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President Donald Trump reportedly laid down an ultimatum to House Republicans on Thursday night: Pass the health-care bill, as is, on Friday, or live with Obamacare. The hard line came after more than a day of frantic negotiations to win the support of conservative Republicans who oppose the bill, and could block its passage. A vote on the bill had been scheduled for Thursday night, but was postponed earlier in the day after the GOP couldn’t win over holdout lawmakers. White House budget director Mitch Mulvaney dropped Trump’s demand in a meeting with rank-and-file House Republicans, and said the administration and House Speaker Paul Ryan were done with negotiations, according to a report in The Wall Street Journal. If Friday’s bill fails, Trump is resigned to live with Obamacare and move on, he said.

CNN similarly reported that the closed-door meeting ended with an ultimatum, and Rep. Chris Collins (R-N.Y.) told the network that the vote is expected to be held Friday afternoon. The move is a gamble by the Trump administration, which has placed much political capital in its promise to repeal and replace the Affordable Care Act, also known as Obamacare. “They’re going to bring it up, pass or fail,” Rep. Mike Simpson (R-Idaho) told the Washington Post. The GOP can’t afford more than 21 dissenting votes, but CNN counted 26 “no” votes and four more “likely” no votes. Every House Democrat is expected to oppose the bill.

And what’s worse, no way out.

• The US Has the Most Expensive Healthcare System in the World (Statista)

If the American Healthcare Act, President Trump’s first major legislative effort, is going to a vote in the House of Representatives as scheduled on Thursday, it is by no means clear that it will receive the 215 votes it needs for passage. When the Republican healthcare plan was first presented to the public on March 6, it left people from both sides of the political spectrum dissatisfied. While Democrats fear that the suggested bill, which would repeal large portions of Obama’s Patient Protection and Affordable Care Act, would leave millions of Americans uninsured and hurt the poor and vulnerable, many Republicans think it doesn’t go far enough in erasing all traces of Obamacare.

For many years now, the American healthcare system has been flawed. As our chart illustrates, U.S. health spending per capita (including public and private spending) is higher than it is anywhere else in the world, and yet, the country lags behind other nations in several aspects such as life expectancy and health insurance coverage. This chart shows health spending (public and private) per capita in selected countries.

Not my original observation, but true: it looks a lot like Russia in the 1990s.

• ‘Deaths of Despair’ Surge in White US Middle Class (Vox)

In 2015, a blockbuster study came to a surprising conclusion: Middle-aged white Americans are dying younger for the first time in decades, despite positive life expectancy trends in other wealthy countries and other segments of the US population. The research, by Princeton University’s Anne Case and Angus Deaton, highlighted the links between economic struggles, suicides, and alcohol and drug overdoses. Since then, Case and Deaton have been working to more fully explain their findings. They’ve now come to a compelling conclusion: It’s complicated. There’s no single reason for this disturbing increase in the mortality rate, but a toxic cocktail of factors. In a new 60-page paper, “Mortality and morbidity in the 21st Century,” out in draft form in the Brookings Papers on Economic Activity Thursday, the researchers weave a narrative of “cumulative disadvantage” over a lifetime for white people ages 45 through 54, particularly those with low levels of education.

[..] The US, particularly middle-aged white Americans, is an outlier in the developed world when it comes to this mid-life mortality uptick. “Mortality rates in comparable rich countries have continued their pre-millennial fall at the rates that used to characterize the US,” Case and Deaton write. “In contrast to the US, mortality rates in Europe are falling for those with low levels of educational attainment, and are doing so more rapidly than mortality rates for those with higher levels of education.” If American wants to turn the trend around, then it has to become a little more like other countries with more generous safety nets and more accessible health care, the researchers said.

Introducing a single-payer health system, for example, or value-added or goods and services taxes that support a stronger safety net would be top of their policy wish list. (America right now is, of course, moving in the opposite direction under Trump, and shredding the safety net.) They also admit, though, that it’s taken decades to reverse the mortality progress in America, and it won’t be turned around quickly or easily. But there is one “no-brainer” change that could help, Case added. “The easy thing would be close the tap on prescription opioids for chronic pain.” Unlike health care and increasing taxes, opioids are actually a public health issue with bipartisan support. Deaton, for his part, was hopeful. Paraphrasing Milton Friedman, he said, “All policy seems impossible until it suddenly becomes inevitable.”

“Visits declined by 50% between 2010 and 2013..” “What’s going on is the customers don’t have the fucking money. That’s it. This isn’t rocket science.”

• The Retail Apocalypse Has Officially Descended On America (BI)

Thousands of mall-based stores are shutting down in what’s fast becoming one of the biggest waves of retail closures in decades. More than 3,500 stores are expected to close in the next couple of months. Department stores like JCPenney, Macy’s, Sears, and Kmart are among the companies shutting down stores, along with middle-of-the-mall chains like Crocs, BCBG, Abercrombie & Fitch, and Guess. Some retailers are exiting the brick-and-mortar business altogether and trying to shift to an all-online model. For example, Bebe is closing all its stores — about 170 — to focus on increasing its online sales, according to a Bloomberg report. The Limited also recently shut down all 250 of its stores, but it still sells merchandise online.

Others, such as Sears and JCPenney, are aggressively paring down their store counts to unload unprofitable locations and try to staunch losses. Sears is shutting down about 10% of its Sears and Kmart locations, or 150 stores, and JCPenney is shutting down about 14% of its locations, or 138 stores. According to many analysts, the retail apocalypse has been a long time coming in the US, where stores per capita far outnumber that of any other country. The US has 23.5 square feet of retail space per person, compared with 16.4 square feet in Canada and 11.1 square feet in Australia, the next two countries with the most retail space per capita, according to a Morningstar Credit Ratings report from October. Visits to shopping malls have been declining for years with the rise of e-commerce and titanic shifts in how shoppers spend their money. Visits declined by 50% between 2010 and 2013, according to the real-estate research firm Cushman & Wakefield.

[..] as longtime retail analyst Howard Davidowitz observed in 2014, “What’s going on is the customers don’t have the fucking money. That’s it. This isn’t rocket science.”

This could be a huge blow to Apple. Who wants to buy something the CIA has already tinkered with in the factory? Expect giant lawsuits too. Apple knew.

• WikiLeaks Releases Vault 7 “Dark Matter”: CIA Bugs “Factory Fresh” iPhones (WL)

Today, March 23rd 2017, WikiLeaks releases Vault 7 “Dark Matter”, which contains documentation for several CIA projects that infect Apple Mac Computer firmware (meaning the infection persists even if the operating system is re-installed) developed by the CIA’s Embedded Development Branch (EDB). These documents explain the techniques used by CIA to gain ‘persistence’ on Apple Mac devices, including Macs and iPhones and demonstrate their use of EFI/UEFI and firmware malware. Among others, these documents reveal the “Sonic Screwdriver” project which, as explained by the CIA, is a “mechanism for executing code on peripheral devices while a Mac laptop or desktop is booting” allowing an attacker to boot its attack software for example from a USB stick “even when a firmware password is enabled”. The CIA’s “Sonic Screwdriver” infector is stored on the modified firmware of an Apple Thunderbolt-to-Ethernet adapter.

“DarkSeaSkies” is “an implant that persists in the EFI firmware of an Apple MacBook Air computer” and consists of “DarkMatter”, “SeaPea” and “NightSkies”, respectively EFI, kernel-space and user-space implants. Documents on the “Triton” MacOSX malware, its infector “Dark Mallet” and its EFI-persistent version “DerStake” are also included in this release. While the DerStake1.4 manual released today dates to 2013, other Vault 7 documents show that as of 2016 the CIA continues to rely on and update these systems and is working on the production of DerStarke2.0.

Also included in this release is the manual for the CIA’s “NightSkies 1.2” a “beacon/loader/implant tool” for the Apple iPhone. Noteworthy is that NightSkies had reached 1.2 by 2008, and is expressly designed to be physically installed onto factory fresh iPhones. i.e the CIA has been infecting the iPhone supply chain of its targets since at least 2008. While CIA assets are sometimes used to physically infect systems in the custody of a target it is likely that many CIA physical access attacks have infected the targeted organization’s supply chain including by interdicting mail orders and other shipments (opening, infecting, and resending) leaving the United States or otherwise.

A lot of cities around the world share that risk.

• China’s Property Bubble Risks Youth Revolt (CNBC)

China faces the risk of youth disenchantment as property prices rise beyond their reach, a renowned Chinese economist said Friday. “In a regular country, wealth should be concentrated in the financial markets, not fixed assets,” said Renmin University of China Vice President Wu Xiaoqiu at a media interview at the Boao Forum in the province of Hainan. He highlighted the risks from the current property bubble in China, such as negative asset values if prices tank. More importantly, the social risks that come from the property bubble in the form of youth disenchantment with not being to afford a home will be damaging, he said. “If young people lose hope, the economy will suffer, as housing is a necessity,” he said.

Wu said he was hopeful the authorities would find a solution to constrain the froth in Chinese real estate, but admitted that repeated measures to curb speculation have so far only met with short-term success. Wu’s comments follow a People’s Bank of China survey published on Tuesday, which found that 52.2% of urban households perceived housing prices to be “unacceptably high” in the first quarter of the year, Reuters reported. In February, gains in Chinese home prices picked up pace after they slowed in the previous four months despite government efforts to curb speculation, Reuters reported on Sunday. Prices in the big cities of Beijing, Shanghai and Shenzhen rose 22.1%, 21.1% and 13.5%, respectively, from a year ago.

Wow.

• China’s Largest Dairy Operator Crashes Over 90% In Minutes (ZH)

In December 2016, Muddy Waters’ Carson Block said China’s largest dairy farm operator, Hong-Kong listed China Huishan Dairy, is “worth close to zero” and questioned its profitability in a report. Today, with no catalyst, it suddenly almost is. The stock collapsed over 90% in minutes to a record low. The sudden crash wiped out about $4.2 billion in market value in the stock, which is a member of the MSCI China Index.

In December, Muddy Waters alleged that Huishan had been overstating its spending on its cow farms by as much as 1.6 billion yuan to “support the company’s income statement.” The report also alleged that the company made an unannounced transfer of a subsidiary that owned at least four cow farms to an undisclosed related party and Muddy Waters concluded that Chairman Yang Kai controls the subsidiary and farms. Those findings came from several months of research including visits to 35 farms and five production facilities, drone flyovers of Huishan sites and interviews with alfalfa suppliers, according to the report. Muddy Waters said it has shorted Huishan’s stock.

“It will be even harder for Huishan to get funded in the capital market after the report, amid a couple of earlier allegations that have raised some red flags to investors,” said Robin Yuen at RHB OSK Securities Hong Kong. Still, Huishan’s shares and operations are unlikely to “collapse” due to its high share concentration and sufficient cash flow generated by its dairy business, he said by telephone. About 73% of Huishan’s shares are held by Champ Harvest Ltd., a company that’s in turn 90% owned by Yang. A buying spree by Yang had supported the shares last year, making it a painful trade for short sellers. A one-year rally of about 80% through a peak in June had made the shares expensive.

“If roughly half of all Italians are against the single currency today, imagine what it will be like when austerity begins really biting.”

• Eurozone Whistles Past its Biggest Threat: Italy’s Multi-Headed Hydra (ZH)

For the last three years, the political establishment in Italy and beyond have had a field day attacking, ridiculing, and vilifying Beppe Grillo’s 5-star movement. Europe’s media have tarred him with the brush of populism. In 2013 The Economist labelled him a clown on its front cover. Yet his party still leads the polls. And that lead is growing. A new Ipsos poll in Corriere della Sera newspaper has put Beppe Grillo’s 5-Star Movement on 32.3% – its highest ever reading. It placed 5.5 points ahead of the governing PD, on 26.8%, after the PD dropped more than three%age points in a month, as former prime minister Matteo Renzi battles to reassert his authority following a walkout by a left-wing faction. Internal political battles are nothing new in Italy. The country enjoys a hard-earned reputation for political instability and paralysis, having seen 63 governments come and go since 1945.

The problem this time around is that internal weakness and strife in Italy’s traditional center-left and center-right parties could end up gifting the next election to a party that refuses to play by the book. If it wins the next elections, which could be brought forward to as early as June this year, 5-Star Movement has pledged to hold a referendum of its own – albeit a non-binding one – on Italy’s membership of the euro. As polls have shown, there is much broader public apathy toward the single currency than in just about any other euro zone nation. Grillo’s plan could also receive the backing of former prime minister Silvio Berlusconi who is determined to pull off a political comeback and is talking of restoring the Italian Lira.

As Reuters reports, such a scenario could spook financial markets “wary of both the 5-Star’s euroskepticism and the threat of prolonged political instability in Italy,” which boasts a public debt burden of over €2 trillion (133% of GDP). In any normal situation that would be a problem. But Italy is not in a normal situation; it is on the cusp of a potentially very large financial crisis that, if mishandled, could bring down Europe’s entire financial system. Unlike many other Eurozone economies like Spain, Ireland Portugal, Italy did not experience a real estate or stock market bubble in the 2000s; nor were its banks heavily exposed to the financial derivatives that helped spread the fallout from the U.S. subprime crisis all around the world. As such, Italy has not had cause to bail out its financial system — until now.

[..] Italy’s current predicament is a multi-headed hydra: a banking crisis, an economic crisis, a debt crisis, and a political crisis all rolled into one, and all coming to a head at the same time. It’s the reason why economists including Deutsche Bank’s Marco Stringa are calling Italy, not France or Greece, the “main risk” to euro-area stability. From a Eurozone-stability point of view, and from a bondholder point of view, the best-case scenario would be the rescue of Italy’s banks, with taxpayers bearing most of the brunt. That should help steady investor nerves and put an end to the gathering exodus of funds out of Italian assets. But even then, the social, political and economic price to be paid in a country already with public debt of over €2 trillion, youth unemployment of almost 40%, and an economy that is 12% smaller than it was 10 years ago, will almost certainly be way too high. If roughly half of all Italians are against the single currency today, imagine what it will be like when austerity begins really biting.

He’s blowing up the EU without noticing a thing.

• Schäuble Annoyed By Foreign Minister Saying Germany Should Pay More To EU (R.)

German Finance Minister Wolfgang Schaeuble on Friday criticised Foreign Minister Sigmar Gabriel for saying Germany should provide more money for Greece and the European Union overall. Schaueble told Deutschlandfunk radio he was annoyed by Gabriel’s suggestion because it “goes in the wrong direction completely” and sent the wrong message. He added that Europe’s problem was not primarily money but that its money needed to be used in the right way. On whether Greece can stay in the euro zone, Schaeuble said: “Greece can only do that if it has a competitive economy.” He said the country needed to carry out reforms and that would take time, adding: “But if the time is not used to carry out reforms because that’s uncomfortable, then that’s the wrong path.”

Feels like a funeral party.

• Greek Objections Mar Preparations For EU’s 60th Birthday (R.)

Greece has stuck to its objections to a declaration to mark the European Union’s 60th anniversary, officials in Brussels and Athens said on Thursday, a potentially embarrassing setback for the bloc as it seeks to rebuild unity ahead of Brexit. The leaders of the EU’s 27 remaining states will mark the anniversary on Saturday at a gathering in Rome overshadowed by Britain’s unprecedented decision to leave. London is due to formally trigger the divorce negotiations next week. Athens has threatened not to sign the Rome declaration charting the future of the post-Brexit EU, making a link between agreeing to the text and separate talks on reforms that lenders are seeking from Greece in exchange for new loans. “The negotiations on the draft Rome Declaration have ended as the text was finalized by the EU27,” an EU source said. “Only Greece has a general reservation on the text.”

Greece has said it wants the Rome text to spell out more clearly the protection of labor rights. Greece’s separate debt talks with international lenders are now stuck over this specific issue. One diplomat in Brussels said the issue may now only be resolved at the highest level with Greek Prime Minister Alexis Tsipras. Another EU diplomat said any attempt by Athens to win leverage on the international debt talks by holding off in Rome should not succeed: “We won’t be blackmailed by one member state which is linking one EU issue with a totally different one.” As well as Greece, Poland indicated on Thursday it might also refuse to endorse the declaration, though diplomats played down the threat. Warsaw is particularly opposed to a ‘multi-speed Europe,’ an idea promoted by Germany, France and Brussels, among others, to help improve decision-making in the post-Brexit EU.

“Whether, in other words, the European acquis is valid for all member states without exception, or for all except Greece.”

• Greece Says To Support Rome Declaration, Calls For EU Backing On Reforms (R.)

Greece will support a declaration marking the EU’s 60th birthday but needs the bloc’s backing against IMF demands on labour reforms, Greek Prime Minister Alexis Tsipras said ahead of a Summit in Rome on Friday. In a letter addressed to EU Council President Donald Tusk and Commission President Jean Claude Juncker, Tsipras called for a clear statement on whether the declaration would apply to Greece, as talks over a key bailout review hit a snag again. “We intend to support the Rome Declaration, a document which moves in a positive direction,” Tsipras said. “Nevertheless, in order to be able to celebrate these achievements, it has to be made clear, on an official level, whether they apply also to Greece. Whether, in other words, the European acquis is valid for all member states without exception, or for all except Greece.”

Earlier this week, Greece threatened not to sign the Rome declaration, demanding a clearer commitment protecting workers’ rights – an issue on which it is at odds with its international lenders who demand more reforms in return for new loans. The disagreements among Athens, the EU and the IMF – which has yet to decide whether it will participate in the country’s current bailout – have delayed a crucial bailout review. As leaders prepared for the summit, Greek ministers were negotiating with lenders’ representatives in Brussels pension cuts and labour reforms, including freeing up mass layoffs and on collective bargaining. The latest round of talks ended inconclusively late on Thursday, according to Greek officials. [..] Greece has cut pensions 12 times since it signed up to its first bailout in 2010. It has also reduced wages and implemented labour reforms to make its market more flexible and competitive.

Just imagine that. And then talk about recovery. No, all you need to do is reform!

• 40% Of Greek Businesses Say Likely To Close Shop Within The Year (K.)

Four in 10 Greek businesses (40.3%) consider it likely that they will have to close shop within the year, according to a survey by the Hellenic Confederation of Professionals, Craftsmen and Merchants (GSEVEE), presented by the ANA-MPA news agency on Thursday. According to the survey, around 18,700 businesses will close in the first six months of the year, forcing thousands to join growing unemployment lines in the crisis-hit country. The majority of shutdowns, according to GSEVEE, will be in and around the capital and will concern the manufacturing sector, while some 34,000 jobs will be lost by the closure of companies that are currently considered high risk. 7 in 10 businesses have reported increasing liquidity problems and a shortage of capital from the market, with the number of firms indebted to the state and their suppliers growing by 10% compared to last year.

Over four in five small and medium-sized businesses (SMEs) admit to being exposed to credit risks, seeing a slump in economic activity and operating with the prospect of shrinking rather than expanding in the near future. In terms of employment, the forecasts for the first half of the year do not bode well, as for every two businesses (8.1% of the total) that plan to hire new staff, another three will be letting people go. GSEVEE estimates that 2,000 salaried jobs will be lost by June, without accounting for the impact on employment of the projected shutdowns. Moreover, 40% of those businesses that do plan to hire staff in the first half of 2017 said they won’t be offering payroll positions, but part-time or outsourced work.

Sentiment is also bleak, with 58.8% of respondents expecting conditions to deteriorate and just 11% seeing a possible improvement through June. As such, just 3.6% of businesses plan to make new investments and 6.4% have applied to investment funding programs for that period. “There needs to be a national plan for the country irrespective of who is in power, and politicians need to learn how to make decisions and give orders,” GSEVEE President Giorgos Kavvathas was quoted by the ANA-MPA news agency as saying. “Moreover, the uncertainty of the situation concerning the outcome of the negotiation [with foreign creditors] exacerbates fears and risks, which in turn make small businesses and the self-employed more vulnerable.”

Could be another scary spring and summer.

• EU Envoy: Three Million Migrants Waiting To Cross Into Greece (K.)

European Commissioner for Migration Dimitris Avramopoulos on Thursday underlined the need to safeguard a deal between Brussels and Ankara to curb human smuggling in the Aegean, noting that some 3 million refugees were in Turkey waiting to cross into Greece in a bid to reach Western and Northern Europe. In comments during a visit to Athens, Avramopoulos said the deal signed last year between Turkey and the EU had reduced an influx of migrants toward Europe and curbed deaths at sea. Reception centers on the islands of the eastern Aegean, the first point of arrival for most migrants arriving in Greece from Turkey, are already overcrowded. A woman and a child were injured in clashes between Afghan and Algerian migrants on Chios on Wednesday night.

We’re on track for multiple records.

• Over 250 Migrants Feared Drowned On ‘Black Day’ In Mediterranean (AFP)

More than 250 African migrants were feared drowned in the Mediterranean Thursday after a charity’s rescue boat found five corpses close to two sinking rubber dinghies off Libya. The UN’s refugee agency (UNHCR) said it was “deeply alarmed” after the Golfo Azzuro, a boat operated by Spanish NGO Proactiva Open Arms, reported the recovery of the bodies close to the drifting, partially-submerged dinghies, 15 miles off the Libyan coast. “We don’t think there can be any other explanation than that these dinghies would have been full of people,” Proactiva spokeswoman Laura Lanuza told AFP. “It seems clear that they sunk.” She added that the inflatables, of a kind usually used by people traffickers, would typically have been carrying 120-140 migrants each.

“In over a year we have never seen any of these dinghies that were anything other than packed.” Lanuza said the bodies recovered were African men with estimated ages of between 16 and 25. They had drowned in the 24 hours prior to them being discovered shortly after dawn on Thursday in waters directly north of the Libyan port of Sabrata, according to the rescue boat’s medical staff. Vincent Cochetel, director of the UN refugee agency (UNHCR)’s Europe bureau, said NGO boats patrolling the area had been called to the aid of a third stricken boat on Thursday afternoon, raising fears others may have perished on what Proactiva called “a black day in the Mediterranean.”

Despite rough winter seas, migrant departures from Libya on boats chartered by people traffickers have accelerated in recent months from already-record levels. Nearly 6,000 people have been picked up by Italian-coordinated rescue boats since the end of last week, bringing the number brought to Italy since the start of 2017 to nearly 22,000, a significant rise on the same period in previous years. Aid groups say the accelerating exodus is being driven by worsening living conditions for migrants in Libya and by fears the sea route to Europe could soon be closed to traffickers. Prior to the latest fatal incident, the UN had estimated that at least 440 migrants had died trying to make the crossing from Libya to Italy since the start of 2017. Its refugee agency estimates total deaths crossing the Mediterranean at nearly 600.

Debt Rattle January 2 2017

Jan 022017

January 2, 2017 Posted by Raúl Ilargi Meijer at 9:56 am Finance Tagged with: Brexit, capital controls, China, EU, Greece, health care, Juncker, Mosul, retail, Trump 2 Responses »

Cary Grant and Constance Bennett, stars of the film ‘Topper’, drive the Topper Buick 1937

• ‘Patients Who Should Live Are Dying’: Greece’s Public Health Meltdown (G.)

• Jean-Claude Juncker Secretly Blocked EU Tax Reforms When Luxembourg PM (G.)

• German Ifo Think Tank Chief Says Italy Risks Quitting Euro Zone (R.)

• Trump Aide Says US Sanctions On Russia May Be Disproportionate (R.)

• Cuomo Vetoes Bill Requiring NY State To Fund Legal Services For Poor (NYDN)

• A Giant Wave Of Store Closures Is About To Hit The US (BI)

• PBOC’s Ma Says New Cash Transaction Rules Are Not Capital Controls (BBG)

• China Central Bank Adviser Calls For Flexible 2017 Growth Target (R.)

• Australia House Prices Defy 2016 Predictions, Rise More Than 15% (AFR)

• 2017: The Wheels Finally Come Off (Jim Kunstler)

• The Mosul Dam: A Bigger Problem Than Isis? (New Yorker)

• ‘Bad Boys of Brexit’ Headed For Screen (R.)

This is the EU. This is what it stands for. There are no fiancial reasons for this to happen. It’s pure malice. And it’s why it’s way past time to close up shop in Brussels. The EU is the mob. Or as I’ve been saying for a long time: the EU eats people alive.

• ‘Patients Who Should Live Are Dying’: Greece’s Public Health Meltdown (G.)

Rising mortality rates, an increase in life-threatening infections and a shortage of staff and medical equipment are crippling Greece’s health system as the country’s dogged pursuit of austerity hammers the weakest in society. Data and anecdote, backed up by doctors and trade unions, suggest the EU’s most chaotic state is in the midst of a public health meltdown. “In the name of tough fiscal targets, people who might otherwise survive are dying,” said Michalis Giannakos who heads the Panhellenic Federation of Public Hospital Employees. “Our hospitals have become danger zones.” Figures released by the European Centre for Disease Prevention and Control recently revealed that about 10% of patients in Greece were at risk of developing potentially fatal hospital infections, with an estimated 3,000 deaths attributed to them.

The occurrence rate was dramatically higher in intensive care units and neonatal wards, the body said. Although the data referred to outbreaks between 2011 and 2012 – the last official figures available – Giannakos said the problem had only got worse. Like other medics who have worked in the Greek national health system since its establishment in 1983, the union chief blamed lack of personnel, inadequate sanitation and absence of cleaning products for the problems. Cutbacks had been exacerbated by overuse of antibiotics, he said. “For every 40 patients there is just one nurse,” he said, mentioning the case of an otherwise healthy woman who died last month after a routine leg operation in a public hospital on Zakynthos. “Cuts are such that even in intensive care units we have lost 150 beds.” “Frequently, patients are placed on beds that have not been disinfected.

Staff are so overworked they don’t have time to wash their hands and often there is no antiseptic soap anyway.” No other sector has been affected to the same extent by Greece’s economic crisis. Bloated, profligate and corrupt, for many healthcare was indicative of all that was wrong with the country and, as such, badly in need of reform. Acknowledging the shortfalls, the government announced last month that it planned to appoint more than 8,000 doctors and nurses in 2017. Since 2009, per capita spending on public health has been cut by nearly a third – more than €5bn – according to the OECD. By 2014, public expenditure had fallen to 4.7% of GDP, from a pre-crisis high of 9.9%. More than 25,000 staff have been laid off, with supplies so scarce that hospitals often run out of medicines, gloves, gauze and sheets.

Symbol of everything that’s wrong with Brussels. He was Luxembourg PM for 18 years.

• Jean-Claude Juncker Secretly Blocked EU Tax Reforms When Luxembourg PM (G.)

The president of the European commission, Jean-Claude Juncker, spent years in his previous role as Luxembourg’s prime minister secretly blocking EU efforts to tackle tax avoidance by multinational corporations, leaked documents reveal. Years’ worth of confidential German diplomatic cables provide a candid account of Luxembourg’s obstructive manoeuvres inside one of Brussels’ most secretive committees. The code of conduct group on business taxation was set up almost 19 years ago to prevent member states from being played off against one another by increasingly powerful multinational businesses, eager to shift profits across borders and avoid tax. Little has been known until now about the workings of the committee, which has been meeting since 1998, after member states agreed a code of conduct on tax policies and pledged not to engage in “harmful competition” with one another.

However, the leaked cables reveal how a small handful of countries have used their seats on the committee to frustrate concerted EU action and protect their own tax regimes. Efforts by a majority of member states to curb aggressive tax planning and to rein in predatory tax policies were regularly delayed, diluted or derailed by the actions of a few of the EU’s smallest members, frequently led by Luxembourg. The leaked papers, shared with the Guardian and the International Consortium of Investigative Journalists by the German radio group NDR, are highly embarrassing for Juncker, who served as Luxembourg’s prime minister from 1995 until the end of 2013. During that period he also acted as finance and treasury minister, taking a close interest in tax policy. Despite having a population of just 560,000, Luxembourg was able to resist widely supported EU tax reforms, its dissenting voice often backed only by that of the Netherlands.

“The standard of living in Italy is at the same level as in 2000..” Wait a minute, why is that such a bad thing? How awful were things in Italy 17 years ago?

• German Ifo Think Tank Chief Says Italy Risks Quitting Euro Zone (R.)

The head of Germany’s Ifo economic institute believes Italians will eventually want to quit the euro currency area if their standard of living does not improve, he told German daily Tagesspiegel. “The standard of living in Italy is at the same level as in 2000. If that does not change, the Italians will at some stage say: ‘We don’t want this euro zone any more’,” Ifo chief Clemens Fuest told the newspaper. He also said that if Germany’s parliament were to approve a European rescue program for Italy, it would impose on German taxpayers risks “the size of which it does not know and cannot control.” He said German lawmakers should not agree to do this. Italy is not seeking such a rescue program. The government in Rome is focusing on underwriting the stability of its banking sector, starting with a bailout of Monte dei Paschi di Siena.

Diplomatic language. Trump was partially briefed a few days ago. Oh, to be a fly on the wall for the full briefing today or tomorrow…

• Trump Aide Says US Sanctions On Russia May Be Disproportionate (R.)

A top aide to President-elect Donald Trump said in an interview aired on Sunday that the White House may have disproportionately punished Russia by ordering the expulsion of 35 suspected Russian spies. Incoming White House press secretary Sean Spicer said on ABC’s “This Week” that Trump will be asking questions of U.S. intelligence agencies after President Barack Obama imposed sanctions last week on two Russian intelligence agencies over what he said was their involvement in hacking political groups in the 2016 U.S. presidential election. Obama also ordered Russia to vacate two U.S. facilities as part of the tough sanctions on Russia.

“One of the questions that we have is why the magnitude of this? I mean you look at 35 people being expelled, two sites being closed down, the question is, is that response in proportion to the actions taken? Maybe it was; maybe it wasn’t but you have to think about that,” Spicer said. Trump is to have briefings with intelligence agencies this week after he returns to New York on Sunday. On Saturday, Trump expressed continued skepticism over whether Russia was responsible for computer hacks of Democratic Party officials. “I think it’s unfair if we don’t know. It could be somebody else. I also know things that other people don’t know so we cannot be sure,” Trump said.

He said he would disclose some information on the issue on Tuesday or Wednesday, without elaborating. It is unclear if, upon taking office on Jan. 20, he would seek to roll back Obama’s actions, which mark a post-Cold War low in U.S.-Russian ties. Spicer said that after China in 2015 seized records of U.S. government employees “no action publicly was taken. Nothing, nothing was taken when millions of people had their private information, including information on security clearances that was shared. Not one thing happened.” “So there is a question about whether there’s a political retribution here versus a diplomatic response,” he added.

By the end of November, Cuomo had already vetoed 70 other bills in 2016. ¿Qué pasa?

• Cuomo Vetoes Bill Requiring NY State To Fund Legal Services For Poor (NYDN)

Gov. Cuomo vetoed a bill late Saturday that would have required the state to fund legal services for the poor in each county. Cuomo’s office in a New Year’s Eve statement released just over an hour before the bill was required to be signed or vetoed said last-minute negotiations with the Legislature to address the governor’s concerns failed to yield a deal. “Until the last possible moment, we attempted to reach an agreement with the Legislature that would have achieved the stated goal of this legislation, been fiscally responsible, and had additional safeguards to ensure accountability and transparency,” Cuomo spokesman Richard Azzopardi said. “Unfortunately, an agreement was unable to be reached and the Legislature was committed to a flawed bill that placed an $800 million burden on taxpayers – $600 million of which was unnecessary – with no way to pay for it and no plan to make one.”

He said the issue will be revisited in the upcoming legislative session. The bill, which had support from progressive and conservative groups, would have given the state seven years to take over complete funding of indigent legal services from towns. Dozens of groups representing public defenders, municipalities and others expressed disappointment. Jonathan Gradess, executive director of the New York State Defenders Association, called Cuomo’s decision to veto the bill “stunning.” “We are all shocked that the Governor vetoed a bill that would have reduced racial disparities in the criminal justice system, helped ensure equal access to justice for all New Yorkers, provided improved public defense programs for those who cannot afford an attorney, and much-needed mandate relief for counties, Gradess said. “The governor refused to accept an independent oversight mechanism on state quality standards, and now, sadly tens of thousands of low-income defendants will pay the price.”

“As shopping patterns have changed..” means: as more credit cards have maxed out.

• A Giant Wave Of Store Closures Is About To Hit The US (BI)

Retailers are bracing for a fresh wave of store closures at the start of the new year. The industry is heading into 2017 with a glut of store space as shopping continues to shift online and foot traffic to malls declines, according to analysts. “If you are weaker player, it’s going to be a very tough 2017 for you, ” said RJ Hottovy, a consumer equity strategist for Morningstar. He said he’s expecting a number of retailers to file for bankruptcy next year, in addition to mass store closures. Nearly every major department store, including Macy’s, Kohl’s, Walmart, and Sears, have collectively closed hundreds of stores over the last couple years to try and stem losses from unprofitable stores and the rise of ecommerce. But the closures are far from over.

Macy’s has already said that it’s planning to close 100 stores, or about 15% of its fleet, in 2017. Sears is shuttering at least 30 Sears and Kmart stores by April, and additional closures are expected to be announced soon. CVS also said this month that it’s planning to shut down 70 locations. Mall stores like Aeropostale, which filed for bankruptcy in May, American Eagle, Chicos, Finish Line, Men’s Wearhouse, and The Children’s Place are also in the midst of multi-year plans to close stores. Many more announcements like these are expected in the coming months. The start of the year is a popular time to announce store closures. Nearly half of annual store closings announced since 2010 have occurred in the first quarter, CNBC reports.

In addition to closing stores, retailers are also looking to shrink their existing locations. “As leases come up, you’re going to see a gradual rotation into smaller-footprint stores,” Hottovy said. Despite recent closures, the US is still oversaturated with stores. The US has 23.5 square feet of retail space per person, compared with 16.4 square feet in Canada and 11.1 square feet in Australia — the next two countries with the highest retail space per capita, according to a Morningstar report from October. “Across retail overall the US has too much space and too many shops,” said Neil Saunders, CEO of the retail consulting firm Conlumino. “As shopping patterns have changed, some of those shops are also in the wrong place and are of the wrong size or configuration.”

1) Think it really matters what you call it? Or is it about how people perceive it?

2) It’s alright Ma, I’m only bleeding.

• PBOC’s Ma Says New Cash Transaction Rules Are Not Capital Controls (BBG)

China’s new regulations on cash transactions and overseas transfers are not capital controls, according to a central bank researcher cited by the official Xinhua News Agency. New requirements published by the People’s Bank of China Friday stoked concern that the government is imposing capital controls in a disguised form, Xinhua reported late Sunday. “It is not capital control at all,” Ma Jun, chief economist of the central bank’s research bureau, told the state-run news service. The $50,000 annual foreign exchange purchase quota for individuals is unchanged, and the rules won’t affect normal activities such as business investment and operations abroad or overseas travel and study, Ma said.

Ma’s comments follow the annual Jan. 1 reset of the $50,000 limit for individuals, which may potentially aggravate capital outflow pressures that have been intensifying after the yuan suffered its steepest annual slump in more than two decades. The PBOC said Friday it will tighten rules for banks to report cross-border customer transactions starting July 1 as part of stepped-up efforts to curb money laundering and prevent terrorism financing. Financial institutions will assume responsibility for reporting and there will be neither extra documentation nor official approval procedures for businesses and individuals, Ma said.

The Chinese come up with one creative way after another to tell us their growth is cratering, without actually saying it. But who’s listening?

• China Central Bank Adviser Calls For Flexible 2017 Growth Target (R.)

The Chinese government should set a more flexible target for economic growth this year to give more space for reform efforts, a central bank adviser told the official Xinhua news agency in comments published on Sunday. China’s economy grew 6.7% in the third quarter from a year earlier and looks set to achieve the government’s full-year forecast of 6.5-7%, buoyed by higher government spending, a housing boom and record bank lending. However, growing debt and concerns about property bubbles have touched off an internal debate about whether China should tolerate slower growth in 2017 to allow more room for painful reforms aimed at reducing industrial overcapacity and indebtedness.

Huang Yiping, a monetary policy committee member of the central People’s Bank of China and Peking University professor, told Xinhua that China’s GDP growth target range should be 6-7% for this year, compared with 6.5-7% in 2016. “The 6.5% target is just an average rate,” Huang said. “As long as employment is stable, a slightly wider growth target range in the short term will reduce the need for pro-growth efforts and give policy makers more room to focus on reforms.” This year’s growth target will determine the government’s monetary policy, Huang said. “Large-scale monetary loosening is unlikely, while the possibility of tightening can not be ruled out,” he added, citing inflation concerns, higher U.S. interest rates and a weakening yuan.

Don’t want to wait to see where it leads? Where would the movie end now?

• Australia House Prices Defy 2016 Predictions, Rise More Than 15% (AFR)

Home prices defied forecasts they would stagnate in 2016 to grow more than they did during the “boom” year of 2015, according to year-end figures from property research firm CoreLogic. Dwelling prices rose 15.46% in Sydney while Melbourne had a rise of 13.68%. Even the much-maligned Hobart and Canberra housing markets posted strong gains, rising 11.24% and 9.29% respectively.

The data disappointed economists hoping for a more subdued housing market in 2016. At the end of 2015, Sydney and Melbourne closed with 11.5% and 11.2% growth respectively across houses and units, according to CoreLogic. ANZ had been expecting soft price growth and had forecast a 3% price rise for NSW, a 3.2% increase for Victoria, a 2% gain in Queensland and an overall 2.8% rise the country as a whole.

Long from Jim. And recommended.

• 2017: The Wheels Finally Come Off (Jim Kunstler)

Apart from all the ill-feeling about the election, one constant ‘out there’ since November 8 is the Ayn Randian rapture that infects the money scene. Wall Street and big business believe that the country has passed through a magic portal into a new age of heroic businessmen-warriors (Trump, Rex T, Mnuchin, Wilbur Ross, et. al.) who will go forth creating untold wealth from super-savvy deal-making that un-does all the self-defeating malarkey of the detested Deep State technocratic regulation regime of recent years. The main signs in the sky, they say, are the virile near-penetration of the Dow Jones 20,000-point maidenhead and the rocket ride of Ole King Dollar to supremacy of the global currency-space. I hate to pound sleet on this manic parade, but, to put it gently, mob psychology is outrunning both experience and reality. Let’s offer a few hypotheses regarding this supposed coming Trumptopian nirvana.

The current narrative weaves an expectation that manufacturing industry will return to the USA complete with all the 1962-vintage societal benefits of great-paying blue collar jobs, plus an orgy of infrastructure-building. I think both ideas are flawed, even allowing for good intentions. For one thing, most of the factories are either standing in ruin or scraped off the landscape. So, it’s not like we’re going to reactivate some mothballed sleeping giant of productive capacity. New state-of-the-art factories would require an Everest of private capital investment that is simply impossible to manifest in a system that is already leveraged up to its eyeballs. Even if we tried to accomplish it via some kind of main force government central planning and financing — going full-Soviet — there is no conceivable way to raise (borrow) the “money” without altogether destroying the value of our money (inflation), and the banking system with it.

If by some magic any new industrial capacity were built, much of the work in it would be performed by robotics, not brawny men in blue shirts, and certainly not at the equivalent of the old United Auto Workers $35-an-hour assembly line wage. We have not faced the fact that the manufacturing fiesta based on fossil fuels was a one-time thing due to special historical circumstances and will not be repeated. The future of manufacturing in America is frighteningly modest. We’ll actually be lucky if we can make a few vital necessities by means of hydro-electric or direct water power, and that will be about the extent of it. Some of you may recognize this as the World Made By Hand scenario. I’ll stick by that.

Not a new topic for many, but if it is for the New Yorker, there may be more people not aware of the Mosul Dam’s inherent problems: “a multilayer foundation of anhydrite, marl, and limestone, all interspersed with gypsum—which dissolves in contact with water. Dams built on this kind of rock are subject to a phenomenon called karstification..” Oh well, may be a good read up for all.

• The Mosul Dam: A Bigger Problem Than Isis? (New Yorker)

On the morning of August 7, 2014, a team of fighters from the Islamic State, riding in pickup trucks and purloined American Humvees, swept out of the Iraqi village of Wana and headed for the Mosul Dam. Two months earlier, isis had captured Mosul, a city of nearly two million people, as part of a ruthless campaign to build a new caliphate in the Middle East. For an occupying force, the dam, twenty-five miles north of Mosul, was an appealing target: it regulates the flow of water to the city, and to millions of Iraqis who live along the Tigris. As the isis invaders approached, they could make out the dam’s four towers, standing over a wide, squat structure that looks like a brutalist mausoleum. Getting closer, they saw a retaining wall that spans the Tigris, rising three hundred and seventy feet from the riverbed and extending nearly two miles from embankment to embankment. Behind it, a reservoir eight miles long holds eleven billion cubic metres of water.

A group of Kurdish soldiers was stationed at the dam, and the isis fighters bombarded them from a distance and then moved in. When the battle was over, the area was nearly empty; most of the Iraqis who worked at the dam, a crew of nearly fifteen hundred, had fled. The fighters began to loot and destroy equipment. An isis propaganda video posted online shows a fighter carrying a flag across, and a man’s voice says, “The banner of unification flutters above the dam.” The next day, Vice-President Joe Biden telephoned Masoud Barzani, the President of the Kurdish region, and urged him to retake the dam as quickly as possible. American officials feared that isis might try to blow it up, engulfing Mosul and a string of cities all the way to Baghdad in a colossal wave. Ten days later, after an intense struggle, Kurdish forces pushed out the isis fighters and took control of the dam.

But, in the months that followed, American officials inspected the dam and became concerned that it was on the brink of collapse. The problem wasn’t structural: the dam had been built to survive an aerial bombardment. (In fact, during the Gulf War, American jets bombed its generator, but the dam remained intact.) The problem, according to Azzam Alwash, an Iraqi-American civil engineer who has served as an adviser on the dam, is that “it’s just in the wrong place.” Completed in 1984, the dam sits on a foundation of soluble rock. To keep it stable, hundreds of employees have to work around the clock, pumping a cement mixture into the earth below. Without continuous maintenance, the rock beneath would wash away, causing the dam to sink and then break apart. But Iraq’s recent history has not been conducive to that kind of vigilance.

Don’t want to wait to see where it leads? Where would the movie end now?

• ‘Bad Boys of Brexit’ Headed For Screen (R.)

Three film production companies including Netflix are interested in making a warts-and-all screen dramatization of Nigel Farage’s insurgent Brexit campaign, according to an associate of Farage. This would be another extraordinary twist for Farage, who from the fringes of British politics achieved his life’s goal when Britons voted to leave the European Union last June, and has since befriended U.S. President-elect Donald Trump. The project would be based on “The Bad Boys of Brexit”, an account of Farage’s campaign by Arron Banks, a multi-millionaire British insurance tycoon who bankrolled the campaign, according to Andy Wigmore, a spokesman for Banks.

“We have three interested parties in the rights to the book and we will be meeting representatives from three studios including a Netflix representative on Jan. 19 in Washington DC,” Wigmore told Reuters in a text message. Farage, Banks, Wigmore and others in their circle will travel to Washington for Trump’s inauguration as president, which will take place on Jan. 20. “We have invited all of them (the studio representatives) to our pre-inaugural drinks party … We have also invited many of Trump’s team to the event,” said Wigmore.

The Sunday Telegraph newspaper earlier reported that Hollywood studio Warner Bros. was also interested, but it was unclear from Wigmore’s texts to Reuters whether those who have approached Banks included representatives of Warner Bros. The subtitle of Banks’ book is “Tales of Mischief, Mayhem and Guerrilla Warfare in the EU Referendum Campaign”. It is described on its publisher’s website as “an honest, uncensored and highly entertaining diary of the campaign that changed the course of history”. Asked whether Farage was likely to appear as himself in any screen adaptation of his campaign, Wigmore said: “Yes we all expect to make a Quentin Tarantino appearance”, a reference to the director’s cameo appearances in his own movies.

Debt Rattle November 18 2016

Nov 182016

November 18, 2016 Posted by Raúl Ilargi Meijer at 10:14 am Finance Tagged with: arctic, collapse, EU, globalization, Italy, recovery, retail, trade, Trump, Wikileaks, Yellen 5 Responses »

Unknown Army of the James, James River, Virginia. 1865

• The End of Globalization? (Spiegel)

• Global Trade Is Slowing (BBG)

• US Recovery Is Heading Towards Its Death: Albert Edwards (CNBC)

• US Retail Sales, Ignorance & Return Reality (Roberts)

• How “Dynamic Scoring” Could Justify A Debt Driven Keynesian Stimulus (BBG)

• How US Federal Revenues Have Been Used To Steer The Economy In The Past (BBG)

• Yellen: I’m Not Stepping Down Until My Term Is Done (CNBC)

• Europe At Risk Of Collapse; France, Germany Must Lead – French PM (R.)

• Renzi Renews Pledge To Resign If He Loses Referendum (Local.it)

• Italy Is The Next Country To Fall To Trumpism (David McWilliams)

• EU Reinforces 2017 Budget On Migration And Jobs (EUO)

• Kremlin Ramps Up Efforts To Crack Down On US Tech Companies (BBG)

• Why the World Needs WikiLeaks (Sarah Harrison)

• Another 100 Migrants Feared Drowned in Mediterranean (AFP)

• The North Pole Is An Insane 36º Warmer Than Normal As Winter Descends (WaPo)

They all find it terribly hard to acknowledge that globalization is gone because growth is too. Wonder how long it will take them. A long five-part article.

• The End of Globalization? (Spiegel)

Who could have imagined in 2006 that such an outlandish billionaire like Donald Trump could become president of the United States? Who would have believed that the British would leave the European Union? Who would have thought it possible that a right-wing populist party in Germany would win over 10% support in several state elections? Nobody. Ten years ago, the world was a vastly different place. In 2006, Germany lived through its “Summer Fairytale” of hosting the football World Cup – still untainted by accusations of corruption – and presented itself as a cosmopolitan host. Russia was still part of the G-8 and welcomed world leaders to the summit in St. Petersburg. Pope Benedict XVI visited Turkey and prayed in the Blue Mosque. In Berlin, the first Islam conference took place, promoting better integration for the religion.

A Romano Prodi-led alliance defeated the populist Silvio Berlusconi in Italian parliamentary elections. And international trade grew by 9% while the Chinese economy spiked by almost 13%. Between then and now lie years of crisis. Banks and entire countries had to be bailed out, debt grew and faith in the economy and politics evaporated. Central banks chopped their interest rates again and again to stimulate the economy – with modest success and significant side-effects: Debt continued climbing around the world while in industrialized countries, savers suffered and middle-class retirement funds in particular took a hit. Now, in 2016, many people in Western, industrialized countries are worried about losing their jobs, their prosperity and that of their children. They see themselves as the losers of a development that has only helped the elite.

[..] It is a fact that globalization and free trade have increased global prosperity, but they have also increased inequality in the world’s wealthiest nations. They have made the biggest companies more powerful, because business operates globally while politics tends to be a local or regional affair, and made the world more vulnerable to crises, because everything is networked and the debts of American homeowners could lead the entire world to the brink of collapse. In short, globalization is responsible for a host of problems that would otherwise not exist. And it is therefore in the process of gambling away the trust of people around the world. Already today, global trade growth has slowed and state interference is on the rise. The world finds itself at a turning point. It must try to eliminate the drawbacks of globalization without destroying its advantages. If, on the other hand, protectionism and populism gain the upper hand, there is a danger that global prosperity could shrink. The age of globalization would be at an end.

“The days of frenzied trade growth may be over.” No kidding.

• Global Trade Is Slowing (BBG)

Until he takes office in January, Donald Trump won’t be able to follow through on his pledges to scrap TPP, renegotiate NAFTA, or penalize Chinese imports. Even without him, protectionism is rising, and world trade is slowing. Responding to an outcry from local steelmakers, the EU this year has punished Chinese competitors for allegedly selling steel below cost. The EU has announced antidumping duties as high as 81.1% on Chinese steel. “Free trade must be fair, and only fair trade can be free,” EC VP Jyrki Katainen said in a statement on Nov. 9, adding that some 30 million European jobs depend on free trade. Around the world, many companies that binged on easy credit after the global financial crisis have excess capacity and are struggling to find buyers, since economic growth in the U.S., Europe, and Japan is relatively weak, and China’s economy is cooling.

“The pie is growing more slowly, and that makes domestic producers more defensive about their share of it and more willing to fight when threatened,” says Tim Condon, chief Asia economist in Singapore with ING. Bloomberg Intelligence chief Asia economist Tom Orlik points out that over the past two decades, consumers and businesses have spent heavily on laptops, tablets, and smartphones, but despite efforts by Apple and others to popularize smart watches, there’s no new must-have device to boost global trade. Stagnant income growth in the West also forces politicians to show they understand voters’ worries. “The pressure grows for governments to appease those voices by giving them the things they want,” says Orlik, “and the things they want are trade restrictions.”

[..] In the five months leading up to mid-October, members of the world’s 20 major economies, the Group of 20, implemented an average of 17 trade constraints a month, the World Trade Organization reported on Nov. 10. “The continued introduction of trade-restrictive measures is a real and persistent concern,” WTO Director-General Roberto Azevêdo said in a statement. The curbs come while global commerce is sputtering. World trade volume has grown a little more than 3% a year since 2012, the IMF reported last month, less than half the average expansion rate over the prior three decades. Said the IMF, “Between 1985 and 2007, real world trade grew on average twice as fast as global GDP, whereas over the past four years, it has barely kept pace. Such prolonged sluggish growth in trade volumes relative to economic activity has few precedents during the past five decades.”

As always, I’m uncomfortable with the definition of inflation used here, it obscures the argument.

• US Recovery Is Heading Towards Its Death: Albert Edwards (CNBC)

Societe Generale’s resident uber-bear, Albert Edwards, says the very long economic recovery underway in the U.S. is gearing up to suffer a “very traditional death” as consumption will likely crumble under rapidly stepped-up inflation and tighter monetary conditions next year. In Edwards’ own words, “Even if the Fed refuses to tighten, monetary conditions will tighten dramatically anyway as bond yields and the dollar surge, exacerbating the profits recession.” “The surge in headline inflation from zero to 2.5%-3% in Q1 next year is likely to crush consumption,” he continued, adding, “The expected expansion of the fiscal deficit under Trump will not prevent this happening in 2017 as it will come too late – in 2018/19.”

Edwards breaks down the recent spike in nominal bond yields by pointing out it has been driven by spiraling inflation expectations with real yields staying relatively steady. An anomaly in the current situation, he says, is that this has occurred without an accompanying surge in oil prices. However, what has risen more quickly than acknowledged by the U.S. Federal Reserve or the broader market, in his view, is real wage inflation, partially disguised by the weakness of nominal wage inflation given subdued consumer price index (CPI) inflation. But as we move into an era of higher CPI inflation, Edwards warns that it is such real wage inflation that will slip to zero before long. According to Edwards, “We might quibble about how much nominal wage inflation might accelerate in a weak economic and corporate profits environment, but accelerate it will.”

Why this is so important, he notes, is that it is likely to propel the Fed into action. Speaking about the U.S. central bank, he says “to those who retort that the increasingly weak economy in H1 2017 means they should not tighten, I would probably agree. But that doesn’t mean the Fed won’t be forced into it by surging wage inflation.” The knock-on effect for bonds will come through in the form of a continued rise in yields over the next six months with the trend upwards now having become a momentum trade with investors “looking for a narrative to support the direction of travel”.

“81% of American’s are now worse off than they were in 2005..”

• US Retail Sales, Ignorance & Return Reality (Roberts)

There was an awful lot of cheering about the recent retail sales report which showed an uptick of 0.8% which beat the analyst’s estimates of 0.6%. Despite the fact the improvement was driven by a surge in gasoline prices (which is important as consumers did not consume MORE of the product, but just paid more for it) important discretionary areas like restaurants and furniture declined. However, if we dig deeper behind the headlines more troubling trends emerge for the consumer which begins to erode the narrative of the “economy is doing great” and “there is no recession” in sight. [..] Despite ongoing prognostications of a “recession nowhere in sight,” it should be remembered that consumption drives roughly 2/3rds of the economy. Of that, retail sales comprise about 40%. Therefore, the ongoing deterioration in retail sales should not be readily dismissed. More troubling is the rise in consumer credit relative to the decline in retail sales as shown below.

What this suggests is that consumers are struggling just to maintain their current living standard and have resorted to credit to make ends meet. Since the amount of credit extended to any one individual is finite, it should not surprise anyone that such a surge in credit as retail sales decline has been a precursor to previous recessions. Further, the weakness of consumption can be seen in the levels of retailers inventory relative to their actual sales. We can also view this problem with retail sales by looking at the National Federation of Independent Business Small Business Survey. The survey asks respondents about last quarter’s actual sales versus next quarter’s expectations.

[..] it really isn’t just the Millennial age group that are struggling to save money but the entirety of the population in the bottom 80% of income earners. According to a recent McKinsey & Company study, 81% of American’s are now worse off than they were in 2005: “Based on market income from wages and capital, the study shows 81% of US citizens are worse off now than a decade ago. In France the figure is 63%, Italy 97%, and Sweden 20%.”

If you don’t like the models, well, we have other ones.

• How “Dynamic Scoring” Could Justify A Debt Driven Keynesian Stimulus (BBG)

Republicans have long argued that economic growth from tax cuts should be fed back into the model, year by year. They call this approach “dynamic scoring” or “macroeconomic analysis.” For the first time, macroeconomic analysis will likely prevail in next year’s official scores for major revenue bills from the JCT. Some Democrats, who’ve been suspicious of an approach that makes tax cuts look cheaper, are slowly warming to the same idea for appropriations bills. It could make infrastructure spending look cheaper, too. Into this fussing over details strides Donald Trump. During the campaign, he proposed a tax cut that would cost, according to his own preferred estimate, $4.4 trillion. And to pay for it, his campaign proposed a new kind of analysis, an economic model radically more complex than what either academics or policymakers have tried in the past.

All aspects of Trump’s plan, including trade and regulatory rollbacks, would be part of the analysis. Together, the campaign argued, they would create enough growth, and therefore enough tax revenue, to offset all but about $200 billion of those tax cuts. The real challenge of budgeting is to offer something, but at a discount. In 2017 dynamic scoring will let the Republican majority offer tax cuts without having to offset them entirely with spending cuts. It may even offer infrastructure spending—without having to renege on the promise of tax cuts. If the models are right, they’re right. If they’re wrong, the tax cuts will be a debt-driven Keynesian stimulus. Dynamic scoring arrived on the Republican wave of 1994. In January 1995, as one of its first acts, the new GOP majority in Congress invited Alan Greenspan, among others, to a rare joint hearing of the budget committees.

The representatives wanted to talk about macroeconomic models of budget changes. Greenspan, then the chairman of the Federal Reserve and thus in charge of the world’s best-known macroeconomic modeler, was skeptical. Then as now, the CBO every year produces a 10-year projection of economic growth. This is the “baseline,” the fixed point from which everything else is calculated. Under “static analysis,” modelers in Washington make assumptions about human behavior. But as they project out into the future, they can’t change the CBO’s baseline gross domestic product. Under “dynamic analysis,” they can. Next year’s projected growth changes the baseline for the year after, and so on. If static analysis is arithmetic, dynamic analysis is calculus.

The comparisons only hold up to a point, as Trump will find out. There’s nowhere to grow to anymore. But focusing on domestic production and consumption can still solidify the economy somewhat.

• How US Federal Revenues Have Been Used To Steer The Economy In The Past (BBG)

Donald Trump plans massive fiscal stimulus to combat lackluster growth just as the budget deficit begins rising again, making this a good time to look at how federal revenues have been used to steer the economy in the past. After the six recessions prior to the 2007-2009 downturn, lawmakers let the deficit’s share of GDP rise for an average of 15 months to make sure the economy was back on track. Following the last downturn, the most severe since World War II, Barack Obama’s stimulus gave way to Republican-backed spending cuts to shrink the deficit within just eight months – and the weakest recovery in decades.

She won’t be able to stop the first rate hike, and after that things will be very different anyway.

• Yellen: I’m Not Stepping Down Until My Term Is Done (CNBC)

Forget all that talk about Janet Yellen stepping down if Donald Trump becomes president: The Fed chair told Congress on Thursday she’s not leaving. Trump has been critical of the central bank leader and has suggested that he would replace her at some point. He once told CNBC that Yellen should be “ashamed” of her actions, saying her policies were political positions to help President Barack Obama. Amid expectations that the president-elect would step up political pressure on the Fed after he takes office in January, there was chatter that Yellen might just step aside. “No I cannot,” she said when asked by Rep. Carolyn Maloney if there were circumstances under which she might leave before her term expires. “I was confirmed by the Senate to a four-year term, which ends at the end of January of 2018, and it is fully my intention to serve out that term.” If Trump removes her from the chair, she could still stay on as a governor until her 14-year term expires in 2024.

Yeah, lead the collapse!

• Europe At Risk Of Collapse; France, Germany Must Lead – French PM (R.)

The EU is in danger of breaking apart unless France and Germany, in particular, work harder to stimulate growth and employment and heed citizens’ concerns, French PM Manuel Valls said in the German capital on Thursday. Valls said the two countries, for decades the axis around which the EU revolved, had to help refocus the bloc to tackle an immigration crisis, a lack of solidarity between member states, Britain’s looming exit, and terrorism. “Europe is in danger of falling apart,” Valls said at an event organized by the Sueddeutsche Zeitung. “So Germany and France have a huge responsibility.” He said France must continue to open up its economy, not least by cutting corporate taxation, while Germany and the EU as a whole must increase investment that would stimulate growth and job creation, as well as boosting defense.

As Britain seeks to negotiate its post-Brexit relationship with the EU, hoping to restrict immigration from the EU while maintaining as much access as possible to the EU single market, Valls said it must be prevented from cherry-picking. “If they are able to have all the advantages of Europe without the inconveniences, then we are opening a window for others to leave the EU,” Valls said. Immigration was one of the main drivers of Britons’ vote to leave the EU, and Valls said the bloc, which more than a million migrants entered last year, had to regain control of its borders. He said the Brexit vote and Donald Trump’s election victory showed how important it was to listen to angry citizens, and that politicians scared of making decisions were opening the door to populists and demagogues.

In France, opinion polls suggest that the far-right, anti-EU, anti-immigration National Front leader Marine Le Pen will win the first round of the presidential election next April, before losing the runoff.

He has no choice.

• Renzi Renews Pledge To Resign If He Loses Referendum (Local.it)

Italian Prime Minister Matteo Renzi said on Wednesday that he would have no interest in a government role if he loses Italy’s upcoming constitutional referendum. In an interview on Italian radio, the premier said: “I’m here to change things. If that doesn’t happen, there is no role for me to play.” If the ‘No’ vote wins on December 4th and Renzi’s proposed changes to the constitution are rejected, it is likely that a temporary or technical government will be formed to change the electoral law before general elections can be held. The PM said he would not be willing to seek a deal with other parties to form a coalition if this happens, adding that he didn’t want to take part in “old-style political games”. Renzi vowed to “fight like a lion” to win the vote and said he believed the “silent majority” of voters would back him in the referendum.

He is currently touring the south of the country, where the ‘No’ camp’s lead is strongest. However, he also emphasized that he didn’t envisage a ‘No’ victory causing immediate problems in the country. “The 5th of December won’t be Armageddon,” said Renzi. “If ‘No’ wins, everything will stay as it is. Italians shouldn’t be fooled by politicians who are fighting to keep the privileges they have always had.” The reforms would see the number of senators and their legislative power drastically reduced, which Renzi claims will cut down on bureaucracy, making government more stable and efficient. But his opponents argue that there are inconsistencies in his proposed changes, and that they would put too much power in the hands of the prime minister.

I like McWilliams, but Trumpism is a nonsensical term, and Italy’s resistance against the EU and globalization was way earlier than Trump became an issue. Correlation and causation.

• Italy Is The Next Country To Fall To Trumpism (David McWilliams)

The Bangladeshi selfie-stick hawkers are doing a brisk trade outside the Colosseum. Local chain-smoking lads dressed as gladiators prey on vulnerable tourists, while portly priests on their annual visit to Catholicism’s corporate HQ take time out from soul-searching. Even the heavily armed soldiers, there to protect against a potential Italian Bataclan, are smiling in the Mediterranean sunshine. And as it is midday in Italy, everyone is checking out everyone else. All looks quite normal, chilled out and as it should be. But it is not. Italy is a country going through what could be described as a nervous breakdown. After a decade of almost no economic growth, in two weeks Italians will vote in a referendum which will determine what direction this huge country of nearly 60 million people will take. The result will profoundly affect the EU.

Although the referendum is technically about the way Italy is governed, the country is split down the middle in a plebiscite that has come to symbolise something much bigger. Once again, like the Brexit vote and the Trump election, this referendum is about insiders against outsiders. It is about those who are the victims of inequality and globalisation and those who uphold the status quo. On one side, you have the Italian political elite — the insiders embodied by Matteo Renzi, the youthful prime minister. He represents the people and institutions that have ruled Italy for decades. On the other side, you have an unusual anti-EU coalition, the Left and the Right — the ‘Outsiders’ — who are united by a common belief that, after 10 years of economic stagnation, there must be another way.

We have the same picture we saw in the UK in June and in the US last week, where an elite is desperately trying to connect with the people and large swathes of the population are saying they have had enough. In terms of the big picture, the Italian election can be seen as yet another domino in a year of falling dominos. First we had Brexit, then Trump, and the next big one for Europe after Italy is the potential rise of Le Pen in France. Italy is the triplet in a quartet that will culminate in France, and, in my opinion, if the Italian elite loses on December 4th, Marine Le Pen will win in France.

The amounts are mind-boggling. Money in, waste out.

• EU Reinforces 2017 Budget On Migration And Jobs (EUO)

EU member states and European Parliament have reached an agreement on a budget for next year that focuses on tackling the migration crisis and creating jobs. After 20 hours of discussions, a deal was reached early on Thursday (17 November) to set the total commitments for 2017 at €157.88 billion and payments at €134.49 billion. “The 2017 EU budget will thus help buffer against shocks, providing a boost to our economy and helping to deal with issues like the refugee crisis,” budget commissioner Kristalina Georgieva said. The budget commits €5.91 billion to tackling the migration crisis and reinforcing security, an 11.3% increase on 2016’s figure, according to a statement from the EU Council, which represents member states.

The money will help EU countries resettle refugees, create reception centres, and return those who have no right to stay. Extra spending will also go to help enhance border protection, crime prevention, counter terrorism activities and protect critical infrastructure. A total of €21.3 billion was put aside to boost economic growth and create new jobs, which is an increase of around 12% compared with this year, the council said. The Erasmus+ scheme, a cross-border student programme, will see an increase of its budget of 19%. The 2017 budget also includes €500 million for youth unemployment, and a €42.6 billion support for farmers.

The Russians are highly aware of what Facebook and Alphabet are doing: “Not replacing foreign IT would be equivalent to dismissing the army.”

• Kremlin Ramps Up Efforts To Crack Down On US Tech Companies (BBG)

In a Nov. 14 phone call with President-elect Donald Trump, Russian President Vladimir Putin held out the prospect of better relations between their two countries. But U.S. tech companies shouldn’t expect warmer ties to ease a Kremlin effort to freeze out their products. Seeking to cut dependence on companies such as Google, Microsoft, and LinkedIn, Putin in recent years has urged the creation of domestic versions of everything from operating systems and e-mail to microchips and payment processing. Putin’s government says Russia needs protection from U.S. sanctions, bugs, and any backdoors built into hardware or software. “It’s a matter of national security,” says Andrey Chernogorov, executive secretary of the State Duma’s commission on strategic information systems. “Not replacing foreign IT would be equivalent to dismissing the army.”

Since last year, Russia has required foreign internet companies to store Russian clients’ data on servers in the country. In January the Kremlin ordered government agencies to use programs for office applications, database management, and cloud storage from an approved list of Russian suppliers or explain why they can’t—a blow to Microsoft, IBM, and Oracle. Google last year was ordered to allow Android phone makers to offer a Russian search engine. And a state-backed group called the Institute of Internet Development is holding a public contest for a messenger service to compete with text and voice apps like WhatsApp and Viber. Russia’s Security Council has criticized the use of those services by state employees over concerns that U.S. spies could monitor the encrypted communications while Russian agencies can’t. Trump’s election hasn’t changed those policies, according to Putin spokesman Dmitry Peskov. “This doesn’t depend on external factors,” he says. “It’s a consistent strategy.”

Do try and wrap your head around the irony of this being published by the NYT, on of the main media companies whose disfunctionality makes Wikileaks so necessary.

• Why the World Needs WikiLeaks (Sarah Harrison)

My organization, WikiLeaks, took a lot of heat during the run-up to the recent presidential election. We have been accused of abetting the candidacy of Donald J. Trump by publishing cryptographically authenticated information about Hillary Clinton’s campaign and its influence over the Democratic National Committee, the implication being that a news organization should have withheld accurate, newsworthy information from the public. The Obama Justice Department continues to pursue its six-year criminal investigation of WikiLeaks, the largest known of its kind, into the publishing of classified documents and articles about the wars in Iraq and Afghanistan, Guantánamo Bay and Mrs. Clinton’s first year as secretary of state. According to the trial testimony of one F.B.I. agent, the investigation includes several of WikiLeaks founders, owners and managers.

And last month our editor, Julian Assange, who has asylum at Ecuador’s London embassy, had his internet connection severed. I can understand the frustration, however misplaced, from Clinton supporters. But the WikiLeaks staff is committed to the mandate set by Mr. Assange, and we are not going to go away, no matter how much he is abused. That’s something that Democrats, along with everyone who believes in the accountability of governments, should be happy about. Despite the mounting legal and political pressure coming from Washington, we continue to publish valuable material, and submissions keep pouring in. There is a desperate need for our work: The world is connected by largely unaccountable networks of power that span industries and countries, political parties, corporations and institutions; WikiLeaks shines a light on these by revealing not just individual incidents, but information about entire structures of power.

While a single document might give a picture of a particular event, the best way to shed light on a whole system is to fully uncover the mechanisms around it – the hierarchy, ideology, habits and economic forces that sustain it. It is the trends and details visible in the large archives we are committed to publishing that reveal the details that tell us about the nature of these structures. It is the constellations, not stars alone, that allow us to read the night sky. [..] WikiLeaks will continue publishing, enforcing transparency where secrecy is the norm. While threats against our editor are mounting, Mr. Assange is not alone, and his ideas continue to inspire us and people around the world.

Just another day.

• Another 100 Migrants Feared Drowned in Mediterranean (AFP)

The toll of missing and dead rose Thursday in a grim week of Mediterranean crossings as African survivors described being robbed of life jackets and boat engines and abandoned to a watery grave. A group of 27 survivors, all men, were plucked to safety on Wednesday, but roughly 100 other passengers who set off with them from Libya were missing and feared drowned, Doctors Without Borders (MSF) said. Along with two other shipwrecks this week, the latest incident pushed the toll to 18 confirmed dead and 340 missing, in what was already the most lethal year ever recorded for migrant deaths at sea. The survivors rescued Wednesday by a British Navy ship, described being stripped of their sole means of survival by the men they had paid for safe passage.

They had set off before dawn on Monday from a beach close to Tripoli. After several hours the traffickers, travelling aboard a separate boat, ordered them at gunpoint to hand over life jackets they had paid for, as well as the boat engine, and left them without a satellite phone to call for help. “At that point I thought we were going to die”, said Abdoullae Diallo, 18, according to MSF. “Without a motor, we couldn’t go far. A trafficker told us we would be rescued but I felt like we were going to die.” The overcrowded dinghy began rapidly taking on water and deflated. Tossed for two days and nights on rough seas, some passengers fell overboard, while others succumbed to exhaustion. By the time the British Royal Navy’s HMS Enterprise – engaged in the anti-trafficking Sofia operation – found them, just 27 people were left alive, clinging to what was left of the dinghy.

[..] The first group of survivors were brought to Catania, in Sicily, while the second group were expected to arrive on Italy’s mainland in the port of Reggio Calabria Some were children. “One young boy has been weeping, asking for his mother,” Mathilde Auvillain, a spokeswoman for SOS Mediterranee told AFP. “Another has written a list of names of the people travelling with him and re-reads it over and over. He wants to know if his friends are on the boat or in the sea,” she said.

Watching in bewilderment.

• The North Pole Is An Insane 36º Warmer Than Normal As Winter Descends (WaPo)

Political people in the United States are watching the chaos in Washington in the moment. But some people in the science community are watching the chaos somewhere else — the Arctic. It’s polar night there now — the sun isn’t rising in much of the Arctic. That’s when the Arctic is supposed to get super-cold, when the sea ice that covers the vast Arctic Ocean is supposed to grow and thicken. But in the fall of 2016 — which has been a zany year for the region, with multiple records set for low levels of monthly sea ice — something is totally off. The Arctic is super-hot, even as a vast area of cold polar air has been displaced over Siberia. At the same time, one of the key indicators of the state of the Arctic — the extent of sea ice covering the polar ocean — is at a record low. The ice is freezing up again, as it always does this time of year after reaching its September low, but it isn’t doing so as rapidly as usual.

Debt Rattle April 1 2016

Apr 012016

April 1, 2016 Posted by Raúl Ilargi Meijer at 8:32 am Finance Tagged with: asylum, bear market, Brexit, deficit, Greece, hack, refugees, retail, steel, Turkey 16 Responses »

William Henry Jackson Jupiter & Lake Worth R.R., Florida 1896

• Asia Stocks Head for Biggest Drop in 7 Weeks Amid Broad Declines (BBG)

• Hong Kong Retail Sales Plunge the Most in 17 Years (BBG)

• A Bear Market Is Now Underway And It’s Likely To Be A Painful One (Felder)

• Foreigners’ ‘Dumb Money’ Flees Japan Stocks (BBG)

• ‘Protectionist’ China Tax on Overseas Purchases Set to Kick In (WSJ)

• Global Steel Industry Facing ‘Ice Age,’ Top China Mill Warns (BBG)

• China’s Anbang Abandons $14 Billion Bid To Buy Starwood Hotels (Reuters)

• The UK Once Made 40% Of Global Steel. Soon It May Produce Almost None (BBG)

• Britain Courts Fate On Brexit With Worst External Deficit In History (AEP)

• A Plan To Turn The Euro From Zero To Hero (Andricopoulos)

• In Technology We Trust -Maybe- (Coppola)

• How To Hack An Election (BBG)

• Canada To Accept Additional 10,000 Syrian Refugees (Reuters)

• Greece, Turkey Take Legal Short-Cuts In Race To Return Migrants (Reuters)

• Amnesty Says Turkey Illegally Sending Syrians Back To War Zone (Reuters)

• Turkey ‘Shooting Dead’ Syrian Refugees As They Flee Civil War (Ind.)

• Greek Asylum System Under ‘Insufferable Pressure’ (IRIN)

Nikkei off 3.55%.

• Asia Stocks Head for Biggest Drop in 7 Weeks Amid Broad Declines (BBG)

Asian stocks headed for the biggest decline in seven weeks as Japanese corporate sentiment deteriorated and a broad-based selloff from consumer discretionary stocks to healthcare engulfed the region’s equities markets. The MSCI Asia Pacific Index slid 2.2% to 126.04 as of 1:49 p.m. in Tokyo. The gauge climbed 8.2% in March, the best month since October, to end a tumultuous quarter for global markets. Equities had rebounded from lows in February as the Federal Reserve reassured investors that it won’t rush to increase borrowing costs. A stellar performance in March was tested immediately on the first day of the second quarter. Japan’s Topix index lost 3.4%, the worst start to a quarter since 2008, after the Tankan index of confidence among large manufacturers missed economist estimates.

“After strong gains from their February lows, shares are overbought and vulnerable to a pullback,” said Shane Oliver, head of investment strategy at Sydney-based AMP Capital Investors Ltd., which oversees about $122 billion. “March quarter Tankan business conditions and confidence readings were disappointing.” The Tankan index of sentiment among large manufacturers fell to a reading of 6 in the first quarter, the lowest level since mid-2013, from 12 in the previous three months, the Bank of Japan reported Friday. Economists had expected a reading of 8. A positive number means there are more optimists than pessimists among manufacturers. The Shanghai Composite Index lost 1.3% even after China’s official factory gauge showed improving conditions for the first time in eight months, suggesting the government’s fiscal and monetary stimulus is kicking in.

A jump in the official factory gauge was overshadowed by a cut in the nation’s credit rating by Standard & Poor’s. S&P cut the outlook for China’s credit rating to negative from stable, saying the nation’s economic rebalancing is likely to proceed more slowly than the ratings firm had expected. The reduction may not have much of an impact on the markets as it comes at a time when the nation’s stocks are rallying and the currency is stabilizing, according to Sinopac Securities.

Retail sales are getting bad in multiple locations.

• Hong Kong Retail Sales Plunge the Most in 17 Years (BBG)

Hong Kong’s retail sales in February have plunged the most since 1999 as fewer Chinese tourists visited the city during the Lunar New Year holiday. Retail sales dropped 21% in February to HK$37 billion ($4.8 billion) year on year, according to a statement from Hong Kong’s statistics department. Combining January and February, sales fell 14%. The monthly decline is the worst since January 1999 when sales were also down 21%. “Apart from the severe drag from the protracted slowdown in inbound tourism, the asset market consolidation might also have weighed on local consumption sentiment,” a government said in a statement on Thursday. “The near-term outlook for retail sales will still be constrained by the weak inbound tourism performance and uncertain economic prospects.”

The government will monitor closely its repercussions on the wider economy and job market, it said. Chow Tai Fook Jewellery, the world’s largest-listed jewelry chain, and Sa Sa International reported slumping sales over the holiday when mainland Chinese tourists to the territory dropped 12% during Feb. 7-13. The stock market rout and a slowing Chinese economy have affected consumer sentiment for luxury goods, Chow Tai Fook has said. Mainland China tourists “are unlikely to come back in the short term,” said Forrest Chan at CCB International Securities. Hong Kong residents are also consuming less due to stagnant property values and the weak stock market, he said. “Hong Kong’s retail market will continue to fall for the rest of 2016 as all the negative factors won’t be solved in the near term,” Chan said.

Margin debt. Next up is margin calls.

• A Bear Market Is Now Underway And It’s Likely To Be A Painful One (Felder)

NYSE margin debt fell again during the month of February. After the selloff in stocks that kicked off 2016, this should come as no surprise. Investors are usually forced to reduce leveraged bets during these sorts of episodes in the stock market. In fact, this forced selling can actually exacerbate the volatility. And because margin debt is only now beginning to come down from record highs, surpassing those seen at the 2000 and 2007 peak, this should be of concern to most equity investors. To fully appreciate this risk, I prefer to look at margin debt relative to overall economic activity. When leveraged financial speculation becomes large relative to the economy, it’s usually a sign investors have become far too greedy. As Warren Buffett would say, this is usually a good time to become more fearful, or conservative towards the stock market.

Not only did margin debt recently hit nominal record-highs, it hit new record-highs in relation to GDP, as well. In other words, over the past several decades, investors have never become so greedy as they did recently. And yes, this includes the dotcom bubble. One reason I prefer this measure is that it has a fairly high negative correlation with forward 3-year returns in the stock market. When investors become too greedy, returns over the subsequent 3 years are poor and vice versa. As of the end of February, the latest forecast implied by this measure is for a loss of about 35% over the next three years. While this measure is pretty good at forecasting 3-year returns that doesn’t help much for investors concerned with the next year or so. In this regard, it may be helpful to observe the trend of margin debt.

Where is the nominal level of margin debt relative to its 12-month moving average or simply its level from one year ago? Historically, when these indicators turn negative from such lofty levels, a bear market, as defined by at least a 20% drawdown, is already underway. Right now both of these measure are, in fact, negative. So margin debt right now is sending a very clear signal that investors have recently become very greedy. This suggests returns over the next several years should be very poor. Finally, the trend in margin debt also suggests that a new bear market is likely underway. If history is to rhyme, that means a decline of at least 20% in the S&P 500 is very likely to occur sometime soon. And because of the sheer size of the potential forced supply that could come to market in this sort of environment, that could easily be just the beginning.

Abenomics chapter 827-B.

• Foreigners’ ‘Dumb Money’ Flees Japan Stocks (BBG)

Brian Heywood, who oversees about $2 billion mostly in Japanese equities, is putting on a brave face as the market tumbles and many foreigners head for the exit. The CEO of Taiyo Pacific Partners says he welcomes the selling by overseas investors as it gives him a better chance to beat his benchmark. His logic is that many money managers invest indiscriminately in Tokyo, pushing up the entire Topix index and making stock-picking less effective. Heywood says his fund is outperforming the equity gauge this year, while declining to give details.

Foreign investors offloaded shares for 12 straight weeks, with net selling reaching a record earlier this month, as they lose faith in the Bank of Japan’s monetary policy and Prime Minister Shinzo Abe’s commitment to reviving the economy. The Topix is down 13% in 2016, and while Taiyo’s biggest holdings have posted strong gains, many others have fallen. “We don’t do well when there is a flood of money into Japan, because it’s dumb money,” Heywood, 49, said in an interview during a visit to Tokyo last week. “When the market punctures, there are companies that we want to add to. The market overreacts. We know the company. We’re at 3% and we’d like to be at 6%. We use it as an opportunity.”

We’re going to see a lot of ‘hidden’ protectionism going forward. Globalization is now turning against individual nations.

• ‘Protectionist’ China Tax on Overseas Purchases Set to Kick In (WSJ)

China is tightening its grip on cross-border e-commerce, imposing a new tax system on overseas purchases that form a growing business catering to Chinese consumers with an appetite for foreign goods. The changes, announced by the Finance Ministry last week, include raising the so-called parcel tax that is currently imposed on foreign retail products that e-commerce firms ship into China. Moreover, such goods sent directly to consumers will now be treated as imports and will be subject to tariffs and value-added and consumption taxes, whose rates vary depending on the type and value of goods. The ministry said the changes, which become effective April 8, are intended to put foreign and domestic products on an equal footing.

Industry analysts said the move seems designed to give a boost to “made-in-China” products and could dent a small, but growing, market for foreign goods sold by Alibaba, JD.com. and other e-commerce players. Those marketplaces feature nutritional supplements and food by brands such as Ocean Spray, as well as diapers and other baby and maternal products. They form a slice of the 5 trillion yuan ($773 billion) in sales by e-commerce firms in China last year, double the level of 2012, according to Beijing-based research firm Analysys International. The new levies could dampen some demand, just as an increasing number of retailers world-wide are hoping to sell into China, said Charles Whiteman, senior vice president of client services for MotionPoint, a technology company that helps international retailers sync their e-commerce websites across languages and currencies.

“Increases in prices always have the effect of driving demand down,” but the effect will be “modest,” Mr. Whiteman said. “It probably won’t be too noticeable for branded products,” for which consumers are willing to pay a premium. Chinese consumers have demonstrated a willingness to pay more for products such as cosmetics, infant formula and other baby products. Chinese e-commerce companies have said that such products form the vast majority of the imported products sold on their websites, because of product-safety concerns in China. Alibaba and JD.com said they expected robust demand from Chinese consumers for overseas products, especially high-quality ones, to continue, even with the changes in policy.

Yeah, that metaphor sort of works.

• Global Steel Industry Facing ‘Ice Age,’ Top China Mill Warns (BBG)

The crisis engulfing the global steel industry is so severe that one of China’s top producers has warned a new Ice Age has set in as mills confront overcapacity and rising competition that threaten their survival. “In 2015, China experienced a slowdown in economic growth and excess steel capacity, which caused the domestic and overseas steel industry to enter into an ‘Ice Age’,” Angang Steel said after posting a net loss of 4.59 billion yuan ($710 million) for last year. There are severe challenges, fierce competition and difficult survival conditions, it said. Steel demand in China is shrinking for the first time in a generation as growth slows and policy makers seek to steer the economy toward consumption.

Faced with declining sales at home, mills in the top producer – which accounts for half of global supply – have shipped record volumes overseas, heightening competition from Europe to the U.S. Tata Steel Ltd. in India said this week it’s planning to sell off its loss-making U.K. plants, prompting Prime Minister David Cameron to call crisis talks on Thursday. The steel industry is set for a “severe winter,” Angang said, describing the market that it and others faced as complex. Output of steel by the country’s fourth-biggest producer contracted 4.4% last year, and the company is seeking to reduce costs and boost efficiency, it said.

Benchmark steel prices sank 31% in China last year, pummeling mills’ margins and spurring the government to step up efforts to force the industry to shut overcapacity and shift workers to other jobs. While reinforcement bar has rebounded since November, Daniel Hynes, senior commodities strategist at Australia & New Zealand Banking Group Ltd., forecasts the rally may not last. “The short-term rally we’ve seen in steel prices will give way to the longer-term dynamic of weaker steel consumption in China,” Hynes said by phone on Thursday. “I suppose the positive thing is that maybe the restructuring we’re seeing in the steel industry will speed up the rationalization of the market.”

This is becoming a curious case. Rumor has it Anbang couldn’t produce details on how they would finance the deal.

• China’s Anbang Abandons $14 Billion Bid To Buy Starwood Hotels (Reuters)

China’s Anbang Insurance said on Thursday it has abandoned its $14 billion bid for Starwood Hotels & Resorts Worldwide, paving the way for Marriott International to buy the Sheraton and Westin hotels operator. The surprise withdrawal marks an anticlimactic end to a bidding war that had pitted Marriott’s ambitions to create the world’s largest lodging company, with about 5,700 hotels, against Anbang’s drive to create a vast portfolio of U.S. real estate assets. It also represents a blow to corporate China’s growing ambitions to acquire U.S. assets. Anbang’s acquisition of Starwood would have been the largest takeover of a U.S. company by a Chinese buyer.

“We were attracted to the opportunity presented by Starwood because of its high-quality, leading global hotel brands, which met many of our acquisition criteria, including the ability to generate consistent, long-term returns over time,” Anbang said. “However, due to various market considerations, the consortium has determined not to proceed further,” Anbang added, referring to the joint bid it had put together with private equity firms J.C. Flowers and Primavera Capital. Anbang did not offer Starwood a reason for not following through on its raised offer of March 26, according to people familiar with the matter. They asked not to be identified disclosing confidential discussions. “The reason of withdrawal is simple – Anbang isn’t interested in a protracted bidding war,” Fred Hu, Chairman of Primavera, told Reuters..

What happens when all your priorities are short term.

• The UK Once Made 40% Of Global Steel. Soon It May Produce Almost None (BBG)

The U.K. once made nearly half the world’s steel. Soon it may produce almost none. Tata Steel plans to sell its U.K. business which include the country’s last blast furnace sites in Scunthorpe and Port Talbot. Used to turn iron ore into steel, these giant plants are the focus of the entire industry. They are also the assets that may prove the most difficult to unload, according to at least one potential buyer. Should Tata’s plants follow Redcar, shut last year, the U.K. would become the first member of the Group of Seven leading economies to operate no blast furnaces. It’s a far cry from its Victorian metal-bashing heyday when Britain produced about 40% of global supply. But beyond the immediate impact on employment, does it matter? Does a major industrial economy need to produce steel, a material vital to industries from construction to car making?

“They’re probably done for,” said Keith Burnett, vice-chancellor at the University of Sheffield, a place that won the moniker Steel City before the industry’s decline. “But if we accept that, it’s a really big step and the long-term consequences are to lose the capabilities to make our own railways, make our own weapon systems, make our own nuclear reactors.” The U.K. was already the industrial world’s laggard when it comes to steel, producing just 12.1 million tons in 2014, less than a third of what Germany makes each year and just over a tenth of Japan’s 110.7 million=ton output. China is the world’s biggest producer making about half the world’s 1.67 billion tons of steel.

British steelmaking has been in relative decline for more than a century, eclipsed by the by the U.S. by the start of World War I and later overtaken by Germany. In the 1970s and 1980s, inefficient and outdated plants led to production falling 64% to less than 10 million metric tons, and the country’s output slipped below France, Italy and Belgium. Still, manufacturing in steel-consuming industries is buoyant. U.K. car production hit a 10-year high last year with 1.6 million cars being made in Britain as overseas sales reached record numbers. The country employs 2.6 million people in manufacturing, much of it steel related, and it accounts for 44% of exports.

More of the same short term focus that will end up damaging Britain for decades to come.

• Britain Courts Fate On Brexit With Worst External Deficit In History (AEP)

Britain’s current account deficit is the worst ever recorded in peace-time since the Bank of England started collecting records in 1772 under the reign of George III. Even during the grimmest moments of the First World War it only slightly exceeded the eye-watering figure of 7pc of GDP racked up in the fourth quarter of last year. No other country in the OECD club is close to this. It has been getting worse for the last four years in a row. Excuses are running thin. The Government can no longer blame the double-dip recession in the eurozone, our biggest export market. Europe has been recovering for three years and is currently enjoying as much growth as it is ever likely to see. The UK deficit is prima facie evidence of a nation living beyond its means, reliant on foreign capital to fund consumption.

Global investors have so far chosen to overlook this chronic deterioration, accepting the stock assurance from London that it is a temporary blip caused by declines in investment income. This may change as the vote on Brexit draws near and the polls tighten. Most investors in Asia, the US, and the Middle East have treated the referendum as political pantomime, taking it for granted that British voters would (as the world sees it) make the “rational” choice. “Very few people have been focusing on the current account. Brexit is now bringing it firmly into focus. We are getting a lot more questions about this from clients in Europe,” said David Owen from Jefferies. The dawning realization that Britain might indeed opt for secession has clearly begun to rattle markets. Sterling has fallen 9pc against a trade-weighted basis since November. The spread between Gilts and German Bunds has been creeping up, an early warning sign of trouble.

The Bank of England’s Financial Policy Committee noted signs of stress in the sterling options market in a statement this week, and warned that it may become harder to the inflows of capital needed to cover the external deficit. Lena Komileva from G+Economics said the current account deficit is now so large that it leaves the country vulnerable to external shocks, amplifying the potential impact of Brexit. Britain’s credit-driven consumer credit is “plainly unsustainable”. The UK savings ratio has fallen to a record low of 3.8pc. Consumer credit has risen by 44pc over the last year to £1.3bn. “We are not very different from the structural fragility of the economy that we had prior to the 2007 global crash,” she said. The Office for Budget Responsibility warned earlier this month that households are running an “unprecedented” deficit of 3pc of GDP – worse than the pre-Lehman peak – with no improvement expected through to the early 2020s.

People are running through savings and taking on debt to fund their lifestyles and buy new cars. They are expected to spend £58bn more than they earn this year, rising to £68bn by the end of the decade. This roughly mirrors what was happening just before the 2007 financial crisis when people were treating their homes as a cash machine, drawing down £50bn a year in home equity. Events were to show brutally that this was not benign.

Well, one can dream, surely. But without -unacceptable to many- ‘transfers’ from north to south, can the euro survive at all?

• A Plan To Turn The Euro From Zero To Hero (Andricopoulos)

It is difficult to read the history of inter-war Europe and the US without feeling a deep sense of foreboding about the future of the Eurozone. What is the Eurozone if not a new gold standard, lacking even the flexibility to readjust the peg? For the war reparations demanded at Versailles, or the war debts owed by France and the UK to the US, we see the huge debts owed by the South of Europe to the North, particularly Germany. The growth model of the Eurozone now appears to be based largely on running a current account surplus. Competitive devaluation is required to make exports relatively cheap. While this may have been a very successful policy for Germany during a period of high economic growth in the rest of the world, it cannot work in the beggar-thy-neighbour demand-starved world economy of today.

As I’ve explained elsewhere, reasonably large government deficits are very important for sustainable economic growth. However, in the Eurozone this is prohibited both by the Stability and Growth Pact (SGP) and by the fear of losing market confidence in the national debt. At the same time credit growth for productive investment is constrained by weak banks and Basel regulation. And the Eurozone as a whole is already running a large current account surplus; the rest of the world will not allow much more export-led growth. Helicopter money would be a solution, but politically this is a long way away. Summing up, if economic growth cannot be funded by government deficits, private sector debt, export growth or helicopter money it is very difficult to see where nominal GDP growth can come from.

In a way, this can be seen as a Prisoner’s Dilemma. Every country knows (or should know) that if all states provided fiscal stimulus, the Eurozone would benefit from more economic growth. However, for any individual state, a unilateral fiscal boost would increase their own government debt whilst giving a fair amount of the GDP growth to other states (because some of the stimulus would go to increasing imports from the other nations). And if all others provide stimulus, then it is in an individual state’s interest to take the benefit of the other states’ stimulus, and become more competitive versus the rest.

We could do with more blockchain scrutiny.

• In Technology We Trust -Maybe- (Coppola)

David Andolfatto of the St. Louis Federal Reserve wonders if investors see Bitcoin as a “safe asset”. By this he means the sort of asset that investors run to when economic storm clouds gather and other asset classes start to look dangerous: “Loosely speaking, I’m thinking about an asset that people flock to in bad or uncertain economic times. In normal times, it’s an asset that is held despite having a relatively low rate of return, perhaps because of its use as a hedge, or because of its liquidity properties.” Like gold, in fact. In important respects, Bitcoin is indeed like gold. Digital gold. It is “mined”, with mining becoming more difficult and expensive as undiscovered supplies dwindle.

There is an absolute limit (21 million) on the number of bitcoins that can ever be mined: once all have been “discovered”, the supply is fixed, unless the Bitcoin community decides that the hard limit should be changed – which at present seems rather less likely than mining asteroids for gold. The gold-like nature of Bitcoin protects it from hyperinflationary collapse, believed by many goldbugs and Bitcoin geeks to be the inevitable future of today’s government-issued fiat currencies. And, importantly, it is not under the control of governments or central banks. Neither the political mafia nor the economics establishment have any say over how, when or if it is produced, nor over its market price. For people who believe that “GUBBMINT WILL STEAL YOUR MONEY”, Bitcoin is possibly even more secure than gold.

After all, in the 1930s the US government confiscated private sector gold holdings. But it has no means of confiscating Bitcoin holdings, since identifying exactly who holds them is costly and difficult, and they can easily be transferred out of reach anyway. Bitcoin is, after all, an international currency with its own highly efficient money transfer technology. Like gold, Bitcoin’s market price tends to be volatile. And like gold, its value also tends to be counter-cyclical. When the US economy weakens, or global risks rise, up goes gold…..and Bitcoin. The profiles of both vis-à-vis the US dollar since the end of 2013 look remarkably similar. We can perhaps say that investors run to gold when trust in government and its instruments fails. In God We Trust becomes In Gold We Trust. But where does Bitcoin fit in?

Bitcoin’s advocates claim that the system is a “trust-free system”, because there are no intermediaries. But for the system to work at all, there must be trust – trust that the technology will work. In Gold We Trust becomes In Technology We Trust. It is perhaps not surprising that Bitcoin use is highest among those with a background in computer science. But hang on. There’s a problem, isn’t there? After all, governments are human constructs. And so are cryptocurrencies. The coders behind Bitcoin are human. Why should anyone have more trust in a digital currency created by an anonymous group of coders accountable to no-one than in a democratically-elected government accountable to everyone? Why is an essentially feudal governance model “safer” than a democratic one?

The election hit man.

• How To Hack An Election (BBG)

It was just before midnight when Enrique Peña Nieto declared victory as the newly elected president of Mexico. Peña Nieto was a lawyer and a millionaire, from a family of mayors and governors. His wife was a telenovela star. He beamed as he was showered with red, green, and white confetti at the Mexico City headquarters of the Institutional Revolutionary Party, or PRI, which had ruled for more than 70 years before being forced out in 2000. Returning the party to power on that night in July 2012, Peña Nieto vowed to tame drug violence, fight corruption, and open a more transparent era in Mexican politics. Two thousand miles away, in an apartment in Bogotá’s upscale Chicó Navarra neighborhood, Andrés Sepúlveda sat before six computer screens.

Sepúlveda is Colombian, bricklike, with a shaved head, goatee, and a tattoo of a QR code containing an encryption key on the back of his head. On his nape are the words “” and “” stacked atop each other, dark riffs on coding. He was watching a live feed of Peña Nieto’s victory party, waiting for an official declaration of the results. When Peña Nieto won, Sepúlveda began destroying evidence. He drilled holes in flash drives, hard drives, and cell phones, fried their circuits in a microwave, then broke them to shards with a hammer. He shredded documents and flushed them down the toilet and erased servers in Russia and Ukraine rented anonymously with Bitcoins. He was dismantling what he says was a secret history of one of the dirtiest Latin American campaigns in recent memory.

For eight years, Sepúlveda, now 31, says he traveled the continent rigging major political campaigns. With a budget of $600,000, the Peña Nieto job was by far his most complex. He led a team of hackers that stole campaign strategies, manipulated social media to create false waves of enthusiasm and derision, and installed spyware in opposition offices, all to help Peña Nieto, a right-of-center candidate, eke out a victory. On that July night, he cracked bottle after bottle of Colón Negra beer in celebration. As usual on election night, he was alone.

Bright spot. Europe must study Canadian law.

• Canada To Accept Additional 10,000 Syrian Refugees (Reuters)

Canada will take in an additional 10,000 Syrian refugees, adding to the more than 25,000 already received in the last few months, said immigration minister John McCallum. McCallum told the Canadian Broadcasting Corp he was responding to complaints from Canadian groups who want to sponsor Syrian refugees but did not have their applications processed quickly enough to be among the government’s initial target of 25,000. “We are doing everything we can to accommodate the very welcomed desire on the part of Canadians to sponsor refugees,” McCallum said in a phone interview with CBC News from Berlin, where he is meeting with the German interior minister. The Liberal government won election in October 2015 pledging to bring in more Syrian refugees more quickly than the previous Conservative government.

Private groups including church, family and community organizations had lined up to sponsor Syrian families. The welcome contrasts sharply to Europe, where resettlement has sparked an anti-migrant backlash amid security fears. While there have been some delays finding permanent housing for refugees arriving in Canada, particularly in large cities like Toronto where the housing market is tight, the resettlement program has been mostly smooth. [..] . A total of 26,200 Syrian refugees had arrived in Canada as of 28 March, according to the immigration department. But nearly 16,000 more applications are in process or have been finalized, even though the refugees have not yet arrived, according to official figures.

Fast and loose.

• Greece, Turkey Take Legal Short-Cuts In Race To Return Migrants (Reuters)

Greece and Turkey are rushing through changes to their asylum rules in a race to implement a EU-Turkey agreement on the return of refugees and migrants from Greek islands to Turkey from next Monday, EU officials and diplomats said. Both Athens and Ankara must amend their legislation to permit the start of a scheme – denounced by the U.N. refugee agency and rights groups – to send back all migrants who crossed to Greece after March 20. The policy is meant to end the uncontrolled influx of refugees and other migrants in which more than a million people crossed into Europe last year, causing a political backlash and pitting EU countries against each other. Greece, which started evacuating hundreds of people stranded in Athens’ Piraeus port on Thursday, submitted to parliament an asylum amendment bill on Wednesday.

Brussels said it had assurances from Athens that it would be passed this week. But it does not explicitly designate Turkey as a “safe third country” – a formula to make any mass returns legally sound – and a senior official of the United Nations High Commissioner for Refugees said that change did not remove its concerns about protecting the rights of asylum seekers. “Our concerns regarding legal safeguards remain unchanged and we hope that the Greek authorities will take them fully into consideration,” UNHCR Europe director Vincent Cochetel said. The EU executive’s spokeswoman, Natasha Bertaud, was unable to say how exactly rejected asylum seekers would be removed from camps on Greek islands or transported back to Turkey, saying those details were still being worked out.

[..]The Greek bill does not name Turkey, but Bertaud said that was not essential provided rules were in place allowing people to be sent back to a “safe third country” or a “safe first country of asylum”, and each case was examined individually. EU officials said the formula was devised to get around unease among lawmakers in Greece’s ruling Syriza party at declaring Turkey safe when it is waging a military crackdown on Kurdish separatists and is accused of curbing media freedom and judicial independence. Asked why Turkey was not mentioned, Greece’s alternate minister for European affairs, Nikos Xydakis, told To Kokkino radio: “It cannot be in a law, because the examination of each application for asylum will be on a case by case basis. That is the safety trigger under international refugee law. Each person is a special case.”

“It is a deal that can only be implemented with the hardest of hearts and a blithe disregard for international law..”

• Amnesty Says Turkey Illegally Sending Syrians Back To War Zone (Reuters)

Turkey has illegally returned thousands of Syrians to their war-torn homeland in recent months, highlighting the dangers for migrants sent back from Europe under a deal due to come into effect next week, Amnesty International said on Friday. Turkey agreed with the EU this month to take back all migrants and refugees who cross illegally to Greece in exchange for financial aid, faster visa-free travel for Turks and slightly accelerated EU membership talks. But the legality of the deal hinges on Turkey being a safe country of asylum, which Amnesty said in its report was clearly not the case. It said it was likely that several thousand refugees had been sent back to Syria in mass returns in the past seven to nine weeks, flouting Turkish, EU and international law.

“In their desperation to seal their borders, EU leaders have wilfully ignored the simplest of facts: Turkey is not a safe country for Syrian refugees and is getting less safe by the day,” said John Dalhuisen, Amnesty International’s Director for Europe and Central Asia. Turkey’s foreign ministry denied Syrians were being sent back against their will. Turkey had maintained an “open door” policy for Syrian migrants for five years and strictly abided by the “non-refoulement” principle of not returning someone to a country where they are liable to face persecution, it said. “None of the Syrians that have demanded protection from our country are being sent back to their country by force, in line with international and national law,” a foreign ministry official told Reuters.

But Amnesty said testimonies it had gathered in Turkey’s southern border provinces suggested the authorities have been rounding up and expelling groups of around 100 Syrian men, women and children almost daily since the middle of January. Many of those returned to Syria appear to be unregistered refugees, though the rights group said it had also documented cases of registered Syrians being returned when apprehended while not carrying their papers. Amnesty also said its research showed the authorities had scaled back the registration of Syrian refugees in the southern border provinces. Those with no registration have no access to basic services such as healthcare and education. [..] “The large-scale returns of Syrian refugees we have documented highlight the fatal flaws in the EU-Turkey deal. It is a deal that can only be implemented with the hardest of hearts and a blithe disregard for international law,” Amnesty’s Dalhuisen said.

How can Europe continue with the Turkey deal under these conditions?

• Turkey ‘Shooting Dead’ Syrian Refugees As They Flee Civil War (Ind.)

Turkish security forces have shot dead refugees escaping from the Syrian conflict, according to reports. UK-based monitoring group the Syrian Observatory for Human Rights alleged 16 people seeking sanctuary in Turkey have been shot over the past four months. They said those killed included three children. Other examples compiled by the Syrian Observatory include the alleged killings of a man and his child at Ras al-Ain, at the eastern end of the Turkish-Syrian border. In the west of the country, two refugees were reportedly shot dead at Guvveci on 5 March. “It’s in all areas. It happens to people coming from Idlib, Aleppo, Isis areas, Kurdish areas,” a spokesman for the Syrian Observatory told The Independent.

Other sources, including a Syrian people smuggler based in Turkey and an officer of the UK-supported Free Syrian Police, told The Times they believed the number of refugees killed by Turkish forces was actually far higher. They said this was because people killed on the Syrian side of the border were buried in the conflict zone, where record keeping is much more difficult. The smuggler told the newspaper refugees attempting to cross the border would now “either be killed or captured”. Citing Turkey’s former open-door refugee policy, he added: “Turkish soldiers used to help the refugees across, carry their bags for them. Now they shoot at them.” It is not the first time Turkish authorities have faced criticism over their treatment of refugees. In March, the Turkish Coast Guard allegedly attacked a dinghy filled with migrants in the Aegean. The latest allegations are likely to cast further scrutiny on the EU migrant deal with Turkey.

“This is how true refugees are lost. Do we really think that a Somali woman who has been raped will sit down and merrily rattle off her experiences?”

• Greek Asylum System Under ‘Insufferable Pressure’ (IRIN)

As Greece prepares to deport an initial 500 migrants and refugees on Monday under a controversial agreement between the EU and Turkey, senior Greek officials say the pressure to process applications quickly has become too great, at the expense of legal and ethical standards. “Insufferable pressure is being put on us to reduce our standards and minimise the guarantees of the asylum process,” Maria Stavropoulou, who heads the Greek Asylum Service, told IRIN. “[We’re asked] to change our laws, to change our standards to the lowest possible under the EU directive [on asylum procedures].” Under the terms of the 18 March agreement, Greece must screen all new arrivals from Turkey as quickly as possible and return those deemed not in need of international protection on the basis that Turkey is a “safe third country” or “first country of asylum” where they were already protected.

Most of the pressure, according to Stavropoulou, is coming from “countries that are very invested in the deal with Turkey working.” Germany, which received more than one million asylum seekers last year, took a leading role in negotiations with Turkey during a tense two-day summit earlier this month. In addition to having to screen and return new arrivals, Greece is also dealing with high numbers of asylum applications from the more than 50,000 refugees and migrants who were already trapped inside Greece before the agreement with Turkey came into effect. An overland route through the western Balkans to Germany has been closed for a month and many of those who cannot afford to pay smugglers to find a new route to Western Europe are now applying for asylum in Greece. Authorities here expect to receive just under 3,000 applications in March, double the figure for January and three times last year’s monthly average.

But even as the numbers have mounted, so has the pressure for speedy processing. The Greek Asylum Service has just hired three dozen new personnel, bringing its total staff to 295. But it says it will need at least double that number to handle the expected caseload in the wake of the EU-Turkey agreement. The European Commission has estimated that some 4,000 personnel are likely to be needed in Greece and is sending reinforcements. Many of those slated to join the effort are coastguard officers, but some 800 are asylum experts and interpreters from other member states and from the European Asylum Support Office, the EU’s coordinating body for asylum matters. The first 60 are to arrive in Greece on Sunday.

[..] Some asylum experts believe that the pressure for rapid screening will mean that vital information for determining asylum claims is overlooked. “It always takes time,” said Spyros Kouloheris, head of legal research at the Greek Council for Refugees (GCR), the country’s most respected legal aid NGO. “Someone who is traumatised will speak in fits and starts. They appear not to be telling the truth. We’ve lost a lot of cases because we didn’t have the time, the information, the culture, the experience, to understand that the more broken up the narrative, the more likely it is that there is a background of torture and abuse. This is how true refugees are lost. Do we really think that a Somali woman who has been raped will sit down and merrily rattle off her experiences?”

Debt Rattle January 16 2016

Jan 162016

January 16, 2016 Posted by Raúl Ilargi Meijer at 9:46 am Finance Tagged with: dollar, earnings, Fed, oil, PCBs, recession, refugees, retail, stocks, Treasuries Comments Off

DPC Union Station, Worcester, Massachusetts 1906

• US Stocks Post Worst 10-Day Start To A Year In History (MW)

• What Goes Up, Comes Down Considerably Faster (ZH)

• Wall Street Hemorrhages As Oil Tumbles And China Fears Deepen (Reuters)

• Weak US Data Deluge Points To Sharply Slower Growth (Reuters)

• A Recession Worse Than 2008 Is Coming (Michael Pento)

• Looming Recession Shifts Fed Support From Equities To Dollar, Banks (Brodsky)

• Global Earnings Downgrades Haven’t Been This Bad in Seven Years (BBG)

• Retail Sales in U.S. Decrease to End Weakest Year Since 2009 (BBG)

• Wal-Mart to Shut Hundreds of Stores (BBG)

• A New Year Of Turmoil For China (WaPo)

• Currency War Revival Seen After Yen, Euro Rally (BBG)

• One Year On, ‘Franckenschock’ Still Hurts Swiss (CNBC)

• America’s Student-Debt Crisis Is Only Getting Worse (MW)

• MH-17’s Unnecessary Mystery (Robert Parry)

• Toxic Chemicals In Scottish Waters Wiping Out Killer Whales (Scotsman)

• Baby Found Dead On Greece Migrant Boat (AP)

History being written.

• US Stocks Post Worst 10-Day Start To A Year In History (MW)

U.S. stocks closed sharply lower Friday, locking in the worst 10-day start to a calendar year ever, as oil prices plunged and investors worried about slowing growth in the U.S. During the course of the session, the S&P 500 broke below its Aug. 24 low—which several market strategists said would be tantamount to a major sell signal—to trade at its lowest level since October 2014. The Dow Jones Industrial Average was briefly down as much as 537 points. Oil appeared to be the main driver of concern. Both the U.S. and global benchmarks settled below $30 a barrel, as investors feared that supplies will continue to rise as Iran prepares to enter the market ad Russia continues pumping oil to help support its flagging economy.

”There’s not a lot of people willing to take their foot off the gas and prices are adjusting accordingly,” said David Meier, portfolio manager at Motley Fool Asset Management. “As a result of that you’re seeing fear just creep in.” The Dow slumped 390.97 points, or 2.4%, to 15,988.08, while the S&P 500 slid 44.85 points, or 2.3%, to 1,876.99, led lower by the financial, technology and energy sectors. The Nasdaq Composite tumbled 126.59 points, or 2.7%, to 4,488.42. All Dow components ended in negative territory, as were all 10 sectors on the S&P 500. Selling began in China after official data showed that new bank loans were lower than expected in December as lenders sharply curtailed activity amid worries about slowing growth and bad debt.

In a bid to boost liquidity, China’s central bank said it pumped $15 billion of funds into the market via a medium-term lending facility on Friday. The Shanghai Composite dropped 3.5% and is down 20% from a Dec. 22 high, which by one definition puts it in a bear market. All of this was exacerbated as options stopped trading ahead of their expiration on Saturday. Dave Lutz, head of ETFs at JonesTrading, said because of how the market was positioned, options dealers needed to sell more futures to hedge their positions as stocks fell.

Yeah, those are real losses. Transitory is no longer a valid term.

• What Goes Up, Comes Down Considerably Faster (ZH)

What goes up, comes down considerably faster. For global stocks, Bloomberg notes, the way down ($15 trillion lost in 7 months) has been much easier than the climb up ($30 trillion added in 4 years).

With markets from Asia to Europe entering bear markets this month, stocks worldwide have lost more than $14 trillion, or 20%, in value from a record last June amid worries over global growth and deepening oil declines. The pace of the drop has been so fast that it has already unraveled about half of the rally since a low in 2011. And here is a bonus chart from Bank of America, which looks at the S&P on an equal weighted basis, to avoid such aberrations as the collapsing market breadth phenomenon, also known as FANG. Spot the symmetry.

“Initially when oil was down, the convenient line was ‘Well, it’s good for the other nine sectors’.. [..] Now, it’s contagion to Main Street and Wall Street.”

• Wall Street Hemorrhages As Oil Tumbles And China Fears Deepen (Reuters)

Wall Street bled on Friday, with the S&P 500 sinking to its lowest since October 2014 as oil prices sank below $30 per barrel and fears grew about economic trouble in China. Pain was dealt widely, with the day’s trading volume unusually high and more than a fifth of S&P 500 stocks touching 52-week lows. The major S&P sectors all ended sharply lower. The Russell 2000 small-cap index dropped as much as 3.5% to its lowest since July 2013. The energy sector dropped 2.87% as oil prices fell 6.5%, in part due to fears of slow economic growth in China, where major stock indexes also slumped overnight. The energy sector has lost nearly half its value after hitting record highs in late 2014. “Initially when oil was down, the convenient line was ‘Well, it’s good for the other nine sectors’,” said Jake Dollarhide, CEO of Longbow Asset Management.

“That tune has changed. Now, it’s a contagion to the other nine sectors. It’s a contagion to Main Street and Wall Street.” The technology sector was the day’s biggest loser, sliding 3.15% as weak quarterly results from chipmaker Intel weighed heavily on chip stocks. The S&P 500 has fallen about 12% from its high in May, pushing it into what is generally considered “correction territory.” China’s major stock indexes shed over 3%, raising questions about Beijing’s ability to halt a sell-off that has now reached 18% since the start of the year. The Dow Jones industrial average dropped 2.39% to end at 15,988.08 and the S&P 500 fell 2.16% to 1,880.33. The Nasdaq Composite lost 2.74% to 4,488.42. For the week, the Dow fell 2.2%, the S&P 500 lost 2.2% and the Nasdaq dropped 3.3%. U.S. stock exchanges will be closed on Monday in observance of Martin Luther King Jr. Day, while China’s equity markets will be open.

And this is news to whom, exactly?

• Weak US Data Deluge Points To Sharply Slower Growth (Reuters)

U.S. retail sales fell in December as unseasonably warm weather undercut purchases of winter apparel and cheaper gasoline weighed on receipts at service stations, the latest indication that economic growth braked sharply in the fourth quarter. The growth picture was further darkened by other data on Friday showing industrial production fell in December, dragged down by cutbacks in utilities and mining output. Business inventories were also weak, posting their biggest drop in just over four years in November. Signs the economy has hit a soft patch – together with weak inflation, a stock market sell-off and faltering global growth – raises doubts on whether the Federal Reserve will raise interest rates again in March. The Fed lifted its benchmark overnight interest rate from near zero last month, the first rate hike in nearly a decade.

“The economy got hit from all sides in December. If these weak data keep going into 2016, the outlook is going to grow even dimmer given the recent financial market turbulence and the fears over what a slowdown in China means for the rest of the world,” said Chris Rupkey, chief economist at MUFG Union Bank in New York. The Commerce Department said retail sales slipped 0.1% after increasing 0.4% in November. For all of 2015, retail sales rose just 2.1%, the weakest reading since 2009, after advancing 3.9% in 2014. Retail sales excluding automobiles, gasoline, building materials and food services fell 0.3% after a 0.5% gain the prior month. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.

Though another report from the University of Michigan showed its consumer sentiment index rose to 93.3 early this month from a reading of 92.6 in December, households were less upbeat about current conditions, reflecting the recent equity market turmoil. Friday’s reports joined weak data on construction, manufacturing and export growth in suggesting that growth slowed abruptly in the final three months of 2015. They could raise fears that the malaise from manufacturing and export-oriented sectors was filtering to the rest of the economy.

“Now that this debt bubble is unwinding, growth in China is going offline”

• A Recession Worse Than 2008 Is Coming (Michael Pento)

The S&P 500 has begun 2016 with its worst performance ever. This has prompted Wall Street apologists to come out in full force and try to explain why the chaos in global currencies and equities will not be a repeat of 2008. Nor do they want investors to believe this environment is commensurate with the dot-com bubble bursting. They claim the current turmoil in China is not even comparable to the 1997 Asian debt crisis. Indeed, the unscrupulous individuals that dominate financial institutions and governments seldom predict a down-tick on Wall Street, so don’t expect them to warn of the impending global recession and market mayhem. But a recession has occurred in the U.S. about every five years, on average, since the end of WWII; and it has been seven years since the last one — we are overdue.

Most importantly, the average market drop during the peak to trough of the last 6 recessions has been 37%. That would take the S&P 500 down to 1,300; if this next recession were to be just of the average variety. But this one will be worse. A major contributor for this imminent recession is the fallout from a faltering Chinese economy. The megalomaniac communist government has increased debt 28 times since the year 2000. Taking that total north of 300% of GDP in a very short period of time for the primary purpose of building a massive unproductive fixed asset bubble that adds little to GDP. Now that this debt bubble is unwinding, growth in China is going offline.

The renminbi’s falling value, cascading Shanghai equity prices (down 40% since June 2014) and plummeting rail freight volumes (down 10.5% year over year), all clearly illustrate that China is not growing at the promulgated 7%, but rather isn’t growing at all. The problem is that China accounted for 34% of global growth, and the nation’s multiplier effect on emerging markets takes that number to over 50%. Therefore, expect more stress on multinational corporate earnings as global growth continues to slow. But the debt debacle in China is not the primary catalyst for the next recession in the United States. It is the fact that equity prices and real estate values can no longer be supported by incomes and GDP. And now that the Federal Reserve’s quantitative easing and zero interest-rate policy have ended, these asset prices are succumbing to the gravitational forces of deflation. The median home price to income ratio is currently 4.1; whereas the average ratio is just 2.6.

An inevitable development that we’ve long predicted.

• Looming Recession Shifts Fed Support From Equities To Dollar, Banks (Brodsky)

Investors are blaming Fed rate hikes, and hence a strong dollar, for weakening global output, commodity prices, and global equity prices so far in 2016. The Fed knows exactly what it’s doing. Equity returns are certainly dismal thus far in 2016. Through January 14 at 14:00PM EST, the MSCI World Index had declined by 8.6%. Accordingly, “the markets” had begun to doubt the Fed’s resolve to hike rates four times in 2016. Fed funds futures implied the December Fed Funds rate at 0.70%, up only 34 basis points from the current rate (0.36%). This implies the market is betting the Fed will hike once or twice more. Clearly, investors see the equity markets as the leading indicator of Fed policy. We disagree.

The Fed no longer works implicitly for equity investors (i.e., “the Fed Put”); it is primarily working for the U.S. banking system by stabilizing and increasing its deposit base, and for the state by providing an incentive across the world to invest in Treasury debt. By raising rates, it increases the exchange value of the U.S. dollar. We have argued that global output growth would have to naturally decline given the extraordinary leverage already built into the global economy, leaving observers to acknowledge in 2016 that recession is near. We have argued further that the Fed is very aware of an imminent global slowdown, and that a logical strategy in such an environment would be for it to import global capital by keeping the dollar un-challenged as a store of value.

We would like to reiterate and refine our view: despite increasing discomfort among equity investors, we think the Fed will remain resolute in its effort to maintain or increase the interest rate differential between U.S. and foreign sovereign rates. The one thing that would change the Fed’s current policy would be if global growth shows signs of increasing – not decreasing. If the world economy were to strengthen then the Fed’s incentive to keep the dollar strong would fade. Investors should consider this meaningful shift in policy when deciding how to allocate across asset classes. As we noted in The Pain Trade last year, falling long-term Treasury yields are the last thing speculative (i.e., levered) investors expect. Following this week’s auctions, it may be time for them to cover shorts.

“Global equity markets are suffering so far in 2016 because the Fed’s primary policy has shifted from protecting asset prices to protecting the exchange value of the dollar. Buy USDs and Treasuries”

Bubbles have limited lifespans.

• Global Earnings Downgrades Haven’t Been This Bad in Seven Years (BBG)

Stocks are losing their last line of defense. Amid a selloff that erased more than two years of gains – about $14 trillion – from global stocks now on the brink of a bear market, at least earnings stood as a potential bright spot. Those hopes are fading: analyst profit downgrades outnumbered upgrades by the most since 2009 last week, according to monthly data from a Citigroup index that tracks such changes. Declines in oil and and other commodities, the withdrawal of Federal Reserve support, Europe’s fragile recovery and China slowdown fears are combining to jeopardize one of the few remaining stock catalysts after a global rally of as much as 156% since 2009. And profit growth estimates are still too high for this year and 2017, says Bankhaus Lampe’s Ralf Zimmermann.

“The momentum in the global economy is slowing down to such an extent that people are seriously talking about recession,” said Zimmermann, a strategist at Bankhaus Lampe in Dusseldorf. “This is not just China, it’s far more widespread. There are few places to hide. Even defensives will feel the pain.” Economists’ projections for worldwide expansion in 2016 have dropped steadily in the past months to just 3.3%, with estimates for China and the U.S. falling since the summer. The biggest bears are getting more bearish – DoubleLine Capital’s Jeffrey Gundlach sees global growth slowing to just 1.9% in 2016, making it the worst year since the aftermath of the financial crisis in 2009.

This earnings season may not provide much reassurance, say strategists at JPMorgan. Analysts project a 6.7% contraction in fourth-quarter profits for Standard & Poor’s 500 Index members. For peers in Europe, estimates call for growth of just 2.7% for all of 2015, about half the pace predicted four months ago. Investors are also running for the door – they pulled about $12 billion from global stock funds last week.

No, no, no ‘socking away’, they’re paying off debt: “Americans probably preferred to sock away the savings from cheaper fuel..”

• Retail Sales in U.S. Decrease to End Weakest Year Since 2009 (BBG)

Sales at U.S. retailers declined in December to wrap the weakest year since 2009, raising concern about the momentum in consumer spending heading into 2016. The 0.1% drop matched the median forecast of 84 economists surveyed by Bloomberg and followed a 0.4% gain in November, Commerce Department figures showed Friday in Washington. For all of 2015, purchases climbed 2.1%, the smallest advance of the current economic expansion.

The slowdown, including electronics stores, clothing merchants and grocers, indicates Americans probably preferred to sock away the savings from cheaper fuel instead of splurging during the holiday season. While hiring has been robust in recent months, faster wage gains remain elusive, one reason household spending may have a tougher time accelerating as the new year gets under way. “There isn’t anything encouraging in this report,” said Thomas Simons at Jefferies in New York. “It’s very disappointing. The labor market is in good shape, which suggests the outlook is probably better than this.”

“I think they need to exit some markets totally and close a lot more than they are closing.”

• Wal-Mart to Shut Hundreds of Stores (BBG)

Wal-Mart plans to shutter 269 stores, the most in at least two decades, as it abandons its experimental small-format Express outlets and looks to streamline the chain. The move by the largest private employer in the U.S. will affect about 10,000 jobs domestically at 154 locations, according to a statement Friday. Overseas, the effort will eliminate 6,000 jobs and includes the closing of 60 money-losing stores in Brazil, a country where Wal-Mart has struggled. The plan will affect less than 1% of its total square footage and revenue, the company said. CEO Doug McMillon took the step after reviewing the chain’s 11,600 stores, evaluating their financial performance and fit with its broader strategy.

The move also marks the end of its pilot Wal-Mart Express program, a bid to create a network of small corner stores to compete with dollar-store chains and drugstores. Wal-Mart will continue its larger-size Neighborhood Markets effort, though 23 poor-performing stores in that chain also will be closed. The company is still expanding its footprint in the U.S., adding 69 new stores and 6,000 jobs in January alone. “We invested considerable time assessing our stores and clubs and don’t take this lightly,” McMillon said. “We are supporting those impacted with extra pay and support, and we will take all appropriate steps to ensure they are treated well.”

Wal-Mart shares fell 1.8% to $61.93 in New York as the broader market tumbled. They have lost 29% of their value over the past 12 months, dragged down by slow growth and profit declines. Some investors may be disappointed that the cuts aren’t deeper, said Brian Yarbrough, an analyst with Edward Jones. “I don’t think this is enough to move the needle,” he said. “I think they need to exit some markets totally and close a lot more than they are closing.”

“The endgame of Chinese communist rule has now begun.”

• A New Year Of Turmoil For China (WaPo)

A year ago, Chinese President Xi Jinping appeared to be living what he called the “Chinese Dream.” China’s economy seemed strong, its military power was growing and Xi was aggressively consolidating domestic political power. But Xi is off to a bad new year. The Chinese economy is slowing sharply, with actual gross domestic product growth last year now estimated by U.S. analysts at several points below the official rate of 6.5%. The Chinese stock market has fallen 15% this year, and the value of its currency has slipped. Capital flight continues, probably at the $1 trillion annual rate estimated for the second half of last year. But China’s economic woes are manageable compared with its domestic political difficulties. Xi’s anti-corruption drive has accelerated into a full-blown purge.

The campaign has rocked the Chinese intelligence service, toppled some senior military commanders and frightened Communist Party leaders around the country. Jittery party officials are lying low, avoiding decisions that might get them in trouble; the resulting paralysis makes other problems worse. “Xi is in an unprecedentedly powerful position. But because he has dismantled the tools of collective leadership that had been built up over decades, he owns this crisis,” said Kurt Campbell, who was the Obama administration’s top Asia expert until 2013. He worries that Xi will “double down” on his nationalistic push for greater power in Asia, which is one of the few themes that can unite the country. “To scale back shows weakness, which Xi can ill afford now,” Campbell said.

Chinese sometimes use historical parables to explain current domestic political issues. The talk recently among some members of the Chinese elite has been a comparison between Xi’s tenure and that of Yongzheng, the emperor who ruled China from 1722 to 1735. Yongzheng waged a harsh campaign against bribery, but he came to be seen by many Chinese as a despot who had gained power illegitimately. “A lot of historical events of that period are repeating in China today, from power conspiracy to corruption, from a deteriorating economy to an external hostility threat,” one Chinese observer said in an email. Xi’s political troubles illustrate the difficulty of trying to reform a one-party system from within.

Much as Mikhail Gorbachev hoped in the 1980s that reforms could revitalize a decaying Soviet Communist Party, Xi began his presidency in 2013 by attacking Chinese party barons who had grown rich and comfortable on the spoils of China’s economic boom. Many of Xi’s rivals were proteges of former President Jiang Zemin, which meant that Xi made some powerful enemies. David Shambaugh, a China scholar at George Washington University, was an outlier when he argued in March that Xi’s reform campaign would backfire. “Despite appearances, China’s political system is badly broken, and nobody knows it better than the Communist Party itself,” he wrote in the Wall Street Journal. “The endgame of Chinese communist rule has now begun.”

The USD is the only possible winner.

• Currency War Revival Seen After Yen, Euro Rally (BBG)

A flare-up in the global currency war is looming, as a resurgent yen and euro threaten to give policy makers in Japan and Europe an incentive to add monetary stimulus. Japan’s currency advanced versus the dollar for the third time in four weeks, while the euro climbed versus most of its peers. Hedge funds lifted bets on yen strength to the highest in more than three years, and pared wagers against the European common currency. The greenback suffered as sentiment cooled for further currency-supportive interest-rate increases in the U.S. amid sustained market volatility and weaker-than-forecast domestic economic data.

A growing divergence in U.S. growth and monetary policy versus the rest of the world has stalled amid signs the American economy can’t wholly escape a slowdown in China and a patchy recovery elsewhere. That’s weighing on the dollar, while stymieing the economic goals of the Bank of Japan and ECB, which benefit when their currencies depreciate. Further monetary easing is on the cards if the yen strengthens beyond 115 per dollar and the euro gains toward $1.15, according to Lee Ferridge, head of macro strategy for North America at State Street Global Markets. “The currency war is still alive and well,” Ferridge said. “If the dollar starts to suffer, then the ECB or the BOJ come back into play.”

$23 billion lost in 2015. How much worse could not acting have been?

• One Year On, ‘Franckenschock’ Still Hurts Swiss (CNBC)

The Swiss National Bank’s (SNB) decision to scrap its cap on the franc against the euro a year ago today shocked markets and sent the country’s currency rocketing 30%. One year on, the franc is still high, 10% up against the euro, and export-focused Switzerland is still feeling the pain. Looking back at the SNB’s shock move James Watson, MD for UK and Europe at ADS Securities, told CNBC “a lot of people were caught in the headlights.” Hashtags such as #Francogeddon and #Franckenschock were soon trending on Twitter. The decision to impose a maximum value on the franc – the cap had been in place at 1.20 franc per euro since 2011 when investors seeking a safe haven amid the turmoil created by the euro zone debt crisis pushed the franc higher – was made to help Swiss exporters compete.

Switzerland’s goods exports grew by 3.5% in 2014, exceeding the record set in 2008. After the cap was lifted, Swiss exports weakened in the first 11 months of 2015, down 3% according to Swiss Customs Office data, although they picked up to growth of 1% in November. Swiss watch sales – the country exports iconic luxury brands such as Hublot and LVMH’s Tag Heuer – remain depressed and recorded their worst November in five years. “I don’t think the SNB really thought about what the effect would be of what they did,” Watson said. The SNB argued that recent falls in the currency meant that maintaining the peg was no longer justifiable. Analysts have also argued the SNB removed the peg for political reasons. The expected introduction of quantitative easing by the ECB at the time also meant that defending the level against an even weaker euro would have required yet more intervention.

Watson believes the central bank took the approach of stimulating the economy, but “maybe they didn’t give it as much thought as they could have”. While it has been painful for exporters, the strong franc has also made imports cheaper. Inflation for 2015 is forecast at –1.1%. Domestic demand looks set to remain robust, according to the bank, which expects growth of approximately 1.5% this year. For 2015, the SNB anticipates growth of just under 1% in Switzerland. Unemployment stood at 4.9% in the third quarter of 2015, according to the ILO, still well below the 6.3% recorded in November in neighbor Germany. The central bank has also indicated that it is prepared to take measures to curb the strength of the franc. The currency, which has weakened in recent months to trade at about 1.09 euros, is still “considerably” overvalued according to the SNB. Vice chairman Fritz Zurbrügg said in speech earlier this week “business as usual is still a long way off”.

Servitude.

• America’s Student-Debt Crisis Is Only Getting Worse (MW)

It’s getting harder and harder to graduate college without taking on student loans. Nearly 70% of bachelor’s degree recipients leave school with debt, according to the White House, and that could have major consequences for the economy. Research indicates that the $1.2 trillion in student loan debt may be preventing Americans,from making the kinds of big purchases that drive economic growth, like house and cars, and reaching other milestones, such as having the ability to save for retirement or move out of mom and dad’s basement. This student debt crisis has become so huge it’s even captured the attention of presidential candidates who are searching for ways to make college more affordable amid an environment of dwindling state funding for higher education and rising college costs. But meanwhile, the approximately 40 million Americans with student debt have to find ways to manage it.

[..] A few numbers to consider (and some that bear repeating):
• The total outstanding student loan debt in the U.S. is $1.2 trillion, that’s the second-highest level of consumer debt behind only mortgages. Most of that is loans held by the federal government.
• About 40 million Americans hold student loans and about 70% of bachelor’s degree recipients graduate with debt.
• The class of 2015 graduated with $35,051 in student debt on average, according to Edvisors, a financial aid website, the most in history.
• One in four student loan borrowers are either in delinquency or default on their student loans, according the Consumer Financial Protection Bureau.

Over the past few decades a variety of factors coalesced to make student debt an almost-universal American experience. For one, state investment in higher education dwindled and colleges made up the difference by raising tuition. At the same time, financial aid hasn’t kept up with tuition growth. In the 1980s, the maximum Pell Grant — the money the federal money gives to low-income students to attend college — covered more than half the cost of a four-year public school, according to The Institute for College Access and Success, a think tank focused on college affordability. Now, it covers less than one-third the cost.

18 months after MH-17 was shot down, it has become a full-tard propaganda tool for the west. There’s zero respect for the victims and their families.

• MH-17’s Unnecessary Mystery (Robert Parry)

[..] despite the flimsiness of the “blame-Russia-for-MH-17” case in July 2014, the Obama administration’s rush to judgment proved critical in whipping up the European press to demonize President Vladimir Putin, who became the Continent’s bete noire accused of killing 298 innocent people. That set the stage for the EU to accede to U.S. demands for economic sanctions on Russia. The MH-17 case was deployed like a classic piece of “strategic communication” or “Stratcom,” mixing propaganda with psychological operations to put an adversary at a disadvantage. Apparently satisfied with that result, the Obama administration stopped talking publicly, leaving the impression of Russian guilt to corrode Moscow’s image in the public mind.

But the intelligence source who spoke to me several times after he received additional briefings about advances in the investigation said that as the U.S. analysts gained more insights into the MH-17 shoot-down from technical and other sources, they came to believe the attack was carried out by a rogue element of the Ukrainian military with ties to a hard-line Ukrainian oligarch. But that conclusion – if made public – would have dealt another blow to America’s already shaky credibility, which has never recovered from the false Iraq-WMD claims in 2002-03. A reversal also would embarrass Kerry, other senior U.S. officials and major Western news outlets, which had bought into the Russia-did-it narrative. Plus, the EU might reconsider its decision to sanction Russia, a key part of U.S. policy in support of the Kiev regime.

Still, as the MH-17 mystery dragged on into 2015, I inquired about the possibility of an update from the DNI’s office. But a spokeswoman told me that no update would be provided because the U.S. government did not want to say anything to prejudice the ongoing investigation. In response, I noted that Kerry and the DNI had already done that by immediately pointing the inquiry in the direction of blaming Russia and the rebels. But there was another purpose in staying mum. By refusing to say anything to contradict the initial rush to judgment, the Obama administration could let Western mainstream journalists and “citizen investigators” on the Internet keep Russia pinned down with more speculation about its guilt in the MH-17 shoot-down. So, silence became the better part of candor. After all, pretty much everyone in the West had judged Russia and Putin guilty. So, why shake that up?

PCBs ware phased out decades ago.

• Toxic Chemicals In Scottish Waters Wiping Out Killer Whales (Scotsman)

Killer whales could vanish from Scottish waters as a result of the lingering effects of toxic chemicals banned more than 30 years ago, according to new international research. Scientists say European seas are a global hotspot of contamination from man-made polychlorinated biphenyls (PCBs), which weaken the immune systems of whales and dolphins and seriously affect their reproduction. The seas around the Hebrides are home to the UK’s only known resident killer whales, known as the West Coast Community. Only eight are left in the pod, after a female died earlier this month. But experts at the international conservation charity, the Zoological Society of London (ZSL), say the group will go extinct in the future as no young have been recorded in more than 20 years.

And other killer whale and dolphin populations around Europe face the same fate. The researchers suggest a failure to breed could be down to high levels of man-made PCBs building up in the animals body fat. “The long life-expectancy and position as apex or top marine predators make species like killer whales and bottlenose dolphins particularly vulnerable to the accumulation of PCBs through marine food webs”, said Dr Paul Jepson, a wildlife vet at ZSL and lead author of the study. “Few coastal orca populations remain in western European waters. Those that do persist are very small and suffering low or zero rates of reproduction. The risk of extinction therefore appears high for these discrete and highly contaminated populations.”

“Without further measures, these chemicals will continue to suppress populations of orcas and other dolphin species for many decades to come.” Dr Jepson’s team will analyse samples taken from the West Coast killer whale known as Lulu, who died recently after entanglement in fishing gear. “This Scottish population feeds on seals, so PCB exposure through diet will be much higher than for killer whales that only eat fish”, he said. “I think the group will, very regrettably, become extinct. Like any animal population, once you stop reproducing you will eventually die out.” But killer whales are very long-lived animals -at least one adult female has lived to over 100 years old in the wild- so local extinction can still take a long time to play out.

Why the EU must be disbanded.

• Baby Found Dead On Greece Migrant Boat (AP)

Greek authorities say a baby has been found dead after a boat full of migrants reached the small eastern Aegean Sea island of Farmakonissi, while 63 people were picked up alive. The incident raises to four the number of deaths that Greek authorities recorded Friday, as migrants continue to make the short but dangerous sea crossing from nearby Turkey to Greeces Aegean islands despite the winter weather. Earlier, three children drowned and 20 people were rescued when another boat carrying migrants foundered off the islet of Agathonissi.

Debt Rattle January 4 2016

Jan 042016

January 4, 2016 Posted by Raúl Ilargi Meijer at 9:10 am Finance Tagged with: China, commodities, crash, dollar, hedge funds, oil, refugees, retail, risk, stocks, wage growth 2 Responses »

AP Refugee carries child in freezing waves off Lesbos 2016

• China Halts Stock Trading After 7% Rout Triggers Circuit Breaker (BBG)

• China Factories Struggle As Weak Exports Drag Industry In Asia (Reuters)

• China’s Tech Sector Likely Faces Tougher Sledding in 2016 (WSJ)

• Obama Dollar Rally Is Forecast to Join Clinton, Reagan Upturns (BBG)

• Global Stock Markets Overvalued And Unprepared For Return Of Risk (Telegraph)

• Reserve Bank of Australia Index of Commodity Prices (RBA)

• As Hedge Funds Go, So Goes The World (John Rubino)

• Japan Central Bank Turns Activist Investor To Revive Economy (Reuters)

• UK Set For Worst Wage Growth Since 1920s, 3rd Worst Since 1860s (Guardian)

• UK High Street Retailers Feel The Pinch As Shoppers Stay At Home (Guardian)

• Big Oil Faces Longest Period Of Investment Cuts In Decades (Reuters)

• New EU Authority Budgets For 10 Bank Failures In Four Years (FT)

• Fed’s Fischer Supports Higher Rates If Markets Overheat (BBG)

• Cash Burning Up For Shipowners As Finance Runs Dry (FT)

• The 20% World: The Odds Of The Unthinkable Are Going Up (BBG)

• Greece Warns Creditors On ‘Unreasonable Demands’ Over Pensions (FT)

• Sweden To Impose ID Checks On Travellers From Denmark (Guardian)

• Refugees Hold Terrified, Frozen Children Above The Waves Off Lesbos (DM)

Great start to the year.

• China Halts Stock Trading After 7% Rout Triggers Circuit Breaker (BBG)

China halted trading in stocks, futures and options after a selloff triggered circuit breakers designed to limit swings in one of the world’s most volatile equity markets. Trading was halted at about 1:34 p.m. local time on Monday after the CSI 300 Index dropped 7%, according to data compiled by Bloomberg. An earlier 15-minute halt at the 5% level failed to stop the retreat, with shares extending losses as soon as the market re-opened. The selloff, the worst-ever start to a year for Chinese shares, came on the first day the circuit breakers took effect. The $7.1 trillion stock market is starting the year on a down note after data showed manufacturing contracted for a fifth straight month and investors anticipated the end of a ban on share sales by major stakeholders.

Chinese policy makers, who went to unprecedented lengths to prop up stock prices during a summer rout, are trying to prevent financial-market volatility from weighing on economy set to grow at its weakest annual pace since 1990. “Stay short, or go home,” said Mikey Hsia at Sunrise Brokers. “That’s all you can do.” The halts took effect as anticipated, without any technical issues, Hsia said. About 595 billion yuan ($89.9 billion) of shares changed hands on mainland exchanges before the suspension, versus a full-day average of about 1 trillion yuan over the past year, according to data compiled by Bloomberg.

Under the circuit breaker rules finalized last month, a move of 5% in the CSI 300 triggers a 15-minute halt for stocks, options and index futures, while a move of 7% closes the market for the rest of the day. The CSI 300, comprised of large-capitalization companies listed in Shanghai and Shenzhen, fell as much as 7.02% before trading was suspended. Chinese shares listed in Hong Kong, where there is no circuit breaker, extended losses after the halt on mainland exchanges. The Hang Seng China Enterprises Index retreated 4.1% at 2:12 p.m. local time. “Investors are using Hong Kong to hedge their positions,” said Castor Pang at Core-Pacific Yamaichi. “The circuit breaker may increase selling pressure further.”

China needs a big clean-up.

• China Factories Struggle As Weak Exports Drag Industry In Asia (Reuters)

China’s factory activity shrank for a 10th straight month in December as surveys across Asia showed industry struggling with slack demand even as the policy cupboard is looking increasingly bare of fresh stimulus. Uncertainty over the economic outlook was exacerbated by a flare up in tensions between Saudi Arabia and Iran, that has sent investors scurrying from stocks to safe havens such as the Japanese yen. Japan’s Nikkei fell over 2% and Shanghai lost more than 3%. The Caixin/Markit China Manufacturing Purchasing Managers’ Index (PMI) slipped to 48.2 in December, below market forecasts of 49.0 and down from November’s 48.6. That was the lowest reading since September and well below the 50-point level which demarcates contraction from expansion.

It followed a fractional increase in the official PMI to 49.7. There was a faint stirring of hope as PMIs in South Korea and Taiwan both edged above the 50 mark, though more thanks to a pick up in domestic demand than any revival in exports. Weighed down by weak demand at home and abroad, factory overcapacity and cooling investment, China is expected to post its weakest economic growth in 25 years in 2015, with the rate of expansion slipping to around 7% from 7.3% in 2014. “Absent vibrant external demand, we think it’s a consensus view that China’s GDP growth is poised to slow further to ‘about’ 6.5% in 2016,” ING said in a research note. The drag from industry comes as China makes gradual progress in its transformation to a more service-driven economy.

Not so smart money: “More than $60 billion of fresh capital found its way into Chinese startup and take-private deals in 2015, compared with $13.9 billion during 2014..”

• China’s Tech Sector Likely Faces Tougher Sledding in 2016 (WSJ)

Investors who poured billions into China’s homegrown technology companies scored big during 2015. But increasingly it looks like the easy money has been made and this year could prove tougher as China’s tech companies face high expectations from investors. Many Chinese privately held startups rewarded investors, as valuations more than doubled during 2015 and a wave of management buyout offers buoyed investors in U.S.-listed Chinese tech companies. More than $60 billion of fresh capital found its way into Chinese startup and take-private deals in 2015, compared with $13.9 billion during 2014 according to data from CB Insights and Dealogic. Investors marked up their holdings in Chinese privately held startups during the year even as they put lower price tags on some of their Silicon Valley investments.

Most investors aren’t required to publicly disclose their valuations of startup holdings, which are often valued based on their most recent round of fundraising. But mutual fund Fidelity Blue Chip Growth Fund, which has marked down some of its Silicon Valley startup investments, instead increased the value ascribed to its January investment in the $15 billion Chinese shopping app Meituan.com by more than 20% through the end of November. Investors have seen their bet on Chinese ride-hailing company Didi Kuaidi Joint Co. nearly triple from a $6 billion valuation in February to $16 billion in September.

The higher valuations and cash-burning of many startups are giving some investors pause. In recent months, some have become more cautious about putting fresh cash into big startups, as China’s rocky domestic stock market put local initial public offerings on hold. “The huge swings in the public markets have spilled over into the later-stage venture investment market,” says Richard Ji, founder of All-Stars Investment, an investor in Chinese startups like $46 billion smartphone maker Xiaomi Corp. and ride-sharing company Didi Kuaidi Joint Co. “Valuations overall have softened and companies are offering better terms to investors.”

Smashing US exports, emerging and commodities currencies in the process.

• Obama Dollar Rally Is Forecast to Join Clinton, Reagan Upturns (BBG)

The dollar has an opportunity to make history. After three straight years of gains, strategists are forecasting the U.S. currency will be a world beater again in 2016, strengthening against seven of 10 developed-world peers by the end of the year, according to the median estimate in a Bloomberg survey. That outlook is backed by the Federal Reserve’s stated intent to continue raising interest rates while peers in the rest of the world keep them flat or lower. The rally that started during President Barack Obama’s second term is poised to join a category defined by only the biggest, most durable periods of dollar strength since the currency’s peg to gold ended in 1971.

Of the two other rallies that share that distinction, during the terms of Presidents Ronald Reagan and Bill Clinton, neither stopped at four years. “This is the third big dollar rally we’ve had,” said Marc Chandler, global head of currency strategy in New York at Brown Brothers Harriman & Co. “The Obama dollar rally, I think, is being fueled by the divergence in monetary policy.” The U.S. currency will end 2016 higher against its major counterparts except the Canadian dollar, British pound and the Norwegian krone, posting its biggest gains against the New Zealand and Australian dollars and the Swiss franc, according to forecasts compiled by Bloomberg.

“UK shares have steadily risen for more than 70 months..”

• Global Stock Markets Overvalued And Unprepared For Return Of Risk (Telegraph)

Investors face a rude awakening in 2016 as the return of risk brings an end to the era of unparalleled financial excess. Central bankers actions to save creditors by reducing borrowing costs to near zero created a Dorian Gray style economy that pursued returns without consequences. We are about to unveil the reality of those decisions after six years in a world devoid of financial responsibility.

[..] The realisation of losses is something that many in the cosseted world of investment will never have experienced. The collapse in high-yield bond prices is already causing paralysis. Third Avenue Management, a $800m high-yield mutual fund, was forced to halt redemptions in order to run down the fund in an orderly fashion as investors clamoured for the exit. The holders of certain bonds in Portuguese bank Novo Banco reacted with fury when they were informed they faced losses last week under a recapitalisation plan. The fact that an investor in the debt of a Portuguese bank is surprised that losses are even a possibility is laughable, if it wasn’t also deeply troubling. The return of risk will turn many of the investment decisions made during the past six years on their head.

Out will go unprofitable companies that relied on constant support from shareholders for stellar growth. In will come companies with solid profit track records that can generate enough cash to fund themselves. The lofty valuations in the technology sector are looking particularly exposed. When the world economy stumbled in 2008 it was only concerted action that pulled it back from the brink. The situation now is very different with the US pursuing monetary tightening, and China devaluing its currency to arrest the decline. Emerging markets have been crippled by a currency collapse and the drop in commodity prices has undermined the budgets of Canada, Norway, Australia, Venezuala and Saudi Arabia. The flow of funds out of developed Western equity markets is becoming alarming.

We enter 2016 as the bull run in the FTSE 100 is looking particularly long in the tooth. UK shares have steadily risen for more than 70 months. The goldilocks scenario of cheap debt and low wages is coming to and end and placing corporate profits under pressure. The Institute of Directors has already warned UK profits may be past their peak. This leaves investors in the FTSE 100 exposed with shares trading on 16 times forecast earnings, a premium to the long run average of 15. Even more worrying when you consider earnings have to increase by 14pc in 2016 to achieve that rating, if earnings remain flat in the year ahead the market is trading on more than 20 times earnings.

Scary graph of the day.

• Reserve Bank of Australia Index of Commodity Prices (RBA)

Preliminary estimates for December indicate that the index declined by 4.9% (on a monthly average basis) in SDR terms, after declining by 3.1% in November (revised). The decline was led by the prices of iron ore and oil. The base metals subindex declined slightly in the month while the rural subindex was little changed. In Australian dollar terms, the index declined by 6.0% in December. Over the past year, the index has fallen by 23.3% in SDR terms, led by declines in the prices of bulk commodities. The index has fallen by 17.1% in Australian dollar terms over the past year. Consistent with previous releases, preliminary estimates for iron ore, coking coal and thermal coal export prices are being used for the most recent months, based on market information. Using spot prices for these commodities, the index declined by 5.3% in December in SDR terms, to be 25.6% lower over the past year.

John provides a slew of examples I have no space for here.

• As Hedge Funds Go, So Goes The World (John Rubino)

How do you make money in a world where history is meaningless? The answer, for a growing number of big fund managers, is that you don’t. Hedge funds, generally the most aggressive species of money manager, do a lot of “black box” trading in which bets are placed on previously-identified patterns and relationships on the assumption that those patterns will repeat in the future. But with governments randomly buying stocks and bonds and bailing out/subsidizing everything in sight, old relationships are distorted and strategies that worked in the past begin to fail, as do the money managers who rely on them.

[..] Why should regular people care about the travails of the leveraged speculating community? Because these guys are generally considered to be the finance world’s best and brightest, and if they can’t figure out what’s going on, no one can. And if no one can, then risky assets are no longer worth the attendant stress. In response, a system that had previously embraced leverage and “alternative” asset classes will go risk-off in a heartbeat, and all those richly-priced growth stocks and trophy buildings and corporate bonds will find air pockets under their prices. And since pretty much everything else now depends on high asset prices, things will get ugly in the real world.

A case can be made that such a contagion is already underway but is being hidden from Americans by the recent strength of the dollar. According to Deutsche Bank, when measured in dollars the rest off the world is now deeply in recession and falling fast. In other words, Main Street is vulnerable to leveraged trading algorithms and Brazilian bonds because it’s not just exotica that is overleveraged. Virtually all governments have to refinance trillions of short-term debt each year. Corporations have borrowed record amounts of money in this expansion (and wasted much of it on share buy-backs). Pension funds (the last remaining leg of the middle-class stool for millions of Americans) are grossly underfunded and will have to slash benefits if their portfolios decline from here.

Risk-off, in short, is no longer just a temporary swing of the pendulum, guaranteed to reverse in a year or two. As amazing as this sounds, we’ve borrowed so much money that as hedge funds go, so goes the world.

Desperation writ large.

• Japan Central Bank Turns Activist Investor To Revive Economy (Reuters)

Japan’s central bank, which dominates the domestic bond market, has begun to call the shots in the equity market as well – to the point where asset managers are looking to design investment funds with the Bank of Japan in mind. The bank has blazed a trail in global central banking by becoming something of an activist investor in pursuit of economic revival, using its influence as a mainly indirect owner of shares to support firms that spend more cash at home. The bank, which owns about $54 billion in exchange-traded funds (ETFs), is ramping up its purchases but has yet to give any detailed investment criteria, beyond a preference for firms with growing capital expenditure and investment in its staff.

“We’re willing and considering to add such a product,” said Kohei Sasaki at Mitsubishi UFJ Kokusai Asset Management. “We’ve already contacted index vendors on this matter.” Bank of Japan Governor Haruhiko Kuroda and Prime Minister Shinzo Abe have been calling on companies to raise capital expenditure and wages to spur the economy, after repeated monetary and fiscal stimulus over the past three years failed to lift it out of a funk of weak consumption and deflation. So far, their pleas have failed to prod companies into action, despite many of them making record profits on the back of the central bank’s zero interest rates and a weak yen.

Losing patience, Kuroda said last month the bank would buy 300 billion yen ($2.5 billion) a year of ETFs, in addition to 3 trillion yen it already assigns each year to ETFs. It said the extra purchases would target funds whose underlying firms were “proactively making investment in physical and human capital”. Though he did not go into detail, the comment was an invitation for asset managers and index compilers to come up with some “Abenomics” ETFs which would be full of listed firms doing their bit to revive consumption and the broader economy. “We’ve already started trying to develop some kind of solution to the demand,” said Seiichiro Uchi, managing director for index compiler MSCI in Tokyo.

This is a policy thing, not some freak accident.

• UK Set For Worst Wage Growth Since 1920s, 3rd Worst Since 1860s (Guardian)

The 10 years between 2010 and 2020 are set to be the worst decade for pay growth in almost a century, and the third worst since the 1860s, according to new research. Research from the House of Commons Library shows that real-terms wage growth is forecast by the Office for Budget Responsibility to average at just 6.2% in this decade, compared with 12.7% between 2000 and 2010. The figures show that real-terms wage growth was lower only in the decades between 1920 and 1930 and between 1900 and 1910. Wage growth averaged at 1.5% in the 1920s and at 1.8% in the 1900s. Owen Smith, shadow work and pensions secretary, who commissioned the research, said that a “Tory decade of low pay” would see “workers’ pay packets squeezed to breaking point”.

“Even with this year’s increase in the minimum wage, the Tories will have overseen the slowest pay growth in a century and the third slowest since the 1860s,” he said. George Osborne has justified cuts to in-work benefits by arguing that the government is transitioning the UK from being “a low-wage, high-welfare economy to a high-wage, low-welfare economy”, a claim that Smith said was contradicted by wage-growth figures. In the autumn statement, the chancellor abandoned plans to cut £4bn from working tax credits, under pressure from the opposition and many backbench Tory MPs. However, Labour has pointed out there will be cuts to in-work benefit payments for new claimants put on the new universal credit system – championed by the work and pensions secretary, Iain Duncan Smith – which rolls at least six different benefits into one.

Reasons given: weather and terrorism. Couldn’t be lack of spending money, could it?

• UK High Street Retailers Feel The Pinch As Shoppers Stay At Home (Guardian)

Record-breaking discounts on offer in the post-Christmas sales have so far failed to attract a rush of bargain hunters to the high street, raising fears that Marks and Spencer, John Lewis and Next will be forced to report disappointing trading figures for the festive period. The number of high street shoppers from Monday 28 December to Friday 1 January was down 3% compared with the same period in 2014, according to research firm Springboard. A year ago, retailers had been celebrating a jump of 6.2%. Retail experts had predicted a stampede to the shops on Boxing day after retailers offered discounts topping last year’s average of more than 50%. They are desperate to clear cold-weather clothing that has remained on the shelves during record mild weather.

While Boxing Day had offered some hope of a pick-up in trade, the following week – which included a bank holiday – was poor. Shopper behaviour differed markedly in different parts of the country, with footfall down by almost 7% in Wales and by 5.8% in the West Midlands, but up in Scotland and the east of England by 11.3% and 4.5% respectively. In London and the south-east, the affluent engine of consumer spending, numbers were also in decline, dropping 4.5% and 3.3% respectively. But Springboard figures showed that some of this trade appeared to have migrated to shopping centres, where numbers were up 3.3% in Greater London and ahead by 8.8% in the south-east. As well as unexpectedly mild weather leaving little demand for winter clothing stock, shoppers are also thought to have been put off venturing out by heavy rainstorms and concerns about potential terrorist attacks.

Will M&A’s be 2016 story?

• Big Oil Faces Longest Period Of Investment Cuts In Decades (Reuters)

With crude prices at 11-year lows, the world’s biggest oil and gas producers are facing their longest period of investment cuts in decades, but are expected to borrow more to preserve the dividends demanded by investors. At around $37 a barrel, crude prices are well below the $60 firms such as Total, Statoil and BP need to balance their books, a level that has already been sharply reduced over the past 18 months. International oil companies are once again being forced to cut spending, sell assets, shed jobs and delay projects as the oil slump shows no sign of recovery. U.S. producers Chevron and ConocoPhillips have published plans to slash their 2016 budgets by a quarter. Shell has also announced a further $5 billion in spending cuts if its planned takeover of BG Group goes ahead.

Global oil and gas investments are expected to fall to their lowest in six years in 2016 to $522 billion, following a 22% fall to $595 billion in 2015, according to the Oslo-based consultancy Rystad Energy. “This will be the first time since the 1986 oil price downturn that we see two consecutive years of a decline in investments,” Bjoernar Tonhaugen, vice president of oil and gas markets at Rystad Energy, told Reuters. The activities that survive will be those that offer the best returns. But with the sector’s debt to equity ratio at a relatively low level of around 20% or below, industry sources say companies will take on even more borrowing to cover the shortfall in revenue in order to protect the level of dividend payouts.

Shell has not cut its dividend since 1945, a tradition its present management is not keen to break. The rest of the sector is also averse to reducing payouts to shareholders, which include the world’s biggest investment and pension funds, for fear investors might take flight. Exxon Mobil and Chevron benefit from the lowest debt ratios among the oil majors while Statoil and Repsol have the highest debt burden, according to Jefferies analyst Jason Gammel.

Amounts look utterly useless.

• New EU Authority Budgets For 10 Bank Failures In Four Years (FT)

The new EU authority that took over the job of winding up failing banks on January 1 has budgeted enough money to wind up 10 banks over the next four years, a tender sent to financial services firms shows. The tender, seen by the Financial Times, says the Single Resolution Board (SRB) is seeking €40m in “accounting advice, economic and financial valuation services and legal advice” to be used in the resolution of struggling eurozone banks from 2016-2020. Industry sources said such advice would cost between €4m and €5m per large case, so the SRB will be able to resolve eight to 10 banks. A spokeswoman for the SRB confirmed the tender’s details, but said the budget should not be interpreted as firm prediction of the number of banks the authority expects to resolve over the coming years.

“The SRB has made a reasonable estimation of the amount,” she said. “This estimation can be negotiated and adjusted.” In the aftermath of the 2008 financial crisis, which saw a series of chaotic and inconsistent collapses, eurozone leaders hammered out a complex protocol for handling bank failures. The goal is to be able to wind up even one of the region’s biggest banks over a single weekend under the guiding arm of the Brussels-based SRB and national resolution authorities. The authority is chaired by Elke König, a former president of the German regulator BaFin.

Many industry insiders and policy watchers are sceptical about whether an orderly wind-down in such a tight timeframe is really possible, especially in cases as complicated as the implosion of the Greek and Cypriot banking systems. As such, the first case the SRB handles will be closely watched. The SRB wants to have the best advice money can buy. The tender, which has not yet been awarded, is only open to large international firms; those offering accountancy or valuation advice must have annual sales of at least €5m the last three years, those offering legal advice must have at least €10m.

Yeah. What are the odds? Which markets? China’s?

• Fed’s Fischer Supports Higher Rates If Markets Overheat (BBG)

Federal Reserve Vice Chairman Stanley Fischer said it might be necessary for the central bank to increase interest rates if financial markets were overheating, though the first line of defense should be using regulatory tools to prevent bubbles from developing. “If asset prices across the economy – that is, taking all financial markets into account – are thought to be excessively high, raising the interest rate may be the appropriate step,” Fischer said in a speech at the annual American Economic Association meeting in San Francisco on Sunday. He suggested that might be particularly true in the U.S., where many of the so-called macro-prudential regulatory tools to tackle financial market excesses are either lacking or untested. Such tools would include, for example, adjusting lending rules to try to rein in borrowing.

Fischer did make clear that he thought “macro-prudential tools, rather than adjustments in short-term interest rates, should be the first line of defense” in tackling asset bubbles, while spelling out that “the real issue of whether adjustments in interest rates should be used to deal with problems of potential financial instability is macroeconomic.” Fischer didn’t address the current state of financial markets, although other policy makers, including Fed Chair Janet Yellen, have indicated that they do not see them, on the whole, as being overheated. Fischer was among three Fed policy makers who made public remarks at the AEA meeting on Sunday. San Francisco Fed President John Williams discussed estimates of long-run neutral rates, while Cleveland’s Loretta Mester delivered her outlook for the U.S. economy and explained why the Fed would not react to short-term swings in economic data.

Baltic Drier.

• Cash Burning Up For Shipowners As Finance Runs Dry (FT)

During stumbles in the market for shipping dry bulk commodities since the financial crisis, DryShips — the listed vehicle of George Economou, one of the industry’s best-known figures — has proved adept at dodging trouble. Diversification into owning oil-drilling rigs — through Ocean Rig, in which DryShips now holds only a minority stake — proved robustly profitable when oil prices were high. The company also diversified into oil tankers. However, slumps in earnings for dry bulk carriers and in oil prices have left the company scrabbling to stay afloat. On December 7, it announced an $820m loss for the third quarter after it was forced to take a $797m write-off for the value of its entire remaining fleet of dry bulk vessels, many of which it has been selling off. In October, the company announced that it was borrowing $60m from an entity controlled by Mr Economou.

The challenges facing DryShips are among the most acute of those facing nearly all dry bulk shipping companies after a slump in earnings drove most owners’ revenues well below their operating costs. Owners are haemorrhaging cash. Owners of Capesize ships — the largest kind — currently bring in around $3,000 a day less than the $8,000 they cost to operate. The losses for the many owners who have to service debts secured against vessels are far higher. Basil Karatzas, a New York-based corporate finance adviser, points out that in an industry that has already been making steady losses for 18 months, such substantial losses quickly mount up. “If you have 10 ships and you’re losing $3,000 to $4,000 per day per ship, that’s, let’s say, $40,000 per day, times 30 in a month, times 12 in a year,” he says. “You are losing some very serious money.” The question is how long dry bulk owners — and the private equity firms which have invested heavily in the companies — can survive the miserable market conditions.

Odd take, but amusing.

• The 20% World: The Odds Of The Unthinkable Are Going Up (BBG)

If you want to pick a number for 2016, how about 20%? Look around the politics of the Western world, and you’ll see that a lot of once-unthinkable ideas and fringe candidates suddenly have a genuine chance of succeeding. The odds are usually somewhere around one in five – not probable, but possible. This “20% world” is going to set the tone in democracies on both sides of the Atlantic – not least because, as anybody who bets on horse racing will tell you, eventually one of these longshots is going to canter home. Start with President Donald Trump. Gamblers, who have been much better at predicting political results than pollsters, currently put the odds of the hard-to-pin-down-but-generally-right-wing billionaire reaching the White House at around 6-1, or 17%.

Interestingly, those are roughly the same odds as the ones offered on Jeremy Corbyn, the most left-wing leader of the Labour Party for a generation, becoming the next British prime minister. In France, gamblers put the likelihood of Marine Le Pen winning France’s presidency in 2017 at closer to 25%, partly because the right-wing populist stands an extremely good chance of reaching the runoff. Geert Wilders, another right-wing populist previously described as “fringe,” perhaps stands a similar chance of becoming the next Dutch prime minister. Other once-unthinkable possibilities could rapidly become realities. America’s version of Corbyn, Bernie Sanders, whom Trump recently described as a “wacko,” is currently trading around 5%, no worse than Jeb Bush.

Plus, Sanders has assembled the sort of Corbynite coalition of students, pensioners and public-sector workers that tends to outperform in primaries. If Hillary Clinton stumbles into another scandal, the Democrats could yet find themselves with a socialist contending for the national ticket. And it’s not just “wacko” candidates; some unthinkable events are also distinctly possible. This year, perhaps as early as June, Britain may vote to leave the European Union. Bookmakers still expect the country to go for the status quo, though most pundits are less certain about this than they were about the Scottish referendum in 2014, which turned out to be an uncomfortably close race for the British establishment.

Investors are used to the political world serving up surprises. These surprises, however, have usually involved one mainstream party doing much better or worse than expected – and things continuing as normal. Not this time. With Trump in charge, America would have a wall along the Rio Grande and could well be stuck in a trade war with China. Le Pen wants to take France out of the euro and renegotiate France’s membership in the EU. It’s hard to tell what would do more damage to the City of London: a Brexit that could lead to thousands of banking jobs moving to the continent; or a Corbyn premiership, which could include a maximum wage and the renationalization of Britain’s banks, railways and energy companies.

Moreover, in the 20% world, some nasty possibilities make others more likely. If Britain leaves the European Union, Scotland (which, unlike England, would probably have voted to stay in) might in turn try to leave Britain. If Le Pen manages to pull France out of the euro, the union’s chances of dissolution increase. And you can only guess what a President Trump would do to U.S. relations with Latin America and the Muslim world.

How much longer for Tsipras?

• Greece Warns Creditors On ‘Unreasonable Demands’ Over Pensions (FT)

Greek Prime Minister Alexis Tsipras has said his government “will not succumb to unreasonable demands” as it prepares to send the country’s creditors proposals on crucial reforms to the pension system this week. “The creditors have to know that we are going to respect the agreement,” Mr Tsipras said in an interview with Real News newspaper on Sunday, referring to reforms demanded in exchange for Greece’s €86bn bailout agreement last year. However, he pledged that Greece “won’t succumb to unreasonable and unfair demands” for more pension cuts. Mr Tsipras said that Greece will reform its pension system through measures targeting additional proceeds of about €600m in 2016, adding that “we have no commitment to find the money exclusively from pension cuts”.

On the contrary, “the agreement provides the option of equivalent measures”, he said, admitting however, that the pension system is “on the brink of collapse” and needs to be overhauled. Greece’s proposals are due to be sent to the creditors via email on Monday. The aim is to reach an agreement when the representatives of the creditors return to Athens later in January. The proposals include increases in employer insurance contributions by 1% and employee contributions by 0.5%. Taxes on banking transactions may also be introduced to secure the targeted €600m and avoid any further cuts. But creditors have indicated that further pension cuts are inevitable.

They have already expressed their scepticism about increasing the contributions paid by employers and workers, stressing the potential wider economic impact on struggling businesses. Mr Tsipras’s comments were echoed by the finance minister Euclid Tsakalotos, who warned of forthcoming difficulties in negotiations with creditors. “There will be victories and defeats,” he said in an interview with Kathimerini newspaper. The government is rushing to finalise and submit the new pension bill to parliament for voting by January 15 so that the first review of the bailout package can be completed and discussion on debt relief can begin. Mr Tsipras’ governing majority is expected to be sorely tested by any pension reform legislation. The government’s majority has slid from 155 seats to 153, only two seats from the required minimum.

How much longer for the EU?

• Sweden To Impose ID Checks On Travellers From Denmark (Guardian)

Sweden is set to drastically reduce the flow of refugees into the country by imposing strict identity checks on all travellers from Denmark, as Scandinavian countries compete with each other to shed their reputations as havens for asylum seekers. For the first time since the 50s, from midnight on Sunday travellers by train, bus or boat will need to present a valid photo ID, such as a passport, to enter Sweden from its southern neighbour, with penalties for travel operators who fail to impose checks. Passengers who fail to present a satisfactory document will be turned back.

“The government now considers that the current situation, with a large number of people entering the country in a relatively short time, poses a serious threat to public order and national security,” the government said in a statement accompanying legislation enabling the border controls to take place. The move marks a turning point for the Swedish ruling coalition of Social Democrats and Greens, which earlier presented itself as a beacon to people fleeing conflict and terror in Asia and the Middle East. “My Europe takes in people fleeing from war, my Europe does not build walls,” Swedish prime minister Stefan Löfven told crowds in Stockholm on 6 September. But three months and about 80,000 asylum seekers later, the migration minister told parliament: “The system cannot cope.”

[..] Critics of Sweden’s refugee crackdown fear it will cause a “domino effect” as countries compete to outdo each other in their hostility to asylum seekers. “Traditionally, Sweden has been connected to humanitarian values, and we are very worried that the signals Sweden is sending out are that we are not that kind of country any more,” said Anna Carlstedt, president of the Red Cross in Sweden, whose staff and volunteers have often been the first line of support for new arrivals in the country. Other Scandinavian countries have recently announced their intention to stem the flow of refugees. In his new year address, Denmark’s liberal PM Lars Løkke Rasmussen said the country was prepared to impose similar controls on its border with Germany, if the Swedish passport checks left large numbers of asylum seekers stranded in Denmark.

The shame deepens still.

• Refugees Hold Terrified, Frozen Children Above The Waves Off Lesbos (DM)

Parents were forced to hold their children above freezing January waves as they struggled to reach shore on the Greek island of Lesbos on Sunday. The group of migrants and refugees were helped to disembark by volunteers, although several were forced to wade to the beach after falling overboard. Photographs show one father struggling to reach shore as he tried to hold his tiny, terrified daughter above the waves. Another image shows a group gathered around a woman in tears, while in another photograph, a little girl cries as she sits wrapped in a giant, silver thermal blanket after the harrowing crossing from Turkey. Once on shore, the group were handed thermal blankets stamped with the logo of the UNHCR as they sat on the beach near the town of Mytilene.

It comes the day after charity workers created a giant peace sign out of thousands of life-jackets on the hills of the Greek island, in honour of those who have died while making the perilous crossing in the hope of reaching Europe. The onset of winter and rougher sea conditions do not appear to have deterred the asylum-seekers, with boats still arriving on the Greek islands daily. Elsewhere, Turkish coastguards rescued a group of 57 migrants and refugees, including children, after they were left stranded on a rocky islet in the Aegean Sea. The group was trying to reach Greece by making the perilous journey across the sea, but they hit trouble after leaving the Turkish resort of Dikili, in Izmir province.

Debt Rattle Christmas Day 2015

Dec 252015

December 25, 2015 Posted by Raúl Ilargi Meijer at 9:44 am Finance Tagged with: deportation, dollar, Fed, jobless claims, money creation, refugees, retail Comments Off

Jack Delano Brockton, Mass., Enterprise newspaper office on Christmas Eve 1940

• Switzerland To Vote On Banning Banks From Creating Money (Telegraph)

• US Retailers At Risk Of Missing Even Modest Holiday Sales Goals (Reuters)

• High Street Christmas Shopping Figures Grim Reading For Retailers (Guardian)

• Lower Jobless Claims Don’t Point to Robust US Labor Market (WSJ)

• African Firms Hit by Dollar Shortages (WSJ)

• Why The Fed Will Never Succeed (Macleod)

• The Perils of Fed Gradualism (Stephen Roach)

• The Political Consequences of Financial Crises (Davies)

• Yanis Varoufakis Talks Again, Insults Everybody (Politico)

• 2015 Year In Review – Scenic vistas from Mount Stupid (Collum)

• Black Lives Matter Protests Roil Cities Across The US (LA Times)

• US Plans Mass Deportation of Illegal Central American Migrants (WSJ)

• In The Bleakness Of The Calais Migrant Camp, A Light Shines Out (Guardian)

• Refugee NGOs On Greek Islands To Be Coordinated (Kath.)

Well, we can hope…

• Switzerland To Vote On Banning Banks From Creating Money (Telegraph)

Switzerland will hold a referendum to decide whether to ban commercial banks from creating money. The Swiss federal government confirmed on Thursday that it would hold the plebiscite, after more than 110,000 people signed a petition calling for the central bank to be given sole power to create money in the financial system. The campaign – led by the Swiss Sovereign Money movement and known as the Vollgeld initiative – is designed to limit financial speculation by requiring private banks to hold 100pc reserves against their deposits. “Banks won’t be able to create money for themselves any more, they’ll only be able to lend money that they have from savers or other banks,” said the campaign group. Under Switzerland’s direct democracy, a referendum can be held if a motion gains 100,000 signatures within 18 months of launching.

If successful, the sovereign money bill would give the Swiss National Bank a monopoly on physical and electronic money creation, “while the decision concerning how new money is introduced into the economy would reside with the government,” says Vollgeld. The idea of limiting all money creation to central banks was first touted in the 1930s and supported by renowned US economist Irving Fischer as a way of preventing asset bubbles and curbing reckless lending. In modern market economies, central banks control the creation of banknotes and coins but not the creation of all money, which occurs when a commercial bank offers a line of credit. Central banks aim to influence the money supply with monetary policy and regulatory tools. The SNB was established in 1891, with exclusive power to mint coins and issue Swiss banknotes.

But over 90pc of money in circulation in Switzerland now exists in the form “electronic” cash created by private banks, rather than the central bank. Members of the initiative committee for Monetary Reform (Vollgeld-Initiative) hand over boxes with more than 120.000 signatures at the Federal Chancellery in Bern, Switzerland “Due to the emergence of electronic payment transactions, banks have regained the opportunity to create their own money,” said the Swiss Sovereign Money campaign. “The decision taken by the people in 1891 has fallen into oblivion.”

Referenda on monetary matters are not new in Switzerland. Last year, the country voted by more than 78pc to reject a law calling for the central bank to increase its gold reserves from 7pc to 20pc. Unlike the gold vote – which was seen as a precursor to re-introducing the Gold Standard in Switzerland – economists have been more supportive of the idea of “sovereign money” as a way to stabilise the economy and prevent excess credit growth. Iceland – which saw its bloated banking system collapse in spectacular fashion in 2008 – has also touted an abolition of private money creation and an end to fractional reserve banking. A date for the Swiss referendum has not been set.

Translation: it’s a lousy shopping season.

• US Retailers At Risk Of Missing Even Modest Holiday Sales Goals (Reuters)

Retailers are struggling to meet even modest forecasts for the holiday shopping season this year after the “Super Saturday” before Christmas failed to live up to its nickname, industry research groups said. The last Saturday before Christmas often sets the annual record for retail sales, vying with Thanksgiving weekend’s Black Friday. In recent years, last-minute shopping has determined the success of the season, and a relatively weak final weekend bodes poorly for retailers. This year Super Saturday weekend sales in stores and online rose 4% to $55 billion, after a 2.5% gain last year, according to retail consultancy and private-equity fund Customer Growth Partners. That puts overall store and online sales from the start of November through Dec. 22 on track to rise 3.1%, below the 3.2% pace the firm forecast and down from 4.1% growth in the same period last year.

“Sales have been sluggish so far this year as most consumers are still buying close to need,” said Craig Johnson, president of Customer Growth Partners. “What’s worse is the marked deceleration from a year ago,” he said. Last year, last-minute sales gained in the final 10 days of the holiday season, driven by savings from lower gasoline prices. If sales, spurred by gift card redemptions, hold up in the week after Christmas this year, retailers could move closer to meeting performance forecasts, consultants and retail experts said. The National Retail Federation, the leading industry body, has forecast a 3.7% rise in store and online sales this year. Discounts across categories have been deeper than last year, in the range of 20% to 50%, said Traci Gregorski at analytics firm Market Track.

But consultants said the discounting still had not been enough to boost store traffic materially. Promotions earlier in November took a toll on in-store sales during the Thanksgiving weekend, when total spending was the same as last year, according to the NRF.

Lousy shopping in Britain too.

• High Street Christmas Shopping Figures Grim Reading For Retailers (Guardian)

High streets are continuing to suffer as shoppers saved on gifts and splashed their spare cash in restaurants and pubs in the days before Christmas. The number of shoppers visiting UK stores slid 9% year on year on Monday and Tuesday, dashing hopes of a late rush to stores, according to analysts at Springboard. Diane Wehrle, insights director at Springboard, said about 2% of the decline in shopper numbers was likely to be linked to the timing of Christmas Day, which is one day later in the week than last year. The changing of shopping habits towards buying online and unseasonably balmy temperatures have also meant there is little demand for new coats, boots and knitwear. The Black Friday discount day in late November may also have eaten up sales.

“There is a downward movement in footfall anyway but we are seeing greater drops in the run-up to Christmas this year,” Wehrle said. “It’s partly because we have now got Black Friday and that has fed the habit to shop online. Retailers have gone hell for leather with with bargains but a lot of those will have been bought online for click & collect later.” The poor shopper numbers will make grim reading for retailers who have been banking on a late rush this year. Bonmarché and Game Digital have already issued profit warnings as demand has failed to materialise this year and analysts expect more will follow. Shares in Marks & Spencer slid earlier this week after analysts at Nomura predicted sales of clothing and homewares at established stores would slump 5.5% over the three months to the end of the year.

The retailer has been offering 30% off knitwear, one of its key seasonal ranges, since 10 December, as chains including Debenhams, Bhs, Dorothy Perkins, H&M and Gap have all got out their sale banners. Veteran analyst Richard Hyman has predicted a shake-out in the new year, as shops count the cost of a lacklustre Christmas. “There’s a lot of zombie-looking, ailing retailers that are not long for this world,” he said. High street stores are particularly suffering as shoppers switch to the internet. In-store spending slid 2.3% in the first 10 days of December according to Barclaycard, while online spending rose 9.4%, leaving overall spending virtually flat year on year.

“The greatest concern in the labor market now aren’t those who recently lost their jobs, but the persistently large number out of work for months or years, and those stuck in low-paying and part-time jobs.“

• Lower Jobless Claims Don’t Point to Robust US Labor Market (WSJ)

The fewest Americans since 1973 will seek new unemployment benefits this year, but that doesn’t mean the labor market is back to full health. In total, less than 15 million American will make first-time requests for government assistance this year–about half as many claims as were made in 2009–and far fewer than the number filed during the 1980s and 90s when the economy was expanding at a stronger clip. The greatest concern in the labor market now aren’t those who recently lost their jobs, but the persistently large number out of work for months or years, and those stuck in low-paying and part-time jobs. At the same time, a larger portion of those newly laid off isn’t seeking benefits.

Initial claims are seen as a proxy for layoffs, but other separation measures show that layoffs have plateaued, or even increased this year. The Labor Department recorded 17.4 million layoffs and discharges during the first 10 months of the year, nearly unchanged from the same period in 2014. Outplacement consultants Challenger, Gray & Christmas report the number of layoffs announced by typically large companies through November was 28% higher than through the first 11 months of last year, partly reflecting cutbacks in the energy industry. Economists usually expect hiring to strengthen when new claims decline. But that hasn’t happened this year. Through November, employers added a monthly average of 210,000 jobs to payrolls.

For all of last year, the average was 260,000. The average level of weekly claims was about 10% higher in 2014. Claims readings could be distorted because a smaller share of those laid off are applying for benefits. The share of laid off workers seeking benefits has fallen this year to just above 50%, according to the National Employment Law Project, a group that advocates for the unemployed. The rate is down from record high of almost 80% just after the recession ended.

Seen from miles away.

• African Firms Hit by Dollar Shortages (WSJ)

Valentine Ozigbo is struggling to obtain a key construction ingredient as he refurbishes and builds hotels in Nigeria: the U.S. dollar. Some of Africa’s largest economies, including Nigeria, Angola, Ethiopia and Mozambique, are restricting access to the greenback to protect dwindling reserves. That is causing problems for businesses from Mr. Ozigbo’s Transcorp Hotels to international giants like General Electric and Coca-Cola, all of which are struggling to get the dollars they need for imports or to send profits back home. The shortage comes as the inflow of dollars from resource exports, from oil to cotton, has plummeted with the prices of these commodities. The commodity rout also is putting pressure on local currencies, which some central banks are trying to support with their dwindling supply of dollars.

This dollar squeeze is frustrating investors, increasing costs and delaying projects. It may hamper future investment in countries reeling from the fall in commodity prices. “It’s been a rough ride for a lot of companies in Nigeria, if not all the companies,” said Mr. Ozigbo, chief executive of Transcorp Hotels. Nigeria gets more than 90% of its foreign-currency reserves from oil exports. Since June 20, 2014, when the U.S. oil price was at $107.26, the U.S. oil price has declined 66% through Tuesday’s close of $36.14, amid oversupply and weak growth in demand. Oil’s decline sent the value of the naira, Nigeria’s currency, sharply lower at the start of the year. In March, the Central Bank of Nigeria fixed its exchange rate at around 199 naira to the dollar. By this month, its currency reserves were down 18% to $29.5 billion from the same month last year.

In the summer, the central bank introduced a list of 41 items, from meat to concrete, that it won’t release dollars for. But no matter what a buyer wants their dollars for, their request has to be vetted against this list, slowing down any attempt to buy the currency. Angola now lists industries—including the oil and food sectors—that have priority for the country’s dollar reserves, In Mozambique, the government requires companies to convert half of any dollar revenues into the local currency, as it looks to shore up its reserves. “It’s obviously not like it used to be, where you would go to the bank and get your dollars,” said Jay Ireland, the Africa chief executive officer for GE. “Now it’s a process that they require and it takes longer,” he said, talking about Nigeria and Angola.

Mr. Ireland said GE remains committed to long-term projects in Africa, but the dollar shortage means that it now takes local clients longer to buy GE products priced in dollars. Coca-Cola has been in Africa for almost a century and can obtain dollars from across its businesses. Still, the beverage giant is concerned that its suppliers will start to feel the pinch as they struggle to fund imports that they need. “If there are no changes in monetary policy it might become a bigger challenge and that is a space we are watching very closely,” said Adeola Adetunji, Coca-Cola’s managing director in Nigeria. “Business is not as usual.”

“The fundamental question is actually far broader than whether or not the Fed should be raising rates: rather, should the Fed be managing interest rates at all?” No, of course not.

• Why The Fed Will Never Succeed (Macleod)

The Fed will never succeed in its attempt to manage inflation and unemployment by varying interest rates. This is because it and its economists do not accept the relationship between, on one side, the money it creates and the bank credit its commercial banks issue out of thin air, and on the other the disruption unsound money causes in the economy. This has been going on since the Fed was created, which makes the question as to whether the Fed was right to raise interest rates recently irrelevant. Furthermore, it’s not just the American people who are affected by the Fed’s monetary management, because the Fed’s actions affect nearly everyone on the planet. The Fed does not even admit to having this wider responsibility, except to the extent that it might have an impact on the US economy.

That the Fed thinks it is only responsible to the American people for its actions when they affect all nations is an abrogation of its duty as issuer of the reserve currency to the rest of the world, and it is therefore not surprising that the new kids on the block, such as China, Russia and their Asian friends, are laying plans to gain independence from the dollar-dominated system. The absence of comment from other central banks in the advanced nations on this important subject should also worry us, because they appear to be acting as mute supporters for the Fed’s group-think. This is the context in which we need to clarify the effects of the Fed’s monetary policy. The fundamental question is actually far broader than whether or not the Fed should be raising rates: rather, should the Fed be managing interest rates at all? Before we can answer this question, we have to understand the relationship between credit and the business cycle.

There are two types of economic activity, one that correctly anticipates consumer demand and is successful, and one that fails to do so. In free markets the failures are closed down quickly, and the scarce economic resources tied up in them are redeployed towards more successful activities. A sound-money economy quickly eliminates business errors, so this self-cleansing action ensures there is no build-up of malinvestments and the associated debt that goes with it. When there is stimulus from monetary inflation, it is inevitable that the strict discipline of genuine profitability that should guide all commercial enterprises takes a back seat. Easy money and interest rates lowered to stimulate demand distort perceptions of risk, over-values financial assets, and encourages businesses to take on projects that are not genuinely profitable. Furthermore, the owners of failing businesses find it possible to run up more debts, rather than face commercial reality. The result is a growing accumulation of malinvestments whose liquidation is deferred into the future.

“..the excess liquidity spawned by gradual normalization leaves financial markets predisposed to excesses and accidents.”

• The Perils of Fed Gradualism (Stephen Roach)

The Fed had, in effect, become beholden to the monster it had created. The corollary was that it had also become steadfast in protecting the financial-market-based underpinnings of the US economy. Largely for that reason, and fearful of “Japan Syndrome” in the aftermath of the collapse of the US equity bubble, the Fed remained overly accommodative during the 2003-2006 period. The federal funds rate was held at a 46-year low of 1% through June 2004, before being raised 17 times in small increments of 25 basis points per move over the two-year period from mid-2004 to mid-2006. Yet it was precisely during this period of gradual normalization and prolonged accommodation that unbridled risk-taking sowed the seeds of the Great Crisis that was soon to come.

Over time, the Fed’s dilemma has become increasingly intractable. The crisis and recession of 2008-2009 was far worse than its predecessors, and the aftershocks were far more wrenching. Yet, because the US central bank had repeatedly upped the ante in providing support to the Asset Economy, taking its policy rate to zero, it had run out of traditional ammunition. And so the Fed, under Ben Bernanke’s leadership, turned to the liquidity injections of quantitative easing, making it even more of a creature of financial markets. With the interest-rate transmission mechanism of monetary policy no longer operative at the zero bound, asset markets became more essential than ever in supporting the economy.

Exceptionally low inflation was the icing on the cake – providing the inflation-targeting Fed with plenty of leeway to experiment with unconventional policies while avoiding adverse interest-rate consequences in the inflation-sensitive bond market. Today’s Fed inherits the deeply entrenched moral hazard of the Asset Economy. In carefully crafted, highly conditional language, it is signaling much greater gradualism relative to its normalization strategy of a decade ago. The debate in the markets is whether there will be two or three rate hikes of 25 basis points per year – suggesting that it could take as long as four years to return the federal funds rate to a 3% norm.

But, as the experience of 2004-2007 revealed, the excess liquidity spawned by gradual normalization leaves financial markets predisposed to excesses and accidents. With prospects for a much longer normalization, those risks are all the more worrisome. Early warning signs of troubles in high-yield markets, emerging-market debt, and eurozone interest-rate derivatives markets are particularly worrisome in this regard.

Swing to the right.

• The Political Consequences of Financial Crises (Davies)

Three German economists, Manuel Funke, Moritz Schularik, and Christoph Trebesch, have just produced a fascinating assessment based on more than 800 elections in Western countries over the last 150 years, the results of which they mapped against 100 financial crises. Their headline conclusion is stark: “politics takes a hard right turn following financial crises. On average, far-right votes increase by about a third in the five years following systemic banking distress.” The Great Depression of the 1930s, which followed the Wall Street crash of 1929, is the most obvious and worrying example that comes to mind, but the trend can be observed even in the Scandinavian countries, following banking crises there in the early 1990s.

So seeking to explain, say, the rise of the National Front in France in terms of President François Hollande’s personal and political unpopularity is not sensible. There are greater forces at work than his exotic private life and inability to connect with voters. The second major conclusion that Funke, Schularik, and Trebesch draw is that governing becomes harder after financial crises, for two reasons. The rise of the far right lies alongside a political landscape that is typically fragmented, with more parties, and a lower share of the vote going to the governing party, whether of the left or the right. So decisive legislative action becomes more challenging. At the same time, a surge of extra-parliamentary mobilization occurs: more and longer strikes and more and larger demonstrations.

Control of the streets by government is not as secure. The average number of anti-government demonstrations triples, the frequency of violent riots doubles, and general strikes increase by at least a third. Greece has boosted those numbers recently. The only comforting conclusion that the three economists reach is that these effects gradually peter out. The data tell us that after five years, the worst is over. That does not seem to be the way things are moving now in Europe, if we look at France’s recent election scare, not to mention Finland and Poland, where right-wing populists have now come to power. Maybe the answer is that the clock starts ticking on the five years when the crisis is fully over, which is not yet true in Europe.

Politico.eu doesn’t seem to like Yanis much.

• Yanis Varoufakis Talks Again, Insults Everybody (Politico)

In an interview published in Thursday’s edition of the Dutch newspaper De Volkskrant, Varoufakis took dozens of hard swings at those who have vilified him and his negotiation tactics. Among the greatest hits were Varoufakis claiming the Eurogroup is a place fit only for psychopaths, calling German Finance Minister Wolfgang Schäuble a puppet master and bashing Eurogroup President Jeroen Dijsselbloem as an ineffectual tool of the Germans. Here are the highlights:

1. It was one big coup d’état – European partners came to an agreement with Tsipras’s left-wing government on a third bailout after a hot summer of tense negotiations and slow progress. Many still blame the Varoufakis for the disastrous turn of events. Does Varoufakis agree? “No! I won’t do that. It was nothing but a coup, one big coup d’état. And it succeeded,” he said. “I’m not taking any responsibility for that,” he said. “My speeches were moderate, my plans measured, my advisors were not left-wing lunatics. There was another reason that the other side poured poison and lies over me, and portrayed me as a dangerous radical while I was the most right wing minister in the cabinet. If I was a crazy left-wing lunatic, they wouldn’t have been afraid of me.” “No, they wanted to get rid of me because I knew what I was talking about.”

Jeroen Dijsselbloem, the president of the Eurogroup of finance ministers, confirmed to the Dutch broadcaster NOS that he pushed Tsipras to pull out his finance minister. The Dutchman said he didn’t think Varoufakis had a mandate to negotiate, and thus “I went to do this with the prime minister instead,” he said in an interview to be broadcasted next Monday.

2. Dijsselbloem is a puppet, Schaüble his master – Varoufakis clashed repeatedly with his fellow finance ministers in the Eurogroup. Soothing the egos of politicians and power brokers was not his strong suit. When asked who dominated the meetings, he said: “(German Finance Minister) Wolfgang Schäuble. He’s the puppet master who pulls all the strings. All the other ministers are marionettes. Schäuble is the grandmaster of the Eurogroup. He decides who becomes the president, he determines the agenda, he controls everything.” The Greek ex-minister is especially hard for Dijsselbloem. “[He] has no real power. Dijsselbloem has no authority; he is a soldier, a puppet … He can’t make any decisions without calling Schäuble.”

“Dijsselbloem is a cog in a machine that he doesn’t understand himself,” he said later in the interview. “There was absolutely no reason for me to speak with Jeroen because he was neither willing nor able to have a real discussion, let alone interested.” But one leader gets praise from the Greek economist: the European Central Bank’s President Mario Draghi: “A formidable economist,” Varoufakis called him, adding that “Draghi is very frustrated by the suffocating limitations of his ECB mandate.”

3. Eurogroup is the place to be — if you’re a psychopath – “Anyone who speaks about blissful moments in the Eurogroup should be locked up immediately for being a dangerous lunatic,” the ex-minister said laughingly. “The Eurogroup is a very unpleasant place, including for Schäuble, Dijsselbloem and the ECB president Draghi. Centers of power are stressful by definition, with big egos and continuous conflict.” “If you’re a psychopath and you thrive on conflict, then the Eurogroup is the place to be.” Asked whether it was a place for power-hungry politicians, he said: “Ultimately, almost no one has any power … [Individuals] power is undermined by opposing power, everyone cancels each other out. I’ve seen a lot of frustration in the Eurogroup.”

Dave’s annual endless litany.

• 2015 Year In Review – Scenic vistas from Mount Stupid (Collum)

I am penning my seventh “Year in Review.” These summaries began exclusively for myself, evolved into a sort of holiday cheer for a couple hundred e-quaintances with whom I had been affiliating since my earliest days as a market bear in the late ’90s, and metastasized into the Tower of Babble—longer than a Ken Burns miniseries—summarizing the human follies that capture my attention each year. Jim Rickards kindly called it “a perfect combination of Mel Brooks, Erwin Schrodinger & Howard Beale.” I wade through the year’s most extreme lunacies as well as a few special topics while trying to find the overarching themes. I love conspiracy theories and detest detractors who belittle those trying to sort out fact from fiction in a propaganda-rich world.

“..the most wonderful time of the year and a winter of discontent..”

• Black Lives Matter Protests Roil Cities Across The US (LA Times)

It’s the most wonderful time of the year and a winter of discontent, a season of police bullhorns and Christmas lights. Demonstrators protesting police shootings of black men confronted last-minute holiday shoppers and travelers in California and the Midwest this week, seeing the crowds as an opportunity to draw attention to their cause. In Chicago on Thursday, more than 100 demonstrators marched down North Michigan Avenue, the city’s premier shopping corridor, and laid down on the street for a “die-in.” They also blocked access to some stores where Christmas Eve shoppers were hoping to wrap up their tardy gift-buying. The demonstrators were again protesting the October 2014 police shooting of Laquan McDonald, a black 17-year-old carrying a knife who was killed when a Chicago police officer shot him 16 times.

The officer, Jason Van Dyke, has been charged with first-degree murder. Footage released last month appeared to show McDonald walking away from Van Dyke, sparking protests that have yet to fully die down, much as the Black Lives Matter movement has remained in national headlines since last year’s protests in Ferguson, Mo. “When one part of Chicago is affected, all of Chicago is affected,” one of the demonstrators, Alex Thiedmann, said of the “Black Christmas” demonstration on North Michigan Avenue. “If I remain silent, I become an oppressor.” Onlookers affected by the protest had a mixed response. Emily Grossman, 36, was kept from getting an iPhone at the Apple Store. “I hate to put myself first, but this is BS,” she said.

Rabiah Muhammad came downtown for a doctor’s appointment but stopped to watch the protests. “I was walking down the street and I saw all these beautiful people of all ages and colors,” she said. “I think it’s a bigger problem than the city of Chicago. It’s an American problem. This kind of brutality? That’s not what our country is supposed to be.” [..] “On one of the busiest travel days of the year, Black Lives Matter is calling for a halt on Christmas as usual in memorial of all of the loved ones we have lost and continue to lose this year to law enforcement violence without justice or recourse,” a statement from Black Lives Matter organizers said.

“It is time that the administration acknowledged once and for all that these mothers and children are refugees just like Syrians.”

• US Plans Mass Deportation of Illegal Central American Migrants (WSJ)

To staunch the flow of illegal migrants to the U.S., the Department of Homeland Security has been preparing a national operation to deport Central American families who have evaded removal orders, according to a government official. Starting early next month, U.S. Immigration and Customs Enforcement, a DHS unit, plans to start rounding up hundreds of families that entered the U.S. illegally and who have ignored a final order to leave the country, said the official. Such an order is issued by a judge in immigration court. The number of families showing up at the southwest border has spiked in recent months as gang-related violence grips El Salvador and Honduras. The region also has been plagued by drought.

Typically, the migrants, many of them women and children, turn themselves in at the border and make asylum claims. U.S. authorities then release them, often to live with relatives here, while their cases are adjudicated. DHS Secretary Jeh Johnson in recent months has warned that those whose claims are denied in immigration court could be removed from the country. A spokeswoman for Immigration and Customs Enforcement didn’t dispute an operation has been planned to pursue Central Americans with removal orders. In a statement, the spokeswoman said the agency “focuses on individuals who pose a threat to national security, public safety and border security.” “As Secretary Johnson has consistently said, our border is not open to illegal immigration, and if individuals come here illegally, do not qualify for asylum or other relief, they will be sent back consistent with our laws and our values,” the statement said.

The operation, which was first reported by the Washington Post, has caused controversy in Mr. Johnson’s agency, the official said, with some within DHS opposed to targeting people who have fled violence in their countries of origin. The official said that the operation’s goal is twofold: It aims to send the message to would-be crossers that they won’t be allowed to remain in the U.S. It also seeks to address safety concerns involved as adults entrust their lives and those of their children to human smugglers. “Jeh Johnson wants to send a message to Central Americans: Don’t come north. But Washington hasn’t solved the underlying problem of massive violence in their home countries that is causing them to come north in the first place,” said Margaret Stock, an immigration attorney in Anchorage, Alaska.

[..] The possible roundup for deportation of families caught immigrant advocates by surprise. “This is the last thing we expected from the administration at this point, given the court decision,” said Marielena Hincapie, executive director of the National Immigration Law Center, an advocacy organization in Los Angeles. “It is time that the administration acknowledged once and for all that these mothers and children are refugees just like Syrians.”

Bit too focused on the Noble Brit, but cool.

• In The Bleakness Of The Calais Migrant Camp, A Light Shines Out (Guardian)

If this had been a conventional disaster, the United Nations would have come in and then the big aid agencies would have got busy. But this is Europe, which is meant to be beyond the need of such help. So the UN and UNHCR are not in Calais, while there’s little sign of Oxfam, Save the Children or the Red Cross. That’s not because they don’t care: aid workers tell visiting politicians they feel they have no mandate to operate in Europe (though Médecins Sans Frontières is there, its first such operation on French soil). As for the French and British governments, their only presence comes in the form of uniformed security personnel policing the barbed wire perimeter, watching – but not helping – the people within, tasked with preventing them breaking out and heading for the tunnel or sea that might take them to England.

The camp has been left instead to the volunteers. That big warehouse – with its kitchen, its clothes-sorting operation and its workshop where carpenters, some professional, some amateur, churn out timber frames for shelters as fast as they can construct them – has been set up by a small, Calais charity, L’Auberge des Migrants. It has grown tenfold in three months, helped by the ad hoc efforts of assorted British groups. The result is that, for the outsider, the atmosphere can seem to be part refugee camp, part Glastonbury. Threading their way around the muddy paths and dirt tracks are countless young Brits, dreadlocked and nose-studded, friendly and eager. Some are there to teach English in the pop-up classroom. Some are helping out at the library (announced by the sign that says “Jungle Books”).

Some are on hand in the large, domed tent set up by two young British playwrights that serves as a kind of arts centre. Musicians from Syria, Iraq or Afghanistan sit in a circle and play songs from the old country. On the walls are drawings or photographs made by refugees. One shows a tree-fringed lake, covered in morning mist. The caption says, “Sometimes I come here and stand for a few minutes, imagining that this is what England looks like.” Judged by the usual standards of policy, this is awful. Both the French and UK governments are guilty of an appalling abdication of responsibility, insisting that the Calais camp is not their problem and so turning their backs on it. They won’t supply it with the basics necessary for human existence, lest they be seen to legitimise or entrench it. This is a shameful response, putting politics before fundamental human decency.

And yet fury cannot be the only response to the camp. Admiration is the right reaction too. First for the migrants and refugees themselves, for their resilience and dignity – for the ingenuity that has seen them build a high street full of chipboard restaurants and plywood cafes, as well as mosques and at least one church. But it’s impossible not to admire the volunteers too. For no pay, they have given up comfortable lives to build or cook or teach, to provide for people they have never met because they know that, if they don’t, no one else will. Some are young or retired, with time on their hands. Others have put busy jobs or careers on hold. But none of them had to trade comfortable lives for working in the mud and squalor of the Jungle. No one forced them to rent a van, fill it with tarpaulins or bulk packs of rice and take it across the Channel.

They did it simply because they were moved by the sight of their fellow human beings in distress. And this is what sets them apart from the governments that claim to represent them. The volunteers saw in the faces of those refugees not a problem to be addressed – or, more accurately, avoided – but people just like them. The same is true of all those who have given, and are still giving, to the Guardian’s unprecedentedly successful Christmas appeal. Within a few hours of the Paris attacks, someone tweeted the advice they’d learned from Fred Rogers, the long-serving face of American children’s television. Don’t look at the killers. Look for the helpers. In what has often been a harsh, dark year, this ragtag, impromptu army of volunteers has been a point of light. They are the very best of us.

This will not go well. It will lead to the biggest NGOs ordering around the rest of them. And to EU border forces to step in.

• Refugee NGOs On Greek Islands To Be Coordinated (Kath.)

A special committee will be formed under the General Secretariat for the Aegean to coordinate dozens of nongovernmental organizations on the Greek islands receiving the biggest inflows of refugees and migrants, Kathimerini has learned. Alternate Minister for Immigration Yiannis Mouzalas visited Lesvos on Wednesday, where he met with authorities and inspected progress on the construction of a registration center. Mouzalas also met with Susan Sarandon, who is on the island helping with rescue efforts. The US actress reportedly said that she plans to make a documentary on her experiences. Arrivals from the Turkish coast on Greece’s islands remain steady at around 3,500-4,000 people a day, coast guard officials said, adding that they have rescued roughly 100,000 people this year. Hundreds of migrants have not been so lucky on the crossing. On Wednesday, seven children, four men and two women drowned as they tried to reach Farmakonisi.

Debt Rattle December 22 2015

Dec 222015

December 22, 2015 Posted by Raúl Ilargi Meijer at 9:06 am Finance Tagged with: China, coal, empire, exposure, household debt, oil, PMI, retail, Spain, superbug Comments Off

DPC Old Absinthe House, bar, New Orleans 1906

• Global Investors Are More Exposed To Interest-Rate Hikes Than Ever (BBG)

• The Keynesian Recovery Meme Is About To Get Mugged, Part 1 (Stockman)

• Brent Oil Hits 11-Year Low As Global Supply Balloons (Reuters)

• US Gas Prices Fall Below $2 – In Some Places Under $1.60 (MarketWatch)

• The Real “Death Cross” Of Oil Markets (ZH)

• Risk Of Insolvency Hangs Over UK High Street Retailers (Guardian)

• UK Economy Concerns As Household Debt Balloons To £40 Billion (PA)

• The Bank of Japan’s $2.5 Billion Plan to Buy Non-Existent ETFs (BBG)

• China ‘Suspends’ Another Unofficial PMI Data Set For A ‘Major Adjustment’ (ZH)

• Zimbabwe To Make Chinese Yuan Legal Currency After Beijing Cancels Debts (AFP)

• Russia, EU Trade Talks Fail, Kiev Set To Face Retaliation (Reuters)

• Political Uprising In Spain Shatters Illusion Of Eurozone Recovery (AEP)

• Portugal Taxpayers Face €3 Billion Loss After 2nd Bank Bailout In 2 Years (ZH)

• Christmas Present (Jim Kunstler)

• Et Tu, Brute? – How Empires Die (Thomas)

• Do We Need The Fed? (Ron Paul)

• Apple Says UK Surveillance Law Would Endanger All Customers (BBG)

• Half of World’s Coal Must Go Unmined to Meet Paris Climate Target (BBG)

• It’s ‘Almost Too Late’ To Stop A Global Superbug Crisis (PA)

Because the entire system is leveraged to the hilt.

• Global Investors Are More Exposed To Interest-Rate Hikes Than Ever (BBG)

With any luck, the world economy will eventually be strong enough for central banks to follow the U.S. Federal Reserve in ending what has been an unprecedented period of extremely low interest rates. If and when they do, they’ll run straight into the same issue that the Fed now faces: Raising rates will precipitate unusually large losses for investors. Over the past several years, investors have gone to great lengths in their search for returns in a low-rate environment. They’ve done so in part by buying longer-maturity bonds, which tend to offer higher yields but are also more sensitive to changes in rates. One gauge of this risk is effective duration, which estimates the percentage decline in a bond’s price given a one-percentage-point increase in yield.

The measure is near all-time highs in the U.S., according to a report issued last week by the Office of Financial Research. The situation globally is no less precarious. Consider the effective duration for the BofA Merrill Lynch Global Broad Market Index, which tracks about $45 trillion in investment-grade bonds issued in major currencies – including government, corporate, mortgage and other asset-backed securities. As of last week, it stood at 6.6, meaning that a one-percentage-point increase in yield would wipe almost $3 trillion off the value of all the bonds included in the index. That’s a larger potential loss than at just about any point since the index’s inception in 1996. Here’s how that looks:

The high level of interest-rate risk illustrates a dilemma for central bankers everywhere. The power of traditional monetary stimulus depends in large part on the willingness of people and companies to borrow for new projects and purchases. But as the debt burden grows, it makes markets and the entire economy more susceptible to rate increases. It can also undermine the effect of rate cuts, as borrowers increasingly struggle under the weight of their existing obligations.

“These academic pettifoggers are so blinded by their tinker toy macro-model that they can’t even see the flashing red lights warning of recession just ahead.”

• The Keynesian Recovery Meme Is About To Get Mugged, Part 1 (Stockman)

Yellen said at least one thing of importance last week, but not in a good way. She confessed to the frightening truth that the FOMC formulates its policies and actions based on forecasts of future economic developments. My point is not simply that our monetary politburo couldn’t forecast its way out of a paper bag; that much they have proved in spades during their last few years of madcap money printing. Notwithstanding the most aggressive monetary stimulus in recorded history – 84 months of ZIRP and $3.5 trillion of bond purchases – average real GDP growth has barely amounted to 50% of the Fed’s preceding year forecast; and even that shortfall is understated owing to the BEA’s systemic suppression of the GDP deflator.

What I am getting at is that it’s inherently impossible to forecast the economic future, but that is especially true when the forecasting model is an obsolete Keynesian relic which essentially assumes a closed US economy and that balance sheets don’t matter. Actually, balance sheets now matter more than anything else. The $225 trillion of debt weighing on the world economy – up an astonishing 5.5X in the last two decades – imposes a stiff barrier to growth that our Keynesian monetary suzerains ignore entirely. Likewise, the economy is now seamlessly global, meaning that everything which counts such as labor supply and wage trends, capacity utilization and investment rates and the pace of business activity and inventory stocks is planetary in nature. By contrast, due to the narrow range of activity they capture, the BLS’ deeply flawed domestic labor statistics are nearly useless. And they are a seriously lagging indicator to boot.

Nevertheless, Yellen & Co. are obsessed with the immeasurable and largely irrelevant level of “slack” in the domestic labor market. They falsely view it as a proxy for the purported gap between potential and actual GDP. Not surprisingly, they are now under the supreme illusion that the labor slack has been largely absorbed and the output gap nearly closed. So they are raising money market rates by a smidgeon to confirm the US economy’s strength and that the Keynesian nirvana of full employment is near at hand. No it isn’t! These academic pettifoggers are so blinded by their tinker toy macro-model that they can’t even see the flashing red lights warning of recession just ahead.

Oil went up a whiff overnight. I always look at the spread between WTI and Brent. The smaller it gets, the higher the risks. Usually, it hovers between $2-3. Right now, it’s at 50 cents.

• Brent Oil Hits 11-Year Low As Global Supply Balloons (Reuters)

Brent oil cratered to its lowest price in more than 11 years on Monday, as demand for heating oil slumped on warmer-than-normal temperatures and traders tested for a bottom. U.S. crude remained above its 2009 low and settled up a penny a barrel as traders squared positions ahead of the January contract’s expiration. The February contract declined and analysts expect stockpiles to build again this week, signaling further oversupply in already glutted market. Concerns about swelling global crude supply and slow demand sparked by economic weakness in China have been recurring themes during this year’s rout. Analysts said the market was still testing for a bottom. “The key in finding the bottom of the market comes in a tightening of the supply side,” said Gene McGillian, senior analyst at Tradition Energy in Stamford, Connecticut.

OPEC and Russia will keep producing at high volumes, increasing pressure on U.S. producers to throttle back production, he said. “I think we’re getting ready for another round of capex cuts in North America,” he said. Heating oil futures weighed down the crude complex, hitting a new July 2004 low warmer-than-expected temperatures have hit seasonal demand. “The market is waiting for the next announcement,” said Tyche Capital Advisors senior research analyst John Macaluso. “The equity markets are waiting on crude oil, and crude oil is waiting for a bounce before shorts will come back into the market.” Crude short-sellers will be reluctant to return before U.S. crude recovers to $35.50, he said. Global oil production is running close to record highs. With more barrels poised to enter the market from nations such as Iran and Libya, the price of crude is set for its largest monthly percentage decline in seven years.

“..1% of stations selling gas at $1.59 a gallon..”

• US Gas Prices Fall Below $2 – In Some Places Under $1.60 (MarketWatch)

Christmas came early for U.S. drivers on Monday, as the national average gasoline price fell below $2 a gallon for the first time since March 2009. AAA put the average U.S. gas price at $1.998 per gallon on Monday, while fuel-price tracking service GasBuddy.com calculated the national average at $1.995 a gallon. That’s the lowest price by either measure since March 25, 2009. Unsurprisingly, drivers can credit a global glut of crude oil for the steady pressure on gas prices. Brent crude the global oil benchmark, plumbed levels last seen in 2004 on Monday, while the January contract for the U.S. benchmark CLF6, -0.20% West Texas Intermediate crude, was down 49 cents, or 1.4%, ahead of expiration at $34.24 a barrel on Nymex. The most-active February contract is down 1.3% at $35.58.

“In areas where there are no refinery bottlenecks, we’ve been able to see the falling price of crude oil translated directly into cheaper gas prices,” said Patrick DeHaan, senior petroleum analyst at GasBuddy.com, in a phone interview. Nymex reformulated gasoline futures for January delivery slumped 6.33 cents, or 5%, to $1.2114 a gallon. So how low are gas prices? In much of the country, the price is already well under $2 a gallon, AAA notes, with 1% of stations selling gas at $1.59 a gallon. On a state-by-state basis, Missouri has the lowest average price at $1.77, followed by Oklahoma and South Carolina at $1.78, and Tennessee and Kansas at $1.79.

China. That’s all.

• The Real “Death Cross” Of Oil Markets (ZH)

The ‘death cross’ of these two energy market indicators is all one needs to know about the oil market… As Bloomberg notes, total industry oil stocks reported by the International Energy Agency rose for a third month, increasing by 0.5% to the highest on record at 2.99 billion barrels. China’s Beige Book, released last week, showed further economic deterioration in one of the world’s largest commodity-consuming nations in the fourth quarter. Until these two indicators change direction, lower-er for longer-er will remain.

Lots of last legs there.

• Risk Of Insolvency Hangs Over UK High Street Retailers (Guardian)

A string of retailers could face insolvency in the new year with tough trading on the high street in the run-up to Christmas leaving businesses fighting for survival, two influential industry bodies have warned. Widespread discounting and warmer-than-average weather have cranked up the pressure on high street retailers over the festive period. In the last few years a number of high street retailers have called in administrations either just before or after Christmas, including Woolworths, HMV, Zavvi, and Jessops. Retailers generate roughly 40% of their annual profits between October and December, underlining the importance of the period. However, if a high street business struggles during the festive season then its death knell is typically the quarterly rental payment they have to make to landlords at the end of December.

Atradius, one of the world’s largest trade credit insurers, has warned that retailers face a “perfect storm” that could lead to a bleak start to 2016 and a “fresh wave of insolvencies”. The comments from Atradius are significant because if a credit insurer refuses to back a retailer then suppliers will be unable to insure their orders with the business and could decide not to provide it with products. Owen Bassett, senior risk underwriter at Atradius, said: “Those who went into the fourth quarter needing – rather than wanting – a strong performance could be looking at a troubled future. “Experience tells us that when retailers need an exceptional seasonal sales period and then hit financial difficulty, we often see failures in the first quarter. It is not unusual in this sector to be loss-making during Q1 and with the first payment of quarterly rent due in January it can be difficult to survive after a poor Q4.”

Private debt. Should have a lot more attention. And not just in Britain.

• UK Economy Concerns As Household Debt Balloons To £40 Billion (PA)

Families are expected to run up £40bn of debt this year, sparking fears about Britain’s economic recovery. Labour raised concerns that millions of households would face “serious hardship” if interest rates rise and warned the borrowing trend could harm the economy. The latest Office for Budget Responsibility (OBR) forecasts have found that households have moved from a surplus of £67bn in 2010, the year the coalition took power, to a £40bn deficit this year. Unsustainable borrowing is on course to near the levels reached in the run-up to the 2008 financial crash, according to Labour. Seema Malhotra, the shadow chief secretary to the Treasury, said: “George Osborne is relying on millions of British families going further into debt to hit his growth targets.

“This is risky behaviour from a chancellor whose policy decisions are hurting, not helping, British families. Alarm bells should be ringing. There is a real risk that millions of families will face serious hardship if interest rates start to rise. “Of course families need access to credit and the ability to borrow to invest for the future. George Osborne should be seeking to rebalance the economy away from an over-reliance on borrowing and debt. “Labour is clear about the need for a strong and sustainable economic recovery. Osborne’s short-term political decisions risk real long-term damage to the finances of millions of British families and the nation’s economy.” The former business secretary Sir Vince Cable warned Britain was returning to “old and unhappily discredited” methods of economic growth. He told the Independent: “We’re back on the treadmill of growth being sustained by personal borrowing. Much of it is against an inflating housing stock.

Abenomics is a different way of saying anything goes.

• The Bank of Japan’s $2.5 Billion Plan to Buy Non-Existent ETFs (BBG)

Haruhiko Kuroda has a new plan. He’s going to buy $2.5 billion of something that doesn’t exist. Markets were roiled Friday after the Bank of Japan unveiled measures including purchasing exchange-traded funds that track companies which are “proactively making investment in physical and human capital.” The central bank will spend 300 billion yen ($2.5 billion) a year from April buying such securities to offset the market impact as it resumes selling stocks purchased earlier from financial institutions. The only problem is such ETFs have never been made in Japan, at least not yet. Even as fund providers start hundreds of so-called “smart beta” products that choose stocks based on everything from dividends to volatility, ETFs that pick companies for how they deploy their cash are rare in global markets.

“These kinds of ETFs don’t exist now. Using capital spending as a factor in deciding what goes in an ETF is quite unusual,” said Koei Imai, who oversees $25 billion of ETFs at Nikko Asset Management Co. in Tokyo. “I think the message from the BOJ is for us to go out and make them.” The central bank is aware such products aren’t yet available and in the meantime will buy ETFs tracking the JPX-Nikkei Index 400, a government-backed equity measure started last year that chooses companies based on return on equity and operating profit. The BOJ also already purchases ETFs linked to the Nikkei 225 Stock Average and Topix index and owns roughly half of the market for ETFs in Japan.

How to kill confidence.

• China ‘Suspends’ Another Unofficial PMI Data Set For A ‘Major Adjustment’ (ZH)

For the second time in two months, an economic data series that indicate drastically weak performance in China has been “suspended.” Having seen Markit/Caixin’s flash gauge of China’s manufacturing discontinued in October (having plunged notably divergently from the government’s official data), Bloomberg reports that the publishers of the alternative China Minxin PMI will stop updating the series to make a “major adjustment.” Guess which time series was just “suspended”…

As Bloomberg details,

Release of the unofficial purchasing managers index jointly compiled by China Minsheng Banking Corp. and the China Academy of New Supply-side Economics will be suspended starting this month, the Beijing-based academy said in an e-mailed statement Monday, about six hours before the latest monthly data were scheduled for release.

Minxin’s suspension is the second in recent months as policy makers in the world’s second-largest economy struggle to arrest a deceleration in growth. Another early estimate of China’s manufacturing sector, a flash gauge of a purchasing managers index compiled by Markit Economics and sponsored by Caixin Media, was discontinued Oct. 1. Minxin’s PMI readings are based on a monthly survey covering more than 4,000 companies, about 70% of which are smaller enterprises. The private gauges have shown a more volatile picture than the official PMIs in the past year.

The manufacturing PMI declined to 42.4 in November from 43.3 in October, while the non-manufacturing reading fell to 42.9 from 44.2, according the the latest release. The factory gauge fell to a record low of 41.9 in August. China’s official PMI from the National Bureau of Statistics fell to a three-year low of 49.6 in November.

Humor?

• Zimbabwe To Make Chinese Yuan Legal Currency After Beijing Cancels Debts (AFP)

Zimbabwe has announced that it will make the Chinese yuan legal tender after Beijing confirmed it would cancel $40m in debts. “They [China] said they are cancelling our debts that are maturing this year and we are in the process of finalising the debt instruments and calculating the debts,” minister Patrick Chinamasa said in a statement. Chinamasa also announced that Zimbabwe will officially make the Chinese yuan legal tender as it seeks to increase trade with Beijing. Zimbabwe abandoned its own dollar in 2009 after hyperinflation, which had peaked at around 500bn%, rendered it unusable. It then started using a slew of foreign currencies, including the US dollar and the South African rand.

The yuan was later added to the basket of the foreign currencies, but its use had not been approved yet for public transactions in the market dominated by the greenback. Use of the yuan “will be a function of trade between China and Zimbabwe and acceptability with customers in Zimbabwe,” the minister said. Zimbabwe’s central bank chief John Mangudya was in negotiations with the People’s Bank of China “to see whether we can enhance its usage here,” said Chinamasa. China is Zimbabwe’s biggest trading partner following Zimbabwe’s isolation by its former western trading partners over Harare’s human rights record.

Europe’s dumb struggle with Moscow continues.

• Russia, EU Trade Talks Fail, Kiev Set To Face Retaliation (Reuters)

The EU failed to allay Russia’s concerns about Ukraine’s free-trade accord with the 28-nation bloc on Monday, leaving Kiev to face Russian retaliation through tighter bilateral trade rules from 2016. Closer ties between Ukraine and the EU, including the free trade deal, were at the heart of a battle for influence between Brussels and Moscow in Russia’s former satellite. When the then-Ukrainian president, Viktor Yanukovich, ditched the accord in early 2014 under pressure from Russia, protests erupted on the street of Kiev leading to a crisis in which he fled power and a pro-Europe leadership took over. The EU and Ukraine delayed implementation of their trade deal by a year out of deference to Moscow’s concerns that it could lead to a flood of European imports across its borders, damaging the competitiveness of Russian exports.

But comments by EU and Russian officials on Monday indicated that numerous meetings between the two sides to try to narrow differences and assuage Moscow’s concerns had failed. EU Trade Commissioner Cecilia Malmstrom raised doubts about the validity of the Russian concerns, saying some were “not real.” “We have been very open in listening to some of the concerns of Russia. Some of them we think are not real in economic terms. Some of them could potentially be real,” Malmstrom told a news conference following final talks in Brussels. Russian Economy Minister Alexei Ulyukayev, speaking in Brussels, said there was no deal and Moscow would scrap trade preferences dating back to 2011 for Ukraine as of 2016, when the bilateral EU-Ukraine deal will be implemented. “An agreement has not been reached. We were left with our concerns on our own and we are forced to safeguard our economic interest unilaterally,” Ulyukayev told reporters.

A stalemate that seems to end in either a fragile left government or new elections.

• Political Uprising In Spain Shatters Illusion Of Eurozone Recovery (AEP)

Spain risks months of political paralysis and a corrosive showdown with Germany over fiscal austerity after insurgent movements smashed the traditional two-party system, leaving the country almost ungovernable. The electoral earthquake over the weekend in one of the eurozone’s ‘big four’ states has echoes of the shock upsets in Greece and Portugal this year, a reminder that the delayed political fuse from years of economic depression and mass unemployment can detonate even once the worst seems to be over. Bank stocks plummeted on the Madrid bourse as startled investors awoke to the possibility of a Left-wing coalition that included the ultra-radical Podemos party, which won 20.7pc of the votes with threats to overturn the government’s bank bail-out and to restructure financial debt.

Pablo Iglesias, the pony-tailed leader of the Podemos rebellion, warned Brussels, Berlin, and Frankfurt that Spain was retaking control over its own destiny after years of kowtowing to eurozone demands. “Our message to Europe is clear. Spain will never again be the periphery of Germany. We will strive to restore the meaning of the word sovereignty to our country,” he said. The risk spread on Spanish 10-year bonds jumped eight basis points to 123 over German Bunds, though there is no imminent danger of a fresh debt crisis as long as the European Central Bank is buying Spanish bonds under quantitative easing. The IBEX index of equities slid 2.5pc, with Banco Popular and Caixabank both off 7pc. Premier Mariano Rajoy has lost his absolute majority in the Cortes.

Support for the conservative Partido Popular crashed from 44pc to 29pc, costing Mr Rajoy 5m votes as a festering corruption scandal took its toll. The electorate punished the two mainstream parties that have dominated Spanish politics since the end of the Franco dictatorship in the 1970s, and which by turns became the reluctant enforcers of eurozone austerity. The Socialists (PSOE) averted electoral collapse but have lost their hegemony over the Left and risk being outflanked and ultimately destroyed by Podemos, just as Syriza annihilated the once-dominant PASOK party in Greece. It had been widely assumed that Mr Rajoy would have enough seats to form a coalition with the free-market and anti-corruption party Ciudadanos, but this new reform movement stalled in the closing weeks of the campaign.

“There is enormous austerity fatigue and the country as a whole has clearly shifted to the Left,” said sovereign bond strategist Nicholas Spiro. Yet the Left has not won enough votes either to form a clear government. “The issue now is whether Spain is governable. All the parties are at daggers drawn and this could drag on for weeks. I don’t see any sustainable solution. We can certainly forget about reform,” he said. Mr Spiro said Spain has already seen a “dramatic deterioration” in the underlying public finances over the last eighteen months, although this has been disguised by a cyclical rebound, the stimulus of cheap oil and a weak euro, and QE from Frankfurt. “They have simply gone for growth,” he said.

Posterchild no more.

• Portugal Taxpayers Face €3 Billion Loss After 2nd Bank Bailout In 2 Years (ZH)

Back in August of 2014, Portugal had an idea. Lisbon would use some €5 billion from the country’s Resolution Fund to shore up (read: bailout) Portugal’s second largest bank by assets, Banco Espirito Santo. The idea, basically, was to sell off Novo Banco SA (the “good bank” that was spun out of BES) in relatively short order and use the proceeds to pay back the Resolution Fun. That way, the cost to taxpayers would be zero. You didn’t have to be a financial wizard or a fortune teller to predict what was likely to happen next. Unsurprisingly, the auction process didn’t go so well.

As we recounted in September, there were any number of reasons why Portugal had trouble selling Novo, not the least of which was that two potential bidders – Anbang Insurance Group and Fosun International which, you’re reminded, is run by the recently “disappeared” Chinese Warren Buffett – suddenly became far more risk-averse in the wake of the financial market turmoil in China. Talks with US PE (Apollo specifically) also went south, presumably because no one knows if this “good” bank will actually turn out to need more capital going forward given that NPLs sit at something like 20% while the H1 loss totaled €250 million thanks to higher provisioning for said NPLs. Now, the auction process has been mothballed and will restart in January. This matters because if the bank can’t be sold, the cost of the bailout ends up being tacked onto Lisbon’s budget.

The impact is substantial. In September, when the effort to sell Novo collapsed, the government restated its 2014 deficit which, after accounting for the bailout, ballooned to 7.2% of GDP from 4.5%. Portugal will tell you that this is only “temporary,” but let’s face it, if they haven’t managed to sell it by now, then one has to believe the prospects are grim – at least in terms of fetching anything that looks like a decent price. Well don’t look now, but Portugal’s seventh-largest bank, Banco Internacional do Funchal, now needs a bailout too. Banif (as it’s known) will be split into a “good” and “bad” bank, and its “healthy” assets will be sold to Banco Santander for €150 million. The government will inject up to €2.2 billion the European Commission said on Monday, to cover “future contingencies.”

Hilariously, the bailout was necessary because the bank was unable to repay a previous government cash injection. “The government injected €1.1 billion of fresh capital into the lender in January 2013 to allow it to meet minimum capital thresholds imposed by the banking regulator,” WSJ writes. For its trouble, Lisbon got a 60% stake in the bank and several hundred million worth of CoCos which the bank missed a payment on last year. “That,” WSJ goes on to note, “triggered close scrutiny by the European Commission, which opened an investigation into the legality of the state aid.” “The commission had said that Banif’s restructuring plan might not be enough to allow the bank to repay the state,” Bloomberg adds. “The Bank of Portugal said in the statement on Sunday that a ‘probable’ decision from the commission declaring the state aid illegal would create a shortage of capital at the bank.”

“We now enter the “discovery” phase of financial collapse, where things labeled “capital” and “credit” turn out to be mere holograms.”

• Christmas Present (Jim Kunstler)

Theory du jour: the new Star Wars movie is sucking in whatever meager disposable lucre remains among the economically-flayed mid-to-lower orders of America. In fact, I propose a new index showing an inverse relationship between Star Wars box office receipts and soundness of the financial commonweal. In other words, Star Wars is all that remains of the US economy outside of the obscure workings of Wall Street — and that heretofore magical realm is not looking too rosy either in this season of the Great Rate Hike after puking up 623 points of the DJIA last Thursday and Friday. Here I confess: for thirty years I have hated those stupid space movies, as much for their badly-written scripts (all mumbo-jumbo exposition of nonsensical story-lines between explosions) as for the degenerate techno-narcissism they promote in a society literally dying from the diminishing returns and unintended consequences of technology.

It adds up to an ominous Yuletide. Turns out that the vehicle the Federal Reserve’s Open Market Committee was driving in its game of “chicken” with oncoming reality was a hearse. The occupants are ghosts, but don’t know it. A lot of commentators around the web think that the Fed “pulled the trigger” on interest rates to save its credibility. Uh, wrong. They had already lost their credibility. What remains is for these ghosts to helplessly watch over the awesome workout, which has obviously been underway for quite a while in the crash of commodity prices (and whole national economies — e.g. Brazil, Canada, Australia), the janky regions of the bond markets, the related death of the shale oil industry, and the imploding hedge fund scene. As it were, all credit these days looks shopworn and threadbare, as if the capital markets had by stealth turned into a swap meet of previously-owned optimism.

Who believes in anything these days besides the allure of fraud? Capital is supposedly plentiful these days — look how much has rushed into the dollar from the nervous former go-go nations with their wobbling ziggurats of bad loans and surfeit of production capacity — but what actually constitutes that capital? Answer: the dwindling faith anyone will pay you back next Tuesday for a hamburger today. We now enter the “discovery” phase of financial collapse, where things labeled “capital” and “credit” turn out to be mere holograms. Fed Chair Janet Yellen herself had a sort of hologramatic look last Wednesday when she stepped onto her Delphic platform to reveal the long-heralded interest rate news. Perhaps Mrs. Yellen is a figment conjured by George Lucas’s Industrial Light & Magic shop (now owned by Disney). What could be more fitting in a smoke-and-mirrors culture?

Recognizable patterns.

• Et Tu, Brute? – How Empires Die (Thomas)

The state-owned Bank of China has been ordered by an American court to hand over customer information to the US. The bank has refused to comply, as to do so would violate China’s privacy law. The US court has subsequently ordered the Bank of China to pay a fine of $50,000 per day. Any guess as to how this is likely to turn out? China is a sovereign nation, halfway around the globe from the US, yet the US seems to feel that it’s somehow entitled to set the rules for China (as well as the other nations in the world). When China sees fit to develop islands in the South China Sea that it has laid claim to for centuries, it begins to hear threatening noises from the US military. A candidate for US president declares that he would buzz the islands with Air Force One, the Presidential jet, saying, “They’ll know we mean business.”

All over the world, those who live outside the US are increasingly observing that the US has become so drunk with power that they’re threatening both friend and foe with fines, trade restrictions, monetary sanctions, warfare, and invasions. And in so-observing, those of us who have studied the history of empires note that history is once again repeating itself. Time and time again, great empires build themselves up through industriousness and sound economic management only to subsequently decline into debt, complacency, and an entitlement mind-set. Over the millennia, empires as disparate as Persia, Rome, Spain, and Great Britain rose to dominate the world. Of course, we know how those empires turned out and, by extension, we might hazard an educated guess as to how the present American Empire will end.

In the final throes of empire-decline, we invariably observe the more sociopathic trends of a failing power, such as we’re seeing today from the US. First and foremost, any empire declines as a result of economic mismanagement. Decline from within (pandering to the populace with “bread and circuses”) and without (endless conquest and/or maintenance of dominance over far-flung geography) drain even the wealthiest government. Even eighteenth-century Spain, with all its billions in stolen New World gold, could not pay its ever-increasing bills and warfare-driven debt. Typically, the empire of the day enjoys the world’s greatest fighting force/armada/weapons build-up yet, when the money runs out, the war machine simply stops. Soldiers think more about their empty bellies than how much ammunition they have left.

Generals continue to issue orders, but they cease to be followed after the supply lines begin to dry up. And the leaders of a collapsing empire invariably make a fatal mistake: they assume that all the goodwill the empire gained when it was on its rise is permanent – that it will continue, even if the empire behaves like the world’s foremost bully. This is never the outcome. Invariably, as the decline nears its end, allies, without ever saying so, begin to withdraw their support. We see this today, as European leaders (America’s most essential allies) realise that the empire is becoming an arrogant liability and they begin cutting deals with the other side, as European leaders are now doing with Russia and others.

“The only way to avoid future crashes is for the Fed to stop creating inflation and bubbles.”

• Do We Need The Fed? (Ron Paul)

Stocks rose Wednesday following the Fed’s announcement of the first interest rate increase since 2006. However, stocks fell just two days later. One reason the positive reaction to the Fed’s announcement did not last long is that the Fed seems to lack confidence in the economy and is unsure what policies it should adopt in the future. At her Wednesday press conference, Fed Chair Janet Yellen acknowledged continuing “cyclical weakness” in the job market. She also suggested that future rate increases are likely to be as small, or even smaller, then Wednesday’s. However, she also expressed concerns over increasing inflation, which suggests the Fed may be open to bigger rate increases. Many investors and those who rely on interest from savings for a substantial part of their income cheered the increase.

However, others expressed concern that even this small rate increase will weaken the already fragile job market. These critics echo the claims of many economists and economic historians who blame past economic crises, including the Great Depression, on ill-timed money tightening by the Fed. While the Federal Reserve is responsible for our boom-bust economy, recessions and depressions are not caused by tight monetary policy. Instead, the real cause of economic crisis is the loose money policies that precede the Fed’s tightening. When the Fed floods the market with artificially created money, it lowers the interest rates, which are the price of money. As the price of money, interest rates send signals to businesses and investors regarding the wisdom of making certain types of investments.

When the rates are artificially lowered by the Fed instead of naturally lowered by the market, businesses and investors receive distorted signals. The result is over-investment in certain sectors of the economy, such as housing. This creates the temporary illusion of prosperity. However, since the boom is rooted in the Fed’s manipulation of the interest rates, eventually the bubble will burst and the economy will slide into recession. While the Federal Reserve may tighten the money supply before an economic downturn, the tightening is simply a futile attempt to control the inflation resulting from the Fed’s earlier increases in the money supply. After the bubble inevitably bursts, the Federal Reserve will inevitability try to revive the economy via new money creation, which starts the whole boom-bust cycle all over again. The only way to avoid future crashes is for the Fed to stop creating inflation and bubbles.

The more they can infringe on privacy, the more they will.

• Apple Says UK Surveillance Law Would Endanger All Customers (BBG)

Apple outlined its opposition to a proposed U.K. surveillance law, saying threats to national security don’t justify weakening privacy and putting the data of hundreds of millions of users at risk. The world’s most valuable company is leading a Silicon Valley challenge to the proposed U.K. law, called the Investigatory Powers bill, which attempts to strengthen the capabilities of law-enforcement agencies to investigate potential crimes or terrorist attacks. The bill would, among other things, give the government the ability to see the Internet browsing history of U.K. citizens. Apple said the U.K. government already has access to an unprecedented amount of data.

The Cupertino, California-based company is particularly concerned the bill would weaken digital privacy tools such as encryption, creating vulnerabilities that will be exploited by sophisticated hackers and government spy agencies. In response to the U.K. rules, other governments would probably adopt their own new laws, “paralyzing multinational corporations under the weight of what could be dozens or hundreds of contradictory country-specific laws,” Apple said. “The creation of backdoors and intercept capabilities would weaken the protections built into Apple products and endanger all our customers,” Apple said in an eight-page submission to the U.K. committee considering the bill. “A key left under the doormat would not just be there for the good guys. The bad guys would find it too.”

And that will not happen.

• Half of World’s Coal Must Go Unmined to Meet Paris Climate Target (BBG)

Coal, the fuel that powered the industrial revolution, is in hiding. While the world still has 890 billion tons of reserves, enough to last more than 65 years, about half must stay underground if nations are to meet environmental limits agreed to earlier this month in Paris, Bank of America Corp. said in a report. Burning less coal is the easiest way to lower emissions blamed for climate change, the bank said. The pact reached by 195 nations doesn’t target specific fuels, yet coal remains the world’s largest source of planet-warming carbon dioxide. A global oversupply of the power plant fuel has pushed producers into bankruptcy and sent prices to at least seven-year lows. The Paris agreement only further diminishes prospects for a recovery.

“The latest carbon initiatives are the nail in the coffin for global coal,” Sabine Schels, Peter Helles and Franciso Blanch, analysts at Bank of America said in the Dec. 18 report. If emissions limits take hold, “50% of the world’s current coal reserves may never be dug out.” Coal demand stopped growing in 2014 for the first time since the 1990s as China’s economy cooled, the Paris-based International Energy Agency said Dec. 18. Coal for delivery to Amsterdam, Rotterdam, and Antwerp, an Atlantic benchmark, is trading near an eight-year low. Newcastle coal, a barometer for the Asia-Pacific market, is at the cheapest in records going back to 2008, data compiled by Bloomberg show.

Last month, the warning came from China. Now it’s England and Wales.

• It’s ‘Almost Too Late’ To Stop A Global Superbug Crisis (PA)

It is “almost too late” to stop a global superbug crisis caused by the misuse of antibiotics, a leading expert has warned. Scientists have a “50-50” chance of salvaging existing antibiotics from bacteria which has become resistant to its effects, according to Dr David Brown. The director at Antibiotic Research UK, whose discoveries helped make more than £20bn ($30bn) in pharmaceutical sales, said efforts to find new antibiotics are “totally failing” despite significant investment and research. It comes after a gene was discovered which makes infectious bacteria resistant to the last line of antibiotic defence, colistin (polymyxins). The resistance to the colistin antibiotic is considered to be a “major step” towards completely untreatable infections and has been found in pigs and humans in England and Wales.

Public Health England said the risk posed to humans by the mcr-1 gene was “low” but was being monitored closely. Performing surgery, treating infections and even travelling abroad safely all rely to some extent on access to effective antibiotics. It is feared the crisis could further penetrate Europe as displaced migrants enter from a war-torn Middle East, where countries such as Syria have increasing levels of antibiotic resistance. Dr Brown told said: “It is almost too late. We needed to start research 10 years ago and we still have no global monitoring system in place. “The issue is people have tried to find new antibiotics but it is totally failing – there has been no new chemical class of drug to treat gram-negative infections for more than 40 years.

Debt Rattle December 10 2015

Dec 102015

December 10, 2015 Posted by Raúl Ilargi Meijer at 9:42 am Finance Tagged with: bonds, China, collapse, commodities, credit, debt, middle class, mining, refugees, retail, stocks 2 Responses »

Unknown GMC truck Associated Oil fuel tanker, San Francisco 1935

• If It Owns a Well or a Mine, It’s Probably in Trouble (NY Times)

• Credit Card Data Reveals First Core Retail Sales Decline Since Recession (ZH)

• America’s Middle Class Meltdown (FT)

• Chinese Devaluation Is A Bigger Danger Than Fed Rate Rises (AEP)

• China Swallows Its Mining Debt Bomb (BBG)

• China’s Plan to Merge Sprawling Firms Risks Curbing Competition (WSJ)

• Billions of Barrels of Oil Vanish in a Puff of Accounting Smoke (BBG)

• Bond King Gets Antsy as Junk Bonds, Which Lead Stocks, Spiral to Heck (WS)

• Banks Buy Protection Against Falling Stock Markets (BBG)

• Dividends Could Be the Next Victim of the Commodity Crunch (BBG)

• Copper, Aluminum And Steel Collapse To Crisis Levels (CNN)

• US Companies Turn To European Debt Markets (FT)

• Italy Needs a Cure for Its Bad-Debt Headache (BBG)

• Swiss to Give Up EVERYTHING & EVERYBODY (Martin Armstrong)

• Trump’s ‘Undesirable’ Muslims of Today Were Yesteryear’s Greeks (Pappas)

• It’s Too Late to Turn Off Trump (Matt Taibbi)

• War Is On The Horizon: Is It Too Late To Stop It? (Paul Craig Roberts)

• Greek Police Move 2,300 Migrants From FYROM Border To Athens (Kath.)

Good headline.

• If It Owns a Well or a Mine, It’s Probably in Trouble (NY Times)

The pain among energy and mining producers worsened again on Tuesday, as one of the industry’s largest players cut its work force by nearly two-thirds and Chinese trade data amplified concerns about the country’s appetite for commodities. The full extent of the shakeout will depend on whether commodities prices have further to fall. And the outlook is shaky, with a swirl of forces battering the markets. The world’s biggest buyer of commodities, China, has pulled back sharply during its economic slowdown. But the world is dealing with gluts in oil, gas, copper and even some grains. “The world of commodities has been turned upside down,” said Daniel Yergin, the energy historian and vice chairman of IHS, a consultant firm.

“Instead of tight supply and strong demand, we have tepid demand and oversupply and overcapacity for commodity production. It’s the end of an era that is not going to come back soon.” The pressure on prices has been significant. Prices for iron ore, the crucial steelmaking ingredient, have fallen by about 40% this year. The Brent crude oil benchmark is now hovering around $40 a barrel, down from more than a $110 since the summer of 2014. Companies are caught in the downdraft. A number of commodity-related businesses have either declared bankruptcy or fallen behind in their debt payments. Even more common are the cutbacks. Nearly 1,200 oil rigs, or two-thirds of the American total, have been decommissioned since late last year.

More than 250,000 workers in the oil and gas industry worldwide have been laid off, with more than a third coming in the United States. The international mining company Anglo American is pulling back broadly, with a goal to reduce the company’s size by 60%. Along with the layoffs announced on Tuesday, the company is suspending its dividend, halving its business units, as well as unloading mines and smelters.

How bad will the holiday shopping season get?

• Credit Card Data Reveals First Core Retail Sales Decline Since Recession (ZH)

While we await the government’s retail sales data on December 11, the last official economic report the Fed will see before its December 16 FOMC decision, Bank of America has been kind enough to provide its own full-month credit card spending data. And while a week ago the same Bank of America disclosed the first holiday spending decline since the recession, in today’s follow up report BofA reveals that if one goes off actual credit card spending – which conveniently resolves the debate if one spends online or in brick and mortar stores as it is all funded by the same credit card – the picture is even more dire. According to the bank’s credit and debit card spending data, core retail sales (those excluding autos which are mostly non-revolving credit funded) just dropped by 0.2% in November, the first annual decline since the financial crisis!

At this point, BofA which recently laid out its bullish 2016 year-end forecast which sees the S&P rising almost as high as 2,300, and is thus conflicted from presenting a version of events that does not foot with its erroenous economic narrative, engages in a desperate attempt to cover up the ugly reality with the following verbiage, which ironically confirms that a Fed hike here would be a major policy error and lead to even more downside once it is digested by the market.

Not usual FT language: “..the forces of technological change and globalisation drive a wedge between the winners and losers in a splintering US society.”

• America’s Middle Class Meltdown (FT)

America’s middle class has shrunk to just half the population for the first time in at least four decades as the forces of technological change and globalisation drive a wedge between the winners and losers in a splintering US society. The ranks of the middle class are now narrowly outnumbered by those in lower and upper income strata combined for the first time since at least the early 1970s, according to the definitions by the Pew Research Center, a non-partisan think-tank in research shared with the Financial Times. The findings come amid an intensifying debate leading up to next year’s presidential election over how to revive the fortunes of the US middle class.

The prevailing view that the middle class is being crushed is helping to feed some of the popular anger that has boosted the populist politics personified by Donald Trump’s candidacy for the Republican presidential nomination. “The middle class is disappearing,” says Alison Fuller, a 25-year-old university graduate working for a medical start-up in Smyrna, Georgia, who sees herself voting for Mr Trump. Pew used one of the broadest income classifications of the middle class, in a new analysis detailing the “hollowing out” of a group that has formed the bedrock of America’s postwar success. The core of American society now represents 50% or less of the adult population, compared with 61% at the end of the 1960s. Strikingly, the change has been driven at least as much by rapid growth in the ranks of prosperous Americans above the level of the middle class as it has by expansion in the numbers of poorer citizens.

Exporting commodities and deflation: “The excess capacity is cosmic.”

• Chinese Devaluation Is A Bigger Danger Than Fed Rate Rises (AEP)

The world has had a year to brace for monetary lift-off by the US Federal Reserve. A near certain rate rise next week will come almost as a relief. Emerging markets have already endured a dollar shock. The currency has risen 20pc since July 2014 in expectation of this moment, based on the Fed’s trade-weighted “broad” dollar index. The tightening of dollar liquidity is what caused a global manufacturing recession and an emerging market crash earlier this year, made worse by China’s fiscal cliff in January and its erratic, stop-start, efforts to wind down a $26 trillion credit boom. The shake-out has been painful: hopefully the dollar effect is largely behind us. The central bank governors of India and Mexico, among others, have been urging the Fed to stop dithering and get on with it. Presumably they have thought long and hard about the consequences for their own economies.

It is a safe bet that Fed chief Janet Yellen will give a “dovish steer”. She has already floated the idea that rates can safely be kept far below zero in real terms for a long time to come, even as unemployment starts to fall beneath the 5pc and test “NAIRU” levels where it turns into inflation. Her apologia draws on a contentious study by Fed staff in Washington that there is more slack in the economy than meets the eye. She argues that after seven years of drought and “supply-side damage” it may make sense to run the economy hotter than would normally be healthy in order to draw discouraged workers back into the labour market and to ignite a long-delayed revival of investment. There are faint echoes of the early 1970s in this line of thinking. Rightly or wrongly, she chose to overlook a competing paper by the Kansas Fed arguing the opposite.

Such a bias towards easy money may contain the seeds of its own destruction if it forces the Fed to slam on the brakes later. But that is a drama for another day. The greater risk for the world over coming months is that China stops trying to hold the line against devaluation, and sends a wave of corrosive deflation through the global economy. Fear that China may join the world’s currency wars is what haunts the elite banks and funds in London. It is why there has been such a neuralgic response to the move this week to let the yuan slip to a five-year low of 6.4260 against the dollar. Bank of America expects the yuan to reach 6.90 next year, setting off a complex chain reaction and a further downward spiral for oil and commodities. Daiwa fears a 20pc slide. My own view is that a fall of this magnitude would set off currency wars across Asia and beyond, replicating the 1998 crisis on a more dangerous scale.

Lest we forget, China’s fixed capital investment has reached $5 trillion a year, as much as in North America and Europe combined. The excess capacity is cosmic. Pressures on China are clearly building up. Capital outflows reached a record $113bn in November. Capital Economics says the central bank (PBOC) probably burned through $57bn of foreign reserves that month defending the yuan peg. A study by the Reserve Bank of Australia calculates that capital outflows reached $300bn in the third quarter, an annual pace of 10pc of GDP. The PBOC had to liquidate $200bn of foreign assets. Defending the currency on this scale is costly. Reserve depletion entails monetary tightening, neutralizing the stimulus from cuts in the reserve requirement ratio (RRR). It makes a “soft landing” that much harder to pull off.

China is trying to find ways to hide debts and losses…

• China Swallows Its Mining Debt Bomb (BBG)

Remember that Bugs Bunny scene where the Tasmanian Devil survives an explosion by eating the bomb? China’s government is trying to do that for its indebted miners. Rather than let the domestic mining industry be dragged down by its $131 billion of debts, the authorities are looking at setting up what amounts to a state-owned “bad bank” to segregate the worst liabilities and allow the remaining businesses to survive. China Minmetals, the metals trader and miner tasked with swallowing up China Metallurgical Group in a state-brokered merger, will be one taker, these people said. That should help with its net debt, which already stood at 136 billion yuan ($22 billion) in December 2014. There’ll be no shortage of others lining up for relief.

Seven of the 17 most debt-laden mining and metals companies worldwide are in China, and all are state-owned or -controlled. Western credit investors have become so chary of miners’ debts that you can pick up bonds with a 100% annual yield if you’re confident the companies will last the year. Anglo American is firing 63 percent of its workforce and selling at least half its mines to cut debt, while Glencore today announced plans to further decrease its borrowings. The political strategist James Carville once joked that he’d like to be reincarnated as the bond market so he could “intimidate everybody.” In China, things are considerably more relaxed. Chalco, one of the top five global aluminum producers, hasn’t generated enough operating income to pay its interest bills in any half-year since 2011. Over the four-year period, interest payments have exceeded earnings by about 29 billion yuan.

It’s a similar picture in China’s coal industry. China Coal Energy, Yanzhou Coal, and Shaanxi Coal, the second-, fourth-, and fifth-biggest domestic producers by sales, have collectively spent 3.3 billion yuan more on interest over the last 12 months than they’ve earned from their operations. This situation can’t go on. While Chalco still has about 47 billion yuan in shareholders’ equity on its balance sheet, it doesn’t have an obvious path back to profitability and most of its excess interest payments were made before aluminum prices started to really slump, back in May. There are also some worrying dates looming: The company has 13.6 billion yuan in bonds maturing next year, and another 20.9 billion yuan in the two years following

Beijing is trying to centralize control.

• China’s Plan to Merge Sprawling Firms Risks Curbing Competition (WSJ)

Already massive, China Inc. is about to get bigger—and that may not be good for the country’s economy or consumers. Beijing is considering combining some of its biggest state-owned companies in a move that would tighten its grip over key parts of the world’s No. 2 economy. The government said Tuesday it would merge two of the country’s largest metals companies. Already it has combined train-car makers and nuclear technology firms and is in the process of combining its two largest shipping lines. It is considering combining more companies in areas ranging from telecommunications to air carriers. In recent weeks, shares of major state-owned enterprises like mobile-phone service China Unicom (Hong Kong) and China Telecom and carriers China Southern Airlines and Air China have surged amid speculation they will be next.

China Telecom said it doesn’t comment on speculation, while the others said they haven’t received any information about mergers. Beijing hopes to form national champions that can better compete abroad. But experts say the moves will likely reduce competition, lead to higher prices for consumers and do little to clean up China’s sprawling and largely wasteful portfolio of state-owned enterprises. “China is throwing the gears of reform into reverse,” said Sheng Hong, director of the Unirule Institute of Economics in Beijing, an independent research group. “Unprofitable state-owned companies should be closed, rather than merged,” he said.

[..] Economists say state-owned enterprises are a drag on China’s economy. They enjoy cheap lands, government subsidies and easy access to bank loans. Private firms face barriers to entering sectors such as oil and banking, and state-run companies’ dominance allow them to keep prices high. However, the performance of SOEs has been deteriorating. According to Morgan Stanley, the gap of return-on-assets between SOEs and private enterprises is the widest since the late 1990s. China’s SOEs had an average return-on-assets rate of 4% in 2014, compared with private companies’ 10%, said Kelvin Pang, an analyst at the bank. State-run Economic Information Daily, a newspaper published by the official Xinhua News Agency, reported in April that Beijing was considering merging its biggest state-owned companies to create around 40 national champions from the existing 111.

“The rule change will cut Chesapeake’s inventory by 45%..” Its market cap will fall right along with it.

• Billions of Barrels of Oil Vanish in a Puff of Accounting Smoke (BBG)

In an instant, Chesapeake Energy will erase the equivalent of 1.1 billion barrels of oil from its books. Across the American shale patch, companies are being forced to square their reported oil reserves with hard economic reality. After lobbying for rules that let them claim their vast underground potential at the start of the boom, they must now acknowledge what their investors already know: many prospective wells would lose money with oil hovering below $40 a barrel. Companies such as Chesapeake, founded by fracking pioneer Aubrey McClendon, pushed the Securities and Exchange Commission for an accounting change in 2009 that made it easier to claim reserves from wells that wouldn’t be drilled for years. Inventories almost doubled and investors poured money into the shale boom, enticed by near-bottomless prospects.

But the rule has a catch. It requires that the undrilled wells be profitable at a price determined by an SEC formula, and they must be drilled within five years. Time is up, prices are down, and the rule is about to wipe out billions of barrels of shale drillers’ reserves. The reckoning is coming in the next few months, when the companies report 2015 figures. “There was too much optimism built into their forecasts,” said David Hughes, a fellow at the Post Carbon Institute. “It was a great game while it lasted.” The rule change will cut Chesapeake’s inventory by 45%, regulatory filings show. Chesapeake’s additional discoveries and expansions will offset some of its revisions, the company said in a third-quarter regulatory filing.

“The problem is the risk investors piled on over the past seven years, when they still believed in the Fed’s hype that risks didn’t matter..”

• Bond King Gets Antsy as Junk Bonds, Which Lead Stocks, Spiral to Heck (WS)

“We are looking at real carnage in the junk bond market,” Jeffrey Gundlach, the bond guru who runs DoubleLine Capital, announced in a webcast on Tuesday. He blamed the Fed. It was “unthinkable” to raise rates, with junk bonds and leveraged loans having such a hard time, he said – as they’re now dragging down his firm’s $80 billion in assets under management. “High-yield spreads have never been this high prior to a Fed rate hike,” he said – as the junk bond market is now in a precarious situation, after seven years of ZIRP and nearly as many years of QE, which made Grundlach a ton of money. When he talks, he wants the Fed to listen. He wants the Fed to move his multi-billion-dollar bets in the right direction. But it’s not a measly quarter-point rate hike that’s the problem. Bond yields move more than that in a single day without breaking a sweat.

The problem is the risk investors piled on over the past seven years, when they still believed in the Fed’s hype that risks didn’t matter, that they should be blindly taken in large quantities without compensation, and that rates would always remain at zero. Those risks that didn’t exist are now coming home to roost. They’re affecting the riskiest parts of the credit spectrum first: lower-rated junk bonds and leveraged loans. Grundlach presumably has plenty of them in his portfolios. Tuesday, the day Grundlach was begging the Fed for mercy, was particularly ugly. The average bid of S&P Capital IQ LCD’s list of 15 large and relatively liquid high-yield bond issues – the “flow-names,” as it calls them, that trade more frequently – dropped 181 basis points to about 87 cents on the dollar, for an average yield of 10%, the worst since July 23, 2009.

Sign of things to come?!

• Banks Buy Protection Against Falling Stock Markets (BBG)

For more than a year, dealers in the U.S. equity derivatives market have noted a widening gap in the price of certain options. If you want to buy a put to protect against losses in the Standard & Poor’s 500 Index, often you’ll pay twice as much as you would for a bullish call betting on gains. New research suggests the divergence is a consequence of financial institutions hoarding insurance against declines in stocks. The pricing anomaly is visible in a value known as skew that measures how much it costs to buy bearish options relative to those that appreciate when shares rise. In 2015, contracts betting on a 10% S&P 500 decline by February have traded at prices averaging 110% more than their bullish counterparts. That compares with a mean premium of 68% since the start of 2005, according to data compiled by Bloomberg.

While various explanations exist including simply nervousness following a six-year bull market, Deutsche Bank says in a Dec. 6 research report that the likeliest explanation may be that demand is being created for downside protection among banks that are subject to stress test evaluations by federal regulators. In short, financial institutions are either hoarding puts or leaving places for them in their models should markets turn turbulent. “Since so many banking institutions are facing these stress tests, the types of protection that help banks do well in these scenarios obtain extra value,” said Rocky Fishman, an equity derivatives strategist at Deutsche Bank. “The way the marketplace has compensated for that is by driving up S&P skew.”

They already are…

• Dividends Could Be the Next Victim of the Commodity Crunch (BBG)

As commodity prices tumble to the lowest since the global financial crisis, the dividends paid by the world’s largest oil producers and miners look increasingly hard to justify. Take the world’s largest 500 companies by sales. Of the 20 expected to pay the highest dividend yields over the next 12 months, 17 are natural resources companies, according to data compiled by Bloomberg. They include BHP Billiton Ltd., the world’s largest miner, with a yield – or dividend divided by share price – of more than 10% on its London shares. Plains All American Pipeline LP tops the list with a yield of 13.7%. Ecopetrol, Colombia’s largest oil producer, has a payout of 11.6%. That compares with an average among all 500 companies of 3.5%. “Investors are suggesting that dividend rates announced as recently as half-year results are generally not sustainable,” said Jeremy Sussman at Clarksons Platou Securities.

“The current environment is among the toughest we have seen across the resource space, putting increased pressure on management teams to deliver cost savings.” Miners Anglo American and Freeport-McMoran have suspended payments to preserve cash, following Glencore Plc earlier in the year. Eni SpA, Italy’s largest oil producer, and Houston-based pipeline owner Kinder Morgan have both reduced dividends. While other chief executive officers, especially at oil producers like Shell and Chevron have promised to keep paying, investors appear to be pricing in the likelihood of more cuts to come. “The fall in oil companies’ share prices and the increase in the dividend yield to historical levels is signaling that the market is fearing a cut,” Ahmed Ben Salem at Oddo & Cie in Paris, said by e-mail.

They should have seen it coming when oil collapsed.

• Copper, Aluminum And Steel Collapse To Crisis Levels (CNN)

It’s no secret that commodities in general have had a horrendous 2015. A nasty combination of overflowing supply and soft demand has wreaked havoc on the industry. But prices for everything from crude oil to industrial metals like aluminum, steel, copper, platinum, and palladium have collapsed even further in recent days. Crude oil crumbled below $37 a barrel on Tuesday for the first time since February 2009. The situation is so bad that this week the Bloomberg Commodity Index, which tracks a wide swath of raw materials, plummeted to its weakest level since June 1999. “Sentiment is horrendous. It’s the worst since the financial crisis – and it’s getting worse every day,” said Garrett Nelson, a BB&T analyst who covers the metals and mining industry.

There was fresh evidence of the sector’s financial stress from De Beers owner Anglo American. The mining giant said it was suspending its dividend and selling off 60% of its assets, which could lead to a reduction of 85,000 jobs. The commodities rout is knocking stock prices, with the Dow falling over 200 points so far this week. It’s also raising concerns about the state of the global economy. “Markets are in the midst of another global growth scare,” analysts at Bespoke Investment Group wrote in a recent report. Soft demand is clearly not helping commodity prices. China and other emerging markets like Brazil have slowed dramatically in recent quarters, lowering their appetite for things like steel, iron ore and crude oil.

More developed markets don’t look great either. Europe’s economy continues to underperform, Japan is barely avoiding recession and U.S. manufacturing activity contracted in November for the first time in three years. But the real driver of the recent commodity crash is on the supply side, compared to the collapse in demand during the Great Recession. Cheap borrowing costs and an inability to predict China’s slowdown led producers to expand too much in recent years. Now they’re flooding the market with too much supply. “There’s a lot of froth and excess production capacity that needs to go away permanently. It’s hard to imagine we’re not in a low-commodity price environment for a fairly long time,” said Nelson.

That means you should brace for more plant closure and announcements like the one announced by Anglo American. In the U.S., roughly 123,000 jobs have disappeared from the mining sector, which includes oil and energy workers, since the end of 2014, according to government statistics. It’s also likely some companies won’t survive the depressed pricing environment. Financial trouble for commodity companies have already lifted global corporate defaults to the highest level since 2009, according to Standard & Poor’s.

Debt addicts getting their fix wherever they can.

• US Companies Turn To European Debt Markets (FT)

US tyremaker Goodyear Dunlop sold a €250m eight-year euro-denominated bond on Wednesday – its first such deal in four years – as US companies raise record amounts in the eurozone. The sale was the latest example of a reverse Yankee — euro-denominated debt issued by US companies. US companies have been the biggest issuers of euro bonds by nationality this year. Last week Ball Corporation, an avionics and packaging company, issued euro and dollar bonds to fund its acquisition of Rexam, a UK drinks maker. “Given the recent [US] disruption, the European market looks more positive,” said Henrik Johnsson, head of the Emea debt syndicate at Deutsche Bank. Diverging monetary policy has reduced the cost of issuing debt in euros as the European Central Bank continues to ease while the Federal Reserve is expected to increase its main interest rate from near zero this month.

Previously companies would issue debt in euros and convert it back into dollars. But the strong dollar has increased the cost of doing this. Many reverse Yankee issuers have significant euro-denominated cash flows and so have a “natural hedge” against exchange rate movements. The sell-off in the debt of US commodity companies – particularly in the energy sector – had been damaging for dollar credit, said Mr Johnsson. “As a matter of investor psychology, you’re not seeing losses in significant portions of your portfolio every day in Europe. It’s the same with fund flows, Europe is consistently receiving inflows.” Market participants expect the trend to continue into next year as successful deals demonstrate the depth of Europe’s markets. US companies have also issued a record amount in dollars, however.

“In the third quarter, for example, GDP was worth €409 billion while the banks were saddled with more than €200 billion of non-paying loans.”

• Italy Needs a Cure for Its Bad-Debt Headache (BBG)

Italy’s economy dragged itself out of recession this year, posting annual growth in GDP of 0.8% in the third quarter. That, though, was only half the pace achieved by the euro zone as a whole. And unless the Italian government gets serious about tackling the bad debts that are crushing the nation’s banking system, its economy will continue to underperform its peers. Economists are only mildly optimistic about Italy’s prospects next year. The consensus forecast is that growth will peak at 1.3% this quarter, slowing for the first three quarters of next year before rallying back to that high by the end of the year. One of the biggest drags on the country’s growth is the sheer volume of non-performing loans, typically defined as debts that have been delinquent for 90 days or more.

Italy’s bad loans have soared to more than €200 billion, a fourfold increase since the end of 2008. Moreover, more and more borrowers have fallen behind even as the economic backdrop has improved. That’s in sharp contrast with Spain, where bad loans peaked at the start of 2014 and have since declined by almost a third. The figures for Italy are even more worrying when you compare them with the growth environment. The burden of bad debts is approaching half of what the economy delivers every three months. In the third quarter, for example, GDP was worth €409 billion while the banks were saddled with more than €200 billion of non-paying loans. If that trend continues, Italy will soon be in a worse position than Spain, even though its economy is 50% bigger.

Here’s the rub: If a euro zone country’s banks are weighed down with bad debts, the ECB’s attempt to boost growth and consumer prices by channeling billions of euros into the economy through its quantitative easing program are doomed to failure. And it’s pretty clear that domestic investment in Italy isn’t showing any evidence of recovery despite the ECB’s best efforts.

“The Swiss should have joined the Euro. What is the point of remaining separate when you surrender all your integrity and sovereignty anyway?”

• Swiss to Give Up EVERYTHING & EVERYBODY (Martin Armstrong)

As of January 1, 2016, Switzerland is handing over the names of everyone who has anything stored in its Swiss freeport customs warehouses. For decades, people have stored precious metals and art in Swiss custom ports — tax-free — as long as they did not take it into Switzerland. Now any hope on trusting Switzerland is totally gone. That’s right — the Swiss handed over everyone with accounts in its banks. Now, they must report the name, address, and item descriptions of anyone storing art in its tax-free custom ports. This also applies to gold, silver, and other precious metals along with anything else of value. Back in 1986, the FBI walked into my office to question me about where Ferdinand Marcos (1917–1989) stored the gold he allegedly stole from the Philippines.

Marcos had been the President of the Philippines from 1965 to 1986 and had actually ruled under martial law from 1972 until 1981. I told them that I had no idea. They never believed me, as always, and pointed out that Ferdinand Marcos was a gold trader before he became president and he made his money as a trader. They told me he was a client and that I had been on the VIP list for the grand opening of Herald Square in NYC, which he funded through a Geneva family. I explained that I never met him, and if he were a client, he must have used a different name. But the rumor was that the gold was stored in the Zurich freeport customs warehouse. His wife, Imelda, was famous for her extravagant displays of wealth that included prime New York City real estate, world-renowned art, outlandish jewelry, and more than a thousand pairs of shoes.

Reportedly, there is a diamond tiara containing a giant 150-carat ruby that is locked up in a vault at the Swiss central bank. Some have valued it at more than US$8 million. The missing gold that people have spent 30 years searching for will surface if there are mandatory reports on whatever is hidden in the dark corners of these warehouses. This action to expose whatever whomever has everywhere in Switzerland may cause many to just sell since they will be taxed by their governments for daring to have private assets. They will not be able to get it out once it sees the light of day for every government is watching.

The Swiss should have joined the Euro. What is the point of remaining separate when you surrender all your integrity and sovereignty anyway? This is what bureaucrats are for. They act on their own circumventing the people. Welcome to the New Age of hunting for loose change. Your sofa and car glove box are next. Oh yeah – what about gold or silver fillings in your mouth? Time to see the dentist?

Good to know one’s history.

• Trump’s ‘Undesirable’ Muslims of Today Were Yesteryear’s Greeks (Pappas)

There are some things you might not know about Greek immigration to the United States. This history becomes particularly relevant when watching today’s news and political candidates like Donald Trump, supported by huge and vociferous crowds, call for the complete ban of people from entering the United States based on their race or religion. This is nothing new. In fact– today’s “undesirable” Muslims (in Donald Trump’s eyes), were yesteryear’s Greeks. It’s a forgotten history— something that only occasionally comes up by organizations like AHEPA or the occasional historian or sociologist. In fact, many Greek Americans are guilty of not only perpetuating— but also creating— myths of our ancestors coming to this country and being welcomed with open arms.

A look back at history will prove that this usually wasn’t the case for the early Greek immigrants to the United States. Greeks, their race and religion, were seen as “strange” and “dangerous” to America and after decades of open discrimination, Greeks were finally barred— by law— from entering the United States in large numbers. The Immigration Act of 1924 imposed harsh restrictions on Greeks and other non-western European immigrant groups. Under that law, only one hundred Greeks per year were allowed entry into the United States as new immigrants. Much like today, when politicians and activists like Donald Trump use language against a particular ethnic group— like his call to ban all Muslims from entering the United States, the same was the case a hundred years ago. Except then, Greeks were one of the main targets.

There was a strong, loud and active “nativist” movement that was led by people who believed they were the “true Americans” and the immigrants arriving— mainly Greeks, Italians, Chinese and others who were deemed “different” and even “dangerous” to American ideals, were unfit to come to America. As early as 1894 a group of men from Harvard University founded the Immigration Restriction League (IRL), proponents of a United States that should be populated with “British, German and Scandinavian stock” and not by “inferior races.” Their biggest targets were Greeks and Italians and the group had a powerful influence with the general public and leaders in the U.S. government in their efforts to keep “undesirables” out of America.

The well-known cartoon “The Fool Pied Piper” by Samuel Erhart appeared in 1909 portraying Uncle Sam as the Pied Piper playing a pipe labeled “Lax Immigration Laws” and leading a horde of rats labeled “Jail Bird, Murderer, Thief, Criminal, Crook, Kidnapper, Incendiary, Assassin, Convict, Bandit, Fire Brand, White Slaver, and Degenerate” toward America. Some rats carry signs that read “Black Hand,” referring to the Italian Mafia. In the background, rulers from France, Russia, Germany, Italy, Austria-Hungary, Turkey and Greece celebrate the departure of the fleeing rats.

“..Trump does have something very much in common with everybody else. He watches TV….”

• It’s Too Late to Turn Off Trump (Matt Taibbi)

[..] in Donald Trump’s world everything is about him, but Trump’s campaign isn’t about Trump anymore. With his increasingly preposterous run to the White House, the Donald is merely articulating something that runs through the entire culture. It’s hard to believe because Trump the person is so limited in his ability to articulate anything. Even in his books, where he’s allegedly trying to string multiple thoughts together, Trump wanders randomly from impulse to impulse, seemingly without rhyme or reason. He doesn’t think anything through. (He’s brilliantly cast this driving-blind trait as “not being politically correct.”) It’s not an accident that his attention span lasts exactly one news cycle. He’s exactly like the rest of America, except that he’s making news, not following it – starring on TV instead of watching it.

Just like we channel-surf, he focuses as long as he can on whatever mess he’s in, and then he moves on to the next bad idea or incorrect memory that pops into his head. Lots of people have remarked on the irony of this absurd caricature of a spoiled rich kid connecting so well with working-class America. But Trump does have something very much in common with everybody else. He watches TV. That’s his primary experience with reality, and just like most of his voters, he doesn’t realize that it’s a distorted picture. If you got all of your information from TV and movies, you’d have some pretty dumb ideas. You’d be convinced blowing stuff up works, because it always does in our movies. You’d have no empathy for the poor, because there are no poor people in American movies or TV shows – they’re rarely even shown on the news, because advertisers consider them a bummer.

Politically, you’d have no ability to grasp nuance or complexity, since there is none in our mainstream political discussion. All problems, even the most complicated, are boiled down to a few minutes of TV content at most. That’s how issues like the last financial collapse completely flew by Middle America. The truth, with all the intricacies of all those arcane new mortgage-based financial instruments, was much harder to grasp than a story about lazy minorities buying houses they couldn’t afford, which is what Middle America still believes. Trump isn’t just selling these easy answers. He’s also buying them.

Trump is a TV believer. He’s so subsumed in all the crap he’s watched – and you can tell by the cropped syntax in his books and his speech, Trump is a watcher, not a reader – it’s all mixed up in his head. He surely believes he saw that celebration of Muslims in Jersey City, when it was probably a clip of people in Palestine. When he says, “I have a great relationship with the blacks,” what he probably means is that he liked watching The Cosby Show. In this he’s just like millions and millions of Americans, who have all been raised on a mountain of unthreatening caricatures and clichés. TV is a world in which the customer is always right, especially about hard stuff like race and class. Trump’s ideas about Mexicans and Muslims are typical of someone who doesn’t know any, except in the shows he chooses to watch about them.

“Unless Russia can wake up Europe, war is inevitable.”

• War Is On The Horizon: Is It Too Late To Stop It? (Paul Craig Roberts)

[..] Washington is not opposed to terrorism. Washington has been purposely creating terrorism for many years. Terrorism is a weapon that Washington intends to use to destabilize Russia and China by exporting it to the Muslim populations in Russia and China. Washington is using Syria, as it used Ukraine, to demonstrate Russia’s impotence to Europe— and to China, as an impotent Russia is less attractive to China as an ally. For Russia, responsible response to provocation has become a liability, because it encourages more provocation. In other words, Washington and the gullibility of its European vassals have put humanity in a very dangerous situation, as the only choices left to Russia and China are to accept American vassalage or to prepare for war.

Putin must be respected for putting more value on human life than do Washington and its European vassals and avoiding military responses to provocations. However, Russia must do something to make the NATO countries aware that there are serious costs of their accommodation of Washington’s aggression against Russia. For example, the Russian government could decide that it makes no sense to sell energy to European countries that are in a de facto state of war against Russia. With winter upon us, the Russian government could announce that Russia does not sell energy to NATO member countries. Russia would lose the money, but that is cheaper than losing one’s sovereignty or a war. To end the conflict in Ukraine, or to escalate it to a level beyond Europe’s willingness to participate, Russia could accept the requests of the breakaway provinces to be reunited with Russia.

For Kiev to continue the conflict, Ukraine would have to attack Russia herself. The Russian government has relied on responsible, non-provocative responses. Russia has taken the diplomatic approach, relying on European governments coming to their senses, realizing that their national interests diverge from Washington’s, and ceasing to enable Washington’s hegemonic policy. Russia’s policy has failed. To repeat, Russia’s low key, responsible responses have been used by Washington to paint Russia as a paper tiger that no one needs to fear. We are left with the paradox that Russia’s determination to avoid war is leading directly to war. Whether or not the Russian media, Russian people, and the entirety of the Russian government understand this, it must be obvious to the Russian military.

All that Russian military leaders need to do is to look at the composition of the forces sent by NATO to “combat ISIS.” As George Abert notes, the American, French, and British aircraft that have been deployed are jet fighters whose purpose is air-to-air combat, not ground attack. The jet fighters are not deployed to attack ISIS on the ground, but to threaten the Russian fighter-bombers that are attacking ISIS ground targets. There is no doubt that Washington is driving the world toward Armageddon, and Europe is the enabler. Washington’s bought-and-paid-for-puppets in Germany, France, and UK are either stupid, unconcerned, or powerless to escape from Washington’s grip. Unless Russia can wake up Europe, war is inevitable.

Europe’s creating no man’s land.

• Greek Police Move 2,300 Migrants From FYROM Border To Athens (Kath.)

Police on Wednesday rounded up some 2,300 migrants from a makeshift camp near the border with the Former Yugoslav Republic of Macedonia and put them on buses to Athens, where they are to be put up in temporary reception facilities, including two former Olympic venues. The police operation, which Greek authorities heralded last week, was carried out relatively smoothly following weeks of tensions along the border. A group of 30 migrants who initially resisted efforts by police to remove them from the camp on Wednesday morning were briefly detained before being put on a bus to the capital. A total of 45 buses were used to transfer the migrants from a makeshift camp in Idomeni and the surrounding area to the capital, according to a police statement which said most the migrants are from Pakistan, Somalia, Morocco, Algeria and Bangladesh.

The migrants are to be put up in former Olympic venues in Elliniko and Galatsi and in a temporary reception facility for immigrants that opened in Elaionas over the summer. Police officers on Wednesday were stopping buses heading toward Idomeni with more migrants from the Aegean islands and conducting checks. All migrants that are not from Iraq, Afghanistan and Syria – the nationalities that FYROM border guards are allowing to pass – were being taken off the buses and sent to Athens, the official said. Complicating matters, FYROM police were said to have started building a second fence on the Balkan country’s frontier with Greece in a bid to keep out migrants trying to slip through.

The crackdown on the Greek-FYROM border is expected to lead to a buildup of migrants in Greece and encourage traffickers to resort to new routes to Europe. The United Nations refugee agency (UNHCR) indicated on Wednesday that an alternative route traffickers are likely to favor could be via Albania, Montenegro, Croatia and Bosnia.

A Picture of the New America

May 242014

May 24, 2014 Posted by Raúl Ilargi Meijer at 2:56 pm Finance Tagged with: America, Fed, housing, retail 11 Responses »

Marion Post Wolcott Farmer’s son making sorghum molasses, Racine, West Virginia Sep 1938

Yesterday, we saw that despite a tepid rebound in new home sales, the underlying numbers are far from promising. In particular, prices, which had been holding up despite sagging sales, are down YoY. We also saw that some big investors are now -openly – betting against housing. We saw that the Fed is as a rule so far off in its official forecasts that one needs to wonder about its level of honesty. But what I think was the main item yesterday is the fact that world trade has landed in negative growth territory. The implications of that are hard to overestimate. Global GDP until now has been up quite a bit more than that of the US, Europe, Japan. But now all are tipping their toes on the other side of the much feared red line. And it’s high time for everyone, including Americans, to start realizing what’s going on, and that it looks nothing like the brightly colored pictures of grandeur just around the corner that are consistently being painted for your consumption.

Yesterday afternoon Bloomberg reported that US Q1 retail numbers were hugely and painfully below analysts’ estimates.

U.S. Retailers Missing Estimates by Most in 13 Years

U.S. retailers’ first-quarter earnings are trailing analysts’ estimates by the widest margin in 13 years after bad weather and weak spending by lower-income consumers intensified competition [..] … the expectations the chains are missing have been significantly lowered. While analysts now project retailers’ earnings fell an average of 4.1%, back in January they had estimated a 13% gain. Lower- and moderate-income consumers had little discretionary spending power [..]

That difference is so stunning one must wonder what goes on. As Alhambra Investment Partners’ Jeffrey P. Snider does, in a piece posted by David Stockman:

Sell-Side “Pent-Up Demand” Fantasy: Q1 Retail Profit Outlook Went From +13% to -4% (Actual) In 90 Days

We keep hearing about pent up demand as if it is a foregone conclusion. For some, particularly orthodox economists, it really is – it has to be. If there is no pent up demand awaiting some ephemeral trigger, then their whole theory of the economy is wrong, from the ground up. [..]

Back-to-school sales were “unexpectedly” low, leading to whispers about retailers stuffed with inventory. That was fine, though, because Christmas sales were going to be the first real treat since before the panic. Even though Kmart started advertising its Christmas deals in September, that was dismissed as idiosyncratic. Then it turned out Kmart was actually emblematic and Christmas (for the retail industry) ended up as the worst since 2009. But that, too, was fine, because holiday hangover would be less significant. So retailer expectations, as with those for overall economic growth, were tremendously optimistic until it snowed in winter.

In the space of only three months or so, retailers went from (yet again) expecting fortune and finding instead more “mysterious headwinds.” But this is beyond the usual ridiculous affair, to miss by that much implies something far more serious. To go from +13% to -4% that quickly is an outrage, not just to the economy as it sinks further under the weight of these commandments, but also in those businesses that continue to rely on orthodox forecasts and assumptions.

In another article, at Real Clear Markets, Snider backs up the numbers with a look at sales at the biggest US retail chains:

Target, Staples And The Same Poor Mess (Alhambra)

At what point do “struggling consumers” begin to register as something more than a mysterious headwind? The state of US households is more like a recession than some tangential factor that is just running below expectations. The results speak for themselves – there was an obvious slowdown in 2012 followed by revenue and spending patterns that very much equate to late 2007 and early 2008. [..] The ups and downs throughout the chronology of the past seven years sure look like two recession cycles. It really doesn’t get much clearer than this:

You can make the case that the current down cycle is nowhere near as bad as 2008, especially into 2009, but that is an exceedingly low standard. We have been promised repeatedly and assuredly that there would be a recovery, even to the point of having to withstand four separate, immense QE paroxysms. To what gain? To what loss? If it was only Target and the rest of the retail industry was doing fine, then you can dismiss these results (actual dollars spent as they are, in contrast to sentiment surveys) as Target’s individual missteps. But Wal-Mart has shown the same exact pattern, though actually faring far worse in terms of its 2008 comparisons. Wal-Mart and Target are #1 and #3 in terms of size.

That suggests that consumers were downgrading their shopping impulses in 2008 from more expensive outfits to bare bones essentials. In other words, the Great Recession almost benefitted Wal-Mart by shifting the whole retail scale toward “cheap.” Now, in 2013 and 2014, they can’t even get away with that. It’s almost as if the country and economic system have grown far poorer throughout this “recovery.”

Of course he doesn’t mean ‘it’s almost as if’, he means America has gotten poorer and is well on its way to get poorer still. The very prolific Snider takes on US housing while he’s on a roll:

• Total Y/Y Home Sales Down 7%, But Plunged 17% At Bottom

The depressed level of existing home sales throughout 2014 so far continued into April despite all projections of pent up demand after a cold and wintry start. There was some growth in the month-to-month change of the seasonally adjusted figures, but even there the clear problem that has been evident since mortgage finance collapsed starkly remains. [..] Protestations aside, the future of real estate will be decided by these financial factors, including both mortgage finance and household impoverishment.

The true pattern really jumps out when viewing these figures Y/Y.

First time home buyers continue to be absent from the housing market. The level of this category of purchasers remains at about only 29% of all sales. That speaks to both affordability (lack of) and household formation. It also shows clearly the shortcomings of the continuous appeal to the insidious wealth effect as it fails to trickle to anyone other than those directly experiencing asset inflation.

The picture that emerges of the new America is starting to get into focus. We can see what goes on, no longer distracted by the media, the markets or the political system. At least, it is there for us to see, and the need to be distracted is gone. Whether we will actually choose the clearer picture over the rosier fuzzy one is another matter altogether. Do we even want to know why American housing and retail are getting so much worse so fast? Why not turn to Jeffrey P. Snider again?

Interest Rate Manipulation Comes Back to Haunt Its Most Ardent Supporters

It is difficult to give too much deference to commentators, particularly economists, that speak to the value of quantitative easing in such bland and generic terms. It almost sounds exceedingly easy, as if the Federal Reserve buys a bunch of mortgage bonds, mortgage rates decline, more people can afford to buy houses and the world is full of sunshine again. It usually doesn’t get more detailed than that, partly because it is now ironclad law that in order to reach a mass market demands such simplicity, but also partly because that is the extent and depth of the profession’s actual knowledge of the inner workings. I hear it all the time when these same persons, who are nearly monolithic in their undying devotion to the sanctity of the FOMC, try to describe something so basic as the “money supply.”

Such a notion in the 21st century is so entirely fungible as to lose all proper and tangible meaning, yet that doesn’t stop a considerable number of respected commentators from removing all real world complexity. For example, Deutsche Bank announced last weekend a new “capital” campaign whereby the bank will raise €8 billion in order to focus more on the high yield and leveraged debt markets in the United States (this is not a joke). Part of the reason is that those debt markets are where all the action is now (thanks to what, exactly?) given that FICC [fixed income, currencies, commodities] trading, boring fixed income and bond trading, is almost completely dead today – the very segment that had sustained the global banking enterprise from the depths of near total despair.

How will Deutsche Bank get its new euro capital from Frankfurt to NYC? It’s all the more amazing since 60 million shares are to be (have been) sold to the investment company of a (the?) Qatari Sheikh. There will be a wonderful trip through derivatives markets and bank balance sheets (no doubt including Deutsche’s London and US subs), requiring the accounting and finance acumen of dozens of systems including risk management. Do we include or exclude the Sheikh’s initial funding toward the US$ money supply?

More interesting is why FICC trading has become so unprofitable. The short answer is the very same people who thought interest rate manipulation was a terrific idea in the first place. But such a generic statement plays right into the very critique I offered at the outset. There is obviously, given this setup, much more “nuance” and “texture” to how policy built up FICC only to tear it apart and set the world of finance into a much more unsettled position. First, you have to realize that the Fed through FRBNY’s Open Market desk doesn’t just buy some mortgage bonds as if they were like US treasuries. QE actually operates deep within the bowels of mortgage bond trading in a place called TBA [to-be-announced, some portion of a pending pool of as-yet unspecified mortgages]. The entire purpose of the TBA market is to provide liquidity to something that is, at its core, completely and totally illiquid. A mortgage loan is about as static as it gets in banking.

The manipulation of interest rates by central banks must at some point backfire. First of all because, as I wrote not long ago, if a market cannot set interest rates, it is by definition dysfunctional, since there’s no way to tell which asset is worth what price. That is of course the reason why the Fed suppresses rates: so highly indebted TBTF corporations can borrow at gutter-scraping rates, and made to look like they’re doing just fine, thank you. But the manipulation also drags down rates that those corporations once used to make money with, so the ‘policy’ is essentially self-defeating from the get-go.

It’s all just a matter of time. And the players in the financial world would like to pride themselves on being able to get the timing right. A tempting self-image for those who make millions a year, and think that means they’re smart. In fact, they’re not, and it all only works as long as the Fed makes up for their losses. Which it will no longer be able to do once upward pressure on interest rates becomes too strong. Or US housing and retail, together good for over 70% of GDP, plunge too much. As they inevitably must, precisely because of the near-freezing-point rates the Fed has set. It’s a closed circuit vicious circle. To put it mildly: we may be close. As for what to expect from the Fed going forward, count on it being found wanting, a lot. And count on the real economy, here’s looking at you, being the real victim, not the broke(n) financial institutions the Fed is tasked with saving. David Stockman:

Financial Storm Chasing With Blinders On: How The Fed Is Driving The Next Bust

The latest iteration of the Fed’s meeting minutes is surreal. Its another economic weather report consisting of trivial, random observations about the quarter just ended that are as superficial as CNBC sound bites. Along with that prattle comes guesses and hopes about the next 30-90 days—including the expectation that the weather will “seasonally normalize” and that auto production schedules, for instance, which were down in March, will stabilize at that level “in the months ahead”. Likewise, after noting that consumption spending moved “roughly sideways” during January and February, it detected that “recent information on factors that influence household spending were positive” – a guess that turned out to be wrong based on data we already know from April retail sales.

The data on new and existing home sales had indicated the continuation of a 5-month trend of sharp drops from prior year, but the minutes could muster only an on-the-one-hand-and-on-the-other-hand whitewash, accented with hopeful indicators on single-family permits and pending home sales. Business investment was treated the same way – that is, it was down in the first quarter but “modest gains” are expected soon based on sentiment surveys. And as you read further the noise just keeps getting more foolish, including the hope that the negative net export performance in Q1 would be off-set by improving global developments. That fond hope included this doozy: “In Japan, industrial production rose robustly, and consumer demand was boosted by anticipation of the April increase in the consumption tax.”

… the monetary politburo does indeed believe that it can steer our $17 trillion economy on a month-to-month basis, and attempts to do so with primitive “in-coming” data from the Washington statistical mills that is so tentative, imputed, guesstimated, seasonally maladjusted and subsequently revised as to be no better than anecdotal sound bites.[..] … its one size fits all control panel includes only interest rate pegging, risk asset propping and periodic open mouth blabbing by Fed heads. But these are no longer efficacious tools for driving the real Main Street economy because to boost the latter above its natural capitalist path of productivity and labor hours based growth requires artificial credit expansion – that is, a persistent leveraging up of balance sheets so that credit bloated spending rises faster than production and income.

I know many, if not most, people see Nicole and I as doomers and pessimists, and if only we did what Shinzo Abe told the Japanese to do: believe in Abenomics, things would be alright, since pessimism is such an corrosive attitude. But if pessimism means refusing to look the other way when confronted by lies, manipulations and tens of trillions in hidden losses, I guess we must accept the label, perhaps even with a shot of pride. Still, of course I realize that as the picture of the new America emerges and it’s not a rosy one, there are always plenty of sources to turn to that will serve a dose of optimism at demand.

The best thing I can do, as always, is to say: look at the data. What do you think you see? I can tell you what I see, and what I’ve been seeing for years, is a load of debt so gigantic that not restructuring it could only have been the worst possible decision, and yet it was made. The fact that this didn’t only happen stateside is no comfort, it just makes things worse: no-one left to unload your debt on. The Fed, the government and the media have ‘shielded’ Americans (and Europeans, and Japanese) from their own reality for many years now, so they wouldn’t notice how private debt was transferred to them. Retail and housing appear to be indicating that is not an effective strategy anymore, people overall are too stretched and stressed financially. What comes next is a scary thing to ponder. But it’ll be a new America, that’s for sure.

• U.S. Retailers Missing Estimates by Most in 13 Years (Bloomberg)

U.S. retailers’ first-quarter earnings are trailing analysts’ estimates by the widest margin in 13 years after bad weather and weak spending by lower-income consumers intensified competition. Chains are missing projections by an average of 3.1%, with 87 retailers, or 70% of those tracked, having reported, researcher Retail Metrics Inc. said in a statement today. That’s the worst performance relative to estimates since the fourth quarter of 2000, when they missed by 3.3%. Over the long term, chains typically beat by 3%, the firm said. Extreme winter weather through February and March forced store closings and stifled sales, Swampscott, Massachusetts-based Retail Metrics said.

Lower- and moderate-income consumers had little discretionary spending power, and chains also faced price competition from e-commerce sites. “The American consumer is not fully back and remains cautious,” Ken Perkins, Retail Metrics’ president, wrote in the report. What’s more, the expectations the chains are missing have been significantly lowered. While analysts now project retailers’ earnings fell an average of 4.1%, back in January they had estimated a 13% gain. Most retail segments are showing profit declines, with department stores, teen-apparel chains and home-furnishing stores faring the worst, Retail Metrics said. About 41% of retailers have missed estimates, while 45% have beat.

• Q1 Retail Profit Outlook Went From +13% to -4% (Actual) In 90 Days (Alhambra)

We keep hearing about pent up demand as if it is a foregone conclusion. For some, particularly orthodox economists, it really is – it has to be. If there is no pent up demand awaiting some ephemeral trigger, then their whole theory of the economy is wrong, from the ground up. The Fed reduced interest rates throughout the economy (though it is far more complicated than that) and thus had to spur a growth impulse. We haven’t seen it yet because of the continual interference of exogeny. Back-to-school sales were “unexpectedly” low, leading to whispers about retailers stuffed with inventory. That was fine, though, because Christmas sales were going to be the first real treat since before the panic. Even though Kmart started advertising its Christmas deals in September, that was dismissed as idiosyncratic. Then it turned out Kmart was actually emblematic and Christmas (for the retail industry) ended up as the worst since 2009.

But that, too, was fine, because holiday hangover would be less significant. So retailer expectations, as with those for overall economic growth, were tremendously optimistic until it snowed in winter. What’s more, the expectations the chains are missing have been significantly lowered. “While analysts now project retailers’ earnings fell an average of 4.1%, back in January they had estimated a 13% gain.” In the space of only three months or so, retailers went from (yet again) expecting fortune and finding instead more “mysterious headwinds.” But this is beyond the usual ridiculous affair, to miss by that much implies something far more serious. To go from +13% to -4% that quickly is an outrage, not just to the economy as it sinks further under the weight of these commandments, but also in those businesses that continue to rely on orthodox forecasts and assumptions.

• Total Y/Y Home Sales Down 7%, But Plunged 17% At Bottom (Alhambra)

The depressed level of existing home sales throughout 2014 so far continued into April despite all projections of pent up demand after a cold and wintry start. There was some growth in the month-to-month change of the seasonally adjusted figures, but even there the clear problem that has been evident since mortgage finance collapsed starkly remains. While it may be encouraging that April was at least better than March, there was also a small rebound in December over November that told us nothing about the future path other than to remind about normal monthly volatility. Protestations aside, the future of real estate will be decided by these financial factors, including both mortgage finance and household impoverishment.

The true pattern really jumps out when viewing these figures Y/Y.

First time home buyers continue to be absent from the housing market. The level of this category of purchasers remains at about only 29% of all sales. That speaks to both affordability (lack of) and household formation. It also shows clearly the shortcomings of the continuous appeal to the insidious wealth effect as it fails to trickle to anyone other than those directly experiencing asset inflation.

The overall distribution of sales was better across all segments except the highest, but the distribution remains heavily skewed in that direction. With all that in mind, there is a new development that may influence future price gains and overall housing momentum. First, the NAR estimates that the average home price was up only 3.7% in April, down significantly from the 7.1% gain in February. The median price fared somewhat better, as you would expect given the persisting favorability of higher end sales, but the price growth is also clearly decelerating there too.

Median home prices were up only 5.2% in April, down from 8.7% growth in February and a 13% increase in August when this mortgage mess (driven by taper threats) really began to strike. The deceleration in bubble pricing, particularly in the past few months, is somewhat unsurprising as inventory levels have gained dramatically alongside the drop in sales pace. That is a very unwelcome trend. The NAR, in particular, has been trying to sell this housing market on a shortage of homes for sale. That may have been the case when sales growth was at a high point last summer, but it is no longer evident now.

In some important markets, particular those like Phoenix, AZ, inventory levels are through the roof (+49% Y/Y). Combined with construction, the real estate market is once again searching for a bottom. Artificiality giveth; taper taketh. The economic growth offset? Conspicuously absent.

• Interest Rate Manipulation Comes Back to Haunt Its Most Ardent Supporters (RCM)

It is difficult to give too much deference to commentators, particularly economists, that speak to the value of quantitative easing in such bland and generic terms. It almost sounds exceedingly easy, as if the Federal Reserve buys a bunch of mortgage bonds, mortgage rates decline, more people can afford to buy houses and the world is full of sunshine again. It usually doesn’t get more detailed than that, partly because it is now ironclad law that in order to reach a mass market demands such simplicity, but also partly because that is the extent and depth of the profession’s actual knowledge of the inner workings. I hear it all the time when these same persons, who are nearly monolithic in their undying devotion to the sanctity of the FOMC, try to describe something so basic as the “money supply.”

Such a notion in the 21st century is so entirely fungible as to lose all proper and tangible meaning, yet that doesn’t stop a considerable number of respected commentators from removing all real world complexity. For example, Deutsche Bank announced last weekend a new “capital” campaign whereby the bank will raise €8 billion in order to focus more on the high yield and leveraged debt markets in the United States (this is not a joke). Part of the reason is that those debt markets are where all the action is now (thanks to what, exactly?) given that FICC [fixed income, currencies, commodities] trading, boring fixed income and bond trading, is almost completely dead today – the very segment that had sustained the global banking enterprise from the depths of near total despair.

How will Deutsche Bank get its new euro capital from Frankfurt to NYC? It’s all the more amazing since 60 million shares are to be (have been) sold to the investment company of a (the?) Qatari Sheikh. There will be a wonderful trip through derivatives markets and bank balance sheets (no doubt including Deutsche’s London and US subs), requiring the accounting and finance acumen of dozens of systems including risk management. Do we include or exclude the Sheikh’s initial funding toward the US$ money supply?

More interesting is why FICC trading has become so unprofitable. The short answer is the very same people who thought interest rate manipulation was a terrific idea in the first place. But such a generic statement plays right into the very critique I offered at the outset. There is obviously, given this setup, much more “nuance” and “texture” to how policy built up FICC only to tear it apart and set the world of finance into a much more unsettled position. First, you have to realize that the Fed through FRBNY’s Open Market desk doesn’t just buy some mortgage bonds as if they were like US treasuries. QE actually operates deep within the bowels of mortgage bond trading in a place called TBA [to-be-announced, some portion of a pending pool of as-yet unspecified mortgages]. The entire purpose of the TBA market is to provide liquidity to something that is, at its core, completely and totally illiquid. A mortgage loan is about as static as it gets in banking.

What the Fed is buying through the Open Market Desk are largely “production coupons.” The TBA market is a highly standardized operation allowing millions of individual mortgage loans to be packaged into MBS securities in such a fashion that these otherwise immovable loans can be turned to cash in a moment’s notice. But mortgage originators need to “buy” GSE guarantees and factor that cost into the setting of MBS prices (along with a set aside for servicing costs). So whatever the net yield on the mortgage pool, say for argument’s sake it is 5%, the originator will pay 50 bps to the GSE for its guarantee, set aside 25 bps for servicing costs and then subtract its own spread. If that profit spread is 25 bps, the “production coupon” that is left is 4% to the market.

The Open Market Desk’s purchase of production coupons amounts to a retail purchase out of what is really a wholesale product. The generic ideal is that by purchasing more production coupons than might have otherwise been bought it will allow more room for originators to pocket a spread. In other words, if the Fed purchases bump up demand to the point that the “market” is competing for production coupons at 3.75% instead of 4%, the originator can gain some additional bps in profit spread and even pass some of those savings to new mortgage loans in the form of lower interest rates. The increased spread should, theoretically, entice more participation and increase production of mortgage loans to add to the TBA pool (because there is more profit to be had).

That amounts to an artificial subsidy to this type of finance, meaning any increase in activity is done so because of this sponsorship rather than the fundamentals of actual mortgage and real estate conditions. The Fed wants what it wants, including and especially an artificial “pump priming” process that it believes (wrongly, as it is turning out) will restart the housing market. There doesn’t seem anything too evidently amiss by this QE process as I’m sure there is no surprise that the Fed is “greasing the wheels” of finance. But there are costs to such grease, some that are only being discussed now in the deep recesses of global banking.

The danger of Open Market operations to such a scale in the TBA market coincides with its position as a futures/forward operation. The actual purchase of production coupons is not immediate, but upon settlement that may be several months into the future. This framework helps originators because they can “lock in” financial factors without having to take on risk of conditions changing between the filing of a mortgage application and the funding of a mortgage loan. That upside to originators poses a bit of a problem in that the pipeline is susceptible to large swings.

• Target, Staples And The Same Poor Mess (Alhambra)

Now that we have results for both Wal-Mart and Target, the retail, and thus consumer, picture has been largely filled out. Both companies continue to blame other factors (both cold; Target credit card theft) while dancing around with soft presentations of minor allusions to struggling consumers. At what point do “struggling consumers” begin to register as something more than a mysterious headwind? The state of US households is more like a recession than some tangential factor that is just running below expectations. The results speak for themselves – there was an obvious slowdown in 2012 followed by revenue and spending patterns that very much equate to late 2007 and early 2008. In fact, going back to 2012, the similarities are almost exact right up until the collapse after the September 2008 panic.

The ups and downs throughout the chronology of the past seven years sure look like two recession cycles. It really doesn’t get much clearer than this:

You can make the case that the current down cycle is nowhere near as bad as 2008, especially into 2009, but that is an exceedingly low standard. We have been promised repeatedly and assuredly that there would be a recovery, even to the point of having to withstand four separate, immense QE paroxysms. To what gain? To what loss? If it was only Target and the rest of the retail industry was doing fine, then you can dismiss these results (actual dollars spent as they are, in contrast to sentiment surveys) as Target’s individual missteps. But Wal-Mart has shown the same exact pattern, though actually faring far worse in terms of its 2008 comparisons. Wal-Mart and Target are #1 and #3 in terms of size.

That suggests that consumers were downgrading their shopping impulses in 2008 from more expensive outfits to bare bones essentials. In other words, the Great Recession almost benefitted Wal-Mart by shifting the whole retail scale toward “cheap.” Now, in 2013 and 2014, they can’t even get away with that. It’s almost as if the country and economic system have grown far poorer throughout this “recovery.”

And since Staples also reported, I might as well throw them in here too. One more large retailer (this one with a propensity to serve small and medium businesses) showing exactly the same slowdown/pattern since 2012.

• How The Fed Is Driving The Next Bust (David Stockman)

The latest iteration of the Fed’s meeting minutes is surreal. Its another economic weather report consisting of trivial, random observations about the quarter just ended that are as superficial as CNBC sound bites. Along with that prattle comes guesses and hopes about the next 30-90 days—including the expectation that the weather will “seasonally normalize” and that auto production schedules, for instance, which were down in March, will stabilize at that level “in the months ahead”. Likewise, after noting that consumption spending moved “roughly sideways” during January and February, it detected that “recent information on factors that influence household spending were positive”—-a guess that turned out to be wrong based on data we already know from April retail sales.

The data on new and existing home sales had indicated the continuation of a 5-month trend of sharp drops from prior year, but the minutes could muster only an on-the-one-hand-and-on-the-other-hand whitewash, accented with hopeful indicators on single-family permits and pending home sales. Business investment was treated the same way—that is, it was down in the first quarter but “modest gains” are expected soon based on sentiment surveys. And as you read further the noise just keeps getting more foolish, including the hope that the negative net export performance in Q1 would be off-set by improving global developments. That fond hope included this doozy: “In Japan, industrial production rose robustly, and consumer demand was boosted by anticipation of the April increase in the consumption tax.”

That particular phrase actually translates into big speed bumps ahead, but that’s beside the point. What this item and all of the rest of the commentary amounts to is bus driver chatter about road conditions at the moment. Stated differently, the monetary politburo does indeed believe that it can steer our $17 trillion economy on a month-to-month basis, and attempts to do so with primitive “in-coming” data from the Washington statistical mills that is so tentative, imputed, guesstimated, seasonally maladjusted and subsequently revised as to be no better than anecdotal sound bites.

Worse still, it pretends to be executing its monetary central planning model without any of the “gosplan” tools that would really be needed to drive the thousands of variables and millions of actors which comprise an open $17 trillion economy that is deeply intertwined in the trade, capital and financial flows of the world’s $75 trillion GDP. Alas, its one size fits all control panel includes only interest rate pegging, risk asset propping and periodic open mouth blabbing by Fed heads. But these are no longer efficacious tools for driving the real Main Street economy because to boost the latter above its natural capitalist path of productivity and labor hours based growth requires artificial credit expansion—that is, a persistent leveraging up of balance sheets so that credit bloated spending rises faster than production and income.

As should be evident after six continuous years of frantic money pumping that old secret sauce doesn’t work any more because the American economy has reached a condition of peak debt. During the Keynesian heyday between 1970 and 2007 the nation’s total leverage ratio—that is, total public and private credit market debt relative to national income—soared right off the historic charts, rising from a 100-year ratio of +/- 150% of national income to a 350% leverage ratio by 2007. Since the financial crisis, the components of national leverage have been shuffled from the household sector to the public sector, but the ratio has remained dead in the water at 3.5X. That means that contrary to all the ballyhoo about deleveraging, it has not happened in the aggregate, but where it has happened at the sector level actually proves that the Fed’s credit transmission channel is over and done.

Total non-financial business debt has risen from $11 trillion to $13.6 trillion since the financial crisis, but virtually all of that gain has gone into shrinkage of business equity capital—that is, LBOs, stock buybacks and cash M&A deals which levitate the price of shares in the secondary market, but do not fund productive assets and the wherewithal of future growth. In fact, as of Q1 business investment in plant and equipment was still nearly $70 billion or 5% below its late 2007 peak. In the case of the household sector, the 40-year sprint into higher and higher leverage ratios has reversed and is now significantly below its peak at 220% of wage and salary income in 2007. At 180% today household leverage is off the mountain top—but it is still far above historically healthy levels, especially for an economy with rapidly aging demographics and soaring ratios of dependency on government benefits that requires tax extraction from debt-burdened households or debt levies on unborn taxpayers.

Household Leverage Ratio - Click to enlarge

So the traditional credit expansion channel of Fed policy is busted, but the monetary politburo is like an old dog that is incapable of learning new tricks. It plans to keep money market rates are zero for seven years running through 2015 on the misbegotten notion that it can restart America’s unfortunate 40-year climb into the nosebleed section of the debt stadium. That isn’t happening, of course, but the $3.5 trillion of new liquidity that it has poured through the coffers of the primary bonds dealers since September 2008 has not functioned like the proverbial tree falling in an empty forest. Just the opposite. It has been a roaring siren on Wall Street—guaranteeing free short-term money to fund the carry trades, while providing a transparent “put” under the price of debt and risk assets. In short, it has fueled the Wall Street gambling channel like never before in recorded history.

Do the Fed minutes evince a clue that six years into this frantic money printing cycle that speculation, financial leverage strategies and momentum chasing gamblers are setting up for the next bursting bubble? Well no. Aside from pro forma caveats about possible future financial risks, the minutes claimed that all is well in the casino:

“In their discussion of financial stability, participants generally did not see imbalances that posed significant near-term risks to the financial system or the broader economy….

Perhaps they did not review the two charts that follow. Both are ringing the bell loudly to the effect that we are reaching the same bubble asymptote—or curve that has reached its limit— as was recorded right before the crashes of 2000-2001 and 2007-2008. The margin debt explosion is especially significant because it had reached a higher ratio to GDP (2.73%) than either of the two pervious bubble cycles. Back in the day of William McChesney Martin, the Fed watched margin debt like a hawk because it was comprised of veterans of the 1929 crash. Accordingly, they did not hesitate to take preemptive tightening actions when speculation began to get out of line, such as in the summer of 1958. But this month’s meeting minutes did not even take note of the margin data.

• Fear Strikes Out On Wall Street (Reuters)

Whatever investors are worried about right now, those concerns are not showing up in Wall Street’s fear gauge. That scares some. On the other hand, it more than likely means that stocks will keep taking things slow and steady. The CBOE Volatility Index, or VIX, closed on Friday at 11.36, its lowest level since March 2013. That means investors see less risk ahead, particularly with the S&P 500 ending at a record high again on Friday. With the typically slow summer months just ahead and little on the horizon to shake the market from its current course, investors could be looking at even lower VIX levels, some analysts said. “It’s not that there’s no likelihood of a correction. It’s that people don’t perceive anything to derail the train at this point,” said Andrew Wilkinson, chief market analyst at Interactive Brokers LLC in Greenwich, Connecticut. “So I think people are beginning to wonder: Are we heading back to single-digit volatility?”

The S&P 500’s record high and the drop in the VIX are not the only signs that fear is not a factor on Wall Street. Volume is down as well. S&P 500 E-mini futures volume was below the 1.52 million daily average of the past year on every day this week except Tuesday. The market’s gain has come despite concerns about a slowdown in China and weakness in small-cap names. Typically small-cap stocks lead the market’s advance when the U.S. economy is improving. However, the recent selloff in small-cap stocks, which drove the Russell 2000 index briefly into correction territory last week, seems to have slowed. The Russell gained 2.1% this week, its biggest weekly bounce in more than a month. The index is less than 7% below its record close of 1,208.65 in early March.

At the same time, the Dow Jones Transportation Average hit record territory late Friday, nearly breaking above the 8,000 level. “One of the reasons the VIX is so low, we haven’t really done anything this year. We haven’t moved an awful lot,” said J.J. Kinahan, chief derivatives officer of TD Ameritrade in Chicago. For the year, the S&P 500 has gained just 2.8%. To be sure, some analysts say the lack of volatility suggests a complacency that could encourage excessive risk-taking. New York Federal Reserve Bank President William Dudley and Dallas Fed President Richard Fisher have both expressed such concerns in recent days. “The lower the VIX, the more overbought the market gets, leaving it vulnerable to some kind of setback,” said Donald Selkin, chief market strategist at National Securities in New York.

The most quoted Newsweek story ever ……

• 40-Year-Old “Cooling World” Story Still Haunts Climate Science (P. Gwynne)

“The central fact is that, after three quarters of a century of extraordinarily mild conditions, the Earth seems to be cooling down. Meteorologists disagree about the cause and extent of the cooling trend, as well as over its specific impact on local weather conditions. But they are almost unanimous in the view that the trend will reduce agricultural productivity for the rest of the century.” – Newsweek: April 28, 1975

That’s an excerpt from a story I wrote about climate science that appeared almost 40 years ago. Titled “The Cooling World,” it was remarkably popular; in fact it might be the only decades-old magazine story about science ever carried onto the set of a late-night TV talk show. Now, as the author of that story, after decades of scientific advances, let me say this: while the hypotheses described in that original story seemed right at the time, climate scientists now know that they were seriously incomplete. Our climate is warming — not cooling, as the original story suggested. Nevertheless, certain websites and individuals that dispute, disparage and deny the science that shows that humans are causing the Earth to warm continue to quote my article. Their message: how can we believe climatologists who tell us that the Earth’s atmosphere is warming when their colleagues asserted that it’s actually cooling?

Well, yes, we should trust them, despite the views of detractors such as comedian Dennis Miller, who brought my story to The Tonight Show in 2006. Several atmospheric scientists did indeed believe in global cooling, as I reported in the April 28, 1975 issue of Newsweek. But that was then. In the 39 years since, biotechnology has flowered from a promising academic topic to a major global industry, the first test-tube baby has been born and become a mother herself, cosmologists have learned that the universe is expanding at an accelerating rate rather than slowing down, and particle physicists have detected the Higgs boson, an entity once regarded as only a theoretical concept. Seven presidents have served most of 11 terms. And Newsweek has become a shadow of its former self. And on the climate front? The vast majority of climatologists now assure us that Earth’s atmosphere is not cooling. Rather it’s warming up. And the main responsibility for the phenomenon lies with human activity.

• May 24: Global March Against Monsanto Day (RT)

Over 400 cities worldwide will see millions marching against the US chemical and agricultural company Monsanto in an effort to boycott the use of Genetically Modified Organizms in food production. Marches are planned in 52 countries in addition to some 47 US states that are jointing in the protest. “MAM supports a sustainable food production system. We must act now to stop GMOs and harmful pesticides,” said Tami Monroe Canal, founder of March Against Monsanto (MAM) in a press release ahead of the global event. The movement was formed after the 2012 California Proposition 37 on mandatory labeling of genetically engineered food initiative failed, prompting activists to demand a boycott of the GMO in food production. “Monsanto’s predatory business and corporate agriculture practices threatens their generation’s health, fertility and longevity,” Canal said.

The main aim of the activism is to organize global awareness for the need to protect food supply, local farms and environment. It seeks to promote organic solutions, while “exposing cronyism between big business and the government.” Activists claim that Monsanto spent hundreds of millions of dollars to “obstruct all labeling attempts” while suppressing all “research containing results not in their favor.” Birth defects, organ damage, infant mortality, sterility and increased cancer risks are just some of the side-effects GMO is believed to cause. “That is what the scientists have learned about, that the genetically modified foods will increase allergies that they are going to be less nutritious and that they can possibly or very contain toxins that can make us ill,” Organic Consumers Association’s political director Alexis Baden-Mayer told RT.

GMOs have been partially banned in a number of countries, including Germany, Japan, and Russia but yet in most countries across the globe still feed GMOs to their animals. Citing the US example, Baden-Mayer told RT that “it is hard to distinguish the company Monsanto from the players in the US government.” “Most of the genetically modified crops grown in the US, almost all of them end up in factory farms, concentrated in animal feeding operations,” stating that US has enough grassland to pasture and raise “100 percent grass-fed beef” and produce even more grass fed beef than is raised on “modified corn and soy.”

Oh, sweet Jesus ….

• Fukushima Daiichi Begins Pumping Groundwater Into Pacific (Guardian)

The operator of the wrecked Fukushima Daiichi nuclear power plant has started pumping groundwater into the Pacific ocean in an attempt to manage the large volume of contaminated water at the site. Tokyo Electric Power (Tepco) said it had released 560 tonnes of groundwater pumped from 12 wells located upstream from the damaged reactors. The water had been temporarily stored in a tank so it could undergo safety checks before being released, the firm added. The buildup of toxic water is the most urgent problem facing workers at the plant, almost two years after the environment ministry said 300 tonnes of contaminated groundwater from Fukushima Daiichi was seeping into the ocean every day. The groundwater, which flows in from hills behind the plant, mixes with contaminated water used to cool melted fuel before ending up in the sea.

Officials concede that decommissioning the reactors will be impossible until the water issue has been resolved. The bypass system intercepts clean groundwater as it flows downhill toward the sea and reroutes it around the plant. It is expected to reduce the amount of water flowing into the reactor basements by up to 100 tonnes a day – a quarter – and relieve pressure on the storage tanks, which will soon reach their capacity. But the system does not include the coolant water that becomes dangerously contaminated after it is pumped into the basements of three reactors that suffered meltdown after the plant was struck by an earthquake and tsunami in March 2011.

That water will continue to be stored in more than 1,000 tanks at the site, while officials debate how to safely dispose of it. The problem has been compounded by frequent technical glitches afflicting the plant’s water purification system. Tepco and the government are also preparing to build an underground frozen wall around four reactors to block groundwater, although some experts doubt the technology will work on such a large scale. The utility is also building more tanks to increase storage capacity. Dale Klein, a senior adviser to Tepco, recently warned the firm that it may have no choice but to eventually dump contaminated water into the Pacific.

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