childbearing and home-buying until later.

The U.S. is also becoming more racially and ethnically diverse. Hispanics and African-Americans have traditionally had more limited opportunities to achieve homeownership – but as Emmons pointed out, citing research from the Harvard Joint Center for Housing Studies, “aspirations to own a home are higher among African-Americans and Latinos than among whites and Asians, despite homeownership rates that are 20 to 30 percentage points lower.” And while much of the impact of the 2008 crash has ebbed, it still continues to impact many people through diminished personal wealth, damaged credit scores, blighted neighborhoods, and some loss of trust in financial institutions.

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How ‘little things’ add up.

How (Slightly) Higher Mortgage Rates Maul Housing Bubble 2 (WS)

After the brutal beating following Election Day, US Treasuries took a breather early this week. But today, the beating resumed and will continue until the mood improves. Mid-day, the 10-year Treasury fell so hard that its yield, which moves in the opposite direction of price, spiked to 2.42%. By the end of the day, the 10-year yield was at 2.36%, up 4 basis points for the day, and up an entire percentage point from July this year: The market is 100% certain that the Fed will stop flip-flopping in mid-December and raise rates by moving the upper limit of the Fed funds target range to 0.75%. The markets see more rate hikes next year. A Fed funds rate with the first “1”-handle since 2008 would be a phenomenon a whole generation of Wall Street gurus has never seen in their professional lives.

Mortgage rates are chasing after Treasury rates. The Mortgage Bankers Association reported today that the 30-year fixed-rate conforming mortgage ($417,000 or less) reached 4.16%, its “highest weekly average since the beginning of 2016.” This caused a flurry of activity. Last week, amid the post-election interest rate spike, mortgage applications plunged. But homebuyers may be trying to lock in whatever rate they can get, before they go even higher, and mortgage applications surged. Ironically, from a historical point of view, nothing major has happened so far. That spike is still small compared to what came before, including the spike during the Taper Tantrum in the summer of 2013, when the Fed started musing about ending QE Infinity. Compared to prior years, rates are still very, very low, but home prices have since soared, and for home buyers even a minor uptick makes a world of difference.

From the peak of Housing Bubble 1, which in San Francisco occurred in 2007, to Q3 2016, the median house price soared 45%. But due to plunging mortgage rates, the monthly housing costs increased only 14%. Now with rates rising, that process is going to reverse. The household income needed to qualify for a 30-year fixed rate mortgage with 20% down on that median $1.3 million house in San Francisco was $251,000 before Election Day. Paragon observes: “By Friday, November 18, the income requirement increased by $13,000. And if the interest rate goes up to 5% (and again, we are not saying it will), an additional $35,000 in annual income would be required.”

Hence, at 5%, a minimum qualifying household income of $286,000 a year. In this scenario, even in less costly markets, there are two things that happen: One, many people have to step down to a lower-priced home, or they don’t buy at all. A market-wide shift of this type puts downward pressure on prices and volume. And two, as people stretch more to buy homes at higher interest rates and higher monthly costs, they have even less money to spend on other things. This creates a new drag on consumer spending. It’s how low mortgage rates not only subsidized the house price bubble but the entire economy by giving consumers more money to spend – not just the US economy but exporter nations around the world.

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Or will it?

‘Brexit Will Blow £59 Billion Hole In UK Public Finances’ (G.)

Philip Hammond conceded that Brexit will blow a £59bn black hole in the public finances over the next five years, as he outlined plans to boost investment in infrastructure and housing to equip the UK economy for life outside the EU. In his first fiscal statement, the chancellor, who had supported remain, sought to strike a cautiously upbeat tone about the country’s prospects, saying the economy had “confounded commentators at home and abroad with its strength and its resilience” since the referendum result last June. But the first official projections conducted after the vote of the likely impact of leaving the EU pointed to significantly weaker growth after Brexit. The Office for Budget Responsibility (OBR) announced that there would be a cumulative £122bn of extra borrowing over the next five years, with £59bn of that as a direct result of Brexit.

Other factors included weaker-than-expected tax revenues, and policy changes, including Hammond’s decision to spend more on infrastructure. George Osborne was expecting to achieve a surplus of £11bn on the public finances by 2020-21; instead, the OBR is now forecasting a £21bn deficit – and public debt is expected to peak at more than 90% of GDP. With little cash to spare, Hammond offered only modest handouts to the “just about managing” families (Jams) Theresa May’s government had said it wanted to help, although he repeatedly used the mantra of “building an economy that works for everyone”. The chancellor announced a renewed freeze in fuel duty, to help motorists – largely paid for with an increase in insurance premium tax from 10% to 12% – and a partial reversal of planned cuts to universal credit.

But Labour said there was no cash for either the NHS or social care, which are under increasing strain with winter approaching. Instead, the main thrust of Hammond’s first set-piece outing at the dispatch box was how to help Britain withstand the challenges of leaving the EU.

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Agree to disagree.

Pro-Brexit Lawmakers Attack Fiscal Watchdog’s Gloomy Outlook (BBG)

Conservative lawmakers attacked Britain’s fiscal watchdog after it warned that Brexit would cost £60 billion ($75 billion) in extra borrowing as the economy falters. The Office for Budget Responsibility’s forecast — the first official assessment of the costs related to leaving the bloc – also stated that exiting the EU would leave Britain with less potential for sustainable growth. Chancellor of the Exchequer Philip Hammond, who presented the forecasts alongside his Autumn Statement Wednesday, said the predictions showed there is an “urgent” need for Britain to tackle its long-term economic weaknesses. “We’ve had an endless slew of gloom and doom, and I just don’t buy it,” said Kwasi Kwarteng, a Tory lawmaker who backed the campaign to leave the EU. “They haven’t exactly had a brilliant track record. I’d take their predictions with a pinch of salt.”

Pro-Brexit lawmakers have been critical of both the OBR and the Treasury for overstating the negative consequences of Brexit. While Hammond made brief references to the opportunities that leaving may bring, his tone was one of caution, with few giveaways and a focus on creating a more productive economy that could weather future shocks. Responding to complaints from pro-Brexit politicians, Hammond told lawmakers that economic forecasting “is not a precise science.” He added: “The OBR very specifically says in its report that there is an unusually high degree of uncertainty in the forecasts it is making because of the unusual circumstances.”

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It’s high time for Italy to go its own separate ways. There’s nothing to gain from the EU anymore, but lots to lose.

Capital Flight From Italy (Reinhart)

Understandably, after the surprise victory in June of the “Leave” campaign in the United Kingdom’s Brexit referendum, and of Donald Trump in the United States’ presidential election, no one has much faith in polls in advance of the Italian vote. There is, however, a disquieting real-time poll of investors’ sentiment: capital flight from Italy has accelerated this year. There is a recent precedent for this. In the summer of 2015, Greece’s short-lived default on its IMF loan and the introduction of capital controls and deposit-withdrawal restrictions were at the center of the eurozone drama. Tensions between the Greek and German governments ran high, and speculation about whether Greece would remain in the eurozone escalated.

The stage has now shifted to the much larger Italian economy. In the current environment of uncertainty, yield spreads on Italian bonds have widened to about 200 basis points over German bunds. Economic and political conditions in the two debt-laden southern European economies differ in important respects; but there are also similarities. Economic growth in both countries has lagged far behind other advanced economies for more than a decade, but most markedly since the Global Financial crisis of 2008-2009. According to IMF estimates, real per capita income in Italy is about 12% below what it was in 2007, with only Greece faring worse. The problem of bank insolvency, endemic in Greece, where nonperforming loans account for more than one-third of bank assets, is not as generalized in Italy.

Still, the uncertain resolution of Italy’s third-largest bank, Monte dei Paschi, together with the Italian government’s limited resources to deal with weak banks, has fueled unease among depositors. Bankers also warn that the plan for Monte dei Paschi’s rescue may be jeopardized by the December referendum, which could trigger another round of decline in share prices. But, for all the talk of a looming banking crisis, the balance-of-payments crisis already underway in Italy since the first half of 2016 is the main factor driving the real-time poll of investors. Prior to the adoption of the euro, an unsustainable balance-of-payments position in Italy (as in other countries with their own currencies) would typically spur the central bank to raise interest rates, thereby making domestic financial assets more attractive to investors and stemming capital flight. With the ECB setting monetary policy for the eurozone as a whole, this is no longer an option for Banca d’Italia.

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Nostalgia for hanging chads.

Jill Stein Raises Over $2 Million To Request US Election Recounts (G.)

Jill Stein, the Green party’s presidential candidate, is prepared to request recounts of the election result in several key battleground states, her campaign said on Wednesday. Stein launched an online fundraising page seeking donations toward a a multimillion-dollar fund she said was needed to request reviews of the results in Michigan, Pennsylvania and Wisconsin. Before midnight EST on Wednesday, the drive had already raised more than the $2m necessary to file for a recount in Wisconsin, where the deadline to challenge is on Friday. Stein said she was acting due to “compelling evidence of voting anomalies” and that data analysis had indicated “significant discrepancies in vote totals” that were released by state authorities.

“These concerns need to be investigated before the 2016 presidential election is certified,” she said in a statement. “We deserve elections we can trust.” The fundraising page said it expected to need around $6m-7m to challenge the results in all three states. Stein’s move came amid growing calls for recounts or audits of the election results by groups of academics and activists concerned that foreign hackers may have interfered with election systems. The concerned groups have been urging Hillary Clinton, the defeated Democratic nominee, to join their cause.

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As I said yesterday in “Trump Moves as America Stands Still”.

Bernie Sanders Should Visit Trump Sooner Rather Than Later (NYDN)

Trump aside, evidently the most clairvoyant messenger of 2016 was Sanders, who got pitifully little support from the Democratic Party establishment — including a raw deal from the DNC, which tilted the scales against him in order to coronate Hillary. His brand of anti-Wall Street, anti-elite populism is ascendant. He is the tribune of the progressive youth, many of whom refused to back Hillary despite her repeated (and hollow) entreaties. So what should Sanders do now? Well, how about meeting with the new President-elect? It might seem incongruous. What would the nationalist, brash Trump have to gain from the aging socialist Sanders? Well, maybe quite a bit. Trump explicitly proclaimed during the campaign that he was going to take a page from Bernie’s playbook, much to the consternation of conservative pundits.

“I’m going to be taking a lot of the things Bernie said and using them,” Trump declared in April. And indeed, Trump followed through on the pledge: He made opposition to the Trans-Pacific Partnership a centerpiece of his campaign, thus emphasizing an area of agreement with Sanders. (Trump has since confirmed that the trade deal will be canceled.) He called for a reduced U.S. military presence abroad. And he even repeatedly defended Sanders before millions of people at the televised debates, pointing out that he’d been screwed over by the DNC and Clinton minions. Naturally, Trump and Sanders will never agree on everything, but where they do see eye-to-eye, why not take advantage?

Two days after the election, Sanders issued a statement noting Trump’s success at connecting with folks “sick and tired of establishment economics, establishment politics and the establishment media.” Sanders then offered to “work with” him on discrete initiatives. Trump has already announced that an infrastructure funding bill is one of his top priorities, so who better than Sanders to help steer the legislative process in the most fruitful possible direction? (Bernie this week characterized Trump’s plan as a “scam,” so why not register those concerns in person?)

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Sounds desperate.

Merkel Warns Against Fake News Driving Populist Gains (AFP)

German Chancellor Angela Merkel warned Wednesday against the power of fake news on social media to spur the rise of populists, after launching her campaign for a fourth term. Speaking in parliament for the first time since her announcement Sunday that she would seek re-election next year, Merkel cautioned that public opinion was being “manipulated” on the internet. “Something has changed – as globalisation has marched on, (political) debate is taking place in a completely new media environment. Opinions aren’t formed the way they were 25 years ago,” she said. “Today we have fake sites, bots, trolls – things that regenerate themselves, reinforcing opinions with certain algorithms and we have to learn to deal with them.”

Merkel, 62, said the challenge for democrats was to “reach and inspire people – we must confront this phenomenon and if necessary, regulate it.” She said she supported initiatives by her right-left coalition government to crack down on “hate speech” on social media in the face of what she said were “concerns about the stability of our familiar order”. “Populism and political extremes are growing in Western democracies,” she warned. Last week, Google and Facebook moved to cut off ad revenue to bogus news sites after a US election campaign in which the global misinformation industry may have influenced the outcome of the vote. But media watchers say more is needed to stamp out a powerful phenomenon seen by some experts as a threat to democracy itself.

Merkel’s conservative Christian Democrats are the odds-on favourites to win the German national election, expected in September or October 2017.

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Well, we already knew the EU has gone crazy.

Putin: EU Resolution Equating RT to ISIS A ‘Degradation Of Democracy’ (R.)

The European Parliament called on the EU and its states to do more to counter Russian “disinformation and propaganda warfare” on Wednesday, drawing an angry response from President Vladimir Putin. A motion endorsing a committee report, which also called for more effort against attempts by Islamic State to radicalize Europeans, passed by 304 votes to 179. Members on the far left and far right were opposed; many in the center-left abstained. “The European Parliament … expresses its strong criticism of Russian efforts to disrupt the EU integration process and deplores, in this respect, Russian backing of anti-EU forces in the EU with regard, in particular, to extreme-right parties, populist forces and movements that deny the basic values of liberal democracies,” the 59-point motion read.

With East-West relations in deep freeze since Moscow responded to an EU pact with Ukraine by annexing Crimea in 2014, the Parliament’s report accused the Kremlin of funding media outlets that spread falsehoods and of sponsoring eurosceptic movements in Western Europe which are growing in strength. Putin said that after lecturing Russia on democracy Europe was now trying to silence dissenting opinions. He told reporters in Moscow: “We are observing a certain, quite obvious, degradation … of how democracy is understood in Western society, in this particular case in the European Parliament.” In Strasbourg, center-left lawmakers said they could not endorse the report because Russia was not alone in posing such threats and they objected to the way it appeared to be given an equivalent status to the non-state militants of Islamic State.

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Not a bug but a feature. Given the multibillion ‘trouble’ with the JSF, what do you think the odds are the military-industrial complex makes broken equipemnt on purpose, for profit?

US Navy’s New $4 Billion Stealth Warship Breaks Down – Again (ZH)

For the second time in two months, The Navy’s new $4 billion stealth warship has broken down. As Military.com reports, the ripped-from-the-pages-of-a-sci-fi mag-looking USS Zumwalt is now in Panama for repairs after suffering a breakdown while passing through the Panama Canal on Monday evening. Military.com’s Hope Hodge Seck reports that a spokesman for U.S. 3rd Fleet, Cmdr. Ryan Perry, told Military.com that the commander of 3rd Fleet, Vice Adm. Nora Tyson, had instructed the USS Zumwalt, the first in a new class of stealthy destroyers, to remain at ex-Naval Station Rodman in Panama to address the engineering casualty. “The timeline for repairs is being determined now, in direct coordination with Naval Sea Systems and Naval Surface Forces,” he said in a statement.

“The schedule for the ship will remain flexible to enable testing and evaluation in order to ensure the ship’s safe transit to her new homeport in San Diego.” An official confirmed to Military.com that the ship had been transiting south through the canal en route to its new San Diego homeport when the incident occurred. The ship had to be towed to pier by the Panama Canal Authority, the official said. While details about what caused the breakdown were few, Navy Times – which first reported the incident – cited reports about problems with heat exchangers in the ship’s integrated power plant that had contributed to the mishap. [..]The ship also made headlines earlier this month when multiple outlets reported that the missiles fired from its 155mm Advanced Gun System, at $800,000 apiece, were too expensive for the Navy to buy in large quantities [..]

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But they’ve accepted tons of others already?!

Greece Wants To Conclude EU/IMF Review, Won’t Accept ‘Irrational’ Demands (R.)

Greece wants to conclude its bailout review but cannot accept what it sees as irrational demands on labor reform or for extra austerity, Prime Minister Alexis Tsipras said on Wednesday, in his first speech to lawmakers after a cabinet reshuffle. Negotiations between Greece and its official creditors – the EU and the IMF – hit a snag this week due to differences on fiscal targets, energy and labor reforms in the country, where one in four is unemployed. “The Greek government is fully consistent with what was agreed and has proven it has the political will to conclude the second bailout review without meaningless delays,” Tsipras told his Syriza party lawmakers. “But this does not mean we would discuss irrational demands.”

The mission chiefs overseeing Greece’s bailout program implementation left Athens on Tuesday. Government officials said talks would continue but the latest disagreements and a long-standing rift among the creditors on medium-term fiscal targets have clouded Greek hopes for a swift conclusion. Unpopular labor reforms, including collective bargaining, a mechanism to set the minimum wage and giving companies more freedom to lay off workers are the main sticking point in talks with lenders. Tsipras said differences could be bridged if there is political will on all sides, adding that an agreement could be reached by Dec. 5, when euro zone finance ministers will meet in Brussels.

“It is realistic but also absolutely necessary to conclude the talks soon to secure at the scheduled Dec. 5 … meeting the agreement needed on a political level in order to conclude the bailout review,” he said. Tsipras said this would pave the way for talks on debt relief measures, not only in the short term but also in the medium and long term, which would allow Greece to lower primary surplus targets beyond 2018, when its bailout program ends.

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The Troika forces Greece to strangle itself.

Greek Businesses Move Abroad To Escape Austerity (R.)

Greek businessman Prokopis Makris believes moving to Bulgaria three years ago was the best decision he ever made. The accountant shut his failing furniture company in Greece and opened a business helping other entrepreneurs move to Bulgaria to escape a 29% tax rate, which has jumped since Athens adopted austerity as part of an international bailout. “We are bombarded with taxes in Greece, businesses are being annihilated,” he says in his plush office overlooking the town square of Petritsi, a Bulgarian town about 12 km (seven miles) north of the border with Greece. The debt crises faced by Greece and several other European countries led to drastic spending cuts and tax increases to improve government finances.

But the higher taxes punished businesses forcing many to shut or move to lower tax jurisdictions such as Bulgaria or Cyprus, helping those economies but undermining the recovery needed to balance the books at home. The number of Greek owned businesses based in Bulgaria, where the corporate tax rate is only 10%, has risen to 17,000 from 2,000 in 2010, when Greece had its first bailout, according to Bulgarian authorities. The Greek government is concerned. It plans a series of tax audits in cooperation with Bulgaria to determine if these business defections are merely changes of address designed to avoid tax rather than a physical relocation of operations. [..] Six hundred kilometers north of Athens, the Greek-Bulgarian border is teeming with traffic. A ravine through mountains on the Greek side gives way to a sweeping valley where agriculture and vineyards are the mainstay of the local economy.

At two small industrial parks 5 km inside Bulgaria, Greek signs are everywhere, advertising storage and office space. “There are dozens of Greek businesses just in this area alone, from transport companies to textile businesses and construction materials,” said Yiorgos Kalaitzoglou who runs a logistics business out of one of the industrial parks where a sign reads, “Land of Opportunities”. Three years ago, his business was stuttering in Greece. He moved to Bulgaria, leaving his wife and family in Thessaloniki, Greece’s second largest city an hour’s drive away. “The taxman in Greece takes 70 to 90% of earnings, Greece simply doesn’t let you live,” the 50-year-old said as he walked through a warehouse stacked with ladders and paint tubs.

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Oct 062016
 
 October 6, 2016  Posted by at 9:19 am Finance Tagged with: , , , , , , , ,  1 Response »


Lewis Wickes Hine 12-year-old newsie, Hyman Alpert, been selling 3 years, New Haven CT 1909

World Is Swimming In Record $152 Trillion In Debt: IMF (R.)
Australia Private-Sector Debt Rises Faster Than Almost Anywhere Else (Aus.)
One-Third Of European Banks Fail IMF Stress Test: (WSJ)
EU Readies Plan for Derivatives Clearing Crisis, the New Too-Big-to-Fail (BBG)
The Noose Is Tightening Quickly On The Global Economy (Alt-M)
Fed’s Fischer Says Low Neutral Rate A Sign Of Potential Economic Trouble (R.)
Goldman Warns Of “Upward Shock” To Rates, Hints At Trillions In Losses (ZH)
Stiglitz Sees Italy, Others Leaving Euro Zone In Coming Years (R.)
Two Thirds Of Young American Adults Live With Their Parents (ZH)
The Math of Escaping From Syria (R.)
Nearly Half Of All Children In Sub-Saharan Africa Live In Extreme Poverty (G.)

 

 

Never mind public debt. $100 trillion in private debt is the big number.

World Is Swimming In Record $152 Trillion In Debt: IMF (R.)

The world is swimming in a record $152 trillion in debt, the IMF said on Wednesday, even as the institution encourages some countries to spend more to boost flagging growth if they can afford it. Global debt, both public and private, reached 225% of global economic output last year, up from about 200% in 2002, the IMF said in its new Fiscal Monitor report. The IMF said about two thirds of the 2015 total, or about $100 trillion, is owed by private sector borrowers, and noted that rapid increases in private debt often lead to financial crises. While debt profiles vary by country, the report said that the sheer size of the debt could set the stage for an unprecedented private deleveraging that could thwart a still-fragile economic recovery.

“Excessive private debt is a major headwind against the global recovery and a risk to financial stability,” IMF Fiscal Affairs Director Vitor Gaspar told a news conference. “Financial recessions are longer and deeper than normal recessions.” While the United States has de-leveraged since the 2008-2009 financial crisis, the report cited the buildup of private debt in China and Brazil as a significant concern, fueled in part by a long era of low interest rates. The report comes as IMF managing director Christine Lagarde is urging the Fund’s 189 member governments that have “fiscal space” – the ability to sustainably borrow and spend more – to do so to boost persistently weak growth.

The Fund’s call for targeted fiscal support for consumer demand comes is accompanied by calls for continued accommodative monetary policy and accelerated structural reforms aimed at boosting countries’ economic efficiency. If a major deleveraging of private debt were to occur, the IMF report recommends that fiscal policy should include targeted interventions to restructure private debt or repair bank balance sheets to mininize damage to the overall economy.

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An Australian take on the IMF debt report, which singles out the country along with Canada.

Australia Private-Sector Debt Rises Faster Than Almost Anywhere Else (Aus.)

Private-sector debt is rising faster in Australia than almost anywhere else in the world, according to the IMF, which is concerned record debt globally may be setting the stage for a future downturn. The fund estimates that total debt levels have kept climbing since the global financial crisis, and are now equivalent to 225% of global GDP, up from 200% before the crisis. “Excessive private debt is a major headwind against the global recovery and a risk to financial stability”, said the head of the fund’s fiscal department, Vitor Gaspar, releasing the fund’s latest review of government finances. The IMF says private-sector debt in most advanced countries reached a peak in 2012 and started coming down, with the biggest reductions recorded in countries such as Ireland and Slovenia that entered the financial crisis with elevated debts.

The IMF says private-sector debt in most advanced countries reached a peak in 2012 and started coming down, with the biggest reductions recorded in countries such as Ireland and Slovenia that entered the financial crisis with elevated debts. In some cases, however, private debt has continued to accumulate at a fast pace-notably, Australia, Canada, and Singapore, the fund says. The IMF estimates that, since 2013, private debt has risen as a share of GDP by 15 percentage points, more than in any other advanced nation. Private debt in Australia has risen from 188% of GDP to 225% since the global financial crisis, mostly driven by lending to households. Mr Gaspar said the risk was not just that private debt could revert to the government in a crisis, as occurred when many advanced country governments had to take over banks during the financial crisis.

“Rapid increases in private debt often end up in financial crises and financial recessions are longer and deeper than normal recessions”, he said. The fund says even without a financial crisis, high private-sector debt will hamper growth because highly indebted borrowers eventually cut back their consumption and investment. It says there is no consensus about the threshold at which debt levels start affecting growth, but says the longer that debt keeps rising, the greater becomes the sensitivity of the economy to any unexpected shocks. The IMF report shows that Australia s federal and state government debt remains one of the lowest in the advanced world, projected to peak at 21.6% of GDP in 2018, compared with an average of 80.5% for the advanced countries in the G20.

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Why Draghi said there are too many banks in Europe. M&A can hide a lot of debt, or have taxpayers shoulder it.

One-Third Of European Banks Fail IMF Stress Test: (WSJ)

Historic debt levels and dwindling policy ammunition risk derailing the meager recovery forecast for next year. Anemic global growth is “setting the stage for a vicious feedback loop in which lower growth hampers deleveraging and the debt overhang exacerbates the slowdown,” the emergency lender warned. The IMF lays out three major risks to the financial system. First, European banks are facing a chronic profitability crisis. Many haven’t been able to clear the legacy debt off their balance sheets and investors are increasingly skeptical they’ll be remain profitable based on their current structures. But it’s not just market perceptions. The IMF estimates that the recent plunge in bank equity price could curb lending until 2018.

It also conducted a survey of more than 280 banks covering most of the banking systems in the U.S. and Europe to see if an economic recovery would be enough to propel them into long-term profitability. While a large majority of U.S. banks passed, nearly one-third of Europe’s banking system flunked. “A cyclical recovery helps but is not enough,” Mr. Dattels says. Those banking duds—representing $8.5 trillion in assets—remain weak and unable to generate sustainable profits even if growth picks up in the fund’s stress test. “Banks and policy makers need to tackle substantial structural challenges to survive in this new era.” Banks need to first resolve the massive stock of nonperforming loans. That requires banking authorities to fix their insolvency rules, a problem the IMF has been bugging Europe about for years. If officials could finally resolve that problem, it could turn a net capital cost to European banks of €85 billion to a net gain of €60 billion, the fund estimates.

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One goal in mind: save large financial institutions. Not citizens.

EU Readies Plan for Derivatives Clearing Crisis, the New Too-Big-to-Fail (BBG)

The EU plans to give authorities sweeping powers to tackle ailing derivatives clearinghouses to prevent their failure from wreaking havoc throughout the financial system. Draft EU legislation seen by Bloomberg sets out rules on saving or shuttering clearinghouses that would apply to firms such as London-based LCH. The proposals cover everything from the creation of resolution authorities to the powers they would have when winding a company down, including writing down shares, debt and collateral. Having forced most clearing to go through central counterparties to manage risk in the financial system, the EU will come out with recovery and resolution proposals by year-end. Clearing has come into focus after emerging as a pawn in the post-Brexit battle for London’s financial-services industry.

“If we are going to rely more on CCPs, we need to have a clear system in place to resolve them if things go wrong,” Valdis Dombrovskis, the EU’s financial-services chief, said last month. Governments around the world were spooked by the damage inflicted by derivatives trades that went awry during the financial crisis. Since then, they’ve taken steps to ensure trading in the contracts is reported and centrally cleared. Clearinghouses stand between the two sides of a derivative wager and hold collateral, known as margin, from both in case a member defaults. Many transactions were previously conducted directly between traders without a third party requiring collateral. Swaps trading, when it was largely unregulated, amplified the 2008 meltdown and prompted a $182 billion U.S. rescue of AIG.

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“The very system they are built around is a corrupt and unsustainable model, and I hold that this is by design.”

The Noose Is Tightening Quickly On The Global Economy (Alt-M)

The supposed “catalyst” for the 2008 crash is primarily attributed to the fall of Lehman Brothers. I highly recommend any of the “bullish” economists out there arguing today that the central banks intend to prolong a stock rally indefinitely examine the statements made in the mainstream about Lehman and by Lehman leading up to their eventual death rattle. Then, absorb and really think on some of the recent statements and tactics used by Deutsche Bank. Specifically, note Lehman’s use of accounting and derivatives gimmicks and the cycling of funds through various accounts in order to make the company appear solvent. Then, take a look at revelations coming out of places like Italy that Deutsche Bank has been using the same model of false accounts and market manipulation, once again, with derivatives as a main tool for fraud.

Also notice the same outright dismissals of all pertinent evidence that Deutsche Bank might be suffering a capital shortfall, as CEO John Cryan blames “speculators” for the companies losses. Lehman’s Dick Fuld and Bear Stearns’ Jimmy Cain both blamed “speculators” and “rumors and conspiracies” for the fall of their companies during the derivatives debacle eight years ago. It would seem that history doesn’t just rhyme, it sometimes repeats exactly. Below is a rather revealing chart from the folks at Zero Hedge comparing the collapse of Lehman Brothers stock value to the steady decline of Deutsche Bank. To be clear, Lehman was no catalyst. It was only a litmus test for a system completely devoid of tangible value and drowning in toxic debt. Lehman was a part of a much larger problem, it was not the cause of the problem. The same is true for Deutsche Bank.

The panic growing around Germany’s second largest financial institution, Commerzbank, as it moves to lay off nearly 10,000 employees and suspend its dividend is another crisis indicator separate from Deutsche Bank. The clear solvency issues in Italy’s major banks, including Monte dei Paschi, are yet another explosive element.

Keep in mind that when these edifices begin to crumble and Europe enters a state of financial emergency, the mainstream media and numerous governments will continue to blame speculators. They will also claim that the entire disaster was set in motion through a “domino effect”; the first domino probably being Deutsche Bank. This will be a lie. There is no line of dominoes. One bank will not be bringing down the other banks — yes, there is terrible interdependency, but the real issue is that ALL of these banks are falling due to their own cancerous behaviors. The very system they are built around is a corrupt and unsustainable model, and I hold that this is by design.

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Wow, he presents what has long been obvious as some sort of epiphany: “We could be stuck in a new longer-run equilibrium characterized by sluggish growth.”

Fed’s Fischer Says Low Neutral Rate A Sign Of Potential Economic Trouble (R.)

Evidence that the so-called natural rate of interest has fallen to low levels could mean the economy is stuck in a low-growth rut that could prove hard to escape, Federal Reserve Vice Chair Stanley Fischer said on Wednesday. Speaking to a central banking seminar in New York, the Fed’s second-in-command said he was concerned that the changes in world savings and investment patterns that may have driven down the natural rate could “prove to be quite persistent…We could be stuck in a new longer-run equilibrium characterized by sluggish growth.” As a result, he said, central bankers may face a future where the short-term interest rates set by policymakers never get far above zero, and the unconventional tools used during the financial crisis become a “recurrent” fact of life.

“Ultralow interest rates may reflect more than just cyclical forces,” Fischer said, but “be yet another indication that the economy’s growth potential may have dimmed considerably.” Fischer’s remarks did not address current Fed policy or interest rate plans. It is not the first time a Fed official has openly expressed concerns about an underlying decline in U.S. economic potential, or fretted that the crisis shifted savings and investment patterns in a damaging way. Over the past year in particular there has been a vigorous debate, backed up by fresh research, about the “natural” rate of interest. Sometimes referred to as a neutral or equilibrium rate, it is in many ways an abstraction – not a rate that is set by the Fed or used in transactions, but an estimate of the underlying rate that would keep the price level stable while the economy grows at potential.

A number of developments have led many at the Fed to conclude that the natural rate is currently very low, and that its decline may reflect a loss of economic potential. There are immediate implications for the Fed: a low natural rate means the Fed could not move its short-term federal funds rate very high before policy becomes too tight.

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Nothing new here either.

Goldman Warns Of “Upward Shock” To Rates, Hints At Trillions In Losses (ZH)

[..] “The total face value of all US bonds, including Treasuries, Federal agency debt, mortgages, corporates, municipals and ABS, is $40 trillion (Securities Industry and Financial Markets Association). The Barclays US aggregate is a smaller number, $17 trillion, as the index excludes some categories of debt, such as money markets, with low duration. To end up with a more palatable number, Goldman uses the Barclays measure of debt outstanding, although it admits this may lead to an understatement of the total loss potential. Using either measure, total debt outstanding has grown by over 60% in real Dollars since 2000.”

[..] Doing the math, and combining a duration estimate of 5.6 years with the SIFMA total estimated notional exposure of $40trn, and current Dollar price of bonds of $105.6, indicates that, to first order, a 100bp shock to interest rates would translate into a market value loss estimate would be $2.4 trillion. That is the part Garzarelli forgot to write about. Which is ironic, because in trying to paint a bullish picture, the Goldman strategist in effect admitted that not just the Fed, but the entire world is trapped: should the global economy continue to contract, global bond yields will continue to sink, with trillions more bonds going negative yield, leading to even more debt issuance, and resulting in a ZIRP (and NIRP) trap from which there is no escape.

On the other hand, if – as Goldman hopes – inflation does materialize, however briefly, the resultant MTM loss will be staggering. Keep in mind that $2.4 trillion is only in the US. Now add tens of trillions of record low yielding global debt, including some $10.5 trillion in negative yield bonds around the globe, and one can make the case that the global MTM hit from an even 1% rise in rates would be somewhere between $5 and $8 trilion dollars! So, according to Goldman, here is the rather unpleasant choice facing the world: continue slowly sinking into a deflationary singularity, coupled with ever greater systemic leverage which makes escape from the ZIRP/NIRP trap impossible as social unrest builds up and ultimately spills over into the streets, or unleash an inflationary impulse, one which crushes countless debt holders, leads to trillions in losses, and requires yet another consolidated bailout…. oh, and also more social unrest.

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If Italy leaves, there’s no EU left.

Stiglitz Sees Italy, Others Leaving Euro Zone In Coming Years (R.)

Nobel Prize-winning economist Joseph Stiglitz predicted in a interview out on Wednesday that Italy and other countries would leave the euro zone in coming years, and he blamed the euro and German austerity policies for Europe’s economic problems. Europe lacks the decisiveness to undertake needed reforms such as the creation of a banking union involving joint bank deposit guarantees, and also lacks solidarity across national boundaries, Stiglitz was quoted as saying by Die Welt newspaper. “There will still be a euro zone in 10 years, but the question is, what will it look like? It’s very unlikely that it will still have 19 members. It’s difficult to say who will still belong,” the paper quoted Stiglitz as saying. “The people in Italy are increasingly disappointed in the euro.”

“Italians are starting to realize that Italy doesn’t work in the euro,” he added. He said Germany had already accepted that Greece would leave the euro zone, noting that he had advised both Greece and Portugal in the past to exit the single currency. Concerns about the euro zone have escalated in Germany in recent months amid growing concern about a shift away from austerity in southern Europe, the loose money policies of the ECB and the rise of the right-wing Alternative for Germany party. Stiglitz told the paper the euro and austerity policies in Germany were at fault for Europe’s economic malaise. The break-up of the single currency or the division into a north euro and a south euro were the only realistic options for reviving Europe’s stalled economy, the paper quoted him as saying.

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‘Target groups’ may be somewhat confusing: one survey looks at 15-29 year-olds, the other at 18-34 year-olds. But the trends are clear enough.

Two Thirds Of Young American Adults Live With Their Parents (ZH)

As part of its periodic report on “Society at a Glance” which looks at how youth across member states are faring in terms of several social indicators, such as employment, poverty, marriage and health, the OECD also provided a unique glimpse into modern household composition, namely the%age of young adults, those aged 15-29, living at home. What it found is that since the Great Recession, there have been significant shifts worldwide in the number of young adults living at home. From 2007 to 2014, the number of youth living at home in countries belonging to the OECD increased by 0.7%, rising to 59.4%.

As expected, the nations hit hardest by the global economic slowdown such as Italy, Slovenia and Greece had the highest%age of youth living at home with their parents, at 80.6%, 76.4% and 76.3%, respectively. In itself, that is hardly surprising, since countries like Greece and Italy were not only among the harfest hit by the recession, and have a culture of young adults living longer at home, but also have some of the highest unemployment rates for young people. In fact, as the chart below shows, some 15% of young adults in OECD countries, or a whopping 40 million, were what the report classifies as NEET: not in employment, education or training, with both Italy and Greece at the very top, just behind Turkey.

On the other end of the spectrum, Canada had the lowest%age of youth living with parents, with just 30% of the country’s youth still living at home. The Nordic countries, including Denmark, Sweden, Finland and Norway, also had low numbers of young adults living at home. In terms of deterioration, France was by far the leader, with the number of young people cohabitating with their parents rising 12.5% to 53.5% from 2007 to 2014. Report authors attribute the increase in part to the high numbers of young adults in France who are not in the workforce or in education. In France, some 16.6% of young adults were not in a job or education institution in 2015, also a notable an increase over the previous few years.

Cited by US News, Claire Keane, an economist with the OECD’s social policy division said that “we really think this is a crisis story,” In France, she says, many benefits flow through families to reach young people. “They are relying on parents for financial support.” As for the US, there has been a 3.9% increase in the proportion of youth living with their parents from 2007 to 2014, significantly higher than the OECD average. As a result, today, about 66.6% of American 15- to 29 year-olds live with their parents as opposed to on their own or with a roommate, compared to around 62.8% before the crisis.

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Syria was a relatively wealthy country not long ago. So was Libya. Guess what happened?

The Math of Escaping From Syria (R.)

– Duration of Syrian Civil War: 5 years, 6 months, approximately. – Number of refugees through Oct. 1: 302,975. – Number of refugees drowned en route to Europe: 3,502 We’ve seen the pictures. We’ve read the stories. The numbers are stark. A single boat crossing on the Mediterranean cost $2,200 per passenger in the summer of 2015, up from an average $1,500 a year earlier, according to refugees’ accounts. For Syrians, as with most migrants seeking asylum, money is scarce; a report by the Syrian Economic Forum showed average monthly income for a citizen of Aleppo was around $80 last year. So if you’re a refugee, you face the prospect of spending as much as two years of your wages for a journey on which 1 of 87 refugees have drowned.

How bad is the economy you’re leaving behind? Let’s take the Great Recession of 2007 to 2009 in the U.S. as a comparison. GDP decreased at an average annual rate of 3.5%. Unemployment reached a high of 10% in Oct. 2009. In that year, 14.3% of the U.S. were living below the poverty line. In Syria, GDP fell 30% in 2013 and another 36% in 2014; 82% of the population lives below the poverty line; unemployment is at 60%. And 2016 looks pretty bleak as well. And that’s leaving aside falling bombs, chemical weapons and woefully inadequate medical care. Also connecting with international aid groups takes time, as many Syrians are located in hard to reach areas.

And let’s not forget you are probably a kid. More than 50% of refugees are under the age of 18 – and haven’t had educational access for years; not to mention the added trauma of witnessing extreme violence. So spending up to two years of your wages and risking your life to get to a safe haven, versus staying in a country where it’s likely you will die a violent death suddenly seems like a remarkably sound decision.

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How many billions have been spent on ending world hunger? Or maybe we should ask how many have been spent on warfare.

Nearly Half Of All Children In Sub-Saharan Africa Live In Extreme Poverty (G.)

Nearly half of all children in sub-Saharan Africa are living in extreme poverty, according to a joint Unicef-World Bank report released on Tuesday, with figures showing that almost 385 million children worldwide survive on less than $1.90 (£1.50) a day, the World Bank international poverty line. Extreme poverty leads to stunted development, limited future productivity as adults, and intergenerational transmission of poverty, the report (pdf) says. The figures – based on data from 89 countries, and representing 84% of the developing world’s population – indicate that much work will be needed to meet the sustainable development goal of eradicating extreme poverty by 2030.

Children are disproportionately affected by extreme poverty – they make up just a third of the population studied, but comprise half of the extreme poor. They are twice as likely as adults to be living on less than $1.90 a day, the report claims, with 19.5% of children in developing countries living in extremely poor households, compared to just 9.2% of adults. “It’s almost a double blow – firstly, that children are twice as likely as an adult to live in extreme poverty, but also that children are much less likely than an adult to be able to cope with extreme poverty because of stunting, infant mortality, and early childhood development,” said Unicef’s deputy executive director, Justin Forsyth. “Extreme poverty can either kill you, or ruin your potential for the rest of your life.”

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Jun 072016
 
 June 7, 2016  Posted by at 8:29 am Finance Tagged with: , , , , , , , , , , ,  9 Responses »


Esther Bubley Soldiers with their girls at the Indianapolis bus station 1943

This Job Market Slump Started In January
Yellen Sees Rates Rising Gradually But .. (BBG)
The Shadow Looming Over China (Balding)
Nation of Debt: New Zealand Sitting on Half-Trillion-Dollar Debt Bomb (NZH)
Sterling Swings Wildly As Polls Suggest UK Heading For EU Exit (G.)
S&P Downgrades Royal Bank of Canada Outlook (WSJ)
Goldman Probed Over Malaysia Fund 1MDB (WSJ)
This Fannie-Freddie Resurrection Needs To Die (WaPo ed.)
State Department Blocks Release Of Hillary Clinton’s TPP Emails (IBT)
Debt Buyers (John Oliver)
Taxes And Recession Slash Income Of Greek Households (Kath.)
Nausea Rising (Jim Kunstler)
NATO Countries Begin Largest War Game In Eastern Europe Since Cold War (G.)
Finns To Bury Nuclear Waste In World’s Costliest Tomb (AFP)
Great Barrier Reef: The Stench Of Death (G.)

And this is Yellen’s favorite index?! Makes you wonder.

This Job Market Slump Started In January

The sharp May hiring slowdown revealed in Friday’s employment report took a lot of people – including me – by surprise. It shouldn’t have. Things have actually been on the downswing for the U.S. labor market for months, according to the Federal Reserve’s Labor Market Conditions Index. The LMCI is a new measure cooked up by Federal Reserve Board economists in 2014 that consolidates 19 different labor market indicators to reflect changes in the job market. They calculated it going all the way back to 1976; the chart above shows its movements since the end of the last recession in June 2009. The May index, released Monday morning, showed a 4.8-point decline from April. As you can see from the chart, the index has now declined for five straight months — its worst performance since the recession.

The index does get revised a lot. When the January number was first reported on Feb. 8, for example, it was still modestly positive. Still, since the February number was released on March 7 the news from the LMCI has been unremittingly negative. Which probably should have told us something. Not many people were paying attention, though. Fed Chair Janet Yellen is apparently a fan of the LMCI, but I have to admit that I first learned of its existence Monday when Erica Groshen, the Commissioner of the BLS, mentioned it at a conference for BLS data users in New York. It was a good reminder, as were a lot of the other presentations at the conference, that the headline jobs numbers that get the lion’s share of attention – the monthly change in payroll employment and the unemployment rate – aren’t always the best places to look for information on the state of the jobs market.

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They should really start having her do these speeches in a cave filled with smoke and vapors.

Yellen Sees Rates Rising Gradually But .. (BBG)

Federal Reserve Chair Janet Yellen said the U.S. economy was making progress but was silent on the timing of another interest-rate increase, an omission viewed as a signal that a June move was off the table. “I continue to think that the federal funds rate will probably need to rise gradually over time to ensure price stability and maximum sustainable employment in the longer run,” Yellen said Monday during a speech in Philadelphia. Her comments were less specific than in her previous remarks in describing when she thought the Fed should raise rates again.

On May 27 at Harvard University, she said an increase would likely be appropriate in “coming months,” a phrase she didn’t repeat on Monday. Since then, the Labor Department reported U.S. employers in May added the fewest number of new jobs in almost six years, causing expectations for a rate increase to plunge. “She did not address the timing of the Fed’s next gradual move, which suggests to us that she is in no hurry,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd, arguing that her comments on the payroll report “largely rules out a move in rates next week. July is not a strong bet either.”

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Beijing has not just allowed shadow banks to grow much too big, it has used this growth to hide its actions behind. Local governments got most of their credit to build highways to nowhere from shadow banks. It’s really weird that the western press only catches on now.

The Shadow Looming Over China (Balding)

Of all the topics sure to be come up in Sino-U.S. economic talks this week – from the problem of excess capacity to currency controls – the health of China’s financial sector will no doubt feature high on the list. Especially worrying are the multiplying links between the country’s commercial and “shadow” banks – the name given to a broad range of non-bank financial institutions from peer-to-peer lending platforms to trusts and wealth management companies. All told, the latter now hold assets that exceed 80 percent of China’s gross domestic product, according to Moody’s – much of them linked to the commercial banking sector in one way or another. That poses a systemic threat, and needs to be treated as such. There’s nothing inherently wrong with shadow banks, of course.

Largely owned by the government, China’s commercial banks focus primarily on directing capital from savers to state-owned enterprises, leaving Chinese households and smaller private enterprises starved for funds. Shadow banks have grown to meet the demand. At their best, they allocate capital more efficiently than state-owned lenders and keep afloat businesses that create jobs and growth. The line between good shadow banks and dodgy ones is increasingly fuzzy, however, as is the divide between shadow and commercial banking. Traditional banks often assign their sales teams to sell shadow products. This gives an unwarranted sheen of legitimacy to schemes that are inherently risky. Buyers trust that the established bank will make them whole if their investment goes south.

Shadow banks are also selling more and more products directly to commercial banks. Wealth management products held as receivables now account for approximately 3 trillion yuan of interbank holdings, or around $500 billion — a number that’s grown sixfold in three years. According to Autonomous Research, as much as 85 percent of those products may have been resold to other shadow banks, creating a web of cross-ownership with disturbing parallels to the U.S. mortgage securities market just before the 2008 crash. In total, the big four state-owned banks hold more than $2 trillion in what’s classified as “financial investment,” much of it in trusts and wealth-management products.

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A nation of lost souls.

Nation of Debt: New Zealand Sitting on Half-Trillion-Dollar Debt Bomb (NZH)

New Zealand is sitting on a half-a-trillion-dollar debt bomb and Kiwis are increasingly treating their houses like cash machines, piling on the debt as they watch the value of their properties soar. Reserve Bank figures show household debt, excluding investment property, has risen 23% in the past five years to $163.4 billion. Incomes have risen only 11.5%. Households are now carrying a debt level that is equivalent to 162% of their annual disposable income – higher than the level reached before the global financial crisis. Including property investment the total debt households owed as of April was $232.9 billion, according to the Reserve Bank. Satish Ranchhod, a senior economist at Westpac Bank, says the main driver has been low interest rates.

“Continued low interest rates have sparked a sharp increase in household borrowing at a time when income growth has been very modest.” And it’s housing loans where the growth has mainly come from. Housing loan debt has risen 23.4% to $132.83 billion. Student loans were up 22.9% to $14.84 billion and consumer loans are up 16.6% to $15.7 billion. Ranchhod said much of the rising debt on housing was down to investors, as more people jumped into the property market on the back of rising house prices. He also believed many people were using their home loans to make consumer purchases. “We think a lot of the increase in lending on housing loans will also be an increase in spending … people feel wealthy when the value of their home goes up.”

Hannah McQueen, an Auckland financial coach and managing director of EnableMe, said she had seen three clients in the past week alone who had paid for a new car by using the equity in their home to increase their mortgage debt. “It’s definitely on the increase … People think, ‘I’m worth so much more now …'”

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Volatility just getting started.

Sterling Swings Wildly As Polls Suggest UK Heading For EU Exit (G.)

The pound swung wildly on currency markets on Monday, reaching extremes of volatility not seen since the financial crisis, as City traders reacted to polls suggesting voters were increasingly likely to send Britain out of the EU this month. The poll boost to the Vote Leave campaign sent the pound tumbling by up to 1.5 cents to below $1.44, adding to a decline of 2 cents last week and indicating the degree of pressure on the UK currency since the remain camp’s lead in the polls began to evaporate. A dovish speech by the US central bank chief, Janet Yellen, hinting that poor jobs data meant the Federal Reserve was unlikely to raise rates this month, steadied the pound – despite her comments that a vote to leave the EU could hurt the US economy.

“One development that could shift investor sentiment is the upcoming referendum in the United Kingdom. A UK vote to exit the European Union could have significant economic repercussions,” she said. Sterling’s value has become increasingly volatile as fears of a Brexit have increased among investors. The index charting the daily swings in the pound’s value has risen to its highest level of volatility since the first quarter of 2009. It is double the level seen in April when the remain camp was ahead in the polls. Elsa Lignos, a foreign exchange expert at City firm RBC, one of many to warn that the pound would come under further pressure should the lead established by Vote Leave be consolidated, said: “Brexit is almost all that matters for the pound at the moment.”

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Hmm.. “..speculative-grade borrowers..”, “..highly indebted Canadian consumers ..”

S&P Downgrades Royal Bank of Canada Outlook (WSJ)

Standard & Poor’s is downgrading the outlook for Royal Bank of Canada, a change it says reflects the lender’s increased risk appetite and credit-risk exposure relative to other domestic banks. The credit-ratings firm said Monday it was revising its outlook on RBC, Canada’s largest bank by assets, to “negative” from “stable,” but would leave its credit ratings untouched. The move comes less than two weeks after the Toronto-based lender reported a stronger-than-expected fiscal second-quarter profit but set aside bigger provisions to cover soured loans. “The outlook revision reflects concerns over what we see as RBC’s higher risk appetite, relative to peers,” said S&P credit analyst Lidia Parfeniuk in a release.

“We see one example of this in its aggressive growth in loans and commitments in the capital markets wholesale loan book, particularly in the U.S., with an emphasis on speculative-grade borrowers, including exposure to leveraged loans,” she added. S&P also pointed to RBC’s “higher-than-peer average exposure” to highly indebted Canadian consumers and to the country’s oil- and gas-producing regions, which have been hard hit by the collapse in crude-oil prices. S&P, however, affirmed RBC’s ratings including its “AA-/A-1+” long- and short-term issuer credit ratings. “RBC is one of the strongest and highest rated banks in Canada, reflecting our strong financial profile and the success of our diversified business model,” said RBC in an emailed statement. “This outlook change will have no direct impact to RBC clients,” it later added.

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“..Goldman wired the $3 billion in proceeds to a Singapore branch of a small Swiss private bank instead of to a large global bank, as would be typical for a transfer of that size..”

Goldman Probed Over Malaysia Fund 1MDB (WSJ)

U.S. investigators are trying to determine whether Goldman Sachs broke the law when it didn’t sound an alarm about a suspicious transaction in Malaysia, people familiar with the investigation said. At issue is $3 billion Goldman raised via a bond issue for Malaysian state investment fund 1Malaysia Development Bhd., or 1MDB. Days after Goldman sent the proceeds into a Swiss bank account controlled by the fund, half of the money disappeared offshore, with some later ending up in the prime minister’s bank account, according to people familiar with the matter and bank-transfer information viewed by The Wall Street Journal. The cash was supposed to fund a major real-estate project in the nation’s capital that was intended to boost the country’s economy.

U.S. law-enforcement officials have sought to schedule interviews with Goldman executives, people familiar with the matter said. Goldman hasn’t been accused of wrongdoing. The bank says it had no way of knowing how 1MDB would use the money it raised. Investigators are focusing on whether the bank failed to comply with the U.S. Bank Secrecy Act, which requires financial institutions to report suspicious transactions to regulators. The law has been used against banks for failing to report money laundering in Mexico and ignoring red flags about the operations of Ponzi scheme operator Bernard Madoff. The investigators believe the bank may have had reason to suspect the money it raised wasn’t being used for its intended purpose, according to people familiar with the probe.

One red flag, they believe, is that Goldman wired the $3 billion in proceeds to a Singapore branch of a small Swiss private bank instead of to a large global bank, as would be typical for a transfer of that size, the people said. Another is the timing of the bond sale and why it was rushed. The deal took place in March 2013, two months after Malaysia’s prime minister, Najib Razak, approached Goldman Sachs bankers during the annual meeting of the World Economic Forum in Davos, Switzerland. And it occurred two months before voting in a tough election campaign for Mr. Najib, who used some of the cash from his personal bank account on election spending, the Journal has reported, citing bank-transfer information and people familiar with the matter.

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This being from the mouthpiece WaPo, g-d only knows what’s behind it.

This Fannie-Freddie Resurrection Needs To Die (WaPo ed.)

It’s been said that Washington is where good ideas go to die. We don’t know about that, but some bad ideas are certainly hard to get rid of. Consider the persistent non-solution to the zombie-like status of Fannie Mae and Freddie Mac known as “recap and release.” The plan is to return the two mortgage-finance giants to their pre-financial-crisis status as privately owned but “government-sponsored” enterprises. That is to say, to recreate the private-gain, public-risk conflict that helped sink them in the first place. Their income would recapitalize the entities, rather than be funneled to the treasury, as is currently the case. Then they could exit the regulatory control known as “conservatorship” that has constrained them since 2008 — and resume bundling home loans and selling them, as if it had never been necessary to bail them out to the tune of $187 billion in the first place.

Congress last year effectively barred recap and release, at least for the next two years. Coupled with the Obama administration’s firm opposition, you’d think that would put a stake through its heart. But “no” is not an acceptable answer for the handful of Wall Street hedge funds that scooped up Fannie and Freddie’s beaten-down common stock for pennies a share after the bailout — and would realize a massive windfall if the government suddenly decided to let shareholders have access to company profits again. With megabillions on the line, the hedge funds have been arguing high-mindedly that their true concerns are property rights and the rule of law; they have also made common cause with certain low-income-housing advocates who see a resurrected Fan-Fred as a potential source of funds for their programs.

Left unexplained, because it’s inexplicable, is how the hedge funds’ arguments square with the fact that there wouldn’t even be a pair of corporate carcasses to fight over but for the massive infusion of taxpayer dollars and the public risk that represented. The latest iteration of recap and release is a hedge-fund-backed bill sponsored by Rep. Mick Mulvaney (R-SC), which would set Fannie and Freddie, unreformed, loose on the marketplace again and do so under terms wildly favorable to the hedge funds. Specifically, shareholders would be charged nothing for the government backing the entities would retain, supposedly to save scarce resources for the capital cushion. But as the WSJ recently noted, capital could be “risk-weighted” so forgivingly that the actual cushion required might be considerably less than headline numbers suggest.

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Desperate move.

State Department Blocks Release Of Hillary Clinton’s TPP Emails (IBT)

Trade is a hot issue in the 2016 U.S. presidential campaign. But correspondence from Hillary Clinton and her top State Department aides about a controversial 12-nation trade deal will not be available for public review — at least not until after the election. The Obama administration abruptly blocked the release of Clinton’s State Department correspondence about the so-called Trans-Pacific Partnership (TPP), after first saying it expected to produce the emails this spring. The decision came in response to International Business Times’ open records request for correspondence between Clinton’s State Department office and the United States Trade Representative. The request, which was submitted in July 2015, specifically asked for all such correspondence that made reference to the TPP.

The State Department originally said it estimated the request would be completed by April 2016. Last week the agency said it had completed the search process for the correspondence but also said it was delaying the completion of the request until late November 2016 — weeks after the presidential election. The delay was issued in the same week the Obama administration filed a court motion to try to kill a lawsuit aimed at forcing the federal government to more quickly comply with open records requests for Clinton-era State Department documents.

Clinton’s shifting positions on the TPP have been a source of controversy during the campaign: She repeatedly promoted the deal as secretary of state but then in 2015 said, “I did not work on TPP,” even though some leaked State Department cables show that her agency was involved in diplomatic discussions about the pact. Under pressure from her Democratic primary opponent, Bernie Sanders, Clinton announced in October that she now opposes the deal — and has disputed that she ever fully backed it in the first place.

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John Oliver buys $15 million of unpaid debt for $60,000. And then forgives it. Now there’s an idea. Unless I’m very mistaken, that means $1 million could forgive $250 million in debt. $10 million, you free $2.5 billion in debt. Well, quite a bit more, actually, because now we’d be talking wholesale. People raise a millon bucks for all sorts of purposes all the time. Know what I mean?

Someone get this properly organized in a fund, and why wouldn’t they (?!), means: You donate $1 and $250 in debt goes away. Donate $100 and $25,000 goes up in air. 100 people donate $100 each, $2,500,000 in debt is gone. I’m not the person to do it, but certainly somebody can?! (Do call me on my math if I missed a digit..). It’s crazy people like Bill Gates or Mark Zuckerberg are not doing this. Or even Janet Yellen. Not all that smart after all, I guess. $1 billion can buy off $250 billion in debt. Want to fight deflation?

Debt Buyers (John Oliver)

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How to make sure an economy and society cannot recover.

Taxes And Recession Slash Income Of Greek Households (Kath.)

The avalanche of new taxes that began this month will deal a devastating blow to household incomes, consumption and the prospects of the Greek economy in general. As the dozens of new measures are implemented, the market will also be forced to deal with the higher charges that will strengthen the lure of tax evasion. All this is expected to extend the recession and deter investment, while leading to more business shutdowns. Crucially, the disposable income of households will shrink anew due to the increase in taxation and the hikes in almost all indirect taxes and social security contributions.

Hundreds of thousands of families are cutting down on their basic expenses while many have run into debt over various obligations: For example, unpaid Public Power Corporation bills now total €2.7 billion. All that has resulted in major drop in retail spending. A consumer confidence survey carried out by Nielsen for the first quarter of the year shows that eight out of 10 Greeks are constantly attempting to reduce their household expenditure. Their main targets for cuts are going out for entertainment and food delivery, while they are buying cheaper and fewer groceries.

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JHK: “As you may know, Kunstler.com is currently under an aggressive Denial of Service (DoS) attack. My web and server technicians are working to get the website and blog back up and live soon (though it’s going to cost a pretty penny). In the meantime, here is today’s blog. Please share this with any of your friends so they don’t miss out.”

Nausea Rising (Jim Kunstler)

The people of the United States have real grievances with the way this country is being run. Last Friday’s job’s report was a humdinger: only 38,000 new jobs created in a country of over 300 million, with a whole new crop of job-seeking college grads just churned out of the diploma mills. I guess the national shortage of waiters and bartenders has finally come to an end. What’s required, of course, is a pretty stout restructuring of the US economy. And that should be understood to be a matter of national survival. We need to step way back on every kind of giantism currently afflicting us: giant agri-biz, giant commerce (Wal Mart etc.), giant banking, giant war-making, and giant government — this last item being so larded with incompetence on top of institutional entropy that it is literally a menace to American society.

The trend on future resources and capital availability is manifestly downward, and the obvious conclusion is the need to make this economy smaller and finer. The finer part of the deal means many more distributed tasks among the population, especially in farming and commerce operations that must be done at a local level. This means more Americans working on smaller farms and more Americans working in reconstructed Main Street business, both wholesale and retail. This would also necessarily lead to a shift out of the suburban clusterfuck and the rebuilding of ten thousand forsaken American towns and smaller cities.

For the moment, many demoralized Americans may feel more comfortable playing video games, eating on SNAP cards, and watching Trump fulminate on TV, but the horizon on that is limited too. Sooner or later they will have to become un-demoralized and do something else with their lives. The main reason I am so against the Hillary and Trump, and so ambivalent on Bernie is their inability to comprehend the scope of action actually required to avoid sheer cultural collapse.

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Completely crazy. Is Trump really the only person who can stop this? For the first time since the Nazi invasion of Soviet-occupied Poland began on 22 June 1941, German tanks will cross the country from west to east.

NATO Countries Begin Largest War Game In Eastern Europe Since Cold War (G.)

The largest war game in eastern Europe since the end of the cold war has started in Poland, as Nato and partner countries seek to mount a display of strength as a response to concerns about Russia’s assertiveness and actions. The 10-day military exercise, involving 31,000 troops and thousands of vehicles from 24 countries, has been welcomed among Nato’s allies in the region, though defence experts warn that any mishap could prompt an offensive reaction from Moscow. A defence attache at a European embassy in Warsaw said the “nightmare scenario” of the exercise, named Anaconda-2016, would be “a mishap, a miscalculation which the Russians construe, or choose to construe, as an offensive action”. Russian jets routinely breach Nordic countries’ airspace and in April they spectacularly “buzzed” the USS Donald Cook in the Baltic Sea.

The exercise, which US and Polish officials formally launched near Warsaw, is billed as a test of cooperation between allied commands and troops in responding to military, chemical and cyber threats. It represents the biggest movement of foreign allied troops in Poland in peace time. For the first time since the Nazi invasion of Soviet-occupied Poland began on 22 June 1941, German tanks will cross the country from west to east. Managed by Poland’s Lt Gen Marek Tomaszycki, the exercise includes 14,000 US troops, 12,000 Polish troops, 800 from Britain and others from non-Nato countries. Anaconda-2016 is a prelude to Nato’s summit in Warsaw on 8-9 July, which is expected to agree to position significant numbers of troops and equipment in Poland and the Baltic states.

It comes within weeks of the US switching on a powerful ballistic missile shield at Deveselu in Romania, as part of a “defence umbrella” that Washington says will stretch from Greenland to the Azores. Last month, building work began on a similar missile interception base at Redzikowo, a village in northern Poland. The exercise comes at a sensitive time for Poland’s military, following the sacking or forced retirement of a quarter of the country’s generals since the nationalist Law and Justice government came to power in October last year. So harsh have the cuts to the top brass been that the Polish armed forces recently found themselves unable to provide a general for Nato’s multinational command centre at Szczecin.

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Tell me, do I feel safe now? 100,000 years is a long time. No fault lines? Volcanic activity?

Finns To Bury Nuclear Waste In World’s Costliest Tomb (AFP)

Deep underground on a lush green island, Finland is preparing to bury its highly-radioactive nuclear waste for 100,000 years — sealing it up and maybe even throwing away the key. Tiny Olkiluoto, off Finland’s west coast, will become home to the world’s costliest and longest-lasting burial ground, a network of tunnels called Onkalo – Finnish for “The Hollow”. Countries have been wrestling with what to do with nuclear power’s dangerous by-products since the first plants were built in the 1950s. Most nations keep the waste above ground in temporary storage facilities but Onkalo is the first attempt to bury it for good. Starting in 2020, Finland plans to stow around 5,500 tons of nuclear waste in the tunnels, more than 420 metres (1,380 feet) below the Earth’s surface.

Already home to one of Finland’s two nuclear power plants, Olkiluoto is now the site of a tunnelling project set to cost up to €3.5 billion until the 2120s, when the vaults will be sealed for good. “This has required all sorts of new know-how,” said Ismo Aaltonen, chief geologist at nuclear waste manager Posiva, which got the green light to develop the site last year. The project began in 2004 with the establishment of a research facility to study the suitability of the bedrock. At the end of last year, the government issued a construction license for the encapsulation plant, effectively giving its final approval for the burial project to go ahead. At present, Onkalo consists of a twisting five-kilometre (three-mile) tunnel with three shafts for staff and ventilation. Eventually the nuclear warren will stretch 42 kilometres (26 miles).

[..] The waste is expected to have lost most of its radioactivity after a few hundred years, but engineers are planning for 100,000, just to be on the safe side. Spent nuclear rods will be placed in iron casts, then sealed into thick copper canisters and lowered into the tunnels. Each capsule will be surrounded with a buffer made of bentonite, a type of clay that will protect them from any shuddering in the surrounding rock and help stop water from seeping in. Clay blocks and more bentonite will fill the tunnels before they are sealed up.

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Long piece on bleaching by the Guardian. Depressing.

Great Barrier Reef: The Stench Of Death (G.)

It was the smell that really got to diver Richard Vevers. The smell of death on the reef. “I can’t even tell you how bad I smelt after the dive – the smell of millions of rotting animals.” Vevers is a former advertising executive and is now the chief executive of the Ocean Agency, a not-for-profit company he founded to raise awareness of environmental problems. After diving for 30 years in his spare time, he was compelled to combine his work and hobby when he was struck by the calamities faced by oceans around the world. Chief among them was coral bleaching, caused by climate change. His job these days is rather morbid. He travels the world documenting dead and dying coral reefs, sometimes gathering photographs just ahead of their death, too.

With the world now in the midst of the longest and probably worst global coral bleaching event in history, it’s boom time for Vevers. Even with all that experience, he’d never seen anything like the devastation he saw last month around Lizard Island in the northern third of Australia’s spectacular Great Barrier Reef. As part of a project documenting the global bleaching event, he had surveyed Lizard Island, which sits about 90km north of Cooktown in far north Queensland, when it was in full glorious health; then just as it started bleaching this year; then finally a few weeks after the bleaching began. “It was one of the most disgusting sights I’ve ever seen,” he says. “The hard corals were dead and covered in algae, looking like they’ve been dead for years. The soft corals were still dying and the flesh of the animals was decomposing and dripping off the reef structure.”

[..] When the coral dies, the entire ecosystem around it transforms. Fish that feed on the coral, use it as shelter, or nibble on the algae that grows among it die or move away. The bigger fish that feed on those fish disappear too. But the cascading effects don’t stop there. Birds that eat fish lose their energy source, and island plants that thrive on bird droppings can be depleted. And, of course, people who rely on reefs for food, income or shelter from waves – some half a billion people worldwide – lose their vital resource.

[..] What’s at stake here is the largest living structure in the world, and by far the largest coral reef system. The oft-repeated cliche is that it can be seen from space, which is not surprising given it stretches more than 2,300km in length and, between its almost 3,000 individual reefs, covers an area about the size of Germany. It is an underwater world of unimaginable scale. But it is up close that the Great Barrier Reef truly astounds. Among its waters live a dizzying array of colourful plants and animals. With 1,600 species of fish, 130 types of sharks and rays, and more than 30 species of whales and dolphins, it is one of the most complex ecosystems on the planet.


Coral off Lizard Island, bleached in March, and then dead and covered in seaweed in May. Photo: the Ocean Agency

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Mar 262016
 
 March 26, 2016  Posted by at 9:29 am Finance Tagged with: , , , , , , , , ,  1 Response »


Jack Delano Freight operations on the Indiana Harbor Belt railroad 1943

US Q4 GDP Rose 1.4% As Corporate Profits Plunged (ZH)
World Trade Collapses in Dollars, Languishes in Volume (WS)
Bank of Japan’s Latest PR Move: ‘Negative Rates in Five Minutes’ (WSJ)
Foreigners Dumped More Japanese Stocks This Week Than Ever Before (ZH)
Yuan’s Fall Drags Down Chinese Companies (WSJ)
Shanghai Rolls Out Tightening Measures To Cool Home Market (Reuters)
Affordable Housing Crisis Has Engulfed All Cities In Southern England (G.)
Radical Economic Ideas Grab Attention Amid Low-inflation Torpor (SMH)
Modern Monetary Theory Has Ardent Proponents (SMH)
Brazil Economic Woes Deepen Amid Political Crisis (WSJ)
The River: America’s 40-Year Hurt (BBC)
Hope Turns To Despair As Lesbos Camp Becomes Open-Air Prison (Ind.)

“The resilient consumer”. Sure.

US Q4 GDP Rose 1.4% As Corporate Profits Plunged (ZH)

While the final revision to Q4 2015 GDP was so irrelevant it was released on a holiday when every US-based market is closed, even the futures, it is nonetheless notable that according to the BEA in the final quarter of 2015 US GDP grew 1.4%, up from the 1.0% previously reported, and higher than the 1.0% consensus estimate matching the highest Q4 GDP forecast. The final Q4 GDP print was still well below the 2.0% annualized GDP growth reported in Q3.

 

The figure marks a slowdown from the 2.2% average pace in the first three quarters of 2015. For all of last year, the U.S. economy grew 2.4% matching the advance in 2014. The reason for the change was largely due to upwardly Personal Consumer Spending, which rose from a contribution of 1.38% to the annualized bottom line to 1.66%. In CAGR terms, personal consumption rose 2.4%, following the 3.0% increase in Q3, higher than the 2.0% previously estimated.

Stripping out inventories and trade, the two most volatile components of GDP, so-called final sales to domestic purchasers increased at a 1.7% rate, compared with a previously estimated 1.4% pace.  The rest of the GDP components were largely unchanged, with Fixed Investment adding 0.06% to the bottom line, up from 0.02% in the previous estimate, Private Inventories contracting fractionally more than previously estimated (-0.22% vs -0.14%), net trade subtracting 0.1% less from growth (-0.14% vs -0.25%), and finally government spending largely unchanged and hugging the unchanged line at 0.02%.

 

But while the “resilient consumer” once again carried the US economy in the fourth quarter, largely due to an estimated jump in spending on Transportation and Recreational services, which added an annualized $13 billion to the US economy vs the prior estimate, more disturbing was the drop in profits which we already knew courtesy of company reports and is known confirmed by the BEA whose GDP report also showed that corporate profits dropped in 2015 by the most in seven years. As Bloomberg writes, the earnings slump illustrates the limits of an economy struggling to gather steam at the start of this year. Some companies, encumbered by low commodities prices and sluggish foreign markets, are cutting back on investment while a firm labor market and low inflation encourage households to keep shopping.

Pre-tax earnings declined 7.8%, the most since the first quarter of 2011, after a 1.6% decrease in the previous three months. The estimate of nonfinancial corporate profits was reduced by a $20.8 billion settlement, considered a transfer to the government, between BP and the U.S. after the 2010 oil spill in the Gulf of Mexico. Profits in the U.S. dropped 3.1% in 2015, the most since 2008. Corporate earnings are being weighed down by weak productivity, rising labor costs and the plunge in energy prices. Economists at JPMorgan had expected a 9.5% drop in pre-tax earnings in the fourth quarter. “The pace of growth slowed as we ended 2015, though consumer spending is still the primary underpinning of this economic expansion,” Sam Bullard at Wells Fargo in Charlotte, North Carolina, said before the report. “Any pickup we might see is still likely going to be capped given the overall global picture.”

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Globalization is ending.

World Trade Collapses in Dollars, Languishes in Volume (WS)

The Merchandise World Trade Monitor by the CPB Netherlands Bureau for Economic Policy Analysis, a division of the Ministry of Economic Affairs, tracks global imports and exports in two measures: by volume and by unit price in US dollars. And the just released data for January was a doozie beneath the lackluster surface. The World Trade Monitor for January, as measured in seasonally adjusted volume, declined 0.4% from December and was up a measly 1.1% from January a year ago. While the sub-index for import volumes rose 3% from a year ago, export volumes fell 0.7%. This sort of “growth,” languishing between slightly negative and slightly positive has been the rule last year. The report added this about trade momentum:

“Regional outcomes were mixed. Both import and export momentum became more negative in the United States. Both became more positive in the Euro Area. Import momentum in emerging Asia rose further, whereas export momentum in emerging Asia has been negative for four consecutive months.” This is also what the world’s largest container carrier, Maersk Lines, and others forecast for 2016: a growth rate of about zero to 1% in terms of volume. So not exactly an endorsement of a booming global economy. But here’s the doozie: In terms of prices per unit expressed in US dollars, world trade dropped 3.8% in January from December and is down 12.1% from January a year ago, continuing a rout that started in June 2014. Not that the index was all that strong at the time, after having cascaded lower from its peak in May 2011.

If June 2014 sounds familiar as a recent high point, it’s because a lot of indices started heading south after that, including the price of oil, revenues of S&P 500 companies, total business revenues in the US…. That’s when the Fed was in the middle of tapering QE out of existence and folks realized that it would be gone soon. That’s when the dollar began to strengthen against other key currencies. Shortly after that, inventories of all kinds in the US began to bloat. Starting from that propitious month, the unit price index of world trade has plunged 23%. It’s now lower than it had been at the trough of the Financial Crisis. It hit the lowest level since March 2006:

This chart puts in perspective what Nils Andersen, the CEO of Danish conglomerate AP Møller-Maersk, which owns Maersk Lines, had said last month in an interview following the company’s dreary earnings report and guidance: “It is worse than in 2008.” But why the difference between the stagnation scenario in world trade in terms of volume and the total collapse of the index that measures world trade in unit prices in US dollars? The volume measure is a reflection of a languishing global economy. It says that global trade may be sick, but it’s not collapsing. It’s worse than it was in 2011. This sort of thing was never part of the rosy scenario. But now it’s here.

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‘Explaining’ what they don’t understand themselves.

Bank of Japan’s Latest PR Move: ‘Negative Rates in Five Minutes’ (WSJ)

The Bank of Japan launched a charm offensive Friday to win over spooked members of the public who have reacted negatively to negative interest rates. The central bank issued a booklet offering a crash course in the basic implications of negative rates, a move that demonstrates the strength of unease created by the introduction of a policy in a nation largely unfamiliar with the concept behind it. Written in a question-and-answer format and in a somewhat casual Japanese, the three-page booklet aims to explain negative rates “in five minutes” by covering 18 issues that have grabbed public attention. Negative rates have become a political hot potato ahead of July’s national elections, with opposition lawmakers accusing the central bank of creating anxiety among consumers. Some ruling party politicians, perhaps feeling uncomfortable about the prospect of explaining the policy to their constituents, are also feeling the jitters.

Prime Minister Shinzo Abe acknowledged Thursday that negative rates have made households nervous and it will likely take some time before people understand them. The Bank of Japan decided to start charging interest on some deposits held by commercial banks at the central bank in January. The policy is part of broader efforts to defeat deflation and create a stronger economy, but the central bank was ill-prepared for the public backlash the policy generated. One of the most common concerns over the policy is whether individuals with regular bank accounts will be charged interest on their deposits at the commercial banks. Opposition lawmakers have frequently quizzed BOJ Gov. Haruhiko Kuroda on this issue in parliament.

“Although the measure is called negative rates, it only involves imposing negative rates on a part of the money deposited at the BOJ by banks,” the booklet says. “Individuals’ deposits are different.” While addressing concerns over the new policy, the central bank also tries to convey the message that Japan must get rid of deflation, a negative cycle of price falls, adding that it has taken the right steps to do just that. “If prices don’t rise because of deflation, this means companies’ revenues don’t increase, and that’s why salaries don’t rise,” the booklet says. Since company earnings have improved a lot during the past three years of monetary easing, firms have started increasing basic pay, it says, adding that salaries will keep rising each year if deflation is overcome.

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“..weakness means weak Japanese economy means sell Japanese assets.. and we will soon see capital controls in the world’s largest debtor nation…”

Foreigners Dumped More Japanese Stocks This Week Than Ever Before (ZH)

USDJPY just had its best week in 2 months, funding bullish momentum and carry trades around the world in the midst of dismal economic data everywhere and tumbling earnings expectations. This "bullish" Yen strength, however, amid China's biggest weekly devaluation in almost 3 months, was ironically driven by drastic investment outflowsrecord sales of Japanese stocks by foreigners (sell JPY), and record purchases of foreign bonds by Japanese investors (sell JPY). Sooner, rather than later, it is obvious that the investment outflows will dominate the carry trades (see Thursday and Friday) and Kuroda and Abe will have a major problem.

Yen was dumped all week…

 

Which provided just enough juice for carry trades to lift Japanese stocks (despite the weakness in data and China's biggest weekly Yuan devaluation in almost 3 months)

 

But notice that the last two days have seen Japanese stocks decouple from USDJPY, perhaps the first glimpse of the investment outflows overwhelming any casino-based carry trades flows.

And this is why… Foreigners sold a record amount of Japanese stocks last week… (implicitly meansing Yen was sold)

 

And Japanese investors fled the insanity of record low yields in JGBs, buying a record amount of foreign bonds last week (implicitly selling Yen again)…

 

So the Yen weakness – which was so bullishly supportive of global equity markets via carry – was in fact a signal of massive investor anxiety fleeing the sinking ship. Peter Pan-ic indeed.

Abe and Kuroda will soon face a major problem as a weaker Yen will signal the exact opposite trade that has been so active since 2012 – weakness means weak Japanese economy means sell Japanese assets.. and we will soon see capital controls in the world's largest debtor nation.

And remember – the devaluation of The Yen has done nothing – NOTHING – to improve exports for Japan…

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It’s all about the dollar.

Yuan’s Fall Drags Down Chinese Companies (WSJ)

A weaker Chinese currency has roiled global markets and heightened worries about the state of the world’s second-largest economy. Now, some Chinese companies are reporting they’ve taken a hit from a depreciating yuan. The yuan fell 5% against the U.S. dollar in 2015, plunging after China’s central bank surprisingly devalued the currency in mid-August. A weaker currency helps the country’s exporters but hurts Chinese companies that pay for raw material in U.S. dollars or need to pay off loans in U.S. dollars. Among those negatively affected are firms that source from outside China, such as milk or food companies, as well as real estate companies that hold a lot of dollar-denominated debt, says Herald van der Linde at HSBC.

This was the case with Hengan International, one of the leading makers of tissue paper in China. The company said in a statement it saw $55.3 million in foreign-exchange losses in 2015 because it pays for raw material in U.S. dollars, holds U.S.-denominated debt and has Hong Kong-based yuan-denominated assets, which dropped in value. This contributed to a decline in tissue sales, it said. Weaker currencies also hurt China’s heavily-indebted real-estate developers. Shanghai-based property developer Shui On Land reported its 2015 profit dropped to 1.77 billion yuan ($272 million) from 2.49 billion yuan ($382 million) a year earlier in large part due to the depreciation of the company’s USD- and HKD-denominated debt. Then there are companies that suffer losses from selling to countries whose currencies have weakened.

Sourcing and logistics giant Li&Fung said 2015 revenue dropped 2.4% on year. The main reason? Foreign-exchange losses from weak European and Asian currencies, it said, since 38% of the company’s business is in non-U.S. markets but it accounts in U.S. dollars. In order to tackle the problem, some companies are looking to shed yuan — or at least get it out of the country. Hengan, the tissue company, has remitted the equivalent of several billion Hong Kong dollars from mainland China to Hong Kong in 2015, and another HK$2 billion in the first quarter of this year, said CFO Vincent Loo in Hong Kong. It is also negotiating with sources to pay them in less time — from 30 to 60 days rather than 90 — just in case the yuan continues to fall.

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Beijing’s ‘vision’ is now limited to short term only.

Shanghai Rolls Out Tightening Measures To Cool Home Market (Reuters)

Municipal authorities in Shanghai tightened mortgage down payment requirements for second home purchases on Friday, in a move to cool an overheating property market and reduce fears of a bubble. Senior Chinese leaders raised concerns about the country’s overheated housing market during an annual parliament meeting this month, and Shanghai is the biggest city to take action in the wake of the National People’s Congress, which ended a week ago. Under the new rules, home buyers will need to put down 50-70% of the price of a second home, compared to 40% previously, to qualify for a mortgage. “The new measure will have a big impact on market sentiment on both the primary and secondary market; new launches being sold out within one, two hours will not happen again,” said Joe Zhou, head of East China research at real estate services firm Jones Lang LaSalle.

With the new rules, Shanghai also made it harder for non-residents to buy homes in the city, according to a statement issued by the local government. Potential buyers who do not hold local residence permits, or hukou, must have paid social insurance or taxes in Shanghai for at least five years before they can purchase property. Previously the requirement was two years. Shanghai will also increase the supply of small- and medium-sized homes and crack down on property financing by informal financial institutions. Shanghai home prices gained 20.6% in February from a year ago, posting the second biggest gain in the country after the southern city of Shenzhen, where prices soared 56.9%, despite slowing economic growth.

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A world full of housing bubbles. Haven’t we understood how dangerous that is?

Affordable Housing Crisis Has Engulfed All Cities In Southern England (G.)

There is no longer a city in the south of England where house prices are less than seven and a half times average local incomes, according to analysis by Lloyds Bank that reveals how the home affordability crisis now stretches far beyond London. “The housing affordability gap has widened to its worst level in eight years,” said the Lloyds analysis, noting that the last time prices were so high was at the very top of the boom in 2008, just before the financial crisis struck. The Lloyds analysis is unique in that it compares local house prices with local earnings rather than national averages. On this measure, the worst house prices are not in London but in other parts of the south-east. Oxford is again identified as the least affordable city in the UK, with average prices at 10.68 times local earnings.

Winchester is a close second at 10.54, with London third at 10.06. Cambridge, Brighton and Bath all have prices that are now nearly 10 times local earnings, while cities such as Bristol and Southampton have prices close to eight times earnings. Wage growth has fallen far behind the rise in house prices, said Lloyds, with affordability worsening for the third successive year. The average home in a city in the UK now costs 6.6 times average local earnings, up from 6.2 last year. In the 1950s and 1960s, buyers could typically find homes with mortgages of three to four times their income. But the Lloyds figures show that there is now just one city in the UK that fits that profile: Derry in Northern Ireland. House prices in the city currently fetch 3.81 times local incomes.

While most of the “most affordable” cities in the Lloyds rankings are in the north, Scotland and Northern Ireland, buyers will still be stretched to afford a home from the local salaries on offer. Hull is widely regarded as a low house price area, yet local residents face having to pay 5.11 times average local incomes to buy a home. Meanwhile, York has joined the ranks of cities in the south in the unaffordability tables, with prices at 7.5 times incomes.

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When crazy ‘conventional’ ideas fail…

Radical Economic Ideas Grab Attention Amid Low-inflation Torpor (SMH)

Our economic guardians at Federal Treasury and the Reserve Bank sound increasingly uneasy about some policy choices being made offshore. Since the global financial crisis, quantitative easing has pumped trillions of dollars into major economies with limited success. More recently central banks in Europe and Japan have opted for negative interest rates in a bid to kick-start growth. On Tuesday the Treasury Secretary, John Fraser, pointed out that we’ve now been in an “experimental stage” with monetary policy for more than seven years. “A range of different interventions have been tried with, at least to date, mixed results,” he said. “Sadly, we will have to await the passage of years before we can pass final judgment.” What is clear, warned Fraser, is that these unusual policies “have had a pervasive and frankly quite worrying impact on the pricing of financial risk.”

Earlier this month the Reserve’s deputy governor, Philip Lowe, said it was “very rare” for central banks to worry that inflation is too low. “Yet today, we hear this concern quite often, and the ‘unconventional’ has almost become conventional,” he said. Lowe warned the abnormal monetary policies being adopted in some countries were “a complication for us” because they put upward pressure on exchange rate. But in a world where traditional economic remedies are proving ineffective a swag of other unorthodox policy suggestions are getting a hearing. One controversial option being canvassed by experts is for central banks to deliver “helicopter drops” of cash directly to citizens’ bank accounts in the hope they will spend it and revive growth. Even more radical is a proposal for governments to mandate an across-the-board pay rise for workers.

Olivier Blanchard, a former chief economist at the IMF, and Adam Posen, president of the Peterson Institute for International Economics, recently recommended the Japanese government try this approach to boost growth. The Bank of England’s chief economist, Andy Haldane, raised eyebrows last September when he argued abandoning cash altogether would make it easier for central banks to manage downturns. He warned that in future it might be necessary for central banks to opt for negative interest rates when depositors are charged for putting their money in the bank in a bid to encourage spending. One problem with that strategy, however, is that people are likely to convert deposits into cash. Eliminating cash and replacing it with a government-backed digital currency would remove that option. “This would preserve the social convention of a state-issued unit of account and medium of exchange… But it would allow negative interest rates to be levied on currency easily and speedily,” Haldane said.

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A second part from the article above.

Modern Monetary Theory Has Ardent Proponents (SMH)

As central banks struggle to revive growth, attention has shifted to fiscal policy the way governments use taxation and spending to influence the economy. Even the hard-heads at the IM have advised governments, including Australia’s, to spend more especially on infrastructure. The fund’s most recent assessment of our economy said “raising public investment (financed by borrowing, thus reducing the pace of deficit reduction) would support aggregate demand, take pressure off monetary policy, and insure against downside growth risks.” Amid these debates about fiscal policy, a radical school of thought called Modern Monetary Theory, or MMT, has gained more prominence. Proponents of this theory have been on the periphery of mainstream economics for more than two decades but their profile has been raised by this year’s US presidential race.

Academic economist Stephanie Kelton , a leading advocate of MMT, is an adviser to presidential hopeful, Senator Bernie Sanders. Kelton calls herself a deficit “owl” rather than a deficit hawk or dove. The hawks, of course, have a straightforward view of government finances: deficits are bad. The doves say deficits are necessary when economic times are tough but they should be balanced by surpluses over time. But deficit owls like Kelton have a far more radical take: deficits don’t matter. The starting point for Modern Monetary Theory is that a currency issuing government can keep printing and spending money but never go broke, so long as it doesn’t borrow in a foreign currency. The Australian Commonwealth, for example, will never run out of Australian dollars because it is a monopoly issuer of that currency.

It can always create the money it needs and, therefore, will always be able to service debts. The MMTers claim that in the modern era of floating exchange rates and deregulated financial markets, governments can, and should, run deficits whenever they are needed. There is a strong moral case for this: in a modern economy, there’s no good reason to have unemployed labour or capital. For the MMTers mass unemployment is a great evil and its daily, human cost dwarfs other economic challenges. They acknowledge there are limits to government spending. Resources in the real economy can be constrained and taxes are an essential tool to ensure demand for the currency and to cool the economy if it overheats. But there’s plenty of scope for governments to print and spend money without causing inflation or triggering a financial crisis. MMTers say sophisticated modern economies like the US and Australia are in no danger of the hyper-inflation which plagued Zimbabwe last decade or Germany’s Weimar Republic in the 1930s.

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Barely functioning, politically nor economically.

Brazil Economic Woes Deepen Amid Political Crisis (WSJ)

Brazil’s economic crisis is as bad as its political one. Latin America’s biggest economy appears headed for one of its worst recessions ever. It stalled in 2014, shrank 3.8% last year and now faces a similar contraction this year. Unemployment rose to 9.5% on Thursday as wages fell 2.4%, both trends forecast to worsen. One in five young Brazilians is out of work, and Goldman Sachs says Brazil may be facing a depression. The deteriorating outlook forms a dire backdrop for Brazil’s political straits. President Dilma Rousseff, deeply unpopular, faces impeachment proceedings in Congress amid a widening corruption scandal surrounding the state oil company, Petróbras. That situation is consuming so much energy from policy makers and Congress that the economic downturn isn’t getting the attention it needs, observers say.

“The gravity of the situation is this: We have the kind of problems where if nothing is done, things will definitely get worse,” said Marcos Lisboa, a former finance ministry official who is now president of the Insper business school in São Paulo. “Pretty soon we could be talking about the solvency of the federal government.” Brazil fended off the results of the 2008 global downturn with stimulus spending, and is trying to again inject money into the economy to spur demand. In January, the Rousseff administration unveiled some $20 billion of subsidized loans from state-owned banks such as the BNDES to boost agriculture and builders of big infrastructure projects.

But this time, the country has less leeway to fund stimulus measures. Brazil’s tax take is diminishing, and the Planning Ministry said Tuesday the government needs to cut around $5.9 billion of spending to meet its budget target. On Thursday, Finance Minister Nelson Barbosa asked Congress to loosen the target to allow a bigger deficit in 2016. Some investors say stimulus policies such as cheap credits from state banks haven’t done much long-term good, because they produced big deficits and the money was often poorly invested in money-losing dams and refineries.

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“..very few people understood that an epochal change had taken place in the American economy. GDP would grow. Income wouldn’t.”

The River: America’s 40-Year Hurt (BBC)

Bruce Springsteen is coming to London with the River tour. At £170 for the cheapest pair, I can’t afford to see the Boss any more, even if my body could handle standing on Wembley Stadium’s pitch for three-and-a-half-hours in an early June drizzle. It’s interesting that Springsteen is re-exploring The River album again. Whenever the anger that simmers in America erupts and reminds the rest of the world that the country is troubled, he seems to be the cultural figure whose work offers an explanation. In late 1986, midway through Ronald Reagan’s second term of office, with the twin scourges of Aids and crack racing through American cities and New Deal ideas of economic and social fairness consumed by the Bonfire of the Vanities taking place on Wall Street, Britain’s Guardian newspaper ran an editorial that said, “for good or ill, [America] is becoming a much more foreign land”.

I had just celebrated my first anniversary as an ex-pat in London and wrote an essay trying to explain what America was like away from the places Guardian readers knew. I described the massive population dislocations that followed the long recession that had begun in the mid-70s. I referenced Springsteen. The piece ran under the headline “Torn in the USA”. Now America is going through even worse ructions. But there is nothing fundamentally new. What we are seeing is the continuation of a disintegration that began forty years ago around the time Springsteen was writing the title song of the album. The River, which came out in 1980, was very much about guys trying to kick back at father time and stave off the inevitable arrival of life’s responsibilities – wife, kids, job, mortgage – and the equally probable onset of life’s disappointments in wife, kids, job, mortgage, and in oneself.

The title track is a long, mournful story about that process and the narrator’s desire to reconnect to the person he was when younger and full of hope. “I come from down in the valley / Where mister, when you’re young / They bring you up to do/like your daddy done…” The key point is being brought up to be like your father. Work the same job, carry yourself in the same way, do the right thing. In the song this tie that binds is seen as restricting the choices you can make in life. Your daddy worked in a steel mill, you will work in a steel mill, or on the line at River Rouge, or down a mine. Today, what wouldn’t many of us give for the economic and social stability that gave resonance to Springsteen’s lyrics? A union job, 30 years of work, a pension. Sounds sweet. The narrator of the song goes on to tell us, “I got a job working construction at the Johnstown company / but lately there ain’t been much work on account of the economy.”

Springsteen based the song on the struggle of his brother-in-law to stay employed during the bleak days after the Oil Shock of 1973: a half-decade of inflation and economic stagnation. At the time this stagflation was seen as a cyclical event, the economy would rebound soon. It would be boom time for all. The economy did rebound, but then went into recession in 1982, and rebounded and went into recession at regular intervals, until the near-death experience of 2007/2008. But very few people understood that an epochal change had taken place in the American economy. GDP would grow. Income wouldn’t. Median salaried workers’ wages stagnated. Those working low-wage jobs saw their incomes decline. As for job security, a perfect storm of automation, declining union power, and free-trade agreements put an end to that.

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All the time I’m thinking someone must stand up and say ‘till here and no further’. But instead, Europe tumbles to new lows on a daily basis.

Hope Turns To Despair As Lesbos Camp Becomes Open-Air Prison (Ind.)

Even before it became a holding pen, Moria was a pretty poor registration centre, unable to provide basic facilities and painfully slow to process the thousands of refugees and migrants who arrive on the shores of Lesbos every week. But since midnight on Sunday, when the new EU-Turkey migrant deal came into force, refugees have been picked up by the coastguard and transported directly to Moria by the Greek authorities. The camp has become an open-air prison, a compound of temporary buildings on a hill overlooking the coast of this island, not far from Turkey’s Mediterranean coast. It is to here that all arrivals must wait for the news their long struggle to reach Europe will almost certainly get them no further than the Greek islands.

They will be returned to Turkey, which the EU has now declared a safe country, in its bid to stem the biggest refugee crisis since the Second World War. The lightning fast implementation of the deal, signed last Friday, has stretched to the limit the capacity of the Greek government, which has no means to process the asylum claims that everyone who arrives has the right to make. Those who came looking for peace and a better life have instead found themselves locked up, and handed detention papers. In response, aid agencies have dropped out of their involvement at the centre one by one, refusing to be associated with the detention of migrants – among whom are more than 100 unaccompanied children. Oxfam this week said the development was “an offence” to Europe’s values.

“They have told us nothing,” says Naima Abdullah, 28, speaking through the chain link fence, her four-year-old daughter Mirna by her side. She paid $2,000 for herself, Mirna, and her one-month-old baby to cross the sea from Turkey after fleeing air strikes in rural Damascus three months ago. She arrived on Sunday, in the first boats after the deal came into force. But four days later, she still hadn’t been given an opportunity to register a claim for asylum. And as the numbers grow, observers worry the only possible outcome will be the mass expulsions Europe has promised to avoid. Nadine Abuasil, 25, said she came to Lesbos because life in Turkey since she fled Deraa in Syria a month ago was not worth living. Her family were blackmailed for money by local gangs, and there was no work in a country that is expensive to live in. “We cannot go back to Turkey,” she says simply.

She and her 23-year-old brother arrived on Sunday after a five hour boat journey during which two men died. They had apparently suffocated. She points to the ground of the detention centre. “We would rather die here than in Turkey.” Her brother, Mohammed, was no less emphatic when asked what he’d do if he was forced to return. “I don’t speak English,” he says. “But: kill myself, kill myself.” The deal has been decried by human rights groups and legal experts who question if Turkey can be considered a safe third country for the forcible return of migrants, and if Greece, which has floundered under the pressure of more than one million refugees arrivals in the past year, is capable of processing asylum claims – even with promised outside help.

“Greece has effectively been asked to build an asylum system in two weeks,” says Camino Mortera, a research fellow for the Centre for European Reform and a specialist in EU law. “The EU claims there won’t be returns en masse but if you are not able to process people in a regulated fashion, how else are they going to deal with this?”

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Oct 062015
 
 October 6, 2015  Posted by at 9:18 am Finance Tagged with: , , , , , , , , , ,  4 Responses »


NPC US Geological Survey fire, F Street NW, Washington DC 1913

In America, It’s Expensive To Be Poor (Economist)
Morgan Stanley Predicts Up To A 25% Collapse in Q3 FICC Revenue (Zero Hedge)
Bill Gross Sees Stocks Plunge Another 10%, Urges Flight to Cash (Bloomberg)
Treasury Auction Sees US Join 0% Club First Time Ever (FT)
Big US Firms Hold $2.1 Trillion Overseas To Avoid Taxes (Reuters)
Lower Interest Rates Hurt Consumers: Deutsche Bank (Bloomberg)
Bernanke Says ‘Not Obvious’ Economy Can Handle Interest Rates At 1% (MarketWatch)
UK Finance Chiefs Signal Sharp Fall In Risk Appetite (FT)
Commodity Collapse Has More to Go as Goldman to Citi See Losses (Bloomberg)
Emerging Market ETF Outflows Double as Losses Hit $12.4 Billion (Bloomberg)
China’s Slowing Demand Burns Gas Giants (WSJ)
BP’s Record Oil Spill Settlement Rises to More Than $20 Billion (Bloomberg)
Glencore Urges Rivals To Shut Lossmaking Mines (FT)
Norway Seen Tapping Its Wealth Fund to Ward Off Oil Slump Risks (Bloomberg)
South East Asia Economic Woes Test Built-Up Reserves, Defenses (Reuters)
Samsung Seen Tapping $55 Billion Cash Pile for Share Buyback (Bloomberg)
German Factory Orders Unexpectedly Fall in Sign of Economic Risk (Bloomberg)
Top EU Court Says US-EU Data Transfer Deal Is Invalid (Reuters)
US, Japan And 10 Countries Strike Pacific Trade Deal (FT)
TPP Trade Deal Text Won’t Be Made Public For Four Years (Ind.)
Air France Workers Rip Shirts From Executives After 2,900 Jobs Cut (Guardian)
Nearly A Third Of World’s Cacti Face Extinction (Guardian)

“In 2014 nearly half of American households said they could not cover an unexpected $400 expense without borrowing or selling something..”

In America, It’s Expensive To Be Poor (Economist)

When Ken Martin, a hat-seller, pays his monthly child-support bill, he uses a money order rather than writing a cheque. Money orders, he says, carry no risk of going overdrawn, which would incur a $40 bank fee. They cost $7 at the bank. At the post office they are only $1.25 but getting there is inconvenient. Despite this, while he was recently homeless, Mr Martin preferred to sleep on the streets with hundreds of dollars in cash—the result of missing closing time at the post office—rather than risk incurring the overdraft fee. The hefty charge, he says, “would kill me”. Life is expensive for America’s poor, with financial services the primary culprit, something that also afflicts migrants sending money home (see article). Mr Martin at least has a bank account.

Some 8% of American households—and nearly one in three whose income is less than $15,000 a year—do not (see chart). More than half of this group say banking is too expensive for them. Many cannot maintain the minimum balance necessary to avoid monthly fees; for others, the risk of being walloped with unexpected fees looms too large. Doing without banks makes life costlier, but in a routine way. Cashing a pay cheque at a credit union or similar outlet typically costs 2-5% of the cheque’s value. The unbanked often end up paying two sets of fees—one to turn their pay cheque into cash, another to turn their cash into a money order—says Joe Valenti of the Centre for American Progress, a left-leaning think-tank.

In 2008 the Brookings Institution, another think-tank, estimated that such fees can accumulate to $40,000 over the career of a full-time worker. Pre-paid debit cards are growing in popularity as an alternative to bank accounts. The Mercator Advisory Group, a consultancy, estimates that deposits on such cards rose by 5% to $570 billion in 2014. Though receiving wages or benefits on pre-paid cards is cheaper than cashing cheques, such cards typically charge plenty of other fees. Many states issue their own pre-paid cards to dispense welfare payments. As a result, those who do not live near the right bank lose out, either from ATM withdrawal charges or from a long trek to make a withdrawal. Other terms can rankle; in Indiana, welfare cards allow only one free ATM withdrawal a month. If claimants check their balance at a machine it costs 40 cents. (Kansas recently abandoned, at the last minute, a plan to limit cash withdrawals to $25 a day, which would have required many costly trips to the cashpoint.)

To access credit, the poor typically rely on high-cost payday lenders. In 2013 the median such loan was $350, lasted two weeks and carried a charge of $15 per $100 borrowed—an interest rate of 322% (a typical credit card charges 15%). Nearly half those who borrowed using payday loans did so more than ten times in 2013, with the median borrower paying $458 in fees. In 2014 nearly half of American households said they could not cover an unexpected $400 expense without borrowing or selling something; 2% said this would cause them to resort to payday lending.

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Fixed Income, Currency and Commodity.

Morgan Stanley Predicts Up To A 25% Collapse in Q3 FICC Revenue (Zero Hedge)

With the third quarter earnings season on deck, in which S&P500 EPS are now expected to post a 5.1% decline (versus a forecast -1.0% decline as of three months ago), it is common knowledge that the biggest culprit will be Energy companies, currently expected to suffer a 65% Y/Y collapse in EPS. What is less known is that the earnings weakness is far more widespread than just the Energy sector, touching on more than half of all sectors with Materials, Industrials, Staples, Utilities and even Info Tech all expected to see EPS declines: this despite what will likely be a record high in stock buyback activity. However, of all sectors the one which may pose the biggest surprise to investors is financials: it is here that Q3 (and Q4) earnings estimates have hardly budged, and as of September 30 are expected to rise by 10% compared to Q3 2014.

This may prove to be a stretch according to Morgan Stanley whose Huw van Steenis is seeing nothing short of a bloodbath in banking revenues, with the traditionally strongest performer, Fixed Income, Currency and Commodity set for a tumble as much as 25%, to wit: “we think FICC may be down 10- 25% YoY (FX up, Rates sluggish, Credit soft), Equities marginally up but IBD also down 10-20%. The reason for this: the double whammy of the ongoing commodity crunch as well as the collapse in fixed income trading, coupled with the lack of major moves across the FX space where the biggest beneficiary, now that bank manipulation cartels have been put out of business, are Virtu’s algos.

To be sure, if Jefferies – which as we previously reported suffered one of its worst FICC quarters in history, and actually posted negative revenues after massive writedown on energy holdings in its prop book – is any indication, Morgan Stanley’s Q3 forecast may be overly optimistic. For the full 2015, the picture hardly gets any better: “In 2015, we see industry revenues going sideways – slowing after a strong Q1. Overall we see FICC down ~3% on 2014, Equities up ~8% and IBD down ~6%. Overall we expect top line revenues to be flattish in 2015. In constant currency, it would be a little better for Europeans. But below this, there is a huge competitive battle afoot as all firms vie for share to drive profits on the cost base.”

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Why stop at 10%?

Bill Gross Sees Stocks Plunge Another 10%, Urges Flight to Cash (Bloomberg)

Bill Gross, who in January predicted that many asset classes would end the year lower, said U.S. equities have another 10% to fall and investors should sit out the current volatility in cash. The whipsaw market reaction to the lackluster U.S. jobs report last week shows that markets, especially stocks, high-yield bonds and some emerging market debt, are trading like a casino, Gross said in an interview on Friday. He was speaking from a cruise ship which had taken shelter near New York City amid stormy weather over the Atlantic. Gross, who earlier made prescient calls on German bunds and Chinese equities, said U.S. stocks will drop another 10% because economic conditions don’t support a rally like in 2013, when corporate profits were going up.

Today they are flat-lining and low commodity prices are hurting energy companies, said the manager of the $1.4 billion Janus Global Unconstrained Bond Fund. “More negative numbers lie ahead and if you define a bear market by a 20% correction, at some point – that’s 6 to 12 months – we’ll have a classic definition of a bear market, meaning another 10% downside,” he said. Just as New York City was the safe harbor for Hurricane Joaquin, Gross said, cash is the best bet until investors get a better view at what the Federal Reserve and the economy are going to do. “Cash doesn’t yield anything but it doesn’t lose anything,’’ so sitting it out and making 25 to 50 basis points in commercial paper compared to 4% to 5% in risk assets is not that much of a penalty, he said. “Investors need cold water splashed on their face and sit out the dance.”

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Bottom. Race.

Treasury Auction Sees US Join 0% Club First Time Ever (FT)

For the first time ever, investors on Monday parked cash for three months at the US Treasury in return for a yield of 0%. The $21bn sale of zero-yielding three-month Treasury bills brings the US closer into line with its rich-world peers. Finland, Germany, France, Switzerland and Japan have all auctioned five-year debt offering investors negative yields. As Alberto Gallo at RBS said in February, “negative yielding bonds are the fastest growing asset class in Europe”. Demand for the US issue was the highest since June, reflecting belief — stoked by Friday’s weak jobs report — that the Federal Reserve will keep interest rates at basement levels throughout 2015. David Bianco, strategist at Deutsche Bank, said the window for a “2015 lift-off” has been slammed shut. “We see a better chance of landing men on Mars before a full normalisation of nominal and real interest rates,” he wrote.

US Treasury debt is a haven asset, attracting hordes of investors whenever there is a flight to safety. Monday’s auction, however, occurred alongside the S&P 500 rallying 1.8%, a fifth straight gain. Also on Monday, the US auctioned six-month bills yielding 0.065%, the lowest in 11 months. The zero-yielding bond was anticipated in the secondary market, where investors trade outstanding bonds. The yield on bonds maturing on January 8 turned negative on September 21 and now yield -0.008%. In the swaps market, the chances that the Fed will lift rates at its October 28 meeting are just 10%. Just before the last meeting, the odds of a lift were placed at one-in-three. Before the financial crisis, three-month Treasury paper routinely paid investors more than 4%. But yields at the weekly auctions have been less than 0.2% at every auction since April 2009, reflecting the Fed’s suppression of interest rates. Until Monday the record low was 0.005%.

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All legal. “..would collectively owe an estimated $620 billion in U.S. taxes if they repatriated the funds..”

Big US Firms Hold $2.1 Trillion Overseas To Avoid Taxes (Reuters)

The 500 largest American companies hold more than $2.1 trillion in accumulated profits offshore to avoid U.S. taxes and would collectively owe an estimated $620 billion in U.S. taxes if they repatriated the funds, according to a study released on Tuesday. The study, by two left-leaning non-profit groups, found that nearly three-quarters of the firms on the Fortune 500 list of biggest American companies by gross revenue operate tax haven subsidiaries in countries like Bermuda, Ireland, Luxembourg and the Netherlands. The Center for Tax Justice and the U.S. Public Interest Research Group Education Fund used the companies’ own financial filings with the Securities and Exchange Commission to reach their conclusions.

Technology firm Apple was holding $181.1 billion offshore, more than any other U.S. company, and would owe an estimated $59.2 billion in U.S. taxes if it tried to bring the money back to the United States from its three overseas tax havens, the study said. The conglomerate General Electric has booked $119 billion offshore in 18 tax havens, software firm Microsoft is holding $108.3 billion in five tax haven subsidiaries and drug company Pfizer is holding $74 billion in 151 subsidiaries, the study said. “At least 358 companies, nearly 72% of the Fortune 500, operate subsidiaries in tax haven jurisdictions as of the end of 2014,” the study said. “All told these 358 companies maintain at least 7,622 tax haven subsidiaries.”

Fortune 500 companies hold more than $2.1 trillion in accumulated profits offshore to avoid taxes, with just 30 of the firms accounting for $1.4 trillion of that amount, or 65%, the study found. Fifty-seven of the companies disclosed that they would expect to pay a combined $184.4 billion in additional U.S. taxes if their profits were not held offshore. Their filings indicated they were paying about 6% in taxes overseas, compared to a 35% U.S. corporate tax rate, it said.

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You don’t say…

Lower Interest Rates Hurt Consumers: Deutsche Bank (Bloomberg)

Central banks the world over have reduced interest rates more than 500 times since the collapse of Lehman Brothers in 2008. But a crucial part of their thesis on how lower rates are supposed to help spur economic activity may be off the mark, according to strategists at Deutsche Bank. Cutting interest rates in response to a deteriorating outlook is thought to work through a variety of channels to help support the economy. Lower rates are supposed to encourage households to borrow and businesses to invest, while ceteris paribus, the softening in the domestic currency that accompanies a reduction in rates also makes the country’s goods and services more competitive on the global stage.

Most questions raised about the broken transmission mechanism from central bank accommodation to the real economy have centered on the efficacy of quantitative easing. But Deutsche’s team, led by chief global strategist Bankim “Binky” Chadha, contends that the commonly accepted link between traditional stimulus and household spending doesn’t have the net effect monetary policymakers think it does. This assertion comes about as a byproduct of the strategists’ investigation into what drives the U.S. household savings rate, which has largely been on the decline for a number of decades.

First, the strategists make the inference that the purpose of household savings is to accumulate wealth. If this holds, then it logically follows that in the event of a faster-than-expected increase in wealth, households will feel less of a need to save because they’ve made progress in collecting a sufficient amount of assets that allows them to enjoy their retirement, pass it down to their children, and so on. Chadha & Co. argue that wealth is therefore the driver of the U.S. savings rate. As this rises, the savings rate tends to fall: “The savings rate has been very strongly negatively correlated (-86%) with the value of gross assets scaled by the size of the economy, i.e., the ratio of household assets to nominal GDP which we use as our proxy for wealth, over the last 65 years,” wrote Chadha.

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So it’s on life-support.

Bernanke Says ‘Not Obvious’ Economy Can Handle Interest Rates At 1% (MarketWatch)

Former Fed Chairman Ben Bernanke said Monday that he was not sure the economy could handle four quarter-point rate hikes. Some economists and Fed officials argue that the U.S. central bank should hike rates now to anticipate inflation. That argument assumes the Fed can raise rates 100 basis points and it wouldn’t hurt anything, Bernanke said. ”That is not obvious, I don’t think everybody would agree to that,” he added in an interview with CNBC. Higher rates could “kill U.S. exports with a very strong dollar,” he said. Bernanke said the “mediocre” September employment report is a “negative” for the U.S. central bank’s plan to begin hiking rates in 2015, as a strengthening labor market was the key conditions for the Fed to be confident inflation was moving higher.

Bernanke said he would not second-guess Fed Chairwoman Janet Yellen, saying only that his successor faced “tough” calls. He said the two do not speak on the phone. Bernanke said interest rates at zero was not “radically easy” policy stance as some have suggested. He said he did not take seriously arguments that zero rates was creating an uncertain environment was holding down business investment Bernanke defended his policies, noting the steady decline in the unemployment rate in recent years. He said that the slower overall pace of GDP since the Great Recession was due to a downturn in productivity and other issues outside the purview of monetary policy. “I am not saying things are great, I don’t mean to say that at all,” he said.,.

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No kidding.

UK Finance Chiefs Signal Sharp Fall In Risk Appetite (FT)

The optimism and risk appetite of those in charge of the UK’s corporate finances has deteriorated sharply over the past three months. “Softening demand in emerging economies, greater financial market volatility and higher levels of risk aversion make for a more challenging backdrop for the UK’s largest businesses,” said David Sproul, chief executive of Deloitte. A Deloitte survey – of 122 chief financial officers of FTSE 350 and other large private UK companies – showed that perceptions of uncertainty were at a two-and-a-half year high, and had risen at the sharpest rate since the question was first put five years ago. Three-quarters of CFOs said the level of financial economic uncertainty was either “very high”, “high” or “above normal”, marking a return to the level last seen in the second quarter of 2013.

Ian Stewart, chief economist at Deloitte, said sentiment at large companies was heavily influenced by the global environment, especially by news flow and the performance of equity markets. “In both areas good news has been in short supply of late: UK equities down 16% from their April peaks; US institutional investor optimism at 2009 levels; financial market volatility up sharply and more downgrades to emerging market growth forecasts,” he said. But he added that CFOs were positive about the state of the UK economy. Instead, their biggest concerns were of imminent interest rate rises and of weakness in emerging market economies, particularly China. A year ago, corporate risk appetite was at a seven-year high. Now a minority of CFOs — 47% — felt that it was a good time to take risk on to their balance sheet, down from 59% in the second quarter of 2015.

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A lot more.

Commodity Collapse Has More to Go as Goldman to Citi See Losses (Bloomberg)

Even with commodities mired in the worst slump in a generation, Goldman Sachs, Morgan Stanley and Citigroup are warning bulls that prices may stay lower for years. Crude oil and copper are unlikely to rebound because of excess supplies, Goldman predicts, and Morgan Stanley forecasts that weaker currencies in producing countries will encourage robust output of raw materials sold for dollars, even during bear markets. Citigroup says the sluggish world economy makes it “hard to argue” that most prices have already bottomed. The Bloomberg Commodity Index on Sept. 30 capped its worst quarterly loss since the depths of the recession in 2008. The economy in China, the biggest consumer of grains, energy and metals, is expanding at the slowest pace in two decades just as producers struggle to ease surpluses.

Alcoa, once a symbol of American industrial might, plans to split itself in two, while Chesapeake Energy cut its workforce by 15%. Caterpillar may shed 10,000 jobs as demand slows for mining and energy equipment. “It would take a brave soul to wade in with both feet into commodities,” Brian Barish at Denver-based Cambiar Investors. “There is far more capacity coming on than there is demand physically. And the only way that you fix the problem is to basically shut capacity in, and you do that by starving commodity producers for capital.” Investors are already bailing. Open interest in raw materials, which measures holdings of futures and options, fell for a fourth month in September, the longest streak since 2008, government data show.

U.S. exchange-traded products tracking metals, energy and agriculture saw net withdrawals of $467.8 million for the month, according to data compiled by Bloomberg. The Bloomberg Commodity Index, a measure of returns for 22 components, is poised for a fifth straight annual loss, the longest slide since the data begins in 1991. It’s a reversal from the previous decade, when booming growth across Asia fueled a synchronized surge in prices, dubbed the commodity super cycle. Farmers, miners and oil drillers expanded supplies, encouraged by prices that were at record highs in 2008. Now, that output is coming to the market just as global growth is slowing.

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The dollar comes home.

Emerging Market ETF Outflows Double as Losses Hit $12.4 Billion (Bloomberg)

Outflows from U.S. exchange-traded funds that invest in emerging markets more than doubled last week, with redemptions exceeding $12 billion in the third quarter. Taiwan led the losses in the five days ended Oct. 2. Withdrawals from emerging-market ETFs that invest across developing nations as well as those that target specific countries totaled $566.1 million compared with outflows of $262.1 million in the previous week, according to data compiled by Bloomberg. Stock funds lost $483.5 million and bond funds declined by $82.5 million. The MSCI Emerging Markets Index advanced 1.9% in the week. The losses marked the 13th time in 14 weeks that investors withdrew money from emerging market ETFs and left the funds down $12.4 billion for the quarter, the most since the first quarter of 2014, when outflows reached $12.7 billion.

For September, emerging market ETFs suffered $1.9 billion of withdrawals. The biggest change last week was in Taiwan, where funds shrank by $93.3 million, compared with $19.9 million of redemptions the previous week. All the withdrawals came from stock funds, while bond funds remained unchanged. The Taiex advanced 2.1%. The Taiwan dollar strengthened 0.2% against the dollar and implied three-month volatility is 8.5%. Brazil had the next-biggest change, with ETF investors redeeming $68.7 million, compared with $12.8 million of inflows the previous week. Stock funds fell by $64.1 million and bond ETFs declined by $4.6 million. The Ibovespa Index gained 4.9%. The real appreciated 1.1% against the dollar and implied three-month volatility is 24%.

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They’ve all been overinvesting by a wide margin.

China’s Slowing Demand Burns Gas Giants (WSJ)

The energy industry overestimated just how much natural gas China needs, and global oil-and-gas companies risk paying a heavy price. When China’s economy hummed along a few years ago, energy companies from Australia to Canada bet its demand for natural gas would grow fast. They spent billions of dollars on promising fields, with plans to freeze the gas into liquid, called LNG, and load it on tankers to sell to energy-starved Asian buyers at a premium. China was “always seen as the kind of wonder market that was going to grow and need so much LNG,” said Howard Rogers of the Oxford Institute for Energy Studies and a former gas executive at BP. “People got somewhat carried away.”

Recent data paints a grimmer picture. Chinese LNG imports are down 3.5% this year, compared with a 10% rise in 2014. Total gas consumption grew about 2% in the first half, a turnabout from double-digit growth in recent years. Natural gas is an extreme example of how China’s slowing economy has contributed to a global commodities crash. Producers of raw materials from aluminum to iron ore made heady bets on Chinese demand. So far, many are being proven wrong. The downturn is sparking an industrywide recalibration. Energy consultancy Wood Mackenzie slashed its China gas-demand forecast by about 15% to 360 billion cubic meters by 2020.

Globally, the market faces 25 million tons of LNG oversupply by 2018, says Citi Research—more than China imported all of last year. If all the projects being constructed, planned and proposed today came to fruition, the market would face around one-third more capacity than it needs by 2025, Citi estimates. “We’re already seeing China cannot absorb all the gas that is thrown at it—that it’s choking on gas somewhat at the moment,” said Gavin Thompson, an analyst at Wood Mackenzie. Northeast Asia spot LNG prices have fallen to less than $8 per million metric British thermal units from over $14 last fall, according to pricing agency Platts. U.S. Henry Hub prices are under $3 per mmBtu versus around $4 a year ago.

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Just civil claims.

BP’s Record Oil Spill Settlement Rises to More Than $20 Billion (Bloomberg)

The value of BP’s settlement with the U.S. government and five Gulf states over the Deepwater Horizon oil spill rose to $20.8 billion in the latest tally of costs from the U.S. Department of Justice. The settlement is the largest in the department’s history and resolves the government’s civil claims under the Clean Water Act and Oil Pollution Act, as well as economic damage claims from regional authorities, according to a U.S. Justice Department statement Monday. The pact is designed “to not only compensate for the damages and provide for a way forward for the health and safety of the Gulf, but let other companies know they are going to be responsible for the harm that occurs should accidents like this happen in the future,” U.S. Attorney General Loretta Lynch told reporters at a briefing in Washington.

BP’s total settlement cost of $18.7 billion announced in July didn’t include some reimbursements, interest payments and committed expenditures for early restoration of damages to natural resources. The London-based company has set aside a total of $53.7 billion to pay for the disaster in 2010, when an explosion on the Deepwater Horizon drilling rig in the Gulf of Mexico resulted in the largest offshore oil spill in U.S. history. The announcement Monday includes $700 million for injuries and losses related to the spill that aren’t yet known, $232 million of which was announced earlier. It also adds $350 million for the reimbursement of assessment costs and $250 million related to the cost of responding to the spill, lost royalties and to resolve a False Claims Act investigation, according to a consent decree filed by the Justice Department at the U.S. District Court in New Orleans.

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“..prices did not reflect supply and demand because of “distortions” in the market.” True, but not in the way he means.

Glencore Urges Rivals To Shut Lossmaking Mines (FT)

Glencore chief executive Ivan Glasenberg stepped up his defence of the under-fire miner and trading house on Monday, calling on rivals to shut unprofitable mines and blaming hedge funds for pushing down commodity prices. Shares in the London-listed company, which have been the worst performer in the FTSE 100 this year falling by almost two-thirds, rallied as much as 21% in the wake of his comments and as analysts said that a recent sell-off and comparisons to Lehman Brothers were “overblown”. Glencore shares are now back above 100p and have recouped all of the losses sustained last week during a one-day sell-off that wiped out almost a third of the company’s equity.

However, the stock remains highly volatile – it has risen 68% in five trading sessions – and is significantly below its 2011 flotation price of 530p. The Switzerland-based company was forced to put out a statement early on Monday after its Hong Kong shares surged more than 70% following a speculative report that said it was open to takeover offers. Glencore’s statement said there was no reason for the share price surge. Insiders at the company said any publicly listed company was for sale at the right price, but dismissed talk of an approach or management buyout.

Speaking on the sidelines of the Financial Times Africa Summit in London, Mr Glasenberg refused to comment on the recent wild swings in Glencore’s share price, but said the company was focused on completing its $10 billion debt reduction plan, which could knock a third off its net debt pile by the end of next year. Mr Glasenberg focused on copper – Glencore’s most important mined commodity – arguing that prices did not reflect supply and demand because of “distortions” in the market. Glencore has been scrambling to reassure investors and creditors and silence its critics who claim that the company will struggle to manage its $30 billion of net debt if commodity prices do not recover quickly.

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Dutch disease.

Norway Seen Tapping Its Wealth Fund to Ward Off Oil Slump Risks (Bloomberg)

For Norway, the future may already be here. The nation could as soon as next year start making withdrawals from its massive $830 billion sovereign wealth fund, which it has built over the past two decades as a nest egg for “future generations.” The minority government will reveal its budget plans on Wednesday and has flagged new spending measures and tax cuts. Prime Minister Erna Solberg is trying to avoid a recession as a slump in the nation’s key commodity takes its toll on the $500 billion oil-reliant economy. Norway has already spent recent years using a growing chunk of its oil revenue to plug deficits while at the same time building the wealth fund. Now, with tax revenue from petroleum extraction down 42% on last year, budget spending in 2016 will probably outstrip income.

“We have reached a point where we will from now on see that the oil-corrected balance will be above the cash flow – that’s based on oil prices increasing slowly in the future,” said Kyrre Aamdal, senior economist at DNB ASA in Oslo. Tapping the fund’s returns marks a turning point that wasn’t expected to come for “several more years,” he said. The government said in May its non-oil budget deficit, or spending in real terms, would be a record 180.9 billion kroner ($21.6 billion). With its crude output waning and prices falling, the government saw petroleum income dropping to 251.6 billion kroner this year, almost 30% lower than its October projections. Those estimates assumed oil at about $69 a barrel. Brent crude has averaged $56 so far this year.

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Dollar-denominated debt.

South East Asia Economic Woes Test Built-Up Reserves, Defenses (Reuters)

Southeast Asia has spent the best past of two decades shoring defenses against a repeat of the Asian financial crisis, including building up record foreign exchange reserves, yet is now feeling vulnerable to speculative attacks again. Officials are growing increasingly concerned as souring sentiment has made currencies slide and investors reassess risk profiles in an environment where China is slowing and U.S. interest rates will rise at some point. And while economists have long dismissed comparisons with the 1997/98 currency crisis, pointing to freer exchange rates, current-account surpluses, lower external debt and stricter oversight by regulators, lately there has been a change.

Malaysia and Indonesia, which export oil and other commodities to fuel China’s factories, are looking vulnerable as the world’s second-largest economy heads for its slowest growth in 25 years and the prices of their commodity exports plunge. “We are worried about the contagion effect,” Indonesian Finance Minister Bambang Brodjonegoro said last week, using a word widely used in 1997/98. In 1997, “the thing happened first in Thailand through the baht, not the rupiah. But the contagion effect became widespread,” he added. Taimur Baig, Deutsche Bank’s chief Asia economist, said that unlike 1997, when pegged currencies were attacked as over-valued, today’s floating ones are “weakening willingly” in response to outflows. But there can still be contagion, as markets lump together economies reliant on China or on commodities.

“If you see a sell-off in Brazil, that can easily spread to Indonesia, which can spread to Malaysia, and so on,” he said. Foreign funds have sold a net $9.7 billion of stocks in Malaysia, Thailand and Indonesia this year, with the bourses in those three countries seeing Asia’s largest net outflows, Nomura said on Oct. 2. Baig said that as in 1997/98, falling currencies will naturally pose balance-sheet problems for companies with dollar debts and local-currency earnings. This year, Malaysia’s ringgit MYR= has fallen nearly 20% against the dollar and its reserves dropped by about the same%age, to below $100 billion. “It’s almost like a perfect storm for Malaysia,” the country’s economic planning minister, Abdul Wahid Omar, said.

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Because their new phones don’t sell.

Samsung Seen Tapping $55 Billion Cash Pile for Share Buyback (Bloomberg)

Investors in Samsung Electronics are watching their holdings plunge as new Galaxy smartphones get a lukewarm public response. With $55 billion in cash, the company may be poised to offer consolation. Analysts expect the world’s biggest smartphone maker to buy back shares as early as this month in an effort to return some value to stockholders. Removing more than $1 billion of stock from the market could prompt shares to rally by as much as 20%, according to the top-ranked analyst covering Samsung, potentially erasing their declines this year. Samsung has lost about $22 billion in market value – roughly equivalent to a Nintendo – this year as sales of the S6 and Note 5 devices sputter against new models from Apple and Chinese makers.

A buyback would be just the second in eight years and may take the sting out of sliding market share and sales projected to hit their lowest since 2011. “A share buyback should happen anytime now because the earnings haven’t been performing well,” said Dongbu Securities Co.’s Yoo Eui Hyung, who tops Bloomberg Absolute Return rankings for his calls on Samsung Electronics. Suwon-based Samsung is scheduled to release third-quarter operating profit and sales estimates Wednesday. That three-month period was marked by price cuts for the S6 and curved-screen S6 Edge phones just months after their debuts. Analysts expect profit of 6.7 trillion won in the period ended September.

While that is up from 4.1 trillion won a year earlier, it’s 34% below a record 10.2 trillion won two years ago. Net income and details of division earnings will be released later this month. Shares of Samsung rose 3.2% to 1,151,000 won in Seoul, paring this year’s decline to 13%. A stock repurchase also would help the founding Lees tighten their grip on the crown jewel of South Korea’s biggest conglomerate since the family typically doesn’t sell stock in a buyback, Yoo said. Vice Chairman Lee Jae Yong, the heir apparent, and his relatives control Samsung Group through a web of cross shareholdings with less than 10% of total shares.

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Before VW.

German Factory Orders Unexpectedly Fall in Sign of Economic Risk (Bloomberg)

German factory orders unexpectedly fell in August in a sign that Europe’s largest economy is vulnerable to weaker growth in China and other emerging markets. Orders, adjusted for seasonal swings and inflation, dropped 1.8% after decreasing a revised 2.2% in July, data from the Economy Ministry in Berlin showed on Tuesday. The typically volatile number compares with a median estimate of a 0.5% increase in a Bloomberg survey. Orders rose 1.9% from a year earlier. A China-led slowdown in emerging markets that threatens Germany’s export-oriented economy is exacerbated by an emissions scandal at Volkswagen AG that could affect as many as 11 million cars globally. Still, business confidence unexpectedly increased in September as the economy benefited from strengthening domestic demand on the back of record employment, rising wages and low inflation.

Excluding big-ticket items, orders dropped 2.1% in August, the Economy Ministry said in a statement. Domestic factory orders declined 2.6% as demand for investment goods slumped. The drop in orders was exaggerated by school holidays, it said. A bright spot was the rest of the euro area, where demand for capital goods jumped. Waning Chinese industrial demand has prompted Henkel AG to announce the removal of 1,200 jobs at its adhesives unit as it adapts capacity. While the brunt of the layoffs will be borne in Asia, 250 jobs will be cut in Europe and 100 in Germany. August factory orders don’t yet reflect the impact of VW’s cheating on U.S. emissions tests revealed last month. Chairman-designate Hans Dieter Poetsch warned that the scandal could pose “an existence-threatening crisis” for Europe’s largest carmaker.

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“..EU laws that prohibit data-sharing with countries deemed to have lower privacy standards, of which the United States is one…”

Top EU Court Says US-EU Data Transfer Deal Is Invalid (Reuters)

A system enabling data transfers from the European Union to the United States by thousands of companies is invalid, the highest European Union court said on Tuesday in a landmark ruling that will leave firms scrambling to find alternative measures. “The Court of Justice declares that the Commission’s U.S. Safe Harbor Decision is invalid,” it said in a statement. The decision could sound the death knell for the Safe Harbor framework set up fifteen years ago to help companies on both sides of the Atlantic conduct everyday business but which has come under heavy fire following 2013 revelations of mass U.S. snooping. Without Safe Harbor, personal data transfers are forbidden, or only allowed via costlier and more time-consuming means, under EU laws that prohibit data-sharing with countries deemed to have lower privacy standards, of which the United States is one.

The Court of Justice of the European Union (ECJ) said that U.S. companies are “bound to disregard, without limitation,” the privacy safeguards provided in Safe Harbor where they come into conflict with the national security, public interest and law enforcement requirements of the United States. Revelations by former National Security Agency contractor Edward Snowden of the so-called Prism program allowing U.S. authorities to harvest private information directly from big tech companies such as Apple, Facebook (FB.O) and Google prompted Austrian law student Max Schrems to try to halt data transfers to the United States. Schrems challenged Facebook’s transfers of European users’ data to its U.S. servers because of the risk of U.S. snooping.

As Facebook has its European headquarters in Ireland, he filed his complaint to the Irish Data Protection Commissioner. The case eventually wound its way up to the Luxembourg-based ECJ, which was asked to rule on whether national data privacy watchdogs could unilaterally suspend the Safe Harbor framework if they had concerns about U.S. privacy safeguards. In declaring the data transfer deal invalid, the Court said the Irish data protection authority had to the power to investigate Schrems’ complaint and subsequently decide whether to suspend Facebook’s data transfers to the United States. “This is extremely bad news for EU-U.S. trade,” said Richard Cumbley, Global Head of technology, media and telecommunications at law firm Linklaters. “Without Safe Harbor, (businesses) will be scrambling to put replacement measures in place.”

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Democracy it ain’t.

US, Japan And 10 Countries Strike Pacific Trade Deal (FT)

The US, Japan and 10 other Pacific Rim nations have struck the largest trade pact in two decades, in a huge strategic and political victory for US President Barack Obama and Japanese Prime Minister Shinzo Abe. The Trans-Pacific Partnership covers 40% of the global economy and will create a Pacific economic bloc with reduced trade barriers to the flow of everything from beef and dairy products to textiles and data, and with new standards and rules for investment, the environment and labour. The deal represents the economic backbone of the Obama administration’s “pivot” to Asia, which is designed to counter the rise of China in the Pacific and beyond. It is also a key component of the “third arrow” of economic reforms that Mr Abe has been trying to push in Japan since taking office in 2012.

But the TPP must still be signed formally by the leaders of each country and ratified by their legislatures, where support for the deal is not universal. In the US, Mr Obama will face a tough fight to push it through Congress next year, especially as presidential candidates such as the Republican frontrunner Donald Trump have argued against it. It is also likely to face parliamentary opposition in countries such as Australia and Canada, where the TPP has been one of the main points of economic debate ahead of an election on October 19. Critics around the world see it as a deal negotiated in secret and biased towards corporations. Those criticisms will be amplified when national legislatures seek to ratify the TPP.

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“When Australian and New Zealand trade representatives asked to view the texts, they were asked to sign an agreement promising to keep it secret for at least four years “to facilitate candid and productive negotiations..”

TPP Trade Deal Text Won’t Be Made Public For Four Years (Ind.)

The text of the Trans-Pacific Partnership that was agreed by trade ministers from US, Japan and ten other countries will not be made public for four years – whether or not it goes on to be passed by Congress and other member nations. If ratified by US Congress and other member nations, TPP will bulldoze through trade barriers and standardise international rules on labour and the environment for the 12 nations, which make up 40% of the world’s economic output. But the details of how it will do this are enshrined in secrecy. Politicians and ordinary people have been largely excluded from TPP negotiations, leaving it in the hands of multinational corporations.

Julian Assange, the founder of Wikileaks, said that the contents of the deal have been kept secret to avoid potential opposition. Wikileaks has leaked three of the 29 chapters of the TPP agreement. One section on intellectual property rights was published in November 2013, another on the environment was published in January 2014 and one on investment was published in March 2015. John Hilary, the executive director the political organisation War On Want, said the result is that nobody knows what’s being negotiated. “You have these far reaching deals that are going to change the face of our economies and societies know nothing about it,” Hilary said in an interview posted on the Wikileaks channel in August.

The US trade representative’s office keeps trade documents secret because they are considered matters of national security, according to Margot E. Kaminski, an assistant professor of law at the Ohio State University and an affiliated fellow of the Yale Information Society. The representatives claim that negotiating documents are “foreign government information” even though some may have been drafted by US officials. When Australian and New Zealand trade representatives asked to view the texts, they were asked to sign an agreement promising to keep it secret for at least four years “to facilitate candid and productive negotiations”, according to a document leaked by the Guardian.

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” It’s the nature of the social dialogue in our country.”

Air France Workers Rip Shirts From Executives After 2,900 Jobs Cut (Guardian)

Striking staff at Air France have taken demonstrating their anger with direct action to a shocking new level. Approximately 100 workers forced their way into a meeting of the airline’s senior management and ripped the shirts from the backs of the executives. The airline filed a criminal complaint after the employees stormed its headquarters, near Charles de Gaulle airport in Paris, in what was condemned as a “scandalous” outbreak of violence. Photographs showed one ashen-faced director being led through a baying crowd, his clothes torn to shreds. In another picture, the deputy head of human resources, bare-chested after workers ripped off his shirt and jacket, is seen being pushed to safety over a fence.

Tensions between management and workers at France’s loss-making flagship carrier had been building over the weekend in the runup to a meeting to finalise a controversial “restructuring plan” involving 2,900 redundancies between now and 2017. The proposed job losses involve 1,700 ground staff, 900 cabin crew and 300 pilots. After the violence erupted at about 9.30am on Monday morning, there was widespread condemnation from French union leaders who sought to blame each other’s members for the assaults. Laurent Berger, secretary general of the CFDT, said the attacks were “undignified and unacceptable”, while Claude Mailly, of Force Ouvrière (Workers Force) said he understood Air France workers’ exasperation, but added: “One can fight management without being violent.”

Manuel Valls, France’s prime minister, said he was “scandalised” by the behaviour of the workers and offered the airline chiefs his “full support”. Air France said it had lodged an official police complaint for “aggravated violence”. [..] Olivier Labarre, director of BTI, a human resources consultancy, told Libération newspaper in 2009: “This happens elsewhere, but to my knowledge, taking the boss hostage is typically French. It’s the nature of the social dialogue in our country.”

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It’s not just rhino’s. We kill across the board.

Nearly A Third Of World’s Cacti Face Extinction (Guardian)

Nearly a third of the world’s cacti are facing the threat of extinction, according to a shocking global assessment of the effects that illegal trade and other human activities are having on the species. Cacti are a critical provider of food and water to desert wildlife ranging from coyotes and deer to lizards, tortoises, bats and hummingbirds, and these fauna spread the plants’ seeds in return. But the International Union for the Conservation of Nature (IUCN)‘s first worldwide health check of the plants, published today in the journal Nature Plants, says that they are coming under unprecedented pressure from human activities such as land use conversions, commercial and residential developments and shrimp farming.

But the paper said the main driver of cacti species extinction was the: “unscrupulous collection of live plants and seeds for horticultural trade and private ornamental collections, smallholder livestock ranching and smallholder annual agriculture.” The findings were described as “disturbing” by Inger Andersen, the IUCN’s director-general. “They confirm that the scale of the illegal wildlife trade – including the trade in plants – is much greater than we had previously thought, and that wildlife trafficking concerns many more species than the charismatic rhinos and elephants which tend to receive global attention.”

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Sep 182015
 
 September 18, 2015  Posted by at 9:57 am Finance Tagged with: , , , , , , , ,  8 Responses »

John Vachon Assassin of Youth November 1938

The Fed Gives Growth a Chance (NY Times ed.)
Fed Delay Looks Like 2013 All Over Again-Rate Hike in December? (Bloomberg)
Fed Rate Decision Roils Emerging-Market Currencies (WSJ)
It’s a New World: How China Growth Concerns Kept the Fed on Hold (Bloomberg)
Europe Lacks Strategy to Tackle Crisis, but Refugees March On (NY Times)
Losing Control Of Refugees, Croatia Closes Serbia Border Crossings (Reuters)
Croatia’s Resources Stretched as Thousands of Refugees Arrive (Bloomberg)
OPEC Assumes Oil Price Will Recover Gradually to $80 in 2020 (Bloomberg)
Defaults Mount in Beleaguered US Energy Industry (WSJ)
Central Banks’ Lesson: Easy Money Alone Isn’t a Growth Salve (WSJ)
China Outflows Said To Surpass A Staggering $300 Billion In Just 75 Days (ZH)
China’s Top Financial Firms Get Green Light for $3 Billion IPOs (WSJ)
Here’s Why China Could Drag The US Into Recession (Fortune)
Primary Dealers Rigged Treasury Auctions, Investor Lawsuit Says (Bloomberg)
Bitcoin Is Officially a Commodity, According to US Regulator (Bloomberg)
Beppe Grillo Gets One Year Jail Sentence for “Defamation” (Tenebrarum)
Scorching Year Continues With the Hottest Summer on Record (Bloomberg)

No, this is not the Onion. But it sure is funny, and not just the headline, try this one: “..the economy shows no signs of overheating..”

The Fed Gives Growth a Chance (NY Times ed.)

The Federal Reserve did the right thing on Thursday when it opted not to begin raising interest rates. By holding steady, the Fed is acknowledging, correctly, that the economy shows no signs of overheating. Price inflation, for example, has been below the Fed’s 2% target for years and shows no signs of accelerating. The Fed also acknowledged the dampening effect global economic weakness and financial-market volatility may have on the American economy. In the past, the Fed played down those dangers, assuming they would be transitory or bearable. In the statement released after its policy-making committee meeting, it shifted, saying international and financial conditions could slow the domestic economy, making an interest-rate increase to restrain the economy unnecessary, at least for now.

In one important respect, however, the Fed appears to be doing the right thing for the wrong reasons. Judging from its statement and its economic projections, the Fed believes that the labor market has largely returned to health. That suggests it will be poised to raise rates as soon as the global headwinds abate. But the labor market is not healthy, and until it is, rate increases would be premature. Unemployment, at 5.1% in August, is still higher than it was before the recession. The share of part-time workers who need full-time jobs is still elevated, while the share of working-age adults with jobs is still well below its prerecession level. Most telling, broad wage growth — the clearest sign of labor market health — has been virtually nil during the six-year-old recovery.

The Fed is supposed to conduct policy in a way that fosters full employment, meaning rates should not be raised until jobs and wages are on a robust growth trajectory. But it seems more concerned with its mandate to fight inflation. That focus would be questionable even if there were nascent signs of inflation; in the absence of any signs, it is indefensible. In fact, inflation has been so low for so long now, it could run somewhat above the Fed’s target for an extended period without being disruptive and, in the process, allow wages to grow in line with productivity.

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Just the fact that after two years we’re still stuck in the same spot should say plenty.

Fed Delay Looks Like 2013 All Over Again-Rate Hike in December? (Bloomberg)

Federal Reserve Chair Janet Yellen shows signs of taking a page out of her predecessor’s policy playbook as she inches toward the central bank’s first interest rate increase in nine years: Delay action in September only to move in December. While the Fed on Thursday opted to keep rates pinned near zero for now, Yellen told a press conference that most policy makers still expect to raise rates this year. She highlighted the strength of the U.S. economy, tying the decision to delay liftoff to fresh uncertainty about the outlook abroad and to financial market turbulence over the past month. “I do not want to overplay the implications of these recent developments, which have not fundamentally altered our outlook,” she said. “The economy has been performing well, and we expect it to continue to do so.”

Yellen’s approach has parallels to the strategy that former Fed Chairman Ben Bernanke pursued in 2013 as officials debated whether to start scaling back bond purchases. Citing uncertainties to the outlook, Bernanke put off a move to begin tapering in September before deciding to go ahead in December. Just like today, much of the Fed’s initial reservations about acting in 2013 centered on developments in emerging markets, which had been rocked by Bernanke’s suggestion a few months earlier that a taper was on its way. Looming in the background then, as it is now, was the threat of a U.S. government shutdown. Today’s situation “lines up in so many ways” with that of 2013, said Aneta Markowska at SocGen, pointing to the upcoming fiscal showdown and emerging market concerns. “If all of that is resolved by December, my expectation is that the data will definitely support a hike.”

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No matter what the Fed does, emerging markets can’t win.

Fed Rate Decision Roils Emerging-Market Currencies (WSJ)

Many emerging-market currencies slumped against the dollar on Thursday despite the Federal Reserve’s decision to hold interest rates near zero for now. Currencies in Brazil, Turkey and South Africa, which have been among the hardest-hit by fears of a U.S. rate increase, enjoyed a short-lived reprieve after the central bank’s announcement. But they gave back all the gains within hours, as investors realized the Fed is still on track to raise interest rates later in the year. Many investors said the Fed’s reluctance to raise rates on Thursday signaled policy makers’ concerns about slowing global growth, which reflects a deepening economic malaise across emerging markets.

Many emerging countries rely on external capital flows to finance growth. The prospect of higher rates in the U.S. has led to outflows from these countries, contributing to weakening currencies and higher bond yields that drive up borrowing costs. The continuation of easy-money policies in the U.S. “buys some time for further adjustments by emerging-market economies, but this decision also confirms the fact that the U.S. economy continues to expand at a modest pace, which is not particularly emerging-market friendly,” said George Hoguet at State Street Global Advisors.

The Brazilian real took a roller-coaster ride. The currency, which was under pressure early in the day, rallied immediately upon the release of the Fed statement at 2 p.m. Eastern time, rising as much as 1.3% against the dollar. But the gains quickly dissipated. By late afternoon, the real lost 1.5% against the dollar to 3.8974, the weakest level in 13 years. Indonesia’s rupiah, after a brief rally, closed at its lowest level against the greenback since July 1998. Both the South African rand and the Turkish lira appreciated against the dollar shortly after the Fed announcement, but ended the day with losses.

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A neat excuse to hide their ignorance behind.

It’s a New World: How China Growth Concerns Kept the Fed on Hold (Bloomberg)

Here’s the latest sign of China’s arrival as a global economic power: It’s roiled financial markets enough to nudge the Federal Reserve away from raising interest rates. Fed policy makers left their benchmark rate near zero Thursday, saying the U.S. economy and inflation may be restrained by “recent global economic and financial developments.” Fed Chair Janet Yellen elaborated in a press briefing, saying the financial turmoil reflected investor concerns about risks to Chinese growth. “If it weren’t for China and all the turmoil surrounding China, I think the Fed would have hiked rates,” said Mickey Levy at Berenberg in New York, who has analyzed Fed policy for more than 30 years.

The focus on China comes after a market rout that wiped $5 trillion in value off the nation’s stocks and after a sudden move on Aug. 11 to change its exchange rate regime, a decision which triggered the yuan’s biggest depreciation in two decades and roiled global markets. The world’s second-largest economy is set to grow at its slowest pace in a quarter century this year even after five central bank interest rate cuts and fiscal stimulus. “China was an influence in this meeting, whereas in the past that would have been much less important,” said Tai Hui at JPMorgan Asset Management in Hong Kong. China affects the world more than ever before, and its influence over global markets will only increase as it approaches the U.S. economy in size. It accounted for 13.3% of global gross domestic product last year, from less than 5% a decade earlier, according to World Bank data.

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Croatia gave it their best, but they too need help.

Europe Lacks Strategy to Tackle Crisis, but Refugees March On (NY Times)

Europe’s failure to fashion even the beginnings of a unified solution to the migrant crisis is intensifying confusion and desperation all along the multicontinent trail and breeding animosity among nations extending back to the Middle East. With the volume of people leaving Syria, Afghanistan and other countries showing no signs of ebbing, the lack of governmental leadership has left thousands of individuals and families on their own and reacting day by day to changing circumstances and conflicting messages, most recently on Thursday when crowds that had been trying to enter Hungary through Serbia diverted to Croatia in search of a new route to Germany.

Despite the chaos, there were few signs that EU leaders, or the governments of other countries along the human river of people flowing from war and poverty, were close to imposing any order or even talking seriously about harmonizing their approaches and messages to the migrants. Instead, countries continue to improvise their responses, as Croatia did Thursday, and Slovenia — the next stop along the rerouted trail — is likely to do in coming days. The migrants did not shift course to Croatia on a whim. When Hungary effectively blocked their access on Tuesday with a border crackdown — which resulted in an ugly skirmish Wednesday between the police and migrants — they had few options.

And Macedonian and Serbian officials, along with many aid organizations, were urging them to circumvent a hostile Hungary and even providing maps and nonstop bus service to the Croatian frontier. Initially, Croatia’s foreign minister, Vesna Pusic, seemed to encourage them, too. “They can move freely in this period,” she said. “We will try to restore a decent face to this part of Europe.” So, since Wednesday morning, more than 11,000 migrants have entered Croatia, and officials said 20,000 more were already in Serbia, making their way to the Croatian border and likely to arrive soon — while untold tens of thousands more waited in Turkey and Greece for a clear signal about whether to follow.

But what the first arriving migrants found on the Croatian border was only more fog. The Croatian interior minister said that the country would abide by European Union rules and register all arriving asylum seekers and that they could not simply pass through the country unfettered. Then late Thursday, swamped by the crush of migrants, Croatia announced that the border would be closed altogether, indefinitely. Slovenian officials said that, no matter how many migrants Croatia lets through, they would register all arrivals and turn back any who do not qualify as refugees — a task that Hungary can attest is easier said than done.

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Dear MSM: Stop calling refugees ‘migrants’. And stop calling a meeting next week an ‘emergency’ meeting.

Losing Control Of Refugees, Croatia Closes Serbia Border Crossings (Reuters)

Croatia has closed seven of eight road border crossings with Serbia after complaining of being overwhelmed by an influx of more than 11,000 migrants who evaded police, trekked through fields and tried to sneak into Slovenia by train in a march westwards that is dividing Europe. Only the main Bajakovo crossing, on the highway between Belgrade and Zagreb, appeared to be open to traffic on Friday, while neighboring Slovenia stopped all rail traffic on the main line from Croatia after halting a train carrying migrants on the Slovenian side of the border. Migrants have been streaming into European Union member Croatia for two days, their path into the bloc via Hungary blocked by a metal fence, the threat of imprisonment and riot police who fired teargas and water cannon on Wednesday to drive back stone-throwing men.

There were desperate scenes at a railway station on Croatia’s eastern frontier with Serbia, where thousands were left stranded overnight under open skies. The EU has called an emergency summit next week to overcome disarray in the 28-nation bloc. Croatian Interior Minister Ranko Ostojic warned on Thursday that Croatia would close its border with Serbia if the flow of migrants continued at the same rate, saying his country was full to capacity. The president of Croatia told the military to be ready to join the effort to stop thousands of people criss-crossing the Western Balkans in their quest for sanctuary in the wealthy bloc. Late on Thursday, police announced they had banned all traffic at seven border crossings. “The measure is valid until further notice,” police said in a statement.

Serbia’s main highway north into Hungary is already closed by Hungarian riot police on the border. It remained unclear whether or how police would stop migrants, many of them refugees from Syria, from streaming through fields across the border away from official crossings, though their path across much of the frontier is made more difficult by the Danube river. Serbia warned its neighbors against shutting down the main arteries between them. “We want to warn Croatia and every other country that it is unacceptable to close international roads and that we will seek to protect our economic and every other interest before international courts,” Aleksandar Vulin, Serbia’s minister in charge of migration, told the Tanjug state news agency.

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And so we move from country to country and border to border, while Europe refuses to set up a meeting. To them, it’s an emergency only for refugees.

Croatia’s Resources Stretched as Thousands of Refugees Arrive (Bloomberg)

Croatia wavered in its commitment to accept a growing influx of migrants after 5,600 refugees poured into the country in one day, underscoring the massive task facing Europe as people flee war and poverty. “If migrants continued to arrive in larger numbers, Croatia would have to consider an entirely different approach,” Interior Minister Ranko Ostojic said in a statement on Thursday. Prime Minister Zoran Milanovic said Croatia will help refugees “as long as we can,” after throwing open its doors Wednesday. The people have been stranded in Serbia trying to enter the European Union through Hungary, which closed its southern frontier and fired tear gas and water cannons at migrants trying to break through a barrier on the border. Police said they used force to repel the crowd after refugees threw rocks and other projectiles.

European leaders have been at odds for weeks over how to deal with the region’s biggest refugee crisis since World War II, with Hungarian Prime Minister Viktor Orban fortifying his border to keep refugees out and German Chancellor Angela Merkel saying Europe has a moral responsibility to help. Orban has built a razor-wire fence along the border with Serbia and announced plans to extend the barrier to part of the frontier with Romania. The crisis claimed its first political casualty in Germany, with the government’s point person on the refugee crisis stepping down. The Interior Ministry announced Thursday that Manfred Schmidt, who headed the office for migration and refugees, was leaving for personal reasons.

Schmidt’s office was responsible for the initial decision to allow all Syrians entering the country to stay – a departure from an EU agreement requires refugees to be registered in the country where the arrive in the bloc and remain there to have their asylum applications processed. “The dramatically increased number of asylum seekers in Germany present the federal agency, as well as the states and municipalities, with an enormous challenge,” Interior Minister Thomas de Maiziere said in a statement thanking Schmidt for his “excellent work.” The departure comes after Merkel was criticized in recent days by some in her own coalition for her handling of the crisis as the country struggles to keep up with the influx. The chancellor has defended her decision to allow in refugees.

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What else are they going to say?

OPEC Assumes Oil Price Will Recover Gradually to $80 in 2020 (Bloomberg)

OPEC is assuming the oil price will rise gradually to $80 a barrel in 2020 as supply growth outside the group weakens, a slower recovery than several member nations have said they need. The average selling price of the Organization of Petroleum Exporting Countries’ crude will increase by about $5 annually to 2020 from $55 this year, according to an internal research report from the group seen by Bloomberg News. Iran and Venezuela said they would like to see a price of at least $70 this month and most member countries cannot balance their budgets at current prices. “It’s much harder for OPEC to lift prices” after the revolution of U.S. shale oil, said Bjarne Schieldrop, Oslo-based chief commodities analyst at SEB AB, which forecasts Brent crude at $73 by the end of the decade.

“Eighty dollars by 2020 is pretty close to consensus view.” The price of crude has tumbled more than 50% in the past year as OPEC followed Saudi Arabia’s strategy of defending its share of the global market against competitors like U.S. shale oil. While both OPEC and the International Energy Agency expect growth in global supply to slow as low prices bite, Goldman Sachs predicts that a persistent glut will keep crude low for the next 15 years. Production from nations outside OPEC will be 58.2 million barrels a day in 2017, 1 million lower than previously forecast, according to the internal report.

The impact low prices is “most apparent on tight oil, which is more price reactive than other liquids sources,” according to the report. “Supply reductions in U.S. and Canada from 2014 to 2016 are clearly revealed.” OPEC expects little stimulus to global demand in the medium term as a result of cheaper oil, with daily consumption growing by about 1 million barrels a year to 97.4 million in 2020, according to the report. While demand from China, Russia and OPEC members will grow more slowly than forecast a year ago, developing nations with still account for the bulk the expansion, it said.

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Debt dominoes.

Defaults Mount in Beleaguered US Energy Industry (WSJ)

The well is running dry for deeply indebted energy companies. Samson Resources became the latest, and largest, victim of an industry downturn, as it filed for chapter 11 protection late Wednesday. Industry experts say more oil-and-gas companies are poised to follow the Tulsa, Okla., company into bankruptcy as oil prices remain low following a steep drop that began last year. The default rate among U.S. energy companies has accelerated in recent months to 4.8%, the highest level since 1999 and up from 3.3% in August, according to Fitch Ratings. Within that group, exploration and production companies like Samson are defaulting at an even higher rate, 8.5%, Fitch said. Default volume for such companies is the highest it has been in five years, at $10.4 billion in debt.

The broader U.S. corporate default rate is 2.9%, according to Fitch. Meanwhile, the yield on a basket of U.S. junk-rated energy bonds has risen to 11%, just off its highest level since July 2009 and up from 5.9% a year ago, according to Barclays PLC. The increase indicates a lack of investor confidence that the bonds will be repaid in full. Yields on debt rise as prices fall. “Everything has been turned upside down,” said Marc Lasry, head of hedge- fund firm Avenue Capital Group, which recently raised $1.3 billion for an energy-focused fund. “If you’re equity it’s been total devastation. If you’re the high-yield guys you’re in total shock and you have no idea what to do,” he said, referring to investors in stocks and risky debt.

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It took 8 years to figure that one out?!

Central Banks’ Lesson: Easy Money Alone Isn’t a Growth Salve (WSJ)

Central bankers have injected roughly $8 trillion into the global economy since the financial crisis. In return, the world has remained in a low-growth rut. The Federal Reserve cited market turmoil and a weak economic picture overseas in deciding Thursday not to back off from one of the most aggressive global monetary policies in decades. Whenever the Fed moves to raise interest rates, one lesson remains: Cheap money alone can’t solve the world’s economic ills. The Fed noted positive developments at home, including increased household spending and business investment, but worried conditions overseas could restrain U.S. growth and put further downward pressure on near-term inflation.

“A lot of our focus has been on risks around China, but not just China—emerging markets more generally and how they may spill over to the U.S.,” said Fed Chairwoman Janet Yellen, noting “the significant economic and financial interconnections between the U.S. and the rest of the world.” Her unease underscores in part the limits of loose monetary policy as a singular response to economic weakness. Instead of using the breathing room of low interest rates to revamp their economies, governments around the globe have failed to enact longer-lasting policy overhauls as they try to combat an array of demographic and other challenges.

“Finance, especially as motivated by central banks, is really only a lubricant to growth,” said Raghuram Rajan, head of the Reserve Bank of India, at a recent meeting of top global finance officials. “It can’t be the underlying driver of growth.” Since the financial crisis began in 2007, the average key interest rate set by central banks has fallen by around 4 percentage points in advanced countries and 2 points in emerging markets. Central banks have also bought bonds and other assets equal to 10% of global output to stir growth in the postcrisis era.

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TEXT

China Outflows Said To Surpass A Staggering $300 Billion In Just 75 Days (ZH)

We’ve detailed the story exhaustively, so we won’t endeavor to recap it all here, but the short version is that what was billed as a move to give the market a greater role in setting the yuan’s exchange rate actually had the opposite effect – at least in the short run. That is, the PBoC used to manipulate the fix to control the spot and now they simply manipulate the spot to control the fix, but unabated devaluation pressure has forced China to intervene on a massive scale and that intervention recently moved into the offshore market as well, as Beijing scrambled to close the onshore/offshore spread. This is costing China dearly in terms of FX reserves, the liquidation of which was so massive in August as to prompt Deutsche Bank to brand it “Quantitative Tightening”, as the reserve drawdowns are effectively QE in reverse.

This is of course the same dynamic that’s been taking place in Saudi Arabia in the wake of the petrodollar’s demise and mirrors the response across EMs which are struggling to support commodity currencies as prices collapse. Attempts to quantify the scope of China’s reserve burn have become ubiquitous, as the cost of offsetting the outflows from China effectively serves as a proxy for the extent to which the Fed would, were they to hike, be “tightening into a tightening”, as we’ve put it. On Wednesday we showed that Beijing liquidated $83 billion in Treasurys in July. That, as we also noted, “is before China announced its devaluation on August 11 and before, as we also first reported, it sold another $100 billion in Treasurys in August.”

Today, we get a fresh look at the numbers courtesy of SAFE which shows that on net, banks sold $128 billion in FX to Chinese non-banks in August. Nothing too surprising there, given that we already knew positioning for FX purchases for the banking sector as a whole dropped by $115 billion for the month. As Goldman notes however, when you include banks’ forward books the picture worsens materially. An alternative gauge that we believe is a closer reflection of the underlying trend of currency demand shows a significantly larger outflow of $178bn. Today’s data at US$178bn on our preferred gauge of underlying currency demand (i.e., outright spot plus freshly-entered forward contracts) is significantly higher than any of [the previous] releases.

This means, as Goldman goes on to point out, that outflows are actually far worse than what’s indicated by simply looking at China’s reserve drawdown, as banks look to be shouldering some of the burden themselves. So between July and August (inclusive of freshly entered forwards), outflows total around $261 billion. But that’s not all. Nomura is out with an estimate of what’s taken place since the start of September. Between onshore spot intervention and offshore spot and forward intervention, the bank estimates China has spent some $47 billion month-to-date stabilizing the yuan, $25 billion of which in the offshore market, reinforcing what we said a week ago after CNH soared the most on record [..]

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What grandmas can move their savings in.

China’s Top Financial Firms Get Green Light for $3 Billion IPOs (WSJ)

China International Capital and China Reinsurance each received approval from the Hong Kong stock exchange late Thursday to hold initial public offerings worth a combined $3 billion, people familiar with the deals said, signaling a possible revival of what has been a quiet quarter for the city’s capital market. CICC, which is China’s top investment bank, and China Reinsurance, its biggest reinsurer, have yet to decide when to go public due to volatile stock markets, though they are aiming to do so this year, the people said. The turmoil in Chinese stocks is hurting investor appetite for initial public offerings in Hong Kong, the world’s top venue for listings this year. In the third quarter, IPOs in Hong Kong have raised $1.8 billion, down significantly from $5.4 billion in the same period last year..

The two IPOs would be the first major offering since China Railway Signal & Communication’s $1.4 billion Hong Kong IPO in August. Hong Kong’s Hang Seng Index, which is weighted heavily with mainland Chinese stocks, has fallen 17% in the third quarter so far, as mainland stocks have tumbled. Those declines have weighed on investor sentiment. On Monday, the short-haul carrier Hong Kong Airlines called off indefinitely a planned listing in which it had hoped to raise $500 million. The potential listing of CICC would give its shareholders, including KKR & Co. and TPG Capital, the chance to exit their investments despite turmoil in Chinese stocks. Central Huijin Investment, the domestic investment arm of China’s sovereign-wealth fund, is the largest shareholder in CICC with a 43.35% stake.

Singapore’s sovereign-wealth fund GIC Pte. Ltd. holds 16.35%, while TPG Capital owns 10.3% and KKR holds 10%, according to its annual report. CICC was formed in 1995 by Morgan Stanley and China Construction Bank. as China’s first Sino-foreign joint-venture investment bank. Morgan Stanley sold its stake in December 2010 to a consortium that included GIC; Great Eastern Holdings, the insurer controlled by Oversea-Chinese Banking; and the private-equity firms KKR and TPG Capital. CICC has played a key role in advising the Chinese government on state-owned enterprise reform and guiding the listing of the country’s major overseas IPOs.

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Investment. In productive areas, that is.

Here’s Why China Could Drag The US Into Recession (Fortune)

No one can say for sure just how bad China’s economic situation has become, but analysts in the United States have been taking comfort in the fact that U.S. trade to China, and the Pacific Rim in general, constitutes a small sliver of U.S. GDP. And while the emerging world makes up a much bigger share of the global economy than it did a generation ago, the U.S. economy is still the largest in the world. When capital flees riskier economies like Brazil or Turkey, the U.S. is where it will run to. There’s one problem. These arguments ignore the fact that economists don’t agree on what, exactly, causes recessions. True, the Asian financial crisis of 1998 didn’t lead to slower growth in the U.S. But that doesn’t mean that a recession in the emerging world will fail to drag us down this time.

David Levy, economist and chairman of The Jerome Levy Forecasting Center, has been predicting that China would suffer an economic crisis and he believes that turmoil in emerging markets can take down the U.S. economy. Levy subscribes to what he calls “the profits perspective,” which examines global profits rather than country-specific GDP for indications of economic turmoil. How can global profits help predict recessions? Profits are the main factor that guides economic activity: when profits are high, businesses will invest and hire workers, and lenders will extend credit. When profits are low, the opposite occurs.

As it turns out, the largest contributor to global profits is net investment. When firms invest in capital equipment or when an individual invests in residential real estate, this is an act of wealth creation that does not require an immediate expense, in accounting terms. On a global scale, then, when investment is rising, we should also see profits rise and the global economy expand. But when we start to see investment stagnate or decline, we should expect profits to fall, putting recessionary conditions right around the corner.

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Slap that wrist!

Primary Dealers Rigged Treasury Auctions, Investor Lawsuit Says (Bloomberg)

The same analytical technique that uncovered cheating in currency markets and the Libor rates benchmark – resulting in about $20 billion of fines – suggests the dealers who control the U.S. Treasury market rigged bond auctions for years, according to a lawsuit. The analysis was part of a 115-page lawsuit filed in Manhattan federal court on Aug. 26 by Quinn Emmanuel Urquhart & Sullivan LLP and other law firms. The plaintiffs built their case against the 22 primary dealers who serve as the backbone of Treasury trading – including Goldman Sachs JPMorgan and Morgan Stanley – using data from Rosa Abrantes-Metz, an adjunct associate professor at New York University who has provided expert testimony in rigging cases.

Her conclusion: More than two-thirds of a certain type of Treasury auction appear to have been rigged. She found issues with other auctions, too. “The only plausible explanation is that Defendants coordinated artificially to influence the results of the auctions in the primary market,” according to the complaint filed by the Cleveland Bakers and Teamsters Pension Fund and other investors. The lawsuit, which seeks unspecified damages, comes as the U.S. Justice Department probes whether information in the Treasury auction market is being shared improperly by financial institutions, three people with knowledge of the investigation said in June.

Treasury traders at some banks learn of customer demand hours before auctions, and were communicating with their counterparts at other firms via chat rooms as recently as last year, Bloomberg News reported earlier this year. Abrantes-Metz’s analysis is similar to one used in lawsuits claiming bank and broker manipulation of the London interbank offer rate, or Libor. Those cases resulted in about $9 billion in settlements from the financial firms. Banks and brokers have paid about $9.9 billion in fines to global regulators related to manipulation of currency markets as of May.

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Bitcoin, rhubarb, it’s all the same.

Bitcoin Is Officially a Commodity, According to US Regulator (Bloomberg)

Virtual money is officially a commodity, just like crude oil or wheat. So says the Commodity Futures Trading Commission (CFTC), which on Thursday announced it had filed and settled charges against a Bitcoin exchange for facilitating the trading of option contracts on its platform. “In this order, the CFTC for the first time finds that Bitcoin and other virtual currencies are properly defined as commodities,” according to the press release. While market participants have long discussed whether Bitcoin could be defined as a commodity, and the CFTC has long pondered whether the cryptocurrency falls under its jurisdiction, the implications of this move are potentially numerous.

By this action, the CFTC asserts its authority to provide oversight of the trading of cryptocurrency futures and options, which will now be subject to the agency’s regulations. In the event of wrongdoing, such as futures manipulation, the CFTC will be able to bring charges against bad actors. If a company wants to operate a trading platform for Bitcoin derivatives or futures, it will need to register as a swap execution facility or designated contract market, just like the CME Group. And Coinflip—the target of the CFTC action—is hardly the only company that provides a platform to trade Bitcoin derivatives or futures.

“While there is a lot of excitement surrounding Bitcoin and other virtual currencies, innovation does not excuse those acting in this space from following the same rules applicable to all participants in the commodity derivatives markets,” said Aitan Goelman, the CFTC’s director of enforcement, in a statement. A request for comment sent to Coinflip’s chief executive via LinkedIn was not immediately returned. Coinflip consented to the order without admitting or denying any of its findings or conclusions. Since Coinflip is not alone in providing a platform to trade Bitcoin derivatives or futures, Goelman’s words imply that other unregulated exchanges could soon attract the attention of the CFTC.

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For calling a tool a tool.

Beppe Grillo Gets One Year Jail Sentence for “Defamation” (Tenebrarum)

Former Italian prime minister Silvio Berlusconi – the cavaliere – has been successful in fighting off legal challenges ranging from sex with minors to alleged tax fraud involving humungous amounts for well over adecade. On a number of occasions, the Italian State even created new laws specifically designed to keep the cavaliere out of jail. We admittedly just loved his constant successful evasions of justice. First of all, we were deeply worried by the thought of potentially losing this unsurpassed master of political entertainment. Secondly, when the Eurocracy decided it didn’t like him anymore, he was basically putsched out of office, and we greatly dislike the meddlers administering the Moloch in Brussels. Incidentally, ever since he has lost political power, Berlusconi’s successes in evading justice have been waning rather rapidly.

What was of course also great about Berlusconi’s brushes with the law was that they demonstrated unequivocally that the concept of “equality before the law” is a basically a bad joke. They showed the hoi-polloi that the modern-day rulers of the “democratic” societies of the West are in many respects really not much different from the feudal robber barons of the past. This seemed eminently useful from an educational perspective to us. This week we have been provided with yet another interesting demonstration by Italy’s justice system. An oppositional critic of the establishment who is seen as a genuine danger to the “European project” and the structures of the State because he enjoys massive voter support can evidently not hope to evade the long arm of the law as easily as the cavaliere was able to do in his heyday.

Beppe Grillo, leader of the wildly successful “5 Star Movement” has been handed a one year jail sentence (suspended, but still – one more misstep, and he’s locked up) and has been ordered to pay altogether 51,250 euro in fines and restitution. What was his crime? Did he defraud the tax man? Did he engage in bunga-bunga with minors? Did he have truck with the mafia? Nope – his alleged crime is defamation – and it appears that the law’s definition of “defamation” is “saying something about a public personality that said person doesn’t like”. Here is what happened, according to the press:

“Ascoli Piceno, September 14 – A judge here handed a suspended sentence of one year to 5-Star Movement (M5S) leader Beppe Grillo on Monday, for defamation of university professor Franco Battaglia. Grillo publicly insulted Battaglia during a speech on nuclear energy in May 2011 in the town of San Benedetto del Tronto, over an appearance Battaglia had made on the TV program Anno Zero. Referring to Battaglia’s comments, Grillo said, “You can’t let an engineer (…) go on television and say, with nonchalance, that no one died in Chernobyl. I’ll kick your ass, I’ll throw you out of television, I’ll report you to the police and send you to jail”. Battaglia testified that his car was also vandalized and he received a “strange phone call” prior to the act of vandalism. Grillo was ordered to pay a fine of €1,250 , and Battaglia was awarded compensation of €50,000.

It is well known that Beppe Grillo doesn’t mince words, but we can be reasonably sure that he was neither the man behind the “strange phone call” (we only have Battaglia’s say-so regarding this call), and that he probably didn’t vandalize the good professor’s car either. Most press reports didn’t go into too many details though – after all, Grillo had it coming, right?

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“Are the record temperatures due to climate change or due to El Niño? The answer is yes..”

Scorching Year Continues With the Hottest Summer on Record (Bloomberg)

Last month was the hottest August on record, topping out the hottest summer on record, according to data released on Thursday by the National Oceanic and Atmospheric Administration. It was the sixth month this year to set a new record: February, March, May, June, July, and August. This has been the hottest start to a year on record and the hottest 12 months on record. It follows the hottest calendar year (2014), and the hottest decade. In 136 years of global temperature data, we are in uncharted territory. And this year’s extremes are likely to continue as a strong El Niño weather pattern in the Pacific Ocean continues to rip more heat into the atmosphere. There’s now a 97% chance that 2015 will set yet another record, according to NOAA.

Results from the world’s top monitoring agencies vary slightly. NOAA and the Japan Meteorological Agency both listed August as the hottest month. NASA rated it one degree cooler than the previous record, set last year. All three agencies agree that 2015 is on track to be the hottest yet, by a long shot. The heat was experienced differently across the world, but few places escaped it altogether. In the U.S., chances are growing that above-normal temperatures will persist in Alaska and along the West Coast, as well as in the upper Midwest and Northeast, through February. That’s in line with what can happen during a strong El Niño. “Are the record temperatures due to climate change or due to El Niño? The answer is yes,” said Deke Arndt, chief of NOAA’s climate monitoring branch in Asheville, N.C.. “Long-term climate change is like climbing a flight of stairs. El Niño is like standing on tippy toes while you are on one of those stairs.”

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Aug 052015
 


NPC Shoomaker’s saloon at 1311 E Street N.W. Washington DC 1917

A Turkish Couple Spent Their Wedding Day Feeding 4,000 Syrian Refugees (i100)
The Devastation in Global Commodity Currencies is Far From Over (Bloomberg)
Atlanta Fed’s Lockhart: Fed ‘Close’ to Being Ready to Raise Rates (WSJ)
The Oil Crash Has Caused a $1.3 Trillion Wipeout (Bloomberg)
Chinese Brokers Halt Short Selling as Regulators Tighten Rules (Bloomberg)
Greece Needs €100 Billion Debt Relief As Permanent Depression Looms (Telegraph)
Keiser Report: Summer Solutions featuring Prof. Steve Keen (Max Keiser)
Greek Police’s Cyber Crime Unit To Investigate Varoufakis Plan (Kathimerini)
Greece And Lenders Strike Upbeat Tone, Deal Seen On Bailout (Reuters)
Short Seller Yu ‘Wildly Bullish’ on Greece in Euro Exit Scenario (Bloomberg)
After The Greek Crisis, It’s Time For A New Deal On Debt (Kenneth Rogoff)
Germans Get Debt Relief Twice in 20th Century, But Demand Greeks Pay Up (TRN)
In Cash-Starved Greece, Plastic Casts Light Into Shadow Economy (Bloomberg)
The Failure of Politics: Merkel’s Euro Debacle (Daniel Stelter)
Europe Needs Major Investment To Avoid Another Greece (Delors/Enderlein)
America’s Un-Greek Tragedies in Puerto Rico and Appalachia (Paul Krugman)
Misery Deepens For Those In Puerto Rico Who Can’t Leave (AP)
Puerto Rico Has Another Debt Worry on the Horizon (NY Times)
‘Perfect Storm’ Engulfing Canada’s Economy Perfectly Predictable (Tyee)
Tony Blair Could Face Trial Over ‘Illegal’ Iraq War: Jeremy Corbyn (Guardian)
Americans Killed 20% Of North Korea’s Population In Three Years (Fisher)
Carbon Tax, Cap And Trade Don’t Work (Topple)
The Migrant Crisis in Calais Exposes a Europe Without Ideas (NY Times)

“We started our journey to happiness with making others happy..”

A Turkish Couple Spent Their Wedding Day Feeding 4,000 Syrian Refugees (i100)

A Turkish couple who got married last week invited 4,000 Syrian refugees to celebrate with them. Fethullah Uzumcuoglu and Esra Polat tied the knot in Kilis province on the Syrian border, which is currently home to thousands of refugees fleeing conflict in the neighbouring country. It’s traditional for Turkish weddings to last between Tuesday to Thursday, culminating in a banquet on the last night, but this couple decided they wanted a celebration with a difference. Hatice Avci, a spokesperson for aid organisation Kimse Yok Mu, told i100.co.uk that the charity feeds around 4,000 refugees who live in and around the town of Kilis, but last Thursday the newlyweds donated the savings their families had put together for a party to share their wedding celebrations with the refugees living nearby instead.

It was the groom’s father, Ali Uzumcuoglu, who originally had the idea to share a bit of wedding joy with those less fortunate. The bride and groom helped distribute the meal themselves and took their wedding pictures with people at the camp, according to local media. Groom Fethullah Uzumcuoglu said that he’d never taken part in something like this before but it was the “best and happiest moment of my life”: “Seeing the happiness in the eyes of the Syrian refugee children is just priceless. We started our journey to happiness with making others happy and that’s a great feeling.” Fethullah said that his friends were so inspired by the day that they’re planning on similar events for their own weddings.

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Bloodbath in the making.

The Devastation in Global Commodity Currencies is Far From Over (Bloomberg)

A bounce in crude oil and other commodity prices Tuesday halted a plunge in currencies of countries linked to natural-resource exports. The respite will be short-lived, according to OppenheimerFunds. The Canadian, Australian and New Zealand dollars are off to the worst start to a year since the financial crisis. The nations are grappling with a 29% drop in raw-material prices amid swelling supplies and slowing demand in China. Next up, they’ll have to contend with the Federal Reserve’s plan to raise interest rates this year, which is forecast to boost the U.S. dollar. “Compared to the U.S. talk about raising rates and tightening policy, the commodity currencies are going in the exact opposite direction,” Alessio de Longis at OppenheimerFunds said. “These currencies are not cheap by any means.”

Even as the Reserve Bank of Australia held interest rates steady and spurred a currency bounce, de Longis said he expects central banks in the commodity-exporting nations to continue easing monetary policy, sending their currencies tumbling versus the greenback.
He projected the Canadian dollar will weaken 14% in the next one to three years. He estimated the Aussie will fall in the same timeframe to 60 cents per U.S. dollar and the kiwi to drop to 50 cents. The Bloomberg Commodity Index fell to a 13-year low Monday after Chinese manufacturing gauges slowed, clouding the outlook for demand. In contrast, the U.S. currency has rallied against all 16 major peers in the past 12 months on signs that the Fed is getting closer to raising rates. “Caution is still in order as today’s Aussie gains are corrective in nature,” Marc Chandler at Brown Brothers Harriman said in a note. “It is obvious that RBA policy must remain accommodative.”

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The Fed just writes its own narrative no matter what anyone says.

Atlanta Fed’s Lockhart: Fed ‘Close’ to Being Ready to Raise Rates (WSJ)

Federal Reserve Bank of Atlanta President Dennis Lockhart said the economy is ready for the first increase in short-term interest rates in more than nine years and it would take a significant deterioration in the data to convince him not to move in September. “I think there is a high bar right now to not acting, speaking for myself,” Mr. Lockhart said. He is among the first officials to speak publicly since the Fed’s policy meeting last week, at which the central bank dropped new hints that a rate increase is coming closer into view, a point he sought to underscore. Mr. Lockhart is watched closely in financial markets because he tends to be a centrist among Fed officials who moves with the central bank’s consensus, unlike those who stake out harder positions for or against changing interest rates.

His comments are among the clearest signals yet that Fed officials are seriously considering a rate increase in September. “It will take a significant deterioration in the economic picture for me to be disinclined to move ahead,” he said at a conference table in a room adjacent to his Atlanta office. His comments follow those of James Bullard, president of the St. Louis Fed, who said in an interview with the Journal on Friday, “we are in good shape” for a rate increase in September. The Fed has held its benchmark federal-funds rate near zero since December 2008 to try to spur borrowing, spending and investment. Most central bank officials, including Chairwoman Janet Yellen, have indicated they expect to start raising the rate this year, but they haven’t decided as a group on when to start.

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Such an awfully conservative estimate it’s simple useless.

The Oil Crash Has Caused a $1.3 Trillion Wipeout (Bloomberg)

It’s the oil crash few saw coming, and few have been spared as it erased $1.3 trillion, the equivalent of Mexico’s annual GDP, in little more than a year. Take billionaire Carl Icahn. When crude was at its peak in June 2014, the activist investor’s stake in Chesapeake Energy was worth almost $2 billion. Today, oil has lost more than half its value, Chesapeake is the worst performer in the Standard & Poor’s 500 Index and Icahn has a paper loss of $1.3 billion. The S&P 500, by contrast, is up 6.9% in that time. State pension funds and insurance companies have also been hard hit. Investment advisers, who manage the mutual funds and exchange-traded products that are staples of many retirement plans, had $1.8 trillion tied to energy stocks in June 2014, according to data compiled by Bloomberg.

“The hit has been huge,” said Chris Beck at Delaware Investments, an asset management firm in Philadelphia. “Everybody was thinking that oil would stay in the $90 to $100 a barrel range.” The California Public Employees Retirement System, a $303 billion fund that provides benefits to 1.72 million people, owned a $91.8 million slice of Pioneer Natural Resources in June 2014. At the time, Pioneer was a $33 billion company and one of the biggest shale producers in Texas. Today, Pioneer is worth $19 billion and Calpers’ stake has lost about $40 million in market value.

Since June 2014, the combined market capitalization of 157 energy companies listed in the MSCI World Energy Sector Index or the Bloomberg Intelligence North America Independent Explorers & Producers Index has lost about $1.3 trillion. If crude rebounds, investors may make some of their money back, though values may not recover as quickly as they fell. After the tech bubble burst in 2000, erasing $7 trillion from the Nasdaq Composite Index, it took almost 15 years for the market to return to its pre-crash level. Oil, which lost more than half its value in the past year, will rise less than $20 through the first quarter of 2016, according to the median estimate compiled by Bloomberg.

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Shorts allow for price discovery.

Chinese Brokers Halt Short Selling as Regulators Tighten Rules (Bloomberg)

Some Chinese brokerages have halted their short-selling businesses after the nation’s regulators tightened rules to freeze out day traders in a fresh bid to arrest a stock-market plunge. Citic Securities, China’s largest brokerage by revenue, is among firms that temporarily stopped short selling by clients after the Shanghai and Shenzhen exchanges unveiled a new measure requiring investors who borrow shares to wait one day to repay the loans. Short selling was suspended to facilitate the adoption of the rule and will resume once the system has adjusted, Citic said in a statement Tuesday. Huatai Securities, Guosen Securities and Great Wall Securities also said they have suspended the practice.

The new T+1 rule on short selling prevents investors from selling and buying back stocks on the same day, a practice that may “increase abnormal fluctuations in stock prices and affect market stability,” the Shenzhen exchange said Monday after the close of trading. China is taking unprecedented measures to stem a stock rout that has wiped almost $4 trillion in market value since mid-June. Exchanges have frozen 38 trading accounts, including one owned by Citadel Securities, as authorities probe whether algorithmic traders are causing disruptions. On Monday, Shanghai’s stock exchange warned two trading accounts for making a “large amount of sell orders affecting security prices or volume.”

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€100 billion won’t be nearly enough and they know it.

Greece Needs €100 Billion Debt Relief As Permanent Depression Looms (Telegraph)

Greece needs a debt write-down of almost €100bn (£70bn) if the country is to stand a chance of clawing its way out of a “prolonged and severe depression”, according to a leading think-tank. In a stark analysis, the National Institute of Economic and Social Research (NIESR) laid bare the impact of VAT hikes and strict budget targets that it said could become “self-defeating”. As Greek bank shares saw a third of their value wiped-off for a second day, NIESR’s analysis showed Greece’s economy will slump back into recession this year and next. By the end of 2016, the economy is forecast to be 30pc smaller than at its peak in 2007 and 7pc smaller than before it joined the euro in 2001.

“We don’t see Greece getting back to the level it was when it joined the euro in 2001, let alone anywhere near where it was before this crisis struck, so this is a prolonged and severe depression for Greece,” said Jack Meaning, research fellow at NIESR. Economists said Greece’s creditors would need to write-off or restructure €95bn of its €320bn debt pile, or around 55pc of gross domestic product (GDP), in order to reduce its debt stock to around 130pc of GDP, from a projection of 186.9pc this year. NIESR said this would make an IMF debt target of 120pc of GDP by 2020 – which it considers to be the maximum sustainable level – “at least possible”.

The think-tank’s forecasts showed the economy is expected to contract by 3pc in 2015 and 2.3pc in 2016, remaining in recession until the second half of 2016. Under current projections, Greece’s economy is not expected to get back to its pre-euro size until the first half of 2023. Simon Kirby, principle research fellow at NIESR, said: “You have to go back to the Great Depression to find economies hit harder by crisis. The 1920s were bad enough for the UK and that was nowhere near this.” Mr Meaning said there remained a “large chance” of a Greek exit fom the single currency, with VAT hikes likely to hit the economy more than suggested by ordinary fiscal multipliers. “Certainly, as the prospects for Greece deteriorate while inside the euro area, questions over Greece remaining a member will persist,” NIESR said.

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Absolutely absolutely excellent. Don’t miss Steve’s very clear points on debt. The seesaw metaphor: Germany asks Greece why they’re not up, and Greece replies: because you are!

Keiser Report: Summer Solutions featuring Prof. Steve Keen (Max Keiser)

In this summer solutions episode of the Keiser Report, Max Keiser and Stacy Herbert are joined by Professor Steve Keen, author of Debunking Economics, to discuss the problem of household debt and an overly large finance sector. They discuss possible solutions, such as perhaps ending the practice of subsidizing too-big-to-fail banks.

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Yada yada yada.

Greek Police’s Cyber Crime Unit To Investigate Varoufakis Plan (Kathimerini)

Ilias Zagoraios, the chief prosecutor of the Athens First Instance Court, has asked Greece’s cyber crime unit to investigate whether the public revenues service was hacked as part of an effort to create a parallel payment system under ex-Finance Minister Yanis Varoufakis. The former minister has claimed that he talked to a ministry employee about hacking into the General Secretariat for Public Revenues’ online system during alleged attempts to create a scheme that would help the government overcome liquidity problems. Varoufakis did not clarify whether this breach took place. However, his claims prompted an internal investigation by the general secretary for public revenues, Katerina Savvaidou. Now, a second probe will be carried out by the cyber crime unit, which should be able to provide its findings to Zagoraios before Savvaidou completes her investigation.

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Greece is going to haul in the cash. What happens after is a whole different story.

Greece And Lenders Strike Upbeat Tone, Deal Seen On Bailout (Reuters)

Both Greece and its lenders said on Tuesday they were optimistic they could broker a deal within days on a multi-billion euro bailout, striking a surprisingly upbeat tone on a process previously fraught with bitterness. A bailout worth up to €86 billion must be settled by Aug. 20 – or a second bridge loan agreed – if Greece is to pay off debt of €3.5 billion to the ECB that matures on that day. Wrapping up a day of talks in Athens, Greek Finance Minister Euclid Tsakalotos said negotiations were going better than expected. In Brussels, a Commission official said they were ‘encouraged’ by progress. “We are moving in the right direction and intense work is continuing,” Commission spokeswoman Mina Andreeva told Reuters.

It will be the indebted nation’s third bailout since 2010, designed to stave off bankruptcy and keep the country from toppling out of the euro zone. Negotiations have been tortuous in the past, bogged down in minutiae of reforms ranging from pensions to shop opening hours. Over much of this year they were also peppered with angry outbursts about responsibility, sovereignty and even blackmail. However, sources on the creditors’ side briefed on negotiations described the Greeks as being “very, very cooperative” in talks which resumed in the last week of July after weeks of deadlock over bailout terms. “They (the Greeks) are really working now,” one euro zone official said. “I think (Prime Minister Alexis) Tsipras has told his ministers to cooperate.”

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“The potential boost of confidence and hope they inspire when they leave the euro is vastly underestimated. We don’t live in a world merely dictated by numbers and stats. Confidence and hope matter.”

Short Seller Yu ‘Wildly Bullish’ on Greece in Euro Exit Scenario (Bloomberg)

Daniel Yu, best known for betting against companies via his short-selling firm Gotham City, says he’s waiting in the wings for Greece to leave the euro – so he can start buying. The short seller shot to fame by claiming to expose dubious practices at companies, and says that won’t change any time soon. But now, he’s eyeing Greek shares in the event the country repudiates its debt and exits the shared currency. When, not if, all of that happens, stocks will rise again, he says. “I’m going to be wildly bullish if they leave, I’ll look at anything and everything Greek,” Yu said by phone from New York. “If Greece leaves the euro, it basically means they’re not going to pay their debt, and that’s a good thing. Once you have debt relief, there are so many positive things that can happen to an economy.”

Recently back from a trip to Greece, Yu says the plight of the Mediterranean nation has now caught his attention. With the country running out of money, the IMF and many economists agree that its debt is too large for it to pay. Prime Minister Alexis Tsipras surrendered to the demands of its creditors in a July summit billed as Greece’s last chance to stay in the euro, but he said he capitulated because leaving the currency would have been too destructive. Choosing to remain anonymous until recently, Yu made waves last year after a bearish call on Let’s Gowex. The Madrid Wi-Fi provider filed for insolvency about a week after Gotham said the stock was worthless because it inflated revenue. In April 2014, Yu triggered a 39% one-day drop in Quindell, a U.K. technology company, after questioning its profits.

Famed short sellers making bullish calls is becoming somewhat of a trend: Jon Carnes, ranked the best short worldwide, said last month that he sees the Shanghai Composite Index more than doubling. Carson Block, the founder of Muddy Waters LLC, sent France’s Bollore Group soaring in February after betting the stock could double. In Greece, Yu will likely find plenty of bargains. Its stock market, which just reopened after a five-week shutdown, has already lost more than 85% of its value since 2007. A gauge tracking its banks trades at a record low, down for a sixth year. “The tidal wave is a Grexit, it needs to happen,” Yu said. “The potential boost of confidence and hope they inspire when they leave the euro is vastly underestimated. We don’t live in a world merely dictated by numbers and stats. Confidence and hope matter.”

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We simply need a way for sovereigns to restructure their debt. Or they’ll default for no good reason.

After The Greek Crisis, It’s Time For A New Deal On Debt (Kenneth Rogoff)

The IMF’s acknowledgement that Greece’s debt is unsustainable could prove to be a watershed moment for the global financial system. Clearly, heterodox policies to deal with high debt burdens need to be taken more seriously, even in some advanced countries. Ever since the onset of the Greek crisis, there have been basically three schools of thought. First, there is the view of the troika, which holds that the eurozone’s debt-distressed periphery (Greece, Ireland, Portugal, and Spain) requires strong policy discipline to prevent a short-term liquidity crisis from morphing into a long-term insolvency problem. The orthodox policy prescription was to extend conventional bridge loans to these countries, thereby giving them time to fix their budget problems and undertake structural reforms aimed at enhancing their long-term growth potential.

This approach has “worked” in Spain, Ireland, and Portugal, but at the cost of epic recessions. Moreover, there is a high risk of relapse in the event of a significant downturn in the global economy. The troika policy has, however, failed to stabilise, much less revive, Greece’s economy. A second school of thought also portrays the crisis as a pure liquidity problem, but views long-term insolvency as an outside risk at worst. The problem is not that the debt of countries on the eurozone’s periphery is too high, but that it has not been allowed to rise nearly high enough. This anti-austerity camp believes that even when private markets totally lost confidence in Europe’s periphery, northern Europe could easily have solved the problem by co-signing periphery debt, perhaps under the umbrella of Eurobonds backed ultimately by all (especially German) eurozone taxpayers.

The periphery countries should then have been permitted not only to roll over their debt, but also to engage in full-on countercyclical fiscal policy for as long as their national governments deemed necessary. In other words, for “anti-austerians,” the eurozone suffered a crisis of competence, not a crisis of confidence. Never mind that the eurozone has no centralised fiscal authority and only an incomplete banking union. Never mind moral-hazard problems or insolvency. And never mind growth-enhancing structural reforms. All of the debtors will be good for the money in the future, even if they have not always been reliable in the past. In any case, faster GDP growth will pay for everything, thanks to high fiscal multipliers. Europe passed up a free lunch.

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Nice piece of history.

Germans Get Debt Relief Twice in 20th Century, But Demand Greeks Pay Up (TRN)

Jayati Ghosh, Professor of Economics at Nehru University, discusses the economic history of Germany’s debt relief in both the 1930s and 1950s and why policies of growth rather than austerity led them to become an economic powerhouse.

DESVARIEUX: So let’s start off in the 1930s. How did Germany handle its debt crisis back then?

GHOSH: Well, remember that this is debt that Germany got essentially because it had to pay war reparations after it lost the first world war. And at that time many economists including John Maynard Keynes had said these reparations are simply too high. And the country will not be able to pay them. But what Germany had to do is to borrow so as to make these payments. And this of course became more and more difficult to manage. The U.S. had been lending Germany money to actually pay this, but when the U.S. had its crash in September ’29, it actually said that it was not going to actually give any more loans and wanted a repayment of the loans it had made. Now, this created all kinds of problems in Germany and the Weimar Republic, actually one of the reasons for its collapse was this.
In 1933 when the Nazis came to power, they unilaterally suspended all debt payments and basically defaulted on the debt.

DESVARIEUX: Okay. Now, let’s fast forward to the 1950s. And this was a post-World War II environment. Germany was granted substantial debt relief. Is that right?

GHOSH: Absolutely. Now, remember that some of this debt was in fact pre-war debt, which was the debt that had been taken on by Germany and not paid since then, since 1933. But more than half of this was actually debt again from the U.S. which was part of the Marshall Plan. The United States after the second world war actually gave a lot of money to Western Europe for its reconstruction and recovery. In many countries it gave grants, but to Germany it gave loans. So more than half of German debt was Marshall Plan loans from the United States. It wasn’t just the war reparations stuff. And another large part of it was the debt that it had incurred in the pre-war period and hadn’t paid.

A group of creditors, about 20 creditors of Germany, which in fact ironically included Greece at the time, got together in negotiations in London in 1953, and they met between February and August in 1953. they ended up with something called the London Agreement, which basically gave Germany very astonishingly generous terms for restructuring its debt and repaying it. What they did is they cut this debt, which was a total of about $32 billion at the time, they cut it by half. And they cut both the pre-war and the post-war part. Most of it was done by the United States, but it was also done by the United Kingdom, and in fact by all the creditors together including Greece.

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Why money flows back into banks.

In Cash-Starved Greece, Plastic Casts Light Into Shadow Economy (Bloomberg)

Greece’s banking crisis is having at least one positive outcome, and it’s made of plastic. In a country where cash is king and undeclared transactions still make up about a quarter of the economy, about 1 million debit cards have been issued by banks since the government closed lenders for three weeks and imposed controls on euro bills. Emergency measures that some officials warned might spur the black market are showing signs of doing the opposite. Alpha Bank issued about 220,000 cards in July, more than all of last year, as mainly pensioners realized that they had to access their money at cash machines and elsewhere, said Leonidas Kasoumis, general manager for household lending.

Supermarket and gasoline sales paid by debit cards doubled in the wake of controls; usage in the countryside tripled, he said. “Capital controls were a big trigger,” Kasoumis said. “It’s good for merchants, because cash is limited; it’s good for banks because it reduces operational costs. But the best news is for the economy.” The restrictions on cash were introduced in late June as banks hemorrhaged money and were kept alive by a drip-feed from the ECB. Greeks can withdraw €420 a week, though there’s no limit on spending with debit cards provided the transaction is within the country. What’s occurred is a shift that’s unprecedented for a country with the smallest number of electronic payments per head in the EU, according to ECB figures.

The cash culture contributed to the country’s poor record in curbing the shadow economy and collecting taxes, one of the reasons that led Greece to seek its first bailout from its euro area partners and the IMF in 2010. The increase in cards coming into circulation will help combat that, as more buying and selling of goods and services goes through the books, according to Theodore Kalantonis at Eurobank. Until now, payments on plastic accounted for 6% of the total, one of the lowest rates in Europe, he said.

Demand from businesses for card payment systems has surged, even from non-traditional customers such as dentists and doctors, according to Kalantonis. The largest bank, National Bank of Greece, issued more than 400,000 debit cards during the last four weeks. The number of active Visa debit cards in Greece more than doubled in July from previous months, said Nikos Kabanopoulos, the country manager for Visa Europe. The company, which processes almost 60% of Greek point-of-sale card payments, saw a 135% increase in card transactions in the two weeks immediately after the capital controls were imposed, Kabanopoulos said. In 2014, spending on Visa cards was €1 for every €37 compared to €1 for €6 in Europe as a whole, he said.

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” It is only possible to deny the hard economical facts for a certain period of time.”

The Failure of Politics: Merkel’s Euro Debacle (Daniel Stelter)

In 2010, at the first and definitely not the last height of the euro crisis, Merkel and her team of advisors most probably had the following decision box in mind: How do we minimize the immediate political damage for us in Germany and how do we postpone the long-term political damage — even minimize it when it comes to pass? The short-term political damage would have been clear. Preventing an immediate, uncontrollable collapse of the eurozone was necessary as this would have caused huge financial losses and demolished Merkel`s domestic reputation. But it was also necessary to keep the German public’s illusion that the Euro would only bring benefits — and not lead to bailouts and transfers to other countries.

In addition, it would also have been highly unpopular to admit that, in reality, it was German banks (not Greece and the rest of the periphery countries) that had to be rescued. The former had given way too much credit to the latter and funded an unsustainable consumption boom in today’s crisis countries. Merkel aimed for the upper right box: Happy voters and postponing any damage. Politically, that was understandable enough. But her choice entailed no effective solution of the crisis. With more political courage on her part, she could have opted for a real solution in 2010. Such a solution required fixing the eurozone through a broad debt restructuring and mechanisms for more economic integration, which implies permanent transfers.

Of course, both of these components are highly unpopular among the German public – they were so then and are so today. Thus, she chose the “extend and pretend” option, still aiming for the upper right box hoping for a happy end and avoiding bad news today– by providing “credit” to already over indebted countries. At first it seemed to work. The German public accepted the conditional support and believed its leadership that no taxpayers’ money would be spent for other countries. The eurozone survived but it was not because of the politics implemented by European leaders but due to the ECB that did whatever it took to keep the Euro afloat. Unfortunately for Merkel, it didn’t last. It is only possible to deny the hard economical facts for a certain period of time. The latest effort to “rescue” Greece and the Euro made this transparent for everybody.

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The old “fathers of the euro” idealists still think they know just what to do. Here’s thinking someone else should clean up their mess.

Europe Needs Major Investment To Avoid Another Greece (Delors/Enderlein)

The good news to take from last month’s Greek debt deal is that Greece will remain inside the euro area. At the same time, the negotiations have shown the weaknesses of the single currency. It will take time to assess the full consequences, but in the aftermath of yet another last-minute decision, we see three main dangers and three fundamental challenges. The first danger is complacency. Many in Europe have an interest in looking at Greece as an isolated special case, but the Greek crisis is indicative of more fundamental disagreements on the functioning of the euro-area. If we are honest with ourselves, two key challenges remain unanswered: how to achieve greater risk-sharing and how to achieve greater sovereignty-sharing.

Minimising the consequences of the discussion with Greece would be paramount to not taking up those challenges. The second danger is to indulge in a lengthy blame game. Inevitably, some continue to say that this deal was forced by a certain vision of how the euro-area should function. Others say it is a consequence of the lack of cooperation by the Greek government. We do not believe such debates can contribute to a forward-looking discussion on how to integrate the euro area further and to complete European monetary union. The third danger is the continuation of muddling-through policies.

If Europe requires more sharing of sovereignty and more risk-sharing, the agreement with Greece is just another example of ad-hoc sovereignty-sharing with very limited legitimacy and of ad-hoc risk-sharing through opaque channels such as emergency liquidity assistance. The experience of past years shows that quick-fix solutions run the risk of neglecting the big-picture implications. In this context, the discussions surrounding Greece give rise to three specific challenges that we urge European policy-makers to take up with calm determination. We need a balanced combination of more investments, smart reforms and a quantum leap in integration, based in particular on much stronger Franco-German cooperation.

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Transfer union. Too late for Europe to establish one, and that dooms the euro.

America’s Un-Greek Tragedies in Puerto Rico and Appalachia (Paul Krugman)

On Friday the government of Puerto Rico announced that it was about to miss a bond payment. It claimed that for technical legal reasons this wouldn’t be a default, but that’s a distinction without a difference. So is Puerto Rico America’s Greece? No, it isn’t, and it’s important to understand why. Puerto Rico’s fiscal crisis is basically the byproduct of a severe economic downturn. The commonwealth’s government was slow to adjust to the worsening fundamentals, papering over the problem with borrowing. And now it has hit the wall. What went wrong? There was a time when the island did quite well as a manufacturing center, boosted in part by a special federal tax break. But that tax break expired in 2006, and in any case changes in the world economy have worked against Puerto Rico.

These days manufacturing favors either very-low-wage nations, or locations close to markets that can take advantage of short logistic chains to respond quickly to changing conditions. But Puerto Rico’s wages aren’t low by global standards. And its island location puts it at a disadvantage compared not just with the U.S. mainland but with places like the north of Mexico, from which goods can be quickly shipped by truck. The situation is, unfortunately, exacerbated by the Jones Act, which requires that goods traveling between Puerto Rico and the mainland use U.S. ships, raising transportation costs even further. Puerto Rico, then, is in the wrong place at the wrong time. But here’s the thing: while the island’s economy has declined sharply, its population, while hurting, hasn’t suffered anything like the catastrophes we see in Europe.

Look, for example, at consumption per capita, which has fallen 30%in Greece but has actually continued to rise in Puerto Rico. Why have the human consequences of economic troubles been muted? The main answer is that Puerto Rico is part of the U.S. fiscal union. When its economy faltered, its payments to Washington fell, but its receipts from Washington — Social Security, Medicare, Medicaid, and more — actually rose. So Puerto Rico automatically received aid on a scale beyond anything conceivable in Europe.

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Just like Greece. So Krugman’s argument holds only to a point.

Misery Deepens For Those In Puerto Rico Who Can’t Leave (AP)

Nearly 10 years into a deep economic slump, Puerto Rico is no closer to pulling out, and, in fact, is poised to plummet further. The unemployment rate is above 12%. Some 144,000 people left the U.S. territory between 2010 and 2013, and about a third of all people born in Puerto Rico now live in the U.S. mainland. Schools and businesses have closed amid the exodus. The population of 3.5 million is expected to drop to 3 million by 2050. The government has tried to boost revenue by hiking the sales tax to 11.5%, higher than any U.S. state, and closing government offices. Its debt-burdened power utility already charges rates that on average are twice those of the mainland, and is under pressure from bondholders to raise them higher.

A $58 million bond payment due Monday went unpaid. If defaults continue, analysts say Puerto Rico will face numerous lawsuits and increasingly limited access to markets, putting a recovery even more out of reach. Carmen Davila, a 65-year-old retired truck driver and window dresser, recently withdrew her money from the bank amid fears the government would shut down and seize it. “Things are happening in Puerto Rico that we’ve never seen before,” Davila said. “Puerto Rico has always had its ups and downs, but you could handle it. This now is serious.” The exodus of people from the island, mainly to central Florida and New York, is palpable. Nearly everyone knows someone who has left, or plans to do so soon. The impact of the departures, and the decline in spending of those remaining, is obvious.

Crowds have thinned at restaurants and movie theaters; families like Davila’s have cut back on summer excursions to beaches and mountains; and even San Juan’s notorious traffic jams have dwindled somewhat. Jose Hernandez said his commute into San Juan’s colonial district, once about two hours, now takes roughly 20 minutes. The 62-year-old lottery vendor would join the departure, too, if not for the grandchildren he helps support – even though he recognizes doing so would only add to the trouble. “Fewer people means there are less of us to help boost the economy,” he said. “This is the worst I’ve seen it. … There are no people on the street. They’ve disappeared.”

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And, of course, worse to come.

Puerto Rico Has Another Debt Worry on the Horizon (NY Times)

While Puerto Rico’s first bond default in its history reverberated through the financial markets on Tuesday, another move by the cash-poor island may provide a clue to where the next trouble spot lies. After openly acknowledging on Monday afternoon that it had not made a $58 million bond payment, the government quietly disclosed in a financial filing later that afternoon that it had temporarily stopped making contributions of $92 million a month into a fund that is used to make payments on an additional $13 billion in bond debt. A small payment from the fund is due on Sept. 1. Unlike the bond payments that went into default on Monday, the ones coming due are on general obligation bonds — the kind many investors have been led to believe would never go into default because the issuer’s full faith, credit and taxing authority stand behind them.

Puerto Rico issued such bonds over the years to raise money for a variety of government projects, and investors bought them eagerly because the island’s constitution explicitly guaranteed that such bonds would be paid. The general obligation payment due to bondholders on Sept. 1 is for a mere $5 million, an amount so small that even if the redemption fund is empty at that point, Puerto Rico could still produce the cash right out of general revenue. It would presumably want to do so because of the constitutional requirement. But a much bigger payment on the general obligation bonds, about $370 million, comes due on Jan. 1. If Puerto Rico misses that one, “it would be an earthquake for the markets,” said Matt Fabian at Municipal Market Analytics. “Defaulting on the Public Finance Corporation bonds was a change in direction,” he said, referring to the government unit whose bonds have been in default since Monday. “Defaulting on the general obligation bonds would change the game entirely.”

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Absolutely. Could see it coming from miles and years away. “You have a resource economy that’s been blown apart sitting on top of a housing bubble..”

‘Perfect Storm’ Engulfing Canada’s Economy Perfectly Predictable (Tyee)

Economists, an irrational tribe of short-sighted mathematicians, are now calling Canada’s declining economic fortunes “a perfect storm.” It seems to be the only weather that complex market economies generate these days, or maybe such things are just another face of globalization. In any case, economists now lament that low oil prices have upended the nation’s trade balance: “Canada has posted trade deficits every month this year, and the cumulative 2015 total of $13.6 billion is a record, exceeding the next highest, in 2009, of $2.95 billion.” But this unique perfect storm gets darker. China, which Harperites eagerly embraced as the globe’s autocratic growth locomotive, has run out of steam.

As the country’s notorious industrial revolution unwinds, China’s stock market has imploded. Communist party cadres are now moving their money to foreign housing markets in places like Vancouver. Throughout the world, analysts no longer refer to bitumen as Canada’s destiny, but as a stranded asset. They view it as a poster child for over-spending, a symbol of climate chaos, a signature of peak oil and a textbook case of miserable energy returns. Nearly $60 billion worth of projects representing 1.6 million barrels of production were mothballed over the last year. A new analysis by oil consultancy Wood Mackenzie reveals that capital flows into the oilsands could drop by two-thirds in the next few years.

The Bank of Canada doesn’t describe the downturn led by oil’s collapse as a recession because the “R word” smacks of negative thinking or just plain reality. Surely lower interest rates will magically soften the consequences of a decade of bad resource policy decisions, Ottawa’s elites now reason. Meanwhile the loonie, another volatile petro-currency, has predictably dropped to its lowest value in six years along with the price of oil. A Wall Street short seller sums up the mess better than the mathematicians. “You have a resource economy that’s been blown apart sitting on top of a housing bubble,” Marc Cohodes told Maclean’s magazine. “That’s a toxic mix.” And so my editor asked me to write this sentence: I told you so.

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That’d be good. But the Chilcot report is still not out.

Tony Blair Could Face Trial Over ‘Illegal’ Iraq War: Jeremy Corbyn (Guardian)

Tony Blair should stand trial on charges of war crimes if the evidence suggests he broke international law over the “illegal” Iraq war in 2003, the Labour leadership frontrunner Jeremy Corbyn has said. Corbyn called on the former prime minister to “confess” the understandings he reached with George W Bush in the run up to the invasion. Asked on BBC Newsnight whether Blair should stand trial on war crimes charges, Corbyn said: “If he has committed a war crime, yes. Everybody who has committed a war crime should be.” The veteran MP for Islington North was a high-profile opponent of the war and became a leading member of the Stop the War coalition. He said: “It was an illegal war. I am confident about that.

Indeed Kofi Annan [UN secretary general at the time of the war] confirmed it was an illegal war and therefore [Tony Blair] has to explain to that. Is he going to be tried for it? I don’t know. Could he be tried for it? Possibly.” Corbyn said he expects the eventual publication of the Chilcot report will force Blair to explain his discussions with President Bush in the runup to the war. He said: “The Chilcot report is going to come out sometime. I hope it comes out soon. I think there are some decisions Tony Blair has got to confess or tell us what actually happened. What happened in Crawford, Texas, in 2002 in his private meetings with George [W] Bush. Why has the Chilcot report still not come out because – apparently there is still debate about the release of information on one side or the other of the Atlantic.
At that point Tony Blair and the others that have made the decisions are then going to have to deal with the consequences of it.”

On Newsnight, Corbyn made clear that he is opposed to British involvement in air strikes against Islamic State forces in Iraq and Syria. Prime minister David Cameron is hoping to win parliamentary support to extend Britain’s involvement in the aerial bombing of Isis targets from Iraq to Syria. Corbyn said: “I would want to isolate Isis. I don’t think going on a bombing campaign in Syria is going to bring about their defeat. I think it would make them stronger. I am not a supporter of military intervention. I am a supporter of isolating Isis and bringing about a coalition of the region against them.”

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“..the US dropped more bombs on North Korea than it had dropped in the entire Pacific theater during World War II.”

Americans Killed 20% Of North Korea’s Population In Three Years (Fisher)

Perhaps no country on Earth is more misunderstood by Americans than North Korea. Though the country’s leaders are typically portrayed as buffoonish, even silly, in fact they are deadly serious in their cruelty and skill at retaining power. Though the country is seen as Soviet-style communist, in fact it is better understood as a holdover of Japanese fascism. And there is another misconception, one that Americans might not want to hear but that is important for understanding the hermit kingdom: Yes, much of its anti-Americanism is cynically manufactured as a propaganda tool, and yes, it is often based on lies. But no, it is not all lies. The US did in fact do something terrible, even evil to North Korea, and while that act does not explain, much less forgive, North Korea’s many abuses since, it is not totally irrelevant either.

That act was this: In the early 1950s, during the Korean War, the US dropped more bombs on North Korea than it had dropped in the entire Pacific theater during World War II. This carpet bombing, which included 32,000 tons of napalm, often deliberately targeted civilian as well as military targets, devastating the country far beyond what was necessary to fight the war. Whole cities were destroyed, with many thousands of innocent civilians killed and many more left homeless and hungry. For Americans, the journalist Blaine Harden has written, this bombing was “perhaps the most forgotten part of a forgotten war,” even though it was almost certainly “a major war crime.” Yet it shows that North Korea’s hatred of America “is not all manufactured,” he wrote. “It is rooted in a fact-based narrative, one that North Korea obsessively remembers and the United States blithely forgets.” And the US, as Harden recounted in a column earlier this year, knew exactly what it was doing:

“Over a period of three years or so, we killed off – what – 20% of the population,” Air Force Gen. Curtis LeMay, head of the Strategic Air Command during the Korean War, told the Office of Air Force History in 1984. Dean Rusk, a supporter of the war and later secretary of state, said the United States bombed “everything that moved in North Korea, every brick standing on top of another.” After running low on urban targets, U.S. bombers destroyed hydroelectric and irrigation dams in the later stages of the war, flooding farmland and destroying crops.

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100% correct. Cap and trade is a ponzi game.

Carbon Tax, Cap And Trade Don’t Work (Topple)

Dear Editor, With a federal election coming in October, it is important that Canadians be aware of the candidates’ positions on climate change, formerly called global warming. Most scientists believe that our planet is heating up due to our burning of fossil fuels, thereby causing severe changes to our climate and weather. A minority of scientists attribute climate change to our sun. But politicians are openly speaking of how to address this matter. Some advocate a carbon tax, which would be a straight tax for carbon emissions on consumers and producers. Other politicians call for a cap-and-trade system in carbon, which would raise the price of carbon through a type of stock market in carbon credits. These two proposals would enrich governments and financial elites, and seriously drive up the price of electricity, natural gas, gasoline and the products we make using them.

This has happened in Europe along with much corruption, job loss and economic burdens. The United Nations Panel on Climate Change has called for $120 billion per year through carbon tax or cap-and-trade programs to be transferred by us to developing countries to allow them to catch up to us in development and to address carbon reduction later. Many of these countries are unaccountable dictatorships. If this sounds like a massive wealth transfer, it is. We are already losing many jobs due to the high cost of electricity driven by billions of dollars in subsidies for useless windmills and solar panels, with companies leaving Ontario for cheaper locations. This would multiply and worsen under a carbon tax or cap-and-trade system.

As for Canada, we contribute 1.6 per cent to the world’s carbon dioxide, and our Alberta oil sands contribute .001 per cent. We are a vast northern nation that requires fossil fuels and electricity to heat our homes and to travel. Yet we are targeted by climate change advocates, even though nations such as China and India far outweigh our carbon emissions, and are not targeted for such emissions. In fact, those nations burn overwhelming amounts of dirty coal and yet we are expected to transfer our jobs and money to them.

If carbon dioxide is such a threat to our planet, then why can developing nations be allowed to continue to pour carbon into the Earth’s atmosphere? And why, under the proposed carbon tax or cap-and-trade, can western companies and elites pay a fine for carbon emissions without reducing them? That is a very costly double standard. Canada cannot afford the economic turmoil and job loss that would occur with the so-called remedies to climate change or global warming. Beware of politicians that advocate this economically disastrous proposal.

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Nah, a Europe without morals.

The Migrant Crisis in Calais Exposes a Europe Without Ideas (NY Times)

Europe is caught between those who want to get in, those who want to get out, and those who want to destroy it. The incomers are desperate, the outbound are angry and the destroyers are brandishing flags. This triple onslaught has, for the first time in its history, left the 28-member European Union more vulnerable to fracture than it is susceptible to further integration. A near borderless Europe at peace constitutes the great achievement of the second half of the 20th century. That you can go from Germany to Poland across a frontier near effaced and scarcely imagine the millions slaughtered seven decades ago is testament to the accomplishment. The European Union is the dullest miracle on earth. This Europe is not at immediate risk of disintegration. But it is fraying.

Let’s start with those who want to get in. They have nothing to lose because they have lost everything. In many cases they are from Afghanistan (at war since anyone can remember), from Syria (four million refugees and counting), Somalia, Iraq, Eritrea, the Maghreb or elsewhere in Africa. At the end of odysseys involving leaking boats and looting traffickers, these migrants are forcing their way into the Channel Tunnel. They have blocked traffic and commerce. They have provoked a flare-up of that perennial condition called Anglo-French friction. They have drawn the ire of The Daily Mail (trumpet for a lot of what’s worst in Britain). The paper thinks it may be time to deploy the army. But bringing in the military, or building walls, will resolve nothing.

The 3,000 or so desperate people in Calais are part of a far bigger phenomenon. More than 100,000 refugees or migrants have entered Europe across the Mediterranean so far this year. A not insignificant number have drowned. War, oppression, persecution and economic hardship — combined with the magnetic accessibility even in the world’s poorest recesses of images of prosperity and security — have created a vast migratory wave. From Milan’s central train station to the streets of Calais its impact is apparent. Give me some of that, the disinherited proclaim. Europe has mostly shrugged. Piecemeal small-mindedness, in 28 national iterations, has been the name of the game. There has been no unity or purpose.

After much hand-wringing and wrangling, and pressure from hard-pressed Italy, European leaders did agree to share the “burden” of some 40,000 refugees, a paltry number. More than 3.5 million refugees are now in Jordan, Turkey and Lebanon, countries far less prosperous than European nations. A continent’s shame is written in the migrants’ misery.

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 May 13, 2015  Posted by at 10:15 am Finance Tagged with: , , , , , , , , ,  5 Responses »


Lewis Wickes Hine Workers in Maryland packing company 1909

Obama’s Plans For TPP, TTIP Trade Deals In Tatters After Senate Vote (Guardian)
US Senate Votes Against Fast-Tracking TPP (RT)
Top Democratic Senator Blasts Obama’s TPP Secrecy (Intercept)
US Set to Rip Up UBS Libor Accord, Seek Conviction (Bloomberg)
No Respite In Selloff Of Low-Risk Bonds (Reuters)
Everyone Looks in the Wrong Place for the Answer to Low Real Rates (Bloomberg)
China Outlook Even Worse Than Imagined: Analyst (CNBC)
EU Said to Consider Plan for Greece in Event of Euro Exit (Bloomberg)
Greece’s Creditors Said to Seek €3 Billion in Budget Cuts (Bloomberg)
Greece Wants Action From Lenders (Reuters)
Greece Tapped Reserves At IMF To Make Debt Repayment (Reuters)
This Is How Greece Kept Its Budget On Track In Q1 (Macropolis)
The Real Sign That Greece’s Financial Turmoil Is Getting Worse (Telegraph)
America’s Achilles’ Heel (Dmitry Orlov)
Central Banks Need To Talk A Lot Less And Act A Lot More (Satyajit Das)
What Does Milan Gain By Hosting Bloated Expo 2015 Extravaganza? (Guardian)
Europe Prepares Plan To Fight Human-Traffickers (Spiegel)
How Struggling Families Are Being Forced Out of London (Vice)
Earth Endangered by New Strain of Fact-Resistant Humans (Borowitz)

“We need to fundamentally renegotiate American trade agreements so that our largest export doesn’t become decent-paying American jobs,” said Sanders.”

Obama’s Plans For TPP, TTIP Trade Deals In Tatters After Senate Vote (Guardian)

Barack Obama’s ambitions to pass sweeping new free trade agreements with Asia and Europe fell at the first hurdle on Tuesday as Senate Democrats put concerns about US manufacturing jobs ahead of arguments that the deals would boost global economic growth. A vote to push through the bill failed as 45 senators voted against it, to 52 in favor. Obama needed 60 out of the 100 votes for it to pass. Failure to secure so-called “fast track” negotiating authority from Congress leaves the president’s top legislative priority in tatters. It may also prove the high-water mark in decades of steady trade liberalisation that has fuelled globalisation but is blamed for exacerbating economic inequality within many developed economies with the outsourcing of manufacturing jobs.

Internet activists had said the deal would curb freedom of speech, while other critics charged it would enshrine currency manipulation. Drama over the landmark trade negotiations has been escalating for weeks, propelling Obama into a public feud with Democrats – going so far as to accuse opposing members within his party of lying about the fast-track bill. The vote marked a rare moment in which Republicans lined up to support the president’s agenda, even as GOP leadership pointed to Obama’s failure to rally his own party in favor of the legislation.

“Really it’s a question of does the president of the United States have enough clout with members of his own political party to produce enough votes to get this bill debated and ultimately passed,” Texas senator John Cornyn, the No 2 Republican in the Senate, told reporters on Capitol Hill. White House officials dismissed the Senate vote against fast tracking as a “procedural snafu” but without this crucial agreement from lawmakers to give the administration negotiating freedom, it is seen as highly unlikely that international diplomats can complete either of the two giant trade deals currently in negotiation: the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP).

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Major defeat. The increased weight of Elizabeth Warren and Bernie Sanders has a lot to do with this.

US Senate Votes Against Fast-Tracking TPP (RT)

Lawmakers in the United States Senate have thrown a wrench in a plan that would have given President Barack Obama “fast track” authority to advance a 12-nation trade deal between the US and Pacific Ring partners. In a 52-45 vote on Tuesday afternoon, the Senate opposed moving forward for now on the Trans-Pacific Partnership. A procedural vote required at least 60 “ayes” in order to let the Senate host discussions on whether or not to give the president so-called “fast track” authority on the matter. Failure to reach that threshold puts the future of the trade agreement in jeopardy. Had the vote gone the other way, lawmakers would have hosted a debate to decide whether to give President Obama the power to approve the potential deal on his own, before asking Congress to either ratify or reject any agreement.

Ahead of Tuesday’s vote, Senator Orrin Hatch (R-Utah), the chairman of the Senate Finance Committee, told Reuters the possibility of expediting the process as the White House had requested “may be dead” due to lack of support soon after the procedural vote failed. “In the future, if we see a sharp decline in US agriculture and manufacturing,” Hatch said after the votes were counted, “…people may very well look back at today’ events and wonder why we couldn’t get our act together.” “I’m already thinking that: why couldn’t we get our act together?” he asked. “I have no doubt some will come to regret what went on here today, one way or another.”

Sen. John Cornyn (R-Texas), the majority whip of the chamber, added on the Senate floor that he was disappointed that Democratic lawmakers refrained from voting for the fast-track authorization, but said he was willing to “work with anybody, including the pres of the United States, to try to get our economy growing again.” President Obama has been touting the TPP as a catalyst for the domestic jobs market and an enabler of workers’ rights abroad, and last week he pitched the deal at the main office of footwear giant Nike. “If I didn’t think that this was the right thing to do for working families then I wouldn’t be fighting for it,” Obama told the crowd at Friday’s event. [..] TPP partners currently include the United States, Japan, Mexico, Canada, Australia, Malaysia, Chile, Singapore, Peru, Vietnam, New Zealand and Brunei.

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‘Wait a minute. I’m going to take notes and then you’re going to take my notes away from me and then you’re going to have them in a file, and you can read my notes? Not on your life.’”

Top Democratic Senator Blasts Obama’s TPP Secrecy (Intercept)

Sen. Barbara Boxer, D-Calif., today blasted the secrecy shrouding the ongoing Trans-Pacific Partnership negotiations. “They said, well, it’s very transparent. Go down and look at it,” said Boxer on the floor of the Senate. “Let me tell you what you have to do to read this agreement. Follow this: you can only take a few of your staffers who happen to have a security clearance — because, God knows why, this is secure, this is classified. It has nothing to do with defense. It has nothing to do with going after ISIS.” Boxer, who has served in the House and Senate for 33 years, then described the restrictions under which members of Congress can look at the current TPP text.

“The guard says, ‘you can’t take notes.’ I said, ‘I can’t take notes?’” Boxer recalled. “‘Well, you can take notes, but have to give them back to me, and I’ll put them in a file.’ So I said: ‘Wait a minute. I’m going to take notes and then you’re going to take my notes away from me and then you’re going to have them in a file, and you can read my notes? Not on your life.’” Boxer noted at the start of her speech that she hoped opponents of the trade promotion authority bill — the so-called fast-track legislation required to advance the TPP — would be able to block the bill via a filibuster. Senate Majority Leader Mitch McConnell, R-Ky., is expected to file a motion to invoke cloture on the measure later this afternoon.

“Instead of standing in a corner, trying to figure out a way to bring a trade bill to the floor that doesn’t do anything for the middle class — that is held so secretively that you need to go down there and hand over your electronics and give up your right to take notes and bring them back to your office — they ought to come over here and figure out how to help the middle class,” Boxer said.

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We must see jail time now.

US Set to Rip Up UBS Libor Accord, Seek Conviction (Bloomberg)

The U.S. Justice Department is set to rip up its agreement not to prosecute UBS Group AG for rigging benchmark interest rates, according to a person familiar with the matter, taking a new step to hold banks accountable for repeat offenses. The move by the U.S. would be a first for the industry, making good on a March threat by a senior Justice Department official to revoke such agreements and putting banks on notice that these accords can be unwound if misconduct continues. UBS is among the five banks that are poised to reach settlements with U.S. regulators over allegations that they manipulated currency markets, people familiar with the situation have said.

Four of them – Citigroup, JPMorgan, Barclays and Royal Bank of Scotland – will likely enter pleas related to antitrust violations, people familiar with the talks have said. “This is basically a trade off,” said Andreas Venditti at Vontobel in Zurich. “They get leniency on foreign exchange and a lower fine and instead the Justice Department comes back with Libor.” UBS’s cooperation in the currency probe may help shield it from antitrust charges in that matter. However, the bank is still exposed to fraud charges in that case, and any admission of wrongdoing could also put it in violation of an earlier deal the Zurich-based bank struck with the Justice Department.

In a December 2012 non-prosecution agreement with the U.S. to resolve a worldwide investigation into the manipulation of the London interbank offered rate, or Libor, UBS promised not to commit crimes for two years. That agreement, which was set to expire last year, was extended through December as the Justice Department investigated currency rigging. As part of the currency settlements, which are set to be announced in coming days, UBS is expected to plead guilty to a charge stemming from the Libor agreement.

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QE becomes the snake that eats its tail.

No Respite In Selloff Of Low-Risk Bonds (Reuters)

Low-risk bonds sold off again on Tuesday driving down stocks and helping push the euro higher against the dollar. Ten-year U.S. Treasury yields, the benchmark for global borrowing costs, hit their highest since early December, while German 10-year yields added 8 basis points to 0.67%. Volatility in the bond markets weighed on stocks, adding to existing investor anxiety over the perilous state of Greece’s finances. Shares in Europe and followed Wall Street lower. “It’s a matter of concern for the market. When any particular asset class goes through periods of extreme volatility in a short space of time, people feel the pressure to take their risk exposure lower,” Ian Richards, global head of equities strategy at Exane BNP Paribas, said.

Less than a month ago German 10-year yields hit a record low of 0.05%, driven down by a €1 trillion ECB bond-purchase scheme intended to kick-start inflation. Traders, who struggle to fully explain the recent yield surge, blame it on a rise in inflation expectations, higher oil prices, and restricted liquidity, caused by ECB purchases, as investors sought to exit a crowded trade. “It’s clear that the market hasn’t stabilized. Before the sell-off started the common perception was one of low volatility. Now investors are more cautious, asking for a premium for the volatility we’ve seen recently,” said Jan von Gerich, chief fixed income analyst at Nordea.

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“For years, companies have been choosing [to outsourec labor], which reduces the requirement for capital in the West, thereby reducing the price of that capital.”

Everyone Looks in the Wrong Place for the Answer to Low Real Rates (Bloomberg)

Ben Bernanke and Larry Summers recently had a public discussion on global interest rates, which currently are exceptionally low, and whether or not secular stagnation—the idea that slow growth in the developed economies may be here to stay—is the culprit. They proved unable to agree on either the cause of, or a solution to, current low real rates. Bernanke, the former central banker, sees the problem as a global savings glut and the solution in monetary policy and structural reforms. Larry Summers, the former U.S. Treasury Secretary, suggests that if secular stagnation is the problem, the solution lies in expansionary fiscal policies. What if they’re both wrong?

In a column published in voxeu.org over the weekend, Toby Nangle, head of multi-asset allocation at Columbia Threadneedle Investments, suggests that current low real rates have little to do with central banks or fiscal policy. The problem is a much larger and longer trend than either Bernanke or Summers suggest and is due, according to Nangle, to the effects of globalization and the collapse of labor power in the West. At its simplest, Nangle’s thesis is that the supply of cheap, skilled labor from East Asia and former communist countries over the past few decades has meant that global labor costs have remained lower than they otherwise would have been. Globalization has meant that industry has had access to this alternative source of labor, which has massively reduced labor power to negotiate higher wages in the West.

[..] a large selection of people who are well-off in global terms—the Western working class—have not benefited at all from the past three decades of global growth. Access to a new reserve army of cheap global labor through globalization has encouraged companies to invest in this workforce rather than in capital at home. A garment company, for example, could chose to build a highly automated, capital-intensive factory in the U.S. or build a low-tech, high-labor factory in the Far East. For years, companies have been choosing the latter option, which reduces the requirement for capital in the West, thereby reducing the price of that capital. For labor-market pricing power to remain weak, the supply of excess labor has to remain strong. Labor market globalization is largely a China story, and there are signs that supply is now drying up.

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“Whenever a country increases its debt to GDP sharply over five years, in the next five years there’s a 70% chance of a financial crisis and 100% chance of a major economic slowdown..”

China Outlook Even Worse Than Imagined: Analyst (CNBC)

The worst of the Chinese economic slowdown is likely still ahead because of the nation’s debt, according to a senior Morgan Stanley investment strategist. “China, to try and sustain its growth rate in the post-financial-crisis era, has engaged in the largest credit binge of any emerging market in history,” said Ruchir Sharma, head of emerging markets and global macro at Morgan Stanley Investment Management, Sharma, speaking Tuesday at the Global Private Equity Conference in Washington, D.C., predicted that the credit boom would cause problems. Whenever a country increases its debt to GDP sharply over five years, in the next five years there’s a 70% chance of a financial crisis and 100% chance of a major economic slowdown, according to Morgan Stanley research.

The Chinese government this week cut interest rates for the third time in six months because of projected 7% GDP growth this year, the lowest level in more than two decades. Sharma said the slow growth he forecast would be around 4% or 5% over the next five years, about half the rate of what it used to be. “If China follows this template, it really is payback time,” he said. Another speaker at the conference, former U.S. Gen. Wesley Clark, took a less grim view. “I’m not as worried about the buildup of debt in China as other countries,” the founder of Wesley Clark & Associates said. He cited two reasons. The renminbi is not fully convertible to other currencies, and the Chinese economy still has elements of central control.

“Every year people at these business conferences say the demise of the Chinese economy is coming very rapidly,” Clark added. “But it hasn’t happened. And President Xi is not going to let it happen if he can avoid it.” Another China bull, Robert Petty, managing partner and co-founder of Clearwater Capital Partners, said China can forestall its debt problems. “We believe the balance sheet of China absolutely has the capacity to do two things: term it out and kick the can down the road,” Petty said.

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“Within the EU there are a lot of financial funds which will continue to be available for Greece..”

EU Said to Consider Plan for Greece in Event of Euro Exit (Bloomberg)

Euro-area governments are considering putting together an aid package for Greece to cushion the country’s economy if it was forced out of the euro, according to two people familiar with the discussions. The Greek government doesn’t expect to need that help. Prime Minister Alexis Tsipras says he’s not considering leaving the currency bloc and is focused on getting the aid he needs to avoid a default. Even so, European officials are considering mechanisms to ring fence Greece both politically and economically in the event of a euro breakup, in order to shield the rest of the currency bloc from the fallout, one of the people said. “There is always a plan B,” Filippo Taddei, an economic adviser to Italian Prime Minister Matteo Renzi, said in an interview in Rome on Tuesday, without referring to the aid package specifically.

“But you have to ask yourself who has the ability to step in, in that event. And I think if you start making up a list you realize very quickly that that list is very short.” While euro-area finance ministers welcomed the progress Greece has made toward qualifying for more financial aid at a meeting in Brussels on Monday, policy makers are still concerned Tsipras may not be prepared to swallow the concessions necessary for a disbursement. Before any payment will be made, Greece has to submit a comprehensive program of economic reforms, win approval from its creditor institutions, secure the endorsement of euro-region finance ministers and then get past parliaments in Berlin and elsewhere. Greek Finance Minister Yanis Varoufakis said on Monday his country will run out of cash within a couple of weeks unless it gets help.

“Trying to pretend that economies as different as Germany and Greece can survive effectively under the same monetary umbrella has already been proven wrong and this is just going to be a long, long painful death for the Greek economy,” Richard Jeffrey at Cazenove Capital, said Monday. With Ukraine to the north of Greece ravaged by Russian-backed separatists and Libya to the south collapsing as rival militias fight for control, the German government has made it clear that leaving the euro wouldn’t jeopardize Greece’s place in the European Union. “Within the EU there are a lot of financial funds which will continue to be available for Greece,” Thomas Steffen, Germany’s chief negotiator with Greece within the euro area, said at an event in Berlin last week. “There is no reason to even contemplate that Greece would leave the European Union.”

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Squeeze your grandma!

Greece’s Creditors Said to Seek €3 Billion in Budget Cuts (Bloomberg)

Greece’s anti-austerity government needs to raise at least €3 billion through additional fiscal measures by the end of this year to meet the minimum budget targets acceptable by creditors, an official with knowledge of the discussions said. The reductions would bring the primary budget surplus in 2015 to just over 1% of gross domestic product, a target Greek Interior Minister Nikos Voutsis said today is acceptable. Without any change in fiscal policy, Greece would end 2015 with a budget deficit of about 0.5% of GDP, the official said. The so-called primary budget balance doesn’t include interest payments Greece, whose debt-to-GDP ratio is the highest in Europe, is locked in talks with euro region governments and the INF over the terms attached to its €240 billion bailout.

Uncertainty over whether it will do enough to receive more money has triggered a liquidity squeeze, prompting the European Commission to revise down deficit and debt forecasts last week. The commission now predicts the country’s debt will be 174% of GDP next year, 15 percentage points above the level projected in February. And that assumes Prime Minister Alexis Tsipras reaches a deal to get previously agreed aid flowing by June. The commission predicts that as defined in the bailout program there will be almost no surplus. Budget cuts aren’t the only thorny issue in the negotiations over the disbursement of the next emergency loans tranche for the cash-strapped economy.

Disagreements remain over the retirement age, pension cuts, privatizations and the government’s intention to reinstate collective bargaining restrictions in the labor market, the official said. As negotiations drag on, euro-area governments are considering putting together an aid package for Greece to cushion the economy in the event that it is forced out of the common currency, two people familiar with the discussions said yesterday. While the Greek government expects to remain in the euro, some officials are considering mechanisms to ring-fence Greece both politically and economically in the event of a breakup, one of the people said.

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“The Greek side has so far fully met everything the Feb. 20 Eurogroup decision foresaw. It has taken as many steps as possible towards the European partners’ side,” the official quoted Tsipras as telling his cabinet.

Greece Wants Action From Lenders (Reuters)

Greek Prime Minister Alexis Tsipras on Tuesday called on lenders to break an impasse in cash-for-reform talks after Athens had to resort to a temporary expedient to make a crucial payment to the IMF. Greek officials told Reuters they had emptied an IMF holding account to repay €750 million to the global lender on Monday, avoiding default but underscoring the dire state of the country’s finances. At his second cabinet meeting in three days, Tsipras told ministers Athens was sticking to its “red lines” and that it was time to see lenders meet Greece halfway, according to a government official. The official said Greece is still expecting a deal by the end of the month.

“The Greek side has so far fully met everything the Feb. 20 Eurogroup decision foresaw. It has taken as many steps as possible towards the European partners’ side,” the official quoted Tsipras as telling his cabinet. “It’s now our partners’ turn to make the necessary steps in order for them to prove in practice their respect towards the democratic popular mandate.” Earlier, Germany’s hardline finance minister Wolfgang Schaeuble said the negotiations’ tone had improved but not their substance, warning again that time was running out for Greece. “On the issues, progress in the talks is not comparable to the improvement in the atmosphere,” Schaeuble told reporters after a EU finance ministers’ meeting in Brussels.

Euro zone partners issued a lukewarm statement on Monday welcoming incremental progress in the talks but noting that more work was needed to narrow remaining gaps. Sources say these are mainly over pension and labor reforms and budget targets. The creditors are insisting Greece must adopt and begin implementing a full reform program before they will start releasing the last €7.2 billion from a bailout program that expires at the end of June.

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Interesting move.

Greece Tapped Reserves At IMF To Make Debt Repayment (Reuters)

Greece tapped emergency reserves in its holding account at the IMF to make a crucial €750 million debt payment to the Fund on Monday, two government officials said on Tuesday. With Athens close to running out of cash and a deal with its international creditors still elusive, there had been doubts whether the leftist-led government would pay the IMF or opt to save cash to pay salaries and pensions later this month. Member countries of the IMF have two accounts at the fund – one where their annual quotas are deposited and a holding account which may be used for emergencies. One official told Reuters that Athens used about €650 million from the holding account to make the payment.

“We made use of money in our holding account in the fund,” the official said, declining to be named. “The government also used about €100 million of its cash reserves.” Made a day early, the payment calmed immediate fears of a Greek default, but Finance Minister Yanis Varoufakis said on Monday the liquidity situation was “terribly urgent” and a deal to release further funds was needed in the next couple of weeks. A second Greek official said on Tuesday that the reserves the government tapped must be replenished in the IMF account in “several weeks.” Following legislative changes, Greece has meanwhile gathered €600 million of local government and other public entity money to help it deal with the cash crunch, the government’s spokesman said on Tuesday.

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It’s not as if Athens isn’t trying.

This Is How Greece Kept Its Budget On Track In Q1 (Macropolis)

Recent Greek budget data showed the huge revenue gap of €968 million recorded in January narrowed to €389 million by the end of the first quarter (Q1) of 2015. At the same time, primary expenditure, which was just €53 million better than target in January, displayed a strong outperformance of €1.18 billion by the end of March. The underlying primary balance (excluding the impact of Public Investment Budget), which is defined as revenues (before tax refunds) minus primary expenditure, showed the shortfall of 915 million euros recorded in January gradually reversed to an outperformance of €791 million by the end of March.

Another important point to take away is that revenues exceeded primary expenditure in all three months of Q1, with the underlying monthly primary surplus ranging between €240 and €845 million. This means that the collected revenues in each month are more than adequate for the payment of primary expenses (salaries, pensions, grants to social security sector and a large part of non-payroll costs). A closer look at the evolution of the key budget items reveals some instructive findings for the underlying trends that were recorded within Q1.

On the revenue front, the target for January was exceptionally high as it was initially due to include VAT revenues and the fifth installment of the single property tax (ENFIA). However, the negative impact from the pre-election period as well the postponement of the VAT payment by one month had a marked impact on the revenue underperformance of that month. VAT payments in February did not result to any significant revenue collection, with VAT revenues coming in 30% lower than those collected in January. However, February closed with a modest revenue outperformance of €91 million, mainly boosted by higher income tax month on month.

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German luxury car sales. Oh irony.

The Real Sign That Greece’s Financial Turmoil Is Getting Worse (Telegraph)

Here is a slightly surprising sign that Greece is in the classic throes of a bank run: car sales jumped by 47pc in April. It was the 20th consecutive month that car registrations of new and used vehicles has risen. People living in a country gripped by financial turmoil often worry about the security of their money. If it’s in a bank, it can be caught up in capital controls or lost through insolvency. Better, then, to spend it. And the purchase of choice is often a car. This makes motor vehicle sales a decent proxy for financial turmoil (under some circumstances). Ordinary Greeks, many of whom are not wealthy enough to hold bank accounts outside of the country, are taking their money of the financial system and spending it on “hard” assets.

In December, when snap elections were called in Greece, monthly car registrations soared by nearly 70pc. Since then, bank desposits have shrunk by nearly 15pc of their total value. Another €7bn left the country in April alone. A similar phenomenon was observed during Russia’s financial meltdown late last year. The rouble’s crash resulted in many Russians scrambling to make “high-ticket” purchases, including four wheels. During Cyprus’s banking crisis in 2013, car registrations increased by nearly a third in 10 months. Many Cypriots rightly feared their unsecured deposits would be at risk from the “bail-ins” of the country’s biggest banks.

Cypriot consumers also chose to make their purchases in cash, rather than be tied to financing or hire-purchase deals. Despite depreciating in value quite quickly, cars are still a handy asset to own because they can be put to productive use – especially if the alternative is just stashing your money under a matress. In a strange irony of Greece’s woes, German industry is perversely one of the main beneficiaries of the country’s banking collapse. Greek consumers, like many of their fellow Europeans, buy German cars more than any other brand.

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Dmitry stays sharp.

America’s Achilles’ Heel (Dmitry Orlov)

Instead of collapsing quietly, the US has decided to pick a fight with Russia. It appears to have already lost the fight, but a question remains: How many more countries will the US manage to destroy before the reality of its inevitable defeat and disintegration finally catches up with it? As Putin said last summer when speaking at the Seliger youth forum, “I get the feeling that no matter what the Americans touch, they end up with Libya or Iraq.” Indeed, the Americans have been on a tear, destroying one country after another. Iraq has been dismembered, Libya is a no-go zone, Syria is a humanitarian disaster, Egypt is a military dictatorship executing a program of mass imprisonment.

The latest fiasco is Yemen, where the pro-American government was recently overthrown, and the American nationals who found themselves trapped there had to wait for the Russians and the Chinese to extract them and send them home. But it was the previous American foreign policy fiasco, in the Ukraine, which prompted the Russians, along with the Chinese, to signal that the US has taken a step too far, and that all further steps will result in automatic escalation. The Russian plan, along with China, India, and much of the rest of the world, is to prepare for war with the US, but to do everything possible to avoid it. Time is on their side, because with each passing day they become stronger while America grows weaker.

But while this process runs its course, America might “touch” a few more countries, turning them into a Libya or an Iraq. Is Greece next on the list? What about throwing under the bus the Baltic states (Estonia, Latvia, Lithuania), which are now NATO members (i.e., sacrificial lambs)? Estonia is a short drive from Russia’s second-largest city, St. Petersburg, it has a large Russian population, it has a majority-Russian capital city, and it has a rabidly anti-Russian government. Of those four facts, just one is incongruous. Is it being set up to self-destruct? Some Central Asian republics, in Russia’s ticklish underbelly, might be ripe for being “touched” too.

There is no question that the Americans will continue to try to create mischief around the world, “touching” vulnerable, exploitable countries, for as long as they can. But there is another question that deserves to be asked: Do the Americans “touch” themselves? Because if they do, then the next candidate for extreme makeover into a bombed-out wasteland might be the United States itself.

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But all they have left is words.

Central Banks Need To Talk A Lot Less And Act A Lot More (Satyajit Das)

Research confirms the increase in the length and complexity of the US Federal Reserve’s statements, parallelling the rise in the size of its balance sheet. Facing intractable problems and difficult choices, politicians have abnegated economic leadership to central bankers. With limited policy options available, central bankers have resorted to “forward guidance”: a tautology, as any guidance must be about future events. They now communicate commitments on future interest rates, liquidity provision or quantitative easing (QE) and currency values over a medium to long-term horizon. Forward guidance suffers from a number of weaknesses. Focus on any single or narrow set of indicators, such as unemployment or inflation, is not meaningful.

Forward guidance relies on the accuracy of central bank forecasts. Guidance is highly conditional. Central bankers have no “skin in the game” – their tenure or remuneration is not linked to outcomes. An unanticipated trigger event can lead to a sudden response or policy change. In January 2015, the Swiss National Bank’s decision to abandon its currency peg highlights the problem. It created volatility and uncertainty, precisely the opposite of the policy intention. Forward guidance increasingly confirms John Maynard Keynes’s fear that “confusion of thought and feeling leads to confusion of speech”. The Fed committed to keeping rates low until the unemployment rate fell below 6%. In early 2014, the Fed changed the unemployment target to a non-binding indicator.

In May 2014, the full-employment goal was changed to cover the “disadvantaged”, including long-term unemployed and workers forced to work part-time. The Bank of Japan and European Central Bank targeted 2% inflation, despite the fact that actual inflation was near zero and proving unresponsive to traditional policies. In March 2014, at her first press conference, the new chair, Janet Yellen, stated that the Fed would not increase interest rates for a “considerable time”. In December 2014, the Fed announced it would be “patient”. Now the word patient has been jettisoned, although Ms Yellen has warned that not being patient is not the same as being impatient.

European central bankers lead the world in policy linguistics. Mario Draghi’s July 2012 statement that the ECB would “do whatever it takes” is credited with stabilising money markets and reducing borrowing costs of eurozone countries without requiring any actual intervention. In October 2013 he was ready to consider all available instruments, a message repeated in November and again in December. In January 2014 he stated that he would take further decisive action if required. In February and March, despite the lack of actual initiatives, he again vowed to take further decisive action if required. In April and May, the ECB undertook to act swiftly if required. Forced finally to announce new measures in June 2014, Mr Draghi finished with a rhetorical flourish: “Are we finished? The answer is no.” By November, he was recycling 2012: “We must do what we must”.

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Beppe Grillo’s M5S has been targeting the EXPO madness for a long time.

What Does Milan Gain By Hosting Bloated Expo 2015 Extravaganza? (Guardian)

A four-storey high rug of twinkling LEDs proclaims the glories of Turkmenistan’s textile traditions above a rain-soaked scene, casting a pinkish glow across the golden arches of the neighbouring McDonald’s. Across the way, a half-finished Nepalese pagoda towers over a faceted glass dome of Belgian produce, while Russia thrusts a gargantuan mirrored canopy into the air, aggressively cocked like a missile next to Estonia’s wooden shed. A bugle call is the signal for a Korean marching band to strike up, trumpeting the arrival of the country’s futuristic white space-blob, just as an Argentinian drumming troop thunders into action next door.

Sprawling across 110 hectares on the outskirts of Milan, this crazed collage of undulating tents, tilting green walls and parametrically-contorted lumps can mean only one thing: Expo 2015, latest in a long and controversial tradition of “world’s fairs”, has landed. “We’ve tried to build a stage where all the actors can make their voices heard,” says its design director Matteo Gatto, fresh from touring the Italian prime minister and the pope (who has his own, relatively restrained, pavilion) around the frenzied fairground. And Gatto appears to have achieved his aim: the 140 participating countries and brand sponsors are screaming their presence at full volume.

In the centre of Milan, however, others have been making their voices heard in a different way. As the fair opened on May Day, thousands took to the streets to protest, while violent splinter groups smashed shopfronts and torched cars. “The Expo is a machine for burning public money,” said one protester, carrying a “No Expo” banner. “It promised to bring jobs and boost the economy, but it’s being run by voluntary labour and has wasted billions on pointless infrastructure.” “It claims to be a celebration of slow food, local agriculture and healthy eating,” added another activist, carrying an anti-globalisation placard. “Its official motto is Feeding the Planet, Energy for Life, but it is sponsored by corporate giants like Coca-Cola and McDonald’s. The whole thing is beyond a joke.”

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One more area in which the EU is entirely clueless. Expect total disaster.

Europe Prepares Plan To Fight Human-Traffickers (Spiegel)

EU leaders convened in Brussels in late April for an emergency summit on the refugee crisis, which came to a head over the course of a few weeks that saw thousands of migrants drown trying to cross the Mediterranean. Negligence on the part of EU member state governments was partly to blame for the tragedy, with the Italian coast guard left alone to cope with the problem. The various leaders assembled in Brussels were eager to take decisive action – and to identify an enemy. “We agreed that we need to tackle the traffickers’ pernicious business model at its roots,” said German Chancellor Angela Merkel. Military action could not be ruled out, including the destruction of boats used by smugglers. Federica Mogherini, the EU’s high representative for foreign affairs and security policy, was tasked with drawing up a proposal for an EU-led military operation.

Two weeks later, Mogherini briefed the UN Security Council on plans for a resolution authorizing the use of force. They amount to a declaration of war on human-trafficking, as evidenced by the fact that the draft paper was classified as top secret by the European External Action Service, the EU’s diplomatic service. It outlines full-scale military action in the Mediterranean and North Africa. The EU is clearly pinning its hopes on deterrence. Rather than considering accepting a greater number of asylum-seekers, aiming for their more even distribution throughout the bloc or drawing up a new refugee policy worthy of the name, the powers-that-be in Brussels are focusing on efforts to keep migrants away from EU shores. Yet there is no precedent for such an uncertain mission in the history of the EU’s Common Security and Defense Policy.

The 30-page “Crisis Management Concept” outlines how the EU should respond in the future. In order “to disrupt the business model of the smugglers,” “systematic efforts” are need “to identify, seize and destroy vessels and assets before they are used by smugglers.” The plan calls for EU soldiers to destroy smugglers’ boats before they can be used. It states that keeping these operations safe from armed militias through “robust force protection” will also be required, as will “special forces units,” satellite surveillance, landing craft and “boarding teams.” A map shows the ambitious scale of the planned area of operations. It suggests that the EU campaign will be focused on Libya’s territorial waters as well as parts of Egypt’s and Tunisia’s ports and dockyards in coastal areas. It also foresees task forces deployed inside Libya in a bid to smash trafficking networks.

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A March article, but still very relevant. This is how you kill a city.

How Struggling Families Are Being Forced Out of London (Vice)

When the housing benefit cap was announced in 2010, Boris Johnson said he would “not accept any kind of Kosovo-style social cleansing of London”, adding, “The last thing we want to have in our city is a situation such as Paris where the less well-off are pushed out to the suburbs.” Fast forward five years and everyone to the left of Boris has at some point bemoaned the ongoing social cleansing of the city. But who is actually being purged from London, and how do they feel about it? Sadly, the most under-reported aspect of the rapidly changing capital is the fate of the people who are being forced to leave it.

There was a flurry of headlines in 2012 and 2013 about London councils finding speculative locations for their homeless tenants in places like Stoke, Hastings, Birmingham and beyond. But it was always speculative: no-one has actually demonstrated how many people are being pushed out – until now. For the first time, VICE can confirm with hard facts what had always been the possibility of an exodus of London’s poor. It’s not an easy trend to measure, or give flesh to – quite simply, there is no London-wide monitoring system. But a data set gleaned from a series of FOI requests submitted by the Green Party over the last five years, seen exclusively by VICE, fleshes out some details on one of the most significant issues to be debated in the forthcoming election. [..]

In this substantial sample – which includes inner boroughs such as Camden, Lambeth and Kensington & Chelsea, as well as outer boroughs like Bromley and Merton – the number of families with children forced out of London rose from ten in the municipal year 2010/11, to 307 in 2013/14, and already stands at 364 for the current year, with several months’ worth of data still to come in. While the sample is incomplete, the pattern is clear: according to our data, over 35 times more families are having to move out of London this year compared to five years ago.

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“.. it’s possible that they will become more receptive to facts once they are in an environment without food, water, or oxygen..”

Earth Endangered by New Strain of Fact-Resistant Humans (Borowitz)

Scientists have discovered a powerful new strain of fact-resistant humans who are threatening the ability of Earth to sustain life, a sobering new study reports. The research, conducted by the University of Minnesota, identifies a virulent strain of humans who are virtually immune to any form of verifiable knowledge, leaving scientists at a loss as to how to combat them. “These humans appear to have all the faculties necessary to receive and process information,” Davis Logsdon, one of the scientists who contributed to the study, said. “And yet, somehow, they have developed defenses that, for all intents and purposes, have rendered those faculties totally inactive.” More worryingly, Logsdon said, “As facts have multiplied, their defenses against those facts have only grown more powerful.”

While scientists have no clear understanding of the mechanisms that prevent the fact-resistant humans from absorbing data, they theorize that the strain may have developed the ability to intercept and discard information en route from the auditory nerve to the brain. “The normal functions of human consciousness have been completely nullified,” Logsdon said. While reaffirming the gloomy assessments of the study, Logsdon held out hope that the threat of fact-resistant humans could be mitigated in the future. “Our research is very preliminary, but it’s possible that they will become more receptive to facts once they are in an environment without food, water, or oxygen,” he said.

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Nov 242014
 
 November 24, 2014  Posted by at 12:02 pm Finance Tagged with: , , , , , , , , , ,  Comments Off on Debt Rattle November 24 2014


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

Global Business Confidence Plunges To Post-Crisis Low (CNBC)
Pope Francis Warns Greed Of Man Will ‘Destroy The World’ (Daily Mail)
Record Numbers Of UK Working Families In Poverty Due To Low-Paid Jobs (Guardian)
New Abnormal Means Relying on Central Banks for Growth (Bloomberg)
Why We Can’t Afford Another Financial Crisis (Guardian)
PBOC Bounce Seen Short Lived as History Defies Bulls (Bloomberg)
China Rate-Cut Likely To Hurt Banks, Curb New Loans To Small Borrowers (Reuters)
Bad News Mounts for Chinese Banks, Funds Grow More Bullish (Bloomberg)
Property, Manufacturing Woes Help Trim China’s Shadow Banking (Reuters)
The Consequences of Imposing Negative Interest Rates (Tenebrarum)
Why Countries Wage Currency Wars (A. Gary Shilling)
How the EU Plans to Turn $26 Billion Into $390 Billion (Bloomberg)
Draghi’s About to Find Out How Urgent His Call for Action Has Become (Bloomberg)
UK Supermarket War Turns Smaller Food Suppliers Into ‘Cannon Fodder’ (Guardian)
‘OPEC’s Easy Days Setting Oil Production Are Over’ (Bloomberg)
Russia Losing ‘Up To $140 Billion’ From Sanctions, Oil Drop (Reuters)
Demand Set to Outstrip the $100 Trillion Bond Market Again in 2015 (Bloomberg)
Swedish Banks Face Deposit Drain as Interest Rates Slump (Bloomberg)
World Locked Into ‘Alarming’ Global Warming: World Bank (CNBC)

How much money was thrown into the system in those five years?

Global Business Confidence Plunges To Post-Crisis Low (CNBC)

Worldwide business confidence slumped to a five-year low, with company hiring and investment intentions at or near their weakest levels in the post-global financial crisis era, according to a new survey. “Clouds are gathering over the global economic outlook, presenting the darkest picture seen since the global financial crisis,” said Chris Williamson, chief economist at Markit. The number of companies expecting their business activity to be higher in a years’ time exceeded those expecting a decline by just 28%. This was below the net balance of 39% recorded in the summer, the Markit Global Business Outlook Survey showed. The tri-annual survey, published on Monday, looked at expectations for the year ahead across 6,100 manufacturing and services companies worldwide. Optimism in manufacturing fell to its lowest since mid-2013 but remained ahead of that seen in services, where confidence about the outlook slumped to the lowest in the survey’s five-year history.

Global hiring intentions slid to within a whisker of the all-time low seen in June of last year, deteriorating in the U.S., Japan, the U.K., euro zone, Russia and Brazil. [..] Investment intentions also collapsed to a new post-crisis low across major economies. China and India bucked the trend, however, with capital expenditure plans in the two countries improving. The survey highlighted a growing list of concerns among companies about the outlook for the year ahead including a worsening global economic climate, the prospect of higher interest rates in countries such as the U.K. and U.S. and geopolitical risk emanating from crises in Ukraine and the Middle East. “Of greatest concern is the slide in business optimism and expansion plans in the U.S. to the weakest seen over the past five years. U.S. growth therefore looks likely to have peaked over the summer months, with a slowing trend signaled for coming months,” Williamson said.

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‘It is also painful to see the struggle against hunger and malnutrition hindered by ‘market priorities’, the ‘primacy of profit’, which reduce foodstuffs to a commodity like any other, subject to speculation and financial speculation in particular ..’

Pope Francis Warns Greed Of Man Will ‘Destroy The World’ (Daily Mail)

Pope Francis has warned that planet earth could face a doomsday scenario if the world does not stop abusing its resources for profit The pontiff warned that nature would exact revenge, and urged the world’s leaders to rein in their greed and help the hungry. He told the Second International Conference on Nutrition (CIN2) in Rome: ‘God always forgives, but the earth does not. ‘Take care of the earth so it does not respond with destruction.’ The three-day meeting aimed at tackling malnutrition, and included representatives from 190 countries.

It was organised by the UN food agency (FAO) and World Health Organization (WHO) in the Italian capital. The 77-year old said the world had ‘paid too little heed to those who are hungry.’ While the number of undernourished people dropped by over half in the past two decades, 805 million people were still affected in 2014. ‘It is also painful to see the struggle against hunger and malnutrition hindered by ‘market priorities’, the ‘primacy of profit’, which reduce foodstuffs to a commodity like any other, subject to speculation and financial speculation in particular,’ Francis said.

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Britain’s new normal: ” .. the report showed a real change in UK society over a relatively short period of time.”

Record Numbers Of UK Working Families In Poverty Due To Low-Paid Jobs (Guardian)

Insecure, low-paid jobs are leaving record numbers of working families in poverty, with two-thirds of people who found work in the past year taking jobs for less than the living wage, according to the latest annual report from the Joseph Rowntree Foundation. The research shows that over the last decade, increasing numbers of pensioners have become comfortable, but at the same time incomes among the worst-off have dropped almost 10% in real terms. Painting a picture of huge numbers trapped on low wages, the foundation said during the decade only a fifth of low-paid workers managed to move to better paid jobs. The living wage is calculated at £7.85 an hour nationally, or £9.15 in London – much higher than the legally enforceable £6.50 minimum wage.

As many people from working families are now in poverty as from workless ones, partly due to a vast increase in insecure work on zero-hours contracts, or in part-time or low-paid self-employment. Nearly 1.4 million people are on the controversial contracts that do not guarantee minimum hours, most of them in catering, accommodation, retail and administrative jobs. Meanwhile, the self-employed earn on average 13% less than they did five years ago, the foundation said. Average wages for men working full time have dropped from £13.90 to £12.90 an hour in real terms between 2008 and 2013 and for women from £10.80 to £10.30.

Poverty wages have been exacerbated by the number of people reliant on private rented accommodation and unable to get social housing, the report said. Evictions of tenants by private landlords outstrip mortgage repossessions and are the most common cause of homelessness. The report noted that price rises for food, energy and transport have far outstripped the accepted CPI inflation of 30% in the last decade. Julia Unwin, chief executive of the foundation, said the report showed a real change in UK society over a relatively short period of time. “We are concerned that the economic recovery we face will still have so many people living in poverty. It is a risk, waste and cost we cannot afford: we will never reach our full economic potential with so many people struggling to make ends meet.

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Central banks can’t create growth.

New Abnormal Means Relying on Central Banks for Growth (Bloomberg)

The “new normal” may be new. It’s hardly normal. The “new abnormal” would be more apt, according to reports published this month by Ed Yardeni and ING’s Mark Cliffe in London. “Dictionaries define ‘normal’ as regular, usual, healthy, natural, orderly, ordinary, rational,” Cliffe said Nov. 7. “It is hard to use those words to describe the current performance of the world economy and financial markets.” Among signs of irregularity since Pimco popularized the expression “new normal” in 2009 to describe an environment of below-average economic growth: Central banks are still deploying near-zero interest rates or quantitative easing six years after the financial crisis, yet output, inflation, business investment and wages remain mostly subpar. In financial markets, equities are hitting new highs as bond yields probe new lows. Even as the U.S. shows signs of strength, commodities are slumping.

The lesson for Yardeni is that by running to the rescue every time asset prices swooned in the past two decades, central bankers’ prescriptions distorted economies. “If a central bank moderates recessions, then speculative excesses are likely to build up much more during the booms and never get fully cleaned out,” Yardeni, a former chief economist at Deutsche Bank, said in a Nov. 19 report. “So each financial crisis gets progressively worse than the previous one, forcing the central bank to provide even more easy money to avert a financial meltdown.” Cliffe at ING is less willing than Yardeni to lambaste central banks, noting it’s hard to say how bad a recession may have occurred without their aid. Still, he agrees that policy makers now find themselves having to keep an eye on markets as much as the economies when setting policy.

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“For now, the Federal Reserve, the European Central Bank and the Bank of England prefer not to contemplate this dire possibility.”

Why We Can’t Afford Another Financial Crisis (Guardian)

A look into the future: David Cameron’s nightmare has come true; the slowdown in the global economy has turned into a second major recession within a decade. In those circumstances, there would be two massive policy challenges. The first would be how to prevent the recession turning into a global slump. The second would be how to prevent the financial system from imploding. These are the same challenges as in 2008, but this time they would be magnified. Zero interest rates and quantitative easing have already been used extensively to support activity, which would leave policymakers with a dilemma. Should they double down on QE or come up with more radical proposals – drops of helicopter money or using QE for specified purposes, such as investment in green energy?

For now, the Federal Reserve, the European Central Bank and the Bank of England prefer not to contemplate this dire possibility. They will deal with it if it happens, but are assuming it won’t. More explicit plans have been drawn up for the big banks. The concern here is obvious. The bailouts last time played havoc with the public finances and the still incomplete repair job has required unpopular austerity. Governments are not flush enough to contemplate a second wave of bailouts. Even if they had the money, they know just how voters would react if there was talk of bailing out the bankers a second time.

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They’ll just cut again. Or maybe even just devalue the yuan overnight.

PBOC Bounce Seen Short Lived as History Defies Bulls (Bloomberg)

China’s benchmark stock index rose to a three-year high after the central bank’s surprise interest rate cut late last week. Recent history suggests the gains won’t last long. While the Shanghai Composite Index climbed 1.9% today, six of the past seven cuts to interest rates and reserve requirements have been followed by declines in stock prices over the next two months. The last time the PBOC lowered lending and deposit rates, in July 2012, the benchmark index fell 7.4%, according to data compiled by Bloomberg. The rate cut, announced after the close of regular trading in China on Nov. 21, underlines concern that a slowdown in the world’s second-largest economy is deepening. Factory production rose 7.7% in October from a year earlier, the second-weakest pace since 2009, while retail sales missed economists’ forecasts.

China’s economy expanded 7.3% in the three months ended September and it’s projected to grow this year at the slowest pace since 1990 amid weakness in the property market and manufacturing. “In the short term, it’s positive, but in the long term, the economic slowdown is probably the main driver of the market,” Lucy Qiu, an emerging markets analyst at UBS Wealth Management, which has $1 trillion in invested assets, said by phone from New York on Nov. 21. “This announcement came after a slew of underperforming economic releases. It kind of shows the government is determined to support growth, but going forward we really have to look at the data.” The PBOC has cut reserve requirements for the nation’s largest lenders three times and lowered benchmark rates three times since late 2011.

Policy makers said in a Nov. 21 statement that the move in interest rates was “a neutral operation and doesn’t mean any change in monetary policy direction.” As China is still able to keep medium to high growth rates, it “has no need to take strong stimulus measures, and the direction of prudent monetary policy won’t change,” the central bank said. China’s retail inflation held at the slowest pace since January 2010 last month. Consumer prices increased 1.6%, matching September’s rate, while producer prices fell for a record 32nd month, slumping 2.2%.

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Unintended consequences?!

China Rate-Cut Likely To Hurt Banks, Curb New Loans To Small Borrowers (Reuters)

China’s latest interest rate cut is set to dent the profitability of domestic lenders, especially mid-sized banks, which are already suffering from higher bad loans and a slowdown in profit growth. The central bank unexpectedly cut rates late on Friday, stepping up efforts to support small and medium-sized enterprises (SMEs) which are struggling to repay loans and access credit, as the economy slides to its slowest growth in nearly a quarter of a century. It slashed the one-year benchmark lending rate by 40 basis points to 5.6% while lowering the one-year benchmark deposit rate by 25 basis points to 2.75%. The narrowing of interest rate margins will eat into lenders’ profitability, with Cinda Securities’ chief strategist, Jiahe Chen, predicting it will cut profits by up to 5%. Interest margins generated from lending have already been shrinking for second-tier lenders, which have been squeezed by competition from online financiers and a rise in funding costs stemming from an industry tussle for deposits.

Fitch Ratings downgraded its credit rating of China Guangfa Bank, a medium-sized lender, two days before the rate-cut announcement, and said the level of off-balance-sheet lending among second-tier banks was a concern. The squeeze on profits will make it tougher for lenders to raise capital to meet new international rules designed to protect depositors from banking collapses. Retained profits are one way in which banks can build up regulatory capital. “In the past when Chinese banks disbursed loans, they mainly relied on profits from their own capital to replenish their capital,” Jiang Jianqing, chairman of China’s biggest commercial bank, the Industrial and Commercial Bank of China, told a conference in Beijing on Saturday. The PBoC said in announcing the rate cut that it wanted to help smaller firms gain access to credit. While the measures may ease the financing costs of these firms’ existing loans, it is unlikely to encourage banks to write new loans to lower-rung borrowers, bankers said.

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Bad debt is China’s biggest conundrum. How can they ever get out other than through defaults?

Bad News Mounts for Chinese Banks, Funds Grow More Bullish (Bloomberg)

China’s banks, already saddled with mounting bad debt, face the risk of sagging profit growth after an interest-rate cut slashed their margins on loans. The twist: some investors are getting more optimistic, not less, about the outlook for the industry’s shares. Victoria Mio, chief investment officer for China at Robeco Hong Kong, whose parent company oversees about €237 billion ($294 billion), said Nov. 21 that bank stocks were very attractive because they were priced at levels that assumed an economic “hard landing.” Hours later, the central bank cut the one-year lending rate by 0.4 percentage point and the one-year deposit rate by 0.25 percentage point. Afterward, Mio said sustained monetary easing may drive an economic rebound and a jump in banks’ share prices. She was “more positive” on the stocks.

Chinese banks are trading at an average 4.8 times estimated earnings for this year, the lowest globally for lenders with a market value of more than $10 billion, according to data compiled by Bloomberg. Another fund manager, Baring Asset Management Ltd.’s Khiem Do, said he was “still bullish” on banks after the rate move and that dividends of more than 6% would become even more attractive as interest rates fall. “You tell me which banks in the world are paying out this yield, and making money, and working in an environment where the economy is growing at about 7% per annum,” he said earlier by phone. Do helps oversee about $60 billion as Hong Kong-based head of Asian multi-asset strategy. Ma Kunpeng, a Shanghai-based analyst at Sinolink Securities Co., has a buy rating on the industry. He said banks’ share prices have fallen even when earnings have exceeded expectations because investors have focused more on “perceived risks” than profits.

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China’s economy doesn’t function without shadow banks. There might be a hard lesson for Beijing in the offing here.

Property, Manufacturing Woes Help Trim China’s Shadow Banking (Reuters)

A bid by China to rein in its “shadow banking” activity is producing results, thanks to slowing economic growth and tighter regulation. But some success for a policy drive to curb risky lending is not all good news for Beijing, as smaller companies may face even bigger struggles to find funding. A cut in interest rates, announced by Beijing on Friday, is unlikely to help them much. Shadow banking includes off-balance-sheet forms of bank finance plus lending by non-traditional institutions, all of which is less regulated than formal lending and thus considered riskier. At the end of 2013, China had the world’s third-largest shadow banking sector, according to the Financial Stability Board, a task force set up by the G-20 economies. It estimated that Chinese assets of “other financial intermediaries” than traditional ones were then just under $3 trillion.

In the three months ended Sept. 30, the shadow banking portion of what China calls total social financing – a broad measure of liquidity in the economy – contracted for the first time on a quarterly basis since the 2008/09 financial crisis. Loans extended by trust companies fell by roughly 100 billion yuan ($16.33 billion). Bankers’ acceptances, a short-term method of financing regularly used by manufacturers, dropped 668.3 billion yuan, according to Reuters calculations based on central bank data. October lending data, released last week, showed further contractions in these types of shadow banking. Bankers’ acceptances and trust loans “fall into categories that have been squeezed by tightening regulations in the last few months, so it’s an ongoing trend,” said Donna Kwok, an economist at UBS in Hong Kong.

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“What can be abolished by laws and decrees is merely the right of the capitalists to receive interest. But such laws would bring about capital consumption and would very soon throw mankind back into the original state of natural poverty.”

The Consequences of Imposing Negative Interest Rates (Tenebrarum)

Ever since the ECB has introduced negative interest rates on its deposit facility, people have been waiting for commercial banks to react. After all, they are effectively losing money as a result of this bizarre directive, on excess reserves the accumulation of which they can do very little about. At first, only a small regional bank, Deutsche Skatbank, imposed a penalty rate on large depositors – slightly in excess of the 20 basis points banks must currently pay for ECB deposits. It turns out this was a Trojan horse. Other banks were presumably watching to see if depositors would flee Skatbank, and when that didn’t happen, Commerzbank decided to go down the same road. However, there is an obvious flaw in taking such measures – at least is seems obvious to us. The Keynesian overlords at the central bank who came up with this idea have failed to consider a warning Ludwig von Mises once uttered about the attempt to abolish interest by decree.

Obviously, the natural interest rate can never become negative, as time preferences cannot possibly become negative: ceteris paribus, consumption in the present will always be preferred to consumption in the future. Mises notes that if the natural interest rate were to decline to zero, all consumption would stop – we would die of hunger while investing all of our resources in capital goods, i.e., while directing all of our efforts and funds toward production for future consumption. This is obviously a situation that would make no sense whatsoever – it is simply not possible for this to happen in the real world of human action. Mises warns however that if interest payments are abolished by decree, or even a negative interest rate is imposed by decree, owners of capital will indeed begin to consume their capital – precisely because want satisfaction in the present will continue to be preferred to want satisfaction in the future regardless of the decree. This threatens to eventually impoverish society and reduce it to a state of penury:

If there were no originary interest, capital goods would not be devoted to immediate consumption and capital would not be consumed. On the contrary, under such an unthinkable and unimaginable state of affairs there would be no consumption at all, but only saving, accumulation of capital, and investment. Not the impossible disappearance of originary interest, but the abolition of payment of interest to the owners of capital, would result in capital consumption.

The capitalists would consume their capital goods and their capital precisely because there is originary interest and present want-satisfaction is preferred to later satisfaction. Therefore there cannot be any question of abolishing interest by any institutions, laws, and devices of bank manipulation. He who wants to “abolish” interest will have to induce people to value an apple available in a hundred years no less than a present apple. What can be abolished by laws and decrees is merely the right of the capitalists to receive interest. But such laws would bring about capital consumption and would very soon throw mankind back into the original state of natural poverty.”

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Because they’re desperate.

Why Countries Wage Currency Wars (A. Gary Shilling)

The U.S. dollar has been on a tear this year, rising against the currencies of virtually all major developed economies. What we’re seeing around the world is intense – and in some cases, deliberate – devaluations. What’s going on and what are the investment implications? One reason for the devaluations is that, when economic growth is weak – as it has been globally for five years – governments feel tremendous pressure to increase exports and reduce imports to restore growth. Often that means lowering the value of the currency so that products sent abroad are relatively less expensive and those coming into the country more so. The European Central Bank, for example, wants to depress the euro to keep deflation at bay. The euro’s earlier strength drove down import prices, forcing domestic producers who compete with imports to slash their prices. As a result, consumer price inflation moved steadily toward zero. It was a mere 0.4% in October versus a year earlier.

The euro-zone economy remains stagnant, with a third recession since 2007 a possibility. Unemployment is high. Youth unemployment tops 25% in many countries; it exceeds 50% in Spain and Greece. Meanwhile, consumer sentiment, which never recovered from the last recession, is again dropping. In early June, the ECB responded by cutting its benchmark interest rate from 0.25% to 0.15% and introducing a penalty charge of 0.1% on reserves it holds for member banks. While these measures were more symbolic than substantive, the euro slid in reaction. In September, the ECB started to make up to €1 trillion in cheap, four-year loans available to member banks, provided they made more credit available to the private sector. Still, these actions didn’t seriously depress the euro, so ECB President Mario Draghi in September announced a further cut in the overnight interest rate to 0.05% and an increase in the penalty rate for member-bank deposits to 0.2%.

In October, the ECB purchased a broad array of securities, including bonds backed by auto loans, home mortgages and credit-card debt, to encourage lenders to offer more credit to companies. Again, these actions have proved more symbolic than substantive, but the euro has weakened a bit further. While the ECB will probably end up with outright quantitative easing in one form or another, keep in mind that QE is less effective in the euro area. Financing is concentrated in the banks, which account for 70% of corporate financing, not in bond markets as in the U.S., where QE works its way into the economy rapidly. Also, weak euro-zone banks are weighed down by bad loans, anemic profits and the need to raise capital to meet new regulatory requirements. In addition, there are 18 euro-area countries and, therefore, 18 separate bond markets for the ECB to consider.

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Magic?!

How the EU Plans to Turn $26 Billion Into $390 Billion (Bloomberg)

The European Union is planning a €21 billion ($26 billion) fund to share the risks of new projects with private investors, two EU officials said. The new entity is designed to have an impact of about 15 times its size, making it the anchor of the EU’s €300 billion investment program, said the officials, who asked not to be named because the plans aren’t final. European Commission President Jean-Claude Juncker is due to announce the three-year initiative this week. The commission will pledge as much as €16 billion in guarantees for the vehicle, which will also include €5 billion from the European Investment Bank, the officials said. Loans, lending guarantees and stakes in equity and debt will be part of its toolbox, with the goal to jumpstart private risk-taking so that stalled projects can get off the ground.

Juncker’s investment plan aims to combine EU resources and regulatory changes “to crowd in more private investment in order to make real investments a reality,” EU Vice President Jyrki Katainen said Nov. 14 in Bratislava. The plan is one element of the EU’s economic strategy and “not a magic wand with which we will be able to miraculously invest ourselves out of a difficult economic climate,” he said. Europe is struggling to spur economic growth as it emerges only slowly from waves of crisis. The 18-nation euro area is forecast to see growth of just 0.8% this year, according to EU forecasts, while the region’s unemployment rate of 11.5% masks rates of about 25% in Greece and in Spain. While the Juncker proposal involves seeding investment in infrastructure and other fields, the €21 billion sum with a proposed leverage rate of 15 times risks disappointing markets.

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EU consumer data coming this week.

Draghi’s About to Find Out How Urgent His Call for Action Has Become (Bloomberg)

Mario Draghi is about to find out just how urgent his call for action has become. One week after the European Central Bank president vowed to revive inflation “as fast as possible,” policy makers will receive a glimpse on just how feeble cost pressures are now in the euro region. Economists forecast data on Nov. 28 will show consumer-price growth matching the weakest since 2009. That would add to the drumroll for a stimulus debate at the Dec. 4 meeting as panels of officials study possible new measures and prepare to cut their economic outlook. While Draghi has stoked pressure toward sovereign-bond buying, colleagues from Germany to the Netherlands are unconvinced quantitative easing is warranted, and his vice president suggested at the weekend that the ECB might hold off until next year. Spanish government bond yields fell today on speculation the ECB will start buy sovereign debt.

“The stakes are high and the risks are asymmetric,” said Frederik Ducrozet, an economist at Credit Agricole in Paris. “A drop in inflation, even a small one, could push the ECB to do something more in December. On the other hand if there is an upside surprise, that buys them time.” Inflation data for November are forecast to show a dip to 0.3% from 0.4%, while economic confidence is seen declining and October unemployment staying at 11.5%, according to economists surveyed by Bloomberg News before those reports this week.

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Deflation at work.

UK Supermarket War Turns Smaller Food Suppliers Into ‘Cannon Fodder’ (Guardian)

Food producers have become cannon fodder in the bitter supermarket price war, according to accountancy firm Moore Stephens, which found 28% more specialist manufacturers have gone into insolvency this year than last. In the year to September, 146 food producers went into insolvency, including wholesale bakeries, pasta makers, fish processors and ready meal manufacturers. In one of the larger cases, 170 jobs were lost when Sussex-based fresh pasta maker Pasta Reale went into administration in August after it lost three major supermarket contracts in a year. Duncan Swift, head of the food advisory group at Moore Stephens, said: “The supermarkets are going through the bloodiest price war in nearly two decades and are using food producers as the cannon fodder. UK supermarkets are trying to compete on price with Aldi and Lidl but with profit margins that are far higher than these discount chains.

“To try and make the maths work, the big supermarkets are putting food producers under so much pressure that we have seen a sharp increase in the number of producers failing.” The rise in insolvencies among food suppliers is in stark contrast to the 8% fall in liquidations in the economy as a whole over the same period. Swift said that because supermarket buyers’ bonuses were based on securing cash contributions from suppliers, they were being hit with “spurious deductions”, cancellations at short notice and threats to take them off the supplier list.

Highlighting contracts where suppliers contribute to supermarkets’ costs, he said: “Supplier contributions cause major cashflow problems for food producers and can tip them into insolvency. It’s a raw deal for food producers, who need the supermarkets to reach the public, but who can’t afford the terms of business that the supermarkets foist on them.” The extent of these contributions has come into the spotlight this year after Tesco admitted it had found a £263m black hole in its accounts relating to the way it booked payments from suppliers.

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This is OPEC’s biggest problem, followed closely by infighting within the cartel. Agreements won’t be worth the paper they’re written on. Who’s going to check production?

‘OPEC’s Easy Days Setting Oil Production Are Over’ (Bloomberg)

The days when OPEC members could all but guarantee consensus when deciding production levels for oil are long gone, according to a veteran of almost two decades of the group’s meetings. The global glut of crude, which has contributed to a 30% decline in prices since June 19, has left the organization disunited and dependent on non-members to shore up the market, said former Qatari Oil Minister Abdullah Bin Hamad Al Attiyah. The 12-member Organization of Petroleum Exporting Countries is scheduled to meet in Vienna on Nov. 27. “OPEC can’t balance the market alone,” Al Attiyah, who participated in the group’s policy meetings from 1992 to 2011, said in a Nov. 19 phone interview. “This time, Russia, Norway and Mexico must all come to the table. OPEC can make a cut, but what will happen is that non-OPEC supply will continue to grow. Then what will the market do?”

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Sounds very bearable.

Russia Losing ‘Up To $140 Billion’ From Sanctions, Oil Drop (Reuters)

Russia is suffering losses at a rate of about $40 billion per year because of Western sanctions and $90-100 billion from the drop in the oil price, Finance Minister Anton Siluanov said on Monday. The admission came on the same morning that a central bank official said that banking profits could be 10% lower in 2014, compared to the previous year. External markets are largely closed for Russian banks and companies, some of which – including top banks Sberbank and VTB – are under Western sanctions over Moscow’s role in the Ukraine crisis. Banks’ profits and margins are also under pressure because they have to serve increased domestic demand for loans, while their sources of capital and liquidity are limited.

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That’s what you get in a world run on zombie money.

Demand Set to Outstrip the $100 Trillion Bond Market Again in 2015 (Bloomberg)

Even in the $100 trillion market for bonds worldwide, one of the most persistent dilemmas facing potential buyers is a dearth of supply. Demand for debt securities has surpassed issuance five times in the past seven years, according to data compiled by JPMorgan. The shortfall is set to continue into 2015, with the New York-based firm predicting demand globally will outstrip supply by $400 billion as central banks in Japan and Europe step up their own debt purchases. The mismatch helps to explain why bond yields worldwide have fallen by more than half since the financial crisis in 2008 to a record-low 1.51% in October, even as borrowing by governments, businesses and consumers added $30 trillion to the market for debt securities. Now, with a global economic slowdown threatening to hold back the U.S. recovery and few signs of inflation anywhere in the developed world, the shortage of bonds may temper the rise in yields forecasters project next year.

“It will keep global yields lower than they would be otherwise,” Chris Low, the New York-based chief economist at FTN Financial, said in a telephone interview on Nov. 19. The demand for bonds “reflects disappointing global growth and that’s been a consistent theme.” Potential bond buyers are poised to spend $2.4 trillion next year on a net basis, while borrowers will issue an estimated $2 trillion of debt, according to JPMorgan, the top-ranked firm for fixed-income research in the U.S. and Europe by Institutional Investor magazine. Since the end of 2007, JPMorgan estimates the potential bond demand has exceeded supply by more than $2.5 trillion, including a gap almost a half-trillion dollars this year. The Bank for International Settlements estimates the amount of bonds outstanding has surged more than 40% since 2007 as countries such as the U.S. increased deficits to pull their economies out of recession and companies locked in low-cost financing as central banks dropped interest rates. Even so, a shortfall emerged.

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How to shoot yourself in the foot: tell banks they need more deposits, but enact low interest policies that drain them away. All part of the same brilliant plan. They had a visit from Krugman, didn’t they?

Swedish Banks Face Deposit Drain as Interest Rates Slump (Bloomberg)

Sweden’s biggest banks could see deposits plunge as record-low interest rates prod households to start seeking higher returns elsewhere. Net deposit inflows declined to 4.4 billion kronor ($589 million) in the third quarter from 44.3 billion kronor the prior quarter, according to Statistics Sweden. While the period typically sees a seasonal decline, deposits were less than half the 10.2 billion kronor recorded a year earlier. While the financial crisis initially saw an influx of deposits into Nordea Bank and other Swedish lenders amid a flight to safety, record-low interest rates are now driving savers into riskier assets. Swedish bank depositors earn on average about 0.4%, while the country’s benchmark stock index has returned more than 8% this year. “We’ve never had such big savings in rates but they have now hit the floor and will return very little in the coming five to seven years,” Claes Hemberg, an economist at Avanza Bank, which offers online trading accounts as well as deposit accounts, said by phone Nov. 20.

“That knowledge hit home when the Riksbank cut rates to zero and it’s now obvious that there is nothing there to fetch. It’s a real U-turn.” The trend threatens to erode a cheap and stable funding source for banks just as regulators demand more. Swedes have about 60% to 65% of their savings in bank accounts or bonds and the rest in stocks, down from about 70% in 2000, according to Avanza. The shift comes amid a campaign by policy makers, including former Finance Minister Anders Borg, to urge banks to reduce their reliance on market funding and increase deposits. The Financial Stability Council, comprised of the Riksbank, the government, the debt office and the regulator, earlier this year said risks that need to be kept under surveillance include bank reliance on market funding in foreign currency.

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1.5°C is lowballing it. There is no doubt we’re looking at 2ºC minimum.

World Locked Into ‘Alarming’ Global Warming: World Bank (CNBC)

The world is locked into 1.5°C global warming, posing severe risks to lives and livelihoods around the world, according to a new climate report commissioned by the World Bank. The report, which called on a large body of scientific evidence, found that global warming of close to 1.5°C above pre-industrial times – up from 0.8°C today – is already locked into Earth’s atmospheric system by past and predicted greenhouse gas emissions. Such an increase could have potentially catastrophic consequences for mankind, causing the global sea level to rise more than 30 centimeters by 2100, droughts to become more severe and placing almost 90% of coral reefs at risk of extinction. The World Bank called on scientists at the Potsdam Institute for Climate Impact Research and Climate Analytics and asked them to look at the likely impacts of present day (0.8°C), 2°C and 4°C warming on agricultural production, water resources, cities and ecosystems across the world.

Their findings, collated in the Bank’s third report on climate change published on Monday, specifically looked at the risks climate change poses to lives and livelihoods across Latin America and the Caribbean, Eastern Europe and Central Asia, and the Middle East and North Africa. In the report entitled “Turndown the heat – Confronting the new climate normal,” scientists warned that even a seemingly slight rise in global warming could have dramatic effects on us all. “A world even 1.5°C [warmer] will mean more severe droughts and global sea level rise, increasing the risk of damage from storm surges and crop loss and raising the cost of adaptation for millions of people,” the report with multiple authors said. “These changes are already underway, with global temperatures 0.8 degrees Celsius above pre-industrial times, and the impact on food security, water supplies and livelihoods is just beginning.”

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Nov 202014
 
 November 20, 2014  Posted by at 12:26 pm Finance Tagged with: , , , , , , , , , , ,  13 Responses »


Jack Delano Truck service station on US 1, NY Avenue, Washington DC Jun 1940

Growth Isn’t God in Indonesia (Bloomberg)
Federal Reserve In Easy Decision To End Stimulus (BBC)
Fed Debate Shifts to Tightening Pace After First Rate Increase (Bloomberg)
The Only Thing More Bullish Than Inflation Is …. Deflation (Zero Hedge)
Cheap-Oil Era Tilts Geopolitical Power to US (Bloomberg)
Oil Industry Risks Trillions Of ‘Stranded Assets’ On US-China Climate Deal (AEP)
Iron Ore’s Massive Expansion Era Is Finished: BHP Billiton (Bloomberg)
China’s Factory Activity Stalls In November (CNBC)
Distressed Debt in China? You Ain’t Seen Nothing Yet (Bloomberg)
The Yen Looks Like It’s Ready To Get Crushed (CNBC)
BOJ Warns Abe Over “Fiscal Responsibility” While Monetizing All Debt (ZH)
Why UK Needs ‘Radical’ Change As Exports Fall (CNBC)
Michael Pettis: Spain Needs to Debate Leaving the Euro (Mish)
Eurozone PMI Falls To 16-Month Low In November (MarketWatch)
French Manufacturing Slump Deepens as Economic Weakness Persists (Bloomberg)
Pressure Mounts for EU Crackdown on Tax Havens (Spiegel)
Senator Slaps Plan For Low-Down-Payment Loans At Fannie, Freddie (MarketWatch)
Junk-Bond Banking Boom Peaks as Firms Drop off Deal List (Bloomberg)
Goldman Fires Staff For Alleged NY Fed Breach (FT)
Banking Industry Culture Promotes Dishonesty, Research Finds (Guardian)
New International Gang Of Thieves Make Somali Pirates Look Like Amateurs (Black)

Is there still hope and sanity in the world?

Growth Isn’t God in Indonesia (Bloomberg)

Joko Widodo’s rise from nowhere to Jakarta governor and then the presidential palace showed the wonders of Indonesia’s democracy. Now, he wants to democratize the economy as well, focusing as much on the quality of growth as the quantity. Sixteen years ago, Indonesia was cascading toward failed statehood. In 1998, as riots forced dictator Suharto from office, many wrote off the world’s fourth-most populous nation. Today, Indonesia is a stable economy growing modestly at 5%, with quite realistic hopes of more. There’s plenty for Widodo, known by his nickname “Jokowi,” to worry about, of course. Indonesia still ranks behind Egypt in corruption and near Ethiopia in ease-of-doing-business surveys. More than 40% of the nation’s 250 million people lives on less than $2 a day.

A dearth of decent roads makes it more cost-effective to ship goods to China than across the archipelago. Retrograde attitudes abound: to this day, female police recruits are subjected to humiliating virginity tests. But this week, Jokowi reminded us why Indonesia is a good-news story — one from which Asian peers could learn. His move to cut fuel subsidies, saving a cash-strapped nation more than $11 billion in its 2015 budget, showed gumption and cheered investors. Even more encouraging is a bold agenda focusing not just on faster growth, but better growth that’s felt among more than Jakarta elites. This might seem like an obvious focus in a region that’s home to a critical mass of the world’s extreme poor (those living on $1 or $2 a day).

But grand rhetoric about “inclusive growth” hasn’t even come close to meeting the reality on the ground. In India, for example, newish Prime Minister Narendra Modi boasts that he will return gross domestic product to the glory days of double-digit growth rates, as if the metric mattered more than what his government plans to do with the windfall. The “Cult of GDP,” the dated idea that booming growth lifts all boats, has long been decried by development economists like William Easterly. The closer growth gets to 10%, the more likely governments are to declare victory and grow complacent. In many cases rapid GDP growth masks serious economic cracks. In her recent book, “GDP: A Brief but Affectionate History,” Diane Coyle called the figure a “familiar piece of jargon that doesn’t actually mean much to most people.”

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Janet Yellen lives in virtual reality.

Federal Reserve In Easy Decision To End Stimulus (BBC)

Although the US Federal Reserve was worried about turmoil in emerging markets, the central bank reached an easy consensus to end its stimulus programme, its latest minutes reveal. Minutes from the central bank’s October meeting show officials were concerned about stock market fluctuations and weakness abroad. However, they worried that saying so could send the wrong message. Overall, officials were confident the US economy was on a strong footing. That is why they decided to end their stimulus programme – known as quantitative easing (QE) – in which the Fed bought bonds in order to keep long-term interest rates low and thus boost spending. “In their discussion of the asset purchase programme, members generally agreed … there was sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment,” read the minutes, referring to the decision to end QE. US markets reacted in a muted way to the news, with the Dow Jones briefly rising before falling once more into the red for the day.

However, to reassure markets that the Fed would not deviate from its set course, the central bank decided to keep its “considerable time” language in reference to when the Fed would raise its short term interest rate. That interest rate – known as the federal funds rate – has been at 0% since late 2008, when the Fed slashed rates in the wake of the financial crisis. Most observers expect that the bank will begin raising that rate in the middle of 2015, mostly in an effort to keep inflation in check as the US recovery gathers steam. However, US Fed chair Janet Yellen has sought to reassure market participants that the bank will not act in haste and remains willing to change its timeline should economic conditions deteriorate in the US. The minutes also show that the Fed is still concerned about possibly lower-than-expected inflation, particularly as oil prices continue to decline and wage growth remains sluggish.

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They’re going to do it. Screw the real economy, it’s dead anyway.

Fed Debate Shifts to Tightening Pace After First Rate Increase (Bloomberg)

U.S. central bankers are weighing whether they should communicate more of their views about the probable pace of interest-rate increases after they lift off zero next year. “A number of participants thought that it could soon be helpful to clarify the committee’s likely approach” to the pace of increases, according to minutes of the Oct. 28-29 Federal Open Market Committee meeting released today in Washington. The discussion last month underscored how much officials will rely on forward guidance on the pace of tightening in the future. After bond purchases ended last month, guidance may be the most practical option left to assure investors that policy won’t become overly restrictive if officials decide to take a stand against inflation seen as too low. The pace of rate increases is “going to be slow until they are really convinced that inflation’s sustainably at target and the labor market’s in really, really good shape,” said Guy Berger, a U.S. economist at RBS Securities. “They are going to take their sweet time.”

The minutes showed that many FOMC participants last month felt the committee should stay on the lookout for signs that inflation expectations were declining. Declining expectations could herald an actual fall in prices. Such deflation does economic damage by encouraging consumers to delay spending in anticipation of lower prices in the future. The potency of the first rate increase could be diminished or increased, depending on what the FOMC says about how it views its subsequent moves, said Laura Rosner, U.S. economist at BNP Paribas SA in New York. “It isn’t just the timing of liftoff the Fed cares about, but the whole path of federal funds rate,” said Rosner, a former New York Fed staff member. “I think they do probably want to limit the extent of tightening that people expect, at least at the beginning.” While telegraphing the future rate path may be attractive to some officials, it may also be unpopular with those, such as Chair Janet Yellen, who recall the Fed’s experience in 2004 with language saying the pace of increases would be “measured.”

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“Positioning for a deflationary boom is a binary event.”

The Only Thing More Bullish Than Inflation Is …. Deflation (Zero Hedge)

Deflation. And not just deflation, but a deflationary bust! At least, such is the goalseeked logic of Cornerstone Marco, which has released a bullish (no really) note titled the Coming Deflationary Boom in the U.S. In it the authors throw in the towel on the most conventional concept in modern economics, namely that for growth one needs stable inflation which in turn causes earnings growth and is low enough not to pressure multiples too high. Well, according to the BLS’ hedonic adjustments and courtesy of Japan’s epic exporting of deflation, inflation is nowhere to be seen (except if one eats pork or beef, or drinks milks), so it is time to give ye olde paragidm shift a try. The paradigm that the only thing more bullish for stocks than inflation, is deflation. To wit:

The concept of a deflationary boom is a controversial one in economics. Truth be told it will not work in every economy. Indeed, a prerequisite for this to unfold is an economy driven by consumers. In that sense, it does not get more consumer-centric than the US. The second, and necessary, condition calls for a major decline in commodity prices ideally compounded by a strong currency to provide the fuel for growth. In essence, a decline in commodity and import prices creates disposable income the same way the Fed Funds rate cuts used to a decade ago.

Positioning for a deflationary boom is a binary event. After all, “deflationary” implies that stocks levered to lower inflation will have a powerful tailwind, these are what we like to call early cyclicals such as consumer, transports and other similar segments. Meanwhile, the “boom” part of the story implies that segments levered to growth, US growth in this case, also find a tailwinds. This should help the beleaguered financials to a better year in 2015 and also provides support for sectors like technology and some of the industrials. As we see it, “deflation” is going to become the operative word on the street … that and PE expansion since they typically go hand in hand. As always, we shall see.

Indeed we shall. Then again the only thing we will see is how every time there is deflation somewhere in the world, one after another central bank somewhere will admit its only mandate is to keep stocks at record highs and inject a few trillion in risk-purchasing power into what was once called a market.

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Wait till shale implodes, then we can talk again.

Cheap-Oil Era Tilts Geopolitical Power to US (Bloomberg)

A new age of abundant and cheap energy supplies is redrawing the world’s geopolitical landscape, weakening and potentially threatening the legitimacy of some governments while enhancing the power of others. Some changes already are evident. Surging U.S. oil production enabled America and its allies to impose tough sanctions on Iran without having to worry much about the loss of imports from the Middle Eastern nation. Russia, meanwhile, faces what President Vladimir Putin called a possibly “catastrophic” slump in prices for its oil as its economy is battered by U.S. and European sanctions over its role in Ukraine. “A new era of lower prices is being ushered in” by the U.S. shale oil and gas revolution, Ed Morse, global head of commodities research for Citigroup, said in an e-mail.

“Undoubtedly some of the geopolitical changes will be momentous.” They certainly were a quarter of a century ago. Plunging oil prices in the latter half of the 1980s helped pave the way for the breakup of the Soviet Union by robbing it of revenue it needed to survive. The depressed market also may have influenced Iraqi leader Saddam Hussein’s decision to invade fellow producer Kuwait in 1990, triggering the first Gulf War. Russia again looks likely to suffer from the fallout in oil markets, along with Iran and Venezuela, while the U.S. and China come out ahead. Oil is “the most geopolitically important commodity,” said Reva Bhalla, vice president of global analysis at Stratfor.

“It drives economies around the world” and is located in some “usually very volatile places.” Benchmark oil prices in New York have dropped more than 30% during the last five months to around $75 a barrel as U.S. crude production reached the highest in more than three decades, driven by shale fields in North Dakota and Texas. Output was 9.06 million barrels a day in the first week of November, the most since at least January 1983, when the weekly data series from the Energy Information Administration began.

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Petrobras was aiming to be the world’s first trillion-dollar company. Now it’s the most indebted company in the world.

Oil Industry Risks Trillions Of ‘Stranded Assets’ On US-China Climate Deal (AEP)

Brazil’s Petrobras is the most indebted company in the world, a perfect barometer of the crisis enveloping the global oil and fossil nexus on multiple fronts at once. PwC has refused to sign off on the books of this state-controlled behemoth, now under sweeping police probes for alleged graft, and rapidly crashing from hero to zero in the Brazilian press. The state oil company says funding from the capital markets has dried up, at least until auditors send a “comfort letter”. The stock price has dropped 87pc from the peak. Hopes of becoming the world’s first trillion dollar company have deflated brutally. What it still has is the debt. Moody’s has cut its credit rating to Baa1. This is still above junk but not by much. Debt has jumped by $25bn in less than a year to $170bn, reaching 5.3 times earnings (EBITDA). Roughly $52bn of this has been raised on the global bond markets over the last five years from the likes of Fidelity, Pimco, and BlackRock.

Part of the debt is a gamble on ultra-deepwater projects so far out into the Atlantic that helicopters supplying the rigs must be refuelled in flight. The wells drill seven thousand feet through layers of salt, blind to seismic imaging. The Carbon Tracker Initiative says the break-even price for these fields is likely to be $120 a barrel. It is much the same story – for different reasons – in the Arctic ‘High North’, off-shore West Africa, and the Alberta tar sands. The major oil companies are committing $1.1 trillion to projects that require prices of at least $95 to make a profit. The International Energy Agency (IEA) says fossil fuel companies have spent $7.6 trillion on exploration and production since 2005, yet output from conventional oil fields has nevertheless fallen. No big project has come on stream over the last three years with a break-even cost below $80 a barrel.

“The oil majors could not even generate free cash flow when oil prices were averaging $100 ,” said Mark Lewis from Kepler Cheuvreux. They have picked the low-hanging fruit. New fields are ever less hospitable. Upstream costs have tripled since 2000. “They have been able to disguise this by drawing down legacy barrels, but they won’t be able to get away with this over the next five years. We think the break-even price for the whole industry is now over $100,” he said. A study by the US Energy Department found that the world’s leading oil and gas companies were sinking into a debt-trap even before the latest crash in oil prices. They increased net debt by $106bn in the year to March – and sold off a net $73bn of assets – to cover surging production costs. The annual shortfall between cash earnings and spending has widened from $18bn to $110bn over the last three years. Yet these companies are still paying normal dividends, raiding the family silver to save face.

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They’ve all invested for continuing huge growth numbers. And now growth is gone.

Iron Ore’s Massive Expansion Era Is Finished: BHP Billiton (Bloomberg)

Iron ore’s golden spending era is history. That’s the verdict of BHP Billiton, the world’s biggest mining company. BHP and rivals Rio Tinto and Vale are flooding the global iron ore market after a $120 billion spending spree to boost the capacity of their mines from Australia to Brazil. Now prices have slumped to the lowest in more than five years as surging supply coincides with a slowdown in China, the world’s biggest consumer. “Our company has been very clear that the time for massive expansions of iron ore are over,” BHP CEO Andrew Mackenzie told reporters today after a shareholder meeting in Adelaide, South Australia. While BHP is still increasing production, the company last approved spending on an iron ore expansion in 2011.

It’s shifting investment into copper and petroleum, he said Global seaborne output will exceed demand by 100 million metric tons this year from 16 million tons in 2013, HSBC said last month. Prices, which are trading around $70 a ton in China, may drop to below $60 a ton next year, according to Citigroup forecasts. “At these prices, we still have a very decent business,” Mackenzie said. “We’ve been fairly clear that prices at about these levels were what we were expecting for the longer term.” Investments in copper may help BHP seize on rising demand for energy in emerging economies. Demand from China, the biggest metals consumer, will be supported by electricity grid expansion and greater adoption of renewable energy sources, all of which require more copper wiring, according to Citigroup.

The prospects for an expansion of BHP’s Olympic Dam copper, gold and uranium mine in Australia are looking more promising after testing of new processing technology shows early signs of success, Mackenzie said. Olympic Dam in South Australia is the world’s largest uranium deposit and fourth-biggest copper deposit. BHP is pilot testing a heap leaching extraction process used in its copper mines in Chile. If the tests “are successful, and they are showing considerable promise, we will use this technology and phased expansions of the underground mine to further increase Olympic Dam’s output,” Mackeznie told the meeting. In 2012, BHP halted a proposed expansion of Olympic Dam, estimated by Deutsche Bank AG to cost $33 billion. Mackenzie was addressing the first annual meeting held in the state since the decision.

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Flash PMI at zero growth.

China’s Factory Activity Stalls In November (CNBC)

China’s factory activity stalled in November as output shrank for the first time in six months, a private survey showed on Thursday. The HSBC flash Purchasing Managers’ Index (PMI) for November clocked in at the breakeven level of 50.0 that separates expansion from contraction, compared with a Reuters estimate for 50.3 and following the 50.4 final reading in October. Overall, new orders picked up slightly but new export orders slowed markedly, dragging on activity. The factory output sub-index fell to 49.5, the first contraction since May.

The Australian dollar eased against the greenback on the news, trading at $0.8607. But shares in China and Hong Kong appear unaffected by the data. The reading is the latest evidence that the world’s second biggest economy continues to lose traction. Recent data on housing prices and foreign direct investments also missed forecasts. “China is slowing and we think it will continue to slow. A lot of it is structural, and in our view, growth will slow to about 4.5% over the next 10 years. We see some sectors that are very challenged; clearly real estate is one,” Robin Bew, MD of Economist Intelligence Unit, told CNBC.

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“They keep reporting such a low number for so many years, there’s only one way it can go – up …”

Distressed Debt in China? You Ain’t Seen Nothing Yet (Bloomberg)

Bad debts in China are well underestimated because authorities persist in propping up weak companies and bailing out local investors, according to DAC Management. The Chicago-based asset management and advisory firm, which focuses on distressed credit and special situations in China, says the worst is yet to come, and that means lots of opportunities for the world’s biggest distressed debt traders. Nonperforming loans at Chinese banks jumped by the most since 2005 in the third quarter to 766.9 billion yuan ($125.3 billion), official statistics released earlier this month showed. The People’s Bank of China has injected 769.5 billion yuan into its banking system over the past two months to support an economy growing at the slowest pace in more than a decade.

“They keep reporting such a low number for so many years, there’s only one way it can go – up,” DAC co-founder Philip Groves said in an interview. “We’ve yet to see it because if you look at corporate defaults, they keep getting covered by the government. At some point, they can’t cover every single one.” DAC manages about $400 million of its own and clients’ money onshore in China. It first bought Chinese bad loans in December 2001 from China Orient Asset Management, one of four asset management companies created by the government to buy, repackage and onsell soured debt, Groves said.

While China’s bad loan ratio is relatively small versus other countries in Asia – soured loans are equivalent to 1.16% of total advances compared with 3.88% in Vietnam and 0.86% in South Korea – their total is still in an order of magnitude greater than the funds raised by distressed investors, Groves said. There hasn’t been enough capital to soak up the nonperforming debt and much ends up being reabsorbed by the government, he said. That’s why distressed activity in China has been “sporadic” over the past 10 years and why some large investors aren’t participating. “It never became a market where you could put a billion dollars to work in a year,” Groves said. “But if the wave of bad debt comes, and there are things to buy, the money will follow.”

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I’ve said it before, Japan is not going to be a nice place to be.

The Yen Looks Like It’s Ready To Get Crushed (CNBC)

Japan has slipped back into recession, with the economy shrinking 1.6% in the third quarter, surprising economists who forecast it would grow 2%. The takeaway? Double down on the dollar versus the yen. How weak can the yen get? Forecasters are lowering their already bearish targets after the new disappointing economic data. “I’d expect another 20% drop next year, which would take us north of 140,” said Peter Boockvar of the Lindsey Group about the dollar-yen rate. The team at Capital Economics raised their forecast for dollar-yen to finish next year at 140 as well, up from 120 previously.

Those are bold calls, because it’s unusual for any currency to move more than 5% to 10% per year. Also, the yen has already tumbled 14% in the past 12 months and 19% the previous year, making it the worst-performing major currency against the dollar both years. But when it comes to the yen right now, it seems, no forecast is too bearish. “When I started in the business, dollar-yen was 230,” recalled David Rosenberg, chief economist and strategist at Gluskin Sheff. “For those that think this move is over, this is probably going to be a round trip, meaning that the dollar’s run-up against the yen has a lot further to go.”

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Japan is a state of panic.

BOJ Warns Abe Over “Fiscal Responsibility” While Monetizing All Debt (ZH)

If one were to look up the definition of hypocrisy, the image of BoJ head Kuroda should be front-and-center. Having tripled-down on his money-printing and ETF-buying largesse just last week, he came out swinging last night at the government’s fiscal irresponsibility blasting Abe’s policies by saying Japan’s fiscal health “is the responsibility of parliament and the government, not an issue for the central bank to be held responsible for.” Aside from the fact that he is directly monetizing all JGB issuance – thus enabling Abe’s arrogant fiscal stimulus plan (by issuing 30Y and 40Y debt), Bloomberg notes that “Kuroda is making it crystal clear the government has to tackle the debt problem and if fiscal trust is lost that’s not going to be on the BOJ.” The world has truly gone mad. Seemingly paying the same lip-service as Bernanke and Yellen in the US and Draghi in Europe, BoJ’s Haruhiko Kuroda is carefully positioning the blame for lack of growth and economic chaos on the government’s lack of growth-oriented policies… and not the central bank’s enabling experiments… (via Bloomberg):

Bank of Japan chief Haruhiko Kuroda emphasized the onus is on the government to strengthen its finances after PM Shinzo Abe postponed a sales-tax hike and outlined plans to boost fiscal stimulus. “It’s the responsibility of parliament and the government, not an issue for the central bank,” Kuroda said when asked about risks to Japan’s fiscal health. The BOJ’s job is to achieve its inflation target, he said at a press conference in Tokyo. Kuroda’s repeated comments at a press conference today on the importance of fiscal discipline indicate the governor is unhappy and may signal a change in strategy, said Credit Suisse economist Hiromichi Shirakawa. “Kuroda is making it crystal clear the government has to tackle the debt problem and if fiscal trust is lost that’s not going to be on the BOJ,” said Shirakawa, a former BOJ official. “This is true, but he used to highlight that the BOJ and the government were working together. Abe might have created an enemy by postponing the sales-tax hike.”

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This is how you expose the madness in all those nonsensical plans and targets.

Why UK Needs ‘Radical’ Change As Exports Fall (CNBC)

The U.K. government needs to make radical changes to halt the slide in export growth, the head of British Chambers of Commerce told CNBC. “Exports are tailing off, the rate of growth is tailing off — it’s the one part of the economy we are failing on,” BCC’s Director- General John Longworth told CNBC Europe’s “Squawk Box” on Thursday. “They always say that the definition of madness is carrying on doing the same thing as before and expecting a different result. We need to do something radically different as a country.” His comments come as the BCC published its third-quarter Trade Confidence Index on Thursday. The survey, carried out with delivery company DHL Express, measures U.K. exporting activity and business confidence of more than 2,300 exporting firms.

It found that in the latest quarter, fewer exporters reported increased sales: 29% of exporters stated that sales had increased in the third quarter of 2014, a sharp drop from 47% in the second quarter. Of those exporters no longer seeing an increase in export sales, most said that sales have remained consistent. “There has a slowdown in the U.K.’s export potential because of the slowdown global economic circumstances,” Longworth said, or government export targets would be missed. The U.K. Prime Minister David Cameron said in his 2012 budget that he wanted the U.K. to double exports to £1 trillion ($1.5 trillion) by 2020. In order to achieve that, however, Longworth said the U.K. would have to see export growth of nearly 11% year-on-year growth every year. “So far since the beginning of the recovery in 2010, the total growth in those years has been 14%. So we’ve got a real issue and unless we do something different we’re not going to hit those targets.”

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And so must Italy, Greece, and many others. Let the people debate it, and give them alll the information, not just choice bits.

Michael Pettis: Spain Needs to Debate Leaving the Euro (Mish)

Michael Pettis has a very interesting article on the Spanish news site ABC regarding a possible default of Spain and the eventual breakup of the eurozone. [..] What follows is my heavily modified translation of key portions of Pettis’ article after reading both of the above translations.

In the Panic of 1837, two-thirds of the US, including several of the richest states, suspended payment of external debt. The United States survived. If the European Union is to survive, it will have to find a solution to the European debt. The more hope instead of action, the more likely there’s a permanent breakdown of the euro and the European Union. In a gesture more of faith than economic or historical data, Madrid assures us that with the right reforms, it will eventually be able to get out of debt. Other countries in debt crises have made the same promise, but the promise is rarely fulfilled. Excessive debt itself impedes growth. Even without the straitjacket of the euro, Spain probably cannot afford its debt. Even those who are against debt cancellation recognize that the only thing that shielded Germany from a Spanish default was the European Central Bank.

Despite their obnoxious policies, far-right parties across Europe flourish more than ever because the ECB protects the euro and European banks at enormous costs for the working and middle classes. These extremists exploit the refusal of European leaders to acknowledge their errors. The longer the economic crisis, greater their chances of winning, and then comes an end to Europe. The only thing that prevented a suspension of payments by Spain and other countries was the promise of the European Central Bank in 2012 to do “whatever it takes” to protect the euro. But debt continues to grow faster than GDP in Europe, and the ECB load increases inexorably month after month. There will come a time when rising debt and a weakening of the German economy will jeopardize the credibility of the guarantee of the ECB (which will be useless), little by little at first, and then suddenly later. In a matter of months Spain will suspend payments.

For now, with debt settlement postponed, German banks strengthen capital to protect themselves from bankruptcy that many predict. Berlin is playing the same game as Washington during the crisis in Latin America in the 1980s. Then US banks actively strengthened their capital, mainly at the covert expense of ordinary Americans, while insisting that Latin American countries needed further reforms and no debt forgiveness. However, multiple reforms led to extremely high rates of unemployment and enormous social upheaval throughout Latin America. From 1987 to 1988, when US banks finally had enough capital, Washington officially recognized that full payment of the debt in 1990 was impossible and forgave the debt of Mexico. In the years following, US banks forgave almost the entire debt of other Latin American countries.

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It’s getting painful. Stop the experiment, it’s failed beyond repair.

Eurozone PMI Falls To 16-Month Low In November (MarketWatch)

Activity in the eurozone’s private sector slowed in November, according to surveys of purchasing managers, an indication the currency area’s economy will continue to grow weakly, if at all, in the final quarter of the year. The surveys also found that businesses again cut their prices in the face of weak demand, a development that will concern the European Central Bank, which is struggling to raise the currency area’s inflation rate from the very low level it has settled at for more than a year. Data firm Markit on Thursday said its composite purchasing managers index – a measure of activity in the manufacturing and services sectors in the currency bloc – fell to 51.4 from 52.1 in October, reaching a 16-month low. A reading below 50.0 indicates activity is declining, while a reading above that level indicates it is increasing.

Preliminary results from Markit’s survey of 5,000 manufacturers and service providers also showed that a significant pickup in activity is unlikely in the coming months, with new orders falling for the first time since July 2013, while employment was unchanged. The surveys also found that businesses continued to cut their prices, although at a slightly less aggressive pace. “The deteriorating trend in the surveys will add to pressure for the ECB to do more to boost the economy without waiting to gauge the effectiveness of previously announced initiatives,” said Chris Williamson, chief economist at Markit.

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France toast.

French Manufacturing Slump Deepens as Economic Weakness Persists (Bloomberg)

French manufacturing shrank more than analysts forecast in November and demand fell, signaling that an economic rebound seen in the third quarter might be short lived. A Purchasing Managers Index fell to 47.6, the lowest in three months, from 48.5 in October, London-based Markit Economics said today. That’s below the 50-point mark that divides expansion from contraction and compares with the median forecast of 48.8 in a Bloomberg News survey. A separate index showed services also contracted, while new business across both industries fell the most in 17 months. The euro area’s second-largest economy has barely grown in three years and recent data suggests that 2014 will be little different. With unemployment near a record and the budget deficit widening, President Francois Hollande is under pressure to deliver on his promises of business-friendly reforms.

“The continued softness in private-sector activity signaled by the PMIs suggests an ongoing drag on growth during the fourth quarter,” said Jack Kennedy, senior economist at Markit. “Another round of job shedding by companies during November meanwhile provides little hope of bringing down the high unemployment rate.” An index of services activity rose to 48.8 this month from 48.3 in October, while a composite gauge for the whole economy increased to 48.4 from 48.2, according to today’s report. Employment across both manufacturing and services fell for 13th month, though the rate of decline slowed compared with the previous month. The French economy grew 0.3% in the three months through September as a jump in public spending offset a fourth quarterly decline in investment. The unemployment rate stood at 10.5% in September, more than double than Germany’s 5%, according to Eurostat. Hollande, whose popularity is among the lowest ever registered for a French president, has said he won’t run for a second term if he is unable to bring down joblessness.

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Please, let’s have some violent infighting in Brussels.

Pressure Mounts for EU Crackdown on Tax Havens (Spiegel)

In Luxembourg, corporate income taxes are as low as 1% for some companies. An average worker in Germany with a salary of €40,000 ($50,000) who doesn’t joint file with a spouse has to pay about €8,940 in taxes each year. At the Luxembourg rate, the worker would only have to pay €400. But some companies have even managed to finagle a tax rate of 0.1%, which would amount to a paltry €40 for the average German worker. As delightful as those figures may sound, normal workers will never have access to those kinds of tax discounts. That’s why it came across as obscene to many when Juncker defended Luxembourg’s tax arrangements on Wednesday as “legal”. They may be legal, but they are anything but fair. It also strengthens an impression that gained currency during the financial crisis – that capitalism favors banks and companies, not normal people, and that these institutions profit even more than previously known from tax loopholes.

But the Juncker case also sheds light on the two faces of European politics. Top Brussels politicians are recruited from the individual EU member states and, as such, have long representated their countries’ national interests. Then they move to Brussels, where they are expected to advocate for the European Union. At times like this, though, when dealings in Brussels are becoming increasingly politicized, the idea that these politicians are promoting the EU’s interests as a bloc loses credibility. And Juncker, the very man who had a hand in stripping Luxembourg’s neighbors of tax money, is supposed to be the main face representing the EU. It’s also very problematic that he, as the man who led a country that was one of the worst perpetrators of these tax practices, is now supposed to see to it that these schemes are investigated and curbed in the future.

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Kudos Crapo. Let’s cut the crap, not reintroduce it.

Senator Slaps Plan For Low-Down-Payment Loans At Fannie, Freddie (MarketWatch)

A controversial housing-finance proposal quickly came under fire during a Wednesday Capitol Hill hearing, with a top committee Republican questioning whether it’s a good idea to allow federally controlled mortgage-finance giants Fannie Mae and Freddie Mac to back mortgages with very low down payments. “I’m troubled,” said Idaho Sen. Mike Crapo, the leading Republican member of the Senate Banking, Housing and Urban Affairs Committee, by a plan from the Federal Housing Finance Agency to enable Fannie and Freddie to buy mortgages with down payments as low as 3%. “After the problems we’ve seen” it could be risky for Fannie and Freddie to buy loans when borrowers have little equity, Crapo said.

In response, Mel Watt, who became FHFA’s director in January and was the sole witness at the agency-oversight hearing, told senators that mortgages with low down payments will require insurance, and that borrowers will be required to have relatively strong credit profiles otherwise. He added that FHFA will provide more details in December about the types of borrowers who would be eligible for such mortgages. “We are not making credit available to people that we cannot reasonably predict, with a high degree of certainty,” will make their mortgage payments, Watt said. Decisions over who can qualify for loans bought by Fannie and Freddie can have a large impact on the housing market. Together Fannie and Freddie back about half of new U.S. mortgages. The FHFA must carefully craft rules that support the housing market’s somewhat erratic recovery without creating too much risk.

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This could make plenty waves, it’s a high stakes game.

Junk-Bond Banking Boom Peaks as Firms Drop off Deal List (Bloomberg)

The explosion of brokers plowing into the lucrative junk-bond underwriting business may be fading. The number of firms managing U.S. high-yield bond sales isn’t growing for the first year since 2008, according to data compiled by Bloomberg. The ranks will likely thin in upcoming years as yields rise, making it more expensive for speculative-grade companies to borrow, according to Charles Peabody, a banking analyst at research firm Portales Partnersin New York. “You’re going to see fewer and fewer deals,” he said in a telephone interview. “Underwriting volumes are probably going to decline from here and you’re going to see more of a consolidation or exodus.” So far, the decline has been small, with 87 firms managing high-yield bond sales this year, down from the record 92 in the same period in 2013, Bloomberg data show.

The number of underwriters is still about twice as many as in 2009, when a slew of bankers founded their own firms to grab business from Wall Street firms that were shrinking as the credit crisis caused trillions of dollars of losses and writedowns. The new firms sought to win assignments managing smaller deals that bigger banks didn’t have the appetite for anymore. Five years later, the scene is changing. The least-creditworthy companies have borrowed record amounts of debt, spurred by central-bank stimulus that pushed borrowing costs to all-time lows. Now, the Federal Reserve is preparing to raise rates and junk-bond buyers are getting jittery.

The notes have declined 1.7% since the end of August as oil prices plunged, eroding the value of debt sold by speculative-grade energy companies, Bank of America Merrill Lynch index data show. While junk-bond sales are still on track for a new record this year, issuance has been choppy, with deals being canceled one week and then a flood of sales going through the next. For the past few years, high-yield underwriting has been a bright spot for banks, especially compared with flagging trading revenues. Speculative-grade companies have sold $1.2 trillion of dollar-denominated debt since the end of 2010 to lock in historically low borrowing costs. That’s also meant there have been a swelling number of firms elbowing each other out of the way for a chance to manage those deals, vying for fees that have been almost three times as much as those on higher-rated deals.

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Pot and kettle.

Goldman Fires Staff For Alleged NY Fed Breach (FT)

Goldman Sachs has fired an investment banker who allegedly accessed confidential information from the Federal Reserve Bank of New York, his former employer. Goldman said it had fired Rohit Bansal, a junior employee, in September and then fired his supervisor Joe Jiampietro, a better-known senior banker in the financial institutions group, which advises other banks. Mr Jiampietro was himself a former government official – a top adviser to Sheila Bair when she was chairman of the Federal Deposit Insurance Corporation. The New York Fed said: “As soon as we learned that Goldman Sachs suspected one of its employees may have inappropriately obtained confidential supervisory information, we alerted law enforcement authorities.”

The news, first reported by the New York Times, comes ahead of a congressional hearing on Friday that is examining whether there is too “cosy” a relationship between regulators and banks. Goldman has been nicknamed “Government Sachs” as the epitome of the “revolving door” between government and banking. Several of its employees formerly worked at government agencies, including the Fed and US Treasury. Hank Paulson, Goldman’s former chief executive, left the bank to become US Treasury secretary under President George W. Bush. On Friday, the Senate banking committee is due to examine allegations from a former New York Fed examiner, who says that she was fired because her bosses wanted her to water down criticism of Goldman. Bill Dudley, president of the New York Fed and himself a former Goldman employee, is due to testify.

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A little skimpy perhaps, but who would doubt the premise?

Banking Industry Culture Promotes Dishonesty, Research Finds (Guardian)

How do you tell if a group of bankers is dishonest? Simply by getting them all to toss a coin. That may not seem like in-depth research, but it is the basis of an academic paper published in Nature magazine this week, which investigates whether the financial sector’s culture encourages dishonesty – and concludes that it does. The academics from the University of Zurich used a sample of 128 employees of a large bank, and split them into two groups. The first set of bankers were primed to start thinking about their job, with questions such as “what is your function at this bank?”. They were then asked to toss a coin 10 times, in private, knowing which outcome would earn them $20 a flip. They then had to report their results online to claim any winnings. Unsurprisingly perhaps, there was cheating – with the percentage of winning tosses coming in at an incredibly fortunate 58.2% (although the research omitted to say how many bankers also trousered the coin).

Meanwhile, the second group completed a survey about their wellbeing and everyday life, that did not include questions relating to their professional life. They then performed the coin-flipping task, which threw up a quite astonishing finding: these bankers proved honest. Identical exercises in other industries did not produce the same skewing in results when participants were primed to start thinking about their work. The research does not reveal which institution took part in the survey, presumably to avoid it suing the authors for unearthing some decent behaviour among the cheating. “The effect induced by the treatment could be attributable to several causes,” the authors muse, “including the competitiveness expected from bank employees, the exposure to competitive bonus schemes, the beliefs about what other employees would do in the same situation or the salience of money in the questionnaire.”

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Anti-tax rant. Simon Black knows quite a bit about moving abroad.

New International Gang Of Thieves Make Somali Pirates Look Like Amateurs (Black)

This past month, a real-life guild of thieves was formed. With 51 governments pledging their support to each other for the protection of their ignoble craft of theft. And another 30 pledging to join by 2018. From day one, governments have been pilfering their citizens’ assets through taxation, claiming a monopoly on thievery. From the largest institution to the pettiest pickpocket, anyone else who tries to engage in theft is severely punished, as governments work to protect their exclusive right to steal. Frighteningly, they do this all out in the open, believing that they actually have a moral right to commit theft. You can see this delusion in the US government’s claims that last year they “lost out” on $337 billion from people avoiding taxes. As if they have some moral claim to the money they’d failed to pilfer. Nonetheless, they use this claim to justify actively hunting down and penalizing anyone who takes action to avoid being stolen from.

The ones that are doing this are the bankrupt countries, and the deeper they slide into debt, the more desperate they become. Which is why these broke governments are now joining forces, pledging to to collect and share information amongst themselves about citizens’ bank accounts, taxes, assets and income outside local tax jurisdictions. Basically – I’ll help you steal from your citizens if you help me steal from mine. Both the punishment and the likelihood of getting caught for tax evasion are growing. Don’t even bother trying. However that doesn’t mean that you have no choice but to sit there and let your self be stolen from. While there are still ways of legally reducing your tax burden from within a country, your best option is to move and diversify. Diversification is key, because if you have all your eggs in one bankrupt basket, you are really taking on extraordinary risk. Moving some assets abroad can legitimately reduce some of this risk. And an even greater strategy is considering moving yourself.

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