May 052016
 
 May 5, 2016  Posted by at 9:23 am Finance Tagged with: , , , , , , , , , ,  


Lewis Wickes Hine Boys working in Phoenix American Cob Pipe Factory 1910

FX Market Truce Looks Increasingly Fragile (BBG)
The ‘Ostrich Approach’ Ignores Real Global and National Debt Figures (SM)
Easy Money Isn’t the Answer for Japan (BBG)
Japan’s Coma Economy Is A Preview For The World (GS)
Eurozone Retail Sales Fall More Than Expected In March (R.)
Kyle Bass Sees 30% To 40% Losses On Chinese Investments (BBG)
Hong Kong Cracks Down On Fake Trade Invoices From China (R.)
Regulators Want to Slow Runs on Derivatives (BBG)
Brexit, Like Grexit, Is Not About Economics (WSJ)
Even ‘Small Crisis’ Enough To Tear EU Apart, Moody’s Warns (Tel.)
Let The TTIP Die If It Threatens Parliamentary Democracy (AEP)
Turkey In Political Freefall As Erdogan Grabs More Power, PM To Resign (MEE)
Study: Bailouts Went To Banks, Only 5% To Greeks (Hand.)
The Terrible News From Fort McMurray, And The Hope That Remains (G&M)
‘Omega Block’ Behind Searing Heat Inflaming Fort McMurray Wildfire (WaPo)
UN Envoy Warns of New Wave of 400,000 Refugees From Syria (WSJ)

A truce that never stood a chance. Some may have believed in it, though.

Foreign-Exchange Market Truce Looks Increasingly Fragile (BBG)

The foreign exchange market is notorious for overshooting. A currency that starts moving in a particular direction as economic fundamentals change will often end up at a rate that can’t be justified by the data. So trying to nudge the matrix of currency values is akin to policy makers attempting to steer a Ouija board pointer – which is exactly what seems to have happened since their February Group of 20 meeting in Shanghai produced a tacit truce in the currency war. Suspicions that finance ministers had agreed in February to stop talking their currencies down seemed confirmed by the dollar’s decline of more than 6% from its Jan. 20 peak.

China’s recent moves to boost the yuan’s reference rate to its highest levels this year also backed the impression of a suspension of hostilities. But while U.S. manufacturers worried that a too-strong dollar would threaten their exports and profits, the recent reversal, and gains for the euro and the yen, pose bigger risks to the struggling economies of Europe, and Japan. The euro, for example, pierced $1.16 on Tuesday, reaching its highest level since August:

The yen, meanwhile, has breached 106 to the dollar, down from as weak as 122 in January:

Those are the kinds of moves that make central banks uncomfortable – especially when, like the ECB and the BOJ, they’re already struggling to avert deflation. Australia’s surprise decision to cut interest rates overnight, driving its currency lower against all 31 of its major trading peers, is a sign that skirmishes might be breaking out again. Marcus Ashworth, a strategist at Haitong Securities in London, said in a research note: The rumor mill has been incessant (despite official denials) that the so-called Shanghai G-20 accord to pacify markets and quell unrest between the members has actually served to make international relations as toxic as they have been for many years.

The Shanghai deal was to stop the negative feedback loop and thereby prevent a sharp devaluation of the yuan; however, it was meant to curtail the rise of the dollar, not sharply reverse it. [..] It’s clear the Treasury doesn’t want the dollar to resume its ascent. But it’s also clear that trying to steer the currency market into stasis has failed, and that the inflation outlooks in both the euro zone and Japan are deteriorating. The environment looks ripe for hostilities to break out again, providing yet another reason to be pessimistic about the prospects for a global economic recovery.

Read more …

Much more in the article.

The ‘Ostrich Approach’ Ignores Real Global and National Debt Figures (SM)

According to Hoisington and Hunt, the ratio of nonfinancial debt-to-GDP rose to 248.6% at the end of 2015, higher than the previous record of 245.5% set in 2009 and well above the average of 167.5% since this figure started to be tracked in 1952. They also point out that since 2000 it has taken $3.30 of debt to generate $1.00 of GDP compared with $1.70 in the 45 years prior to 2000. This points to the fact that a greater proportion of new debt is devoted to unproductive uses. Debt drains away vital resources from economic growth. Fighting a debt crisis with more debt is doomed to failure, yet that is not only what global central banks did during the crisis but long after markets stabilized (though the crisis never truly ended, just slowed). This was an epic policy failure that continues today.

U.S. government debt is growing to unsustainable levels. Gross debt (excluding off-balance sheet items) reached $18.9 trillion at the end of 2015, equal to 104% of GDP (considerably higher than the 63-year average of 55.2%). Government debt increased by $780.7 billion in 2015, or $230 billion more than the nominal or dollar rise in GDP. This actual debt increase is considerably larger than the budget deficit of $478 billion reported by the government because many spending items were shifted off-budget. Readers should remember this the next time The WSJ editorial page trumpets that the deficit dropped significantly from the four consecutive years of $1 trillion+ deficits between 2009 and 2012. And these figures don’t even touch upon the $60 trillion of unfunded liabilities (calculated on a net present value basis) for Social Security and other entitlement programs.

Globally, the debt picture is more disturbing. Total public and private debt/GDP is 350% in China, 370% in the U.S., 457% in Europe and 615% in Japan, respectively. Those numbers should speak for themselves.

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It isn’t the answer for anyone, certainly not today when everyone’s debts are through the roof.

Easy Money Isn’t the Answer for Japan (BBG)

Strolling through Tokyo on a Sunday afternoon, it’s hard to tell Japan’s economy is a mess. Deflation has returned, while growth hasn’t. But Shibuya Crossing remains as packed with diners, bag-toting shoppers and gawking tourists as ever. Nearby, a line of more than 50 people stretches outside a restaurant selling overpriced burgers. Lost decades be damned! Japan had the good fortune to have become wealthy before entering its years of stagnation. Some Japanese are now suffering in an economy that’s endured four recessions in eight years; the poverty rate has reached 16%, its highest level on record. But for many, especially in big cities such as Tokyo, life hasn’t so much deteriorated as frozen in time. GDP per capita, on a nominal basis, is little different now than in 1992.

And though the quality of many jobs has waned due to the increase of temporary work, joblessness remains a rarity. The unemployment rate is an enviable 3.2%. The Shibuya crowds raise serious and uncomfortable questions about the direction of Tokyo’s economic policy. Even as some analysts urge the Bank of Japan to double down on its monetary easing program and the government to ramp up its own spending in an effort to boost inflation, there’s a good argument to be made that the approach of Japan’s policymakers has been dead wrong, and for a very long time. The thrust of Japanese policies since the bursting of its gargantuan asset-price bubble in the early 1990s has been to spur growth with lots and lots of cash, whether from the government or the BOJ.

Since 2013, Prime Minister Shinzo Abe has dramatically pumped up that strategy – running large budget deficits, delaying taxes and encouraging the BOJ to print money on an ever grander scale. Arguably, however, Japan’s main focus should be to preserve the wealth it’s already accumulated. With a population that’s aging and shrinking, Japan can get richer on a per capita basis even if GDP remains perfectly flat. In that sense, deflation – long considered the scourge of Japan’s economy – is actually a boon: Falling prices raise the future value of savings, helping the elderly and others on fixed incomes. In constant terms, Japan’s GDP per capita is 17% higher than in 1992, thanks to deflation.

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“When you fly to Australia, you land in 2000, to China you land in 2016, Japan you land in 1989.”

Japan’s Coma Economy Is A Preview For The World (GS)

The 1980s were the apex of Japanese culture and economic might. Back then, Japan’s economy was growing so fast, it was thought they would overtake the US. But that all came to a screeching halt. Truth is, Japan’s meteoric rise was fueled by an epic lending bubble. Similar to the Roaring 20s in America. And when the bubble popped, the government launched massive and misguided measures that set Japan back decades. Their economy hasn’t expanded since. They are stuck in the 1980s. There’s been no growth for 30 years. And as you’ll hear about this in this special bonus video, the United States could be going down the same path. Imagine, if we are stuck in the 2000s for the next couple decades. How will you ever be able to retire?

Read more …

Deflation.

Eurozone Retail Sales Fall More Than Expected In March (R.)

Euro zone retail sales fell more than expected in March against February as consumers cut purchases of food, drinks and tobacco, the EU’s statistics office said on Wednesday. Retail sales, a proxy for household spending, decreased 0.5% in March month-on-month in the 19-country currency union, Eurostat said. Economists polled by Reuters had forecast a much smaller decrease of 0.1%. Yearly figures were also lower than expected, with sales up 2.1%, below market forecasts of a 2.5% rise. The fall in March sales was partly offset by an upward revision of data for February.

Eurostat said on Wednesday that in February sales rose 0.3% on a monthly basis and 2.7% year-on-year. It had previously estimated an increase of 0.2% monthly and 2.4% yearly. On a monthly basis, retail sales of food, drinks and tobacco products dropped 1.3% in March, the biggest fall among all the categories. Sales of non-food products, excluding automotive fuels, went down 0.5% month-on-month. Purchases of fuel for cars also dropped 0.4% on a monthly basis. Among the largest euro zone economies, Germany posted a 1.1% monthly drop of retail sales and France recorded a decrease of 0.7%. In Spain, sales increased 0.4% on a monthly basis in March.

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Conservative.

Kyle Bass Sees 30% To 40% Losses On Chinese Investments (BBG)

Kyle Bass, founder of Hayman Capital Management, said investors wouldn’t be investing in China if they realized how vulnerable its banking system is. “Common sense will tell you that they are going to have a loss cycle,” he said at the Milken Institute Global Conference in Beverly Hills, California, on Wednesday. “So if you think about how precarious that system is, you wouldn’t be allocating money to China.” Bass, a hedge fund manager famed for betting against U.S. subprime mortgages, is predicting losses for China’s banks and raising money to start a dedicated fund for bets in the nation. Bass said investors putting money in Asia should ask if they can handle 30 to 40% writedowns in Chinese investments.

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Or so we’re supposed to think.

Hong Kong Cracks Down On Fake Trade Invoices From China (R.)

Hong Kong is conducting a multi-pronged customs, shipping and financial sector crackdown against so-called fake trade invoicing that allows billions of dollars of capital to leave China illegally. Hong Kong’s central bank told Reuters it has beefed up its scrutiny of banks’ trade financing operations, while customs officials are doing more random checks on shipments crossing border posts and conducting raids on warehouses to ensure the authenticity of goods, senior officials working in shipping, logistics and banking said. The head of a logistics company said surprise customs inspections at Hong Kong border posts had doubled. The sources[..] said the increased efforts began this year and reflected concerns about billions of dollars in illicit cash authorities suspect are being channeled through Hong Kong following a stock market crash in China last year.

“Examinations and investigations reflect one of the strongest trends we are seeing now in the financial sector,” said Urszula McCormack, a partner at law firm King & Wood Mallesons, which helped co-author a report published by The Hong Kong Association of Banks in February that highlighted shipping as a sector where fake invoicing can thrive. “(Hong Kong) regulators are now in enforcement mode.” China has become increasingly concerned about capital outflows since the middle of last year when Chinese rushed to get money offshore for safekeeping or to invest following the stock market slump and unexpected yuan devaluation. Hong Kong is the most popular route, analysts say, because of its proximity to China.

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Until counterparties start raising their voices?!

Regulators Want to Slow Runs on Derivatives (BBG)

Nobody quite knows what it means for a bank to be “too big to fail,” so the regulators in charge of solving the problem have an understandable focus on tidiness. A bank that fails tidily, sensibly, in neat little compartments, probably won’t do much damage to anyone else. A bank whose failure is sprawling and incomprehensible might well turn out to be catastrophic. So the preferred mechanism for winding up a possibly too-big-to-fail bank these days is largely about compartmentalization. You put all of the important, messy stuff into subsidiaries – put the deposits in a bank subsidiary, the repurchase agreements and derivatives in a broker-dealer subsidiary, etc. – and put those subsidiaries under a “clean” bank holding company with a fairly large amount of capital and long-term debt.

Then if things go horribly wrong, the holding company’s shareholders and bondholders are the ones who lose money, shielding the people who have messier and more systemic claims on the subsidiaries. The regulators swoop in and recapitalize the holding company, or just sell the subsidiaries to other, healthier banks, in any case without ever interrupting service at the systemic subsidiaries. All the bad stuff happens at the holding company, all the important stuff happens at the subsidiaries, and you try to avoid mixing the two. Then all you have to do is make sure that the holding company has enough equity and long-term debt to shield the subsidiaries against any plausible bad outcome. But to make this work you really need to keep things in their boxes. Derivatives have a tendency to want to jump out of their boxes.

In particular, if bad things are happening at a large and systemically important bank holding company, there isn’t a lot of reason for the bank’s derivatives counterparties and repo creditors to stick around. Repo is meant to be a super-safe place to park your money overnight; if it looks like a repo counterparty might default, then you look for a different counterparty. And derivatives are just supposed to work: If Bank A owes you money under an interest-rate swap, and you owe Bank B money under an offsetting swap, and Bank A defaults, then all of a sudden you have an unanticipated unhedged risk. So if your derivatives or repo counterparty gets in trouble, you bail immediately to protect yourself. (Also there is always the possibility of making a lot of money on the unwind.) But while this is individually rational, it is systemically bad. As Janet Yellen put it yesterday:

“The crisis underscored that when a large financial institution gets into trouble, its failure can destabilize other firms. This is because large banking organizations are connected with each other by the business they do together and through the contracts that result from that business. Indeed, in the 21st century, a run on a failing banking organization may begin with the mass cancellation of the derivatives and repo contracts that govern the everyday course of financial transactions. When these contracts, known collectively as Qualified Financial Contracts or QFCs, unravel all at once at a failed large banking organization, an orderly resolution of the bank may become far more difficult, sparking asset firesales that may consume many firms.”

So yesterday U.S. banking regulators proposed new rules to prevent that from happening. The rules basically say that a bank subsidiary’s derivatives and repo contracts can’t be cancelled for 48 hours after the bank’s holding company files for bankruptcy or otherwise enters resolution proceedings. This gives the regulators two days to swoop in and conduct the neat resolution of the bank before its derivatives spill out everywhere and create a mess.

Read more …

Not only about economics. But if the economy were growing like crazy, the Brexit risk would be much more subdued.

Brexit, Like Grexit, Is Not About Economics (WSJ)

Britain’s flirtation with leaving the European Union is as puzzling as Greece’s stubborn desire to stay. After all, Britain’s economy has done quite well inside the bloc while Greece’s has been decimated. What explains both sentiments is that the European project has always been about more than economics. It also seeks “an ever closer union among the peoples of Europe,” as the Treaty of Rome, its founding charter, declared in 1957. “Closer union” with Europe deeply appeals to Greeks, whose own state has failed them so badly. But it repels many Britons, whose state works just fine and who want no part of a European political union. For them, the quagmire of the euro, which Britain hasn’t adopted, is a cautionary tale of what such a union could bring.

How they decide between the economic benefits and political risks of staying could determine whether Britain votes to leave the EU in a June 23 referendum. Greece joined the European Economic Community, the EU’s predecessor, in 1981, in search of shelter from foreign invaders, domestic coups, and its own dysfunctional government. Economics actually argued against membership: EEC technocrats said Greece wasn’t ready, but were overruled by political leaders worried about geopolitical instability on the Continent’s southern flank. The same logic brought Greece into the euro in 2001 when its debts and deficits should have disqualified it. Greece’s underdeveloped, overprotected economy was poorly prepared for life inside the EU.

A study led by Nauro Campos of Brunel University concluded only Greece was poorer in 2008 for having joined the EU; Britain, they reckon, was 24% richer. Eurozone membership initially brought down Greek interest rates and unleashed a borrowing binge but resulted in crisis and a six-year depression. Yet Greeks still don’t want to give up the euro. “Anglo Saxons think the euro is only an economic and financial project,” said Yannis Stournaras, governor of the Greek central bank, in an interview. “It’s political as well. It’s a means to an identity. We feel safer in the euro.” British considerations were just the opposite. A Conservative government took Britain into the EEC in 1973 largely for its trade benefits, a decision voters overwhelmingly approved in a 1975 referendum.

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You don’t say.

Even ‘Small Crisis’ Enough To Tear EU Apart, Moody’s Warns (Tel.)

Fresh turmoil in the EU risks triggering the disintegration of the entire bloc, according to Moody’s. In a stark warning, the rating agency said the “painful adjustment” faced by some countries in the eurozone meant the collapse of the single currency area and wider EU was believed by some to be a question of “when” not “if”. Moody’s said that even a “small crisis” threatened to set off an uncontrollable chain of events that would “threaten the sustainability” of the EU and its institutions. The rating agency praised the “significant political progress” made since the crisis in putting the foundations in place for a banking union and creating a eurozone rescue fund. However, it said endless austerity demands in return for bail-outs had fuelled deep resentment across the region, especially in countries weighed down by sky-high unemployment.

“Significant vulnerabilities” facing the bloc such as a British exit from the EU also remained, which would fuel support for “anti-establishment and anti-EU parties elsewhere”, it warned in a report. Colin Ellis, Moody’s chief credit officer for Europe, said a British exit could spark an “existential moment” for the bloc. “Even if the EU survives its current challenges largely unscathed, even a ‘small’ future crisis could threaten the sustainability of current institutional frameworks, if it coincided with negative public sentiment and populist political developments,” the report said. “This can create the impression that the question is when the system breaks, rather than if.”

It came as Mervyn King, the former governor of the Bank of England, warned that the eurozone faced four “unpalatable choices” as policymakers struggle to lift the bloc out of its economic malaise. Lord King said the single currency area would have to choose between an economic “depression” in the south, higher inflation in northern states like Germany, permanent fiscal transfers or a “change of composition of the euro area”. However, he told an audience in Frankfurt that there was “a limit to the economic pain that can be imposed in pursuit of a federal Europe without risking a political reaction. “There are no empires in Europe any more and our leaders would do well not to try to recreate one.”

Read more …

Ambrose votes Brexit?!

Let The TTIP Die If It Threatens Parliamentary Democracy (AEP)

Unloved, untimely, and unnecessary, the putative free trade pact between Europe and America is dying a slow death. The Dutch people have amassed 100,000 signatures calling for a referendum on this Transatlantic Trade and Investment Partnership, or TTIP. The number is likely to soar after Greenpeace leaked 248 pages of negotiation papers over the weekend. The documents do not exactly show a “race to the bottom in environmental, consumer protection and public health standards” – as Greenpeace alleges – but they do raise red flags over who sets our laws and who holds the whip hand over our eviscerated parliaments. Dutch voters have already rebuked Brussels once this year, throwing out an association agreement with Ukraine in what was really a protest against the wider conduct of European affairs by an EU priesthood that long ago lost touch with economic and political reality.

French president François Hollande cannot hide from that reality. Faced with approval ratings of 13pc in the latest TNS-Sofres poll, a TTIP mutiny within his own Socialist Party, and electoral annihilation in 2017, he is retreating. “We don’t want unbridled free trade. We will never accept that basic principles are threatened,” he said. In Germany, just 17pc now back the project, and barely half even accept that free trade itself a “good thing”, an astonishing turn for a mercantilist country that has geared its industrial system to exports. The criticisms have struck home. The Dutch, Germans, and French, have come to suspect that TTIP is a secretive stitch-up by corporate lawyers, yet another backroom deal that allows the owners of capital to game the international system at the expense of common people.

Weighty principles are at stake. The Greenpeace documents show that the EU’s ‘precautionary principle’ is omitted from the texts, while the rival “risk based” doctrine of the US earns a frequent mention. Clearly, the two approaches are fundamentally incompatible. It is a heresy in our liberal age – a sin against Davos orthodoxies – to question to the premises of free trade, but this tissue rejection of the TTIP project in Europe may be a blessing in disguise. You can push societies too far. [..] The European Commission’s Spring forecast this week has an eye-opening section on the rise of inequality. Without succumbing to the fallacy of ‘post hoc, propter hoc’, it is an inescapable fact that the pauperisation of Europe’s blue collar classes corresponds exactly with the advent of globalisation.

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Let’s sign another set of deals with them.

Turkey In Political Freefall As Erdogan Grabs More Power, PM To Resign (MEE)

News that Turkish Prime Minister Ahmet Davutoglu, after meeting President Recep Tayyip Erdogan, is to announce the holding of a party congress on Thursday, effectively signifying his resignation, has sent shockwaves through the country. The value of the Turkish Lira dropped from 2.79 to the dollar earlier in the day to 2.94. Davutoglu is expected to make the announcement at 1100am local time. After 14 years in power, the ruling Justice and Development Party (AKP) may be coming apart at the seams. But far more threatening than the unravelling of a political party are fears about the direction in which the country is headed. Both domestic and international critics have for years pointed to the growing authoritarianism and strong-man tactics employed by Erdogan. The fact that he can so easily dismiss the prime minister, a man he rapidly promoted through the ranks, is sending shivers down the spines of many.

“This is a palace coup,” said Yusuf Kanli, a veteran commentator on Turkish politics. “The president wanted the prime minister to step down and that’s it. Now we will have a party convention in May or early June,” Kanli told Middle East Eye. Rumours of tensions within the party have been rife for almost a year, but not even the AKP’s worst enemies had imagined a split could occur on such a scale. Unconfirmed reports suggest the AKP will convene a party congress within 60 days and that Davutoglu will not stand as a candidate. “Events today show that the AKP will move to consolidate Erdogan’s aspirations of becoming a super president. Whether they will succeed remains to be seen. These are very fine political calculations,” Kanli said. The party congress elects the party chairman, who automatically becomes their choice for prime minister.

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Now confirmed by another study.

Study: Bailouts Went To Banks, Only 5% To Greeks (Hand.)

After six years of ongoing bailouts amounting to more than €220 billion, or $253 billion in loans, Greece just cannot get out of crisis mode. It is tempting to blame those who refused to reform the country’s pensions and labor markets for the latest calamity. But a study by the European School of Management and Technology, a copy of which Handelsblatt has obtained exclusively, gives another perspective. The aid programs were badly designed by Greece’s lenders, the ECB, the EU and the IMF. Their priority, the report says, was to save not the Greek people, but its banks and private creditors. This accusation has been around for a long time. But now, for the first time, the Berlin-based ESMT has compiled a detailed calculation over 24 pages.

Their economists looked at every individual loan instalment and examined where the money from the first two aid packages, amounting to €215.9 billion, actually went. Researchers found that only €9.7 billion, or less than 5% of the total, ended up in the Greek state budget, where it could benefit citizens directly. The rest was used to service old debts and interest payments. The report comes as the EU and the Greek government prepare to hold negotiations about further debt relief. E.U. Economics Commissioner Pierre Moscovici said he hoped all sides could reach an agreement at a special meeting of the Eurogroup of euro-zone finance ministers next Monday. Extensions of credit repayment periods, deferments and freezing interest rates are all being discussed. This “debt relief light” would not affect private investors – just the loans from Europeans.

At the moment, German Chancellor Angela Merkel and her colleagues are not inclined to listen to the Greek prime minister, Alexis Tsipras, as he asks for a new multi-billion euro aid package. It is easy to understand why. The chancellor must feel she has seen it all before. She has experienced many near state bankruptcies since early 2010 when she put together the first bailout for Greece. But Jörg Rocholl, president of the European School of Management and Technology said that his institute’s research shows that the biggest problem lies with the way the bailout packages were designed in the first place. “The aid packages served primarily to rescue European banks,” he said. For example, €86.9 billion were used to pay off old debts, €52.3 billion went on interest payments and €37.3 billion were used to recapitalize Greek banks.

Of course, the servicing of debts and interest payments is a major source of expenditure in any state budget – so the Greek state did benefit from it indirectly, as it had also spent the loan money beforehand. But the new calculations do throw doubts on whether the aid programs were sensibly constructed: The loans were used to service debt, although Greece has been de facto bankrupt since 2010.

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Apart form the obvious human tragedy, I don’t know why, but nobody talks about this being the end of the tar sands industry. That’s a real possibility, though. Nearly all workers live in the town. And so oil prices are up a bit for the moment.

The Terrible News From Fort McMurray, And The Hope That Remains (G&M)

On Monday, residents of Fort McMurray watched anxiously as wildfires burned southwest of the northern Alberta city. Fort Mac’s streets are carved out of the boreal forest at the spot where the Clearwater River flows into the Athabasca. Backyards in the residential neighbourhoods in the west and northwest run up against walls of pine and spruce. Forest fire is always a threat, but on Monday the smoke and flames appeared to be far enough away to allow for hope that the city was safe. On Tuesday, the worst happened. The winds came up and the wildfires flanked the city. The two oldest residential developments, Abasands and Beacon Hill, have been decimated. Thickwood, Timberlea and Parsons Creek, the newest and by far the largest residential developments, where there are modern schools and shopping malls and a beautiful ravine park, were on the verge of being overrun by the flames.

The destruction by fire of an entire Canadian city of more than 80,000 people is suddenly a possibility. Fort McMurray is a remarkable place. People from across Canada and the world have built lives there. In grocery stores, you’ll find halal meats displayed alongside cod tongues. Muslim and Christian children mix easily at the new Roman Catholic high school. Fort Mac is often maligned as a transient, wild west town and a symbol of oil extraction at all costs, but it is in fact a tolerant, diverse and progressive city – a very Canadian boomtown. Not perfect, but doing its best to be a durable home for oil sands workers in spite of the capriciousness of oil prices, the isolation and the long winters.

The focus now is on the logistics of caring for 89,000 evacuees – a staggering challenge. Government officials at all levels and in all provinces, along with private industry and the many native bands around Fort McMurray, are offering aid. Residents are safe and, miraculously, no one has been reported killed or injured. But many, or even perhaps all, may not have homes to return to.

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Temperature anomalies keep spreading.

‘Omega Block’ Behind Searing Heat Inflaming Fort McMurray Wildfire (WaPo)

Unseasonably hot weather in Alberta, Canada, is fueling the worst wildfire disaster in the country’s history. An extreme weather pattern, known as an omega block, is the source of the heat. An omega block is essentially a stoppage in the atmosphere’s flow in which a sprawling area of high pressure forms. This clog impedes the typical west-to-east progress of storms. The jet stream, along which storms track, is forced to flow around the blockage. At the heart of the block in Canadian’s western provinces, the air is sinking and much warmer than normal. Such a clog can persist for days until the atmosphere’s flow is able to break it down and flush it out.

Centers of storminess form on both sides of the block, and the resulting jet stream configuration takes on the likeness of the Greek letter omega. In this case, cool and unsettled weather is affecting the eastern Pacific Ocean and eastern North America, including much of the U.S. East Coast. As the Fort McMurray wildfire rapidly spread Tuesday, temperatures surged to 90 degrees (32 Celsius), shattering the daily record of 82 degrees set May 3, 1945. Dozens of other locations in Alberta also had record high temperatures. More records are likely to fall today. Temperatures are forecast to climb well into the 80s today at Fort McMurray, about 30 degrees warmer than normal. The average high is in the upper 50s.

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This is very far from over.

UN Envoy Warns of New Wave of 400,000 Refugees From Syria (WSJ)

A top United Nations official warned of a new tide of refugees from Syria if world powers didn’t succeed in calming an outbreak of hostilities in and around the northern Syrian city of Aleppo. Staffan de Mistura, the U.N.’s special envoy for Syria, said after meeting with European diplomats and Syrian opposition officials Wednesday that the priority in moving forward with a peace process for Syria was to stop the fighting around what was once Syria’s most populous city. “The alternative is truly quite catastrophic,” Mr. de Mistura said. “We could see 400,000 people moving toward the Turkish border.” The talks in Berlin centered on ways to return to talks in Geneva on Syria’s political future. The opposition’s High Negotiations Committee, headed by Riad Hijab, pulled out of those talks on April 18 as a cessation of hostilities agreed to in February disintegrated.

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Jan 152015
 
 January 15, 2015  Posted by at 11:30 am Finance Tagged with: , , , , , , , , , ,  


Unknown Marin-Dell dairy truck, San Francisco Mar 1 1945

US Retail Sales Down Sharply, Likely Cuts to Growth Forecasts Ahead (Bloomberg)
US Retail Sales Drop Most Since June 2012 – It’s Not Gas Prices (Zero Hedge)
The December Retail Report: “Disappointing” Isn’t The Half Of It (Stockman)
Swiss Franc Jumps 30% As Central Bank Abandons Ceiling Versus Euro (Reuters)
What, Us Worry? Economists Stay Upbeat as Markets See Trouble (Bloomberg)
Here’s Why Wall Street Is Wrong About Oil Stocks (MarketWatch)
Increased US Output Bolsters Oil Glut Fears Sending Prices Back Down (Bloomberg)
US Oil Output Advances To Record Even as Prices Decline (Bloomberg)
Iraq to Double Exports of Kirkuk Crude Amid Oil Surplus (Bloomberg)
Big Oil Cuts Back As Analysts Slash Forecasts (CNBC)
Gravy Train Derails for Oil Patch Workers Laid Off in Downturn (Bloomberg)
Oil Price Crash Threatens The Future Of The North Sea Oilfields (Guardian)
Qatar, Shell Scrap $6.5 Billion Project After Oil’s Drop (Bloomberg)
Europe’s Imperial Court Is A Threat To All Our Democracies (AEP)
ECB Stimulus Already Priced Into Market (CNBC)
Deflation Risk Renders Czech Koruna’s Euro Cap Irrelevant (Bloomberg)
Germany Gets Walloped By Its Own Austerity (Bloomberg)
Weak Capex Spending Spells Trouble For Japan (CNBC)
Market Madness Started With End Of Fed’s QE (CNBC)
Russia to Shift Ukraine Gas Transit to Turkey as EU Cries Foul (Bloomberg)
Russia to Dip Into Wealth Fund as Ruble Crisis Pressures Economy (Bloomberg)
China’s Credit Growth Surges; Shadow Banking Stages a Comeback (Bloomberg)
Asian Central Banks Should Focus On Deflation Not Inflation (Bloomberg)
Specter Of Fascist Past Haunts European Nationalism (Reuters)
Rate Of Sea-Level Rise ‘Far Steeper’ (BBC)

What on earth happened to holiday sales?

US Retail Sales Down Sharply, Likely Cuts to Growth Forecasts Ahead (Bloomberg)

The optimism surrounding the outlook for U.S. consumers was taken down a notch as retail sales slumped in December by the most in almost a year, prompting some economists to lower spending and growth forecasts. The 0.9% decline in purchases followed a 0.4% advance in November that was smaller than previously estimated, Commerce Department figures showed today in Washington. Last month’s decrease extended beyond any single group as receipts fell in nine of 13 major retail categories. While disappointing, the drop followed large-enough gains at the start of the quarter that signaled consumer spending accelerated from the previous three months as the job market strengthened and gasoline prices plunged. Continued improvement in hiring that sparks more wage growth will be needed to ensure customers at retailers such as Family Dollar Stores also thrive.

“Maybe the optimism a month ago got a little too heated,” said Guy Berger, U.S. economist at RBS. “It’s a weak number but it follows some really strong ones and I don’t think it changes my general feeling on how the economy and consumers are doing.” Treasury yields and stocks fell as a deepening commodities rout and the drop in sales spurred concern global growth is slowing. The Standard & Poor’s 500 Index retreated 0.6% to 2,011.27 at the close in New York. The 30-year Treasury bond yielded 2.47% after declining earlier to a record-low 2.39%. Electronics merchants, clothing outlets, department stores and auto dealers were among those posting sales declines in December, today’s report showed. Cheaper fuel helped push receipts at gasoline stations down by the most in six years. T

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But but but indeed.

US Retail Sales Drop Most Since June 2012 – It’s Not Gas Prices (Zero Hedge)

But but but… US retail advanced sales dropped a stunning 0.9% MoM (massively missing expectations of a 0.1% drop). The last time we saw a bigger monthly drop was June 2012. Want to blame lower gas prices – think again… Retail Sales ex Autos and Gas also fell 0.3% (missing an exuberantly hopeful expectation of +0.5% MoM) and the all-important ‘Control Group’ saw sales fall 0.4% (missing expectations of a 0.4% surge). Boom goes the narrative. Advance Retail Sales massively missed For Dec…

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“.. no economy can thrive for long – especially one already at “peak debt” – based on consumer “spending” that is 100% dependent upon borrowed funds.”

The December Retail Report: “Disappointing” Isn’t The Half Of It (Stockman)

Today’s 0.9% decline in December retail sales apparently came as a shock to bubblevision’s talking heads. After all, we have had this giant “oil tax cut”, and, besides, the US economy has “decoupled” from the stormy waters abroad and is finally on its way to “escape velocity”. The Wall Street touts and Keynesian economic doctors have been saying that for months now – while averring that all the Fed’s massive money printing is finally beginning to bear fruit. So today’s retail report is a real stumpe – –even if you embrace Wall Street’s sudden skepticism about government economic reports and ignore the purported “noise” in the seasonally maladjusted numbers for December. All right then. Forget the December monthly numbers. Why not look at the unadjusted numbers in the full year retail spending report for 2014 compared to the prior year.

Recall that the swoon from last winter’s polar vortex overlapped both years, and was supposed to be a temporary effect anyway – a mere shift of consumer spending to a few months down the road when spring arrived on schedule. On an all-in basis, total retail sales in 2014 rose by $210 billion or a respectable 4.0%. But 58% of that gain was attributable to two categories – auto sales and bars&restaurants – which accounted for only 28% of retail sales in 2013. And therein lies a telling tale. New and used motor vehicle sale alone jumped by $86 billion in CY2014 or nearly 9%. Then again, during the most recent 12 months auto loans outstanding soared by $89 billion. Roughly speaking, therefore, consumers borrowed every dime they spent on auto purchases and took home a few billion extra in spare change.

The point here is that no economy can thrive for long – especially one already at “peak debt” – based on consumer “spending” that is 100% dependent upon borrowed funds. Yet that has been the essence of the retail sales rebound since the Great Recession officially ended in June 2009. Auto sales, which have been heavily financed by borrowing, are up by about 70%; the balance of non-auto retail sales, where consumer credit outstanding is still below the pre-crisis peak, has gained only 22%. Stated differently, the only credit channel of monetary policy transmission which is still working is auto credit. Yet as indicated earlier this week, that actually amounts to a proverbial “accident” waiting to happen. On the margin, the boom in auto loans, which are now nearing $1 trillion in outstandings, is on its last leg. The latest surge of growth has been in “subprime” credit based on the foolish assumption that vehicle prices never come down; and that the junk car loan boom led by fly-by-night lenders is nothing to worry about since loans are “collateralized”.

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Wow!

Swiss Franc Jumps 30% As Central Bank Abandons Ceiling Versus Euro (Reuters)

Switzerland’s franc soared by almost 30% in value against the euro on Thursday after the Swiss National Bank abandoned its three-year old cap at 1.20 francs per euro. In a chaotic few minutes on markets after the SNB’s announcement, the franc broke past parity against the euro to trade at 0.8052 francs per euro before trimming those gains to stand at 88.00 francs. It also gained 25% against the dollar to trade at 74 francs per dollar.

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Huh? ” ..looking at economic data, “we’re certainly not seeing anything that’s unnerving us.”

What, Us Worry? Economists Stay Upbeat as Markets See Trouble (Bloomberg)

The U.S. consumer, that dynamo of the global economy, just took a step back. Relax. It’s not that bad, economists say. News Wednesday that U.S. retail sales unexpectedly declined in December reverberated through financial markets, but few economists read the report as a sign of trouble for the nation’s economy. In fact, many economists say the U.S. economy is doing just fine. So why did the markets react the way they did? The answer, in part, is that the report added to a wall of worry confronting investors. Topping the 2015 angst-list are the plunge in oil and other commodities, as well as slowdowns in China and Europe.

“It feels like a global recession when you look at the markets,” said David Hensley, director of global economics for JPMorgan. But looking at economic data, “we’re certainly not seeing anything that’s unnerving us.” For the moment, the 0.9% decline in December retail sales reported by the Commerce Department has pushed back market expectations for when the Federal Reserve will start raising interest rates. It also has bond investors betting that inflation will stay low. Forecasts change all the time. But before anyone panics over one economic number, here are four reasons to stay optimistic about the U.S. economy, which is still in the driver’s seat of global growth.

• December sales figures aside, U.S. consumers aren’t running scared. Yes, last month’s decline was the biggest in a year. But consumer spending probably rose at an annual rate of more than 4% during the fourth quarter as a whole, according to Ted Wieseman at Morgan Stanley. The first quarter of this year is looking just as good, Wieseman wrote in a note today to clients.

• The U.S. jobs market is perking up. Less than a week ago, investors were cheering news of another big rise in U.S. payrolls. In all, the economy added about 3 million jobs last year. “The U.S. is doing great relative to the rest of the developed world,” said Jim O’Sullivan at High Frequency Economics.

• The plunge in oil and other commodities is mostly good news for consumers. Cheaper oil means cheaper fuel. And most economists say that’s good for global growth. The plunge in oil, for example, largely reflects an increase in supply, from shale and the like, rather than a decrease in demand. U.S. production of crude oil rose to 9.19 million barrels a day last week, the highest in Energy Information Administration weekly estimates going back to 1983.

• Bond yields are hitting new lows, but that doesn’t necessarily mean the entire world is about to sink into a deflationary spiral in which prices, wages and output fall in tandem. In fact, many economists predict wages in the U.S. will finally start rising this year. “It’s just a matter of time before wage growth picks up,” said Mohamed El-Erian.

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“The Street’s estimates are based on a price of roughly $75 a barrel for oil ..”

Here’s Why Wall Street Is Wrong About Oil Stocks (MarketWatch)

Most Wall Street analysts are basing their 2015 earnings estimates for oil companies on a questionable number: the price of oil itself. Exxon Mobil, which has, by far, the largest market value of any oil producer, illustrates this point perfectly. The consensus among sell-side analysts polled by FactSet is for the company to earn $5.18 a share this year, down 40% from an estimated $7.27 in 2014. The expected decline in earnings springs from the crash in oil prices amid slowing demand, increased U.S. supply and OPEC’s strategy of defending its market share by refusing to cut production. But Oppenheimer analyst Fadel Gheit, who’s based in New York, has diverged wildly from his peers, predicting a 2015 EPS estimate of only $2.65 for Exxon Mobil.

“The Street’s estimates are based on a price of roughly $75 a barrel for oil,” which is where the analysts think oil will end up after recovering from its drop. Oppenheimer’s estimates are updated every Friday, based on current oil prices, not on where the firm’s analysts think the price may eventually settle. Gheit’s estimates from Friday were based on prices of $51.68 a barrel for West Texas crude and $55.20 for Brent crude. Based on the consensus 2015 estimate and Tuesday’s closing stock price of $90, Exxon Mobil would trade for 17.4 times this year’s earnings. That’s not an outrageously high valuation. However, based on Gheit’s estimate, which in turn is based on what’s actually going on in the oil market, the stock would trade for about twice as much: 34 times earnings.

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What do they expect?

Increased US Output Bolsters Oil Glut Fears Sending Prices Back Down (Bloomberg)

Oil resumed its decline after the biggest gain since June 2012 as U.S. crude production increased, bolstering speculation a global supply glut that spurred last year’s price collapse may persist. Futures dropped as much as 1.3% in New York. U.S. output surged to 9.19 million barrels a day last week, the fastest pace in weekly records dating back to January 1983, the Energy Information Administration reported yesterday. Crude may fall below a six-month forecast of $39 a barrel and rallies could be thwarted by the speed at which lost shale production can recover, according to Goldman Sachs. Oil slumped almost 50% last year, the most since the 2008 financial crisis, as OPEC resisted cutting output even amid the U.S. shale boom, exacerbating a surplus estimated by Kuwait at 1.8 million barrels a day.

Prices rose yesterday as a relative strength index rebounded after more than two weeks below 30, a level that typically signals the market is oversold. “You tend to arrive at points every now and then in major trends like this where you just see a little bit of short covering and profit taking,” Ric Spooner at CMC Markets in Sydney, said. “Supply is still the general theme.” Oil is leading this week’s slide in commodities after a decade-long bull market led companies to boost production and a stronger dollar diminished their allure to investors. The Bloomberg Commodity Index of 22 energy, agriculture and metal products decreased to the lowest level since November 2002 on Jan. 13, extending a 17% loss last year.

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“.. output rose in November as the number of new wells coming online fell by 73%.”

US Oil Output Advances To Record Even as Prices Decline (Bloomberg)

Drillers that unlocked the shale oil boom in the U.S. are finding it hard to shut off the nozzle. U.S. crude production rose even as prices slumped to the lowest in more than five years and the number of rigs targeting oil decreased. In North Dakota’s prolific Bakken shale formation, output rose in November as the number of new wells coming online fell by 73%. The increases illustrate how improvements in horizontal drilling and hydraulic fracturing technology may prop up U.S. crude production even as companies cut spending, idle rigs and lay off thousands of workers with oil prices down more than 50% since June. “We have an oversupply of crude,” Michael Hiley, head of energy OTC at LPS Partners said yesterday.

“Production keeps going up. There is not a great correlation between the rig count and production because drilling has gotten more efficient over the last several years.” Output climbed to 9.19 million barrels a day last week, the most in Energy Information Administration weekly estimates going back to 1983. Strong production helped push crude inventories to a seasonal record, EIA data showed. Crude has slumped 9% in 2015 after declining 46% in 2014 as shale oil lifted U.S. supply and OPEC maintained production. Last week, U.S. oil rigs declined by the most since 1991. Producers including Continental and ConocoPhillips say they will cut spending.

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“.. in the coming few weeks,”

Iraq to Double Exports of Kirkuk Crude Amid Oil Surplus (Bloomberg)

Iraq will double exports within weeks from its northern Kirkuk oil fields and continue boosting output further south amid a global market glut that’s pushed prices to their lowest level in more than five and a half years. Crude shipments will rise to 300,000 barrels a day from the Kirkuk oil hub, where authorities are also upgrading pipelines between fields, Fouad Hussein, at Kirkuk provincial council’s oil and gas committee, said. “There is a need to install a new pipeline network” to increase exports from the area, Hussein said. Kirkuk, which currently exports about 150,000 barrels a day, will boost shipments to 250,000 barrels a day and then to 300,000 “in the coming few weeks,” he said. Iraq, holder of the world’s fifth-largest crude reserves, is rebuilding its energy industry after decades of wars and economic sanctions.

The country exported 2.94 million barrels a day in December, the most since the 1980s, Oil Ministry spokesman Asim Jihad said Jan. 2. The exports, pumped mostly from fields in southern Iraq, included 5.579 million barrels from Kirkuk in that month, he said. [..] State-owned Missan Oil plans to boost its production to 1 million barrels a day in 2017 from an average output of 257,000 barrels a day in 2014, according to Director-General Adnan Sajet. Output exceeded 93 million barrels in 2014, up 10 million barrels from the previous year, he said yesterday. Iraq’s government also awarded a contract to an unspecified international company to more than double the capacity of the southern Basra oil refinery to 300,000 barrels a day, according to an e-mailed statement from the office of Deputy Prime Minister Rowsch Nuri Shaways. The refinery can currently process about 140,000 barrels a day.

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“U.K.-based Tullow Oil has painted a bleak outlook for the years ahead. The firm announced earnings Thursday, with write offs of $2.3 billion ..” “Premier Oil also announced an estimated $300-million impairment charge for the second half of this year ..”

Big Oil Cuts Back As Analysts Slash Forecasts (CNBC)

The ongoing rout in oil markets is putting high-profile industry names on the back foot, with Shell announcing major changes to operations this week – and BP expected to follow suit. BP is expected to announce significant job cuts across the 20 oil fields in owns in the North Sea – just off the coast of the U.K. – on Thursday, according to media reports. It currently employs 4,000 workers in the area. Meanwhile, Anglo–Dutch multinational Royal Dutch Shell announced that it had decided to shelve the construction of a new petrochemicals complex in Qatar, was due to be a tie-up with the country’s state-owned oil firm.

In the exploration sector – the first to be hit by falling oil prices – U.K.-based Tullow Oil has painted a bleak outlook for the years ahead. The firm announced earnings Thursday, with write offs of $2.3 billion, and warned there had been “major steps taken to strengthen the business to adapt to current market conditions.” Rival exploration firm Premier Oil also announced an estimated $300-million impairment charge for the second half of this year on Wednesday, with delays and cost-cutting plans expected in the development of some of its new oil fields. Weak global demand and booming U.S. shale oil production are seen as two key reasons behind the price plunge, as well as OPEC’s reluctance to cut its output. Both WTI and Brent crude prices have crashed by around 60% since mid-June last year and oil stocks have been crushed, underperforming the wider benchmarks.

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“As of November, oil and gas companies employed 543,000 people across the U.S., a number that’s more than doubled from a decade ago ..”

Gravy Train Derails for Oil Patch Workers Laid Off in Downturn (Bloomberg)

The first thing oilfield geophysicist Emmanuel Osakwe noticed when he arrived back at work before 8 a.m. last month after a short vacation was all the darkened offices. By that time of morning, the West Houston building of his oilfield services company was usually bustling with workers. A couple hours later, after a surprise call from Human Resources, Osakwe was adding to the emptiness: one of thousands of energy industry workers getting their pink slips as crude prices have plunged to less than $50 a barrel. “For the oil and gas industry, it’s scary,” Osakwe said in an interview after he was laid off last month from a unit of Halliburton, which he joined in September 2013. “I was blind to the ups and downs associated with the industry.”

It’s hard to blame him. The oil industry has been on a tear for most of the past decade, with just a brief timeout for the financial crisis. As of November, oil and gas companies employed 543,000 people across the U.S., a number that’s more than doubled from a decade ago, according to data kept by Rigzone, an employment company servicing the energy industry. Stunned by the sudden plunge in the price of oil, energy companies have increasingly resorted to layoffs to cut costs since Christmas, shocking a new generation of workers, like Osakwe, unfamiliar with the industry’s historic boom and bust cycles. Workers who entered the holiday season confident they had secure employment in one of the country’s safest havens now find themselves in shrinking workplaces with dimming prospects. [..]

There’s no firm number yet on how many oil industry workers are losing their jobs, or how many more cuts might be coming. Halliburton said last month it was laying off 1,000 staff in the Eastern Hemisphere alone as it adapted to a shrinking business. Suncor, a Canadian oil company, said this week it will cut 1,000 jobs in 2015, a day after Shell said it would cut 300 in the region. Other companies have announced layoffs, but many are making the cuts without public fanfare. The effects are being felt beyond the oil companies as cutbacks trickle down to suppliers and other companies that thrived along with $100 oil. The biggest drilling states – Texas, North Dakota, Louisiana, Oklahoma, Colorado – are expected to feel the most pain. The Dallas Federal Reserve estimates 140,000 jobs directly and indirectly tied to energy will be lost in Texas in 2015 because of low oil prices.

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“North Sea oilfields could be shut down if the oil price fell by just a few more dollars ..”

Oil Price Crash Threatens The Future Of The North Sea Oilfields (Guardian)

The potential impact of the oil price slump on Scotland was underlined as a leading energy expert warned on Wednesday that North Sea oilfields could be shut down if the oil price fell by just a few more dollars. The rising sense of crisis about the plummeting price – which has fallen 60% in the last six months – prompted the Scottish government to promise an emergency taskforce to try to preserve jobs in the offshore energy sector. Meanwhile, Mark Carney, the governor of the Bank of England warned that the Scottish economy was heading for a “negative shock”. The oil industry consultancy Wood Mackenzie said that at the current price for Brent blend, of $46 a barrel, some UK production was already failing to break even, and further falls could endanger output.

Robert Plummer, a research analyst with the firm, said that at $50 a barrel oil production was costing more than its value in 17 countries, including the US and UK. Plummer told Scottish Energy News: “Once the oil price reaches these levels producers have a sometimes complex decision to continue producing, losing money on every barrel produced, or to halt production, which will reduce supply.” Concern about cutbacks was heightened Wednesday when Shell announced it was scrapping a $6.4bn (£4.2bn) energy project in the Middle East because it was no longer commercial, with oil prices falling to six-year lows. Plummer said that if oil prices fell to $40, a small but significant part of global supply would become “cash negative”, although some operators would choose to keep producing oil at a loss rather than stop production.

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So many projects will be shelved.

Qatar, Shell Scrap $6.5 Billion Project After Oil’s Drop (Bloomberg)

Qatar Petroleum and Royal Dutch Shell called off plans to build a $6.5 billion petrochemical plant in the emirate, saying the project is no longer commercially feasible amid the upheaval in global energy markets. The companies formed a partnership for the al-Karaana project in 2011 and planned to operate it as a joint venture, with state-run QP owning 80% and Shell the remaining 20%. They decided not to proceed after evaluating quotations from bidders for engineering and construction work, the companies said yesterday in a joint statement. The expected capital cost of the petrochemical complex planned in Ras Laffan industrial city “has rendered it commercially unfeasible, particularly in the current economic climate prevailing in the energy industry,” they said.

Al-Karaana is the second petrochemical project in Qatar to be canceled in recent months due to unfavorable economics. Industries Qatar, the state-controlled petrochemical and steel producer, halted plans to build a $6 billion plant in September. Qatar, an OPEC member and the world’s biggest exporter of liquefied natural gas, is seeking like other energy producers in the Persian Gulf to diversify its economy away from oil and gas exports and building factories to make petrochemicals, aluminum and steel. “The region is beginning to reduce its capital expenditure for petrochemical and hydrocarbon expansion, and that is expected given that oil prices have plunged,” John Sfakianakis, Middle East director at Ashmore Group Plc, said in a phone interview.

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“This would be a fundamental transformation of the EU from a treaty organisation, which depends on the democratic assent of the sovereign states, into a supranational entity.”

Europe’s Imperial Court Is A Threat To All Our Democracies (AEP)

The European Court of Justice has declared legal supremacy over the sovereign state of Germany, and therefore of Britain, France, Denmark and Poland as well. The ECJ’s advocate-general has not only brushed aside the careful findings of the German constitutional court on a matter of highest importance, he has gone so far as to claim that Germany is obliged to submit to the final decision. “We cannot possibly accept this and they know it,” said one German jurist close to the case. The matter at hand is whether the European Central Bank broke the law with its back-stop plan for Italian and Spanish debt (OMT) in 2012. The teleological ECJ – always eager to further the cause of EU integration – did come up with the politically-correct answer as expected. The ECB is in the clear.

The opinion is a green light for quantitative easing next week, legally never in doubt. The European Court did defer to the Verfassungsgericht in Karlsruhe on a few points. The ECB must not get mixed up with the EU bail-out fund (ESM) or take part in Troika rescue operations. But these details are not the deeper import of the case. The opinion is a vaulting assertion of EU primacy. If the Karlsruhe accepts this, the implication is that Germany will no longer be a fully self-governing sovereign state. The advocate-general knows he is risking a showdown but views this fight as unavoidable. “It seems to me an all but impossible task to preserve this Union, as we know it today, if it is to be made subject to an absolute reservation, ill-defined and virtually at the discretion of each of the Member States,” he said.

In this he is right. “This Union” – meaning the Union to which EU integrationists aspire – is currently blocked by the German court, the last safeguard of our nation states against encroachment. This is why the battle is historic.”His opinion is a direct affront to the German court. It asserts that the EU court has the final say in defining and creating the EU’s own powers, without any national check,” said Gunnar Beck, a German legal theorist at the University of London. “This would be a fundamental transformation of the EU from a treaty organisation, which depends on the democratic assent of the sovereign states, into a supranational entity.” Germany’s judges have never accepted the ECJ’s outlandish claims to primacy.

Their ruling on the Maastricht Treaty in 1993 warned in thunderous terms that the court reserves the right to strike down any EU law that breaches the German Grundgesetz or Basic Law. They went further in their verdict on the Lisbon Treaty in July 2009, shooting down imperial conceits. The EU is merely a treaty club. The historic states are the “masters of the Treaties” and not the other way round. They set limits to EU integration. Whole areas of policy “must forever remain German”. If the drift of EU affairs erodes German democracy – including the Bundestag’s fiscal sovereignty – the country must “refuse further participation in the European Union”.

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“In the U.S., 18% of bank assets are stuck at the Fed, dead money. So it’s not really a good move for Europe that’s going to cause stimulus.”

ECB Stimulus Already Priced Into Market (CNBC)

The markets have already priced in the quantitative easing that the European Central Bank is expected to do next week and he doesn’t think it will be very powerful, David Malpass, president of Encima Global, told CNBC Wednesday. Therefore, he believes the markets are entering a phase of global rebalancing. “People will get tired of just being in the U.S. and will take a look at some of the emerging markets, oil, the euro and so on,” Malpass said in an interview with “Closing Bell.” David Hale, chairman of David Hale Global Economics, agrees the market has been discounting the anticipated QE for several weeks.

“Bond yields in Europe are at record low levels. Leaving aside the last few days, stock markets have been resilient. So I do think the expectation of this happening is now broadly in the market because of both comments by [ECB President Mario] Draghi and other members of the monetary policy council.” The European Central Bank meets next Thursday, and Draghi has said the bank is ready to start full-blown quantitative easing. Hale expects a “decent” amount of QE but said he doesn’t think it will work well enough to be stimulative. “The bond yields are already low, and remember the ECB is going to finance all those bond purchases with bank financing,” he said. “In the U.S., 18% of bank assets are stuck at the Fed, dead money. So it’s not really a good move for Europe that’s going to cause stimulus.”

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Sort of like Switzerland. Only, the koruna will plummet, not rise.

Deflation Risk Renders Czech Koruna’s Euro Cap Irrelevant (Bloomberg)

Currency traders are taking aim at the Czech Republic amid speculation that policy makers will have little choice but to weaken the koruna as it seeks to avert deflation. A measure of volatility jumped this month by the most among 31 major peers as the koruna fell to a six-year low of 28.5 per euro. The exchange rate is so far away from the 27-per-euro cap imposed by the central bank more than a year ago when inflation was the bigger threat that Goldman Sachs says it’s now “odds on” that the ceiling gets adjusted to 30 per euro. “I expect the koruna to tumble much further,” Bernd Berg, director of emerging-market strategy at SocGen, said. “The economy is on the brink of deflation. This has increased the likelihood of a dovish monetary-policy reaction.”

While neighboring Poland and Hungary have room to cut interest rates to curb deflation, the Czech Republic’s options are limited because its borrowing costs are already close to zero at 0.05%. Central-bank Governor Miroslav Singer entered the debate yesterday, seeking to play down the prospect of a lower currency limit by saying it may only become necessary if there were a “long-term increase in deflation pressures.” Singer’s comments in a blog on the Czech National Bank’s website helped the koruna rally late in the trading day, though it’s still 1.5% lower against the euro this year, the biggest loss among 31 major currencies after Russia’s ruble.

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“.. their business environment is getting worse, they’re reluctant to invest, and no matter how much cheap money the European Central Bank tries to steer their way, they’re not interested in borrowing to expand.”

Germany Gets Walloped By Its Own Austerity (Bloomberg)

The euro region is suffering from austerity fatigue, exemplified by polls showing Greece on the verge of dumping its government for one with less enthusiasm for spending cuts. Germany has been the principal architect of fiscal rectitude and the main opponent to any relaxation of deficit rules. What’s happening in the heartland of German industry, however, suggests it’s not just Germany’s neighbors who are threatened by its economic intransigence. The backbone of the German economy is formed by about 3.7 million small- and medium-sized enterprises, defined as those with annual sales no greater than 50 million euros ($60 million) and known as the Mittelstand. It turns out their business environment is getting worse, they’re reluctant to invest, and no matter how much cheap money the European Central Bank tries to steer their way, they’re not interested in borrowing to expand.

That’s the unavoidable conclusion of a report published by the German Savings Banks Association yesterday. The association polled more than 330 of the country’s 416 savings banks in October, and examined more than a quarter of a million SME balance sheets. For German companies that did invest last year, only 19.7% cited “expansion” as their motivation, down from 27.5% in 2013 and the lowest outcome since 2010. More than half of the companies instead were replacing old machinery. Investment itself remains stagnant, stuck at about 340 billion euros or 11.7% of gross domestic product. For small and medium-sized enterprises, this weakness of investment was not due to a lack of external financing or insufficient equity. The continuing economic difficulties experienced by many partner countries in the Monetary Union as well as geopolitical crises have reinforced the wait-and-see attitude of many enterprises.

Only 16% of the business managers at the banks said their customers’ businesses got better in 2014, less than half the number who said a year earlier that they were seeing improvements. Some 18% said things had gotten worse, versus just 4.6% in 2013. Companies in the west of Germany, which are typically the most dependent on exports, were worse hit than those in the eastern federal states, the association said. In response, companies are retrenching. Some 46% of the bank respondents said they provided less investment financing for their customers last year, with just 16% upping their credit allocations. By contrast, more than 64% of companies expanded their equity bases, adding to 59% in both 2012 and 2013.

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What goes for Germany goes for Japan: “Many Japanese corporations don’t want to invest because they don’t think they can make any money in Japan ..”

Weak Capex Spending Spells Trouble For Japan (CNBC)

The majority of Japanese companies appear unwilling to spend, latest government data showed on Wednesday, adding to doubts over the economy’s ability to recover amid slowing growth across the world, particularly in China. Core machinery orders, a leading indicator of capex spending, grew 1.3% on-month in November, a reversal from October’s 6.4% decline, but well below expectations for a 5.0% rise in a Reuters poll. Year-on-year, machinery orders dropped 14.6%, below the Reuters poll estimate of a 5.8% decline. At the same time, the Cabinet Office cut its assessment of machinery orders, citing signs that the economic recovery is stalling, Reuters reported.

“Many Japanese corporations don’t want to invest because they don’t think they can make any money in Japan,” said Taro Saito, director of economic research at NLI Research Institute. “The trend to hoard cash rather than invest is not good for the wider Japanese economy.” Still, he reckons capital spending is on a modest recovery trend now that the second consumption tax hike initially scheduled for October 2015 was shelved until April 2017. The first hike from 5% to 8% in April 2014 was too brutal, he said. Japan’s economy contracted in the two quarters following April’s tax hike, tipping the country into a technical recession.

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We are just leaving the madness. “The fuel for the fire over the last several years has been stock repurchases, and that has been fueled for the most part by the zero interest rate environment.”

Market Madness Started With End Of Fed’s QE (CNBC)

For nearly six years running, the U.S. stock market has withstood a myriad of body blows, from a stuttering economic recovery to a debt crisis in Europe to massive political instability in Washington. Underpinning each move higher was the knowledge that the Federal Reserve would keep the printing presses running, with aggressive quantitative easing programs that sent market confidence high and asset prices soaring. Now, though, comes a shock that has Wall Street reeling: The Black Swan-like collapse in oil prices that has provided a stern test of whether equity markets can survive nearly free of Fed hand-holding. So far, with volatility spiking, traditional correlations breaking down and the bad-news-is-good-news theme no longer in play, the early results are not particularly reassuring. “Stuff happens when QE ends,” said Peter Boockvar, chief market analyst at The Lindsey Group.

“It’s no coincidence that the market started going into a higher volatility mode, it’s no coincidence that the decline in commodity prices accelerated, it’s no coincidence that the yield curve started flattening when QE ended.” Indeed, the increase in volatility and its effect on prices across the capital market spectrum was closely tied to the Fed ending the third round of QE in October. That month marked a momentary collapse in bond yields on Oct. 15, a day that also saw the Dow Jones industrial average plunge some 460 points at one juncture before slicing its losses. The day, and the general tenor of markets as the Fed ended QE amid a global Ebola and economic growth scare, helped make October the most volatile month of 2014.

In second place for monthly volatility was December, according to a Tabb Group analysis, as investors pondered the meaning of “patient” in a Fed statement on when it planned to raise rates and waited for a Santa Claus rally that failed to materialize. January has proven to be an even bumpier month as investors evaluate an oil plunge that sent a gallon of gasoline below $2 in some locations but has raised question about longer-term effects on corporate bottom lines and business investment. Then came Wednesday’s disappointing retail sales numbers, all of which raised concerns about whether Wall Street is capable of negotiating its way through rough times with only zero-bound short-term interest rates as a backstop. “The assumption that low energy prices were unambiguously good was called into question with December retail sales,” said Art Hogan at Wunderlich Securities. “I think it’s all connected, but I’d be hard-pressed to tie it just to monetary policy.”

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Threat to the EU.

Russia to Shift Ukraine Gas Transit to Turkey as EU Cries Foul (Bloomberg)

Russia plans to shift all its natural gas flows crossing Ukraine to a route via Turkey, a surprise move that the European Union’s energy chief said would hurt its reputation as a supplier. The decision makes no economic sense, Maros Sefcovic, the European Commission’s vice president for energy union, told reporters today after talks with Russian government officials and the head of gas exporter, Gazprom, in Moscow. Gazprom, the world’s biggest natural gas supplier, plans to send 63 billion cubic meters through a proposed link under the Black Sea to Turkey, fully replacing shipments via Ukraine, Chief Executive Officer Alexey Miller said during the discussions. About 40% of Russia’s gas exports to Europe and Turkey travel through Ukraine’s Soviet-era network.

Russia, which supplies about 30% of Europe’s gas, dropped a planned link through Bulgaria bypassing Ukraine amid EU opposition last year. Russia’s relations with the EU have reached a post-Cold War low over President Vladimir Putin’s support for separatists in Ukraine. Sefcovic said he was “very surprised” by Miller’s comment, adding that relying on a Turkish route, without Ukraine, won’t fit with the EU’s gas system. Gazprom plans to deliver the fuel to Turkey’s border with Greece and “it’s up to the EU to decide what to do” with it further, according to Sefcovic. “We don’t work like this,” he said. “The trading system and trading habits – how we do it today – are different.”

Sefcovic said he arrived in the Russian capital to discuss supplies to south-eastern EU countries after Putin scrapped the proposed $45 billion South Stream pipeline. The region, even if Turkey is included, doesn’t need the volumes Gazprom is planning for a new link, he said. Ukraine makes sense as a transit country given its location in Europe and the “very clear specified places of deliveries” in Gazprom’s current long-term contracts with EU customers, Sefcovic said. “I believe we can find a better solution,” Sefcovic said.

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They’ll be fine.

Russia to Dip Into Wealth Fund as Ruble Crisis Pressures Economy (Bloomberg)

Russia will unseal its $88 billion Reserve Fund and use it to acquire rubles, the government’s latest effort to stem the country’s worst currency crisis in almost 17 years and limit its effects on the ailing economy. “Together with the central bank, we are selling a part of our foreign-currency reserves,” Finance Minister Anton Siluanov said in Moscow today. “We’ll get rubles and place them in deposits for banks, giving liquidity to the economy.” Russian officials are running out of options to stem the ruble’s plunge as oil prices below $50 a barrel and sanctions imposed over the conflict in Ukraine push the country to the brink of recession. Policy makers have already raised interest rates by the most since 1998 and introduced a 1 trillion-ruble ($15 billion) bank recapitalization plan. The risk for policy makers is that using the reserves to fight the ruble’s slide will worsen its standing with investors.

Economy Minister Alexei Ulyukayev said today there’s a “fairly high” risk that the country’s credit rating will be cut below investment grade for the the first time in a decade. “This should be viewed just as the continuation of the desire to present a united front in dealing with events in the foreign-currency market,” Ivan Tchakarov, chief economist at Citigroup in Moscow, said. Russia may convert the equivalent of as much as 500 billion rubles from one of the government’s two sovereign wealth funds to support the national currency, Siluanov said, calling the ruble “undervalued.” The Finance Ministry last month started selling foreign currency remaining on the Treasury’s accounts. The entire 500 billion rubles or part of the amount will be converted in January-February through the central bank, according to Deputy Finance Minister Alexey Moiseev. The Bank of Russia will determine the timing and method of the operation.

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“Some of the jump in shadow-banking credit might have been related to the anticipation of new restrictions on borrowing by local-government financing vehicles”

China’s Credit Growth Surges; Shadow Banking Stages a Comeback (Bloomberg)

China’s shadow banking industry staged a comeback in December as equity investors and local governments contributed to a surge in credit, underscoring challenges for a central bank trying to revive growth without exacerbating risks. Aggregate financing was 1.69 trillion yuan ($273 billion), the People’s Bank of China said in Beijing today, topping the 1.2 trillion yuan median estimate in a Bloomberg survey. While new yuan loans missed economists’ forecasts, shadow lending rose to the highest in monthly records that began in 2012. With economic growth headed below 7%, the central bank cut interest rates for the first time in two years in November. While manufacturing and factory-gate deflation have worsened, the main stock market index surged about 30% since the rate reduction was announced on Nov. 21.

“This highlights the dilemma for the PBOC: the real economy is still weak, and loan demand is weak, but speculative activity is rampant in the stock market, and local governments need funding,” said Shen Jianguang, Hong Kong-based chief Asia economist at Mizuho Securities Asia Ltd. “I believe the PBOC will further postpone rate and RRR cuts, and instead will resort to targeted measures of injecting liquidity.” New yuan loans, which measure new lending minus loans repaid, were 697.3 billion yuan, missing the median estimate of 880 billion yuan. The M2 gauge of money supply rose 12.2% from a year earlier, compared with the median estimate of 12.5%. December’s entrusted loans increased to about 458 billion yuan, according to PBOC data compiled by Bloomberg — the most on record for the company-to-company credits that are brokered by banks.

Trust loans increased to 210 billion yuan, the most since March 2013. The contrast between new yuan loans and aggregate financing “shows that financial liquidity is not sufficient to support economic activity,” said Lu Ting, Bank of America Corp.’s head of Greater China economics in Hong Kong. “IPOs have been active, and shadow banking is reviving.” The outstanding balance of margin-trading loans on the Shanghai and Shenzhen stock exchanges rose to a then-record 1.02 trillion yuan on Dec. 30, according to data compiled by Bloomberg. That was up from 757 billion yuan on Nov. 21. Some of the jump in shadow-banking credit might have been related to the anticipation of new restrictions on borrowing by local-government financing vehicles.

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“.. Raghuram Rajan shocked India today by unexpectedly slashing the benchmark repurchase rate to 7.75% from 8%.”

Asian Central Banks Should Focus On Deflation Not Inflation (Bloomberg)

After months of preaching monetary discipline to fend off inflation, Raghuram Rajan shocked India today by unexpectedly slashing the benchmark repurchase rate to 7.75% from 8%. Close observers shouldn’t have been surprised. India’s central banker, who famously predicted the 2008 global crisis, warned in an op-ed just yesterday that several of the world’s major economies were “flirting with deflation,” with dire implications for emerging markets like his. The threat of global “secular stagnation” – combined with lower prices in India – no doubt prompted him to act. The question is why Rajan’s peers across the region don’t appear to appreciate the danger. Just today, South Korea’s central bank courted its own deflationary funk by holding benchmark interest rates steady at 2%, even as consumer prices advance at the slowest pace since 1999.

While energy costs in Indonesia are rising due to the lifting of fuel subsidies, economist Daniel Wilson of ANZ warns that prices overall are set to slow or fall: “Disinflation synchronisation is in sight and it will be severe,” he says. From Beijing to Bangkok, Asian central banks seem too blinded by longstanding inflation fears to recognize the trends inexorably pushing prices downward. In a world of plunging commodity prices and weakening global demand, Asian economies that have traditionally depended on exports are going to have to do all they can to gin up growth. Since most of the tools available to governments – increasing spending, lowering trade barriers, loosening labor markets – can’t have an immediate impact, the burden falls on central banks to act. That’s the only sure way to ease strains in credit markets, relieve hard-pressed borrowers and boost investments.

So why aren’t they? An overly doctrinaire fear of inflation explains much of the reluctance. Take the Philippines, where consumer prices are rising just 2.7% and the economy is growing 5.3%. On Dec. 12, central bank Governor Amando Tetangco said cheaper oil gave him “some scope” to leave interest rates unchanged. Since then, Brent crude has fallen to about $48 a barrel, the World Bank has downgraded its 2015 global growth forecast to 3% from 3.4% and Europe has neared a new crisis. Last week, the Philippines government sold $2 billion of 25-year debt at a record-low yield of 3.95%. Markets aren’t always right, but it sure seems time for Tetangco to move the benchmark rate below 4%.

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“.. whether Le Pen’s stances – and those of other nationalist leaders in Europe – qualify as fascist is questionable.” Well, better be careful then?!

Specter Of Fascist Past Haunts European Nationalism (Reuters)

When up to a dozen world leaders and roughly 1.5 million people gathered in Paris on Sunday to mourn the murder of 10 editors and cartoonists of the satirical newspaper Charlie Hebdo and seven other people by three French-born Islamic radicals, they wanted to demonstrate that Europe will always embrace liberal and tolerant values. But the more telling event may turn out to be a counter-rally that took place at a 17th-century town hall in Beaucaire, France, that was led by Marine Le Pen, the leader of the far-right National Front. In Beaucaire, the crowd ended Le Pen’s rally by singing the French national anthem and chanting, “This is our home.” Le Pen is at the forefront of a European-wide nationalist resurgence – one that wants to evict from their homelands people they view as Muslim subversives.

She and other far-right nationalists are seizing on some legitimate worries about Islamic militancy – 10,000 soldiers are now deployed in France as a safety measure – in order to label all Muslims as hostile to traditional European cultural and religious values. Le Pen herself has likened their presence to the Nazi occupation of France. Le Pen herself espouses an authoritarian program that calls for a moratorium on immigration, a restoration of the death penalty and a “French first” policy on welfare benefits and employment. Long after World War Two, fascism is a specter that still haunts the continent. But whether Le Pen’s stances – and those of other nationalist leaders in Europe – qualify as fascist is questionable. The borderline between the kind of populism they espouse and the outright fascism of the 1920s and 1930s, when Adolf Hitler and Benito Mussolini espoused doctrines of racial superiority, is a slippery one.

Scholars continue to debate whether Mussolini was even fascist – or simply an opportunistic nationalist. The real aim of today’s would-be authoritarians – politicians who appeal to the public’s desire for an iron hand – is to present themselves as legitimate leaders who are saying what the public really thinks but is afraid to say. And these far-right leaders are indeed increasingly popular. The card they are playing is populism presented as an aggrieved nationalism. They depict Europeans as victims of rapacious Muslim immigrants. Le Pen, Britain’s Nigel Farage of the U.K. Independence Party and others aim to come across as reasonable and socially acceptable, while sounding dog whistles to their followers about immigrant social parasites who are either stealing jobs from “real” Europeans or living off welfare.

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“This new acceleration is about 25% higher than previous estimates ..”

Rate Of Sea-Level Rise ‘Far Steeper’ (BBC)

The rate at which the global oceans have risen in the past two decades is more significant than previously recognised, say US-based scientists. Their reassessment of tide gauge data from 1900-1990 found that the world’s seas went up more slowly than earlier estimates – by about 1.2mm per year. But this makes the 3mm per year tracked by satellites since 1990 a much bigger trend change as a consequence. It could mean some projections for future rises having to be revisited. “Our estimates from 1993 to 2010 agree with [the prior] estimates from modern tide gauges and satellite altimetry, within the bounds of uncertainty. But that means that the acceleration into the last two decades is far worse than previously thought,” said Dr Carling Hay from Harvard University in Cambridge, Massachusetts.

“This new acceleration is about 25% higher than previous estimates,” she told BBC News. Dr Hay and colleagues report their re-analysis in this week’s edition of the journal Nature. Tide gauges have been in operation in some places for hundreds of years, but pulling their data into a coherent narrative of worldwide sea-level change is fiendishly difficult. Historically, their deployment has been sparse, predominantly at mid-latitudes in the Northern Hemisphere, and only at coastal sites. In other words, the instrument record is extremely patchy. What is more, the data needs careful handling because it hides all kinds of “contamination”. Scientists must account for effects that mask the true signal – such as tectonic movements that might force the local land upwards – and those that exaggerate it – such as groundwater extraction, which will make the land dip.

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