recession Archives - Page 6 of 8 - The Automatic Earth

While 2016’s anemic growth level isn’t an automatic disqualifier for an interest rate increase, the bar just got a little higher. Friday’s GDP reading fell below even the dimming hopes on Wall Street. The 1.2% growth ratein the second quarter combined with a downward revision to the first three months of the year to produce an average growth rate of just 1%. In total, it was far below the Wall Street forecast of 2.6% second-quarter growth and didn’t lend a lot of credence to a Fed statement earlier this week that sounded more confident on the economy. (The Atlanta Fed was much closer, forecasting 1.8%.) In short, they are not numbers upon which a rate hawk would want to hang one’s hat.

“We’re tired of talking about rate hikes when it’s not going to happen for a while,” Diane Swonk of DS Economics told CNBC. “I really think the Fed is sidelined until the end of the year. Or, perhaps, longer. Market expectations for the next Fed hike had been sliding as the release of the GDP report got closer, and they plunged afterward. The fed funds futures market Friday morning was indicating just a 34.4% chance of a rate rise this year, with the next move pushed out until well into 2017. A day earlier, the futures market had moved to just over 50% for a 2016 move. The Fed last hiked in December 2015, which was the first move after eight years of keeping the overnight rate near zero.

To be sure, GDP growth is just one input for the central bank. Ostensibly, the Fed’s mandate is to ensure full employment and price stability, and it has come close to achieving the former while continually falling short of the latter. [..] .. the Fed has been warning about weak business investment, and Friday’s data showed those concerns were well-founded. Business investment fell 2.2%, its third consecutive quarterly decline. Gross private domestic investment tumbled 9.7%, and residential investment, which had been on the rise, reversed course and declined 6.1%, the first decrease since early 2014. Those numbers act as a counterweight to the declining jobless rate, which is down to 4.9%.

“What is really worrying is that pace has still been enough to reduce the unemployment rate further, suggesting that the economy’s potential growth rate could conceivably be close to zero,” Paul Ashworth, chief U.S. economist at Capital Economics, said in a note. The headline jobless rate has been declining, in part, due to a generational low in labor force participation, suggesting that outside a decline in labor slack, there’s little moving economic growth.

And consumer spending is set to contract sharply.

• US Non-Consumer Economy Is Now In A Recession (ZH)

While yesterday’s GDP report was an undisputed disappointment, printing at 1.2% or less than half the 2.5% expected following dramatic historical data revisions, an even more troubling finding emerged when looking at the annual growth rate of GDP. This is how Deutsche Bank’s Dominic Konstam summarized what we showed yesterday:

The latest GDP release favors our hypothesis of an imminent endogenous labor market slowdown over a more optimistic scenario in which productivity will replace employment as the engine for growth. With real GDP growing at just 1.2%, there is little evidence that productivity is ready to do the heavy lifting. We are particularly concerned because annual nominal growth has slowed to 2.4%, essentially a cyclical trough.

He was looking at the following chart (which as the BEA admitted yesterday, may be revised even lower in coming quarters).

However, as it turns out, that was not even the biggest risk. Recall that even as overall GDP rose a paltry 1.2%, somehow the consumer-driven portion of this number soared, with Personal Consumption Expenditures surging at an annualized 2.8% rate, nearly triple that recorded in the first quarter.

This means that the non-consumer part of the US economy subtracted 1.6% from GDP growth in the second quarter. In fact, as Deutsche Bank calculates, on an annual basis, the non-consumer portion of the economy is shrinking, i.e., in a recession, not only in real terms but also in nominal terms.

More parts of Stockman’s upcoming book ‘Trumped’.

• US Government Entitlements – Sixth Biggest Economy On Earth (Stockman)

……..Because the main street economy is failing, the nation’s entitlement rolls have exploded. About 110 million citizens now receive some form of means tested benefits. When social security is included, more than 160 million citizens get checks from Washington. The total cost is now $3 trillion per year and rising rapidly. America’s entitlements sector, in fact, is the sixth biggest economy in the world. Yet in a society that is rapidly aging to the tune of 10,000 baby boom retirees per day, this 50% dependency ratio is not even remotely sustainable. As we show in a later chapter, social security itself will be bankrupt within 10 years. Still, there is another even more important aspect of the mainstream narrative’s absolute radio silence about the monumental entitlements problem.

Like in the case of the nation’s 30-year LBO, the transfer payments crisis is obfuscated by the economic blind spots of our Keynesian central banking regime. Greenspan, Bernanke, Yellen and their posse of paint-by-the-numbers economic plumbers have deified the great aggregates of consumer, business and government spending as the motor force of economic life. As more fully deconstructed below, however, this boils down to a primitive notion of bathtub economics. In this bogus economic model, it is assumed that the supply-side of the economy is always fully endowed or even over-provided. By contrast, the perennial problem is purportedly a shortfall of an ether called “aggregate demand”.

Can we please stop talking about it, and do it already?

• Helicopter Money Talk Takes Flight As Bank of Japan Runs Out Of Runway (R.)

In the narrowest sense, a government can arrange a helicopter drop of cash by selling perpetual bonds, which never need to be repaid, directly to the central bank. Economists do not expect this in Japan, but they do see a high chance of mission creep, with the BOJ perhaps committing to buy municipal bonds or debt issued by state-backed entities, giving its interventions more impact than in the treasury bond market, where it is currently buying 80 trillion yen a year of Japanese government bonds (JGBs) from financial institutions. “Compared with government debt, these assets have low trading volume and low liquidity, so BOJ purchases stand a high chance of distorting these markets,” said Shinichi Fukuda, a professor of economics at Tokyo University.

“Prices would have an upward bias, so even if the BOJ bought at market rates, this would be considered close to helicopter money.” Other options include creating a special account at the BOJ that the government can always borrow from, committing to hold a certain%age of outstanding government debt or buying corporate bonds, economists say. With the BOJ’s annual JGB purchases already more than twice the volume of new debt issued by the government, Japan has already adopted something akin to helicopter money, said Etsuro Honda, a former special adviser to the Cabinet and a key architect of Abe’s reflationary economic policy. But it has not been enough to stop consumer prices falling in June at their fastest since the BOJ began quantitative easing in 2013.

And these are half-ass stress tests designed to let banks pass.

• No Clean Bill Of Health For EU Banks In Stress Test (R.)

Banks from Italy, Ireland, Spain and Austria fared worst in the latest European Union stress test, which the region’s banking watchdog said on Friday showed there was still work to do in order to boost credit to the bloc’s economy. Eight years since the collapse of Lehman Brothers sparked a global banking meltdown, many of Europe’s banks are still saddled with billions of euros in poorly performing loans, crimping their ability to lend and putting off investors. “While a number of individual banks have clearly fared badly, the overall finding of the European Banking Authority – that Europe’s banks are resilient to another crisis – is heartening,” Anthony Kruizinga at PwC said. Italy’s Monte dei Paschi, Austria’s Raiffeisen, Spain’s Banco Popular and two of Ireland’s main banks came out with the worst results in the EBA’s test of 51 EU lenders.

“Whilst we recognize the extensive capital raising done so far, this is not a clean bill of health,” EBA Chairman Andrea Enria said in a statement. “There remains work to do.” Italy’s largest lender, UniCredit, was also among those banks which fared badly, and it said it will work with supervisors to see if it should take further measures. Germany’s biggest banks, Deutsche Bank and Commerzbank, were also among the 12 weakest banks in the test, along with British rival Barclays. Monte dei Paschi, Italy’s third largest lender, had been scrambling to pull together a rescue plan and win approval for it from the ECB ahead of the test results. The Italian bank confirmed less than an hour before the results that it had finalised a plan to sell off its entire portfolio of non-performing loans and had assembled a consortium of banks to back a €5 billion capital increase.

More!

• Ireland Jails Three Top Bankers Over 2008 Banking Meltdown (R.)

Three senior Irish bankers were jailed on Friday for up to three-and-a-half years for conspiring to defraud investors in the most prominent prosecution arising from the 2008 banking crisis that crippled the country’s economy. The trio will be among the first senior bankers globally to be jailed for their role in the collapse of a bank during the crisis. The lack of convictions until now has angered Irish taxpayers, who had to stump up €64 billion – almost 40% of annual economic output – after a property collapse forced the biggest state bank rescue in the euro zone. The crash thrust Ireland into a three-year sovereign bailout in 2010 and the finance ministry said last month that it could take another 15 years to recover the funds pumped into the banks still operating.

Former Irish Life and Permanent Chief Executive Denis Casey was sentenced to two years and nine months following the 74-day criminal trial, Ireland’s longest ever. Willie McAteer, former finance director at the failed Anglo Irish Bank, and John Bowe, its ex-head of capital markets, were given sentences of 42 months and 24 months respectively. All three were convicted of conspiring together and with others to mislead investors, depositors and lenders by setting up a €7.2 billion circular transaction scheme between March and September 2008 to bolster Anglo’s balance sheet. Irish Life placed the deposits via a non-banking subsidiary in the run-up to Anglo’s financial year-end, to allow its rival to categorize them as customer deposits, which are viewed as more secure, rather than a deposit from another bank.

“..a couple of generations of Australians will be all the poorer for it…”

• Australia’s Property Market Is Completely Bonkers (Schwab)

House prices are no longer a function of value but rather of how much people are prepared to pay. That in turn is determined by how much banks are willing to lend. And that amount continues to rise. Before the current boom started in 1997, the ratio of household debt to GDP was around 40% — it’s now more than 100% (it’s the same story for household income to household debt). In short, the banks are lending Australians a whole load of cash, and we’re using that cash to bid up the price of an unproductive asset (established housing).

The removal of housing prices from reality is almost total. Most investment advisers will tell you that the price of an asset is dependent on the income that asset generates. For example, the more a company earns (or more specifically, the more investors think that company will earn in the future), the higher its share price will rise. Given house and apartment prices are currently high (based on their terrible net rental yield) one would expect rents to be increasing significantly to justify their price. However, the data tells a very different story. CoreLogic found that Australian dwellings increased in price by 10% in the past year. In Sydney and Melbourne the price rises were even more significant, with Sydney increasing by 13% and Melbourne by 13.9%.

If the market had any degree of rationality, given the market is already expensive, rentals would have needed to rise by around 20% during the year to justify those price increases. However, CoreLogic also reported that Sydney rents were up a mere 0.4% and Melbourne up by 1.7% (both well below the inflation rate). That means if the market was insane a year ago, it’s even worse now. Already overprice property is increasing, in Sydney’s case, 20 times as fast as underlying income. The problem is no one seems to care what the banks do (least of all the government, even though taxpayers are on the hook if any of the big banks fall over, which if the history of banking is anything to go by is a virtual certainty at some point).

Moreover, successive governments’ taxation policies (negative gearing, no capital gains tax, minimal land tax) serve to exacerbate the insanity. How long will the boom last? Potentially some time. There are a lot of vested interests (banks, real estate industry, state governments, the media) who are utterly reliant on the bubble continuing. Sadly, a couple of generations of Australians will be all the poorer for it.

“Economic stability breeds instability. Periods of prosperity give way to financial fragility. With overleveraged banks and no-money-down mortgages still fresh in the mind after the global financial crisis, Minsky’s insight might sound obvious.”

• Minsky’s Moment (Economist)

Minsky distinguished between three kinds of financing. The first, which he called “hedge financing”, is the safest: firms rely on their future cashflow to repay all their borrowings. For this to work, they need to have very limited borrowings and healthy profits. The second, speculative financing, is a bit riskier: firms rely on their cashflow to repay the interest on their borrowings but must roll over their debt to repay the principal. This should be manageable as long as the economy functions smoothly, but a downturn could cause distress. The third, Ponzi financing, is the most dangerous. Cashflow covers neither principal nor interest; firms are betting only that the underlying asset will appreciate by enough to cover their liabilities. If that fails to happen, they will be left exposed.

Economies dominated by hedge financing—that is, those with strong cashflows and low debt levels—are the most stable. When speculative and, especially, Ponzi financing come to the fore, financial systems are more vulnerable. If asset values start to fall, either because of monetary tightening or some external shock, the most overstretched firms will be forced to sell their positions. This further undermines asset values, causing pain for even more firms. They could avoid this trouble by restricting themselves to hedge financing. But over time, particularly when the economy is in fine fettle, the temptation to take on debt is irresistible. When growth looks assured, why not borrow more? Banks add to the dynamic, lowering their credit standards the longer booms last.

If defaults are minimal, why not lend more? Minsky’s conclusion was unsettling. Economic stability breeds instability. Periods of prosperity give way to financial fragility. With overleveraged banks and no-money-down mortgages still fresh in the mind after the global financial crisis, Minsky’s insight might sound obvious. Of course, debt and finance matter. But for decades the study of economics paid little heed to the former and relegated the latter to a sub-discipline, not an essential element in broader theories. Minsky was a maverick. He challenged both the Keynesian backbone of macroeconomics and a prevailing belief in efficient markets.

Yanis calling for heads to roll.

• The IMF Confesses It Immolated Greece On Behalf Of The Eurogroup (YV)

[..] an urgent apology is due to the Greek people, not just by the IMF but also by the ECB and the Commission whose officials were egging the IMF on with the fiscal waterboarding of Greece. But an apology and a collective mea culpa from the troika is woefully inadequate. It needs to be followed up by the immediate dismissal of at least three functionaries. First on the list is Mr Poul Thomsen – the original IMF Greek Mission Chief whose great failure (according to the IMF’s own reports never before had a mission chief presided over a greater macroeconomic disaster) led to his promotion to the IMF’s European Chief status.

A close second spot in this list is Mr Thomas Wieser, the chair of the EuroWorkingGroup who has been part of every policy and every coup that resulted in Greece’s immolation and Europe’s ignominy, hopefully to be joined into retirement by Mr Declan Costello, whose fingerprints are all over the instruments of fiscal waterboarding. And, lastly, a gentleman that my Irish friends know only too well, Mr Klaus Masuch of the ECB. Finally, and most importantly, the apology and the dismissals will count for nothing if they are not followed by a complete U-turn over macroeconomic, fiscal and reform policies for Greece and beyond.

Is any of this going to happen? Or will the IMF’s IEO report light up the sky fleetingly, to be forgotten soon? The omens are pointing to the latter. In which case, the EU’s chances of regaining the confidence of its citizens, chances that are already too slim, will run through our leaders’ fingers like thin, white sand.

“..the shift into an era of post-truth politics…”

• Econocracy Has Split Britain Into Experts And Ordinary People (G.)

During the EU referendum debate almost the whole global economic and financial establishment lined up to warn of the consequences of Brexit, and yet 52% of the country ignored them. For many Remain voters it is a clear sign of the shift into an era of post-truth politics. While economists developed rigorous, evidence-based arguments, Leave campaigners slandered experts and appeared to pluck numbers out of the air. Yet they won. Post-truth politics is indeed a scary prospect but to avoid such a future we cannot simply blame “populist politicians” or “ill-informed voters”. We must understand the referendum in its wider context; economists must realise that they are both part of the problem and a necessary part of the solution. We are living in an econocracy.

Such a society seems like a democracy, with political parties and elections, but political goals are expressed in terms of their effect on “the economy”, and economic policymaking is viewed as a technical, not a political, activity. Areas of political life are increasingly delegated to experts, whether at the Bank of England, the government’s behavioural insights team, the Competition Commission or the Treasury. As members of Rethinking Economics, an international student movement seeking to reform the discipline of economics, we are campaigning for a more pluralist, critical and participatory approach. We conduct workshops in schools, run evening crash courses for adults, and this year launched Economy, a website providing accessible economic analysis of current affairs and a platform for lively public debate.

We want economists and citizens to join us in our mission to democratise economics. That’s because the language of economics has become the language of government, and as the experts on “the economy”, economists have secured a position of prestige and authority. Their rise has gone hand in hand with the increasing importance over the 20th century and beyond of the idea of the economy in political and social life. This idea in its modern use took hold only in the 1950s but today GDP growth is one of the central indicators of success for governments, and it is unheard of for a political party to win a general election without being viewed as competent on the economy.

We have also seen the economisation of daily life, so that parts of society as diverse as the arts and healthcare now justify their value in terms of their contribution to the economy. But in this process economists have largely ignored citizens and failed to consider their right to participate in discussion and decision-making.

A bunch of dangerous sickos.

• Network Close To NATO Military Leader Fueled Ukraine Conflict (Spiegel)

The newly leaked emails reveal a clandestine network of Western agitators around the NATO military chief, whose presence fueled the conflict in Ukraine. Many allies found in Breedlove’s alarmist public statements about alleged large Russian troop movements cause for concern early on. Earlier this year, the general was assuring the world that US European Command was “deterring Russia now and preparing to fight and win if necessary.” The emails document for the first time the questionable sources from whom Breedlove was getting his information. He had exaggerated Russian activities in eastern Ukraine with the overt goal of delivering weapons to Kiev. The general and his likeminded colleagues perceived US President Barack Obama, the commander-in-chief of all American forces, as well as German Chancellor Angela Merkel as obstacles.

Obama and Merkel were being “politically naive & counter-productive” in their calls for de-escalation, according to Phillip Karber, a central figure in Breedlove’s network who was feeding information from Ukraine to the general. “I think POTUS sees us as a threat that must be minimized,… ie do not get me into a war????” Breedlove wrote in one email, using the acronym for the president of the United States. How could Obama be persuaded to be more “engaged” in the conflict in Ukraine – read: deliver weapons – Breedlove had asked former Secretary of State Colin Powell. Breedlove sought counsel from some very prominent people, his emails show. Among them were Wesley Clark, Breedlove’s predecessor at NATO, Victoria Nuland, the assistant secretary of state for European and Eurasian affairs at the State Department, and Geoffrey Pyatt, the US ambassador to Kiev.

One name that kept popping up was Phillip Karber, an adjunct assistant professor at Georgetown University in Washington DC and president of the Potomac Foundation, a conservative think tank founded by the former defense contractor BDM. By its own account, the foundation has helped eastern European countries prepare their accession into NATO. Now the Ukrainian parliament and the government in Kiev were asking Karber for help. On February 16, 2015, when the Ukraine crisis had reached its climax, Karber wrote an email to Breedlove, Clark, Pyatt and Rose Gottemoeller, the under secretary for arms control and international security at the State Department, who will be moving to Brussels this fall to take up the post of deputy secretary general of NATO.

Karber was in Warsaw, and he said he had found surreptitious channels to get weapons to Ukraine – without the US being directly involved. According to the email, Pakistan had offered, “under the table,” to sell Ukraine 500 portable TOW-II launchers and 8,000 TOW-II missiles. The deliveries could begin within two weeks. Even the Poles were willing to start sending “well maintained T-72 tanks, plus several hundred SP 122mm guns, and SP-122 howitzers (along with copious amounts of artillery ammunition for both)” that they had leftover from the Soviet era. The sales would likely go unnoticed, Karber said, because Poland’s old weapons were “virtually undistinguishable from those of Ukraine.”

What Trump said.

• America’s Military Is “Lender Of Last Resort” (Cate Long)

America is slowly awakening from its long debt-induced slumber. It has conducted two major wars, a bailout of banks and a major stimulus program without raising taxes to pay for them. Because the Federal Reserve kept interest rates low, it was easy for politicians to continue to raise the debt ceiling and spend without making reductions in other areas of the budget. But those days have ended, the punch bowl has been removed and a new sobriety has rolled into our national capital. Even with its massive deficit problems, America has been providing security for its global allies for decades at no cost to them.

This resulted in spending 4.8% of GDP on U.S. military in 2010, which was ramped up from 3.0% in 2001, according to the Stockholm International Peace Research Institute. In contrast, you can see that European countries spent 1.73% of total GDP on military in 2010, which declined slightly from 1.99% in 2001. America has been subsidizing European military needs largely due to its role in the NATO alliance. The Council on Foreign Relations explains the new problems with this arrangement:

In 2011, then Secretary of Defense Robert Gates warned that ‘there will be dwindling appetite and patience in the U.S. . . . to expend increasingly precious funds on behalf of nations that are apparently unwilling to devote the necessary resources to be serious and capable partners in their own defense.’ France in Mali is now a case in point; the Obama administration is providing only grudging assistance to an under-resourced French intervention.

[…] French military spending…has since 2001 exhibited a marked constancy—one which is inconsistent with the country’s newfound passion for military engagement. (Libya in March 2011 was another example of the French, as well as British, military biting off more than it could chew). It also highlights the need for the Obama administration to address Gates’ prescient concern and to develop a clearer policy foundation for America’s global military ‘lender of last resort’ role.

America is woefully underfunded in infrastructure spending and many other social needs. A big question is whether it can also be the global military “lender of last resort” and still maintain its own house. The military contracting industry in America does create a lot of jobs, but in essence it also gives the benefits away free to its allies. Times must change. America must either charge for these services or understand more clearly what we gain from continued military involvement overseas.

Debt Rattle July 30 2016

Jul 302016

July 30, 2016 Posted by Raúl Ilargi Meijer at 7:59 am Finance Tagged with: BoJ, debt restructuring, deflation, GDP, hack, NAFTA, plastic bags, recession, refugees, Stress Test 10 Responses »

Jack Delano Street scene on a rainy day in Norwich, Connecticut 1940

• US GDP Grew a Disappointing 1.2% in Q2 As Q1 Revised Down to 0.8% (WSJ)

• Rescue Package In Place For Europe’s Oldest Bank, Weakest In Stress Tests (G.)

• ECB Bond Buying Risks Blocking Debt Restructurings (R.)

• Chinese Capital Outflows May Still Be Happening – But In Disguise (BBG)

• Bank of Japan’s Quest for 2% Inflation (BBG)

• The Bank of Japan Is At A Crossroads (BBG)

• US Authorities Subpoena Goldman In 1MDB Probe (R.)

• Australia Headed For Recession As Early As Next Year – Steve Keen (ABC.au)

• ‘Sell The House, Sell The Car, Sell The Kids’ – Gundlach (R.)

• British Columbia Violates NAFTA With Its Foreign Property Tax (FP)

• Another “Smoking Gun” Looms As Hillary Campaign Admits Server Hacked (ZH)

• Greek Islands Appeal For Measures To Deal With Influx Of Refugees (Kath.)

• England’s Plastic Bag Usage Drops 85% Since 5p Charge Introduced (G.)

Only positive is consumer spending. But without knowing how much of that is borrowed (let alone manipulated), it’s a meaningless number.

• US GDP Grew a Disappointing 1.2% in Q2 As Q1 Revised Down to 0.8% (WSJ)

Declining business investment is hobbling an already sluggish U.S. expansion, raising concerns about the economy’s durability as the presidential campaign heads into its final stretch. GDP, the broadest measure of goods and services produced across the U.S., grew at a seasonally and inflation adjusted annual rate of just 1.2% in the second quarter, the Commerce Department said Friday, well below the pace economists expected. Economic growth is now tracking at a 1% rate in 2016—the weakest start to a year since 2011—when combined with a downwardly revised reading for the first quarter. That makes for an annual average rate of 2.1% growth since the end of the recession, the weakest pace of any expansion since at least 1949.

The output figures are in some ways discordant with other gauges of the economy. The unemployment rate stands at 4.9% after a streak of strong job gains, wages have begun to pick up, and home sales hit a post-recession high last month. Consumer spending also remains strong. Personal consumption, which accounts for more than two-thirds of economic output, expanded at a 4.2% rate in the second quarter, the best gain since late 2014. On the downside, the third straight quarter of reduced business investment, a large paring back of inventories and declining government spending cut into those gains. “Consumer spending growth was the sole element of good news” in the latest GDP figures, said Gregory Daco at Oxford Economics. “Weakness in business investment is an important and lingering growth constraint.”

“This is a market operation that will reinforce the capital position of the bank and free it completely of bad loans…” If it’s that easy, do it all over the place, I’d think. Who do they think they’re fooling?

• Rescue Package In Place For Europe’s Oldest Bank, Weakest In Stress Tests (G.)

A rescue package of the world’s oldest bank has been announced after a health check of the biggest banks across the EU showed that Banca Monte dei Paschi di Siena’s financial position would be wiped out if the global economy and financial markets came under strain. The much-anticipated result of the stress tests – for which there was no pass or fail mark – of 51 banks showed that Italy’s third largest bank emerged weakest from the assessment. But the test – which exposed banks to headwinds in the global economy and dramatic movements in currency markets – also underlined the drop in the capital position of bailed-out Royal Bank of Scotland and the hit taken by Barclays observed under the imaginary scenarios. Banks from Italy, Ireland, Spain and Austria fared worst.

Regulators said that the tests showed that the bank sector was much stronger than it had been at the time of the 2008 financial crisis, which led to the introduction of the stress tests. Even so, the European Banking Authority (EBA), which conducted the tests on lenders, acknowledged that more needed to done.Under the latest stress test scenario, some €269bn (£227bn) would be wiped off the capital bases of the banks. “The EBA’s 2016 stress test shows the benefits of capital strengthening done so far are reflected in the resilience of the EU banking sector to a severe shock,” said Andrea Enria, EBA chair. “This stress test is a vital tool to assist supervisors in accelerating the process of repair of banks’ balance sheets, which is so important for restoring lending to households and businesses.

“The EBA’s stress test is not a pass [or] fail exercise. While we recognise the extensive capital raising done so far, this is not a clean bill of health. There remains work to do which supervisors will undertake.” The bank that fared the worst was MPS, which suffered a dramatic 14 percentage point fall in its capital position. It had been expected to perform badly and talks had already been underway before the results of the stress tests were published to try to find a way to bolster its capital. New EU regulations prevented the Italian government from pumping any taxpayer money into MPS so efforts were needed to try to stop of tens of thousands of ordinary Italians – who had bought its bonds – losing their savings. Italy’s banks are in the spotlight as they are weighed down by €360bn of bad debts.

Italy’s finance minister, Pier Carlo Padoan – who as recently as Sunday said there was no crisis in Italy – endorsed the deal put together to raise €5bn from private investors and sell €9.2bn of bad debts. “The government is greatly satisfied with the operation [the deal] launched … by Monte dei Paschi of Siena,” he said. “This is a market operation that will reinforce the capital position of the bank and free it completely of bad loans. The operation will allow the bank to develop a solid industrial plan, thanks to which it will boost its support for the real economy through lending to families and businesses.”

Unintended consequences. Hilarious, really.

• ECB Bond Buying Risks Blocking Debt Restructurings (R.)

The European Central Bank could scupper future eurozone debt restructurings if it increases the amount of a country’s bonds it can buy under its economic stimulus program, a top debt lawyer warned. The problem, on the radar of European authorities suffering a hangover from the 2012 crisis, has been pushed to the fore by expectations the ECB will need to raise limits on its bond purchases to keep its quantitative easing scheme on track.

Kai Schaffelhuber, a partner at law firm Allen & Overy, said that if the ECB permitted itself to buy more than a third of a country’s debt it would make a restructuring of privately-held bonds more difficult, a move that could increase the likelihood of taxpayer rescues. In a debt restructuring, a quorum of investors has to agree the terms of a deal. The ECB cannot participate because it is forbidden from directly financing governments. “They (the ECB) should avoid a situation where they are holding so much (of a) debt that a restructuring becomes virtually impossible,” said Schaffelhuber, whose firm worked on Greece’s 2012 debt restructuring.

Samoa….

• Chinese Capital Outflows May Still Be Happening – But In Disguise (BBG)

When there’s a will to get money out of China, there’s a way: overpay. Authorities in the world’s second-largest economy have been able to pursue a policy of managed depreciation for the Chinese yuan without spooking markets and eliciting expectations of major foreign-exchange volatility, the way the one-off devaluation did last August. One big reason is that Beijing seems to have had success in cracking down on the flood of money leaving the country, which had been prompting sizable drawdowns in the central bank’s foreign currency reserves, to prop up the value of the yuan. But a report from a Nomura team led by Chief China Economist Yang Zhao says these capital outflows have merely taken another form: the over-invoicing of imports from select locales.

And this time, it’s not just a Hong Kong story. “A detailed breakdown by region shows imports from some tax haven islands or offshore financial centres surged” in the first half of the year, he writes, “against the backdrop of a large decline in overall imports.” Now, it may be the China’s appetite for copra and coconut oil, two key Samoan exports, has indeed surged. But Zhao has a different explanation. “This suggests to us that capital outflows may have been disguised as imports in China’s trade with these tax-haven or offshore financial centres, though the precise volumes are unknown,” according to the economist. “With stronger capital controls in place we believe continued capital outflows via the current account are likely.”

Exposing the uselessness of the whole idea.

• Bank of Japan’s Quest for 2% Inflation (BBG)

The U.S. Federal Reserve, the Bank of England and the ECB are among the world’s monetary authorities that have set an inflation target right around 2%. Nowhere, though, does the quest for this special number carry drama like it does in Japan, where Bank of Japan Governor Haruhiko Kuroda has vowed to do whatever it takes to stimulate prices. On Friday in Tokyo, the BOJ indicated there were risks to achieving this target anytime soon.

1. What’s so special about 2%? The BOJ set its current inflation target in January 2013, less than a month after Prime Minister Shinzo Abe came to power with a plan to pull the economy out of two decades of stagnation. In Japan and many other developed economies, prices rising by 2% a year is seen as optimal for encouraging companies to invest and consumers to spend. It’s also thought to be low enough to avoid sparking the runaway inflation that crippled Germany’s Weimar Republic in the 1920s and Zimbabwe in more recent times.

2. How close has Japan gotten to 2% inflation? Not very. What Japan has had, on-and-off since the late 1990s, is deflation – inflation below 0% – with prices dropping across a wide range of goods.

3. What caused deflation? It began with the bursting of a real estate and asset-price bubble. Wounded banks curbed lending, companies focused on cutting debt, wages stagnated and consumers reined in spending. Households became accustomed to falling prices and put off purchases. The global financial crisis of 2008, and the devastating earthquake, tsunami and nuclear meltdown at the Fukushima Daiichi plant in 2011, entrenched what Kuroda describes as a “deflationary mindset” among consumers and companies in Japan. The nation’s aging and shrinking population is now making matters worse.

I think they passed that crossroads long ago. Just didn’t recognize it for what it was.

• The Bank of Japan Is At A Crossroads (BBG)

After more than three years of pumping out wave after wave of cheap money that’s failed to secure its inflation target, the Bank of Japan has signaled a rethink. Instead of buying yet more government bonds, cutting interest rates or pushing further into uncharted territory, the BOJ disappointed some Friday when its policy meeting concluded with only a modest adjustment. Governor Haruhiko Kuroda, 71, and his colleagues declared it was time to assess the impact of their policies, which have variously spurred strong criticism from bankers, bond dealers and some lawmakers and former BOJ executives. The next gathering, on Sept. 20-21, offers a chance to either provide greater evidence that the current framework should continue, head further into uncharted territory, or scale back.

Regardless of the decision, this isn’t where one of the world’s most aggressive central bankers wanted to be in his fourth year in office. In early 2013, he expressed confidence the BOJ had the power to ensure its 2% inflation target could be reached within about two years. This year, with the shock adoption of a negative interest rate policy backfiring through a welter of warnings from commercial banks, there’s a growing perception monetary policy is losing effectiveness. “We are at a turning point” for the BOJ, because “it can no longer assume that stepping harder on the gas pedal would make this car go faster,” said Stephen Jen, co-founder of hedge fund SLJ Macro Partners and a former IMF economist. “Arrow 2 will take the lead now,” he said, in a reference to the three arrows of Abenomics – monetary, fiscal and structural-reform policies.

Yeah, that’ll result in some jail time….

• US Authorities Subpoena Goldman In 1MDB Probe (R.)

U.S. authorities have issued subpoenas to Goldman Sachs for documents related to the bank’s dealings with scandal-hit Malaysian state fund 1MDB, the Wall Street Journal reported late on Friday. Goldman received the subpoenas earlier this year from the U.S. Department of Justice and the Securities and Exchange Commission , the Journal reported, citing a person familiar with the matter. The authorities also want to interview current and former Goldman employees in connection with the inquiries, but none of those meetings had occurred by Friday, WSJ said.

1MDB, which was founded by Malaysian Prime Minister Najib Razak in 2009 shortly after he came to office, is being investigated for money-laundering in at least six countries including the United States, Singapore and Switzerland. Najib has consistently denied any wrongdoing. U.S. law enforcement officials are attempting to identify whether Goldman violated federal law after failing to flag a transaction in Malaysia, the Journal reported in June. New York state regulators have also asked the Wall Street bank for details about probes into billions of dollars it raised in a bond offering for 1MDB, Reuters reported in June, citing a person familiar with the matter.

Note – Steve says: “I’ve said “as early as” 2017 and “between 20% & 70% fall” but all people hear is 2017 & 70%..”

• Australia Headed For Recession As Early As Next Year – Steve Keen (ABC.au)

Australia’s credit binge will lead to a bust as soon as next year, with house prices to fall between 40 and 70% and unemployment to rise sharply, Professor Steve Keen says. The professor famously lost a bet when he predicted a catastrophic crash in Australian house prices following the GFC and had to walk from Canberra to Mount Kosciusko as a result. But he says, this time, he is right and does not have his hiking boots at the ready. “We have borrowed ourselves so much to the hilt that we are now dependent on that continuing to rise over time and it simply won’t,” he told the ABC’s The Business.

Many believe the Reserve Bank has been a steady guiding hand to the Australian economy in the years since the GFC, but Professor Keen believes it has guided the economy “straight toward the shoals” by encouraging households to borrow with low rates which has led to asset bubbles. “They don’t know what they’re doing,” he said. “Our debt level according to the Bank of International Settlements, private debt level, has gone from 150% of GDP to 210% of GDP.” He argued that means a large part of the growth that Australia has enjoyed since the GFC, while many other countries plunged into recession, has been fuelled by a 60% rise in household debt. “Ireland did the same thing when they called themselves the Celtic Tiger and they don’t call themselves that anymore,” he said.

“Spain was doing the same thing during its housing bubble and we’ve replicated the same mistakes. He believes the Reserve Bank will be forced to take rates down to zero from their current level of 1.75% as the economy continues to slow, but that will not stop the collapse of the credit binge that has kept the country afloat until now. “[Lower rates] will suck more people in, it will suck more people in for a while and the [Reserve Bank] can delay this for a while by cutting the rates,” he said. He said the catalysts for the recession were the declining terms of trade, the continued fall in investment into the economy and the Federal Government’s “stupid” pursuit of a budget surplus. “The Government is frankly stupid about the economy and is obsessed about running surpluses when it is bad economics.”

“The stock markets should be down massively but investors seem to have been hypnotized that nothing can go wrong.”

• ‘Sell The House, Sell The Car, Sell The Kids’ – Gundlach (R.)

Jeffrey Gundlach, the chief executive of DoubleLine Capital, said on Friday that many asset classes look frothy and his firm continues to hold gold, a traditional safe-haven, along with gold miner stocks. Noting the recent run-up in the benchmark Standard & Poor’s 500 index while economic growth remains weak and corporate earnings are stagnant, Gundlach said stock investors have entered a “world of uber complacency.” The S&P 500 on Friday touched an all-time high of 2,177.09, while the government reported that U.S. GDP in the second quarter grew at a meager 1.2% rate. “The artist Christopher Wool has a word painting, ‘Sell the house, sell the car, sell the kids.’ That’s exactly how I feel – sell everything. Nothing here looks good,” Gundlach said in a telephone interview.

“The stock markets should be down massively but investors seem to have been hypnotized that nothing can go wrong.” Gundlach, who oversees more than $100 billion at Los Angeles-based DoubleLine, said the firm went “maximum negative” on Treasuries on July 6 when the yield on the benchmark 10-year Treasury note hit 1.32%. “We never short in our mainline strategies. We also never go to zero Treasuries. We went to lower weightings and change the duration,” Gundlach said. Currently, the yield on the 10-year Treasury note is 1.45%, which has translated into some profits so far for DoubleLine. “The yield on the 10-year yield may reverse and go lower again but I am not interested. You don’t make any money. The risk-reward is horrific,” Gundlach said. “There is no upside” in Treasury prices.

The perks of trade agreements.

• British Columbia Violates NAFTA With Its Foreign Property Tax (FP)

The British Columbia government has suddenly introduced a penalty tax forcing non-Canadian purchasers of residential real estate in the Greater Vancouver Regional District to pay a 15% tax on all purchases registered from Aug. 2, 2016. This penalty tax discriminates by definition against foreign investors buying residential real estate in the Greater Vancouver Area: Canadian citizens buying residential real estate are exempt; foreign buyers must pay the tax. That discrimination is a glaring violation of our trade treaties. The North American Free Trade Agreement (NAFTA) and other Canadian trade agreements prohibit governments from imposing discriminatory policies that punish foreigners while exempting locals.

NAFTA’s national treatment obligation requires that citizens from other NAFTA partners investing in B.C. receive the same treatment from the government as the very best treatment received by Canadian investors. Americans and Mexicans forced to pay the 15% penalty tax would be able to pursue direct compensation for B.C.’s discriminatory tax from an independent international tribunal. [..] While the vast majority of Vancouver’s foreign property buyers might be Chinese, who were apparently the provincial government’s main target, enough investors from our dozens of treaty partners, comprising of hundreds of affected foreigners with trade rights, could be caught up in this tax, leading to mass claims. Those claims would be against the Canadian government, the signatory to NAFTA and the other international trade treaties, not B.C. Canadian taxpayers could be on the hook for hundreds of millions, or even billions, of dollars.

Big kahuna remains: the classified mails on Hillay’s server(s).

• Another “Smoking Gun” Looms As Hillary Campaign Admits Server Hacked (ZH)

In the third cyberattack on Democratic Party-related servers, Reuters reports that the computer network used by Democratic presidential candidate Hillary Clinton’s campaign was hacked. This follows hacks of the DNC and the DCCC (the party’s fund-raising committee) in the past week. Who to blame this time? Well with US intelligence head Jim Clapper having exclaimed that he was “somewhat taken aback by the hyperventilation [blaming Russia]” by Democratic surrogates, we suspect another scapegoat will need to be found. The latest attack, which was disclosed to Reuters on Friday, follows reports of two other hacks on the Democratic National Committee and the party’s fundraising committee for candidates for the U.S. House of Representatives.

“The U.S. Department of Justice national security division is investigating whether cyber hacking attacks on Democratic political organizations threatened U.S. security, sources familiar with the matter said on Friday. The involvement of the Justice Department’s national security division is a sign that the Obama administration has concluded that the hacking was state sponsored, individuals with knowledge of the investigation said. The Clinton campaign, based in Brooklyn, had no immediate comment and referred Reuters to a comment from earlier this week by campaign senior policy adviser Jake Sullivan criticizing Republican presidential candidate Donald Trump and calling the hacking “a national security issue.”

It was not immediately clear what information on the Clinton campaign’s computer system hackers would have been able to access, but the possibility of more ‘smoking guns’ only rises with each hack. Of course the finger will inevitably be pointed at Vladimir Putin (and his media-designated puppet Trump) but even The Director of Nation Intelligence has urged that an end be put to the “reactionary mode” blaming it all on Russia…

“We don’t know enough to ascribe motivation regardless of who it might have been,” Director of National Intelligence James Clapper said speaking at Aspen’s Security Forum in Colorado, when asked if the media was getting ahead of themselves in fingering the perpetrator of the hack. Speaking on Thursday, Clapper said that Americans need to stop blaming Russia for the hack, telling the crowd that the US has been running in “reactionary mode” when it comes to the numerous cyber-attacks the nation is continuously facing. “I’m somewhat taken aback by the hyperventilation on this,” Clapper said, as cited by the Washington Examiner. “I’m shocked someone did some hacking,” he added sarcastically, “[as if] that’s never happened before.”

Of course that won’t stop the endless distraction and guilt-mongering to avoid any accountability for actual content of anything that is released. Finally, does it not seem a little “reckless” that so many Democratic servers have been hacked so easily?

It’s starting to increase again.

• Greek Islands Appeal For Measures To Deal With Influx Of Refugees (Kath.)

As the influx of migrants from neighboring Turkey continues – with a slight but noticable increase – regional authorities and tourism professionals are calling for measures to support communities on the Aegean islands. Over the past two weeks, following a failed coup in Turkey on July 15, the influx of migrants has increased, according to government figures. Overall, more than 1,000 migrants landed on the five so-called hot spots: Lesvos, Chios, Kos, Samos and Leros since the failed coup. Those islands are now accommodating 9,313 migrants in camps, many of whom have been there for several months awaiting the outcome of asylum applications or deportation.

In a letter to Migration Policy Minister Yiannis Mouzalas and Alternate Defense Minister Dimitris Vitsas, the governor of the northern Aegean region, Christiana Kalogirou, asked for immediate steps to decongest the islands. “We are seeing a constant and apparently increasing flow of migrants and refugees toward the islands of the northern Aegean,” she wrote, noting that the maximum capacity of state reception centers has been exceeded on all the islands. A representative of an aid agency working on Lesvos said that the increase in migrant arrivals on the island has not yet fuelled tensions in the camps. “But if they keep arriving at the same rate, we’ll have a problem soon,” according to the worker who asked not to be identified.

That’s how hard that is. 5p.

• England’s Plastic Bag Usage Drops 85% Since 5p Charge Introduced (G.)

The number of single-use plastic bags used by shoppers in England has plummeted by more than 85% after the introduction of a 5p charge last October, early figures suggest. More than 7bn bags were handed out by seven main supermarkets in the year before the charge, but this figure plummeted to slightly more than 500m in the first six months after the charge was introduced, the Department for Environment, Food and Rural Affairs (Defra) said. The data is the government’s first official assessment of the impact of the charge, which was introduced to help reduce litter and protect wildlife – and the expected full-year drop of 6bn bags was hailed by ministers as a sign that it is working.

The charge has also triggered donations of more than £29m from retailers towards good causes including charities and community groups, according to Defra. England was the last part of the UK to adopt the 5p levy, after successful schemes in Scotland, Wales and Northern Ireland. Retailers with 250 or more full-time equivalent employees have to charge a minimum of 5p for the bags they provide for shopping in stores and for deliveries, but smaller shops and paper bags are not included. There are also exemptions for some goods, such as raw meat and fish, prescription medicines, seeds and flowers and live fish. Around 8m tonnes of plastic makes its way into the world’s oceans each year, posing a serious threat to the marine environment. Experts estimate that plastic is eaten by 31 species of marine mammals and more than 100 species of sea birds.

Debt Rattle July 29 2016

Jul 292016

July 29, 2016 Posted by Raúl Ilargi Meijer at 9:20 am Finance Tagged with: Abenomics, deflation, earnings, global trade, Greece, IMF, Japan, Kuroda, oil, recession, refugees 2 Responses »

Dorothea Lange Crossroads grocery store and filling station, Yakima, Washington, Sumac Park 1939

• IMF: Disastrous Love Affair With Euro, Apologies For Immolation Of Greece (AEP)

• Global Trade Is Not Growing Slower – It’s Not Growing At All (WEF)

• Not Even Fiscal Stimulus Will Save Global Growth – Deutsche Bank (BBG)

• Kuroda’s $26 Billion Gift to Stock Market Underwhelms Investors (BBG)

• Bank of Japan Blames Brexit As It Unleashes More Monetary Stimulus (G.)

• Japan Sees Weaker Consumer Spending, Manufacturing In June (AP)

• Japan Should Stop Chasing A Weaker Yen – Steen Jakobsen (CNBC)

• US Homeownership Rate Falls to Five-Decade Low (WSJ)

• Wholesale California Gasoline Prices Plunge, Consumers Still Pay Up (R.)

• Oil Glut Proves Harder To Kill Than Saudis To Goldman Predicted (BBG)

• In Past 50 Years Earnings Recession This Big Always Triggered Bear Market (F.)

• Barcelona Unveils ‘Shame Counter’ That Tracks Refugee Deaths (AFP)

” They had no fall-back plans on how to tackle a systemic crisis in the eurozone [..] because they had ruled out any possibility that it could happen.”

“Some staff members warned that the design of the euro was fundamentally flawed but they were overruled..”

Ambrose on Twitter: ”IMF seems to have slipped leash of political control. Even its own watchdog in dark on EMU crisis. Astonishing saga..”

• IMF: Disastrous Love Affair With Euro, Apologies For Immolation Of Greece (AEP)

The IMF’s top staff misled their own board, made a series of calamitous misjudgments in Greece, became euphoric cheerleaders for the euro project, ignored warning signs of impending crisis, and collectively failed to grasp an elemental concept of currency theory. This is the lacerating verdict of the IMF’s top watchdog on the Fund’s tangled political role in the eurozone debt crisis, the most damaging episode in the history of the Bretton Woods institutions. It describes a “culture of complacency”, prone to “superficial and mechanistic” analysis, and traces a shocking break-down in the governance of the IMF, leaving it unclear who is ultimately in charge of this extremely powerful organisation. The report by the IMF’s Independent Evaluation Office (IEO) goes above the head of the managing director, Christine Lagarde.

It answers solely to the board of executive directors, and those from Asia and Latin America are clearly incensed at the way EU insiders used the Fund to rescue their own rich currency union and banking system. The three main bail-outs for Greece, Portugal, and Ireland were unprecedented in scale and character. The trio were each allowed to borrow over 2,000% of their allocated quota – more than three times the normal limit – and accounted for 80pc of all lending by the Fund between 2011 and 2014. In an astonishing admission, the report said its own investigators were unable to obtain key records or penetrate the activities of secretive “ad-hoc task forces”. Mrs Lagarde herself is not accused of obstruction.

“Many documents were prepared outside the regular established channels; written documentation on some sensitive matters could not be located. The IEO in some instances has not been able to determine who made certain decisions or what information was available, nor has it been able to assess the relative roles of management and staff,” it said. The report said the whole approach to the eurozone was characterised by “groupthink” and intellectual capture. They had no fall-back plans on how to tackle a systemic crisis in the eurozone – or how to deal with the politics of a multinational currency union – because they had ruled out any possibility that it could happen. “Before the launch of the euro, the IMF’s public statements tended to emphasize the advantages of the common currency, “ it said. Some staff members warned that the design of the euro was fundamentally flawed but they were overruled.

The forecasts for Greek growth compared to what actually happened Credit: IMF

[..] While the Fund’s actions were understandable in the white heat of the crisis, the harsh truth is that the bail-out sacrificed Greece in a “holding action” to save the euro and north European banks. Greece endured the traditional IMF shock of austerity, without the offsetting IMF cure of debt relief and devaluation to restore viability. A sub-report on the Greek saga said the country was forced to go through a staggering squeeze, equal to 11pc of GDP over the first three years. This set off a self-feeding downward spiral. The worse it became, the more Greece was forced cut – what ex-finance minister Yanis Varoufakis called “fiscal water-boarding”. “The automatic stabilizers were not allowed to operate, thus aggravating the pro-cyclicality of the fiscal policy, which exacerbated the contraction,” said the report.

Who says we need global growth?

• Global Trade Is Not Growing Slower – It’s Not Growing At All (WEF)

Falling rates of global trade growth have attracted much comment by analysts and officials, giving rise to a literature on the ‘global trade slowdown’ (Hoekman 2015, Constantinescu et al. 2016). The term ‘slowdown’ gives the impression of world trade losing momentum, but growing nonetheless. The sense of the global pie getting larger has the soothing implication that one nation’s export gains don’t come at the expense of another’s. But are we right to be so sanguine? Using what is widely regarded as the best available data on global trade dynamics, namely, theWorld Trade Monitor prepared by the Netherlands Bureau of Economic Policy Analysis, the 19th Report of the Global Trade Alert, published today, evaluates global trade dynamics (Evenett and Fritz 2016).

Figure 1 World trade plateaued around the start of 2015

Our first finding that the rosy impression painted by some should be set aside. We demonstrate that: •World export volumes reached a plateau at the start of January 2015. The same finding holds if import volume or total volume data are used instead. •Both industrialised countries’ and emerging markets’ trade volumes have plateaued (Figure 1). •Except during global recessions, a plateau lasting 15 months is practically unheard of since the Berlin Wall fell. •In 2015 the best available data on world export volumes diverges markedly from that reported by the WTO, IMF, and World Bank, and probably explains why analysts at these organisations have missed this profound change in global trade dynamics (Table 1).

Table 1 Marked differences in reported global trade volume growth in 2015

“The fight against sluggish growth rates..” Maybe we should stop that fight?

• Not Even Fiscal Stimulus Will Save Global Growth – Deutsche Bank (BBG)

While monetary policy may be at — or beyond — the limits of its usefulness in stoking global growth, economists at Deutsche Bank say fiscal stimulus is unlikely to be much more effective. At least, not the kind that is politically possible. The fight against sluggish growth rates and low inflation has seen central banks from Europe to Japan buy up swaths of the bond market, and experiment with negative interest rates. Yet with growth still stubbornly slow, these efforts are seen either as ineffective or counterproductive, spurring calls for more active fiscal policy, whether it take the form of tax cuts or ‘helicopter money’ transfers to the private sector. Just this past weekend, finance ministers from the Group of Twenty meeting in China gave strong backing to this view.

“Monetary policy alone cannot lead to balanced growth,” they said. “Fiscal strategies are equally important to support our common growth objectives.” Those comments could signal a “new direction for fiscal policy,” according to Deutsche Bank economists led by Peter Hooper. Yet while they welcomed the potential dethroning of monetary policy as “the principal lever of support,” the economists expect that the boost to global growth from the most probable fiscal packages “is likely to be modest.” Europe is in greatest need of fiscal stimulus — even though the ECB has been gobbling up bonds since 2014, and has cut its deposit rate to minus 0.4% — and it’s also where fiscal stimulus would be most effective, according to the Deutsche Bank economists.

Are Kuroda and Abe drifting apart?

• Kuroda’s $26 Billion Gift to Stock Market Underwhelms Investors (BBG)

Welcome to Japan, where a central bank plan to pump $26 billion a year more into stocks and continue buying 30 times that in debt sees equities struggle to advance and bonds plunge. The Topix index slid as much as 1.4% in Tokyo after the Bank of Japan boosted its annual exchange-traded fund budget to 6 trillion yen ($58 billion), from 3.3 trillion yen. Japanese government bonds headed for their steepest slump since 2008, as policy makers retained a plan to expand the monetary base by an annual 80 trillion yen. Speculation among investors and analysts that Friday’s policy announcement might even see the adoption of so-called helicopter money, as well as a cut to the negative deposit rate, resulted in a lukewarm reception for the expanded stimulus program.

The yen surged as much as 2.4%, the most since the U.K. decision to leave the European Union, even as BOJ Governor Haruhiko Kuroda hinted more easing might still be in the pipeline. “The BOJ had a choice of about five boxes to tick today, but only chose one,” said Sean Callow, a senior FX strategist at Westpac Banking in Sydney. “Buying more ETFs was as widely expected as balloons dropping on Hillary.” [..] In an unexpected development, Kuroda has ordered an assessment of the effectiveness of BOJ policy, to be undertaken at the next meeting, which is scheduled for Sept. 20-21.

“The BOJ won’t admit it, but it has reached the limits of quantitative easing and negative rates.”

• Bank of Japan Blames Brexit As It Unleashes More Monetary Stimulus (G.)

The Bank of Japan has announced a modest expansion of its monetary easing programme, blaming Britain’s decision to leave the European Union as the biggest uncertainty facing world markets. The central bank acknowledged government pressure for more action to drive the yen lower and help Japan’s legion of exporters, but stopped short of upping its bond purchases or cutting interest rates. Instead the bank sanctioned an increase in purchases of exchange-traded funds as it attempted to accelerate inflation towards its 2% target. The moves disappointed the markets, which had expected another big influx of liquidity. The Nikkei stock average yo-yoed wildly in the aftermath of the move before falling nearly 2% in late afternoon trade.

Other stock markets in the region were also down while futures trading indicated the FTSE100 and Dow Jones would open slightly down on Friday morning. The yen rose 2% against the US dollar, which will frustrate government attempts to devalue the stubbornly high currency. [..] Some market experts said the lack of bold action suggested the bank had decided that the effectiveness of its huge monetary easing programme had reached its limits. “The BOJ did not live up to expectations … increasing ETF purchases makes no contribution to achieving 2% inflation,” said Norio Miyagawa, senior economist at Mizuho Securities. “The BOJ won’t admit it, but it has reached the limits of quantitative easing and negative rates.”

After Abenomics has been running for 3 years, deflation continues unabated.

• Japan Sees Weaker Consumer Spending, Manufacturing In June (AP)

Japan reported further signs of weakness in its economy in June, with industrial output and consumer spending falling from the year before. The data released Friday were in line with expectations the central bank may follow the government’s lead in opting for more stimulus at a policy meeting that ends Friday. Core inflation excluding volatile food prices dropped 0.5% from 0.4% in May. The Bank of Japan and government have made scant progress toward a 2% inflation goal set more than three year ago, partly due to the prolonged slump in crude oil prices.

Household spending fell 2.2% from a year earlier, while industrial output slipped 1.9% on an annual basis. Earlier this week Prime Minister Shinzo Abe announced plans to propose 28 trillion yen ($267 billion) in spending initiatives to help support the sagging economic recovery. Household incomes rose 0.3% in June, weak for a month when workers commonly receive bonuses.

Let’s not pretend there is a way out for Japan.

• Japan Should Stop Chasing A Weaker Yen – Steen Jakobsen (CNBC)

Japan has aimed a lot of firepower at keeping its currency weak, but a stronger yen might be just what the long moribund economy really needs, said Saxo Bank’s Chief Investment Officer Steen Jakobsen. “The government of Japan sort of quasi-promises to maintain a weak yen in order to support and buy time for the export companies,” Jakobsen said. “Having a focus only on the export sector takes away from [what] the focus should be: To reform the domestic economy.” Jakobsen’s comments came just as Japan appears set to level a double bazooka of easing at its sluggish economy, firepower that appears aimed, at least in part, at wiping out the recent gains in the newly resurgent yen.

The Bank of Japan was widely expected to announce another monetary easing bomb at the close of its two-day meeting on Friday, with analysts anticipating that the central bank would either cut interest rates deeper into negative territory or expand its asset purchase program or both. At the same time, fresh fiscal stimulus was expected to offer additional cross fire. News agency Jiji reported that Prime Minister Shinzo Abe had revealed a 28 trillion yen ($265 billion) injection, which Reuters estimated at 6% of Japan’s economy.

The double-barreled approach was in line with Abe’s plan to break Japan’s economy out of a decades-long deflationary spiral. That effort, dubbed Abenomics, was introduced in 2013 with a plan for three “arrows:” A first arrow of massive quantitative easing from the BOJ, followed by a second arrow of increased government spending and a third arrow of structural reforms, including immigration and labor changes. But Jakobsen noted that the latest plan for combined BOJ and fiscal easing just replayed the same strategy. “The present situation we’re talking about is just re-launching arrow one and two,” he said. “We’re still missing arrow number three, which is the reform side.”

It didn’t take long to kill the dream.

• US Homeownership Rate Falls to Five-Decade Low (WSJ)

The U.S. homeownership rate fell to the lowest level in more than 50 years in the second quarter of 2016, a reflection of the lingering effects of the housing bust, financial hurdles to buying and shifting demographics across the country. But the bigger picture also suggests more Americans are gaining the confidence to strike out on their own, albeit as renters rather than buyers. The homeownership rate, the proportion of households that are owner-occupied, fell to 62.9%, half a percentage point lower than the second quarter of 2015 and 0.6%age point lower than the first quarter 2016, the Census Bureau said on Thursday. That was the lowest figure since 1965.

There are many ways to interpret the numbers. Part of the story is the catastrophic housing market collapse, which was especially severe for Generation X—those born from 1965 to 1984. Younger households may struggle to save amid student debt, growing rents, rising home prices and limited inventories of starter homes. Indeed, the homeownership rate for 18- to 35-year-olds slipped to 34.1%, the lowest level in records dating to 1994. At 77.9%, the homeownership rate was highest for those 65 years and over.

But the broader picture suggests a degree of economic strength: Renters are spurring a steady increase in overall household formation. Renter-occupied housing units jumped by 967,000 from the same period a year earlier. Overall, household formation has been fairly steady since the early days of the expansion. A rising number of households suggests more people are optimistic enough to strike out on their own and helps further spur growth as they buy furniture, start families and move up the economic ladder. Indeed, moving into a rental unit has been entirely responsible for rising household formation since the recession began.

“It’s probably going to take a little longer than they expected.” “Demand growth has faltered a bit.”

• Oil Glut Proves Harder To Kill Than Saudis To Goldman Predicted (BBG)

The bullish spirit that gripped oil traders as industry giants from Saudi Arabia to Goldman Sachs declared the supply glut over is rapidly ebbing away. Oil is poised for a drop of 20% since early June, meeting the definition of a bear market. While excess crude production is abating, inventories around the world are brimming, especially for gasoline, and a revival in U.S. drilling threatens to swell supplies further. As the output disruptions that cleared some of the surplus earlier this year begin to be resolved, crude could again slump toward $30 a barrel, Morgan Stanley predicts. “The tables are turning on the bulls, who were prematurely constructive on oil prices on the basis the re-balancing of the oil market was a done deal,” said Harry Tchilinguirian at BNP Paribas in London.

“It’s probably going to take a little longer than they expected.” Oil almost doubled in New York between February and June as big names from Goldman and the International Energy Agency to new Saudi Energy Minister Khalid Al-Falih said declining U.S. oil production and disruptions from Nigeria to Canada were finally ending years of oversupply. Prices retreated to a three-month low near $41 a barrel this week amid a growing recognition the surplus will take time to clear. “There’s lots of crude and refined products around,” said David Fransen, Geneva-based head of Vitol SA, the biggest independent oil trader. “Demand growth has faltered a bit.”

Don’t worry, prices will come down.

• Wholesale California Gasoline Prices Plunge, Consumers Still Pay Up (R.)

Wholesale gasoline in California became the cheapest in the country this week, but that change has largely gone unseen at the pump, where consumers are still paying the highest prices in the continental United States to fill up their cars. Ample inventories along with relatively stable refinery operations and imports has driven down the spot value of gasoline in Los Angeles at the wholesale level by more than 60 cents since mid-June. However, that has not translated to similarly lower retail fuel prices for consumers because of peculiarities in California’s market. The declines in the state’s retail gasoline market over that period of time have averaged less than 14 cents, according to data from the U.S. Energy Information Administration.

On Thursday, wholesale California gasoline was trading below $1.20 a gallon. The spread between California’s wholesale and retail gasoline markets was about $1.50 a gallon the week to July 25, about 40 cents wider than a similar spread in the New York market. California is one of the most expensive places in the United States to produce gasoline because of the state’s unique blending requirements and its relative isolation from the rest of the country, which makes securing crude oil to refine pricier. Gasoline prices across the country have plunged as crude has also slumped in the past two years, pressured by a global supply glut. On the West Coast, gasoline stocks are at a five-year seasonal high of 29.6 million barrels, according to the EIA.

Lots of reports due later today.

• In Past 50 Years Earnings Recession This Big Always Triggered Bear Market (F.)

It’s earnings season once again and it looks as if, as a group, corporate America still can’t find the end of its earnings decline since profits peaked over a year ago. What’s more analysts, renowned for their Pollyannish expectations, can’t seem to find it, either. So I thought it might be interesting to look at what the stock market has done in the past during earnings recessions comparable to the current one. And it’s pretty eye-opening. Over the past half-century, we have never seen a decline in earnings of this magnitude without at least a 20% fall in stock prices, a hurdle many use to define a bear market. In other words, buying the new highs in the S&P 500 today means you believe “this time is different.” It could turn out that way but history shows that sort of thinking to be very dangerous to your financial wellbeing.

Great idea. There should be one in Athens too.

• Barcelona Unveils ‘Shame Counter’ That Tracks Refugee Deaths (AFP)

Spain’s seaside city of Barcelona on Thursday unveiled a large digital counter that will track the number of refugees who die in the Mediterranean, next to one of its popular beaches. “We are inaugurating this shame counter which will update all known victims who drowned in the Mediterranean in real time,” said Mayor Ada Colau. The monument consists of a large metal rectangular pillar that comes decked out with a digital counter above the inscription “This isn’t just a number, these are people.”

The counter kicked off with 3,034 — the number of migrants and refugees who have died trying to cross the Mediterranean to Europe in 2016, according to the International Organization for Migration (IOM). “We’re here to look the Mediterranean in the face and look at this number — 3,034 people who drowned because they were not offered a safe passage,” said Colau, as swimmers took advantage of the last rays of sunshine nearby.

Barcelona’s mayor Ada Colau poses in front a digital billboard that shows the number of refugees who died in the Mediterranean sea, named “the shame counter” (AFP Photo/Josep Lago)

Debt Rattle July 19 2016

Jul 192016

July 19, 2016 Posted by Raúl Ilargi Meijer at 8:56 am Finance Tagged with: Alberta, Brexit, decentralization, Glass-Steagall, oil, police state, poor, recession, rendition 1 Response »

Russell Lee Tracy, California. Gasoline filling station 1942

• Republican Platform Calls For Return Of Glass-Steagall (MW)

• Calpers Targets 7.5% Investment Return, Earns Just 0.6% In Latest FY (BBG)

• Oil Prices Fall On Oversupply Concerns Despite Output Cuts (R.)

• Alberta Is In The Midst Of Its Worst Recession On Record (BBG)

• China’s Local Debt Problem Goes Global (BBG)

• Middle-Income Families In UK Resemble The Poor Of Years Past (G.)

• Brexit Could Cut London House Prices By 30-50%: SocGen (G.)

• New Zealand to Rein in Housing Boom (BBG)

• ‘NZ First-Home Buyers Should Benefit From Central Bank Proposal’ (Stuff)

• Greek Pensioners Protest Cuts At Top Constitutional Court (Kath.)

• There Will Be No Second American Revolution (Whitehead)

• Britain’s Part In Torture And Rendition Is Still Kept Hidden (Conv.)

• Hans-Hermann Hoppe: “Put Your Hope In Radical Decentralization” (Mises Inst.)

“Opponents of the return of Glass-Steagall were swift to react. “Glass-Steagall is dumb politics and dumb economics…”

• Republican Platform Calls For Return Of Glass-Steagall (MW)

Republicans and Democrats are both bending over backwards to show that they are not beholden to Wall Street. The Republican Party platform, released late Monday, calls for the return of Glass-Steagall restrictions on banks. Paul Manafort, campaign manager for presumptive GOP nominee Donald Trump, told reporters earlier Monday the language would be included. “We believe that the Obama-Clinton years have passed legislation that has been favorable to the big banks, which is one of the reasons why you see all the Wall Street money going to [Hillary Clinton],” Manafort said.

Glass-Steagall was a Depression-era measure restricting commercial banks from the investment-banking business. The measure was repealed in 1999. Some critics contend that loosening of the banking rules played a role in the subsequent financial crisis. Manafort’s comments suggest Republicans hope to use the issue against Clinton, the presumptive Democratic nominee. The measure was a major point of contention between Bernie Sanders and Clinton in the Democratic primary. The Democratic platform also includes language calling for a modern version of Glass-Steagall. Party platforms have no teeth. But having Glass-Steagall in both platforms suggests Congress will likely consider the issue next year.

Opponents of the return of Glass-Steagall were swift to react. “Glass-Steagall is dumb politics and dumb economics … returning to Glass-Steagall would be destructive and unworkable,” said Tony Fratto, managing partner in Washington at Hamilton Place Strategies, a lobbying firm that represents large banks. Brian Gardner, an analyst at Keefe, Bruyette & Woods, said the market may be underestimating the likelihood of a forced breakup of big banks. “There is an unappreciated risk that Glass-Steagall might be reimposed in 2017 or 2018, especially if Congress seriously looks at changes to the Dodd-Frank Act. We think this is the case regardless of who wins the presidential election,” he said in a note to clients.

And Calpers is not some outlier.

• Calpers Targets 7.5% Investment Return, Earns Just 0.6% In Latest FY (BBG)

The California Public Employees’ Retirement System, the largest U.S. public pension fund, earned a return of 0.6% on its investments last fiscal year, trailing its long-term target as holdings in stocks and forestland lost money. The pension’s public equity portfolio lost 3.4% in the year through June 30 and forestland assets declined 9.6%, Chief Investment Officer Ted Eliopoulos said Monday. Fixed-income holdings rose 9.3% and infrastructure investments gained 9%. “The longer-term returns of the fund – the three-, five-, 10-, 15- and 20-year total returns of the fund – are now below the assumed rate of 7.5% for the fund,” Eliopoulos said. “That’s a significant policy issue for us.”

The system must average at least 7.5% a year to match its assumed rate of return or turn to taxpayers to make up the difference. Calpers’s annualized returns were 6.9% for the last three years, 5.1% for the last 10 years and 7% over 20 years, according to a presentation to the board. It is among U.S. pensions under pressure to boost investment returns as funding shortfalls increase amid an aging population and low interest rates. In fiscal 2015, Calpers earned 2.4%. The pension lost a quarter of its value in 2009. Two years later, it earned a record 20.7% only to see the gain drop to 1% one year later. Since the recession, the fund has sought to better gauge its risks from market volatility.

One day even Reuters will have to admit that demand is way down…

• Oil Prices Fall On Oversupply Concerns Despite Output Cuts (R.)

Oil prices eased on Tuesday as concerns over a crude and refined fuel glut outweighed an expected cut in U.S. shale production and a probable further draw in U.S. crude inventories. Crude prices fell more than 1% in the previous session after worries about potential supply disruptions stemming from an attempted coup in Turkey proved unfounded. “Prices are a bit softer in the Asian trading period – traders and investors are torn which way prices are going to break. It’s a knife edge between optimism and pessimism,” said Ben Le Brun, market analyst at Sydney’s OptionsExpress. The market is waiting for U.S. crude stocks data on Tuesday and Wednesday to help give direction to prices, he said.

Brent crude slipped 11 cents to $46.85 a barrel as of 0657 GMT after finishing the previous session down 65 cents, or 1.4%. U.S. crude, known as West Texas Intermediate (WTI), fell 11 cents to $45.13 a barrel after settling 71 cents, or about 1.6%, lower in the previous session. Fuel inventories in the United States, Europe and Asia are brimming despite this being the peak summer driving season, leading traders to store diesel on tankers at sea amid wilting demand growth. With landed oil product storage nearly full as well, there is little support for any sustained recovery in crude prices even as output tapers. U.S. shale oil production is expected to fall in August for a tenth straight month, by 99,000 barrels per day (bpd) to 4.55 million bpd, according to a U.S. drilling productivity report on Monday.

And here’s the result of the demand collapse:

• Alberta Is In The Midst Of Its Worst Recession On Record (BBG)

Alberta, the home of Canada’s oil sands, is going through its worst downturn in activity on record as a prolonged period of low oil prices and the wildfires earlier this year buffet the provincial economy. According to Toronto-Dominion Bank’s economics team, the cumulative annual%age contraction in real output projected for 2015 to 2016 exceeds even the financial crisis, as well as the last supply-side driven crash in oil prices in the mid-1980s, in magnitude. While the recent episode seems poised to be the worst single recession on record, the two recessions in the 1980s mean that stretch is still likely to be regarded as the most challeng≠ing period in the post-war period in Alberta, says a TD team led by Deputy Chief Economist Derek Burelton.

However, TD s team notes that labor market indicators point to a more mild downturn. Periods of boom followed by bust are no strangers to an econ≠omy that is tied to the vagaries of the global oil market, write the economists. The current recession is expected to yield a cumulative annual decline in real GDP of around 6.5%, which is more than twice that of the average of past downturns. While economic activity appeared to be picking up earlier this year, the wildfires that wreaked havoc in the region and disrupted oil operations threw a wrench in the province s nascent comeback story. The economists note that the softness in the Canadian dollar and low interest rates helped Alberta s economy escape an even worse fate.

Buying into the last stages of a bubble.

• China’s Local Debt Problem Goes Global (BBG)

A very local problem in China is being exported at an alarming rate.Debt from special-purpose vehicles linked to municipal and provincial governments — leverage that central authorities are trying (unsuccessfully) to extinguish — is becoming more common in overseas markets. What’s worse, lately it’s been the weakest cities and provinces panhandling to international investors.Since June, as many as six local government financing vehicles have sold dollar bonds, bringing the total issued by such entities to at least $4 billion this year, just shy of the record $4.1 billion logged in all of 2015. Three offerings were scored below investment grade by Fitch, whereas prior to 2016, only one junk security of its kind had surfaced internationally.

Investors should ask why these localities are going abroad when all their revenue is onshore. Could it be that they’re having a harder time raising funds domestically?That wasn’t always the case.After a 1994 law banned regional authorities from issuing bonds directly, LGFVs were set up in their thousands in China to fund infrastructure projects like roads and bridges. Beijing lost track of how big the liabilities were and deployed about 50,000 auditors across the country in 2014. That crackdown culminated in authorities’ decision last year to open the municipal debt spigots and use funds raised that way to repay local governments’ off-balance-sheet debt. As a result, provincial and municipal governments issued an unprecedented 3.8 trillion yuan ($567 billion) directly last year, and may sell as much as 5 trillion yuan this year.

In case people still don’t get where Brexit came from.

• Middle-Income Families In UK Resemble The Poor Of Years Past (G.)

Plunging levels of homeownership and an increased reliance on state benefits to top up salaries have meant that Britain’s middle-income families increasingly look like the poor households of the past, according to one of the UK’s leading thinktanks. A report from the Institute for Fiscal Studies showed that the old link between worklessness and child poverty had been broken, with record levels of employment leading to a drop in the number of poor children living in homes where no adult works. However, the study found that by 2014-15, two-thirds of children classified as living below the poverty line had at least one parent who was working. If Theresa May wanted to take forward David Cameron’s “life chances” strategy, the IFS said, the prime minister needed to focus on lifting the incomes of working households.

“In key respects, middle-income families with children now more closely resemble poor families than in the past,” the IFS said. “Half are now renters rather than owner-occupiers and, while poorer families have become less reliant on benefits as employment has risen, middle-income households with children now get 30% of their income from benefits and tax credits, up from 22% 20 years ago.” The report divided the population into five groups according to income and found that for the middle 20% of children, half were living in an owner-occupied house, down from 69% two decades ago. It also found that mothers’ earnings were increasingly important for households with children. More than 25% of the incomes of middle-income households came from mothers in 2014-15, up from less than 20% in 1996, while this figure doubled from 7% to 15% for the poorest group over the 20-year period.

“We see a classic housing bubble in London and Brexit as the trigger for the correction..”

• Brexit Could Cut London House Prices By 30-50%: SocGen (G.)

London property prices could fall by more than 30% in the wake of Britain’s vote to leave the EU and may halve in the most expensive parts of the city, according to analysts at the French bank Société Générale. Brexit may be the trigger to end London’s seven-year house-price boom as companies move employees out of the UK, forcing sales of high-end properties, the company’s real estate analyst Marc Mozzi said in a note to clients. Commercial property has been at the centre of post-Brexit fears as investors have tried to get their money out of property funds, but residential real estate could be hit harder, Société Générale said. “While in recent stress tests the major UK banks were assessed with declines of about 30% in commercial real estate prices, we fear that London residential could experience an even more severe downturn,” it said.

Prices are already falling on properties previously valued at £1m or more, and may have further to go, particularly in the priciest parts of town. London’s highly paid investment bankers and hedge fund managers congregate in boroughs such as Hammersmith and Fulham as well as Kensington and Westminster. Société Générale added: “We see a classic housing bubble in London and Brexit as the trigger for the correction … Given the current ratio of prices to incomes in London, a price correction of even 40-50% in the most expensive London boroughs does not seem impossible.” London property prices have more than doubled since they began to recover from the financial crisis in 2009. Last month, the average London house price was £472,000 – 12 times average London earnings compared with a long-term average of six times, Société Générale said.

Too late. Way.

• New Zealand to Rein in Housing Boom (BBG)

New Zealand’s central bank is moving to quell the country’s housing boom by restricting the amount of money property investors can borrow, paving the way for another cut in interest rates. The Reserve Bank will require investors across New Zealand to have a deposit of at least 40%, it said in a statement Tuesday in Wellington. The new rule, which tightens an existing requirement that investors in Auckland have at least a 30% deposit, will be introduced Sept. 1, the RBNZ said. New Zealand’s dollar fell as markets bet Governor Graeme Wheeler will now be free to respond to persistently weak inflation by cutting the official cash rate to a record-low 2% on Aug. 11.

He has been reticent to lower borrowing costs for fear of stoking housing demand. The proposed new lending rules remove the distinction between Auckland and the rest of the country, Wheeler said in the statement. Since November, the RBNZ has required most investors buying Auckland properties to have a 30% deposit, but that has prompted many to look at opportunities in other centers. In the North Island city of Hamilton, house prices rocketed 29% in the year through June. [..] “A sharp correction in house prices is a key risk to the financial system, and there are clear signs that this risk is increasing across the country,” Wheeler said. “A severe fall in house prices could have major implications for the functioning of the banking system and cause long-lasting damage to households and the broader economy.”

New Zealand politics as a whole built this bubble. And now comes the time to blame each other for it. It will take a long time for the country to live this down.

• ‘NZ First-Home Buyers Should Benefit From Central Bank Proposal’ (Stuff)

The Reserve Bank made the “right decision” to impose new lending rules on property investors, says Prime Minister John Key. Proposed restrictions announced on Tuesday would require banks to lend only a small fraction of their loans to investors with less than a 40% deposit. Key said “in theory” the restrictions would help first-home buyers get into the market by making it more difficult and “less economic” for investors to buy a property. “What the Reserve Bank’s trying to do here is not be forced to increase interest rates, while at the same time trying to take a little bit of steam out of the housing market,” he said. “It’s got a fine line to walk here and I think it’s walking it about right.”

The Labour Party accused National of being “stuck in denial mode” over the housing crisis, but Key said it was up to everyone – central government, the Reserve Bank and councils – to stem the rate of increase in house prices. Key said the new rules would not lead to a drop in house values. “I don’t think anyone’s really arguing that house prices should dramatically fall, other than probably (economist) Arthur Grimes and Don Brash, and that’s not a view supported by the Government.” Labour and the Greens both supported the bank’s proposal. Labour’s finance spokesperson Grant Robertson said it was “the right thing to do” as nearly half of property purchases in Auckland were made by speculators and there were signs of house price increases spreading to other regions.

However, Robertson said the bank was openly calling on the Government to “step up and fix the crisis”. “Labour’s plan to fix the housing crisis includes banning offshore speculators from buying residential properties, an extension of the bright line test to five years and consulting on ending the practice of negative gearing,” he said. “It is clear that the only way to bring stability to the housing market and give first home buyers a fair go is to change the government.” [..] NZ First leader Winston Peters did not think the lending rules would have much of an effect on the housing market. “Given the way house financing is constructed from offshore, foreign investors will carry on as usual whilst New Zealand investors will simply have to stump up a greater deposit. “Accordingly, for a short time longer the house price bubble will just get greater before the inevitable crash.”

Futile. The EU has willed it. But devastating too.

• Greek Pensioners Protest Cuts At Top Constitutional Court (Kath.)

The new law on social security brings fresh cuts to new pensions that could reach up to €722 per month, generating more concern among citizens who are close to retirement. The law introduced by Labor Minister Giorgos Katrougalos provides for adjustments to pensions that have not yet been issued of between €11.38 and €722.09, prompting a group known as the Single Network of Pensions to oppose it at the Council of State, the country’s top constitutional court. The pensioners argue that the law introduces cuts that violate the constitution.

Redefining ‘police state’.

• There Will Be No Second American Revolution (Whitehead)

America is a ticking time bomb. All that remains to be seen is who – or what – will set fire to the fuse. We are poised at what seems to be the pinnacle of a manufactured breakdown, with police shooting unarmed citizens, snipers shooting police, global and domestic violence rising, and a political showdown between two presidential candidates equally matched in unpopularity. The preparations for the Republican and Democratic national conventions taking place in Cleveland and Philadelphia—augmented by a $50 million federal security grant for each city—provide a foretaste of how the government plans to deal with any individual or group that steps out of line: they will be censored, silenced, spied on, caged, intimidated, interrogated, investigated, recorded, tracked, labeled, held at gunpoint, detained, restrained, arrested, tried and found guilty.

For instance, anticipating civil unrest and mass demonstrations in connection with the Republican Party convention, Cleveland officials set up makeshift prisons, extra courtrooms to handle protesters, and shut down a local university in order to house 1,700 riot police and their weapons. The city’s courts are preparing to process up to 1,000 people a day. Additionally, the FBI has also been conducting “interviews” with activists in advance of the conventions to discourage them from engaging in protests. Make no mistake, the government is ready for a civil uprising. Indeed, the government has been preparing for this moment for years. A 2008 Army War College report revealed that “widespread civil violence inside the United States would force the defense establishment to reorient priorities in extremis to defend basic domestic order and human security.”

The 44-page report goes on to warn that potential causes for such civil unrest could include another terrorist attack, “unforeseen economic collapse, loss of functioning political and legal order, purposeful domestic resistance or insurgency, pervasive public health emergencies, and catastrophic natural and human disasters.” Subsequent reports by the Department of Homeland Security to identify, monitor and label right-wing and left-wing activists and military veterans as extremists (a.k.a. terrorists) have manifested into full-fledged pre-crime surveillance programs. Almost a decade later, after locking down the nation and spending billions to fight terrorism, the DHS has concluded that the greater threat is not ISIS but domestic right-wing extremism.

Meanwhile, the government has been amassing an arsenal of military weapons for use domestically and equipping and training their “troops” for war. Even government agencies with largely administrative functions such as the Food and Drug Administration, Department of Veterans Affairs, and the Smithsonian have been acquiring body armor, riot helmets and shields, cannon launchers and police firearms and ammunition.

Are there perhaps more important discussions to be had than who’s to blame for Brexit?

• Britain’s Part In Torture And Rendition Is Still Kept Hidden (Conv.)

Even as the Chilcot Report lays bare the sad story of the UK’s decision to join in the 2003 invasion of Iraq, a veil is still drawn over another dark aspect of Britain’s partnership with George W Bush’s administration. For years now, the British state has barely acknowledged its alleged deep involvement in the abuse of terror suspects, and there has been very little in the way of justice for the victims of torture and “rendition” – the practice of abducting suspects without due legal process and transferring them to other countries or territories for interrogation. Nonetheless, my colleague Ruth Blakeley and I have found that this involvement was direct, deep and longstanding. Moreover, most official channels have been closed to keep the extent of the UK’s co-operation from coming to light.

An aborted judge-led inquiry into British involvement in prisoner mistreatment uncovered more than 200 separate allegations of abuse, at least 40 of which were significant enough to warrant detailed investigation. Some of these cases have led to civil action against the British government in the UK courts, others have led to police investigations and criminal inquiry. In response, however, the government has maintained its innocence in every individual case while simultaneously working to block the release of relevant information. There have been attempts to withhold publication of key documents in open court, such as those which demonstrate that British intelligence knew about the torture of prisoners by the CIA before participating directly in their interrogation.

Where British courts have refused to accept government attempts to hold hearings in camera, the government has offered substantial payouts without any admission of liability. Indeed, the 2013 Justice and Security Act, which introduced so-called “closed material procedures” into the main civil courts, gave the state the legal ability to keep details of British involvement in torture out of the public record.

One of my ‘pet’ themes. Not sure Hoppe understands this is an economic phenomenon, in that centralization depends one-on-one on a growing economy. He seems to think it’s political.

• Hans-Hermann Hoppe: “Put Your Hope In Radical Decentralization” (Mises Inst.)

Can one say, then, that the politicians running the EU are even worse than the politicians running national affairs? No, and yes. On the one hand, all democratic politicians, with almost no exception, are morally uninhibited demagogues. One of my German books is titled The Competition of Crooks, which captures what democracy and democratic party politics are really all about. There is in this regard little if any difference between the political elites of Berlin, Paris, Rome, etc., and those running the show in Brussels. In fact, the EU elites are typically political has-beens, with the same mentality as their domestic counterparts, on the lookout for the super-lavish salaries, benefits, and pensions doled out by the EU. On the other hand, the EU elites are worse than their political cronies at home, of course, in that their decisions and rulings always affect a far larger number of people.

What do you predict, then, will be the future of the EU? The EU and the ECB are a moral and economic monstrosity, in violation of natural law and the laws of economics. You cannot continuously punish productivity and success and reward idleness and failure without bringing about the disaster. The EU will slide from one economic crisis to the next and ultimately break apart. The Brexit, that we have just experienced, is only the first step in this inevitable process of devolution and political decentralization.

Is there anything that an ordinary citizen can do in this situation? For one, instead of swallowing the high-sounding blabber of politicians about “freedom,” “prosperity,” “social justice,” etc., people must learn to recognize the EU for what it really is: a gang of power-lusty crooks empowering and enriching themselves at other, productive people’s expense. And secondly, people must develop a clear vision of the alternative to the present morass: not a European Super-State or even a federation of nation States, but the vision of a Europe made up of thousands of Liechtensteins and Swiss cantons, united through free trade, and in competition with one another in the attempt of offering the most attractive conditions for productive people to stay or move.

Can you give a comparative assessment of the USA and the situation in Europe? The difference between the situation in the US and Western Europe is much smaller than is generally surmised on either side of the Atlantic. For one, the developments in Europe since the end of World War II have been closely watched, steered and manipulated, whether through threats or bribes, by the political elites in Washington DC. In fact, Europe has essentially become a dependency, a satellite or vassal of the US. This is indicated on the one hand by the fact that US troops are stationed all across Europe, by now all the way right up to the Russian border. And on the other hand, this is indicated by the steady pilgrimage, performed more regularly and dutifully than any Muslim’s pilgrimage to Mecca, of the European political elites and their intellectual bodyguards to Washington DC, in order to receive their masters’ blessings.

Especially the German political elite, whose guilt complex has meanwhile assumed the status of some sort of mental illness, stands out in this regard by its cowardice, submissiveness, and servility. As for US domestic affairs, both Europeans and Americans have it typically wrong. Europeans still frequently view the US as the “land of the free,” of rugged individualism, and of unhampered capitalism. Whereas Americans, insofar as they know or claim to know anything about the world outside the US at all, frequently view Europe as a place of unhinged socialism and collectivism, entirely alien to their own “American way.” In fact, there exists no principal difference between the so-called “democratic capitalism” of the US and Europe’s “democratic socialism.”

Debt Rattle July 14 2016

Jul 142016

July 14, 2016 Posted by Raúl Ilargi Meijer at 9:08 am Finance Tagged with: biodiesel, Boris, China, EU, Fed, helicopter, psychosis, recession, steel, Steve Keen 4 Responses »

NPC Hessick & Son Coal Co. Washington 1925

• China June Exports, Imports Both Fall More Than Forecast (R.)

• China’s Steel Exports Jump to Second Highest Amid Tensions (BBG)

• Great American Oil Bust Rages on; Defaults, Bankruptcies Soar (WS)

• Gundlach Says Wall Street’s Suffering ‘Mass Psychosis’ (MW)

• Helicopter Money – The Biggest Fed Power Grab Yet (David Stockman)

• 35-Year-Old Bond Bull Is on Its Last Legs (WSJ)

• Bank of England To Cut Interest Rates To Halt UK Recession (G.)

• UK Housing Sales Forecast To Fall Sharply This Summer After Brexit (G.)

• Steve Keen Accused Of Causing Australia’s Coming Recession (Mish)

• Britain’s MEPs Ushered Quietly Off Stage As The EU Show Goes On (G.)

• Spain’s Banks are Suddenly “Too Broke To Fine” (DQ)

• What It’s Like To Be A Non-EU Citizen (Trninic)

• The Fake Biodiesel Factory That Pumped Out Real Money (BBG)

And that is with record steel exports. Not the first time I ask this: where would China exports be without that?

• China June Exports, Imports Both Fall More Than Forecast (R.)

China’s exports fell more than expected in June as global demand remained stubbornly weak and as Britain’s decision to leave the European Union clouds the outlook for one of Beijing’s biggest markets. Imports also shrank more than forecast, indicating the impact of measures to stimulate growth in the world’s second-largest economy may be fading, after encouraging import readings in May. Exports fell 4.8% from a year earlier, the General Administration of Customs said on Wednesday, adding that China’s economy faces increasing downward pressure and the trade situation will be severe this year. Imports dropped 8.4% from a year earlier. That resulted in a trade surplus of $48.11 billion in June, versus forecasts of $46.64 billion and May’s $49.98 billion.

Economists polled by Reuters had expected June exports to fall 4.1%, matching May’s decline, and expected imports to fall 5%, following May’s 0.4% dip. The marginal import decline in May was the smallest since late 2014, and had raised hopes that China’s domestic demand was picking up. “The world economy still faces many uncertainties. For example, Brexit, expectations of an interest rate hike by the Federal Reserve, volatile international financial markets, the geopolitical situation, the threat of terrorism … these will affect the confidence of consumers and investors globally and curb international trade,” customs spokesman Huang Songping told a news conference. “We believe China’s trade situation remains grim and complex this year. The downward pressure is still relatively big.”

“Sales advanced 23% from a year earlier..”

• China’s Steel Exports Jump to Second Highest Amid Tensions (BBG)

China’s steel exports climbed to the second-highest level on record in June, as shipments from the world’s biggest producer ramp up amid escalating trade tensions. Sales advanced 23% from a year earlier to 10.94 million metric tons, according to China’s customs administration. That’s only eclipsed by shipments in September last year, when the country sent 11.25 million tons overseas. Exports in the first six months were 57.12 million tons, the seventh on-year increase in a row and the most ever for the period.
China’s record supplies have fueled global trade tensions as too many producers compete for sales. An EU investigation launched last week into imports from five countries is “symptomatic of the rising protectionism in global steel markets as a result of overcapacity,” according to a note from Macquarie.

“There’s a lot of trade friction but overall Chinese steel prices are relatively low, demand is steady, and together with the renminbi’s depreciation, the Chinese exports are very competitive,” Helen Lau, an analyst at Argonaut Securities Asia Ltd., said from Hong Kong. “It’s encouraging for Chinese mills and good for overseas consumers, but it’s not what foreign mills want to see.” Faced with its slowest growth in decades, China is exporting its steel surplus. Shipments will accelerate in the second half as prices decline and margins at mills are squeezed, Ren Zhuqian, chief analyst at Mysteel Research, said last month, forecasting exports could reach 117 million tons for the year, higher than last year’s record 112.4 million tons.

Cleansing.

• Great American Oil Bust Rages on; Defaults, Bankruptcies Soar (WS)

Junk bonds, trading like stocks since February, have skyrocketed and yields have plunged. But that doesn’t mean the bloodletting is over. The trailing 12-month US high-yield bond default rate jumped to 4.9% at the end of June, the highest since May 2010 as the Financial Crisis was winding down, Fitch Ratings reported today. The first-half total of $50.2 billion of defaults already exceeds the $48.3 billion for the entire year 2015. Energy companies accounted for 56% of those defaults. The energy sector default rate shot up to 15%. Within it, the default rate of the Exploration & Production (E&P) sub-sector soared to 29%! And the default party isn’t over: “Despite the run-up in prices since the February trough, there will be additional sector defaults, with Halcon Resources expected to file imminently,” Fitch reported.

Issuance of junk bonds in the first half has plunged 34% from a year ago, to $120.5 billion, according to the Securities Industry and Financial Markets Association (SIFMA), as junk-rated energy companies are having one heck of a time borrowing money and issuing bonds. The fact that investors – who’ve now been burned for nearly two years – are reluctant to extend new credit to teetering oil & gas companies precipitates their default and bankruptcy. Fitch: “The combination of high energy and metals/mining default rates and lower year to date issuance has been a one-two punch for the high yield bond market this year,” said Eric Rosenthal, Senior Director of Leveraged Finance. “The question going forward is whether macro events will disrupt markets and restrain issuance for the remainder of the year.”

“Call me old-fashioned, but I don’t like investments where if you’re right you don’t make any money..”

• Gundlach Says Wall Street’s Suffering ‘Mass Psychosis’ (MW)

This market is dealing with a “mass psychosis.” That’s the latest perspective on the state of Wall Street from Jeff Gundlach, the star money manager who founded DoubleLine Capital. Late Tuesday, during his regular webcasts to discuss markets, Gundlach sounded perplexed that investors’ demand for the perceived safety of government bonds has driven 10-year Treasury notes to record lows, even as the Dow Jones Industrial Average and the S&P 500 index scored fresh record highs Wednesday. Treasury yields, which have come off their 2016 nadir, are still hovering below their levels before the U.K.’s decision to exit the European Union sent global stock markets spiraling down. Bond prices move inversely to yields. Gundlach used the following chart in his Tuesday webcast presentation to highlight the historic moves in Treasury yields:

“There’s something of a mass psychosis going on related to the so-called starvation for yield,” said Gundlach, whose fund manages about $100 billion. “Call me old-fashioned, but I don’t like investments where if you’re right you don’t make any money,” he said. Gundlach believes that the benchmark 10-year note will move above 2% soon, but perhaps not until sometime next year. Some market participants see the benchmark’s yield tumbling further before that rise happens. Tom Di Galoma, managing director at Seaport Global, predicts the 10-year yield will slip below 1% over the next six to nine months, citing the anemic European economy in the wake of Brexit and concerns over the world’s second-largest economy, China. Meanwhile, the 10-year yield slipped below 1.47% midday Wednesday as U.S. stocks were struggling for a fourth straight session of gains, extending a record run.

“..our monetary politburo would overtly conspire and coordinate with the White House and Capitol Hill to bury future generations in crushing public debts.”

• Helicopter Money – The Biggest Fed Power Grab Yet (David Stockman)

The Cleveland Fed’s Loretta Mester is a clueless apparatchik and Fed lifer, who joined the system in 1985 fresh out of Barnard and Princeton and has imbibed in its Keynesian groupthink and institutional arrogance ever since. So it’s not surprising that she was out flogging – albeit downunder in Australia – the next step in the Fed’s rolling coup d’ etat. We’re always assessing tools that we could use,” Mester told the ABC’s AM program. “In the US we’ve done quantitative easing and I think that’s proven to be useful. “So it’s my view that [helicopter money] would be sort of the next step if we ever found ourselves in a situation where we wanted to be more accommodative.” This is beyond the pale because “helicopter money” isn’t some kind of new wrinkle in monetary policy, at all.

It’s an old as the hills rationalization for monetization of the public debt – that is, purchase of government bonds with central bank credit conjured from thin air. It’s the ultimate in “something for nothing” economics. That’s because most assuredly those government bonds originally funded the purchase of real labor hours, contract services or dams and aircraft carriers. As a technical matter, helicopter money is exactly the same thing as QE. Nor does the journalistic confusion that it involves “direct” central bank funding of public debt make a wit of difference. Suppose Washington issues treasury bonds to the 23 primary dealers on Wall Street in the regular manner. Further, assume that some or all of these dealers stick the bonds in inventory for 3 days, 3 months or even 3 years, and then sell them back to the Fed under QE (and most likely at a higher price).

So what! The only thing different technically about “helicopter money” policy is the suggestion by Bernanke and others that the treasury bonds could be issued directly to the Fed. That would just circumvent the dwell time in dealer (or “investor”) inventories but result in exactly the same end state. In that event, of course, Wall Street wouldn’t get the skim. But that’s not the real reason why helicopter money policy is so loathsome. The unstated essence of it is that our monetary politburo would overtly conspire and coordinate with the White House and Capitol Hill to bury future generations in crushing public debts.

“It is outright panic-driven momentum.”

• 35-Year-Old Bond Bull Is on Its Last Legs (WSJ)

They have been saying it for 35 years. But after 3Ω decades of stunning returns, the biggest bond bull market in history looks to be entering its final stages. Why? Changing politics and the perverse, looking-glass world of negative yields. Bonds are meant to be safe, dull investments. But there is nothing boring, and not a lot of safety, in Japanese government bonds this year: The 40-year has returned an extraordinary 48% in six months, including the paltry coupon, and other long-dated JGBs have also had their best returns on record. U.K. and German long-dated bonds have produced similar returns to those after the collapse of Lehman. Returns on U.S. Treasurys are less exotic, but the 30-year has returned 22% this year—a gain big enough to worry longtime bond watchers.

It would have been easy to make the mistake of thinking the bull run in bonds was over many times since then-Federal Reserve Chairman Paul Volcker got it started by taking control of inflation. The bet that the Japanese bond market—which long had the lowest yields in the world—would finally buckle has lost so much money for so many people that it is known as the “widowmaker” among traders. That hasn’t stopped Eric Lonergan, who runs a multistrategy fund for M&G in London. He has 15% of his fund betting against long-dated JGBs, and has endured a brutal move in the market against him in the past few weeks. Yet, he believes the likelihood is that the market will soon turn. “This is price driving price and is hugely, hugely vulnerable,” he said. “It is outright panic-driven momentum.”

Did consumer confidence perhaps fall because Carney et al -the media!- spread all their fear stories before the Brexit referendum?! And now they can all go: I told you so!

• Bank of England To Cut Interest Rates To Halt UK Recession (G.)

The Bank of England could cut interest rates and inject billions of pounds into the financial system as early as Thursday as policymakers seek to prevent Britain sliding into recession after the EU referendum. Under pressure to stem further falls in sterling, Mark Carney, the governor, is expected by financial markets to halve the 0.5% base rate on Thursday and reignite the Bank’s quantitative easing programme. Speculation has intensified in recent days after Carney dropped heavy hints that action would be needed to turn around an economy suffering badly as a result of the vote to leave the EU.

Several City economists said it was crucial for the central bank to step in and maintain the flow of cheap credit to the economy at a time when business and consumer confidence had fallen to levels last seen after the financial crash. A slump in the pound to a 31-year low has also undermined confidence among City investors concerned that the UK’s growth prospects will be damaged by leaving the single market. Markets have put an 80% probability on a move by the Bank by Thursday. Howard Archer, chief economist at IHS Global Insight, said: “With the UK economic outlook weakened by the Brexit vote, there can be little doubt – if any – that the Bank of England will enact some stimulus following the July MPC [monetary policy committee] meeting.

The only question really seems to be what action will the MPC take?” Carney said in a speech last month that the loss of confidence highlighted by a string of negative surveys meant “some monetary policy easing will likely be required over the summer”. A closely watched consumer confidence index from market researchers GfK last week recorded the biggest drop in sentiment for 21 years, following the Brexit vote.

Britain gets exactly what it needs. Where is the joy?

• UK Housing Sales Forecast To Fall Sharply This Summer After Brexit (G.)

The number of homes changing hands is expected to slump this summer in the wake of the UK’s vote to leave the EU, with estate agents and surveyors more pessimistic about the housing market than at any point since the late 1990s. Inquiries from buyers fell for the third month running in June, and the number of sales agreed dropped sharply as the Brexit vote fuelled uncertainty in the market, according to the latest monthly survey by the Royal Institution of Chartered Surveyors (Rics). New buyer inquiries declined “significantly” during the month, it said, with 36% more respondents reporting a drop than an increase – the lowest reading since the financial downturn was beginning in mid-2008.

Over the same period, the supply of properties coming onto the market fell in every region except Northern Ireland, Rics said, and sales fell for a third consecutive month. Looking ahead over the next three months, 26% more Rics members expected sales to drop further than expected a busier housing market. “This is the most negative reading for near-term expectations since 1998,” Rics said. The numbers of surveyors in London reporting falling prices slipped deeper into negative territory in June, with nearly half of surveyors in the capital reporting falls rather than rises. Price falls were particularly concentrated in central London.

The referendum is not the only factor behind the dip in activity. The stamp duty hike on second homes, which came into force on 1 April, has also disrupted the market. Rics’s chief economist, Simon Rubinsohn, said: “Big events such as elections typically do unsettle markets so it is no surprise that the EU referendum has been associated with a downturn in activity. “However even without the buildup to the vote and subsequent decision in favour of Brexit, it is likely that the housing numbers would have slowed during the second quarter of the year, following the rush in many parts of the country from buy-to-let investors to secure purchases ahead of the tax changes.”

Australia Insolvencies +14%, Debt Agreements +25%, Bankruptcies +7%

“..we all know at heart there is precisely one person to blame: Australian economist Steve Keen, now exiled in God-forsaken London. Were it not for Keen’s incessant fearmomgering about the Australian housing bubble, property values in Sydney alone would now be worth more than the sum total of property values in the US, China, UK, Mars, and Uranus combined.”

• Steve Keen Accused Of Causing Australia’s Coming Recession (Mish)

It appears there are a bit of credit difficulties down under. Cash-strapped Australian personal insolvencies, bankruptcies, and debt agreements experience their sharpest rise in seven years. Please consider Struggling Aussies Rack Up Debt.

“Alarming new figures released yesterday by the Australian Financial Security Authority found personal insolvencies in the June quarter climbed by nearly 14% compared to the June 2015. Debt agreements — an agreement between a debtor and a creditor where creditors agree to accept a sum of money from the debtor – rose by nearly a massive 25%. Bankruptcies increased by 7%. Veda’s general manager of consumer risk Angus Luffman said multiple factors were to be blamed for a stalling of consumer credit. “The continuing slowdown in residential property markets, coupled with weak wages growth and subdued retail sales growth had all contributed to the continued slowdown seen in the June credit demand index,’’ he said.

“Turnover for household goods which is often big-ticket items like whitegoods and couches which are financed by credit has slowed significantly in recent months.” Australian Bureau of Statistics lending data released yesterday found total new lending commitments including housing, personal, commercial and lease finance dropped by 3.2% in May, the second consecutive fall. Lending totalled $67.5 billion in May which was down seven per over the year and sat at a 17-month low. HSBC chief economist Paul Bloxham blamed the cooling of the housing market for the softening of the willingness to borrow.”

While others point the finger every which way, we all know at heart there is precisely one person to blame: Australian economist Steve Keen, now exiled in God-forsaken London. Were it not for Keen’s incessant fearmomgering about the Australian housing bubble, property values in Sydney alone would now be worth more than the sum total of property values in the US, China, UK, Mars, and Uranus combined. Were it not for Keen, every property owner down under could retire now and live off the perpetual appreciation of their property wealth.

“..Nigel Farage and 20 other Ukip MEPs will get to vote on the terms of Britain’s exit, while the British government, led by remain supporter Theresa May, will have to accept the EU’s terms..”

• Britain’s MEPs Ushered Quietly Off Stage As The EU Show Goes On (G.)

[..] Paradoxically, British MEPs are expected to vote on the UK’s EU divorce treaty, expected to be thrashed out by David Davis, the secretary of state for exiting the EU. Although the British government will be treated as a foreign country, there is nothing in the EU rulebook that prevents British MEPs from having a say when the European parliament votes on the British divorce treaty under article 50. This throws up the odd situation that Nigel Farage and 20 other Ukip MEPs will get to vote on the terms of Britain’s exit, while the British government, led by remain supporter Theresa May, will have to accept the EU’s terms. British diplomats also find themselves in a peculiar Brexit limbo.

They will have to decide how hard to fight Britain’s corner on EU legislation that will exist for years after the UK has left. The most likely outcome is that British diplomats will continue to press British interests, because EU legislation could still affect the UK after Brexit. Norway implements all EU directives as the price of being in the EU single market – the “pay without a say” model that politicians in Oslo think the British would loathe. It is the scenario envisaged by Cameron when he promised an EU referendum in 2013. “Even if we pulled out completely, decisions made in the EU would continue to have a profound effect on our country,” he said in a Bloomberg speech. “But we would have lost all our remaining vetoes and our voice in those decisions.”

British diplomats might push British interests, but they could be frozen out of the informal wheeling and dealing. “Politics is about the future and if someone at the table has no position any more, [the others] will do deals without them,” says Dirk Schoenmaker, a senior fellow at the Bruegel thinktank. He predicts that “the big three” that decide financial regulation – Germany, France and the UK – will be cut down to a big two. “It is quite clear, from 23 June onwards the big deals in this area will be made by Germany and France, without the UK.”

Spain’s backdoor to hurt its already shattered people.

• Spain’s Banks are Suddenly “Too Broke To Fine” (DQ)

After eight years of chronic crisis mismanagement, moral hazard and perverse incentives have infected just about every part of the financial system. Earlier this week, the U.S. Congress published the findings of a three-year investigation into why the Department of Justice chose not to punish HSBC and its executives for their violations of US anti-money laundering laws and related offenses – because doing so would have had “serious adverse consequences” for the financial system – the “Too Big To Jail” phenomenon, a perfect, all-purpose, real-world Get-Out-of-Jail-Free card. But now there’s “Too Broke to Fine.” Today over a dozen Spanish banks were given a life-line by the EU’s advocate general, Paolo Mengozzi, that could be worth billions of euros in savings for the banks.

For millions of Spanish mortgage holders, it could mean billions of euros in lost compensation. Just over seven years ago, when conditions were beginning to sour for Spain’s banking system, 40 out of 42 Spanish banks decided to insert “floor clauses” in their mortgage contracts. These effectively set a minimum interest rate — typically between 3% and 4.5% — for all their variable-rate mortgages (which are very common in Spain), even if the Euribor dropped far below that figure. This, in and of itself, was not illegal. The problem is that most banks failed to properly inform their customers that the mortgage contract included such a clause. Those that did, often told their customers that the clause was an extreme precautionary measure and would almost cerainly never be activated.

After all, they argued, what are the chances of the euribor ever dropping below 3.5% for any length of time? At the time (early 2009), Europe’s benchmark rate was hovering around the 5% mark. Within a year it had crashed below 1% and is now languishing deep below zero. As a result, most Spanish banks were able to enjoy all the benefits of virtually free money while avoiding one of the biggest drawbacks: having to offer customers dirt-cheap interest rates on their variable-rate mortgages. For millions of Spanish homeowners, the banks’ sleight of hand cost them an average of €2,000 per year in additional interest payments, during one of the worst economic crises in living memory. Many ended up losing their homes.

Nice but very biased: “You have good jobs that make it possible to pay the taxes and your expenses.” Err.. no, too many don’t, and that’s why Leave won. You may have a master’s on engineering, but if you can’t understand these dynamics, what’s that worth?

• What It’s Like To Be A Non-EU Citizen (Trninic)

[..] let me tell you a few things about the life of a non-EU citizen. When I came to Austria from Bosnia in 2003 to study at Technical University of Graz, I had to undergo various administrative and non-administrative checks. At one point, I and all my fellow Bosnian students had to show proof we didn’t have pneumonia, typhus – which I somewhat understand. But we even had to prove we did not have RABIES. Rabies! In the 21st century! My home country is only about 300 kilometers from Austria and yet we were treated as if we came from 200 years ago, at least. On top of that, we had – and still have – the pleasure of needing a visa every year and paying for it, of course. We even paid tuition for college, though the Austrians and EU students did not.

But that was the deal, and I personally was happy to be able to work the lowest level student jobs and in return get a decent education. The common attitude was “deal with it!” and so we did. After college, I got my first job at a big construction company. The trick? I worked with a Bosnian contract. It was an all-in contract, written for slaves. But hey, I had a job. I was one of three people in my branch office who had a master’s degree in engineering (much less went to college), spoke three foreign languages, drove 50,000 kilometers per year, yet I was still paid less than everyone. But I dealt with it. If the company was to say at any moment I was fired, I had two months to leave the country or find a new company.

Many highly qualified non-EU citizens live this kind of life day-to-day and the only thing on our minds is, “What the hell was on the UK’s mind when they voted LEAVE?” The UK always was the “favorite (and the spoiled) kid of the EU family.” It kept its currency. It had more favorable EU conditions and it always behaved a bit stand-offish toward the rest of the Europe, if we are honest. The UK has about 52 million residents and pays about €5 billion to EU fund per year (€96 per citizen). By comparison, Austria has 8 million residents and pays about €1 billion per year to EU fund (€125 per citizen).

Great story.

• The Fake Biodiesel Factory That Pumped Out Real Money (BBG)

The biodiesel factory, a three-story steel skeleton crammed with pipes and valves, squatted on a concrete slab between a railroad track and a field of storage tanks towering over the Houston Ship Channel. Jeffrey Kimes, an engineer for the Environmental Protection Agency, arrived there at 9 a.m. on a muggy Wednesday in August 2011. He’d come to visit Green Diesel, a company that appeared to be an important contributor to the EPA’s fledgling renewable fuels program, part of an effort to clean the air and lessen U.S. dependence on foreign fuel. In less than three years, Green Diesel had reported producing 50 million gallons of biodiesel. Yet Kimes didn’t know the company. He asked other producers, and they weren’t familiar with Green Diesel either.

He thought he ought to see this business for himself. Kimes, who works out of Denver, was greeted at the Green Diesel facility by a man who said he was the plant manager. He was the only employee there, which was odd. “For a big plant like that, you’re going to need a handful of people at least to run it, maintain it, and monitor the process,” says Kimes, a 21-year EPA veteran. The two toured the grounds, climbing metal stairways and examining the equipment. The place was weirdly still and quiet. Some pipes weren’t connected to anything. Two-story-high biodiesel mixing canisters sat rusting, the fittings on their tops covered in garbage bags secured with duct tape. Kimes started asking questions.

“They showed me a log, and from that you could see they hadn’t been producing fuel for a long period of time,” he says. An attorney for Green Diesel showed up. Kimes asked how he could reconcile the lack of production with what Green Diesel had been telling the EPA. The attorney said he didn’t know, he’d been hired only the day before. “It was obvious what was going on,” Kimes says. The next day, he appeared at Green Diesel’s office in Houston’s upscale Galleria neighborhood, 15 miles from the plant, hoping to collect production records and other information. Someone stuck him in a conference room. Soon he was on the phone with the lawyer from the day before, who told him not to speak with any more Green Diesel employees.

Kimes went back to Denver and started calling Philip Rivkin, Green Diesel’s founder and chief executive. He wasn’t available. And he never would be. That fall, Rivkin left Houston to live in Spain with his wife, their teenage son, a $270,000 Lamborghini Murcielago Coupe, and a $3.4 million Canadair Challenger jet. A passport Rivkin obtained in Guatemala, where he moved after living for an undetermined period in Spain, shows him with dark hair, a double chin, a lazy eye, and an impassive look. It’s one of the few publicly available photographs of the man. Now serving a 10-year sentence at the federal prison in Bastrop, Texas, Rivkin declined through his lawyer, Jack Zimmermann, to be interviewed for this story.

Debt Rattle 4th of July 2016

Jul 042016

July 4, 2016 Posted by Raúl Ilargi Meijer at 8:23 am Finance Tagged with: arms, bailout, Brexit, crash, crisis, Ebay, Greece, Lehman, oil, recession 3 Responses »

Walker Evans “Sidewalk scene in Selma, Alabama.” 1935

• China Bank Bailout Calls Go Mainstream (BBG)

• Deutsche: Probability Of US Recession Surges To 60% (ZH)

• Druckenmiller, Soros, Spitznagel, Gross Warn Of Crisis (VW)

• Oil Rally Threatened as Gasoline Supply Surge Swamps US Demand (BBG)

• Brexit Is a Lehman Moment for European Banks (BBG)

• Angela Merkel ‘To Oust Juncker’ As Europe Splits Deepen Over Brexit (Tel.)

• Germany’s Schäuble Urges Post-Brexit Push to Curb EU Commission (BBG)

• French Economy Minister Macron Claims Euro-Clearing Business for Paris (BBG)

• Where Have Those Nice Britons Gone? (G.)

• Brexit Voters Are Not Thick, Not Racist: Just Poor (Spec.)

• German Arms Exports Almost Doubled In 2015 (R.)

• Kaczynski May Divert Polish Pension Cash to State Projects (BBG)

• Europe Puts Greece On Ebay (G.)

• How To Fix A Broken Auckland? Crash Home Prices By 40% (Grimes)

“Non-performing loans jumped by more than 40% in the 12 months ended March to 1.4 trillion yuan ($210 billion)..” “..CLSA estimating NPLs were probably closer to 11.4 trillion yuan at the end of last year..” That would be well over $2 trillion….

• China Bank Bailout Calls Go Mainstream (BBG)

Predictions of a Chinese banking system bailout are going mainstream. What was once the fringe view of permabears and short sellers is now increasingly being adopted by economists at some of the world’s biggest banks and brokerages. Nine of 15 respondents in a Bloomberg survey at the end of last month, including Standard Chartered and Commonwealth Bank of Australia, predicted a government-funded recapitalization will take place within two years. Among those who provided estimates of the cost, a majority said it will exceed $500 billion. While a bailout of that size would be a far cry from the $10 trillion forecast of U.S. hedge fund manager Kyle Bass in February, the responses reflect widespread concern that Chinese lenders will struggle to cope as bad loans surge.

Even as some analysts said a state recapitalization would put the banking system on a stronger footing, 80% of respondents predicted news of a rescue would weigh on Chinese markets – dragging down bank stocks and the yuan while pushing up government borrowing costs and credit risk. “A recapitalization will happen after the Chinese government comes clean with the true nonperforming loan figure,” said Kevin Lai at Daiwa Capital Markets. “That will require a lot of money creation.” [..] Chinese lenders are grappling with a growing mountain of bad debt after flooding the financial system with cheap credit for years to prop up economic growth.

Non-performing loans jumped by more than 40% in the 12 months ended March to 1.4 trillion yuan ($210 billion), or 1.75% of the total, according to government data. The figures are widely believed to understate the true scale of the problem, with CLSA estimating NPLs were probably closer to 11.4 trillion yuan at the end of last year.

Reading the yield curve.

• Deutsche: Probability Of US Recession Surges To 60% (ZH)

Over the weekend, following the latest collapse in long-term yields to new all time lows, Deutsche Bank looked at what implied recession odds are if one once-again adjust for Fed intervention. What it found, in the words of Deutsche Bank’s Dominic Konstam, is “worrisome.” From Deutsche Bank:

Since the UK referendum the US yield curve has flattened to new post-crisis lows. The 3m10y spread is now 115 bps compared to 210 bps at the start of the year, and the 2y10y spread is just 85 bps versus 120 bps on January 1. This relentless flattening of the curve is worrisome. Given the historical tendency of a very flat or inverted yield curve to precede a US recession, the odds of the next economic downturn are rising. In our probit model, the probability of a recession within the next 12 months has jumped to 60%, the highest it’s been since August 2008.

The model adjusts the 3m10y spread by the historically low level of short rates and it suggests that on an adjusted basis the curve has already appeared to be inverted for some time. The yield curve had successfully signaled the last two recessions when the model output rose above 70%. If 10y yields rally to 1.00% and the 3m rate is unchanged, the implied recession probability from our model will reach that number. At current market levels, the market is just 40 bps from that distinct possibility.

In other words, while the Fed is terrified of killing the recovery by “tightening” financial conditions, all that will take for the next recession to arrive is for the Fed and its central bank peers to ease just that much more to send the long end 40 bps lower, something which as we reported yesterday may happen even sooner than expected, now that pension funds are ready to throw in the towel and start buying 10Y and 30Y Tsys with wreckless (sic) abandon.

“One of the best indicators showing how healthy is the economy is the velocity of circulation of money.”

• Druckenmiller, Soros, Spitznagel, Gross Warn Of Crisis (VW)

Brexit referendum pushed financial markets into turmoil. Even if this is only the beginning of tough times the main reason behind this is definitely not the result of the UK referendum. What we see today is merely a result of financial markets being disconnected from the real condition of the global economy. The red flags signalling overpriced markets (especially in the case of the US) now are raised not only from statistical data but also from experienced investors having a good forecasting record.

From the start, I would like to focus on aforementioned statistical data. They can give us clear picture of the US economy and what happened after previous crisis until now. The financial situation of the US is crucial because it is the American stock exchange that delivers 44% of the global capitalisation of financial markets. American financial sector is responsible for setting trends and today those trends are pointing south. Developing markets are falling right behind the trendsetter. One of the best indicators showing how healthy is the economy is the velocity of circulation of money. The better the economy, the more money people and other participants of the economy spend – this increases money circulation.

At first glance, you can see that after 2008-09 crisis situation worsened. During official ‘post-crisis recovery’ velocity was slightly above 1.7 while during the first quarter of 20016 it fell below 1.5 (for comparison – before the crisis it around 2.0). The above chart is not the only data point. Low money velocity means also less consumption – this is visible in higher inventory-to-sales ratio. Below you can see a record of it. Today this indicator is above the Lehman level. What is more, it soon can match the levels of the worst phase of the 2008 meltdown. This clearly shows how American society is getting poorer.

Low prices, but falling demand.

• Oil Rally Threatened as Gasoline Supply Surge Swamps US Demand (BBG)

American drivers’ seemingly insatiable thirst for gasoline is running into a flood of supply. Refineries across the nation are operating full-out and imports are pouring into the East Coast, boosting gasoline supplies to a record. At the same time, consumption has turned out to be less robust than thought. That’s weighed on prices, threatening to stem oil’s rebound from a 12-year low. “Earlier this year there was a lot of hope that gasoline would lead crude higher,” said John Kilduff, partner at Again Capital, a New York hedge fund focused on energy. “That’s not turned out to be the case and gasoline will soon be a weight on the market.”

The Energy Information Administration said in a monthly report on June 30 that demand in April was 9.21 million barrels a day, down from 9.49 million seen in weekly data. “The monthly data for April raises doubts about the idea that we have reliably robust gasoline demand to support the entire complex,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. Gasoline stockpiles along the East Coast, which includes New York Harbor, the delivery point for U.S. futures contracts, surged to a record 72.5 million barrels in week ended June 24, EIA data show. Imports to the region jumped to a six-year seasonal high. Production climbed to a record in the previous week, as refiners typically run harder in the second quarter to meet summer peak driving season.

“When the biggest bank in Europe’s biggest economy, with annual revenue of about €37 billion, is worth about the same as Snapchat – a messaging app that generated just $59 million of revenue last year – you know something’s wrong.”

Italy’s efforts at aiding its banks risk leading to a big problem with Germany, but Brexit makes the latter hesitant. But it can’t give in, it would set a precedent the EU can’t handle. So is Italy the next Greece?

• Brexit Is a Lehman Moment for European Banks (BBG)

European banks are undergoing a real-life stress test in the wake of Britain’s vote to leave the European Union. Their share prices were already down 20% this year; since the referendum result was announced, they’ve doubled that decline. If the rot isn’t stopped soon, Europe will have found a novel solution to the too-big-to-fail problem — by allowing its banks to shrink until they’re too small to be fit for purpose. The answer is found in the adage never let a good crisis go to waste. The current situation should be both a motivation and an excuse to do what Europe failed to do after the 2008 collapse of Lehman Brothers brought the financial world to its knees: fix its banking system. Here’s a snapshot of this year’s drop in value of some of the region’s biggest institutions:

Deutsche Bank, which once had pretensions to be Europe’s contender on the global investment banking stage, is now worth just €17 billion. When the biggest bank in Europe’s biggest economy, with annual revenue of about €37 billion, is worth about the same as Snapchat – a messaging app that generated just $59 million of revenue last year – you know something’s wrong. No wonder the billionaire investor George Soros was betting against Deutsche Bank shares this month. Greece has recapitalized its banks three times, to almost no effect. Piraeus Bank, for example, is worth less than €1.5 billion, down from €4 billion in December after the last cash injection, and as much as €40 billion just two years ago.

UniCredit, Italy’s biggest bank, has suffered particularly badly this year. It has a market capitalization of just €12 billion, dwarfed by its non-performing loans worth €51 billion. Italian banks as a whole have non-performing debts worth €198 billion, a total that’s been rising ever since the financial crisis and is illustrative of Europe’s failure to tackle its banking problems. Add in so-called “sofferenze,” Italian for doubtful loans, and the total value of Italian debt at risk of non-payment rises to about €360 billion. That explains why Italy has seized upon Brexit to justify trying to shovel €40 billion of state aid into its banking system, much to the annoyance of Germany, which views the move as contravening rules on state aid.

The end of the ever closer union.

• Angela Merkel ‘To Oust Juncker’ As Europe Splits Deepen Over Brexit (Tel.)

Angela Merkel could move to oust Europe’s federalist chief Jean-Claude Juncker ‘within the next year’, a Germany government minister has said, in a sign of deepening European divisions over how to respond to Britain’s Brexit vote. The German chancellor’s frustration with the European Commission chief came as Europe split over whether to use the Brexit negotiations as a trigger to deepen European integration or take a more pragmatic approach to Britain as it heads for the exit door. “The pressure on him [Juncker] to resign will only become greater and Chancellor Merkel will eventually have to deal with this next year,” an unnamed German minister told The Sunday Times, adding that Berlin had been furious with Mr Juncker “gloating” over the UK referendum result.

Mr Juncker’s constant and unabashed calls for “more Europe”, as well as his reported drinking problem has led to several of Europe other dissenting members – including Poland, Hungary and the Czech Republic – to lay some of the blame for Brexit at his door. Since the June 23 vote both the Czech and Polish foreign ministers have called publicly for Mr Juncker to resign – moves that one senior EU official dismissed last week as “predictable”. However, the rumblings from Berlin now represent a much more serious threat to Mr Juncker’s tenure. The split also offers a glimmer of hope for British negotiators who are preparing for fractious EU-UK divorce talks and are desperate to avoid a repeat of February’s failed negotiations which – controlled as they were by Mr Juncker and the Commission – left David Cameron without enough ‘wins’ to avoid Brexit.

“Everyone is determined that this negotiation is handled in the European Council – i.e. between the 27 heads of government – and not by the Commission, the eurocrats and the EU ‘theologians’ in Brussels,” a senior UK source told The Telegraph. In a signal that battle has partly already been won, Mrs Merkel pointedly met with French and Italian leaders in Berlin last week, excluding Mr Juncker from the conversation. The Commission has also declined to fight the Council for the role of “chief negotiator”. British strategists hope that creating a much broader negotiation that includes the UK’s role in keeping Europe geopolitically relevant through its deep Nato ties, defence contributions and links to Washington, they can avoid a narrow tit-for-tat negotiation on trade where the UK has only very limited leverage.

The problem with the end of the ever closer union is who will then decide. And that can only be Germany. The quintessential EU conundrum is unsolvable.

• Germany’s Schäuble Urges Post-Brexit Push to Curb EU Commission (BBG)

Finance Minister Wolfgang Schaeuble signaled that Germany wants national governments to set the pace for future cooperation within the European Union, saying in a newspaper interview that they should sidestep the European Commission in Brussels if needed. Schaeuble’s comments to Welt am Sonntag outline the emerging response by Chancellor Angela Merkel’s government to the U.K. referendum on June 23 to leave the EU. It signals a looming clash with advocates of EU integration such as European Commission President Jean-Claude Juncker. EU countries must seek to reach agreements even if not all of the 27 non-U.K. members want to participate and should circumvent the commission, the EU’s executive arm, if it isn’t willing to cooperate, the newspaper quoted Schaeuble as saying.

“Now is the time for pragmatism,” Schaeuble told the newspaper. “If not all 27 want to pull together from the beginning, then we’ll just start with a few. If the Commission isn’t along, then we’ll take matters into our own hands and solve problems between governments.” Schaeuble expressed frustration that EU officials in Brussels took too long to respond to the refugee crisis last year. Many people’s dissatisfaction with the EU is because rules weren’t respected, including by the European Commission in its response to the sovereign-debt crisis, he was quoted as saying. The U.K. and the EU have a shared interest in starting exit talks quickly to limit the fallout and because “market pressure” may rise the longer it takes, Schaeuble told the newspaper.

Another sociopath striving for power.

• French Economy Minister Macron Claims Euro-Clearing Business for Paris (BBG)

Scruples be damned. The dust has barely settled on the June 23 British vote to take the U.K. out of the European Union, and the French Economy Minister Emmanuel Macron is claiming the euro-clearing business for Paris. Speaking Sunday in a Bloomberg interview, Macron laid out why the French capital is a contender for the business as other euro-area cities from Frankfurt to Dublin gear up for a battle for transactions currently done in London, Europe’s largest financial center. German officials have said Paris is dreaming if it thinks it can beat out Frankfurt, the home of the ECB and Deutsche Boerse’s Eurex operations. “On clearing, we will have a full discussion on a series of issues,” the 38-year-old French minister said.

“We have many more players now in Paris than in Frankfurt, and a much deeper market place.” London’s role in clearing trades in the $493 trillion derivatives market has returned as an issue since Britain voted to exit the 28-nation bloc. EU courts blocked a previous ECB effort to bring clearing under its regulatory control by shifting it to a euro-area country. But that was before the Brexit vote. While echoing President Francois Hollande’s insistence last week that euro-clearing won’t remain in London, Macron went further, saying that Paris may be the best place to move the process.

ECB Executive Board member Benoit Coeure warned his French compatriots to cool down on the prospect, insisting that London’s status as the biggest executor of euro financial transactions will depend on the kind of separation agreement the U.K. negotiates with the remaining 27 countries in the EU. “It is premature to have this type of discussion,” he said in Aix-en-Provence Saturday. “Everything will depend on the legal framework. This landscape, will it change? It depends on the relationship between the U.K. and the single market. Right now, we have no idea.” Separately, Macron also said he doesn’t rule out running for president next year, even though he insisted it was too early to declare.

Hi hi. “The rest of the EU wanted to be able to restrain eastern Europeans for another seven years. Most of us did. You kept true to your word and did not.”

• Where Have Those Nice Britons Gone? (G.)

Who are you and what have you done with those Britons I used to know and like so much? Have you no idea how disruptive uncertainty is for our countries, for business? Forgive me, of course you do – it’s you British who taught us that. The single market, for heaven’s sake, the EU’s largest and most formidably lucrative business venture, was very much down to you. It was your Lord Cockfield who worked out a plan, and if your then prime minister Margaret Thatcher had not used all her force to push it through in the face of reluctant protectionists on the continent, it might never had happened. Trade is your thing, after all and here it was: full freedom of movement for capital, goods, services and people. Yes, for people, including for eastern Europeans, not long after the Berlin Wall came down.

That happened because you British insisted on uniting the whole of Europe, the sooner, the better, while the French, the Italians and others all held back for as long as they could. They were so worried that the eastern European workers would come storming in their millions to the west, taking our jobs, pushing our wages down. But you insisted. Openness, inclusiveness, freedom – we have come to associate that with you. And you have, or had, such a way with words. You’re so gifted at persuasion, winning us over with your thoroughly prepared and elegant arguments. In the end, all agreed to do the enlargement your way. Except for the instant freedom of movement for all. The rest of the EU wanted to be able to restrain eastern Europeans for another seven years. Most of us did. You kept true to your word and did not.

You also have such a way with people. Your politicians are well schooled in parliament, aspiring to hold their own in any heated debate with their opponents. For decades, you have applied the brakes in the EU and watered down proposals to suit you. (Thanks by the way. You have never been an easy partner but the less-than-perfect compromise that is the EU has been improved by your hard work in Brussels.) And your Foreign Office comes better prepared than anyone else with numbers and facts, closely following what is going on in other countries, and sometimes managing diplomatic acrobatics that stun others into a deal. How on earth did Thatcher talk the others into giving one of the richest countries billions of pounds’ worth of a rebate to its EU fee? Permanently!

Amen.

• Brexit Voters Are Not Thick, Not Racist: Just Poor (Spec.)

The most striking thing about Britain’s break with the EU is this: it’s the poor wot done it. Council-estate dwellers, Sun readers, people who didn’t get good GCSE results (which is primarily an indicator of class, not stupidity): they rose up, they tramped to the polling station, and they said no to the EU. It was like a second peasants’ revolt, though no pitchforks this time. The statistics are extraordinary. The well-to-do voted Remain, the down-at-heel demanded to Leave. The Brexiteer/Remainer divide splits almost perfectly, and beautifully, along class lines. Of local authorities that have a high number of manufacturing jobs, a whopping 86% voted Leave. Of those bits of Britain with low manufacturing, only 42% did so.

Of local authorities with average house prices of less than £282,000, 79% voted Leave; where house prices are above that figure, just 28% did so. Of the 240 local authorities that have low education levels — i.e. more than a quarter of adults do not have five A to Cs at GCSE — 83% voted Leave. Then there’s pay, the basic gauge of one’s place in the pecking order: 77% of local authorities in which lots of people earn a low wage (of less than £23,000) voted Leave, compared with only 35% of areas with decent pay packets. It’s this stark: if you do physical labour, live in a modest home and have never darkened the door of a university, you’re far more likely to have said ‘screw you’ to the EU than the bloke in the leafier neighbouring borough who has a nicer existence.

Of course there are discrepancies. The 16 local authorities in Scotland that have high manufacturing levels voted Remain rather than Leave. But for the most part, class was the deciding factor in the vote. This, for me, is the most breathtaking fact: of the 50 areas of Britain that have the highest number of people in social classes D and E – semi-skilled and unskilled workers and unemployed people – only 3 voted Remain. Three. That means 47 very poor areas, in unison, said no to the thing the establishment insisted they should say yes to. Let’s make no bones about this: Britain’s poor and workless have risen up. And in doing so they didn’t just give the EU and its British backers the bloodiest of bloody noses. They also brought crashing down the Blairite myth of a post-class, Third Way Blighty, where the old ideological divide between rich and poor did not exist, since we were all supposed to be ‘stakeholders’ in society.

Amoral.

• German Arms Exports Almost Doubled In 2015 (R.)

German arms exports almost doubled last year to their highest level since the beginning of this century, a German newspaper said on Sunday, citing a report from the Economy Ministry that is due to be presented to the cabinet on Wednesday. Newspaper Welt am Sonntag said the value of individual approvals granted for exporting arms was €7.86 billion last year compared with €3.97 billion worth of arms exports in 2014. It said the Economy Ministry had pointed to special factors that boosted arms exports such as the approval of four tanker aircraft for Britain worth €1.1 billion.

It also pointed to the approval of battle tanks and tank howitzers along with munitions and accompanying vehicles worth €1.6 billion for Qatar – a controversial deal that the report said was approved in 2013 by the previous government. In February German Economy Minister Sigmar Gabriel said preliminary figures showed that Germany had given approval for around €7.5 billion worth of arms shipments in 2015. The Federal Office for Economics and Export Control (Bafa), a subsidiary of the economy ministry, is responsible for licensing arms export deals and Gabriel had promised to take a much more cautious approach to licensing arms exports, especially with regard to the Middle East. Germany is one of the world’s main arms exporters to EU and NATO countries and has been cutting its sales of light weapons outside those states.

This happens everywhere: pensions being moved into risky and/or politically driven ‘assets’. That will be the end of pensions.

• Kaczynski May Divert Polish Pension Cash to State Projects (BBG)

Poland is considering diverting funds from the country’s $35 billion pension industry and piling them into government-backed projects, ruling party leader Jaroslaw Kaczynski said. Poland’s privately run pension funds, set up in 1999 to provide long-term financing for the nation’s companies and make Warsaw into a regional capital hub, own a fifth of the shares traded on the Warsaw stock exchange. The proposed shift of money from the funds could help the eight-month-old government fulfill its election promises, including higher social benefits, cheap housing as well as state-backed investments into industries ranging from ship building to the production of coal and electric buses.

“We must think what to do with the money in the pension funds, there are already proposals,” Kaczynski, who was reappointed as head of the Law & Justice party on Saturday, said at the party’s congress. “That money is now losing its value,” while it could be the “basis for new, important investments, that will help build strong economic policy and support millions of Polish households.” Kaczynski said his party seeks to implement a new “economic order,” one based on redistributing wealth and rejection of free-market reforms. The Law & Justice government imposed the European Union’s highest levies on banks, rolled out unprecedented child benefits and is in a stand-off with the EU over democratic standards, which triggered the country’s first-ever credit rating downgrade and spooked investors.

From May 30. Just loved the Simpsons’ image.

• Europe Puts Greece On Ebay (G.)

In Greece today, government power comes with few trappings. Unable to tap capital markets and dependent wholly on international aid, the debt-stricken country’s senior officials are acrobats in a tightrope act. They are placating creditors, whose demands at times seem insatiable, and citizens, whose shock is never far away. Few know this better than Stergios Pitsiorlas, the head of Greece’s privatisation agency. The agency’s asset portfolio – readily available online – goes some way to explaining why. A catalogue of beaches, islands, boutique hotels, golf courses, Olympic venues and historic properties in Plaka on the slopes beneath the ancient Acropolis, it could be a shopping list for the scenery in a movie – rather than a list of possessions that Athens is under immense pressure to offload.

In the coming months, the list will grow as the contours of a “super fund” – established to expedite the sale of ailing utilities and state-owned properties – take shape. The fund, the product of last week’s agreement to disburse an extra €10.3bn (£7bn) in bailout loans in return for further reforms, takes the divestment of state holdings to new heights. More than 71,000 pieces of public property will be transferred to the umbrella entity in what will amount to the biggest privatisation programme on the continent of Europe in modern times. Seven years into Greece’s seemingly unstoppable financial crisis, lenders are not taking any chances. The EU and IMF, which to date have poured more than €250bn into Greece in the form of three bailouts, have demanded that the organisation operates for 99 years.

Greeks have reacted with anger and derision, viewing the fund as the lowest point in the country’s epic struggle to remain anchored to the eurozone. For many, it is the ultimate depredation, another dent to their dignity at a time of unprecedented unemployment, poverty and suffering. If this is the way, they say, then only the Acropolis will retain a patina of Greekness about it. “There is nothing we are not giving up,” splutters Maria Ethymiou, a small business owner encapsulating the mood. “The Germans are going to take everything. I hear that even beaches are up for sale. Is this the Europe that we want? Is this the united Europe of our dreams?”

Absolutely right and horribly mistaken at the same time. Arthur Grimes is former chief economist of the Reserve Bank.

• How To Fix A Broken Auckland? Crash Home Prices By 40% (Grimes)

In March 2016, the REINZ Auckland median house price reached $820,000. Four years previously, it was $495,000 – that’s a 66% increase in 4 years. What’s more alarming is that in 2012, many people considered that house prices were already getting of reach for most people. That was particularly the case for young people and low income earners. That extraordinary increase – coupled with the already high level in 2012 – was behind my call to a recent Auckland Conversations event that policy-makers should strive to cause a 40% collapse in house prices to bring the median back to around $500,000.

My call for policies to drive a house price collapse is driven by my personal value judgement that it’s great for young families and families on lower incomes, to be able to afford to buy a house if they wish to do so. My concern is not for older, richer families, couples or individuals who already own their own (highly appreciated) house. Others may have a different value judgement to mine – but rarely do they make such a judgement explicit. Or, they may argue that such a collapse would cause financial instability given banks’ loans to mortgage-holders. Luckily, New Zealand’s banks are well-capitalised and stress tests have shown that they can survive a large fall in house prices – mostly because the bulk of their loans pertain to older mortgages with plenty of equity behind them.

For those who share my wish to bring house prices back to a level at which ordinary people can afford, what is to be done? One possibility is to try and stem the demand. Many Aucklanders seem to want their city to remain something like a rural town. In world terms, however, Auckland is a smallish city; while in Australasian terms, it is a mid-sized city sitting between Adelaide and Perth in size, and well behind the big three (Sydney, Melbourne, Brisbane). If New Zealand is to have one city of moderate size where head offices, R&D facilities and other wealth-generating activities reside, Auckland needs to be that city. To curb its growth is tantamount to saying that development should take place in Australia, not here. I favour Auckland being competitive in attracting high-value activities at least within the Australasian context. So I am not in favour of curbing Auckland’s growth.

Debt Rattle June 20 2016

Jun 202016

June 20, 2016 Posted by Raúl Ilargi Meijer at 9:02 am Finance Tagged with: Abenomics, Brexit, China, debt, M5S, recession, refugees, Rome 1 Response »

Harris&Ewing Car exterior. Washington & Old Dominion R.R. 1930

• IMF Calls For Overhaul Of Abenomics (R.)

• The Economy Is Not What It Seems (Roberts)

• Asking Prices For Homes In England And Wales Rise To Record High (G.)

• City of London Fears Brexit Will End Golden Age (BBG)

• Brexit Is The Best Outcome (Gambles)

• Brexit – The End of the Universe (Rose)

• The Progressive Argument For Leaving The EU Is Not Being Heard (G.)

• Economic Gauges Raise Specter of Recession (WSJ)

• Italy PM Renzi Suffers Setback As 5-Star Makes Breakthrough (R.)

• China’s Housing Market in Flux as Price Recovery Tapering Off (BBG)

• Chinese Bare All for Credit (BBG)

• World Refugee Day: 65.3 Million People Displaced (R.)

• Turkish Border Guards Shoot and Kill 8 Syrian Refugees, 3 Children (G.)

The amount of nonsense that can be held in just a few words is breathtaking. Nobody knows what deflation is. The IMF and Shinzo Abe: the deaf and the blind.

• IMF Calls For Overhaul Of Abenomics (R.)

The IMF on Monday urged Japan’s government to overhaul its stimulus policies by moving income policies and labor market reform to the forefront, supported by more monetary and fiscal stimulus. “Under current policies, the high nominal growth goal, the inflation target, and the primary budget surplus objective all remain out of reach within the timeframe set by the authorities,” the IMF said in a statement after “Article 4” annual consultations on economic policy with Japan.

The global lender called for a more flexible monetary policy framework with the Bank of Japan abandoning a specific calendar date for achieving its 2% inflation target. It added that Japan would need to raise the sales tax to at least 15% to strike the right balance between growth and fiscal sustainability. “Without bolder structural reforms and credible fiscal consolidation, domestic demand could remain sluggish, and any further monetary easing could lead to overreliance on depreciation of the yen,” the IMF said.

Strong graphs.

• The Economy Is Not What It Seems (Roberts)

Economic cycles are only sustainable for as long as excesses are being built. The natural law of reversions, while they can be suspended by artificial interventions, can not be repealed. More importantly, while there is currently “no sign of recession,” what is going on with the main driver of economic growth – the consumer? The chart below shows the real problem. Since the financial crisis, the average American has not seen much of a recovery. Wages have remained stagnant, real employment has been subdued and the actual cost of living (when accounting for insurance, college, and taxes) has risen rather sharply. The net effect has been a struggle to maintain the current standard of living which can be seen by the surge in credit as a percentage of the economy.

To put this into perspective, we can look back throughout history and see that substantial increases in consumer debt to GDP have occurred coincident with recessionary drags in the economy.

A nation built on debt.

• Asking Prices For Homes In England And Wales Rise To Record High (G.)

Asking prices for homes in England and Wales have risen to a new record high, and sales are being agreed quicker than at any point since 2010, according to latest figures from the property website Rightmove. The site, which measured asking prices for just under 150,000 properties listed over the past month, said they had risen by 0.8% in June, to an average of £310,471 – 5.5% higher than in June 2015. Asking prices have risen every month so far in 2016, and Rightmove said the rush for properties ahead of April’s stamp duty increase for second homes and the availability of cheap mortgages had supported the market. As a result of increased buyer demand, the average time taken to sell a property dropped to 57 days, compared with 60 in May and 65 in June 2015.

The headline figures do not suggest that the looming EU referendum is having an impact on buyers’ decisions, but Rightmove said there were signs that sellers were sitting tight until the outcome is known. “Fewer new sellers are coming to market, with this month’s numbers being 5.3% below the monthly average for this time of year since 2010,” the monthly report said. “The most reluctant are owners of larger homes, those with four or more bedrooms, with 6.6% fewer sellers over the same time period. Given the well-documented structural shortages of housing supply any longer-term reluctance of owners to come to market would be a worrying trend.”

Far too big.

• City of London Fears Brexit Will End Golden Age (BBG)

Gooses don’t come much more golden than the City of London. The narrow lanes of the Square Mile, lined with handsome neoclassical stone and gleaming modern glass, are at the heart of a British financial sector that paid 66 billion pounds ($94 billion) in tax last year and employs more than 2 million people nationwide. It is oft-resented, has helped push the capital’s house prices out of reach for many, and required a bailout of more than 100 billion pounds from taxpayers less than a decade ago. It is also without a doubt the country’s most lucrative industry. Yet ahead of a June 23 referendum on European Union membership, many of the City’s leading lights are deeply worried about its future.

Since almost exactly 30 years ago, when Conservative Prime Minister Margaret Thatcher liberalized finance through a package of reforms so dramatic they were dubbed the “Big Bang,” London has become the undisputed financial capital of a united Europe – a status that now hangs in the balance. “Just because the City is strong at the moment doesn’t mean that it has a perpetual right to remain so,” said Marcus Agius, 69, the chairman of Barclays during the 2008 global financial crisis. “Brexit would be an act of supreme folly. In the future we would look back and wonder: ‘Why the hell did we do that? What were we thinking?’”

“..remaining in a collapsing tower of bad debt will guarantee a far worse economic outcome and catastrophic confrontations between Europe’s ever narrowing core and ever widening periphery..”

• Brexit Is The Best Outcome (Gambles)

Imagine this week that the exit vote prevails, the U.K. government stands down and in a ripple effect not seen in Europe since the fall of the Berlin Wall, the immediate dissolution of the EU is announced and there is a return to national currencies. Equities would plunge and trading in the euro currency would be suspended. European bourses would go into free-fall, continuing even after the U.K., the U.S. and others initially appear to stabilize. Each country’s no longer fungible euro would be converted into national currencies and chaos would reign until many EU national governments bail out banks. The uncertainty caused would puncture China’s debt bubble, hitting emerging and developed markets.

After a few years of global pain, by 2018 to 2020 peripheral Europe, the U.K., the U.S. and ‘healthier” emerging economies might begin to recover. Recovery in Germany and China, however, may take far longer. Until now Germany has successfully re-imposed the costs of the reckless euro borrowing spree on debtor banks, individuals, corporations and even governments. A break-up of either the euro or the EU would expose German banks’ vulnerable underbellies, having effectively underwritten the euro project in exchange for German control over sovereign budgets. Sounds scary? In my view, this would be the best long term outcome.

However, it’s extremely unlikely to happen. Either U.K. voters will decide to remain or, if the leave campaign wins, the U.K. government and Eurocrats will desperately cling on to power. This may delay the collapse but would leave a far more painful journey with a much more severe conclusion ahead. [..] The EU has already facilitated the destruction of private and sovereign balance sheets with reckless levels of record debt that can never be repaid. This is why leaving now will precipitate a global economic drama. It’s also why remaining in a collapsing tower of bad debt will guarantee a far worse economic outcome and catastrophic confrontations between Europe’s ever narrowing core and ever widening periphery.

“The EU elite feel too secure and have too much to lose.”

• Brexit – The End of the Universe (Rose)

[..] The EU spends millions every year maintaining the illusion that it is one of the great European achievements. The problem is that it has not been the case for a long time. It has become the enforcer of a now-liberal agenda, converting the particular interests of big business into European law. So we have an anti-democratic EU under German hegemony furthering the interests of large corporations – I doubt this is what the people of Europe want or deserve. The words of the British playwright Dennis Potter apply to the current situation in the EU: “They are not interested in our development or emancipation. That is the quality of an occupying force.” This is a conclusion the Greeks reached years ago.

It has been interesting to follow the stages of the Brexit campaign. Initially it seemed to be a referendum concerning David Cameron’s government. Then the role of immigration took centre stage. Now the question of national sovereignty and the lack of democracy in the EU has become an important debating point. There is even a nascent debate among the British left if the EU can be re-democratised, which is rather odd, seeing that it never was a democratic organisation. There seems to be little hope of the EU being reformed. The EU elite feel too secure and have too much to lose. A democratic EU is completely useless for them, especially for the Germans.

Schäuble has recently joined those calling for a stop to further EU integration. Germany no longer needs integration, which implies compromise, when it is already calling the shots. As I was recently in Brussels a member of an NGO explained that Germany is very content with the current EU situation. They dictate policy. There may be resistance here and there, but these cases are never existential for Germany and its clients. Brexit however offers Britain a unique opportunity. Once out of the EU, who are the Tories going to blame when it becomes clear that it is mainly they who are ruining Britain, not the EU or the immigrants?

The closer they try to make the union, the more violent the reactions will be.

• The Progressive Argument For Leaving The EU Is Not Being Heard (G.)

The British economy has become increasingly dominated by the fortunes of the financial sector, with the bankers responsible for the worst slump since the 1930s escaping pretty much scot free. London and the rest of the UK have become two countries, which explains why hostility to the EU increases with distance from the capital. Nor is this phenomenon confined to the UK. It has become commonplace to bracket growing support for leave in poorer parts of Britain with Donald Trump’s emergence as the Republican candidate in this year’s US presidential election, but populist and anti EU sentiment is on the rise across Europe.

The US research company Pew conducted a survey earlier this year to test sentiment towards the EU. In Britain, 48% said they had an unfavourable view of the EU and 44% said they had a favourable view. In France, the anti-EU sentiment was much more pronounced at 61% and 38% in favour, while in Germany there had been an eight-point drop in support for the EU in the past year, leaving those in favour only narrowly ahead at 50% against 48% . The impact of the great recession in Europe has been exacerbated by monetary union, a policy blunder of catastrophic proportions. The euro has been responsible for the slow growth and high unemployment that has angered the French, and the high debts and that have alarmed the Germans.

Stir in the unexpectedly large flows of refugees from the Middle East and North Africa, and you have a toxic mix. Last summer, when the Greek debt crisis was at its most intense, Europe’s leaders came up with a plan. The “five presidents’ report” laid down a step-by-step approach to a United States of Europe, with banking union followed by a common budget and finally political union. Getting even the least controversial part of this agenda – banking union – past sceptical European electorates has proved impossible. Yet the alternative approach, breaking up the euro and giving countries more control over their own economic destiny, is seen as not just potentially dangerous but also a betrayal of the idea of ever-closer union.

Useless talk about how hard forecasting is.

• Economic Gauges Raise Specter of Recession (WSJ)

Gut-wrenching gyrations in financial markets early in the year helped summon the specter of a new recession. Now, warning signs are coming mostly from the U.S. economy itself. Hiring is slowing, auto sales are slipping and business investment is dropping. America’s factories remain weak and corporate profits are under pressure. All are classic signs of an economic downturn, and forecasters have certainly noticed. In a Wall Street Journal survey this month, economists pegged the probability of a recession starting within the next year at 21%, up from just 10% a year earlier. Some economists think the risk is even higher. Whether this proves to be the precursor to a recession or yet another false alarm could take years to sort out.

Uneven economic growth throughout the seven-year expansion has delivered several such scares that passed. But plenty of gauges are pointing to a decent chance of a recession starting within the next 18 months. “Like everybody, I can see clouds on the horizon,” said Stanford University economist Robert Hall, chairman of the National Bureau of Economic Research committee that will—eventually—identify the start date of the next recession. But, he said, “Nobody’s very good at predicting. I don’t even try.” Financial-market convulsions at the start of the year stoked worries about a possible recession. But continued strength in the labor market reassured most economists about the resilience of the expansion, and markets largely calmed.

While the economy is still adding jobs, the recent hiring slowdown has spooked some forecasters. May’s growth in payrolls—just 38,000 jobs—was the weakest month of hiring since U.S. employers stopped shedding jobs in 2010. Barclays economist Michael Gapen noted that since 1960, persistently slower hiring compared with the recovery average, as seen in recent months, “more often than not” was followed by a recession in the next nine to 18 months.

M5S won’t be happy about not getting Milan.

• Italy PM Renzi Suffers Setback As 5-Star Makes Breakthrough (R.)

Italian Prime Minister Matteo Renzi was trounced by the anti-establishment 5-Star Movement in local elections in Rome and Turin on Sunday, clouding his chances of winning a do-or-die referendum in October. The result represented a major breakthrough for 5-Star, which feeds off popular anger over widespread corruption, with the party’s Virginia Raggi, a 37-year-old lawyer, making history by becoming the first woman mayor in the Italian capital. “A new era is beginning with us,” said Raggi, who won 67% of the vote in the run-off ballot. “We’ll work to bring back legality and transparency to the city’s institutions.”

As a consolation for Renzi, his center-left Democratic Party (PD) held on to power in Italy’s financial capital Milan and in the northern city of Bologna, beating more traditional, center-right candidates in both places. Renzi has said he would not step down whatever the results on Sunday. Instead, he has pinned his future on the referendum on his constitutional reform that, he says, will bring stability to Italy and end its tradition of revolving-door governments. But the losses in Rome and Turin suggest he might struggle to rally the nation behind him, with opposition parties lined up to reject his reform and even his own PD divided over the issue.

[..] The PD’s defeat in Rome had been expected after widespread criticism of its management of the city over the past three years, with its mayor forced to resign in 2015 in a scandal over his expenses. But the loss in Turin, a center-left stronghold and home of carmaker Fiat, was a major shock. The incumbent, Piero Fassino, a veteran party heavyweight, was swept aside by 5-Star candidate Chiara Appendino, 31, who overturned an 11-point gap after the first round to win 55% of the vote. “It will be difficult (for the PD) to downplay what happened,” wrote Massimo Franco, leading political commentator for the Corriere della Sera newspaper.

How to make even Bizarro jealous: ..the recovery is almost hitting the ceiling.. That mortgages graph is frightening by the way.

• China’s Housing Market in Flux as Price Recovery Tapering Off (BBG)

The recovery in China’s housing market that helped underpin the economy in the first half is showing signs of tapering off. New-home prices excluding government-subsidized housing climbed in 60 cities in May, down from 65 in April, among the 70 tracked, the National Bureau of Statistics said Saturday. With less of a boost from a recovering property market likely in the second half, the government will need to find other drivers such as infrastructure investment to meet its growth goal of at least 6.5% this year, according to Shen Jianguang at Mizuho. “The housing market is in flux,” Shen said. “The government is likely to step up policies to encourage home-buying in places where demand is weak and inventories of unsold housing are still high as the destocking policy didn’t yield the expected results.

” Faced with a massive pile of unsold homes in smaller cities, the government and central bank since late 2014 had unleashed a range of measures aimed at improving demand for homes to clear the overhang. While inventory levels may not have budged much, mortgage demand has, rising to a record last month, according to the latest data from the central bank. Still, the recovery in home prices last month abated as local governments put curbs in top economic centers like Shanghai and Shenzhen where prices have been surging, while they deployed home-buying stimulus in smaller cities to clear the glut of unsold residences. “This market rebound since last May has been fueled by credit and easing measures, making it unsustainable in some regions,” said Xia Dan at Bank of Communications. “Now the recovery is almost hitting the ceiling.”

Some send nude selfies to get a better loan.

• Chinese Bare All for Credit (BBG)

Talkative people pay back loans. The very talkative default. Too taciturn is no good either. Also, don’t take out a loan at 4 a.m. Those are lessons from online lenders in China that are tracking people’s behavior – via apps on their mobile phones – and taking it into account when deciding what their credit ratings should be. Chinese consumers don’t mind handing over personal details that would spark outrage in the West, in exchange for lower interest rates. The Chinese willingness to share is key to China’s plan to create the largest repository of online data on its citizens and their habits in the world. More than 80% of what’s collected is in the hands of the government, which will make it largely available for private sector use, Chinese Premier Li Keqiang recently told an audience in China that included Dell CEO Michael Dell.

WeLab Ltd., a Hong Kong-based online lender that makes loans in China, looks at what apps people have downloaded, where they go using the phone’s GPS tracker, their social networks and their school records. It offers discounted interest rates for each extra piece of personal information that helps profile customers for credit ratings. In Hong Kong, for example, giving WeLab access to a Facebook account gets a 5% discount on the cost of a loan, and access to LinkedIn gets you 10% off, on loans with interest rates that otherwise reach as high as 20%. “Chinese people have no issue handing over their personal data, giving you their credit card number, giving you their bank account,” said GGV Capital’s Jenny Lee, whose firm has invested in data-hungry tech giants such as Alibaba. “Look at the whole internet finance sector, people are giving you their bank statement so you can do profiling.”

Another record. We’re number 1!

• World Refugee Day: 65.3 Million People Displaced (R.)

A record 65.3 million people were uprooted worldwide last year, many of them fleeing wars only to face walls, tougher laws and xenophobia as they reach borders, the United Nations refugee agency said on Monday. The figure, which jumped from 59.5 million in 2014 and by 50% in five years, means that 1 in every 113 people on the planet is now a refugee, asylum-seeker or internally displaced in a home country. Fighting in Syria, Afghanistan, Burundi and South Sudan has driven the latest exodus, bringing the total number of refugees to 21.3 million, half of them children, the UNHCR said in its “Global Trends” report marking World Refugee Day.

“The refugees and migrants crossing the Mediterranean and arriving on the shores of Europe, the message that they have carried is that if you don’t solve problems, problems will come to you,” U.N. High Commissioner for Refugees Filippo Grandi told a news briefing. “It’s painful that it has taken so long for people in the rich countries to understand that,” he said. “We need action, political action to stop conflicts, that would be the most important prevention of refugee flows.” A record 2 million new asylum claims were lodged in industrialized countries in 2015, the report said. Nearly 100,000 were children unaccompanied or separated from their families, a three-fold rise on 2014 and a historic high.

Germany, where one in three applicants was Syrian, led with 441,900 claims, followed by the United States with 172,700, many of them fleeing gang and drug-related violence in Mexico and Central America. Developing regions still host 86% of the world’s refugees, led by Turkey with 2.5 million Syrians, followed by Pakistan and Lebanon, the report said.

Our friend Erdogan.

• Turkish Border Guards Shoot and Kill 8 Syrian Refugees, 3 Children (G.)

Eight Syrian refugees have been shot dead by Turkish border guards as they tried to escape war-torn northern Syria, a human rights watchdog has claimed. Three children, four women and one man were killed on Saturday night, according to the Syrian Observatory for Human Rights. It said a total of 60 Syrian refugees had been shot at the border since the start of the year. Six of this weekend’s casualties were from the same family, said the observatory’s founder, Rami Abdelrahman. “I sent our activists to hospital there, we have video [of the corpses], but we haven’t published it because there are children [involved],” he said.

The Local Coordination Committees, a network of activists inside Syria, supported the claim, reporting that one of the children was as young as six. Syrian refugees have been making illegal crossings of the Turkish border as Jordan, Turkey and Lebanon have made it virtually impossible for them to leave Syria legally. There have been reports of shootings on the border since at least 2013, and rights groups fear that the number of incidents has increased since European countries, including Britain, began pressing Turkey to curb migration flows towards Europe late last year.

Debt Rattle May 12 2016

May 122016

May 12, 2016 Posted by Raúl Ilargi Meijer at 8:55 am Finance Tagged with: Blackstone, Bud, euro, excess supply, infrastructure, Italy, property, recession, refugees, Turkey, visa 2 Responses »

DPC Betsy Ross house, Philadelphia. Birthplace of Old Glory 1900

• The Next US President Will Face A Recession (BBG)

• America’s Middle Class Meltdown (FT)

• ‘Fed Doesn’t Get It About Global Excess Supply’ (MW)

• The New Kings Of Wall Street (Forbes)

• Italy Must Choose Between The Euro And Its Own Economic Survival (AEP)

• Hong Kong Property Market in Free Fall: Kyle Bass (BBG)

• China Eyes $724 Billion Of Transport Investment Over Next Three Years (R.)

• Defying Debt Fears, China Bets On Infrastructure, Property (R.)

• Budweiser’s ‘America’ No Longer Exists (MW)

• US Anti-Poverty Campaigner Is Worried About Australia (DL)

• Berlin Should Be Careful What It Wishes For (FT)

• EU Parliament Raises the Rhetoric Over Turkey’s Visa-Waiver Bid (BBG)

• European Rights Watchdog Complains About Greek Refugee Camps Conditions (R.)

Look what the Fed bought you! “The 83-month-old expansion is already the fourth-longest in more than 150 years..”

• The Next US President Will Face A Recession (BBG)

Talk about a poisoned chalice. No matter who is elected to the White House in November, the next president will probably face a recession. The 83-month-old expansion is already the fourth-longest in more than 150 years and starting to show some signs of aging as corporate profits peak and wage pressures build. It also remains vulnerable to a shock because growth has been so feeble, averaging just about 2% since the last downturn ended in June 2009. “If the next president is not going to have a recession, it will be a U.S. record,” said Gad Levanon, chief economist for North America at the Conference Board in New York. “The longest expansion we ever had was 10 years,” beginning in 1991.

The history of cyclical fluctuations suggests that the “odds are significantly better than 50-50 that we will have a recession within the next three years,” according to former Treasury Secretary Lawrence Summers. Michael Feroli, chief U.S. economist for JPMorgan Chase & Co. in New York, puts the probability of a downturn during that time frame at about two in three. The U.S. doesn’t look all that well-equipped to handle a contraction should one occur during the next president’s term, former Federal Reserve Vice Chairman Alan Blinder said. Monetary policy is stretched near its limit while fiscal policy is hamstrung by ideological battles.

This wouldn’t be the first time that a new president was forced to tackle a contraction in GDP. The nation was in the midst of its deepest slump since the Great Depression when Barack Obama took office on January 20, 2009. His predecessor, George W. Bush, started his tenure as president in 2001 with the economy about to be mired in a downturn as well, albeit a much milder one than greeted Obama. The biggest near-term threat comes from abroad. Former IMF official Desmond Lachman said a June 23 vote by the U.K. to leave the European Union, a steeper-than-anticipated Chinese slowdown and a renewed recession in Japan are among potential developments that could upend financial markets and the global economy in the coming months. “There’s a non-negligible risk that by the time the next president takes office in January you would have the world in a pretty bad place,” said Lachman, who put the odds of that happening at 30% to 40%.

A strange combo of how great Raleigh is and how decrepit at the same time. ‘Remarkable success story’ blah blah. The FT blows up America’s economic myths, but it does so reluctantly.

• America’s Middle Class Meltdown (FT)

The erosion of America’s middle class and the resulting voter frustration that has helped fuel the presidential campaigns of Republican Donald Trump and Bernie Sanders, the populist Democratic senator from Vermont, is often portrayed as a phenomenon brought about by the collapse of well-paying manufacturing jobs over the past three decades thanks to increased automation and competition from China. But a new study by the non-partisan Pew Research Center, shared with the Financial Times, points to just how widespread the damage to America’s middle has been and how divided the country’s class structures are becoming. Median incomes fell in four-fifths of the 229 metropolitan areas studied by Pew, with the share of middle-income adults decreasing in 203 areas.

At the same time the portion of lower-income adults rose in 160 metropolitan areas between 1999 and 2014 while the share of upper-income households rose in 172. Of the metropolitan areas analysed by Pew, none saw faster population growth this century than Raleigh. Together with neighbouring Durham and the Research Triangle Park, it is celebrated as an example of how cities can transform themselves into sparky science and technology-driven hubs of innovation, or key outposts for America’s new “knowledge economy”. “It is one of the most remarkable success stories of the last 20 years, or even 30 years,” says Enrico Moretti, a University of California, Berkeley, economist and author of The New Geography of Jobs.

[..] But while Raleigh’s population continues to grow, the new data from Pew shows that the robust population growth has not necessarily translated into higher incomes for its new residents. The benefits of the boom have been shared unequally. The inflation-adjusted annual median income for a household of three in Raleigh fell by more than $10,000 to $74,283 in 2014 from $85,784 in 1999, even as its population grew by two-thirds to more than 1.3m people from just under 800,000. More surprisingly, the only income group to grow as a share of the population was its poorest. In 1999 one in five residents of the metropolitan area lived in households making two-thirds or less of the median income. By 2014 that figure had grown to one in four.

“..the Forecaster of the Month contest for April..”? Geez, that’s for real? But the point made is relevant, even if I’m not convinced the Fed ‘doesn’t get it’.

• ‘Fed Doesn’t Get It About Global Excess Supply’ (MW)

The Federal Reserve is blowing it because it thinks the economy could be overheating, but the real problem is excess supply and deflationary pressure, says Steven Ricchiuto, chief economist for Mizuho Securities USA and the winner of the Forecaster of the Month contest for April. “The dynamics of supply and demand have shifted,” Ricchiuto said in an interview. “I don’t think they get it yet,” he said of the Fed. The central bank is trying to manage the economy as if excess demand were still the major problem it was in the 1970s and 1980s. But today’s global economy suffers from a different imbalance, Ricchiuto says: Excess supply. When excess demand is the normal state of the economy, then inflation is the perennial problem.

But if the economy is stuck in a rut of excess supply, then slow growth and deflation will persist. “We should be immunizing the nation against deflation,” Ricchiuto said. But, instead, the Fed still seems to be living in the 1970s, worried that the unemployment rate will go too low and that the economy will overheat. That’s why the Fed “blew it in December” when it raised interest rates. The myopic focus on unemployment is misguided, in Ricchiuto’s view. Almost all of the economic data on the production side of the economy (such as industrial output, business sales and gross domestic product) show a tepid economy. But the labor market is doing great, comparatively. The Fed reacts to the strong job news, but ignores the rest of the story. If the Fed cared about the supply side of the economy, it would see that idle resources are pulling the economy toward stagnation and deflation.

Of course, excess supply is a global problem, not just in the U.S. Other economies are trying to reduce their excess supply the quickest way they can: Devaluing their currency in hopes that they can push the problem of excess capacity onto the country with the strongest currency. These beggar-thy-neighbor policies don’t really solve the problem, at least not quickly. Everybody around the world needs to figure out how to increase domestic demand to bring supply and demand back into balance, he said. Although the Fed doesn’t get it, many voters do, and so do candidates like Bernie Sanders, Ricchiuto said. “People are recognizing deep, fundamental flaws” in the economy. They are clamoring for policies such as more spending on infrastructure, measures to reduce the concentration of wealth, and tax reform.

In a nutshell: Banks are regulated. Blackstone is not.

• The New Kings Of Wall Street (Forbes)

In March 2015 Stephen Schwarzman got a telephone call from JPMorgan vice chairman Jimmy Lee, one of Wall Street’s legendary power brokers. Lee, who died three months later, was helping General Electric unload $30 billion in commercial real estate assets lingering on its books. GE boss Jeffrey Immelt was uncomfortable with the massive financial services business his predecessor, Jack Welch, had slowly built up. During the 2008 meltdown, frozen credit markets put GE Capital’s $101 billion in commercial paper funding in peril, bringing the mighty industrial conglomerate to its knees. Lee told Schwarzman that the real estate sale was the keystone to Immelt’s reinvention plan for the 123-year-old company.

The hang-up: finding a single buyer for a portfolio that included financing for everything from Mexican warehouses to Parisian office buildings to commercial mortgages in Australia. The billions in real estate and commercial mortgages were scattered across six countries, comprising all sorts of risks. Lee, Immelt and GE Capital boss Keith Sherin knew that Blackstone Group was the only firm with three key traits: the global reach to understand all the different assets, the resources to close a deal quickly and the financial firepower to swallow the entire package. The first call went to Blackstone’s global real estate chief, Jonathan Gray, who quickly darted over to GE’s 30 Rockefeller Center offices in Manhattan.

There Sherin offered Blackstone an exclusive look for three weeks–a minuscule period of time given the scope of the assets, but also a huge opportunity. Gray agreed, and before even getting off the elevator, he was marshaling an army of 100 Blackstone real estate professionals to tear through GE Capital’s portfolio. Four weeks later, on Apr. 10, Immelt announced that Blackstone would purchase $14 billion of GE’s assets, with Wells Fargo WFC -0.65% taking $9 billion of GE’s commercial real estate mortgages. For Immelt, Blackstone was a savior. GE’s languishing stock jumped 11% on the news. It was an even better transaction for Blackstone. The private equity firm had the inside track and thus more control over the deal terms and price, which was ultimately discounted.

“It was a perfect deal for us,” Schwarzman says. “No one else in the world is set up to buy both equity assets and real estate debt on a global basis.” Indeed, Blackstone’s massive 2015 purchase, executed flawlessly, announced to the world that the bankers at JPMorgan and Goldman Sachs–who had been the premier financiers for many decades–were no longer the kings of Wall Street. There was a new pecking order that put private equity firms on top–with Blackstone at the apex and its chairman and chief executive, Schwarzman, as the most powerful banker on the planet.

All that’s missing is a spark to start the fire.

• Italy Must Choose Between The Euro And Its Own Economic Survival (AEP)

Italy is running out of economic time. Seven years into an ageing global expansion, the country is still stuck in debt-deflation and still grappling with a banking crisis that it cannot combat within the paralyzing constraints of monetary union. “We have lost nine %age points of GDP since the peak of the crisis, and a quarter of our industrial production,” says Ignazio Visco, the rueful governor of the Banca d’Italia. Each year Rome hopefully pencils in a fall in the ratio of public debt to GDP, and each year the ratio rises. The reason is always the same. Deflationary conditions prevent nominal GDP rising fast enough to outgrow the debt. The putative savings from drastic fiscal austerity – cuts in public investment – were overwhelmed by the crushing arithmetic of the ‘denominator effect’. Debt was 121pc in 2011, 123pc in 2012, 129pc in 2013.

It came close to levelling out last year at 132.7pc, helped by the tailwinds of a cheap euro, cheap oil, and Mario Draghi’s fairy dust of quantitative easing. This triple stimulus is already fading before the country escapes the stagnation trap. The IMF expects growth of just 1pc this year. The global window is closing in any case. US wage growth will probably force the Federal Reserve to raise interest rates and wild speculation will certainly force China to rein in its latest credit boom. Italy will enter the next downturn – perhaps early next year – with every macro-economic indicator in worse shape than in 2008, and half the country already near political revolt. “Italy is enormously vulnerable. It has gone through a whole global recovery with no growth,” said Simon Tilford from the Centre for European Reform.

“Core inflation is at dangerously low levels. The government has almost no policy ammunition to fight recession.” Italy needs root-and-branch reform but that is by nature contractionary in the short-run. It is viable only with a blast of investment to cushion the shock, says Mr Tilford, but no such New Deal is on the horizon. Legally, the EU Fiscal Compact obliges Italy to do the exact opposite: to run budget surpluses large enough to cut its debt ratio by 3.6pc of GDP every year for twenty years. Do you laugh or cry? “There is a very real risk that Matteo Renzi will come to the conclusion that his only way to hold on to power is to go into the next election on an openly anti-euro platform. People are being very complacent about the political risks,” said Mr Tilford. Indeed. The latest Ipsos MORI survey shows that 48pc of Italians would vote to leave the EU as well as the euro if given a chance.

The rebel Five Star movement of comedian Beppe Grillo has not faded away, and Mr Grillo is still calling for debt default and a restoration of the Italian lira to break out of the German mercantilist grip (as he sees it). His party leads the national polls at 28pc, and looks poised to take Rome in municipal elections next month. The rising star on the Italian Right, the Northern League’s Matteo Salvini, told me at a forum in Pescara that the euro was “a crime against humanity” – no less – which gives you some idea of where this political debate is going. The official unemployment rate is 11.4pc. That is deceptively low. The European Commission says a further 12pc have dropped out of the data, three times the average EU for discouraged workers.

Italy’s industrial output has fallen back to the levels of the 1980s. It has been catastrophic Credit: St Louis Fed

The youth jobless rate is 65pc in Calabria, 56pc in Sicily, and 53pc in Campania, despite an exodus of 100,000 a year from the Mezzogiorno – often in the direction of London. The research institute SVIMEZ says the birth rate in these former Bourbon territories is the lowest since 1862, when the Kingdom of the Two Sicilies in Naples began collecting data. Pauperisation is roughly comparable to that in Greece. Industrial output has dropped by 35pc since 2008, and investment by 59pc. SVIMEZ warns that the downward spiral is turning a cyclical crisis into a “permanent state of underdevelopment”. In short, southern Italy is close to social collapse, and there is precious little that premier Renzi can do about it without reclaiming Italian economic sovereignty.

“The Chinese credit system, according to Bass, is “one of the biggest macro imbalances the world has ever seen”..”

• Hong Kong Property Market in Free Fall: Kyle Bass (BBG)

Kyle Bass, the hedge-fund manager who’s wagering on a slowdown in China’s economy, said Hong Kong’s property market is in “free fall” and the credit expansion in Southeast Asian emerging markets will unravel. “Hong Kong’s in a worse position than it was in prior to the ’97 crisis today,” Bass said at the SkyBridge Alternatives Conference in Las Vegas on Wednesday. He said credit in Asian emerging markets has grown “recklessly,” citing Malaysia and Thailand. Hong Kong property prices have declined and sales are hovering near a 25-year low as the city grapples with the repercussions of a slowing Chinese economy. Home prices have dropped about 13% from a peak in September, according to data compiled by Centaline Property Agency.

The last major housing crash in the former British colony saw prices tumble almost 50% in the 12 months from October 1997. They eventually bottomed in mid-2003 when the city was swept up by the severe acute respiratory syndrome epidemic and have almost quadrupled since then. Bass, famed for betting against U.S. subprime mortgages prior to the housing crash, is predicting losses for China’s banks and raising money to start a dedicated fund for bets in the nation. He said last week at a conference that investors putting money in Asia should ask themselves if they can handle 30% to 40% writedowns in Chinese investments.

“China may be able to not tell the truth about specific output levels, or GDP figures – they might be able to fudge those numbers for a while,” Bass said at a panel discussion, moderated by Bloomberg TV’s Erik Schatzker. “But their trading partners kind of tell the truth, and you’re already seeing what’s happening in their primary trading partners.” The Chinese credit system, according to Bass, is “one of the biggest macro imbalances the world has ever seen.” The fund manager said China is already experiencing a “hard landing as we speak.” He said he isn’t a “permanent bear” on China, instead describing himself as a pragmatist.

In lieu of welfare?! BTW, where will they borrow the money?

• China Eyes $724 Billion Of Transport Investment Over Next Three Years (R.)

China will invest around 4.7 trillion yuan ($724 billion) in transport infrastructure projects over the next three years, the country’s transport ministry said in an article posted on its website late on Wednesday. The 2016-2018 plan from China’s Ministry of Transport and National Development and Reform Commission (NDRC) will see the country push forward 303 key transportation projects including railways, highways, waterways, airports and urban rail, it said. The investment splurge underlines China’s reliance on high-levels of public sector spending, credited by economists as being behind recent signs of improvement in the country’s economy, but also as creating a risk as debt levels rise.

The article, posted on the Ministry of Transport’s website, said the investment plan would improve the country’s high-speed transport networks and inter-city links to meet the demands of China’s wider economic and social development. China’s first quarter investment in infrastructure surged almost 20%, as the government looks to transport-related sectors to help support wider economic growth. The official Xinhua news agency reported earlier this month that China will invest around $12 billion this year in building aviation infrastructure.

And yes, this is where they’ll borrow, and that means shadow banks: “..Beijing has given local governments its blessings to raise funds in the bond market, much of it through local government financing vehicles (LGFVs) that skirt official spending limits..”

• Defying Debt Fears, China Bets On Infrastructure, Property (R.)

Local governments across China are binging on debt again to pump-prime their slack economies. But this time round, they are not wasting money propping up zombie factories or loss-making steel plants. Investment in industries hit by chronic overcapacity is drying up quickly. Investment in mining tumbled 18% in the first quarter from a year earlier, the most since at least the second quarter of 2004, while investment in manufacturing grew just 6%, the slowest in the same period, according to the latest data from the National Bureau of Statistics. In recent years, miners and manufacturers had tapped easy-to-access bank credit and government subsidies to fire up production even as demand began to wilt.

In a landmark move, Beijing has ordered the closure of debt-ridden zombie firms as its policy priority for 2016. In contrast, first-quarter investment in infrastructure and real estate surged 19.6% and 6.2%, respectively. The numbers reflect the government’s strategy of re-allocating capital to other engines of the economy, and in turn, providing a little respite to the steel, cement, energy and related services sectors. China will invest $11.9 billion in aviation infrastructure this year alone. It has also approved a 27.4 billion yuan high-speed rail project linking Beijing’s new airport with neighboring Hebei province. In real estate, China’s March home prices rose at the fastest clip in almost two years on the back of a boom in top-tier cities amid easy bank credit.

To boost infrastructure investment, Beijing has given local governments its blessings to raise funds in the bond market, much of it through local government financing vehicles (LGFVs) that skirt official spending limits. LGFVs have raised tens of billions of dollars through bonds in the first quarter, according to brokerage estimates, even as China skeptics warn of another debt bust. The AA-rated LGFV issuances have appealed to investors increasingly unsure of the quality of corporate paper. Overall local government bond issuances in the quarter totaled 955.4 billion yuan, according to investment firm China International Capital. Investment in infrastructure and real estate is more organized and demand-based this time, and will have a better chance of success than more speculative developments in the past, some economists say. But that’s a subject for debate.

Fun with beer. The kind of stuff to bore your guests with while serving them ‘America’.

• Budweiser’s ‘America’ No Longer Exists (MW)

Oh, Budweiser is American all right — just not in the way its cans want you to think it is. Earlier this week, the folks behind Anheuser-Busch InBev’s Budweiser brand announced their intention to relabel Budweiser as “America” from late May through the November presidential election. They’re going to sub in “US” for “AB” in the logo, switch out “King of Beers” for “E Pluribus Unum” and include the entire first stanza of “The Star-Spangled Banner” on the head of the label. Now, you could write this off by saying that A-B takes some sort of patriotic measure with Budweiser cans every year, and you’d be right, but this particular rebrand says more about Budweiser’s American tale than it likely wants to admit. For starters, “Budweiser” traces its origins back to the South Bohemia region of what is now the Czech Republic.

The city of Ceske Budejovice has been brewing beer since the 1400s, and its German-speaking residents — who called it “Budweis” — began brewing Budweiser Bürgerbräu in 1795. They began shipping that beer to the U.S. in 1875, or about a year before a German immigrant named Adolphus Busch made a trip to Bohemia and decided to name his own U.S. beer Budweiser in tribute to the Bohemian brand. Though Anheuser-Busch InBev now owns that brand, another Czech brewery — state-owned Budejovicky Budvar , founded in 1895 — has laid claim to the Budweiser name, saying it is indicative of the city where it was first made. While A-B InBev can call its beer Budweiser in North America, the United Kingdom and much of the rest of the world, Budvar has the rights to the Budweiser name in much of Europe and forces Anheuser-Busch InBev to name its version “Bud.”

When challenged in court, Budvar simply reminds folks of what Adolphus Busch himself testified in a New York courthouse in 1896: “The Budweiser beer is brewed according to the Budweiser Bohemian process. The idea was simply to brew a beer similar in quality, color, flavor and taste to the beer then made at Budweis, or in Bohemia.” If the loss of its identity in Europe didn’t sever Budweiser’s ties to the Old World, the sale of Anheuser-Busch to InBev for $52 billion back in 2008 certainly did. Not only had A-B been taken over by a company with headquarters in Belgium and Brazil — enabling it to engage in the grand American tradition of tax inversion — but cost-cutting measures reduced U.S. jobs, removed German Hallertauer Mittelfrüh hops from the equation and put pressure on suppliers of everything from rice grains to the beechwood used in “beechwood-aged” Budweiser’s touted brewing process.

“You’re gonna lift the tax-free threshold for rich people. If you lift my tax-free threshold, that changes my life. That means that I get to say to my little girls, ‘Daddy’s not broke this weekend, we can go to the pictures.’ Rich people don’t even notice their tax-free threshold lift.”

• US Anti-Poverty Campaigner Is Worried About Australia (DL)

Linda Tirado is in the green room of the ABC on Monday night during the broadcast of Q&A and she is getting madder and madder; and it’s not just from hearing #IStandWithDuncan Duncan Storrar be real in the audience that evening. Tirado, a US anti-poverty campaigner (a job we should all do), is overwhelmed by what Storrar, the 45 year-old Geelong father of two and part-time truck driver had to say about the federal government’s planned tax cuts. “You’re gonna lift the tax-free threshold for rich people. Why don’t I get it? Why do they get it?” he asked assistant treasurer Kelly O’Dwyer.

“I’ve got a disability and a low education – that means I’ve spent my whole life working off a minimum wage. You’re gonna lift the tax-free threshold for rich people. If you lift my tax-free threshold, that changes my life. That means that I get to say to my little girls, ‘Daddy’s not broke this weekend, we can go to the pictures.’ Rich people don’t even notice their tax-free threshold lift.” So, Duncan Storrar is talking, Kelly O’Dwyer is responding and Tirado is sitting in the green room, furious. She’s wondering exactly what’s been happening to Australia over the last 12 months. “Obviously I cannot tell you what a hero he is and what a sacrifice he made. To say something like that in public, to say you don’t make enough to make ends meet, that is incredibly brave.”

But she fears the change she has seen in the Australian political landscape since she was last here. She’s here as part of the Anti-Poverty Network’s conference but is keen to stay a little longer and cover the Australian election from the eyes of a survivor of the US class war. [..] “In America, we have this idea of meritocracy. If you deserve it, you will have it. If you don’t have it, it is because you don’t deserve it and the fact remains 45 million Americans are living in poverty, most of those people are in work. They’re holding down multiple jobs and we call them lazy. By definition anybody who works three jobs is not lazy and if you think so I dare you to get out of your air conditioned office and try it for yourself.”

“..a disease whose main cause is now Germany’s own current account surplus.”

• Berlin Should Be Careful What It Wishes For (FT)

Greece’s parliament this week approved reforms to the country’s creaking pensions and tax system by a larger margin than had been anticipated. But significant differences remain, notably on how large a primary budget surplus should be targeted over the next few years, and above all on the question of debt relief. The disagreement between the IMF and European governments on the latter point has come into the open. On this, the IMF is right and those Europeans who oppose relief are wrong: there can be no solution to the Greek crisis without it. Germany, driven by Wolfgang Schäuble, its finance minister, remains doggedly opposed, but even within the German government, open opposition to Mr Schäuble’s hard line has come recently from Sigmar Gabriel, economics minister.

Chancellor Angela Merkel may be tempted to ignore Mr Gabriel, whose Social Democratic party is polling poorly and whose own future as its leader is in question. German public opinion sees relief as a favour the Greeks have done little or nothing to deserve, and asks whether it will stop with Greece. The issue is not a winning one for a chancellor already under siege. Nevertheless, she would be wise to recognise the stakes for Europe as a whole. Berlin’s tenacious enforcement of austerity across the eurozone mistakes a symptom — the continued difficulties of countries like Greece — for a disease whose main cause is now Germany’s own current account surplus. The Germans have been able to persist in this illusion because without the low interest rates that Germany’s affluent voters now complain about it is doubtful whether the eurozone would have weathered the last six years at all.

Mr Schäuble might believe that the eurozone is safe come what may, even if his hard line leads to Grexit, but saving the euro will count for little if the cost is massive damage to the EU itself. Is this putting it too strongly? Perhaps it was two or three years ago but things have moved on since then. The refugee crisis has mushroomed and openly authoritarian Eurosceptic parties have profited and threaten some of the EU’s core values and principles. Euclid Tsakalotos, the Greek finance minister, warned his European counterparts recently of turning the country into a “failed state”. Even though some of his frustrated partners might think it already is, he is right: things could get much worse. It is not just about the refugee crisis although that is one factor.

There is a good deal of wishful thinking right now on this in much of central and eastern Europe. The Greeks, who despite their own deep difficulties are actually doing a great deal to help the refugees, know better: the neo-Habsburg military frontier going up across south-eastern Europe to keep out refugees will not work. There is no good alternative to helping the Greeks in the massive task that confronts them. Then there is the question of the Balkans as a whole. In Bosnia the Dayton peace settlement did one thing: it stopped the fighting. But two decades on, Bosnia remains a genuinely failed state, and Kosovo and Macedonia, too, are deeply fragile polities. The EU needs Greece to serve as a force for growth right across the Balkans and not as some kind of confirmation that the EU has decided to abandon the entire region.

Does the parliament have the guts to say no? It’s starting to look that way. EP president Schulz has refused to send the necessary documents to be appraised.

• EU Parliament Raises the Rhetoric Over Turkey’s Visa-Waiver Bid (BBG)

The European Parliament added to the war of words with Turkey over its bid for visa-free travel to Europe, highlighting the risk that a hard-fought agreement with Ankara to curb the influx of Mideast refugees will collapse. Members of the European Union assembly said Turkey must narrow the scope of its terrorism legislation to qualify for EU visa-free status. That is a prize the Turkish government sought in return for signing up to the mid-March migrant accord, which has stemmed Europe’s biggest refugee wave since World War II and eased domestic political pressure on leaders including Angela Merkel. Turkish President Recep Tayyip Erdogan has signaled he won’t bow to the European demand over terrorism legislation, citing terror threats in Turkey that his critics say are being used as cover to jail political opponents.

Adding Turkey to a list of around 60 countries whose citizens benefit from hassle-free travel to Europe requires approval by EU governments and the 28-nation Parliament. “The liberalization can only be granted if all of the criteria are fulfilled,” Mariya Gabriel, a Bulgarian member of the Christian Democrats, the EU Parliament’s biggest faction, said during a debate on Wednesday in Strasbourg, France. Tanja Fajon, a Slovenian member of the No. 2 Socialists, said: “Turkey is very important to the solution to the migration crisis, but this does not mean that we should be making promises to Turkey without ensuring that all the conditions are fulfilled.” The EU-Turkey sparring is a test of geopolitical power that combines high politics, principles and pride.

The migrant flows into Europe via Turkey over the past year have handed Erdogan leverage over the EU, which has lambasted him for cracking down on domestic dissenters and kept Turkey’s longstanding bid for membership of the bloc largely on hold. Last Friday, when commenting on the EU call for Turkish terrorism-rule changes, Erdogan said “we are going our way and you go yours.” He also dared the bloc to “go make a deal with whoever you can.” In a further sign of Ankara’s renewed confidence in dealing with the EU, Burhan Kuzu, a former adviser to Erdogan, said earlier on Wednesday that Turkey would send refugees to Europe should the EU Parliament make a “wrong decision” in the deliberations over visa-free status for Turkey. “That is blackmail,” said Sophie in ’t Veld, a Dutch member of the EU Parliament’s Liberal group. She called Erdogan a “dictator.” Cecilia Wikstroem, a Swedish Liberal, said “something is rotten in this.”

This is Europe’s epic failure. And that is what the UK Brexit vote next month is really about: do you want to be part of this?

• European Rights Watchdog Complains About Greek Refugee Camps Conditions (R.)

Urgent measures are need to address overcrowding and poor living conditions in refugee and migrant camps in Greece, Europe’s top rights watchdog warned on Wednesday. The Council of Europe, which brings together 47 countries, said some facilities were “sub-standard” and able to provide no more than the most basic needs such as food, hygiene products and blankets. The report echoes warnings by other rights groups and aid agencies who say Greece has been unable to care properly for the more than 800,000 people reaching its shores in the last year, fleeing wars or poverty in the Middle East and Africa. The Council described dire living conditions in several sites visited on a March 7-11 trip, just before the EU and Turkey reached a deal that reduced arrivals but increased the number of people held in detention awaiting asylum decisions or deportation.

It said in its report that people who reached Greece were locked away in violation of international human rights standards and lacked legal access. At Greece’s Nea Kavala temporary transit camp, people were left burning trash to keep warm and sleeping in mud-soaked tents, according to the report. The Council called for the closure of a makeshift camp in Idomeni, where some 10,000 people have been stranded en route to northern Europe due to the closure of Macedonia’s border. Germany has taken in most of the 1.3 million refugees and migrants who reached Europe across the Mediterranean in the past year, triggering bitter disputes among the 28 EU member states on how to handle the influx. Europe’s deal with Turkey last month gave its leaders some breathing space but has come under pressure since Prime Minister Ahmet Davutoglu, one of the sponsors of the accord, stepped down.

The morality and legality of the deal has been challenged by human rights groups, however, and a provision to grant Turkish citizens visa-free travel to Europe in exchange for Ankara’s help remains politically contentious. In a separate report, a trio of European Parliamentarians on Tuesday described the poor conditions faced by people who have been returned to Turkey under the deal. “We have seen how the migration policies imposed by the European Union have terrible consequences on the lives of thousands of people,” said Cornelia Ernst, a German member of the European Parliament and a co-author of that report. “Turkey has been hired as a deportation agency, putting into practice the migration policies designed in Brussels.”

Debt Rattle April 10 2016

Apr 102016

April 10, 2016 Posted by Raúl Ilargi Meijer at 9:43 am Finance Tagged with: Cameron, EU, Greece, infrastructure, Panama Papers, pope, recession, refugees, tax evasion 3 Responses »

Jack Delano Bridge with 5-ton coal bucket, Milwaukee Western Fuel Co 1942

• Britain Is The Heart And Soul Of Tax Evasion (RT)

• How a US president and JP Morgan Made Panama and Turned It Into A Tax Haven (G.)

• Cameron Faces Questions Over £200,000 Gift From Mother (Observer)

• Panama Papers: Act Now. Don’t Wait For Another Crisis (Piketty)

• The Next Recession Will Blow Out the US Budget (Mauldin)

• Schäuble: Time is Near to End Central Banks’ Easy-Money Policies (WSJ)

• Why US Infrastructure Costs So Much (BBG)

• SYRIZA, IMF and EU: Gambling With The Future Of Greece (SE)

• Lesbos Hopes Pope’s Visit Will Shine Light On Island’s Refugee Role (Observer)

• Greece Says It Will Take At Least Two Weeks To Fix Deporation System (Kath.)

Why the City of London got so big.

• Britain Is The Heart And Soul Of Tax Evasion (RT)

The British government’s claim to be tackling tax evasion is about as credible as Al Capone claiming to be leading the fight against organized crime. In fact, Britain is at the heart of the global tax haven network, and continues to lead the fight against its regulation. The 11 and a half million leaked documents from Panamanian law firm Mossack Fonseca have proven, once again, what we have already known for some time – that the ‘offshore world’ of tax havens is a den of money laundering and tax evasion right at the heart of the global financial system. Despite attempts by Western media to twist the revelations into a story about the ‘corruption’ of official enemies – North Korea, Syria, China and, of course, Putin, who is not even mentioned in the documents – the real story is the British government’s assiduous cultivation of the offshore world.

For whilst corruption exists in every country, what enables that corruption to flourish and become institutionalized is the network of secretive financial regimes that allow the world’s biggest criminals and fraudsters to escape taxation, regulation and oversight of their activities. And this network is a conscious creation of the British state. Of the 215,000 companies identified in the Mossack Fonseca documents, over half were incorporated in the British Virgin Islands, one single territory in what tax haven expert Nicholas Shaxson calls a “spider’s web” of well over a dozen separate UK-controlled dens of financial chicanery. In addition, the UK was ranked number two of those jurisdictions where the banks, law firms and other middlemen associated with the Panama Papers operate, only topped by Hong Kong, whose institutional environment is itself a creation of the UK.

And of the ten banks who most frequently asked Mossack Fonseca to set up paper companies to hide their client’s finances, four were British: HSBC, Coutts, Rothschild and UBS. HSBC, recently fined $1.9bn for laundering the money of Mexico’s most violent drug cartels, used the Panamanian firm to create 2,300 offshore companies, whilst Coutts – the family bank of the Windsors – set up just under 500. And, of course, David Cameron’s own father was named in the papers, having “helped create and develop” Blairmore Holdings, worth $20million, from its inception in 1982 till his death in 2010.

Blairmore, in which Cameron junior was also a shareholder, was registered in the Bahamas, and was specifically advertised to investors as a means of avoiding UK tax. The Daily Mail noted that: “Even though he lived in London, the Prime Minister’s father would leave the country and fly to Switzerland or the Bahamas for board meetings of Blairmore Holdings – to ensure it would not have to pay UK income tax or corporation tax. He hired a small army of Bahamas residents, including a part-time bishop, to sign its paperwork – as part of another bid to show his firm was not British-based.”

That Britain should emerge as central to this scandal is no surprise. For as Nicholas Shaxson, a leading authority on tax havens put it when I interviewed him in 2011, “The City of London is effectively the grand-daddy of the global offshore system.” Whilst there are various different lists of tax havens in existence, depending on how exactly they are defined, on any one of them explains Shaxson, “you will see that about half of the tax havens on there, of the ones that matter, are in some way British or partly British.” Firstly, are “Jersey, Guernsey and the Isle of Man: the crown dependencies. They’re very fundamentally controlled by Britain.” Then there are the Overseas Territories, such as the Caymans, Bermuda, and the Virgin Islands, in which “all the things that matter are effectively controlled by Great Britain.”

History counts too.

• How a US president and JP Morgan Made Panama and Turned It Into A Tax Haven (G.)

This goes back a long way. The Panamanian state was originally created to function on behalf of the rich and self-seeking of this world – or rather their antecedents in America – when the 20th century was barely born. Panama was created by the United States for purely selfish commercial reasons, right on that historical hinge between the imminent demise of Britain as the great global empire, and the rise of the new American imperium. The writer Ken Silverstein put it with estimable simplicity in an article for Vice magazine two years ago: “In 1903, the administration of Theodore Roosevelt created the country after bullying Colombia into handing over what was then the province of Panama. Roosevelt acted at the behest of various banking groups, among them JP Morgan, which was appointed as the country’s ‘fiscal agent’ in charge of managing $10m in aid that the US had rushed down to the new nation.”

The reason, of course, was to gain access to, and control of, the canal across the Panamanian isthmus that would open in 1914 to connect the world’s two great oceans, and the commerce that sailed them. The Panamanian elite had learned early that their future lay more lucratively in accommodating the far-off rich than in being part of South America. Annuities paid by the Panama Railroad Company sent more into the Colombian exchequer than Panama ever got back from Bogotá, and it is likely that the province would have seceded anyway – had not a treaty been signed in September 1902 for the Americans to construct a canal under terms that, as the country’s leading historian in English, David Bushnell, writes, “accurately reflected the weak bargaining position of the Colombian negotiator”.

Colombia was, at the time, riven by what it calls the “thousand-day war” between its Liberal and Historical Conservative parties. Panama was one of the battlefields for the war’s later stages. The canal treaty was closely followed by the “Panamanian revolution”, which was led by a French promoter of the canal and backed by what Bushnell calls “the evident complicity of the United States” – and was aided by the fact that the terms of the canal treaty forbade Colombian troops from landing to suppress it, lest they disturb the free transit of goods. The Roosevelt/JP Morgan connection in the setting-up of the new state was a direct one. The Americans’ paperwork was done by a Republican party lawyer close to the administration, William Cromwell, who acted as legal counsel for JP Morgan.

JP Morgan led the American banks in gradually turning Panama into a financial centre – and a haven for tax evasion and money laundering – as well as a passage for shipping, with which these practices were at first entwined when Panama began to register foreign ships to carry fuel for the Standard Oil company in order for the corporation to avoid US tax liabilities.

He’s not done answering. In his circles, everyone has offshore accounts. That being PM means holding a higher standard is a mere nuisance to him.

• Cameron Faces Questions Over £200,000 Gift From Mother (Observer)

The prime minister took the unprecedented decision to release his personal tax records on Saturday, as growing anger over revelations in the Panama Papers threatened to derail his premiership. But the extraordinary move seems set to plunge David Cameron into further controversy, as it emerged that his mother transferred two separate payments of £100,000 to his accounts in 2011, allowing the family estate to avoid a potential £80,000 worth of inheritance tax. Four years after first promising to open his financial affairs to public view, Downing Street published a document detailing Cameron’s income and tax payments from 2009-10 to 2014-15. The move came after an emotional Cameron admitted to the Conservative party’s spring forum that he alone was to blame for the furore caused by his failure to be frank about his profits from an offshore investment fund.

On Monday, Cameron will announce the establishment of a taskforce, led by HM Revenue & Customs and the National Crime Agency, to examine the legality of the financial affairs of companies mentioned in the Panama Papers, where documents relating to his father’s offshore fund were discovered by the Guardian and the International Consortium of Investigative Journalists. The taskforce will draw on investigators, compliance specialists and analysts from HMRC, the National Crime Agency, the Serious Fraud Office and the Financial Conduct Authority. There will be new money provided of up to £10m. But following the release of the prime minister’s tax records, Cameron now faces questions over whether his family took elaborate steps to minimise the amount of inheritance tax that would eventually be due on their estate.

The records show that the prime minister received a considerable boost to his savings in 2011. Following the death of his father in 2010, Cameron was left £300,000 tax free as an inheritance. However, his mother also transferred two payments of £100,000 to him in May and July 2011. Inheritance tax is not payable on gifts up to £325,000 that are paid at least seven years before the source of the possession dies, be it property or money. A spokesman for the prime minister said that Cameron’s mother and father had “some years earlier” transferred the family home to their eldest son, Alexander Cameron, and the sums paid in 2011 were considered to be Cameron’s share.

Not going to happen. Too much money means too much power.

• Panama Papers: Act Now. Don’t Wait For Another Crisis (Piketty)

The question of tax havens and financial opacity has been headline news for years now. Unfortunately, in this area there is a huge gap between the triumphant declarations of governments and the reality of what they actually do. In 2014, the LuxLeaks investigation revealed that multinationals paid almost no tax in Europe, thanks to their subsidiaries in Luxembourg. In 2016, the Panama Papers have shown the extent to which financial and political elites in the north and the south conceal their assets. We can be glad to see that the journalists are doing their job. The problem is that the governments are not doing theirs. The truth is that almost nothing has been done since the crisis in 2008. In some ways, things have even got worse.

Let’s take each topic in turn. Exacerbated fiscal competition on the taxing of profits of big companies has reached new heights in Europe. The United Kingdom is going to reduce its rate to 17%, something unheard of for a major country, while continuing to protect the predatory practices of the Virgin Islands and other offshore centres under the British Crown. If nothing is done, we will all ultimately align ourselves on the 12% of Ireland, or possibly on 0%, or even on grants to investments, as is already sometimes the case. In the meantime, in the United States where there is a federal tax on profits, that rate is 35% (not including the taxes levelled by states, ranging between 5% and 10%). It is the political fragmentation of Europe and the lack of a strong public authority which puts us at the mercy of private interests.

The good news is that there is a way out of the current political impasse. If four countries, France, Germany, Italy and Spain, who together account for over 75% of the GDP and the population in the eurozone put forward a new treaty based on democracy and fiscal justice, with as a strong measure the adoption of a common tax system for large corporations, then the other countries would be forced to follow them. If they did not do so they would not be in compliance with the improvement in transparency which public opinions have been demanding for years and would be open to sanctions.

There is still a complete lack of transparency as far as private assets held in tax havens are concerned. In many areas of the world, the biggest fortunes have continued to grow since 2008 much more quickly than the size of the economy, partly because they pay less tax than the others. In France in 2013 a junior minister for the budget calmly explained that he did not have an account in Switzerland, with no fear that his ministry might find out about it. Once again, it took journalists to reveal the truth.

“Next year, the US national debt will top $20 trillion. The deficit is running close to $500 billion, and the Congressional Budget Office projects that figure to rise. Add another $3 trillion or so in state and local debt.”

• The Next Recession Will Blow Out the US Budget (Mauldin)

The weakest recovery in modern history has stretched on for 69 months. By 2017, it will be the third-longest recovery without a recession since the Great Depression. By 2018, it will be the second longest. Only during the halcyon economic days of the 1960s have we seen a longer recovery; but that record, too, will be eclipsed sometime in 2019—if we don’t see a recession first. And note that we were growing at well over 3% in the 1960s, not the anemic 2% we have averaged during this recovery and certainly not the positively puny 1.5% we have endured lately. Global growth is slowing down. Given the limited number of arrows left in the Federal Reserve’s monetary policy quiver, the US is going to have a difficult time dealing with the fallout from a recession. Even worse, a number of factors are coming together that will require serious crisis management.

Next year, the US national debt will top $20 trillion. The deficit is running close to $500 billion, and the Congressional Budget Office projects that figure to rise. Add another $3 trillion or so in state and local debt. As you may imagine, the interest on that debt is beginning to add up, even at the extraordinarily low rates we have today. Sometime in 2019, entitlement spending, defense, and interest will consume all the tax revenues collected by the US government. That means all spending for everything else will have to be borrowed. The CBO projects the deficit will rise to over $1 trillion by 2023. By that point, entitlement spending and net interest will be consuming almost all tax revenues, and we will be borrowing to pay for our defense. Let’s look at the following chart, which comes from CBO data:

By 2019, the deficit is projected to be $738 billion. There are only three ways to reduce that deficit: cut spending, raise taxes, or authorize the Federal Reserve to monetize the debt. At the numbers we are now talking about, getting rid of fraud and wasted government expenditures is a rounding error. Let’s say you could find $100 billion here or there. You are still a long, long way from a balanced budget. But implicit in the CBO projections is the assumption that we will not have a recession in the next 10 years. Plus, the CBO assumes growth above what we’ve seen in the last year or so.

Trouble with Berlin is brewing.

• Schäuble: Time is Near to End Central Banks’ Easy-Money Policies (WSJ)

German Finance Minister Wolfgang Schäuble called on governments in Europe and the U.S. to encourage their central banks to gradually exit easy-money policies, in the strongest sign yet of Berlin’s growing impatience with the ultralow interest rates of the ECB. “There is a growing understanding that excessive liquidity has become more a cause than a solution to the problem,” Mr. Schäuble said, comparing the move away from easy-money policies to ending a drug addiction. The unusually blunt comments from Chancellor Angela Merkel’s closest political ally come as the ECB has repeatedly ramped up its stimulus in recent months, seeking to support economic growth in the face of rising global headwinds and financial-market volatility.

While Mr. Schäuble’s opposition to the ECB’s monetary policy is well known, the veteran politician has voiced his criticism more openly lately, suggesting Berlin is growing impatient amid a mounting popular backlash against a policy that has depleted the returns on the savings of millions of Germans. Government officials and central bankers are preparing to converge on Washington, D.C., next week for the Spring meetings of the IMF, where they are expected to discuss policies to revive global growth. Speaking in Kronberg near Frankfurt late Friday at a prize ceremony organized by a German economic think tank, Mr. Schäuble said he had just discussed central-bank policies with his U.S. counterpart, Treasury Secretary Jacob Lew. “I just said to Jack Lew that you should encourage the Federal Reserve and we should encourage the ECB and the Bank of England in a concerted action, to carefully but slowly exit,” Mr. Schäuble said.

In the U.S., the Treasury secretary doesn’t have authority over the Federal Reserve, which is tasked with setting monetary policy. The ECB has twice ramped up its €1.5 trillion stimulus since December, most recently in March, when it rolled out a series of rate cuts, cheap loans for banks and an acceleration of bond purchases. Top ECB officials have stressed in recent days that they are ready to do even more to support the bloc’s economy. Meanwhile Federal Reserve officials have signaled that the U.S. central bank will raise rates only gradually until the global economy picks up steam, according to the minutes of their March policy meeting. Japan’s central bank stunned the markets in January by setting the country’s first negative interest rates.

Not sure this explains the entire issue.

• Why US Infrastructure Costs So Much (BBG)

The U.S. ought to be spending more on infrastructure. This is the view of all right-thinking people, and as a right-thinking person I of course endorse it. With interest rates near record lows and the working-age population still, by historical and international standards, underemployed, governments (or in some cases entrepreneurs) should be borrowing much more to repave roads, shore up bridges, expand mass-transit systems, build new sewage-treatment plants, replace water mains, you name it. Such borrowing and spending would make the nation richer by stimulating economic activity now and paving the way for stronger economic growth in the future.

That said, the U.S. probably also ought to be spending less on infrastructure. Not overall, but on something like a per-mile basis. Broad international cost comparisons across all kinds of infrastructure don’t seem to be available, but there is a growing body of evidence on one particular infrastructure area that matters a lot to me as a New York City commuter: subways and other rail systems. And it shows that U.S. construction costs are among the world’s highest.

Transportation blogger Alon Levy has probably done the most to raise awareness of this, with five years of posts documenting the cost differences. And last year, Tracy Gordon of the Urban-Brookings Tax Policy Center and David Schleicher of Yale Law School examined 144 planned and finished rail projects in 44 countries and found that the four most expensive on a per-kilometer basis (and six of the top 12) were in the U.S. To put these numbers in global perspective, New York’s Second Avenue Subway will cost roughly eight times more than Tokyo’s Koto Waterfront line and 36 times more than Madrid’s Metrosur tunnels on a per-kilometer, purchasing power parity (PPP) basis.

Why is this? It’s actually pretty hard to answer. Here’s Levy, writing in November 2014: “I try to avoid giving explanations for these patterns of construction costs. If I knew for certain what caused them, I would not be blogging; I would be forming a consultancy and teaching New York and other high-cost cities how to build subways for less than $100 million per kilometer.” Still, others have been willing to offer explanations. In a 2012 Bloomberg View piece, New York land-use and transit writer Stephen Smith blamed over-reliance on outside consultants, overly ambitious station architecture and a legal system that favors contractors over the agencies paying them to build things.

Gordon and Schleicher agreed that the legal system may be an issue, but for other reasons: “Many of the world’s most expensive projects are in the United Kingdom, Australia, and New Zealand, which, like the United States, have common-law systems. So it might be that common-law systems provide legal protections for property owners – allowing more lawsuits over noise, smoke, and other nuisances, as well as limits on eminent domain – that increase costs by forcing the government to pay off opponents or to locate projects inefficiently to avoid angering property owners.” They also cite political fragmentation as a factor that drives up costs – U.S. commuter rail systems often cross city and state lines, which brings coordination challenges – and note that when regional authorities are created to manage these challenges, they can bring a whole new set of problems.

“The agreement is effectively dead and all parties involved are aware of that, even if they are not openly admitting it.”

• SYRIZA, IMF and EU: Gambling With The Future Of Greece (SE)

The latest flare up regarding Greece has followed publication by Wikileaks of illegally taped discussions among IMF officials. To analyse the significance of this event it is vital to bear one point in mind: Greece cannot meet the terms of the bailout agreement struck on July 2015 by Prime Minister, Alexis Tsipras. The agreement is effectively dead and all parties involved are aware of that, even if they are not openly admitting it. To establish this point there is no need to engage either in Debt Sustainability Analysis, or in macroeconomic projections of output. Suffice to mention that the agreement requires Greece to ensure a primary surplus of 3.5% of GDP in 2018.

The Greek economy actually returned to recession in the last quarter of 2015 and the available indicators since the end of 2015 have ranged from bad to appalling: industrial turnover in December was down 13.5%, retail turnover in January down 3.8%, unemployment in the last quarter of 2015 up to 24.4%, job vacancies for the whole of the economy in the last quarter of 2015 stood at a pitiful 3119, and the banking system currently has perhaps €115bn of non-performing exposure, roughly 50% of its loan book. Once the austerity measures of the bailout agreement kick in, substantially reducing aggregate demand for 2016-17 via tax increases and lower pensions, the recession will become deeper. There is no way that this ruined economy could generate a 3.5% primary surplus in 2018. The problems thereby created for all parties to this disastrous bailout are legion.

In the worst position is the Greek government, which signed up to the bailout in direct contravention of everything that it had promised to do in 2015. As the reality of its deception and the harshness of the squeeze have begun to sink in, electoral support for Tsipras has vanished. All competent polls show the opposition New Democracy – with a new leader – comfortably ahead. The outlook has become even worse for SYRIZA via the refugee wave, which has turned Greece into a kind of EU repository for refugees and migrants. For the time being the country has avoided a major crisis, but the situation remains extremely fraught as the deportation of migrants to Turkey has just started.

In this context, the last thing that the Tsipras government would like to do is to impose further pressure on wage earners, or tax payers in an attempt to meet the impossible target of 3.5%. On the contrary, it is extremely keen to complete the first review of the bailout programme on a nod and a wink, pretending that current measures are sufficient to hit the bailout targets. It then hopes to receive a tranche of bailout money that will give it breathing space for a few months. The government’s further hope is that investment will pick up by the end of 2016, possibly through foreign capital inflows, thus allowing the economy to recover somewhat.

He should put his money where his mouth is.

• Lesbos Hopes Pope’s Visit Will Shine Light On Island’s Refugee Role (Observer)

The island of Lesbos tends to go to town when celebrities descend. The last time it welcomed a VIP, the razorwire running along large parts of its infamous detention centre was hastily removed. Angelina Jolie got a brief glimpse of it as she walked in, but reportedly not as she later walked around the camp greeting migrants and refugees. The superstar special envoy of the UN high commissioner for refugees (UNHCR) was instead given an edited view of the camp, volunteers say. It will be different when Pope Francis flies in on Saturday. The purpose of the pontiff’s visit to the Aegean is to see the migrant emergency up close, and the authorities are keen that no blinkers are involved. This time, the island on the frontline of the biggest movement of people in modern times intends to show it as it is.

“We won’t be changing anything,” says mayor Spyros Galinos when asked if municipal workers will at least be cleaning up the graffiti on the camp’s walls. “His visit has huge symbolism. It is what we have wanted, what we have seen in our sleep, what we have dreamed of for years.” For four hours, Francis will grant that wish when he arrives in Greece for what will be a rare papal visit. The leader of the worldwide Catholic church will be accompanied by the Istanbul-based spiritual leader of the world’s 300 million Orthodox Christians, Bartholomew I, and Ieronymos II of Athens, head of the Greek Orthodox church. It will be a whirlwind tour of the island traversed by many of the 1.1 million men, women and children who have streamed into Europe, mostly from Syria but also from other parts of the Middle East, Africa and Asia last year.

The pope has long had refugees in his sights – and encyclicals. The trip, say Vatican officials, is aimed squarely at drawing attention to the centre of Europe’s migration crisis. By highlighting the “increasingly precarious living conditions for thousands of refugees and migrants” who have reached Lesbos, the Holy See’s newspaper, L’Osservatore Romano, said Francis hoped to offer a “Christian response to the tragedy that is unfolding”. [..] “His visit is not going to do anything for one single refugee in this country,” laments Alison Terry-Evans, who runs Dirty Girls, an organisation in Lesbos that launders blankets distributed by the UNHCR and the wet clothes of arriving refugees. “It is so hypocritical that a man who heads a multibillion-dollar corporation like the Vatican is unlikely to take any action that will contribute financially. That is the pity of it. ”

It won’t be fixed. Wanna bet? Europe goes for chaos as a deterrent. The use of the term ‘deportation system’ says it all in all its ugliness.

Meanwhile, this morning FYROM started shooting dozens of tear gas cannisters across its border with Greece to disperse the refugees camped out there.

• Greece Says It Will Take At Least Two Weeks To Fix Deporation System (Kath.)

Greece says it will take at least two weeks to fix the process of deporting migrants from the eastern Aegean islands to Turkey. The country’s deputy foreign minister for European affairs, Nikos Xydakis, admitted as much at a press conference attended also by his colleagues from France, Italy, Malta and Portugal, as well as the foreign ministers of the Netherlands and Slovakia. Deportations from Greece to Turkey have been temporarily halted as most of the 6,750 migrants in the Greek islands are applying for asylum and there is a lack of qualified officials such as translators to process the applications.

Most of the experts promised by the EU have not yet arrived. French European affairs minister Harlem Desir is urging refugees from war-torn Syria and Iraq to follow legal procedures to seek asylum in Europe rather than risk their lives in the perilous sea crossing into Greece, which now leads only back to Turkey, since Balkan countries north of Greece have shut their borders. Desir says France will welcome 200 refugees directly from Turkey “in the coming days and weeks.”

Debt Rattle April 6 2016

Apr 062016

April 6, 2016 Posted by Raúl Ilargi Meijer at 9:21 am Finance Tagged with: Bernie, default, deflation, derivatives, Greece, Liquidity Trap, Panama Papers, recession, refugees, yield 4 Responses »

Jack Delano Residents of Miss Disher’s rooming house for rail workers, Clinton, Iowa 1943

• The Global Liquidity Trap Turns More Treacherous (Minerd)

• Global Profits Recession Leaves Investors With Nowhere to Hide (BBG)

• Global Bond Yield Plunge to Record 1.3% Is Flashing Warning Sign (BBG)

• Are We Facing A Global “Lost Decade”? (Steve Keen)

• Default Tsunami Brewing (BBG)

• China’s Global Investment Spree Is Fuelled By Debt (Economist)

• China Bulls Become an Extinct Species (WSJ)

• Bond Investors Looking to Get Ahead of ECB Turn to Derivatives (BBG)

• The Panama Papers Could Hand Bernie Sanders The Keys To The White House (Ind.)

• Bernie Sanders Predicted The Panama Papers In 2011 (AHT)

• How America Became A World Leader In Tax Avoidance (Salon)

• Panama Has Company as Bank-Secrecy Holdout: America (BBG)

• Panama Secrecy Leak Claims First Casualty as Iceland PM Quits (BBG)

• Mossack Fonseca Says Data Hack Was External, Files Complaint (Reuters)

• David Cameron Left Dangerously Exposed By Panama Papers Fallout (G.)

• The Enduring Certainty Of Radical Uncertainty (John Kay)

• EU Executive To Present Steps To Tighten External Border Controls (Reuters)

• With New Deal, A Refugee’s Rights Come Down To Luck (Reuters)

• Greece Pauses Deportations As Asylum Claims Mount (AP)

Whaddaya know.. Someone other than me gets the link between money velocity and deflation. And Guggenheim’s Scott Minerd adds negative rates for good measure.

• The Global Liquidity Trap Turns More Treacherous (Minerd)

For the first time since the Great Depression, the world is in a global liquidity trap. The unintended consequence of many central banks pushing negative interest rate policy is conjuring deflationary headwinds, stronger currencies, and slower growth — the exact opposite of what struggling economies need. But when monetary policy is the only game in town, negative rates are likely to beget even more negative rates, creating a perverse cycle with important implications for investors. When central banks reduce policy rates, their objective is to stimulate growth. Lower rates are designed to spur savers to spend, redirect capital into higher-return (ie riskier) investments, and drive down borrowing costs for businesses and consumers. Additionally, lower real interest rates are associated with a weaker currency, which stimulates growth by making exports more competitive.

In short, central banks reduce borrowing costs to kindle reflationary behaviour that helps growth. But does this work when monetary policy is driven through the proverbial looking glass of negative rates? There is a strong argument that when rates go negative it squeezes the speed at which money circulates through the economy, commonly referred to by economists as the velocity of money. We are already seeing this happen in Japan where citizens are clamouring for 10,000-yen bills (and home safes to store them in). People are taking their money out of the banking system to stuff it under their metaphorical mattresses. This may sound extreme, but whether paper money is stashed in home safes or moved into transaction substitutes or other stores of value like gold, the point is it’s not circulating in the economy.

The empirical data support this view — the velocity of money has declined precipitously as policymakers have moved aggressively to reduce rates. A decline in the velocity of money increases deflationary pressure. Each dollar (or yen or euro) generates less and less economic activity, so policymakers must pump more money into the system to generate growth. As consumers watch prices decline, they defer purchases, reducing consumption and slowing growth. Deflation also lifts real interest rates, which drives currency values higher. In today’s mercantilist, beggar-thy-neighbour world of global trade, a strong currency is a headwind to exports. Obviously, this is not the desired outcome of policymakers. But as central banks grasp for new, stimulative tools, they end up pushing on an ever-lengthening piece of string.

The BOJ and the ECB are already executing massive quantitative easing programmes, but as their balance sheets expand, assets available to purchase shrink. The BoJ now buys virtually all of the Japanese government bonds that are issued every year, and has resorted to buying exchange traded funds to expand its balance sheet. The ECB continues to grow the definition of assets that qualify for purchase as sovereign debt alone cannot satisfy its appetite for QE. As options for further QE diminish, negative rates have become the shiny new tool kit of monetary policy orthodoxy. If Doctor Draghi and Doctor Kuroda do not get the outcome they want from their QE prescriptions – which is highly likely – then more negative rates will be on the way.

Greater fools and bubbles.

• Global Profits Recession Leaves Investors With Nowhere to Hide (BBG)

The profits recession is global – and that’s bad news for the world economy and for equity markets. So say researchers at the Institute of International Finance, a Washington-based association that represents close to 500 financial institutions from 70 countries. In their April “Capital Markets Monitor,” IIF executive managing director Hung Tran and his team blamed the global decline in earnings on poor productivity growth, weak demand and a general lack of pricing power. U.S. companies also are being squeezed by rising labor costs as they add people to their payrolls. The pervasiveness of the downturn means there’s nowhere for corporations to turn. “In the past, if you had poor performance at home, you could recoup and compensate for that with overseas investment,” Tran said in an interview.

“But if you suffer declines in profits domestically and internationally, you tend to retrench.” That in turn raises the odds of an economic recession. He put the chances of a U.S. downturn within two years at around 30 to 35% due to the earnings slump, up from 20 to 25%. The prolonged profits recession makes Tran and his associates skeptical that the recent rebound in global stock markets can last. They see prices stuck in a downward trend. “With profits expected to remain under pressure for the foreseeable future, this situation will eventually exert downward pressure on equity prices,” they wrote in their report.

Shares? No. Bonds? No.

• Global Bond Yield Plunge to Record 1.3% Is Flashing Warning Sign (BBG)

Global bond yields fell to a record, a warning sign on the worldwide economy. The yield on the Bank of America Global Broad Market Index plunged to 1.3%, the lowest level in almost 20 years of data. Bonds in the gauge have returned 3.6% in 2016, while the MSCI All Country World Index of shares has slumped 1.5%, including dividends. “This is a sign of global disinflation,” said Hideaki Kuriki at Sumitomo Mitsui Trust Asset Management. “The U.S. cannot pull up the world economy.” The Treasury 10-year note yield was little changed on Wednesday at 1.73% as of 10:19 a.m. in Tokyo, based on Bloomberg Bond Trader data. The price of the 1.625% security due in February 2026 was 99 2/32. The yield dropped to a record 1.38% in 2012. The Federal Reserve is scheduled to issue the minutes of its March 15-16 meeting Wednesday. Chair Janet Yellen said last week U.S. central bankers need to “proceed cautiously” in raising interest rates because the global economy presents heightened risks.

Don’t think a decade will do it.

• Are We Facing A Global “Lost Decade”? (Steve Keen)

The era of low growth known as Japan’s “Lost Decade” commenced in 1990, and persists to this day. While most authors acknowledge that the seeds for the Lost Decade were sown by excessive credit growth in the preceding Bubble Economy years, only Richard Koo and Richard Werner have systematically argued that insufficient credit growth during the “Lost Decade” explains Japan’s now quarter-century long slump. Yet these arguments tell us more about the dilemmas facing today’s world economy than many more commonly accepted explanations of the current slowdown.

The insufficient credit growth story is rejected out of hand by most economists, for reasons summed up by Paul Krugman. From the perspective of mainstream economics, any event that negatively affects debtors is, to a large degree, offset by the positive effects of that event for creditors. Krugman therefore sees no possibility of Koo’s argument of “an entire economy being “balance-sheet constrained”: Maybe part of the problem is that Koo envisages an economy in which everyone is balance-sheet constrained, as opposed to one in which lots of people are balance-sheet constrained. I’d say that his vision makes no sense: where there are debtors, there must also be creditors, so there have to be at least some people who can respond to lower real interest rates even in a balance-sheet recession. (Krugman, 2013)

Koo is, however, correct: it IS possible for an entire economy to be balance-sheet constrained. Understanding why requires an appreciation of private credit creation that goes beyond the mere accounting truism that every entity’s liability is another entity’s asset. This paper will argue that the assumptions made by mainstream economists about the role of credit and banking in the economy are incorrect. When taking into account the “money creation” functions of banking, it becomes clear that the USA and most advanced economies as well as many emerging economies have joined Japan in being balance-sheet constrained, and face their own “lost decade” as a consequence of low credit growth. I will start with the empirical data and its implications, and then move on to the argument that an entire economy can be balance-sheet constrained.

We’ve neglected emerging markets recently.

• Default Tsunami Brewing (BBG)

Investors worried by a potential second wave of defaults in the U.S. should be even more concerned about emerging markets.Moody’s Investors Service says default rates currently stand at about 4% and could soar to as high as 14.9% by the end of the year under the most pessimistic scenario, Bloomberg News reports today. Its best-case projection is a 5.05% rate.Edward Altman, New York University professor and creator of the widely used Z-Score method for predicting bankruptcies, has also forecast rising U.S. defaults this year, saying in January that recession could follow even with a rate of less than 10%, given the increase in debt since the financial crisis.

Altman, a specialist in credit markets, hasn’t been able to create successful default rate statistics for emerging markets due to a lack of historical data, he told an audience at Hong Kong University last year. However, it was safe to assume that they would normally exceed those of developed markets such as the U.S., he concluded. If that’s the case, there’s trouble on the way. According to Standard & Poor’s, emerging markets recorded their highest number of defaults for 11 years in 2015, a tally of 26. The Bank of America Merrill Lynch High Yield Emerging Markets Corporate Plus index currently comprises 696 bonds, a number that’s risen from 346 eight years ago. Based on those numbers, the delinquency rate stands at only 3.7% (though the S&P figures don’t capture the entire universe of defaults).

A study by Moody’s published in February 2009 showed that the default rate among high-yield emerging-markets issues could reach as high as 22% in the five years following severe banking and sovereign crises. So far, most countries in the asset class have suffered currency and liquidity crises but have skirted the more severe sovereign and banking kind. A further cause for concern: Fitch Ratings said in January that 24% of companies in seven of the biggest emerging markets have raised money offshore. That increases their vulnerability to weakening currencies, an issue that’s dogging Chinese issuers. Fitch also said that the share of banks and sovereign ratings on negative outlook is at the highest since 2009.

China debt=Monopoloy money.

• China’s Global Investment Spree Is Fuelled By Debt (Economist)

[..] Chinese buyers, by and large, are far more indebted than the firms they are acquiring. Of the deals announced since the start of 2015, the median debt-to-equity ratio of Chinese buyers has been 71%, compared with 44% for the foreign targets, according to The Economist’s analysis of S&P Global Market Intelligence data. Cash cushions are generally also much thinner for Chinese buyers: their liquid assets are roughly a quarter lower than their immediate liabilities. The forbearance of their creditors makes these heavy debts more bearable in China than they would be elsewhere. But the Chinese buyers are financially stretched, all the same. Where, then, are they getting the money for the deals? For many, the answer is yet more debt. Chinese banks see lending to Chinese firms abroad as a safe way of gaining more international exposure.

The government has encouraged them to support foreign deals. As long as the firms to be acquired have strong cash flows, the banks are happy to lend against the targets’ balance-sheets, bringing debt to levels usually only seen in leveraged buy-outs. Foreign banks are also getting involved in some of the deals: HSBC, Credit Suisse, Rabobank and UniCredit are helping to arrange syndicated loans for ChemChina, which agreed to buy Syngenta, a Swiss seed and pesticide firm, for $43 billion. When the acquirers’ finances look shaky, bankers say they find solace in two things: that the deals themselves will generate returns and that the political pedigree of the buyers, especially that of state-owned companies, will protect them. “You have to trust that the acquirer has become too big to fail,” says an M&A adviser.

For the buyers, there are two strong financial rationales for the deals, albeit ones that highlight distortions in the Chinese market. First, debt-funded buyouts can actually make their debt burdens more tolerable. Take the case of Zoomlion, a construction-equipment maker with 83 times more debt than it earns before interest, tax, depreciation and amortisation. It wants to buy Terex, an American rival with debt just 3.5 times larger than its earnings, for $3.4 billion. Even if the purchase consists entirely of borrowed cash, the combined entity would still have a debt-to-earnings multiple of roughly 18, a marked improvement for Zoomlion.

Second, Chinese buyers know that one key financial metric works to their advantage: valuations in the domestic stockmarket are much higher than abroad. The median price-to-earnings ratio of Chinese buyers is 56, twice that of their targets. In effect, this means they can issue shares domestically and use the proceeds to buy what, from their perspective, are half-price assets abroad. This also gives them the firepower to outbid rivals in bidding wars. To foreign eyes, it might look like the Chinese are overpaying. But so long as their banks and shareholders are willing to stump up the cash, Chinese companies see a window of opportunity.

Except in Beijing.

• China Bulls Become an Extinct Species (WSJ)

The definition of a China “bull” used to be those who saw the Chinese economy rushing full speed ahead into the distant future. Their vision wasn’t so far-fetched. Remember: Annual growth was still hitting double digits until 2010. As recently as 2014, Justin Lin Yifu, a former World Bank chief economist, was publicly confident that growth could roll along at 8% a year for another 20 years, with the right mix of economic overhauls to oil the wheels. The minority “bear” proposition was for a severe slowdown, somewhere in the mid-to-low single digits. An even rarer breed of “permabears” warned of collapse. How quickly calculations have changed. We haven’t yet reached the point where the former bear case has become the bull case, but we’re getting close.

At a recent workshop hosted by the Council on Foreign Relations, a nonpartisan U.S. think tank, participants—35 or so academic economists, Wall Street professionals and geopolitical strategists—lined up around three different growth scenarios for China. Only 31% chose the optimistic one, defined as 4% to 6% annual growth, dependent on leaders successfully implementing reforms; 61% foresaw a “lost decade” of 1% to 3% growth; the rest thought a so-called hard-landing, or contraction, was most likely. Of course it wasn’t a scientific survey, but what’s interesting is that apparently nobody considered the possibility that the Chinese government could deliver on its promise of “medium to fast” growth, meaning 6.5% or higher.

If the old-style bulls are virtually extinct as a species, a major reason is widespread skepticism that the Chinese leadership under President Xi Jinping is focused on economic transformation. Instead, Mr. Xi’s attention seems to be fixated on his anticorruption drive, cracking down on internal dissent, bringing the media to heel, firming up his control over the security forces and challenging the U.S. for dominance in the South China Sea. Ironically, those predicting a hard landing in the Council on Foreign Relations workshop might have had the best rationale for optimism. Michael Levi, a council fellow and one of the organizers, says this crowd thought that the economy hitting rock-bottom would galvanize the leadership into action and that China would “come out better on the other side.”

Liquidity vacuum.

• Bond Investors Looking to Get Ahead of ECB Turn to Derivatives (BBG)

A rush for credit exposure in Europe is manifesting in the swaps market because investors are struggling to find enough bonds to satisfy their demand. The ECB’s plan to purchase corporate bonds is fueling demand for securities in anticipation of a rally when the purchases start. Investment-grade bond funds in euros had inflows each week since the ECB said on March 10 that it would expand measures to stimulate the economy. That’s already suppressed yields and made it harder to obtain the notes, making credit derivatives more attractive. Wagers on European credit-default swap indexes have more than doubled since the ECB’s announcement. Investors had sold a net $25 billion of protection as of March 25, near the highest since at least December 2013 and up from $11 billion as of March 4.

“There’s a dearth of bonds investors can get their hands on,” said Mitch Reznick at Hermes Investment Management. “In this liquidity vacuum, managers can use credit-default swaps as a proxy for the bonds that they can’t obtain in order to get longer in credit.” Investors placed the equivalent of $379 million into investment-grade bond funds in euros in the week through March 30, the fourth straight week of inflows, according to Bank of America. That helped push average borrowing costs for investment-grade companies to 1.07%, the lowest in almost a year, the bank’s bond index data show. They’re putting money into euro funds even as they withdraw from other segments, Bank of America said, citing EPFR Global data. Dollar and sterling funds had a combined $249 million of withdrawals in the period, the data show.

The ECB said it will start buying bonds from investment-grade companies in the euro area toward the end of the second quarter and investors are rushing to buy securities before then because they expect the purchases to sap liquidity and suppress yields even further. Some investors are also hoarding bonds, compounding the situation and making it more efficient to sell credit protection, Reznick said. “The quickest way to go long credit is by selling contracts tied to indexes in large size,” said Roman Gaiser at Pictet Asset Management. “That’s easier than buying lots of individual bonds. It’s a quick way of getting exposure to credit.”

I have no such hope.

• The Panama Papers Could Hand Bernie Sanders The Keys To The White House (Ind.)

The revelation that the rich and wealthy are shovelling money in overseas tax havens is not a particularly surprising one. Nevertheless, the sheer scale of the 11.5 million document leak from Panamanian law firm Mossack Fonesca has whipped up an overdue storm and forced the issue of tax justice back on the agenda. It is likely that the Panama papers is just the tip of the iceberg, and if even more is revealed about the financial affairs of world leaders, the implication for global politics will be huge. The Democratic presidential primaries in the US have been characterised by surging anger at the global elite. The Panama papers scandal will only fuel popular indignation at the actions of perceived establishment figures – those who have stood idly by and allowed this huge miscarriage of justice to take place.

Although there have been no major American casualties over the leak at this stage, all of the presidential candidates will be questioned about the scandal. And nobody is going to be under more pressure than Hillary Clinton. For some Americans, she is the embodiment of a “global elite”, while Bernie Sanders is its antithesis. The huge leak exposes governments across the globe wilfully ignoring tax avoidance by the rich. Although Clinton has not been linked to any malfeasance in the leak, there is a sense that she is among the elite rich, some of whose members have benefited from such schemes. It has been revealed Clinton pushed through the Panama Free Trade Deal at the same time that Sanders vocally opposed it, citing research warning that it would strictly limit the government’s ability to clamp down on questionable or even illegal activity.

Even if the Clintons remain unmentioned in future tax bombshells, Sanders can continue to exploit the narrative that Clinton is part of the demographic responsible, and has assisted in flagrant abuses of the system through trade deals. As this scandal looks intent on dragging on, it is now increasingly likely that undecided voters will swing towards the Sanders camp in the vital primaries coming up, including New York. In a general election, Republican favourite Donald Trump’s alleged historic tax dodging will leave him in hot water in comparison to Sanders’ squeaky clean record. He is the only candidate who even speaks in terms of the 1% vs the 99%. Should he secure the Democratic nomination, early general election polls suggest Sanders would knock Trump out of the park.

“Sanders has opposed all free trade agreements in recent memory, such as NAFTA and the TPP. Clinton has supported them and even criticized Sanders for his lack of support.”

• Bernie Sanders Predicted The Panama Papers In 2011 (AHT)

[..] the Panama Papers implicate 140 world leaders from 50 countries in stashing enormous sums of untaxed money in offshore shell corporations. Of course, this is part and parcel of the 1%, but the ubiquitousness shown in the leaks is astonishing. [..] No American leaders have been named in the leak as yet, but the editor of Süddeutsche Zeitung told other journalists “Just wait for what is coming next” in regards to American empire. Nevertheless, Senator and Democratic primary contender Bernie Sanders may very well have already come out ahead. In October 2011, Sanders criticized the Panama trade pact on the Senate floor.“Panama’s entire annual economic output is only $26.7 billion a year, or about two-tenths of one% of the U.S. economy. No one can legitimately make the claim that approving this free trade agreement will significantly increase American jobs.”

Sanders then asks the Senate, “why would we be considering a standalone free trade agreement with Panama?” The agreement in question, which was ultimately passed despite Sanders’ objections, is called The United States—Panama Trade Promotion Agreement (TPA). Sanders then answered his own question in a haunting premonition of things to come: “Well it turns out that Panama is a world leader when it comes to allowing wealthy Americans and large corporations to evade U.S. taxes by stashing their cash in offshore tax havens; and the Panama free trade agreement will make this bad situation much worse. Each and every year, the wealthiest people in our country and the largest corporations evade about $100 billion in U.S. taxes through abusive and illegal offshore tax havens in Panama and other countries…”

The D.C.-based progressive think tank Citizens for Tax Justice proclaims “that tax haven use is ubiquitous among America’s largest companies,” citing its volumes of research. In 2014, Fortune 500 companies held more than $2.1 trillion in accumulated profits offshore in order to evade taxes. Hillary Clinton, Sanders’ opponent in the Democratic primary, argued vehemently for the TPA in 2011. “The Free Trade Agreements passed by Congress tonight will make it easier for American companies to sell their products to South Korea, Colombia and Panama, which will create jobs here at home,” part of Clinton’s 13 October, 2011 statement read. Strangely enough, her full statement no longer exists on the State Department’s website. Sanders has opposed all free trade agreements in recent memory, such as the North American Free Trade Agreement (NAFTA) and the Trans-Pacific Partnership (TPP). Clinton has supported them and even criticized Sanders for his lack of support.

We need a Delaware Papers.

• How America Became A World Leader In Tax Avoidance (Salon)

What we have not yet seen is any U.S. individual implicated in the leak, which seems unlikely given our stable of international wealth. The editor of Süddeutsche Zeitung, the German newspaper which first received the documents, promises there will be more to come. But one reason why Americans haven’t yet been implicated is that they already have a perfectly good place for their tax avoidance schemes: right here in the United States. While several developed countries are already moving to reduce the anonymity behind shell companies, including a public registry of “beneficial ownership” information in the United Kingdom and a directive to collect similar information throughout the European Union, the United States has resisted such transparency. According to recent research, the United States is the second-easiest country in the world to obtain an anonymous shell corporation account. (The first is Kenya.) You can create one in Delaware for your cat.

While we force foreign financial institutions to give up information on accounts held by U.S. taxpayers through the Foreign Account Tax Compliance Act of 2010, we don’t reciprocate by complying with international disclosure requirements standardized by the OECD and agreed to by 97 other nations. As a result, the U.S. is becoming one of the world’s foremost tax havens. Several states – Delaware, Nevada, South Dakota, Wyoming – specialize in incorporating anonymous shell corporations. Delaware earns between one-quarter and one-third of their budget from incorporation fees, according to Clark Gascoigne of the FACT Coalition. The appeal of this revenue has emboldened small states, and now Wyoming bank accounts are the new Swiss bank accounts. America has become a lure, not only for foreign elites looking to seal money away from their own governments, but to launder their money through the purchase of U.S. real estate.

In addition, if the United States really wanted to stop Panama or the Cayman Islands or other offshore tax havens from allowing the wealthy to avoid hundreds of billions in payments, they could do so in about 15 minutes. Our recent free trade deal with Panama allegedly prevents Americans from creating offshore tax havens there, but in general, such tax information exchanges are insufferably weak. And the little America does abroad to police tax evasion dwarfs the next to nothing we do at home. The intertwining of global and political elites makes tax avoidance, whether legal or illegal, a secondary concern for the country, regardless of how it robs the country of resources and promotes the conception of a two-tiered economic and justice system where the upper class need not follow the same rules as the rest of us. Our politicians made a consistent choice that this rampant tax avoidance doesn’t bother them.

“Anonymous shell companies have been used to rip off Medicare,” said Gascoigne. “They’ve been used to evade U.S. sanctions. Arms dealers like Viktor Bout, the so-called Merchant of Death, used U.S. shell companies to launder money.” Indeed, Mossack Fonseca has affiliated offices in Wyoming, Nevada, and Florida. America is up to its eyeballs in this style of corruption.

“..the U.S. is just as big a secrecy jurisdiction as so many of these Caribbean countries and Panama. We should not want to be the playground for the world’s dirty money, which is what we are right now.”

• Panama Has Company as Bank-Secrecy Holdout: America (BBG)

Panama and the U.S. have at least one thing in common: Neither has agreed to new international standards to make it harder for tax evaders and money launderers to hide their money. Over the past several years, amid increased scrutiny by journalists, regulators and law enforcers, the global tax-haven landscape has shifted. In an effort to catch tax dodgers, almost 100 countries and other jurisdictions have agreed since 2014 to impose new disclosure requirements for bank accounts, trusts and some other investments held by international customers – standards issued by the OECD, a government-funded international policy group. Places like Switzerland and Bermuda are agreeing, at least in principle, to share bank account information with tax authorities in other countries.

Only a handful of nations have declined to sign on. The most prominent is the U.S. Another, Panama, is at the center of a storm over tax evasion and global cash flight that broke out over the weekend. A law firm there helped set up tens of thousands of shell companies, according to a report by the International Consortium of Investigative Journalists. ICIJ and other news organizations published reports they said showed global efforts to hide wealth, undertaken by global politicians and the ultra-rich, with the aid of banks and lawyers. The central tool: shell companies that people used to shield the identity of the owners’ assets. While such structures can be legal, they can also support efforts to avoid taxes.

The latest reporting “underscores the secrecy in Panama,” said Stefanie Ostfeld, the acting head of the U.S. office of the anti-corruption group Global Witness. “What’s lesser known, is the U.S. is just as big a secrecy jurisdiction as so many of these Caribbean countries and Panama. We should not want to be the playground for the world’s dirty money, which is what we are right now.” Advisers around the world are increasingly using the U.S. resistance to the OECD’s standards as a marketing tool — attracting overseas money to U.S. state-level tax and secrecy havens like Nevada and South Dakota, potentially keeping it hidden from their home governments.

[..] “The U.S. doesn’t follow a lot of the international standards, and because of its political power, it’s able to continue,” said Bruce Zagaris an attorney at Berliner Corcoran & Rowe who specializes in international tax and money laundering regulations. “It’s basically the only country that can continue to do that. Others like Panama have tried, but Panama can’t punch as high as the U.S.” Indeed, in a statement issued Monday by OECD secretary general Angel Gurria, the OECD said “Panama is the last major holdout that continues to allow funds to be hidden offshore from tax and law-enforcement authorities.” The statement didn’t mention the U.S., which is the OECD’s largest funder.

Icelanders want a lot more: for the entire ruling class to be replaced.

• Panama Secrecy Leak Claims First Casualty as Iceland PM Quits (BBG)

The Panama secrecy leak claimed its first casualty after Iceland’s Prime Minister Sigmundur David Gunnlaugsson resigned following allegations he had sought to hide his wealth and dodge taxes. The decision was announced in parliament after the legislature had been the focus of street protests that attracted thousands of Icelanders angered by the alleged tax evasion efforts of their leader. Gunnlaugsson, who will step down a year before his term was due to end, gave in to mounting pressure from the opposition and even from corners of his own party. “What this exemplifies more than anything else is that there’s a growing lack of tolerance over the way that the international financial system has been gamed and rigged by corrupt elites,” Carl Dolan, director of Transparency International’s EU division, said in a phone interview from Brussels.

The Panama files, printed in newspapers around the world, showed that the 41-year-old premier and his wife had investments placed in the British Virgin Islands, which included debt in Iceland’s three failed banks. The leaked documents therefore also raise questions about Gunnlaugsson’s role in overseeing negotiations with the banks’ creditors. Ironically, the offshore investments were held while Iceland enforced capital controls. Gunnlaugsson is the second Icelandic premier to resign amid a popular uprising, after Geir Haarde was forced out following protests in 2009. Gunnlaugsson always looked to be the most vulnerable of the politicians implicated in the documents. From Moscow to Islamabad and Buenos Aires, most public figures have managed to beat off the revelations with either outrage, denial or indifference.

None of those tactics worked for Gunnlaugsson, whose first response was to walk out of an interview with Swedish TV, a clip that went viral after the leaks were published on Sunday. “The Iceland PM is the tip of the iceberg in terms of how much political instability we’ll see long-term on the basis” of the leaks, Ian Bremmer, president of the New York-based Eurasia Group, said by phone on Tuesday. Iceland’s electorate balked at the alleged tax evasion and Gunnlaugsson’s initial refusal to budge. Police on Monday erected barricades around the parliament in Reykjavik as protesters beat drums and pelted the legislature with eggs and yogurt. Almost 10,000 people gathered, according to police, while organizers said the figure was twice as high. Thousands more had signed up on Facebook to attend a second round of protests that was due to take place on Tuesday afternoon.

Will we ever find out how these files saw the light of day?

• Mossack Fonseca Says Data Hack Was External, Files Complaint (Reuters)

The Panamanian lawyer at the center of a data leak scandal that has embarrassed a clutch of world leaders said on Tuesday his firm was a victim of a hack from outside the company, and has filed a complaint with state prosecutors. Founding partner Ramon Fonseca said the firm, Mossack Fonseca, which specializes in setting up offshore companies, had broken no laws and that all its operations were legal. Nor had it ever destroyed any documents or helped anyone evade taxes or launder money, he added in an interview with Reuters. Company emails, extracts of which were published in an investigation by the U.S.-based International Consortium of Investigative Journalists and other media organizations, were “taken out of context” and misinterpreted, he added.

“We rule out an inside job. This is not a leak. This is a hack,” Fonseca, 63, said at the company’s headquarters in Panama City’s business district. “We have a theory and we are following it,” he added, without elaborating. “We have already made the relevant complaints to the Attorney General’s office, and there is a government institution studying the issue,” he added, flanked by two press advisers. Governments across the world have begun investigating possible financial wrongdoing by the rich and powerful after the leak of more than 11.5 million documents, dubbed the “Panama Papers,” from the law firm that span four decades. The papers have revealed financial arrangements of prominent figures, including friends of Russian President Vladimir Putin, relatives of the prime ministers of Britain and Pakistan and Chinese President Xi Jinping, and the president of Ukraine.

On Tuesday, Iceland’s prime minister, Sigmundur David Gunnlaugsson, resigned, becoming the first casualty of the leak. “The (emails) were taken out of context,” Fonseca said. He lamented what he called journalistic activism and sensationalism, extolling his own investigative research credentials as a published novelist in Panama. “The only crime that has been proven is the hack,” Fonseca said. “No one is talking about that. That is the story.” France announced on Tuesday it would put the Central American nation back on its blacklist of uncooperative tax jurisdictions. Alvaro Aleman, chief of staff to President Juan Carlos Varela, told a news conference the government could respond with similar measures against France, or any other country that followed France’s lead.

Question is, even if he held no shares: did he know what his dad did?

• David Cameron Left Dangerously Exposed By Panama Papers Fallout (G.)

David Cameron was left dangerously exposed on Tuesday after repeatedly failing to provide a clear and full account about links to an offshore fund set up by his late father, as the storm over the Panama Papers gathered strength in both the UK and elsewhere around the world. The prime minister and his office have now offered three partial answers about the fund set up by his father Ian, which avoided ever paying tax in Britain. The key unanswered question is whether the prime minister’s family stands to gain in the future from his father’s company, Blairmore, an investment fund run from the Bahamas. After Downing Street said on Monday that the fund was a “private matter”, a journalist asked Cameron about it during a visit to Birmingham on Tuesday. Cameron replied: “I own no shares, no offshore trusts, no offshore funds, nothing like that. And, so that, I think, is a very clear description.”

He dodged the key part of the question about whether he or his family stood to benefit. Having failed to satisfy reporters, Downing Street issued a further statement that Cameron’s wife and children also do not benefit from offshore funds but again left the main question about the future unanswered. The Labour leader, Jeremy Corbyn, who had called earlier in the day for an independent investigation, told the Guardian: “Three times Downing Street has been asked to provide a full and comprehensive answer. The public has a right to know the truth. “We need to know the full extent of the links between Britain and the web of tax avoidance and evasion revealed by the Panama Papers at all levels.”

[..] The row embroiling Cameron picked up pace on Tuesday morning when Corbyn responded to Downing Street’s assertion that the matter was private by telling reporters: “Well, it’s a private matter insofar as it’s a privately-held interest. But it’s not a private matter if tax is not being paid. So an investigation must take place, an independent investigation, unprejudiced, to decide whether or not tax has been paid.” Later in the day, Cameron told reporters: “In terms of my own financial affairs, I own no shares. I have a salary as prime minister and I have some savings, which I get some interest from and I have a house, which we used to live in, which we now let out while we are living in Downing Street and that’s all I have.”

More on the nonsense prevalent in ‘mainstream’ economics. No clue about risk.

• The Enduring Certainty Of Radical Uncertainty (John Kay)

The excellent new book by Mervyn King, former governor of the Bank of England, is inevitably noticed mainly for its views on banking regulation and the outlook for the eurozone. For me the most important message of The End of Alchemy is its emphasis on radical uncertainty — or, to quote Donald Rumsfeld, former US defence secretary: “The things we do not know we do not know.” That emphasis reflects the parallel intellectual paths Lord King and I have taken since we were young dons 40 years ago. In a book published in 1976, economist Milton Friedman disparaged a tradition that “drew a sharp distinction between risk, as referring to events subject to a known or knowable probability distribution, and uncertainty, as referring to events for which it was not possible to specify numerical probabilities”.

Friedman went on: “I have not referred to this distinction because I do not believe it is valid. We may treat people as if they assigned numerical probabilities to every conceivable event.” Asked, “Who will win the war?”, Churchill might have responded, “Britain, with probability 0.7”; and Hitler with a similar answer but perhaps different number. However absurd, this is what we were taught and what we passed on to the next generation of students. It seemed an exciting time for young turks in finance; insider trading in an old-boy network was to be superseded by a new generation of quants and rocket scientists. We had the mathematical tools to revolutionise investment banking. Our theory came to underpin the risk models used in financial institutions and imposed by regulators.

But Friedman was wrong. There really are limits to the range of problems susceptible to the mathematics of classical statistics. He was, erroneously, rejecting the concept of radical uncertainty described 50 years earlier by the economists John Maynard Keynes and Frank Knight. “By uncertain knowledge,” wrote Keynes in 1921, “I do not mean merely to distinguish what is known for certain from what is only probable. The sense in which I am using the term is that in which the prospect of a European war is uncertain…There is no scientific basis to form any calculable probability whatever. We simply do not know.”

While the long-term future of interest rates or copper prices, about which Keynes also speculated, might be approached probabilistically, questions about the social system 50 years hence are too open-ended, and the outcomes too varied and insufficiently specific, to be described in probabilistic terms. A recent book on superforecasters, co-written by Philip Tetlock, illustrates the point well. By trying to turn multi-faceted questions into ones precise enough to enable those who proffer answers to be assessed for their accuracy, he makes the questions narrow and uninteresting: “How will the Syrian war develop” and “How will Europe manage its refugee crisis?” become: “How many Syrian refugees will land in Europe in 2016?”

To get rid of refugees, the EU has no qualms about shamelessly linking them to terrorism.

• EU Executive To Present Steps To Tighten External Border Controls (Reuters)

The EU’s executive will propose on Wednesday a raft of technical measures to strengthen its external borders as it seeks to tackle both an uncontrolled influx of migrants and security threats following deadly attacks in Paris and Brussels. More than 160 people were killed in the November shooting and bombing attacks in Paris and suicide bombings in Brussels in March. The deadly strikes, claimed by Islamic State, strengthened the hand of those campaigning for tighter security checks and data sharing against those who warn of the risks of abuse and undermining privacy through enhanced surveillance. In its proposal on Wednesday, seen by Reuters ahead of official publication, the European Commission said the carnage in Paris and Brussels “brought into sharper focus the need to join up and strengthen the EU’s border management, migration and security cooperation.”

Europol chief Rob Wainwright highlighted separately on Tuesday an “indirect link” between Europe’s migration crisis, which saw more than a million people arriving over the last year, and the Islamist militant threat, saying some militants had used the chaotic migrant influx to sneak in. EU border agency Frontex also said that two of the perpetrators of the Nov. 13 attacks in Paris had entered through Greece and been registered by Greek authorities after presenting fraudulent Syrian documents. “EU citizens are known to have crossed the external border to travel to (Middle East) conflict zones for terrorist purposes and pose a risk upon their return. There is evidence that terrorists have used routes of irregular migration to enter the EU,” the Commission said in its proposal.

But the EU has a dozen-or-so different sets of fragmented databases for border management and law enforcement that are plagued with gaps and often not inter-operable. Custom authorities’ data are held largely separate. The Commission on Wednesday will therefore set out technical proposals to beef them up and improve the way they communicate with one another, including a joint search interface.

Rich Europeans have one priority only: to remain rich and privileged.

• With New Deal, A Refugee’s Rights Come Down To Luck (Reuters)

Through a barbed wire fence, 17-year-old Syrian refugee Asma attempted to tell us about her journey to Greece. We didn’t have much time to listen. Greek police officers were breathing down our necks, threatening to arrest us unless we left. We learned that Asma traveled alone on a tiny rubber boat from Turkey, and broke her arm – still wrapped in a white bandage – when a building collapsed in her hometown of Daraa, the birthplace of the Syrian uprising. As she started to tell us about her hope for a fresh start in Germany, the policemen issued their final warning before escorting us off Moria camp’s fenced perimeter. “We’re animals now,” Asma shouted after us. “We’re no longer humans.” If Turkey is a crowded departure hall to a better life, Greece is now a transit lounge for those who’ve missed their connection.

Many will never move onward to northern Europe; others will only move backward. With more than 52,000 refugees and migrants stranded in the country, Greece has become exactly what Prime Minister Alexis Tsipras warned months ago: a “warehouse of souls.” And the new deal between the EU and Turkey, intended to stem the refugee flow into Europe, only redirects it. Under the terms of the deal, most asylum seekers who illegally travel to Greece from Turkey are to be sent back to Turkey. The first returns took place Monday at dawn. For every returnee to Turkey, a Syrian living in a Turkish refugee camp will be legally resettled by plane to EU countries. As such, a refugee’s rights come down to luck. If Asma had arrived in Greece last month, she’d likely be in Germany by now.

If she had arrived three weeks ago, she’d likely be trapped in a makeshift camp on the Greece-Macedonia border – not much of an upgrade, but she’d have more access to the outside world than she does in Lesbos, where more than 3,000 refugees are locked in a former military base. For refugees like her, who arrived after the deal took effect March 21, most will be sent back to Turkey; that is, unless they can individually prove Turkey is “unsafe” for them. Even many Syrians, Iraqis and Eritreans – who have special protections under international law and qualify for the EU’s official “relocation” program – will be returned to Turkey. Officials insist the deal isn’t about restricting access to asylum in Europe, but eliminating illegal smuggling routes that sent more than 1 million refugees and migrants to Europe from Turkey over the past year.

Indeed, as ferryboats carrying migrants returned to Turkey on Monday, Syrians from Turkish refugee camps were being resettled in Germany and Finland. But this “one-for-one” deal struck in Brussels – which creates a kind of human carousel – is disconnected from the reality on the ground in Greece. The deal’s byzantine complexities have sowed confusion, fear and anxiety among asylum-seekers and authorities alike. Humanitarian groups such as the United Nations refugee agency, Doctors Without Borders and Save the Children have suspended activities on several Greek islands to protest its terms. They argue that the deal turns reception centers for refugees into inhumane, de facto detention facilities.

This is going to get so messy..

• Greece Pauses Deportations As Asylum Claims Mount (AP)

Authorities in Greece have temporarily suspended deportations to Turkey and acknowledged that most migrants and refugees detained on Greek islands have applied for asylum. The EU began sending back migrants Monday under an agreement with Turkey, but no transfers were planned Tuesday. Maria Stavropoulou, director of Greece’s Asylum Service, told state TV that some 3,000 people held in deportation camps on the islands are seeking asylum, with the application process to formally start by the end of the week. She says asylum applications typically take about three months to process, but would be “considerably faster” for those held in detention.

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