Feb 102016
 
 February 10, 2016  Posted by at 10:20 am Finance Tagged with: , , , , , , , , , ,  14 Responses »


Arthur Rothstein Scene along Bathgate Avenue in the Bronx 1936

Europe’s Dead Cats Bounce, Deutsche Up 10% (BBG)
Surging Credit Risk for Banks a Major Issue in European Markets (WSJ)
Banks Eye More Cost Cuts Amid Global Growth Concerns (Reuters)
Europe Banks May Face $27 Billion Energy-Loan Losses (BBG)
European Banks: Oil, Commodity Exposure As High As 160% Of Tangible Book (ZH)
Europe’s ‘Doom-Loop’ Returns As Credit Markets Seize Up (AEP)
Options Bears Circle Nasdaq (BBG)
Deutsche Bank’s Big Unknowns (BBG)
The Market Isn’t Buying That Deutsche Bank Is ‘Rock Solid’ (Coppola)
Deutsche Considers Multibillion Bond Buyback (FT)
Distillates Demand Signals US Recession Is Imminent (BI)
US Oil Drillers Must Slash Another $24 Billion This Year (BBG)
Five Reasons Behind US Bank Stocks Selloff (FT)
10-Year Japanese Government Bond Yield Falls Below Zero (FT)
EU Probes Suspected Rigging Of $1.5 Trillion Debt Market (FT)
Italy, A Ponzi Scheme Of Gargantuan Proportions (Tenebrarum)
Maersk Profit Plunges as Oil, Container Units Both Suffer (BBG)
Australia Admits Recent Stellar Job Numbers Were Cooked (ZH)
Pentagon Fires First Shot In New Arms Race (Guardian)
NATO Weighs Mission to Monitor Mediterranean Refugee Flow (BBG)
Border Fences Will Not Stop Refugees, Migrants Heading To Europe (Reuters)

Brimming with confidence. Deutsche buying back its debt at this point in the game screams EXIT.

Europe’s Dead Cats Bounce, Deutsche Up 10% (BBG)

European stocks rebounded from their lowest level since October 2013 as investors assessed valuations following seven days of declines. A measure of lenders posted the best performance of the 19 industry groups on the Stoxx Europe 600 Index, with Deutsche Bank rising 10% as a person familiar with the matter said the German bank is considering buying back some of its debt. Commerzbank climbed 6%. Greece’s Eurobank Ergasias recovered 11% after falling to its lowest since at least 1999 on Tuesday, and Italy’s UniCredit SpA gained 10%. The Stoxx 600 advanced 1.6% to 314.39 at 9:27 a.m. in London, moving out of so-called “oversold” territory.

Global equities have been battered in 2016 in volatile trading amid investor concern over oil prices, earnings, the strength of the U.S. and Chinese economies, as well as the creditworthiness of European banks. The Stoxx 600 now trades at 13.9 times estimated earnings, about 20% below its April 2015 peak. A gauge tracking stock swings has jumped 47% this year. “When it feels this bad, it’s usually a good buying opportunity,” said Kevin Lilley at Old Mutual Global Investors in London. “But we’ve just been through a huge crisis of confidence and I think a long-term rebound is still very dependent on central-bank policy and global macro data. You’re fighting negative newsflow with very low valuations at the moment, and that’s the trade off.”

Read more …

Not just in Europe either.

Surging Credit Risk for Banks a Major Issue in European Markets (WSJ)

If there’s one thing on the mind of analysts and investors in Europe right now, it’s credit risk. The recent selloff in equities has sparked questions over whether a similar bearishness on credit is justified, particularly among European banks that have been slammed in stock markets over the last month. The iTraxx Senior Financials index tracks the cost of credit default swaps, which protect the investors buying them against a company’s default, for major financial institutions in Europe. More credit risk means pricier CDS, and the cost of European bank CDS has taken off. The index is still far from the extremely elevated levels reached in 2012, during the dismal days of the euro crisis.

Some of the latest analysts to weigh in on the subject come from Bank of America Merrill Lynch. In a research note out on Monday titled “the tide has turned,” analysts Ioannis Angelakis, Barnaby Martin and Souheir Asba argue that risk is becoming more systematic. The authors go on: “Risks are not contained any more within the EM/oil related names. Global growth outlook fears and risks of quantitative failure have led to weakness into cyclical names. Add also the recent sell-off in financials and you have the perfect recipe for a market sell-off that looks and feels systemic.” Within the last week we’ve spoken to analysts and investors that disagreed, suggesting that European bank credit was quite secure. Either way, it’s clear that the worries about credit risks have become heightened. How far the threat to balance sheets now goes is one of the biggest questions in European markets right now.

Read more …

The more you try to look confident, the less you do.

Banks Eye More Cost Cuts Amid Global Growth Concerns (Reuters)

Goldman Sachs and other U.S. banks are looking at ways to slash expenses further this year as market turmoil, declining oil prices and concerns about Germany’s Deutsche Bank have sent the sector’s shares down sharply. “We can absolutely do a lot more on the cost side if we have to, especially now, when you have to deliver a return,” Goldman Chief Executive Officer Lloyd Blankfein said on Tuesday at the Credit Suisse financial services forum in Miami. “We take a particular and energetic look at continued cost cuts when revenues are stalled,” he said. ” … Necessity is the mother of invention.” U.S. Bancorp CFO Kathy Rogers echoed Blankfein’s comments at a separate panel, saying her bank would continue cutting costs this year. She cited a smaller chance that interest rates would rise, which would have indicated a stronger economy and more revenue for the bank.

As executives were speaking at the conference, Deutsche Bank shares hit a record low, following their 9.5% plunge on Monday. Although the bank has said it has sufficient reserves, investors have worried that it will not be able to repay some bonds that are coming due. The bonds, called AT1 securities, convert into equity in times of market stress. Deutsche Bank’s woes reflect broader concerns about the health and profitability of euro zone banks. Last week, for instance, Sanford Bernstein analyst Chirantan Barua said Barclays should spin off its investment bank in an effort to revive its core UK retail and commercial business. Major Wall Street banks have also had a brutal start to 2016, with the KBW Nasdaq Bank index down nearly 20% on concerns about profitability.

Since demand for U.S. bank shares began to weaken in late November, the sector’s top five stocks have lost 20% of their market capitalization, or around $120 billion. Almost 70% of the banks deemed globally significant are trading below their tangible book values, or what they would be worth if liquidated. Analysts say if this continues, banks may have to restructure more drastically to cut costs. Investors said bank executives would need to look at other ways to boost profitability now that hopes for further interest rates hikes have faded. “They’re going to have to come up with other levers to pull, whether it is investing in technology or reducing headcount,” said John Fox at Feinmore Asset Management, which invests in financials. “There will be more pressure on expenses because of the interest rate environment.”

Read more …

Bloomberg lowballing.

Europe Banks May Face $27 Billion Energy-Loan Losses (BBG)

European banks face potential loan losses from energy firms of $27 billion, or about 6% of their pretax profit over three years, according to analysts at Bank of America. “We believe European banks with large exposures to energy and commodities lending will be increasingly challenged over these positions by shareholders,” analysts Alastair Ryan and Michael Helsby wrote in a note to clients on Tuesday. “While long-term oil- and metal-price forecasts are well above current levels, we expect the equity market to continue to stress exposures to current market prices and deduct potential losses from the earnings multiple of the banks.”

The $27 billion estimate is “potentially a smaller figure than is implied in the share prices of a number of banks,” and lenders’ potential losses aren’t a threat to the capitalization of the banking system or its ability to provide credit to the economy, they wrote. European banks are getting walloped by the global market rout and plunge in global oil prices while struggling to bolster their capital buffers amid record low interest rates in the euro zone. The 46-member Stoxx Europe 600 Banks Index has lost about 27% this year, outpacing the 15% drop by the wider Stoxx 600.

Read more …

Tyler Durden doesn’t lowball.

European Banks: Oil, Commodity Exposure As High As 160% Of Tangible Book (ZH)

[..] Morgan Stanley writes, “Europeans have not typically disclosed reserve levels against energy exposure, making comparison to US banks challenging. Moreover, quality of books can vary meaningfully. For example, we note that Wells Fargo has raised reserves against its US$17 billion substantially non-investment grade book, while BNP and Cred Ag have indicated a significant skew (75% and 90%, respectively) to IG within energy books. Equally we note that US mid-cap banks typically have a greater skew to higher-risk support services (~20-25%) compared to Europeans (~5-10%) and to E&P/upstream (~65% versus Europeans ~10-20%).” Morgan Stanley then proceeds to make some assumptions about how rising reserves would impact European bank income statements as reserve builds flow through the P&L: in some cases the hit to EPS would be .

A ~2% reserve build in 2016 would impact EPS by 6-27%, we estimate:We believe noticeable differences exist between US and EU banks’ portfolios in terms of seniority and type of exposure. As such, applying the assumption of a ~2% further build in energy reserves in 2016, versus ~4% assumed for large US banks, we estimate that EPS would decline by 6-27% for European-exposed names (ex-UBS), with Standard Chartered, Barclays, Credit Agricole, Natixis and DNB most exposed. [..] But the biggest apparent threat for European banks, at least according to MS calulcations, is the following: while in the US even a modest 2% reserve on loans equates to just 10% of Tangible Book value…

… in Europe a long overdue reserve build of 3-10% for the most exposed banks, would immediately soak up anywhere between 60 and a whopping 160% of tangible book!

Which means just one thing: as oil stays “lower for longer”, and as many more European banks are forced to first reserve and then charge off their existing oil and gas exposure, expect much more diluation. Which, incidentlaly also explains why European bank stocks have been plunging since the beginning of the year as existing equity investors dump ahead of inevitable capital raises. And while that answers some of the “gross exposure to oil and commodities” question, another outstanding question is what is the net exposure to China. As a reminder, this is what Deutsche Bank’s credit analyst Dominic Konstam said in his explicit defense of what needs to be done to stop the European bloodletting:

The exposure issue has been downplayed but make no mistake banks are heavily exposed to Asia/MidEast and while 10% writedown might be worst case for China but too high for the whole, it is what investors shd and do worry about — whole wd include the contagion to banking hubs in Sing/HKong

Ironically, it is Deutsche Bank that has been hit the hardest as the full exposure answer, either at the German bank or elsewhere, remains elusive; it is also what has cost European banks billions (and counting) in market cap in just the past 6 weeks.

Read more …

“..Liquidity is totally drained and it is very difficult to exit trades. You can’t find a buyer..”

Europe’s ‘Doom-Loop’ Returns As Credit Markets Seize Up (AEP)

Credit stress in the European banking system has suddenly turned virulent and begun spreading to Italian, Spanish and Portuguese government debt, reviving fears of the sovereign “doom-loop” that ravaged the region four years ago. “People are scared. This is very close to a potentially self-fulfilling credit crisis,” said Antonio Guglielmi, head of European banking research at Italy’s Mediobanca. “We have a major dislocation in the credit markets. Liquidity is totally drained and it is very difficult to exit trades. You can’t find a buyer,” he said. The perverse result is that investors are “shorting” the equity of bank stocks in order to hedge their positions, making matters worse. Marc Ostwald, a credit expert at ADM, said the ominous new development is that bank stress has suddenly begun to drive up yields in the former crisis states of southern Europe.

“The doom-loop is rearing its ugly head again,” he said, referring to the vicious cycle in 2011 and 2012 when eurozone banks and states engulfed in each other in a destructive vortex. It comes just as sovereign wealth funds from the commodity bloc and emerging markets are forced to liquidate foreign assets on a grand scale, either to defend their currencies or to cover spending crises at home. Mr Ostwald said the Bank of Japan’s failure to gain any traction by cutting interest rates below zero last month was the trigger for the latest crisis, undermining faith in the magic of global central banks. “That was unquestionably the straw that broke the camel’s back. It has created havoc,” he said. Yield spreads on Italian and Spanish 10-year bonds have jumped to almost 150 basis points over German Bunds, up from 90 last year.

Portuguese spreads have surged to 235 as the country’s Left-wing government clashes with Brussels on austerity policies. While these levels are low by crisis standards, they are rising even though the ECB is buying the debt of these countries in large volumes under quantitative easing. The yield spike is a foretaste of what could happen if and when the ECB ever steps back. Mr Guglielmi said a key cause of the latest credit seizure is the imposition of a tough new “bail-in” regime for eurozone bank bonds without the crucial elements of an EMU banking union needed make it viable. “The markets are taking their revenge. They have been over-regulated and now are demanding a sacrificial lamb from the politicians,” he said.

Mr Guglielmi said there is a gnawing fear among global investors that these draconian “bail-ins” may be crystallised as European banks grapple with €1 trillion of non-performing loans. Declared bad debts make up 6.4pc of total loans, compared with 3pc in the US and 2.8pc in the UK.

Read more …

Pop some more.

Options Bears Circle Nasdaq (BBG)

Options traders are betting the pain is far from over in the Nasdaq 100 Index. Unconvinced a two-day decline of 5% found the bottom, they’re loading up on protection in the technology-heavy index, pushing the cost of options on a Nasdaq 100 exchange-traded fund to the highest in almost two years versus the Standard & Poor’s 500 Index, data compiled by Bloomberg show. It’s the latest exodus from risk in the U.S. equity market, with selling that started in energy shares spreading to everything from health-care to banks. Technology companies, which until recently had been spared because of their low debt burden and rising earnings, joined the rout as investors focus on elevated valuations among the industry’s biggest stocks.

“Exuberance has turned to panic pretty quickly,” said Stephen Solaka at Belmont Capital. “Technology stocks have had quite a run, and now they’re seeing momentum the other way.” The S&P 500 slipped less than 0.1% to 1,852.21 at 4 p.m. in New York, extending its three-day decline to 3.3%. The Nasdaq 100 lost 0.3%. Options are signaling more trouble ahead just as professional speculators dump bullish wagers on the group. Hedge funds and large speculators have pared back their long positions on the Nasdaq 100 for a fourth week out of five, data from the Commodity Futures Trading Commission show. Investors were dealt a blow on Friday when disappointing results from LinkedIn and Tableau sent both companies down more than 40%.

The selloff has been heaviest in a handful of momentum stocks that boosted returns in the Nasdaq 100 last year, sending the gauge’s valuation to a one-year high versus the S&P 500’s in December. Since then, the Nasdaq multiple has tumbled faster than the S&P 500’s, dropping 20% versus 13%, as stocks from Amazon to Netflix faced scrutiny from investors amid broader economic concerns. Even after a 16% plunge from a record in November, Nasdaq 100 companies still trade at 16.3 times projected profits, higher than the S&P 500’s 15.4 ratio. Scott Minerd at Guggenheim Partners said in an interview that technology stocks will tumble even further this year as investors flee to safety and buyers stay on the sidelines.

Read more …

Tick. Tock.

Deutsche Bank’s Big Unknowns (BBG)

Regulation is forcing banks to retrench from some previously lucrative businesses. Lacklustre economic growth and low interest rates are stymieing profit growth in other areas. Concerns about China’s economy and the energy industry are rippling through markets, reducing activity among bank clients.There are specific concerns about Deutsche Bank. Cryan is trying to reshape the business while facing these ominous economic and market headwinds. There’s still a slew of litigation costs to be settled. And he’s trying to offload parts of the bank that don’t fit any more, including Postbank, the domestic German retail unit. The announced full-year net loss of €6.8 billion darkened the mood.

The bank’s shares now trade at about 35% of the tangible book value of the bank’s assets, partly because equity investors can’t get a clear handle on what lies ahead. In the credit market, concerns were fueled Monday by a note from CreditSights analyst Simon Adamson that spelled out “a base case” for Deutsche Bank to pay AT1 coupons this year and next year. But there is a caveat – a bigger than expected loss this financial year, because of a major fine or other litigation cost, could wipe out the bank’s capacity to pay. In other words, what happens if a big unknown strikes? Deutsche Bank, for its part, made the case that it has more than enough capacity for the 2016 payment due in April – 1 billion euros of capacity compared with coupons of about €350 million.

The bank says it estimates it has €4.3 billion of capacity for the April 2017 payment, partly driven by the proceeds from selling its stake in a Chinese lender. That sale is still pending regulatory approval but should go through in coming months. So, Deutsche Bank ought to have enough to make its payments and will be desperate to do so. Can pay, will pay. Unless, the bank is hit with a big shock, like a major, unforeseen litigation cost. Nervous investors await further communication.

Read more …

“I have said before that Deutsche Bank should be broken up. Now is the time to do it.”

The Market Isn’t Buying That Deutsche Bank Is ‘Rock Solid’ (Coppola)

This has been a terrible day for Deutsche Bank. The stock price has collapsed, and shares are now trading lower than they were in the dark days of 2008 after the fall of Lehman. Yields on CoCos and CDS are spiking too. Despite a reassuring statement from the German Finance Minister that he had “no concerns” about Deutsche Bank, markets are clearly worried that Deutsche Bank may be in serious trouble. And when “serious trouble” means that shareholders, subordinated debt holders and even senior unsecured bondholders could lose part or all of their investment, because of the bail-in rules under the EU’s Bank Recovery and Resolution Directive (BRRD), it is hardly surprising that investors are running for the hills. Even if Deutsche Bank were not in trouble before, it is now.

Unsurprisingly, the CEO, John Cryan, is upbeat about it. Today he issued a statement to staff advising them how to address the concerns of clients:

Volatility in the fourth quarter impacted the earnings of most major banks, especially those in Europe, and clients may ask you about how the market-wide volatility is impacting Deutsche Bank. You can tell them that Deutsche Bank remains absolutely rock-solid, given our strong capital and risk position. On Monday, we took advantage of this strength to reassure the market of our capacity and commitment to pay coupons to investors who hold our Additional Tier 1 capital. This type of instrument has been the subject of recent market concern. The market also expressed some concern about the adequacy of our legal provisions but I don’t share that concern. We will almost certainly have to add to our legal provisions this year but this is already accounted for in our financial plan.

I reviewed Deutsche Bank’s financial position as stated in their interim results last week. My findings do not support John Cryan’s statement that the bank is “rock solid”. Its capital and leverage ratios were not particularly strong by current standards, and have deteriorated since the full-year results. More worryingly, I found evidence that profits in two of the four divisions were only achieved by risking-up: the other two divisions were loss-making. Risking-up to generate profits would, if sustained over the medium-term, require substantially more capital than Deutsche Bank currently has. For two divisions of a bank that is currently delivering NEGATIVE return on equity to adopt strategies which would in due course require more capital does not appear remotely sensible.

Though I suppose actually admitting that the bank cannot generate anything like a reasonable return for shareholders without taking significantly more risk would be even worse. I also share the market’s concern about lack of legal provisions. A large part of the write-off of 5.2bn Euros due to litigation costs and fines in the interim results arose from cases already settled, particularly the record multi-jurisdictional fine for benchmark rate rigging in April 2015, though it also includes the 1.3bn Euros increase in provisions announced in October 2015 to cover charges potentially arising from the investigation of Deutsche Bank’s Russian operation for money laundering. But since these provisions seem light for what is a serious offense, and Deutsche Bank faces other potentially very expensive regulatory investigations and legal cases, I do not consider this write-off adequate.

Read more …

They’re so f**ked. Biggest bank, biggest derivatives portfolio. Run for the hills. When you even need your finance minister to do a reassurance call, you know you’re cooked.

Deutsche Considers Multibillion Bond Buyback (FT)

Deutsche Bank is considering buying back several billion euros of its debt, as Germany’s biggest bank steps up efforts to shore up the tumbling value of its securities against the backdrop of a broader rout of financial stocks. After European banks suffered a second consecutive day of sharp falls, Deutsche Bank is expected to focus its emergency buyback plan on senior bonds, of which it has about €50bn in issue, according to the bank. The move was unlikely to involve so-called contingent convertible bonds which, along with the bank’s shares, have been the butt of a brutal investor sell-off in recent days, people briefed on the plan said. The news came as Germany’s finance minister Wolfgang Schäuble and Deutsche CEO John Cryan both sought to assuage market fears.

Mr Schäuble said he had “no concerns” about the bank, while Mr Cryan insisted Deutsche’s position was “absolutely rock-solid”. The bank’s shares still fell 4%, taking the decline since the start of the year to 40%. Other European banks fared even worse on Tuesday, with Credit Suisse falling 8% and UniCredit 7%, as investor nervousness intensified over the relative weakness of European bank capital and earnings amid broader market turmoil. US banks, which have been hit hard in recent weeks, too, were only marginally weaker at lunchtime on Tuesday. Investors have also been rattled by the prospect of negative interest rates spreading across the developed world.

On Tuesday Japan became the first major economy with a sub-zero borrowing rate for 10-year debt as the total of government bonds trading with negative yields climbed to a new peak of $6tn. Concern about the solidity of bank debt — principally European bank cocos, which can suspend coupons and may convert into equity in a crisis — has prompted an investor dash to buy protection. A popular credit derivatives index that tracks the likelihood of default of investment-grade debt of European companies and banks was trading at 119 basis points on Tuesday, near its highest level since June 2013. Broader investor concerns about the health of the financial sector have coincided with more specific questions about Deutsche’s nascent restructuring programme.

Read more …

Ouch. Peddling fiction, sir?

Distillates Demand Signals US Recession Is Imminent (BI)

The US economy is flashing warning signs, particularly the industrial and manufacturing sectors. Demand for oil, and particularly so-called distillates – which are refined oil products such as jet fuels and heating oils – is crashing. Here’s the Barclays commodities team on the indicator:

January US demand for the four main refined products came in at -568k b/d (-3.9% y/y), compared with January 2015. Distillates were the weakest sector, down 18% y/y. Whether or not the data itself point to much weaker underlying growth in the US economy is still open to question, but not much. As illustrated in Figure 4, the scale of the decline in distillates demand in January has only ever been seen before during full-blown US recessions.

And here’s that chart:

Barclays does cite some mitigating factors, such as unusually warm winter weather and the fact this is based on preliminary data that may get revised upward later on. But it doesn’t look great.

Read more …

And counting.

US Oil Drillers Must Slash Another $24 Billion This Year (BBG)

North American oil and natural gas drillers will need to cut an additional 30% from their capital budgets to balance their spending with the cash coming in their doors even if crude rises to $40 a barrel, according to an analysis by IHS Inc. A group of 44 North American exploration and production companies are planning to spend $78 billion on capital projects this year, down from $101 billion last year. Those companies need to cut another $24 billion this year to get their spending in line with a historical 130% ratio of spending to cash flow, IHS said Monday.

“These spending cuts will be particularly troublesome for the highly leveraged companies,” said Paul O’Donnell at IHS Energy. “These E&Ps are torn between slashing spending further to avoid additional weakening of their balance sheets, and the need to maintain sufficient production and cash flow to meet financial obligations.” The analysis is based on IHS’s low-case price scenario of $40-a-barrel oil and $2.50-per-million-cubic-feet natural gas prices. IHS cited Concho Resources, Whiting Petroleum, WPX Energy, and PDC Energy. as examples of companies displaying the best spending discipline.

Read more …

“..“There is not any kind of imaginary line where you can say, ‘OK this has gone down enough,’ and it’s now a recovery play or a turnround play. They just go down more, until they are done going down..”

Five Reasons Behind US Bank Stocks Selloff (FT)

US bank stocks have suffered a brutal start to 2016. Out of the 90 stocks on the S&P financials index, just eight were in positive territory for the year at mid-morning on Tuesday. Two of the biggest losers, Bank of America and Morgan Stanley, are down 27% and 28% respectively. Citigroup, also down 27%, is now trading at just 6.5 times earnings, not far off its post-crisis trough of 5.9 times, reached during the depths of the European debt crisis five years ago.

• Collapsing expectations of US interest rate rises Analysts offer a lot of different reasons for the big sell-off, but on this they agree. “Lift-off” in December was supposed to usher in an era of higher interest rates — which are always good news for the banks. In previous rate-raising cycles, assets have always re-priced faster than liabilities, earning banks a bigger spread between the yields on their loans and the cost of their funds. But worsening data since then from big economies, notably China, has investors worried that the world economy is a lot sicker than they had assumed. Expectations of another three rate rises from the Fed this year have collapsed in a matter of weeks. Talk of a rate cut, or even a move to negative rates, is entering the picture.

• Worsening credit quality In itself, a lower oil price will not do much direct damage to the big banks’ balance sheets, say analysts. Total energy exposures amount to less than 3% of gross loans at the big banks, which have mostly investment-grade assets, and which have already pumped up reserves. Perhaps more worrying are the second-round effects: if weakness in oil-dependent communities begins to spill into commercial real estate loan books, say, or if consumers find they cannot afford repayments on loans for their new gas-guzzling cars. In an environment of precious little growth — the big six US banks produced exactly the same amount of revenue last year as they did in 2014 — rising credit costs are likely to lead to lower profits.

• Deutsche Bank Every sell-off needs a point of focus and in recent days it has been Deutsche Bank. The contortions of the Frankfurt-based lender weighed on the entire banking sector on Monday, as it fought to dispel fears that it could not pay a coupon on a bond. “I think maybe counterparty risk is emerging,” says Shannon Stemm at Edward Jones in St Louis. “At the root, are some of these [European] banks as well capitalised as the US banks? Probably not. Can they continue to build capital in an environment where there is not a lot of revenue growth, and a lot of expenses have already been taken out of the business?”

• Banks are banks These are confidence stocks. When markets are doing well, banks tend to do well, as companies feel better about doing deals and raising money, investors put on a lot of trades, and asset management arms benefit from big inflows. But when confidence disappears, banks tend to bear the brunt of the sell-off. Matt O’Connor at Deutsche Bank notes that in 15 corrections going back to 1983, the US banks sector has been hit roughly twice as hard as the rest of the market — regional banks about 1.8 times worse, and capital markets-focused banks about 2.3 times worse. “At the end of the day when markets get scared, banks go down more, that is just what happens,” he says. “There is not any kind of imaginary line where you can say, ‘OK this has gone down enough,’ and it’s now a recovery play or a turnround play. They just go down more, until they are done going down or markets feel better about macro conditions.”

• Bank stocks were not cheap before the slide At the peak last July, the S&P 500 was trading about 20% above historical levels, and bank stocks were up to 25% higher than their historical averages, based on multiples of estimated earnings.* But none of these reasons is providing much comfort to investors at the moment. At Edward Jones, Ms Stemm is recommending clients ride out the turmoil by switching big global universal banks for steadier, US-focused lenders such as Wells Fargo and US Bancorp. “If there are global macro concerns, if recession concerns really are on the table, investors would rather get out than wait to see what happens,” she says.

Read more …

Japan is getting cooked. Fried. Roasted. Torched.

10-Year Japanese Government Bond Yield Falls Below Zero (FT)

The universe of government bonds trading with negative yields climbed to a new peak of $6tn on Tuesday as Japan became the first major economy with a sub-zero borrowing rate for 10-year debt. Benchmark bonds issued by the world’s third-largest economy dropped to a yield of minus 0.05%, as investors sought shelter from market convulsions triggered by sliding oil prices, concern for the health of the global economy and mounting fears over parts of the financial system. Japan’s recent decision to introduce a charge on new reserves parked with the central bank has rippled out across global government bond markets as investors expect central banks in Europe to push their overnight borrowing rates further into negative territory. That has spurred strong buying of positive yielding government debt across the eurozone, US and UK markets, while also bolstering other havens such as gold and the yen.

“The bear market in risk assets is evolving very quickly,” said Andrew Milligan at Standard Life. “A month ago the focus was China, then oil, then the prospect of US recession, now it is European financial companies.” The move comes just 11 days after the Bank of Japan’s surprise decision to follow in the footsteps of Switzerland, Denmark, Sweden and the eurozone by adopting negative interest rates, raising fresh concern about the side-effects of ultra-loose monetary policy by central banks. The growing trend of negative yields within the $23tn universe of developed world government debt tracked by JP Morgan has also sapped sentiment for financial shares and bonds, intensifying the demand for havens, as investors reassess their holdings of equities and corporate bonds. David Tan at JPMorgan said negative interest rates were being viewed as negative for bank earnings.

“The principal driver of negative JGB yields was the Bank of Japan’s deposit rate cut to -10bp, and the market now expects additional cuts during this year starting from as soon as the next Bank of Japan meeting,” he said. “This has contributed to a sell-off in banking stocks and a renewed flight to safety into government bonds.” Leading the slide among financials has been Deutsche Bank, with investors worried that it may have trouble repaying its debts. David Ader, CRT Investment Banking bond strategist, said market skittishness was understandable, if not expected. “The European banking system clearly remains a meaningful concern and memories of the credit crisis in the sector are still fresh,” he said.

For Japan’s government, the appreciating yen looms as an uncomfortable development. A weak currency is one of the major hallmarks of Prime Minister Shinzo Abe’s economic revival plan, dubbed Abenomics. Investors now suspect Japan Inc’s assumptions of an average rate of Y117.5 against the dollar during 2016 could leave companies missing profit forecasts and force the BoJ and government into fresh action — if more is possible. “If a 20 basis points cut won’t stop the yen rising, what can the Japanese authorities do? That is the question the market is asking,” said Shusuke Yamada at Bank of America. Investors, especially foreign funds that poured into the Japanese stock market during 2013, are increasingly taking the view that the magic of the “Abenomics” growth programme has worn off. Foreigners sold a net Y1.66tn of Japanese equities in January, according to official figures.

Read more …

Why not have another one of these scams?

EU Probes Suspected Rigging Of $1.5 Trillion Debt Market (FT)

European regulators have opened a preliminary cartel investigation into possible manipulation of the $1.5tn government-sponsored bond market, in the latest efforts to root out rigging involving financial traders. The European Commission’s early-stage inquiry comes amid revelations that the US Department of Justice and the UK’s Financial Conduct Authority are also investigating the market. The investigations are part of a campaign by antitrust regulators to root out collusion in financial markets following revelations that groups of traders worked together to manipulate Libor, a key rate that underpins the price of loans around the world. Further allegations followed that traders colluded to rig foreign exchange markets.

The commission’s powerful competition department has sent questionnaires to a number of market participants as part of an early-stage probe into possible manipulation of the price of supranational, subsovereign and agency debt, known as the SSA market. This market covers a diverse range of debt issuers including organisations such as the European Bank for Reconstruction and Development and regional borrowers like Germany’s Länder. A common feature is that the bonds often have a form of implicit or explicit state guarantee. Banks and interdealer brokers have so far been fined around $20bn by authorities around the world in response to the Libor and foreign exchange rate scandals which saw over a dozen leading financial institutions investigated by antitrust authorities.

The findings also led to criminal prosecutions of individual traders, and spurred investigations into other markets such as derivatives trading. The Financial Times reported last month that Crédit Agricole, Nomura and Credit Suisse are among a number of banks being investigated by the DOJ as part of its investigation into possible manipulation of SSA markets. London-based traders at these three banks, in addition to another trader at Bank of America, have been put on leave in response to the DOJ investigations, according to people familiar with the matter. It is understood that the commission’s inquiry started around the same time as the DoJ probe.

The commission’s enquiries concern a possible cartel or “concerted practice” according to the person familiar with the investigation, who did not provide further details. The questionnaires will help Margrethe Vestager, the commission’s competition chief, decide whether there are the grounds to launch a formal probe. Complex cartel cases typically take a minimum of four years to complete and are usually based on evidence from tip-offs provided by whistleblowers. The commission can fine a company involved in a cartel up to 10% of its global turnover.

Read more …

I picked one detail from the longer article on eurozone banks.

Italy, A Ponzi Scheme Of Gargantuan Proportions (Tenebrarum)

Ever since the ECB has begun to implement its assorted money printing programs in recent years – lately culminating in an outright QE program involving government bonds, agency bonds, ABS and covered bonds – bank reserves and the euro area money supply have soared. Bank reserves deposited with the central bank can be seen as equivalent to the cash assets of banks. The greater the proportion of such reserves (plus vault cash) relative to their outstanding deposit liabilities, the more of the outstanding deposit money is in fact represented by “covered” money substitutes as opposed to fiduciary media.


Euro area true money supply (excl. deposits held by non-residents) – the action since 2007-2008 largely reflects the ECB’s money printing efforts, as private banks have barely expanded credit on a euro area-wide basis since then.

Many funny tricks have been employed to keep euro area banks and governments afloat during the sovereign debt crisis. Essentially these consisted of a version of Worldcom propping up Enron, with the central bank’s printing press as a go-between. As an example here is how Italian banks and the Italian government are helping each other in pretending that they are more solvent than they really are: the banks buy government properties (everything from office buildings to military barracks) from the government, and pay for them with government bonds. The government then leases the buildings back from the banks, and the banks turn the properties into asset backed securities. The Italian government then slaps a “guarantee” on these securities, which makes them eligible for repo with the ECB. The banks then repo these ABS with the ECB and take the proceeds to buy more Italian government bonds – and back to step one.

Simply put, this is a Ponzi scheme of gargantuan proportions. Still, in view of these concerted efforts to reliquefy the banking system, one would expect that European banks should be at least temporarily solvent, more or less. Since they have barely expanded credit to the private sector, preferring instead to invest in government bonds, the markets should in theory have little to worry about.

Read more …

Overinvested.

Maersk Profit Plunges as Oil, Container Units Both Suffer (BBG)

A.P. Moeller-Maersk A/S reported an 84% plunge in 2015 profit after its oil unit was hit by lower energy prices and its container division got squeezed between sluggish trade growth and overcapacity. Maersk said net income was $791 million last year compared with $5.02 billion in 2014. The result includes a writedown in the value of Maersk’s oil assets by $2.6 billion, the Copenhagen-based company said. “Given our expectation that the oil price will remain at a low level for a longer period, we have impaired the value of a number of Maersk Oil’s assets,” CEO Nils Smedegaard Andersen said in the statement. “We will continue to strengthen the Group’s position through strong operational performance and growth investments.”

In October, Maersk started cost cut programs for both of its two biggest units to address what analysts have described as a perfect storm for the conglomerate, which historically has found support from positive market conditions for at least one the two divisions. Maersk said Wednesday that 2016’s underlying profit will be “significantly below” last year’s $3.1 billion. The Maersk Line unit’s profit will also be “significantly below” 2015’s level, which was $1.3 billion. Maersk Oil will report a loss this year, it said. The unit currently breaks even when oil prices are in a range of $45 to $55 a barrel, the company said.

Read more …

“..with the Australian economy suddenly desperate for lower rates from the RBA, one can ignore the propaganda lies, and focus once again on the far uglier truth…”

Australia Admits Recent Stellar Job Numbers Were Cooked (ZH)

Two months ago the Australian media, which unlike its US counterpart refuses to be spoon fed ebullient economic propaganda, called bullshit on the spectacular October job numbers, when instead of adding 15,000 jobs as consensus expected, Australia’s Bureau of Statistics reported that a whopping 58,600 jobs had been added. [.] One month later, the situation got even more ridiculous, when instead of the expected 10,000 drop in November, the “statistical” bureau announced that 71,400 jobs had been added, the most in 15 years, and the equivalent of 1 million jobs added in the US. Once again the local media cried foul.

Two months later we find that the media, and all those mocking the government propaganda apparatus, were spot on, because moments ago today, Australia Treasury Secretary John Fraser, during testimony to parliamentary committee, admitted that jobs growth for the two months in question “may be overstated.” What’s the reason? The same one the propaganda bureau always uses when its lies are exposed: “technical issues”, the same explanation the Atlanta Fed used in its explanation for a strangely belated release of its GDP Now estimate one month ago. Here’s Bloomberg with more:

Australia has had some technical issues with its labor data, which “look a little bit better” than would otherwise have been the case, the secretary to the Treasury said, commenting on record employment growth in the final quarter of 2015. John Fraser, the nation’s top economic bureaucrat, told a parliamentary panel in Canberra Wednesday that he held discussions on the employment figures with the chief statistician this week. He didn’t elaborate on the meeting but said the recent strength in the jobs market is encouraging.

There were some “technical issues” in October and November that may have made the employment figures “look a little bit better than otherwise would be the case,” he said. The technical issues relate to “rolling off” of participants in the labor survey. Australia’s economy added 55,000 jobs in October and a further 74,900 in November, before shedding 1,000 in December to produce the record quarterly gain. Questions regarding the accuracy of the data have been raised following acknowledgment by the statistics agency in 2014 of measurement challenges.

Why the sudden admission it was all a lie? Simple: weakness in commodity prices “is far greater than people had been expecting,” Fraser said in earlier remarks to the panel. Australia is now “swimming against the tide” because of uncertainties in the global economy, he added. Translation: “we need more easing, and to do that, the economy has to go from strong to crap.” And with the Australian economy suddenly desperate for lower rates from the RBA, one can ignore the propaganda lies, and focus once again on the far uglier truth.

Which makes us wonder: with the Yellen Fed in desperate need of political cover for relenting on its terrible rate hike strategy, and once again lowering rates to zero or negative, a recession – something JPM hinted at yesterday – will be critical. And what better way to admit the US has been in one for nearly a year than to drastically revise all the exorbitant labor numbers over the past 12 months. You know, for “technical reasons”…

Read more …

The crazies are in charge: “Ash Carter said he would ask for spending on US military forces in Europe to be quadrupled in the light of “Russian aggression”. The allocation for combating Islamic State, in contrast, is to be increased by 50%.”

Pentagon Fires First Shot In New Arms Race (Guardian)

As the voters of New Hampshire braved the snow to play their part in the great pageant of American democracy on Tuesday, the US secretary of defence was setting out his spending requirements for 2017. And while the television cameras may have preferred the miniature dramas at the likes of Dixville Notch, the reorientation of US defence priorities under the outgoing president may turn out to exert the greater influence – and not in a good way, at least for the future of Europe. In a speech in Washington last week, previewing his announcement, Ash Carter said he would ask for spending on US military forces in Europe to be quadrupled in the light of “Russian aggression”. The allocation for combating Islamic State, in contrast, is to be increased by 50%. The message is unambiguous: as viewed from the Pentagon, the threat from Russia has become more alarming, suddenly, even than the menace that is Isis.

If this is Pentagon thinking, then it reverses a trend that has remained remarkably consistent throughout Barack Obama’s presidency. Even before he was elected there was trepidation in some European quarters that he would be the first genuinely post-cold war president – too young to remember the second world war, and more global than Atlanticist in outlook. And so it proved. From his first day in the White House, Obama seemed more interested in almost anywhere than Europe. He began his presidency with an appeal in Cairo addressed to the Muslim world, in an initiative that was frustrated by the Arab spring and its aftermath, but partly rescued by last year’s nuclear agreement with Iran. He had no choice but to address the growing competition from China, and he ended half a century of estrangement from Cuba.

But Europe, he left largely to its own devices. When France and the UK intervened in Libya, the US “led from behind”. Most of the US troops remaining in Europe, it was disclosed last year, were to be withdrawn. Nor was such an approach illogical. Europe was at peace – comparatively, at least. The European Union was chugging along, diverted only briefly (so it might have seemed from the US) by the internal crises of Greece and the euro. Even the unrest in Ukraine, at least in its early stages, was treated by Washington more as a local difficulty than a cold war-style standoff. Day to day policy was handled (fiercely, but to no great effect) by Victoria Nuland at the state department; Sanctions against Russia were agreed and coordinated with the EU. All the while – despite the urging of the Kiev government – Obama kept the conflict at arm’s length.

Congress agitated for weapons to be sent, but Obama wisely resisted. This was not, he thereby implied, America’s fight. In the last months of his presidency, this detachment is ending. The additional funds for Europe’s defence are earmarked for new bases and weapons stores in Poland and the Baltic states. There will be more training for local Nato troops, more state-of-the-art hardware and more manoeuvres. Now it is just possible that the extra spending and the capability it will buy are no more than sops to the “frontline” EU countries in the runup to the Nato summit in Warsaw in July, to be quietly forgotten afterwards. More probably, though, they are for real – and if so the timing could hardly be worse. Ditto the implications for Europe’s future.

By planning to increase spending in this way, the US is sending hostile signals to Russia at the very time when there is less reason to do so than for a long time. It is nearly two years since Russia annexed Crimea and 18 months since the downing of MH17. The fighting in eastern Ukraine has died down; there is no evidence of recent Russian material support for the anti-Kiev rebels, and there is a prospect, at least, that the Minsk-2 agreement could be honoured, with Ukraine (minus Crimea) remaining – albeit uneasily – whole.

Read more …

These people are inventing a entire parallel universe, and nobody says a thing. NATO to patrol the Med on refugee streams? NATO is an aggression force, an army way past its expiration date. It has zero links to refugees. There is no military threat there. Oh, but then we bring in Russia.. “Stoltenberg said naval patrols would fit into “reassurance measures” to shield Turkey from the war in neighboring Syria..” ‘We’ have lost our marbles. ‘We’ are on the war path.

NATO Weighs Mission to Monitor Mediterranean Refugee Flow (BBG)

NATO will weigh calls for a naval mission in the eastern Mediterranean Sea to police refugee streams as a fresh exodus from Syria adds to European leaders’ desperation. Such a mission, proposed by Germany and Turkey, would thrust the 28-nation alliance into the humanitarian trauma aggravated by the Russian-backed offensive by Syrian troops that drove thousands out of Aleppo and toward Turkey. “We will take very seriously a request from Turkey and other allies to look into what NATO can do to help them cope with and deal with the crisis,” NATO Secretary General Jens Stoltenberg told reporters in Brussels on Tuesday. NATO is confronted with Russian intervention in the Middle East – including airspace violations over Turkey, an alliance member – after reinforcing its eastern European defenses in response to the Kremlin’s annexation of Crimea and fomenting rebellion in Ukraine in 2014.

Allied warships now on a counter-terrorism mission in the Mediterranean and anti-piracy patrols off the coast of Somalia could be reassigned to monitor and potentially go after human traffickers in the Aegean Sea between Greece and Turkey. A naval mission, to be discussed Wednesday and Thursday at a meeting of defense ministers in Brussels, is controversial. It could produce unpleasant images of NATO sailors and soldiers herding refugee children behind barbed wire, handing a propaganda victory to Islamic radicals and the alliance’s detractors in the Kremlin. With her political standing in jeopardy as German public opinion turns against her open-arms approach, German Chancellor Angela Merkel went to Ankara on Monday with limited European leverage to persuade Turkey to house more refugees on its soil instead of pointing them toward western Europe.

Stoltenberg said naval patrols would fit into “reassurance measures” to shield Turkey from the war in neighboring Syria that already include Patriot air-defense missiles and air surveillance over Turkish territory and the coast. U.S. Ambassador to NATO Douglas Lute called on European Union governments to take the lead on civilian emergency management, with the alliance confined to offering backup. He said military planners will draw up options. “This is fundamentally an issue that should be addressed a couple miles from here at EU headquarters, but it doesn’t mean NATO can’t assist,” Lute told reporters.

Read more …

I could have spared them the research.

Border Fences Will Not Stop Refugees, Migrants Heading To Europe (Reuters)

Efforts by European countries to deter migrants with border fences, teargas and asset seizures will not stem the flow of people into the continent, and European leaders should make their journeys safer, a think-tank said on Wednesday. The Overseas Development Insitute (ODI) said Europe must act now to reduce migrant deaths in the Mediterranean, where nearly 4,000 people died last year trying to reach Greece and Italy, and more than 400 have died so far this year. European governments could open consular outposts in countries like Turkey and Libya which could grant humanitarian visas to people with a plausible asylum claim, the think-tank said. Allowing people to fly directly to Europe would be safer and cheaper than for them to pay people smugglers, and would help cripple the smuggling networks that feed off the migrant crisis, the London-based ODI said.

More than 1.1 million people fleeing poverty, war and repression in the Middle East, Asia and Africa reached Europe’s shores last year, prompting many European leaders to take steps to put people off traveling. But the ODI said new research showed such attempts either fail to alter people’s thinking or merely divert flows to neighboring states. Researchers interviewed 52 migrants from Syria, Eritrea and Senegal who had recently arrived in Germany, Britain and Spain. Their journeys had cost an average 2,680 pounds ($3,880) each. More than one third had been victims of extortion, and almost half the Eritreans had been kidnapped for ransom during their journey. Researchers said that, contrary to popular perception, many migrants left home without a clear destination in mind. Their experiences along the way and the people they met informed where they would go next.

Information from European governments was unlikely drastically to alter migrants’ behavior, the ODI said. “Our research suggests that while individual EU member states may be able to shift the flow of migration on to their neighbors through deterrent measures such as putting up fences, using teargas and seizing assets, it does little to change the overall number … coming to Europe,” said report co-author Jessica Hagen-Zanker. “As one of the people we interviewed put it ‘When one door shuts, another opens’.”

Read more …

Feb 062016
 
 February 6, 2016  Posted by at 10:00 am Finance Tagged with: , , , , , , , , ,  1 Response »


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

Oil Market Spiral Threatens To Prick Global Debt Bubble, Warns BIS (AEP)
Gundlach Says Financials Below Crisis Prices ‘Frightening’ (BBG)
Global Financial System Risk Is Soaring Worldwide (ZH)
Standard Chartered Down 57%, Returns to 1998 (WSJ)
US Exports Fell In 2015 For First Time Since Recession (AP)
Oil Rout Threatens Vicious Cycle for US Economy (WSJ)
The Chart of Doom: When Private Debt Stops Expanding… (CHS)
Why It Would Be Wise To Prepare For The Next Recession (Wolf)
Citi: World Economy Trapped In ‘Death Spiral’ (CNBC)
Negative-Interest-Rate Effect Already Dead, Central Banks Lost Control (WS)
China’s Reserves Pose The Next Hurdle For Yuan (CNBC)
Europe’s Economic Outlook Darkens, Sends Shudder Through Markets (BBG)
LinkedIn Sheds $11 Billion In Value On Stock’s Worst Day Since Debut (Reuters)
Armed With New US Money, NATO To Strengthen Russia Deterrence (Reuters)
Why Pensions Are The New Flashpoint In Greece’s Crisis (AP)

All growth is being exposed as debt. Don’t know that it’s wise to claim that it’s oil whodunnit.

Oil Market Spiral Threatens To Prick Global Debt Bubble, Warns BIS (AEP)

The global oil industry is caught in a self-feeding downward spiral as falling prices cause producers to boost output even further in a scramble to service $3 trillion of dollar debt, the world’s top watchdog has warned. The Bank for International Settlements fears that a perverse dynamic is at work where energy companies in Brazil, Russia, China and parts of the US shale belt are increasing production in defiance of normal market logic, leading to a bad “feedback-loop” that is sucking the whole sector into a destructive vortex. “Lower prices have not removed excess capacity from the market, but instead may have exacerbated it. Production has been ramped up, rather than curtailed,” said Jaime Caruana, the general manager of the Swiss-based club for central bankers.

The findings raise serious questions about the strategy of Saudi Arabia and the core Opec states as they flood the global crude market to knock out rivals in a cut-throat battle for export share. The process of attrition may take far longer and do more damage than originally supposed. Oil exporters are embracing austerity and slashing government spending, leading to a form of fiscal tightening that is slowing the global economy. Speaking at the London School of Economics, Mr Caruana said the sheer scale of leverage in the oil and gas industry is amplifying the downturn since companies are attempting to eke out extra production to stay afloat. The risk spreads on high-yield energy bonds have jumped from 330 basis points to 1,600 over the past 18 months, amplifying the effects of the oil price crash itself.

The industry has issued $1.4 trillion of bonds and taken out a further $1.6 trillion in syndicated loans, driving up the combined energy debt threefold to $3 trillion in less than a decade. While US shale frackers hog the limelight in the Anglo-Saxon press, many of these energy groups are giant “parastatals”, such as Rosneft, Petrobras or CNOOC. The BIS said state-owned oil companies increased debt at annual rate of 13pc in Russia, 25pc in Brazil and 31pc in China between 2006 and 2014, much it in the form of dollar debt through offshore subsidiaries. These oil companies do not respond to pure market pressures since they are cash cows for government budgets. The nexus of oil and gas debt is just one part of an over-stretched financial system, increasingly exposed to the dangers of a “maturing financial cycle” and to punishing moves in the global currency markets.

Mr Caruana said an “illusion of sustainability” has blinded borrowers and debtors, lulling them into a false of security when credit was easy and asset prices were rising. This illusion can die in the blink of an eye. “The turning of the financial cycle can be quite abrupt,” he said. The BIS calculates that debt in US dollars outside the United States has surged to $9.8 trillion, a fivefold rise since 2000 and an unprecedented level for the global monetary system as a whole. While some of this dollar debt is matched by dollar assets and dollar earnings, a big chunk has been used to play the local property markets of east Asia, Latin America or eastern Europe, and another chunk has been gobbled up by “non-tradable” sectors that have no natural currency hedge if it all goes wrong. [..] The BIS seems to be telling us that reckoning can still be orderly if we face up to reality, or end in a chaotic wave of defaults if we do not. Either way, the debt must clear.

Read more …

All banks.

Gundlach Says Financials Below Crisis Prices ‘Frightening’ (BBG)

DoubleLine Capital’s Jeffrey Gundlach said it’s “frightening” to see major financial stocks trading at prices below their financial crisis levels. He cited Deutsche Bank and Credit Suisse as examples in a talk outlining bearish views at a conference in Beverly Hills, California, on Friday. Both banks fell this week to their lowest levels since the early 1990s in European trading. “We see the price of major financial stocks, particularly in Europe, which are truly frightening,” Gundlach said. “Do you know that Credit Suisse, which is a powerhouse bank, their stock price is lower than it was in the depths of the financial crisis in 2009? Do you know that Deutsche Bank is at a lower price today than it was in 2009 when we were talking about the potential implosion of the entire global banking system?”

The manager of the $54.7 billion DoubleLine Total Return Bond Fund said the dollar is headed lower in 2016 and that he’s buying non-U.S. currencies for the first time in five years. The euro is likely to strengthen against the greenback as the probability that the Federal Reserve will increase borrowing costs at its March meeting is virtually zero, and only 50% for the rest of the year, he told the Tiger 21 conference for high-net-worth investors. Gundlach, 56, said he’s considering buying corporate bonds later this year as prices continue to fall, including investing his personal money. “The whole question for me is when am I going to buy enormous amounts of corporate credit, because it’s crystal clear that that’s the next opportunity that’s out there,” Gundlach said. “There’s plenty of things out there that will have 100% returns. It’s a whole question of: Don’t tell me what to buy, tell me when to buy it.”

Debt related to energy and mining is still very risky, because of weakness in China’s economy and a worldwide oil glut, he said. “There’s simply no bullish case for oil right now,” Gundlach said. While he’s considering buying corporate debt, Gundlach said he’s moving away from municipal bonds, which have become overpriced. Puerto Rican general obligation bonds, which are priced for a haircut, are an exception, he said. The possibility for a workout is high because of the large number of Puerto Ricans in Florida, which is a key battleground state in this year’s presidential election, Gundlach said. “My guess is if you get defaulted on, you’re probably going to get something like 70 cents anyway,” he said.

Read more …

So are losses.

Global Financial System Risk Is Soaring Worldwide (ZH)

We warned earlier in the week that the credit risk of the world's financial institutions were on the rise and that trend has worsened as the week ends.

 

Global Bank Risk is spiking…

 

European Bank Risk is blowing out in Core and Peripheral nations…

 

And China Bank credit risk has broken to new cycle highs..

 

Some idiocysncratic names to keep an eye on…

Deutsche Bank – Europe's largest derivatives exposure (and thus epicenter of collapse should things turn out as bad as the bank's CoCos suggest) – is suffering seriously… It is becoming very clear that banks are buying protection on DB to hedge their counterparty exposure…

 

ICBC Bank is among China's largest banks (depending on the volatility of the day) and as China bank risk soars so China's sovereign risk is soaring too with devaluation and systemic crisis co-priced into these contracts…

 

National Commercial Bank – the largest Saudi bank and proxy for The Kingdom's wealth – is seeing its credit risk explode. As one analyst noted, if NCB has a crisis then Saudi military adventurism is in grave jeopardy…

 

And finally – yes it is spilling over to American banks and their "fortress" balance sheets…

 

But apart from that "storm in a teacup" – Buy The F**king Dip, right?

Read more …

Just one example.

Standard Chartered Down 57%, Returns to 1998 (WSJ)

Standard Chartered’s share price has fallen over 20% this year, reaching depths last seen in 1998, in the midst of the Asian economic crisis. The problems the bank faced back then are much the same as they are now. Back in 1997, StanChart’s share price was soaring. But following a crisis of confidence in Asia’s economy, the bank’s stock had collapsed 60% a year later. It was also still suffering from a tarnished reputation, after it was banned for a year from the Hong Kong IPO market in 1994 for creating a false market for shares. The board turned to a former senior banker from a Wall Street giant to solve its problems. Rana Talwar, a senior banker at Citigroup, was appointed head of StanChart in June 1998, a year after joining from the US bank. Talwar quickly set about re-organising the bank’s focus – binning unwanted regions (such as its British consumer finance arm) and concentrating on Asia via a series of acquisitions.

He also looked to refocus the investment bank, focusing in currency dealing, corporate banking and cash management, and eventually making some strategic deals in Asia. Fast forward almost 20 years, and new chief executive Bill Winters – an ex-JP Morgan banker – is also trying extract StanChart from a period of underperformance driven by a sputtering Asian economy, and ongoing run-ins with regulators. A new strategy is also underway, with a move toward retail, private banking and wealth management, cutting back on higher-risk corporate business and some investment banking units, such as equity capital markets. But investors have continued to sell the stock.Under Talwar, StanChart’s share price rebounded, as China’s economy kicked into overdrive. Today, while Standard Chartered’s share price continues to drop, Winters will be keen that China’s economy finds a second wind.

56.97%
The amount Standard Chartered share price has dropped since Winters joined in May 2015

Read more …

Omen.

US Exports Fell In 2015 For First Time Since Recession (AP)

The U.S. trade deficit rose in December as American exports fell for a third straight month, reflecting the pressures of a stronger dollar and spreading global weakness. Those factors contributed to the first annual drop in U.S. export sales since the Great Recession shrank global trade six years ago. The December deficit increased 2.7% to $43.4 billion, the Commerce Department reported Friday. Exports fell by 0.3%, driven by sales declines of civilian aircraft, autos and farm products. Imports increased 0.3% as Americans bought more foreign-made cars and petroleum. For all of 2015, the deficit rose 4.6% to $531.5 billion. Exports fell 4.8%, the first setback since 2009 when the world was in the grips of recession. Imports also retreated 3.1%.

American exporters have been hurt by global economic weakness and a stronger dollar, which makes their products more expensive on overseas markets. A wider trade deficit is a drag on economic growth because it means fewer overseas sales by American producers and larger imports of foreign goods. The deficit subtracted about one-half percentage point from growth in 2015, a year when the economy, as measured by the gross domestic product, grew by a modest 2.4%. Analysts say trade will also subtract from growth this year as well given that the dollar has continued to rise and China, the world’s second largest economy, is still struggling to cope with slowing growth. The U.S. deficit with China set a record in 2015, rising 6.6% to $365.7 billion. The deficit with the EU also set a record, rising 7.9% to $153.3 billion.

Read more …

The real impact of low oil prices starts to shine through even for the dimmest amongst us.

Oil Rout Threatens Vicious Cycle for US Economy (WSJ)

With oil hovering at $30 a barrel and gasoline below $2 a gallon, the pleasure of lower fuel prices is turning painful for more of the U.S. economy. The problem isn’t just the layoffs and investment cutbacks in the oil patch, two effects that have been expected since crude oil began sliding in 2014. Worries about energy-related bankruptcies and loan defaults also are helping to tighten financial conditions, weighing on a broader swath of the economy. Can the U.S. have too much of a good thing? Few economists expect the crude slump will tip the economy into recession. But the fallout could grow harder to contain if the oil-price declines are instead a symptom of broader weaknesses in the global economy, including soft demand and an oversupply of raw material, productive capacity and labor.

Cheap oil reflects a strengthening dollar, which has already crimped U.S. exports. And consumer sentiment could take a hit if the early-year stock-market declines are sustained. The bottom line: Even if cheap gas is still good for consumers, the forces behind it could be more corrosive than initially imagined. This past month’s declines in oil “are less a sign that things are about to get a lot better, and more a sign that things are in danger of getting a lot worse,” said HSBC senior economist Stephen King. Typically, markets treat higher energy prices as tax increases and lower prices as tax cuts. Indeed, cheap gasoline has been a boon to American households, which saved around $140 billion last year as a result, roughly double the savings in 2014. Gas prices averaged $1.82 a gallon last week, down from $3.68 in June 2014.

And last year’s fuel-price drop contributed around 0.5 percentage point in consumption growth, according to Jason Thomas at private-equity firm Carlyle Group. But the overall boost was weaker than expected, suggesting high household debt levels along with rising housing, health-care and college-education costs have American consumers refraining from bigger purchases. Cutbacks in the oil patch have so far “swamped whatever benefits you had on the consumer side,” said Lewis Alexander, chief U.S. economist at Nomura Securities.

Read more …

NOTE: private debt is also what causes these crises. So adding more won’t solve the issue.

The Chart of Doom: When Private Debt Stops Expanding… (CHS)

Once private credit rolls over in China and the U.S., the global recession will start its rapid slide down the Seneca Cliff. Few question the importance of private credit in the global economy. When households and businesses are borrowing to expand production and buy homes, vehicles, etc., the economy expands smartly. When private credit shrinks-that is, as businesses and households stop borrowing more and start paying down existing debt-the result is at best stagnation and at worst recession or depression. Courtesy of Market Daily Briefing, here is The Chart of Doom, a chart of private credit in the five primary economies:

Why is this The Chart of Doom? It’s fairly obvious that private credit is contracting in Japan and the Eurozone and stagnant in the U.K. As for the U.S.: after trillions of dollars in bank bailouts and additional liquidity, and $8 trillion in deficit spending, private credit in the U.S. managed a paltry $1.5 trillion increase in the seven years since the 2008 financial meltdown. Compare this to the strong growth from the mid-1990s up to 2008. This chart makes it clear that the sole prop under the global “recovery” since 2008-09 has been private credit growth in China. From $4 trillion to over $21 trillion in seven years–no wonder bubbles have been inflated globally.

Combine this expansion of private credit in China with the expansion of local government and other state-sector debt (state-owned enterprises, SOEs, etc.) and you have the makings of a global bubble machine. In other words, the faltering global “recovery” and all the tenuous asset bubbles around the world both depend on a continued hyper-velocity rocket rise in China’s private credit. What are the odds of this happening? Aren’t the signs that this rocket ship has burned its available fuel abundant? Three out of the five major economies are already experiencing stagnant or negative private credit growth. Three down, two to go. Helicopter money-government issued “free money” to households-is no replacement for private credit expansion.

Read more …

Martin Wolf stating the obvious.

Why It Would Be Wise To Prepare For The Next Recession (Wolf)

What might central banks do if the next recession hit while interest rates were still far below pre-2008 levels? As a paper from the London-based Resolution Foundation argues, this is highly likely. Central banks need to be prepared for this eventuality. The most important part of such preparation is to convince the public that they know what to do. Today, eight-and-a-half years after the first signs of the financial crisis, the highest short-term intervention rate applied by the Fed, the ECB, the Bank of Japan or the Bank of England is the latter’s 0.5%, which has been in effect since March 2009 and with no rise in sight. The ECB and the BoJ are even using negative rates, the latter after more than 20 years of short-term rates of 0.5%, or less.

The plight of the UK might not be that dire. Nevertheless, the latest market expectations imply a base rate of roughly 1.6% in 2021 and around 2.5% in 2025 — less than half as high as in 2007. What are the chances of a significant recession in the UK before 2025? Very high indeed. The same surely applies to the US, eurozone and Japan. Indeed, the imbalances within the Chinese economy, plus difficulties in many emerging economies, make this a risk now. The high-income economies are likely to hit a recession with much less room for conventional monetary loosening than before previous recessions. What would then be the options? One would be to do nothing. Many would call for the cleansing depression they believe the world needs. Personally, I find this idea crazy, given the damage it would do to the social fabric.

A second possibility would be to change targets, possibly to ones for growth or level of nominal gross domestic product or to a higher inflation rate. It would probably have been wise to have had a higher inflation target. But changing it when central banks are unable to deliver today’s lower target might destabilise expectations without improving outcomes. Moreover, without effective instruments a more ambitious target might just seem empty bombast. So the third possibility is either to change instruments or to use the existing ones more powerfully. One instrument, not much discussed, would be to organise the deleveraging of economies. This might need forced conversion of debt into equity. But, while desirable in extreme circumstances, this would be practically difficult.

Read more …

Light at the end of the death spiral?! “Rational behavior, most likely, will prevail,..”

Citi: World Economy Trapped In ‘Death Spiral’ (CNBC)

The global economy seems trapped in a “death spiral” that could lead to further weakness in oil prices, recession and a serious equity bear market, Citi strategists have warned. Some analysts -including those at Citi- have turned bearish on the world economy this year, following an equity rout in January and weaker economic data out of China and the U.S. “The world appears to be trapped in a circular reference death spiral,” Citi strategists led by Jonathan Stubbs said in a report on Thursday. “Stronger U.S. dollar, weaker oil/commodity prices, weaker world trade/petrodollar liquidity, weaker EM (and global growth)… and repeat. Ad infinitum, this would lead to Oilmageddon, a ‘significant and synchronized’ global recession and a proper modern-day equity bear market.”

Stubbs said that macro strategists at Citi forecast that the dollar would weaken in 2016 and that oil prices were likely bottoming, potentially providing some light at the end of the tunnel. “The death spiral is in nobody’s interest. Rational behavior, most likely, will prevail,” he said in the report. Crude oil prices have tumbled by around 70% since the middle of 2014, during which time the U.S. dollar has risen by around 20% against a basket of currencies. The world economy grew by 3.1% in 2015 and is projected to accelerate to expand by 3.4% in 2016 and 3.6% in 2017, according to the IMF. The forecast reflects expectations of gradual improvement in countries currently in economic distress, notably Brazil, Russia and some in the Middle East.

By contrast, Citi forecasts the world economy will grow by only 2.7% in 2016 having cut its outlook last month. Overall, advanced economies are mostly making a modest recovery, while many emerging market and developing economies are under strain from the rebalancing of the Chinese economy, lower commodity prices and capital outflows.

Read more …

As I remarked the other day, the accelerating speed with which ‘policies’ lose steam looks very much like the Bernanke days.

Negative-Interest-Rate Effect Already Dead, Central Banks Lost Control (WS)

The Bank of Japan’s surprise Negative-Interest-Rate party for stocks set a new record: it lasted only two days. Today a week ago, the Bank of Japan shocked markets into action. As the economy has deteriorated despite years of zero-interest-rate policy and Quantitative and Qualitative Easing (QQE) – a souped-up version of QE – the BOJ announced that it would cut one of its deposit rates from positive 0.1% to negative 0.1%. Headlines screamed Japan had gone “negative,” that it had joined the NIRPs of Europe – the Eurozone countries, Switzerland, Sweden, and Denmark. It was another desperate move, a head fake, and once the dust would settle, the hot air would go out. Now the dust has settled and the hot air has gone out.

On Thursday, January 28, the Nikkei closed at 17,041 down 19% from its Abenomics peak of 20,953 in June 2015. This situation is a bit of an embarrassment for the BOJ which has pushed Japanese asset managers of all kinds, including pension funds, particularly the Government Pension Investment Fund (GPIF), the largest such pension fund in the word, to get off their conservative stance, sell their Japanese Government Bonds which made up the bulk or entirety of their portfolios, and buy risk assets with the proceeds. This they did, near the peak of the Abenomics bubble. While the BOJ was eagerly mopping up JGBs, the asset managers bought mostly Japanese equities, but they also bought global equities and corporate bonds. And the mere prospect of all this buying, the front-running by hedge funds, and then the actual buying drove up Japanese stock prices in 2014 and early 2015.

The bet seemed to work out. Wealth had been created out of nothing. A few more years of this, and it might actually resolve the Japanese underfunded pension crisis. Then the party stopped, and Japanese stocks swooned. In the second quarter of fiscal 2015 (June through August), the most recent report available, the GPIF lost ¥7.9 trillion, or 5.6%! It was its first quarterly loss since 2008 during the Financial Crisis. Its decision to yield to the pressures of the government and the BOJ to plow into Japanese stocks, global equities, and corporate bonds, when they were at the peak, has turned into a fiasco. So now the BOJ is trying to re-inflate these assets. For over two years, BOJ Governor Haruhiko Kuroda has been giving whatever-it-takes and no-limits speeches that were once lapped up by hedge funds and that fueled the big Abenomics rally, but that have since become ineffectual, and perhaps the butt of many jokes, as Japanese stocks continued to swoon.

Hence, on Friday last week, the bazooka: negative rates. After some volatility, the Nikkei soared 2.8% for the day. On Monday, it gained another 2%. But then the hot NIRP air came out of the market, and the Nikkei has dropped every single day since. Today, it closed at 16,819, having given up all of the two-day NIRP party gains, plus some. It’s now down 19.7% from its Abenomics high. Pension fund beneficiaries in Japan will be ecstatic when they learn what this strategy is doing to their future. [..] The bitter irony for Japanese pension funds? The very JGBs that they sold to the BOJ upon the BOJ’s urging have since soared in price, while the prices of the risk asset they bought upon the BOJ’s urging have plunged.

Read more …

Happy Lunar New Year. First, on Sunday China reserves numbers. ‘Eagerly anticipated’ though everyone knows they’re made up.

China’s Reserves Pose The Next Hurdle For Yuan (CNBC)

China has recently struggled to shore up the yuan amid hefty capital outflows. Reserves data over the weekend may offer a glimpse of the severity of the challenge. Analysts are generally calling for a drawdown of around $100 billion, following a decline of $107.9 billion in December. Reserves plunged by $512.66 billion in 2015, a record drop for the country, to $3.33 trillion, a move attributed in part to Beijing’s moves to prop up the yuan. In addition, China suffered almost $700 billion of capital flight in 2015, according to the Institute of International Finance. Local companies rushed to repay overseas loans as the yuan depreciated, while global investors grew increasingly wary of the country’s economic slowdown and Chinese authorities’ interventions in the financial markets.

The reserve data due Sunday will be closely watched, even though China’s financial markets will be closed for the Lunar New Year holiday for the next week. “Global markets aren’t closed. I think we’ll see some contagion effect there if we see a very significant drainage coming through,” Steve Brice at Standard Chartered Wealth Management told CNBC’s Street Signs. “If there were a trend acceleration we’ve seen in December and extended to January that would lead to people putting more pressure on the Chinese authorities to be more clear on their communications.” China’s policymakers have struggled recently to implement changes to the currency, attempting to move from a dollar-peg to a trade-weighted basket.

The move was targeted at shifting the currency towards an exchange rate that better reflects China’s trade links as well as divert attention away from the dollar/yuan exchange rate, which has risen sharply amid the divergence in monetary policy between the U.S. and China. The PBOC has also let market forces play a greater role in setting the value of the yuan although its recent actions have increased rather than curb confusion. In January, the central bank, the People’s Bank of China (PBOC), guided the currency sharply lower without providing much indication to the market about its endgame – one factor in the China market selloff that triggered a global stock rout amid expectations the yuan would fall further. That spurred policymakers to intervene in the market by keeping the currency from falling further, but propping up the yuan also likely required selling dollars.

That’s opened up concerns about whether China’s reserves, the world’s largest, could become too depleted. Using IMF methodology, Khoon Goh, senior foreign-exchange strategist at ANZ, estimates that China will need a minimum of around $2.7 trillion in reserves if it keeps a fixed exchange-rate regime without capital controls. That leaves China only around a half a year of continuing to stabilize the yuan at the current drawdown rate, Goh said in a note Friday. Others have expressed concern about how the currency policy is affecting the reserves — and expectations of when the yuan will be allowed a freer float.

Read more …

Lipstick’s washing off the pig.

Europe’s Economic Outlook Darkens, Sends Shudder Through Markets (BBG)

Hints of investor optimism in Europe were snuffed out this week, as the darkening economic outlook registered across the continent and sent stocks and credit markets sliding. While market turmoil at the start of this year was sparked by a selloff in commodities and Chinese stocks, the reality of Europe’s own woes hit home as companies reported dismal earnings, and policy makers and institutions lined up to cut economic forecasts and warn of further risks. The European Commission cut its prediction for 2016 growth in the 19-nation bloc to 1.7% from 1.8% and said the largest economies of Germany, France and Italy will all perform worse than predicted just three months ago. While the ECB may spur into action again, moves in the euro and stocks suggest President Mario Draghi may be losing his ability to convince investors he can anesthetize the region from risks.

“Markets had a very rough start,” said Andreas Nigg at Vontobel Asset Management in Zurich. “There’s only so much central bankers, even Draghi, can do. Each incremental dose probably has a lower impact than the previous one. The weaker-than-expected economic growth and the associated increased likelihood of a recession led to selling of risky assets.” The blunt truth is that the euro area is still struggling to recover nearly six years after it first bailed out Greece, while European leaders are trying to tackle their latest crisis and stem the inflow of refugees. The doom and gloom nixed a nascent stock-market recovery in Europe, with a drop of 3.6% in the region’s shares this week almost completely erasing the rebound from the previous two. The losses have left the Stoxx Europe 600 Index down 9.9% this year, its worst start since 2008. It’s trading near its lowest valuation since July relative to a gauge of global equities.

Read more …

New tech, too, is just a bubble.

LinkedIn Sheds $11 Billion In Value On Stock’s Worst Day Since Debut (Reuters)

LinkedIn shares closed down 43.6% on Friday, wiping out nearly $11 billion of market value, after the social network for professionals shocked Wall Street with a revenue forecast that fell far short of expectations. The stock plunged as much as 46.5% to a more than three-year low of $102.89, registering its sharpest decline since the company’s high-profile public listing in 2011. The rout in the stock cost LinkedIn chairman Reid Hoffman about $1.2 billion based on his 11.1% stake in the company he co-founded, according to Reuters calculations. At least nine brokerages downgraded the stock to “hold” from “buy”, saying the company’s lofty valuation was no longer justified.

“With a lower growth profile, we believe that LinkedIn should not enjoy the premium multiple it has grown accustomed to,” Mizuho analysts wrote in a note. At least 36 brokerages cut their price targets, with Pacific Crest halving its target to $190. Their median target dropped 34% to $188, according to Reuters data. LinkedIn forecast full-year revenue of $3.60-$3.65 billion, missing the average analyst estimate of $3.91 billion, according to Thomson Reuters I/B/E/S. “This would imply that LinkedIn will grow around 15% in 2017 and 10% in 2018,” Mizuho analysts said. Underscoring the slowdown in growth, LinkedIn said online ad revenue growth slowed to 20% in the latest quarter from 56% a year earlier.

Read more …

Told you -along with Ron Paul-, we should have dismantled it. Now NATO is a real and clear danger to all of us.

Armed With New US Money, NATO To Strengthen Russia Deterrence (Reuters)

Backed by an increase in U.S. military spending, NATO is planning its biggest build-up in eastern Europe since the Cold War to deter Russia but will reject Polish demands for permanent bases. Worried since Russia’s seizure of Crimea that Moscow could rapidly invade Poland or the Baltic states, the Western military alliance wants to bolster defenses on its eastern flank without provoking the Kremlin by stationing large forces permanently. NATO defense ministers will next week begin outlining plans for a complex web of small eastern outposts, forces on rotation, regular war games and warehoused equipment ready for a rapid response force. That force includes air, maritime and special operations units of up to 40,000 personnel.

The allies are also expected to offer Moscow a renewed dialogue in the NATO-Russia Council, which has not met since 2014, about improved military transparency to avoid surprise events and misunderstandings, a senior NATO diplomat said. U.S. plans for a four-fold increase in military spending in Europe to $3.4 billion in 2017 are central to the strategy, which has been shaped in response to Russia’s annexation of Crimea from Ukraine in 2014. The plans are welcomed by NATO whose chief, Secretary General Jens Stoltenberg, says it will mean “more troops in the eastern part of the alliance … the pre-positioning of equipment, tanks, armored vehicles … more exercises and more investment in infrastructure.”

Read more …

The only way I see to make any pensions sytem “remain viable” is to introduce basic income instead.

Why Pensions Are The New Flashpoint In Greece’s Crisis (AP)

Combine a rapidly aging population, a depleted work force and leaky finances and any country’s pension system would be in trouble. For debt-hobbled, unemployment-plagued Greece, it’s a nightmare. Hemmed in by a grim economic reality and tough-talking bailout creditors, the leftwing-led government in Athens is now attempting the seemingly impossible: to reform the pension system without cutting pensions, largely through a steep increase in social security contributions. The overhaul, which creditors are demanding in return for rescue loans, means Greeks who have a job — and who are outnumbered by the unemployed and retired — have to pay for the rest Unions are up in arms about the move, which has become the main hurdle in Greece’s negotiations with its European creditors and the IMF.

Critics say the reform will heap the most pain on self-employed professionals and farmers, forcing them to pay up to three quarters of their income in pension contributions and taxes. They warn the majority will be forced to change jobs or emigrate — accelerating the brain drain the country has suffered since the crisis started in 2010. “We are fighting for our very survival,” said Georgios Stassinos, head of the country’s biggest engineers’ union. If the reforms are adopted, he said, “the country will be left without engineers, doctors, lawyers, pharmacists and economists.” The head of Greece’s bar associations, Vassilios Alexandris, said the new system would reduce some lawyers’ net incomes to as little as 31% of their gross intakes, from the current 46%. “Professionals will not pay their (pension) contributions, not out of choice but because they will be unable to,” he said.

In Greek cities, a wave of protests has become known as the necktie revolution, from a series of demonstrations by formally-dressed professionals. The discontent is even more obvious in the countryside, where farmers have manned highway blockades for over two weeks. Costas Alexandris, a farmers’ union leader in the northeastern area of Thrace, said he stands to pay 75% of his income in taxes and contributions next year under the government’s proposals, which include taxation on subsidies and a leap in farmers’ pension contributions from 7 to 28%. But if Greece wants to make its pensions system viable, it has few options. Current retirees have already seen their pensions cut repeatedly under austerity programs since 2009 and the retirement age has been raised from about 62 to 67.

Read more …

Jan 042016
 
 January 4, 2016  Posted by at 9:10 am Finance Tagged with: , , , , , , , , , ,  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.”

Read more …

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.

Read more …

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.”

Read more …

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.

Read more …

“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.

Read more …

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.

Read more …

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.

Read more …

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.

Read more …

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.

Read more …

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.

Read more …

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.

Read more …

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.

Read more …

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.

Read more …

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.

Read more …

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.

Read more …

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.

Read more …

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.

Read more …

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.

Read more …

Dec 282015
 
 December 28, 2015  Posted by at 10:48 pm Finance Tagged with: , , , , , , , , ,  4 Responses »


AP Police Officer Carries Aylan Kurdi’s Body, Bodrum Sep 2 2015

No year is ever easy to predict, if only because if it were, that would take all the fun out of life. But still, predictions for 2016 look quite a bit easier than other years. This is because a whole bunch of irreversible things happened in 2015 that were not recognized for what they are, either intentionally or by ‘accident’. Things that will therefore now be forced to play out in 2016, when denial will no longer be an available option.

A year ago, I wrote 2014: The Year Propaganda Came Of Age, and though that was more about geopolitics, it might as well have dealt with the financial press. And that goes for 2015 at least as much. Mainstream western media are no more likely to tell you what’s real than Chinese state media are.

2015 should have been the year of China, and it was in a way, but the extent to which was clouded by Beijing’s insistence on made-up numbers (GDP growth of 7% against the backdrop of plummeting imports and exports, 45 months of falling producer prices and bad loans reaching 20%), by the western media’s insistence on copying these numbers, and by everyone’s fear of the economic and financial consequences of the ‘Great Fall of China‘.

2015 was also the year when deflation, closely linked -but by no means limited- to China, got a firm hold on the global economy. Denial and fear have restricted our understanding of this development just as much.

And while it should be obvious that 2015 was the year of refugees as well, that topic too has been twisted and turned until full public comprehension has become impossible. Both in the US and in Europe politicians pose for their voters loudly proclaiming that borders must be closed and refugees and migrants sent back to the places they’re fleeing due to our very own military interventions.

And that said politicians have the power to make that happen, the power to close borders to hundreds of thousands of fellow human beings arriving on their countries’ doorsteps. As if thousands of years of human mass migrations never occurred, and have no lessons to teach the present or the future.

The price of oil was a big story, and China plays the lead role in that story, even if again poorly understood. All the reports and opinions about OPEC plans and ‘tactics’ to squeeze US frackers are hollow, since neither OPEC as a whole nor its separate members have the luxury anymore to engage in tactical games; they’re all too squeezed by the demise of Chinese demand growth, if not demand, period.

Ever since 2008, the entire world economy has been kept afloat by the $25 trillion or so that China printed to build overleveraged overcapacity. And now that is gone, never to return. There is nowhere else left for our economies to turn for growth. Everyone counted on China to take them down the yellow brick road to la-la-land, forever. And then it didn’t happen.

What 2015 should have made clear, and did in a way but not nearly clear enough, is that the world economy is falling apart due to a Ponzi bubble of over-production, over-capacity, over-investment, over-borrowing, all of which was grossly overleveraged. And that this now is, for lack of a better word, over.

Most people who read this will have noticed the troubled waters investment funds -hedge funds, mutual funds, money market funds et al- have recently landed in. But perhaps not many understand what this means, and where it may lead. These things tend to be seen as incidents, as is anything that diverts attention away from the ‘recovery just around the corner’ narrative.

Not only do the losses and redemptions at investment funds drive these funds to the brink, everything they’ve invested in also tumbles. Add to this the fact that most of the investments are highly leveraged, which means that typically a loss of just a few percent can wipe out all of the principal, and a notion of the risks becomes clear.

Of course, since many of the funds hold the same or similar investments, we can add yet another risk factor: contagion. Things will blow up first where the risk is highest. Then everything else becomes riskier. Low interest rates have caused many parties to chase high yields -junk bonds-, and that’s where risks are highest.

This is the 2015 story of investment funds, and it will continue, and aggravate, in 2016. Ultra low interest rates drive economies into deflation and investors into ever riskier assets. This is a process of unavoidable deterioration, unstoppable until it has played out in full. A 0.25% rate hike won’t do anything to change that.

Why do interest rate hikes pose such a problem? Because ZIRP has invited if not beckoned everyone to be up to their necks in debt. The entire economy is being kept lopsidedly upright, Wile. E style, by debt. Asset prices, even as commodities have now begun to fall in serious fashion, still look sort of OK, but only until you start to look at the amount of leverage that’s pinning it all up.

Once you see that, you understand how fragile it all is. Go one step further, and it becomes clear that this exponentially growing ‘machinery‘ can only be ‘sustained’ by ever more debt and leverage. Until it no longer can.

Commodities prices have nowhere to go but down for a long time to come. These prices have been propped up by the illusionary expectations for Chinese growth and demand, and now that growth is gone. So, too, then, must the over-leveraged over-investments both in China and abroad.

Growth that was expected to be in double digits for years to come has shrunk to levels well below that ‘official’ 7%. China’s switch to a consumer driven economy is as much a fantasy as the western switch to a knowledge economy has proved to be. If you don’t actually produce things, you’re done. And producing for export markets is futile when there’s no-one left to spend in those markets.

Ergo, commodities, raw materials, the very building blocks of our economies, from oil all the way to steel, are caught in a fire sale. Everything must go! Eventually, commodities prices will more or less stabilize, but at much lower levels than they -still- are at present. That we will need to figure this out in 2016 instead of 2015 is our own fault. We could have been healing, but we’ve yet to face the pain.

Trying to guesstimate how low oil will go is a way of looking at things that seems very outdated. It’s interesting just about exclusively for people who ‘invest’ in the markets, but the reality is that the Fed, BoJ, PBoC and ECB have first made sure through QE and ZIRP/NIRP that there no longer are functioning markets, and they are now losing their relevance because of these very ‘policies’.

Price discovery has already started (oil, commodities), and central banks have benched themselves. They could only re-enter the game if they quit interfering in the markets, but they’re too afraid, all of them, of the consequences that might have, not even so much for their economies but for their TBTF banks.

Yellen’s rate hike will mean some extra profits for those same banks at the cost of the rest of the financial world, but with growth gone to not return for a very long time, and with deflation hitting everything in sight and then some, there is no pretty picture left.

And none of this is really hard to process or understand. It’s just that there’s these concerted efforts to keep you from understanding, that keep you believing in some miracle salvation effort. Which would, so goes the narrative, have to come from the same central banks and the same Wall Street banks that put everyone and their pet guinea pig as deep in debt as they are.

If you have been reading the Automatic Earth over the past 8 years and change, you know what this is about. There are a few, but unfortunately only a few, other sources that may have put you on the same trail.

I was impressed with the following earlier this month from David Stockman, Reagan’s Director of the Office of Management and Budget, who now seems to have firmly caught up with the deflation theme Nicole Foss and I have been warning about ever since we started writing – pre-TAE – at the Oil Drum 10 years ago. Stockman today says that we are entering an epic deflation and the world economy is actually going to shrink for the first time since the 1930s. (!)

The End Of The Bubble Finance Era

There has been so much over-investment in energy, mining, materials processing, manufacturing and warehousing that nothing new will be built for years to come. [..] .. there will be a severe curtailment in the production of mining and construction equipment, oilfield drilling rigs, heavy trucks and rail cars, bulk carriers and containerships, materials handling machinery and warehouse rigging, machine tools and chemical processing equipment and much, much more.

It’s good to see people finally acknowledging this. It’s still rare. But there’s another, again interlinked, development that is very poorly understood. Which is that in a debt deflation, the ‘money’ that appears to be real and present in leveraged investments more often than not doesn’t get pulled out of one ‘investment’ only to be put into another, it just goes POOF, it vanishes.

And though it may seem strange, conventional economics has a very hard time with that. In the eyes of that field, if you don’t spend your money, you must be saving it. The possibility of losing it altogether is not a viable option. Or, if you lose it, someone else must be gaining it, zero-sum style.

But that view ignores the entire ‘pyramid’ of leveraged loans and investments and commodity prices, which precisely because that pyramid contained no more than a few percentage points of ‘real collateral’ to underpin everything it kept afloat, should have been a red flag. Because this is the very essence of debt deflation.

Just one little example of how and why this happens comes from this Bloomberg item. The key word is ‘evaporates’:

$100 Billion Evaporates as World’s Worst Oil Major Plunges 90%

Colombia is nursing paper losses of more than $100 billion after its oil boom fell short of expectations, wiping out 90% of the value of what was once Latin America’s biggest company. From being the world’s fifth-most valuable oil producer at its zenith in 2012, worth more than BP, state-controlled Ecopetrol now ranks 38th. Its market capitalization has fallen to $14.5 billion, down from its peak of $136.7 billion. “They just haven’t found oil, it’s as simple as that,” Rupert Stebbings at Bancolombia said from Medellin. “The whole oil sector got massively over-bought, and people assumed that one day they’d hit an absolute gusher.”

2016 will be the year when a lot of ‘underlying wealth’ evaporates. Trillions of dollars already have in the commodities markets, but, again, our media don’t tell us about it, or at least they frame it in different terms. They use deflation to mean falling consumer prices, but then insist on calling falling prices at the pump a positive thing. Without recognizing to what extent those falling prices eat away at the entire economy, and at society at large.

To summarize for now: we have elected to deny and ignore what has happened to our economies, our societies and our lives in 2015, only to be forced to face all of it in 2016. That makes the year an easy one to predict. But there are of course a lot of other possible spokes and wheels and other things.

Any government that sees its nation slide down into a deep enough pit will always consider going to war. One or more central banks may opt for a Hail Mary helicopter ride. A volcano may erupt. But none of these things will prevent the bubbles we have blown from deflating. They may divert attention, they may delay the inevitable a bit more, sure. But bubbles never last.

I have a whole list of key words I wanted to use in this, but I think I’ll turn them into a separate article. The main point is you understand the gist of it all. There are no markets, and what has posed as markets is crumbling before our very eyes, inexorably. The best we can do is say ‘see you on the other side’, if we’re lucky.

Nov 222015
 
 November 22, 2015  Posted by at 2:56 pm Finance Tagged with: , , , , , , , ,  Comments Off on Nicole Foss presents: Challenge and Choices


Theodor Horydczak Washington Monument 1933

The Automatic Earth today releases its newest video presentation by Nicole Foss. Entitled ‘Challenge and Choices’, it deals with the problems presented to us by the earth’s limits to growth, in finance, energy and the natural world, and with the options and answers that exist in face of these problems.

To purchase the 3-hour video download of Challenge and Choices, go to our store. Click this image to get there:

Nicole Foss: After more than 30 years of exponential growth, gargantuan resource demand and increasingly frenetic consumption, we have now reached, or are reaching, an array of limits to growth. During our long, debt-fuelled boom, we reached out spatially through globalisation to monetise as much global production as possible, in order to facilitate the efficient transfer of wealth from the global periphery to its economic heartland.

We also, through the profligate use of credit and debt, reached forward in time to borrow from the future in order to stage an orgy of consumption in the present. This spectacularly successful modern form of economic imperialism delivered unprecedented wealth concentration, the like of which previous imperial structures could not have dreamed of attaining.

We are facing limits in terms of finance, energy, water, soil fertility, food web integrity on both land and sea, biodiversity, carrying capacity and the environment’s ability to absorb waste streams, among others. All of these factors, and the interactions between them, constitute parts of the reality jigsaw which we have been developing here at the Automatic Earth for the past eight years. Although we focus primarily on finance, as this is the first limit many will face, all limiting factors, and their relative timeframes, are vital to an understanding of the way the next several decades can be expected to play out.

This understanding of the big picture is crucial, but even more important is the ability to apply the knowledge in practice. This involves working through a complex decision tree process, spanning the assessment of strengths, weaknesses, opportunities, vulnerabilities and potential courses of action at different scales, from the individual to the regional. Our latest Automatic Earth video offering – Challenge and Choices – is designed to offer guidance in working through this process.

The video is divided into chapters, beginning in Chapter 1 with a broad overview of the limits to growth scenario, expanded to include a wider range of factors than we generally focus on at the Automatic Earth. The elements to be considered in an assessment of dependencies, or vulnerabilities, naturally lend themselves to actions at different scales. A vulnerability assessment typically begins with personal or family circumstances, hence the initial segments of the presentation focus on these aspects, beginning in Chapter 2 with financial circumstances.

As we have discussed many times at the Automatic Earth, we are facing the bursting of a major financial bubble and this is leading us directly into a state of economic depression, where people can expect many of the assumptions upon which their lives have been built to be invalidated in a short space of time. Such a period is characterised by high unemployment, sharply rising interest rates, taxes and rates (property taxes), falling incomes, cuts to benefits and entitlements, falling asset prices, major government spending cuts and increasingly aggressive debt collection, among other factors.

Being aware of these risks in advance allows for people to minimise the impact. The factors under consideration in our new presentation include leverage (what you owe compared to what your own), consequent interest rate risk, the potential for bankruptcy protection, margin call potential, access to and control over liquidity reserves, personal stores of value, risk management strategies and extended family issues.

The security of both liquidity and of stores of value will be extremely important, and extremely challenging. During a liquidity crunch, there will be very little money in circulation, leading to very little economic activity, and under such circumstances, cash will be exceptionally important. Managing risks to liquidity (cash) makes the difference between being at the mercy of changing circumstances and having the freedom of action to respond to both opportunities and threats as they develop. It is therefore important to avoid the large risks beyond one’s own control that are associated with assets inside the financial system, while learning to manage the risks associated with being outside of it.

Income streams will vary greatly in terms of reliability in economically contractionary times, given that the quantity of money available will decline sharply, and money in circulation will diminish even more quickly as increasingly risk-averse people cease spending and hold on to cash reserves, if they are lucky enough to have some. Many current employment opportunities will dry up or cease to exist entirely, and holding on to such a position now may mean being economically stranded at a time when available employment niches are much reduced in scope and already filled to capacity.

In an ideal world, one would therefore seek to be positioned in advance in a trade or profession likely to continue to deliver an income stream even in times when disposable income will be very scarce. This involves looking at one’s own skill set and personal inclinations, and moving towards using these to provide essential goods or services locally. Either employment or self-employment can be viable options, with running one’s own business raising many additional considerations. Although the complications may be greater, so is the potential for adding usefully to the economic and social fabric of one’s local environment.

Major decisions for everyone surround the issue of shelter – the appropriate form, the means of obtaining it and where it is located. The question of ownership versus renting deserves much greater consideration than most people allow for, given the degree of leverage involved in most cases. Property is drastically over-valued in many locations.

Purchasing property will not necessarily be the right decision, especially under circumstances where the financial value of the asset is set to fall substantially, but the debt will remain the same, leading to a rash of negative equity. Since the burden the debt represents will grow as both interest rates and unemployment rise, and social safety nets are withdrawn, there is a considerable incentive to remain debt-free through renting rather than ownership. Renting also allows for valuable flexibility as to location.

Chapter 3 goes into considerable detail as to the advantages and disadvantages of different types of locations – urban, rural, suburban, small town and intentional community. It is important to realise that the status quo is an active choice, not just a default option, and it may well not be a good one for one’s circumstances. All alternative options, including the status quo, should be thought through in order to avoid becoming stuck in the wrong place, facing risks that might have been avoidable. Becoming stuck is a very real risk under depression conditions, when freedom of action is likely to be very sharply limited, hence positioning in advance in highly advantageous.

The best choice will vary for different people with different circumstances, so there is no one right answer as to the best place, or set of circumstances, to be located. Each option is presented with suggestions as to which might suit what kind of individuals and families, and case-studies are provided as to workable approaches in each different environment. There are many quite inspiring examples from around the world to choose from.

In choosing a good location, carrying capacity and natural factors such as local resource availability need to be taken into account. These factors are considered in Chapter 4. For instance, a reliable water supply of predictable quality will be of particular importance, and one might not be able to rely on current sources that may be vulnerable under depression conditions. Similarly the potential impact of natural threats – wildfires, flooding, drought, earthquakes, cyclones, blizzards, extreme cold – needs to be understood as these are highly variable and represent a wide range of risk scenarios. The risks one feels comfortable with, or can tolerate, manage or mitigate, will be individual choices.

The most obviously good places are probably already over-crowded and expensive, whereas more marginal places may well have been overlooked and may represent both much better financial value and a greater range of opportunities. A given area can only support a certain number of people, and those limits can only be circumvented if large-scale trade is feasible and affordable energy readily available.

As we have pointed out at the Automatic Earth many times before, trade is very vulnerable when the credit it relies on dries up, meaning that economically contractionary times typically lead to trade collapses. At that point, local circumstances such as carrying capacity for a given local resource base become paramount. However, living close to a rich resource base is not necessarily the answer. One only has to look at the resource-rich geopolitical hotspots in the world to know that living on top of coveted resources is not necessarily an advantage.

Energy supply will be a major issue in many, if not most, regions. As we have noted many times here at the Automatic Earth, gross energy production is flat to falling globally, and the average energy profit ratio (energy returned on energy invested) is falling sharply. A greater and greater percentage of energy produced is being reinvested in energy production, leaving less and less to serve all society’s other purposes.

Both unconventional oil and gas and most forms of ‘renewable’ energy have low energy profit ratios and are also critically dependent on conventional oil gas gas production to enable them to be developed at all. As such they represent nothing more than an extension of the high energy profit ratio conventional fossil fuel era that we are now moving beyond. Being capital intensive as well as trade-dependent, they also depend on the continued expansion of the financial bubble, but this is on the verge of implosion. The future will be one of far less energy available, and consequently much reduced socio-economic complexity.

Families would do well to take a hard look at their energy-dependent essential functions (such as cooking, climate control, transport, and equipment operation), and think about what energy sources are required to fulfil these functions, what vulnerabilities different sources of supply may be subject to, whether each function is truly essential, and whether there may be more than one way to perform truly essential functions. One may require specifically electricity, liquid fuel or solid fuel, but there may be some capacity for substitution, perhaps with some additional or modified equipment.

The energy required may come from overseas or may require a large-scale centralised distribution system. Both of these represent significant threats to continued supply under conditions of credit contraction, trade collapse and reduced socio-economic complexity. Conversely, local energy sources which can be relatively simply obtained are a far more secure source of supply. Local dependency creates considerably less vulnerability, hence moving over to local supply in advance of supply problems would be advisable. Redefining essentials and moving away from requiring external energy sources would reduce vulnerability even further.

The local climate will determine how many aspects of life play out in practice, notably energy demand for climate control. Climate not requiring external energy inputs would eliminate a substantial dependency, but only a minority would have the choice to live in such a place. For the rest, thinking through how truly essential climate control is, and how this might be achieved in a low energy environment, will be important.

The development of tolerance for a wider range of indoor temperatures is likely to be necessary. Climate and water availability will, of course, determine what food can be grown locally, and in the sharp reduction of trade will reduce the potential for bringing food in from elsewhere. Relative proximity to the poles determines growing season, and is therefore a strong influence on the balance between plant and animal foodstuffs under a locavore scenario.

Health, healthcare care, social circumstances and political culture are also important factors in determining a good location for a given individual or family group. They are highly variable now, and can be expected to become more so as regions become more isolated with reduced trade. Human connections will grow greatly in importance in difficult times, hence being in a location where one is socially and culturally embedded can be expected to make a substantial difference to family fortunes. Any contemplation of relocation must take these aspects into account as they may ultimately matter more than physical circumstances. These factors are covered in depth in the Challenge and Choices presentation.

The scale of the community in which a family is socially involved will determine the range of choices available beyond the scale of individuals and families themselves. Isolation limits the range of options considerably, meaning that attempting to ‘go it alone’ is not advisable. Communities, whether urban, suburban, small town, village or rural, all offer the advantages of being able to work with others for mutual benefit. Chapter 5 is devoted to exploring the options available at larger scale, beginning with emphasis on community scale potential for pooling resources and building valuable social capital.

Relationships of trust are the foundation of society, enabling collective human endeavours to function. Building them in advance of difficult times creates a critical advantage, allowing existing constructive initiatives to flourish and new ones to gain traction rapidly once the need for them becomes clear. A range of examples of communal possibilities is given in the presentation, including community hubs, maker spaces, community projects, local network building and peer to peer coordination and funding activities.

Several are then discussed in greater depth, notably those in the economic sphere which will be necessary to navigate a period of liquidity crunch. These include time banking, savings pools, alternative currencies, alternative trading arrangements and the slow money movement. These are initiatives reducing the dependence on the existing monetary system, thereby reducing exposure to the risk of that system being disrupted.

Periods of economic depression create a situation of artificial scarcity, where a society has all the resources it had before, but due to the lack of money in circulation, can no longer make use of them. As those who lived through the great depression of the 1930s said – “We had everything but money”. Finance represents the operating system for our societies, and when that system crashes, it it necessary to ride out the acute phase of the crunch, and then to reboot the system into a more workable form.  The initial phase creates an urgent need to substitute for the missing liquidity in the larger system with alternative forms of liquidity at the local level, in other words to relocalise finance in order to ride out the period of hardship.

Such systems emerge spontaneously at times and in places where economic depressions have been or are now in force, for instance Austria during the 1930s, Argentina following 2001 or Greece today. However, they can be initiated in advance, functioning in parallel with the larger system, and then are well positioned to stand more or less alone when the need arises. Examples of alternative currencies functioning under normal circumstances and under depression conditions are discussed in Challenge and Choices.

The need for financial relocalisation is but one aspect of the general need for much greater decentralisation. The contraction of the trust horizon during times of economic and financial contraction results in the need for all manner of activities, very much including finance, to operate at much smaller scale in order to function. Trust determines effective organizational scale, hence in contractionary times, working within the trust horizon implies working at substantially smaller scale. Governance mechanisms will be no exception.

Dependence on larger scale organizations to deliver essential goods and services, or to maintain a functioning socio-economic system, will represent a considerable vulnerability at a time when those entities are ceasing to be able to perform the functions for which they currently hold responsibility. Over time those responsibilities will come to vest in whichever organizations are positioned in practice to assume them, whether or not such organizations have the legal responsibility to do so.

Smaller scale governing institutions and regulatory mechanisms, which have been substantially disempowered in recent years, can therefore expect to inherit greater responsibility in the future. Being informed and well-positioned in advance to step into any power vacuum once it appears will be advantageous.

Centralised systems often struggle already to deliver what they are supposed to, hence decentralisation initiatives are already underway in many fields. These are commonly opposed by a top-down system critically dependent on continued growth, and the increasingly complete buy-in required to maintain it. It is therefore becoming increasingly difficult to opt out, even as doing so is coming to make more and more sense because the cost burden associated with the larger system is increasingly disproportionate to the benefits it is able to deliver.

In many ways the essentials can be provided independently at far lower cost, thanks to the absence of large and complex bureaucracies to support. This makes them a threat to a larger system reliant on holding hostage the provision of essentials by closing off independent options. Trying to achieve independence in any sphere therefore faces obstacles which make it more difficult than it should be, but it will be necessary to move in that direction in any case.

The existing level of socio-economic complexity allowing larger scale systems to function is itself dependent on trust, political legitimacy, cheap money and cheap energy, all of which are threatened in a limits to growth scenario. The future will be simpler and more local whether we like it or not, so we must position ourselves for that future. In doing so we generate resilience – the ability to cope under a wide range of circumstances, to bounce back from system shocks and to thrive in the meantime. This capacity is what working through the limits to growth decision tree process is capable of establishing.

Challenge and Choices provides the basis for being proactive at both the individual and collective levels, allowing us to face the approaching limits and navigate a near future fraught with risk and uncertainty. Challenging circumstances are much less daunting when equipped with information, analysis and the tools required to adapt to a changing big picture. We can replace a destructive mindset with a constructive one grounded in a solid sense of purpose, replacing fear of the unknown with empowerment.


Nicole Foss

To purchase the 3-hour video download of Challenge and Choices, go to our store. Click this image to get there:

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


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

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

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

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

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

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

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

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

Read more …

Fixed Income, Currency and Commodity.

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

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

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

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

Read more …

Why stop at 10%?

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

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

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

Read more …

Bottom. Race.

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

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

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

Read more …

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

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

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

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

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

Read more …

You don’t say…

Lower Interest Rates Hurt Consumers: Deutsche Bank (Bloomberg)

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

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

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

Read more …

So it’s on life-support.

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

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

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

Read more …

No kidding.

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

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

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

Read more …

A lot more.

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

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

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

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

Read more …

The dollar comes home.

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

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

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

Read more …

They’ve all been overinvesting by a wide margin.

China’s Slowing Demand Burns Gas Giants (WSJ)

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

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

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

Read more …

Just civil claims.

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

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

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

Read more …

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

Glencore Urges Rivals To Shut Lossmaking Mines (FT)

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

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

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

Read more …

Dutch disease.

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

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

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

Read more …

Dollar-denominated debt.

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

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

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

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

Read more …

Because their new phones don’t sell.

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

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

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

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

Read more …

Before VW.

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

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

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

Read more …

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

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

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

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

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

Read more …

Democracy it ain’t.

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

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

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

Read more …

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

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

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

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

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

Read more …

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

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

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

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

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

Read more …

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

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

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

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

Read more …

Jun 292015
 
 June 29, 2015  Posted by at 7:31 am Finance Tagged with: , , , , ,  26 Responses »


G. G. Bain At Casino, Belmar, Sunday, NJ 1910

It is with immense pleasure that I can introduce the return to The Automatic Earth of my friend and co-founder Nicole Foss. If only because I myself can now retire to a beach chair…. (not).

With the violent swings that have started and been amplified in Asia overnight, as well as in European and US futures, Nicole’s piece on volatility is quite pertinent.

Nicole Foss: A recent Business Insider chart of the day feature was particularly interesting. Called The stock market is asleep, it observed that the US market has been in a period of very low volatility:

Market technician Ryan Detrick noted that it’s been 8 weeks since we’ve seen a weekly move of at least 1% up or down in the S&P 500. That’s the longest such streak we’ve seen in 21 years.

The suggestion in the article is that the market will go on rising until the economy enters a recession, the implication being that a long period of low volatility is a sign of market health. In fact it is quite the opposite. A sleep-walking market is a reflection of complete disregard as to risk.

Markets enter such periods of complacency when there has been a long uptrend, with periods of very low volatility reflecting where the market has come from, not where it is going. Such periods are far more likely to be a sign of an impending trend reversal than of a continued uptrend.

Under normal circumstances, markets can be expected to show more variation, with regular inhalation and exhalation indicative of healthy risk perception. The loss of that pattern, indicating extreme complacency, is a leading indicator of a rude awakening. The VIX index, or volatility/fear index, is at extreme lows, indicating a historic level of complacency. It is no surprise that this coincides with a market extreme.

In short, market sentiment is a very effective contrarian indicator. When fear and volatility are low, there are typically few opportunities left and investors are openly flirting with danger they fail to perceive or acknowledge in their search for returns. Leverage balloons as riskier and riskier bets are made, along with bets on top of bets on top of bets.

Continuance of the prevailing uptrend becomes received wisdom as the combination of optimism and leverage drive the market higher in a self-fulfilling feedback loop. Bears capitulate over time, and as the last holdouts capitulate, the trend reversal become imminent. Risk typically returns with a vengeance, taking market participants by surprise.

The perception of risk shifts dramatically, from complacency to extreme risk aversion, and it can do so very quickly. In fact there already appears to be a shift underway, a mere two days after such an expression of complacency. Volatility and fear go hand in hand, and as increasing fear drives financial contraction and deleveraging, volatility goes through the roof.

The increasing and cumulative risks previously taken begin to manifest, piling on top of each other on the way down. A flood of margin calls overwhelms a mountain of IOUs, rendering them largely worthless. Excess claims to underlying real wealth are destroyed. Ironically, it is at this time that opportunity increases dramatically, for the relatively few who perceive it and are in a position to take advantage of it.

We are approaching just such a juncture at the moment. The long uptrend appears to be finally coming to an end. It is at extremes when it pays most to be a contrarian. Apart from the misinterpretation of low volatility as being good news for the stock market, another misconception is that market corrections are driven by recession.

Causation runs in the other direction. It’s not that a recession causes the markets to fall, but that a market trend change to the downside is a leading indicator of economic recession. Changes in finance, which is largely virtual, happen far more quickly than changes in the real economy.

When the trend change comes in finance, a similar direction change in the real economy can be expected to follow, with a time lag thanks to the longer time constant for change in the real economy. If the downward shift of the last couple of days does indeed mark the long-awaited trend reversal, then economic recession is sure to follow.

There is a substantial potential for the reversals in both finance and the real economy to be very large, as we have been predicting here at TAE for some time. This is yet another high risk juncture. Be careful.

May 162015
 
 May 16, 2015  Posted by at 10:19 am Finance Tagged with: , , , , , , , , , , ,  5 Responses »


Lewis Wickes Hine Workers stringing beans in J.S. Farrand Packing Co, Baltimore 1920

The New Era Of Return-Free Risk (Reuters)
Global Asset Classes Suffer From a Highly Contagious Disease (Bloomberg)
US Farmers In ‘Dire Straits’: JPM Warns Of Liquidity Crunch (Zero Hedge)
Private Debt, Economic Stagnation and a Modern Debt Jubilee (Steve Keen)
China Backtracks on Deleveraging Local Government Debt (WSJ)
China Deleveraging Measures Create Perpetual Leverage Machine (Zero Hedge)
A Blueprint for Greece’s Recovery within a Consolidating Europe (Varoufakis)
Greek PM Tsipras Takes ‘Command’ Of Reform Talks (CNBC)
Tsipras Says He Won’t Cross Red Lines in Talks With Creditors (Bloomberg)
Greece Pays Public Sector Wages To Avert Fresh Economic Crisis (Guardian)
Home Is Where The Household Income Goes (Kathimerini)
Osborne Calls Emergency July Budget To Reveal Next Wave Of Austerity (Guardian)
Russia is a Product of WWII, In Terms of Demographics (Adomanis)
Poland Pays $250,000 To Alleged Victims Of CIA Rendition And Torture (Guardian)
Ukraine GDP Drops 17.6%, Prices Rise 61% (FT)
Anti-Poverty Crusader Leads Race To Be Barcelona’s Next Mayor (Guardian)
US Anger With RT Will Start World War Three – Emir Kusturica (Sputnik)
Food and Finance: Create A Revolution With Your Shopping Trolley (Berrino)
The Awful Truth About Climate Change No One Wants To Admit (Vox)
Without Universal Access To Water, There Can Be No Food Security (Guardian)

WIth today’s exteremely distorted asset prices, risk must get distorted too.

The New Era Of Return-Free Risk (Reuters)

U.S. and German government bonds are gyrating as they rarely do. Yields are shooting higher for no apparent reason, and sometimes falling back within hours for equally unclear motives. Such turbulence in the biggest and most liquid bond markets is ushering in a new era. The traditional concept of risk-free returns has been turned on its head. Ten-year Bund yields have multiplied by 16 times, to a high of 0.80% on May 7 from 0.05% on April 17. And German bond prices, which move inversely to yields, have suffered a larger drop than in 99% of the three-week periods of the last 25 years, UBS Wealth Management strategists calculate. Meanwhile, comparable U.S. yields have risen by more than a quarter in less than four weeks, peaking at 2.37%.

The brutal moves are creating what Jan Straatman, global chief investment officer at Lombard Odier Investment Managers, calls “return-free risk”. Investors have two problems as a result. The first is sharply practical. Safety has become expensive, or less safe. Holding cash in the form of a rock-solid currency, such as the Swiss franc, is punitive, since policy interest rates are close to zero, or even negative. Gold is supposed to be a solid store of value, but the price is in thrall to the dollar’s volatile exchange rate. And now U.S. and German government bonds are looking risky.

These days, the hunt for safety is not a big theme for most investors. They would rather take some risks in return for higher yields. But that brings up the second problem with the new era. High turbulence in supposedly safe bond markets complicates the pricing of risk. The standard asset pricing model relies on a benchmark risk-free interest rate. Riskier investments – from corporate bonds through shares to artworks – are supposed to promise a probable additional return in exchange for additional uncertainty and price volatility. The model is like a compass pointing in the direction of the right price. But this compass goes haywire when safe debt becomes extraordinarily volatile. Investors are left at sea.

Read more …

“And when they all convince themselves to be mega-long at the wrong price, the market inevitably cracks.”

Global Asset Classes Suffer From a Highly Contagious Disease (Bloomberg)

A trio of profitable trades over the past year – long U.S. dollar, long Treasuries, and long European equities – have taken a big hit in the second quarter of 2015. Over at Jefferies, chief market strategist David Zervos puts his finger on the source of these sell-offs: German debt. Zervos writes: “The Dollar, the U.S. bond market, and the European stock market have all recently become infected with a highly contagious disease. The source of this nasty fever appears to be coming from none other than the sleepy old German bond market.” The yield on 10-year German sovereign debt has spiked from below 0.1% in mid-April to 0.635% as of publishing. That’s the kind of move you’d expect to see about once every six decades.

Investors who bought bunds, Zervos argues, bet on the wrong horse following the introduction of quantitative easing by the ECB. “When QE begins folks sadly get excited about front running central bank duration purchases, and then they take a very rich asset and make it stupid rich,” he writes. “And when they all convince themselves to be mega-long at the wrong price, the market inevitably cracks.” The sell-off in bunds began at a time when European credit growth was beginning to turn up, the economy began to improve, and a pair of fixed income legends, Jeffrey Gundlach and Bill Gross, offered some very bearish commentary on German bonds. The sell-off also came at a time of extreme positioning in major markets.

According to Zervos, the toppling of this domino is currently rippling through other asset classes. He considers this a period in which all these popular trades will get hit as the market purges the good QE trades from the poor ones. “Right now we have to get through this nasty period of contagious spring fever in Europe, or what the Germans would call Frühjahrsmüdigkeit,” he writes. “I honestly don’t know how long this fever will last (or how to pronounce that crazy German word), but none of this nasty price action dissuades from believing in the long-term QE-induced reflationary trend for European risk assets.”

Read more …

US ag gets hit from many sides at once, from drought to credit drought.

US Farmers In ‘Dire Straits’: JPM Warns Of Liquidity Crunch (Zero Hedge)

Despite the government’s ‘advice’ to young debt-laden students, the tragedy of the American farmer continues with worryingly pessimistic views on the future of the industry. With farmland prices falling for the first time in almost 30 years, credit conditions are weakening dramatically and the Kansas City Fed warns that persistently low crop prices and high input costs reduced profit margins and increased concerns about future loan repayment capacity, and JPMorgan concludes, the industry is currently in dire straits with the potential for a liquidity crunch for farmers into 2016.

Not so long ago, US farmland – whose prices were until recently rising exponentially – was considered by many to be the next asset bubble. Then, almost overnight, the fairytale ended, and as reported in February, US farmland saw its first price drop since 1986. Looking ahead, very few bankers expect price appreciation and more than a quarter of survey respondents expect cropland values to decline further in the next three months. And now, The Kansas City Fed warns that Agricultural credit conditions are worsening rapidly…

Credit conditions in the Federal Reserve’s Tenth District weakened as farm income declined further in the first quarter of 2015. Persistently low crop prices and high input costs reduced profit margins and increased concerns about future loan repayment capacity. Funds were available to meet historically high loan demand, but loan repayment rates dropped considerably. Although profit margins in the livestock industry have remained stable, most bankers do not expect farm income or credit conditions to improve in the next three months.

Read more …

“..economic growth will remain low (and inequality will remain high) until the level of private debt is drastically reduced..”

Private Debt, Economic Stagnation and a Modern Debt Jubilee (Steve Keen)

This is the talk I gave at the 8th Subversive Festival in Zagreb on May 15th 2015. I start with the Queen of England’s question “If these things were so large, how come everyone missed them? Why did nobody notice it?” and then show how private debt was the missing ingredient in the models that conventional economists have, which is why they missed the crisis. I finish with the assertion that economic growth will remain low (and inequality will remain high) until the level of private debt is drastically reduced. I recommend a “Modern Debt Jubilee” as the way to do this.

Read more …

As we predicted many times, China is failing in its attempts to smother the shadow banking system, which is A) too big to fight and B) too crucial for the economy.

China Backtracks on Deleveraging Local Government Debt (WSJ)

China is reversing course on a major effort to tackle its hefty local government debt problem, marking a setback for a priority reform aimed at getting its financial house in order. The move could provide the economy with some short-term help. But it restores a backdoor way that enabled local governments to load up on debt in recent years, providing a drag on growth at a time when Beijing is looking for ways to rekindle it. According to an announcement made Friday by the State Council, China’s cabinet, the authorities relaxed controls on the ability of local governments to raise money by allowing them to tap government-sponsored financing companies—the very entities that have been blamed for a rapid run-up in China’s local debt load over the past few years.

The move undermines an October policy intended to prevent those financing firms from taking on new debt. It comes as China’s long push toward financial reform—part of its broader effort to make the economy rely less on big investments but more on consumer spending—increasingly bumps up against a more pressing national goal: boosting growth. “To transition to a consumer-led economy, China will have to push through painful reforms and accept recession,” said Geoffrey Barker at Asian Macro Fund in Hong Kong. “But at least for now, the government appears unwilling to do that.” The latest move comes as the world’s second-largest economy endures slower-than-expected growth. A barrage of monetary-easing measures since last year has proved insufficient to counter a real-estate downturn and flagging factory output.

Earlier this week, China reported a sharp drop-off in growth of investment in factories, buildings and other fixed assets in the first four months compared with a year ago, partly because local governments found credit hard to come by to invest in big projects due to Beijing’s crackdown on local borrowing. Now, by backtracking on the local-debt cleanup initiative, Beijing is resorting to greater stimulus efforts to meet GDP targets. “We take this as a significant policy easing signal,” said chief China economist Zhiwei Zhang at Deutsche Bank. The need to bolster growth gained urgency after an April tour by Premier Li Keqiang of China’s three Rust Belt provinces in the northeast, including Liaoning, Jilin and Heilongjiang, according to Chinese officials with knowledge of the leadership’s thinking.

Read more …

CHina is simply too addicted to debt to move away smoothly.

China Deleveraging Measures Create Perpetual Leverage Machine (Zero Hedge)

China is in a tough spot and it’s starting to show up in what look like contradictory policy decisions. The problem goes something like this. In the interest of curbing systemic risk and decreasing the percentage of total social financing (TSF) comprised of off-balance sheet financing, China has moved to rein in the shadow banking boom that helped fuel the country’s meteoric growth. The effort to deleverage a system laboring under some $28 trillion in debt is complicated by the fact that the export-driven economy is growing at the slowest pace in 6 years (and that’s if you believe the official numbers), a scenario which calls for some manner of stimulus.

Unfortunately, the yuan’s dollar peg has served to further pressure China’s exports while rising capital outflows (plus an IMF SDR bid) make currency devaluation an undesirable tool for boosting the economy. Beijing has thus resorted to slashing policy rates, cutting the benchmark lending rate three times in six months and RRR twice this year (and they aren’t done yet). This of course flies in the face of attempts to deleverage the system. That is, lowering real interest rates encourages more leverage, not less, but Beijing has little choice. It must walk the tightrope, because at some point, the deceleration in economic growth will become so readily apparent that China will no longer be able to stick to the (likely) fabricated 7% output figure.

As we discussed on Thursday, the country’s local government debt dilemma is a microcosm of the challenges facing the broader economy. Local governments used shadow banking conduits to skirt borrowing limits, accumulating a massive pile of high-yield debt in the process. The total debt burden for these localities sums to around 35% of GDP and because a non-trivial portion carries yields that are much higher than traditional muni bonds, the debt servicing costs have become unbearable. To remedy the situation, Beijing is implementing a debt swap program which allows local governments to swap their high-yielding loans for long-term bonds with lower coupons.

In order to create demand for the new issues, the PBoC is allowing banks that purchase the new bonds to post them as collateral for cash that can then be re-lent to the broader economy, presumably at a healthy spread. So while the program is designed to help local governments deleverage by cutting hundreds of billions from debt servicing costs, the PBoC’s move to allow the new LGBs to be pledged for cash by the purchasing banks, means that on net, the entire refi program will actually add leverage to the system as banks use the cash they receive from repoing their LGBs to make new loans.

Read more …

“The institutions have, over the years, relied on a process of backward induction..”

A Blueprint for Greece’s Recovery within a Consolidating Europe (Varoufakis)

[..] .. agreement on a new development model for Greece requires overcoming two hurdles. First, we must concur on how to approach Greece’s fiscal consolidation and our management of public debt. Second, we need a comprehensive, commonly agreed reform agenda that will underpin that consolidation path and inspire the confidence of Greek society on the one hand and our partners on the other. Beginning with fiscal consolidation, the issue at hand concerns the method. The institutions have, over the years, relied on a process of backward induction: They set a date (say, the year 2019) and a target for the ratio of nominal debt to national income (say, 120%) that must be achieved before money markets are deemed ready to lend to Greece at reasonable rates.

Then, under arbitrary assumptions regarding growth rates, inflation, privatization receipts, and so forth, they compute what primary surpluses are necessary in every year, going backwards to the present. The result of this method, in our government’s opinion, is an ‘austerity trap’. When fiscal consolidation turns on a pre-determined debt ratio to be achieved at a predetermined point in the future, the primary surpluses needed to hit those targets are such that the effect on the private sector undermines the assumed growth rates and thus derails the planned fiscal path. Indeed, this is precisely why previous fiscal-consolidation plans for Greece missed their targets so spectacularly.

Read more …

Greece is getting tired of the institutions.

Greek PM Tsipras Takes ‘Command’ Of Reform Talks (CNBC)

Greek Prime Minister Alexis Tsipras has taken control of the country’s reform talks with its international lenders at a “critical” point in the negotiations, Greek government sources told CNBC. The sources, who did not want to be named due to the sensitive nature of the discussions, told CNBC that the Greek prime minister had taken command of the negotiating process and was involved in discussions with the Brussels Group of the country’s creditors – the IMF, European Commission and ECB as well as the European Stability Mechanism.

The sources added that a teleconference held Thursday on the reforms were held at the prime minister’s office – an incident denied by the government’s official spokesman. The Athens government has been in debt deadlock with its international creditors since it came to power in late January. While the left-wing Syriza party was elected on an anti-austerity ticket, those holding the purse-strings on its multibillion-euro bailout are insisting on strict economic and welfare reforms. The sources added that Tsipras’ move to lead the talks was an attempt to show his commitment to finding a resolution to the country’s impasse with lenders.

Greece certainly needs a deal over reforms, which could release a vital €7.2 billion euros worth of aid from its second bailout program. The country has millions of euros worth of loan repayments to pay over the next few weeks and months to lenders and money is running out. The sources noted that Tsipras wanted to be more involved in the talks as they entered a “delicate and critical” phase, adding that the prime minister was focusing on the “political” side of the deal while Finance Minister Yanis Varoufakis and Euclid Tsakalatos (currently in charge of Greece’s negotiating team) had been looking after the “technical side.”

Read more …

“Tsipras’s mandate from the Greek people is the biggest stumbling block to a deal with the country’s creditors..” Huh? Where did democracy go?

Tsipras Says He Won’t Cross Red Lines in Talks With Creditors (Bloomberg)

Greece won’t cross its red lines in negotiations with international creditors just because time is pressing to close a deal, Prime Minister Alexis Tsipras said. “Those who think that our red lines will fade as time goes on would do well to forget it,” Tsipras said at a conference in Athens late Friday. “I want to assure the Greek people that there’s no way the government will back down on the issue of pension and wage cuts,” he said. “A deal must be reached but it must be mutually beneficial.” Tsipras will address the standoff in bailout negotiations on the sidelines of a meeting of European Union leaders to be held May 21-22 in Riga, Latvia. More than 110 days of talks between Greece and its creditors have failed to produce an agreement to unlock further aid and avert default.

The standoff has triggered a liquidity squeeze, pulling the country back into a recession and renewing doubts over Greece’s future in the euro area. “The bottom line is that pressure on Greek authorities to come to a deal is rising,” JPMorgan’s Barr and Mackie wrote in a note to clients Friday. “The pressures on central government cash flow, pressures on the banking system and the political timetable are all converging on late May-early June. At that point some form of interim deal will need to be struck” and “it’s clear that time is running out,” they said. Negotiations in the so-called Brussels Group of Greek and creditor institution representatives will continue over the weekend and into next week.

While Greece has found common ground with its creditors in areas including fiscal targets, a marginal change to the sales tax rate and tax administration reform, there are “still open issues” concerning labor market and pension system reforms, Tsipras said. Greece may seek an additional meeting of euro-area finance ministers by the end of May, Greek government spokesman Gabriel Sakellaridis said on May 14, as the cash crunch intensifies. It remains unclear how Tsipras will deal with the likely objection by the Left Platform section of his Syriza party to the content of any deal, Barr and Mackie said. “Even small countries can stand upright to confront imperialist pressures and threats,” Greek Energy Minister Panagiotis Lafazanis said today in Athens following a meeting with Venezuela’s ambassador to Greece. Lafazanis leads the Left Platform.

Tsipras’s mandate from the Greek people is the biggest stumbling block to a deal with the country’s creditors, Maltese Finance Minister Edward Scicluna said in an interview Friday.

Read more …

Wise.

Greece Pays Public Sector Wages To Avert Fresh Economic Crisis (Guardian)

Greece avoided another financial crisis by paying about €500 million in wages to public sector workers, but suffered another downgrade of its credit rating. “The mid-May payments of wages and pensions … were made within the scheduled time frame,” the finance ministry said. They had been due on Friday. The payment came as Greece remained locked in talks with its creditors in an effort to release €7.2bn of bailout funds to avoid a default and exit from the eurozone. In a sign the leftist Syriza government was preparing to compromise over some of the reforms demanded by Brussels and the IMF, it said it would push ahead with privatisation of its biggest port, Piraeus.

It is in talks with China’s Cosco Group, which manages two container piers at the port, about selling a majority stake. “We are in very advanced talks to expand this cooperation very soon in relation with the inclusion of a railway network as well,” the defence minister, Panos Kammenos, told an economic conference in Athens. The Greek prime minister, Alexis Tsipras, said his country was “very close” to reaching a vital deal with bailout lenders, but insisted there was “no possibility” of giving in to key demands including further cuts to pensions and wages.

Tsipras said the government had not abandoned its goal to try to persuade lenders to restructure Greece’s debt. “It appears that we have reached common ground with the institutions on a number of issues, and that makes us optimistic that we are really very close to an agreement,” Tsipras said, noting convergence on harmonised sales tax rates and tax administration reforms. “But several issues remain open … I want to reassure the Greek people that there is no chance or possibility for the Greek government to retreat on the issue of wages and pensions. Wage earners and pensioners have suffered enough.”

Read more …

28.1% of mortgages are non-performing.

Home Is Where The Household Income Goes (Kathimerini)

Owning or even renting a home has become a bane rather than a boon for Greeks – to say nothing of the taxes ownership and utilization of a property entail – as the latest Housing Europe report shows that Greece has the highest housing costs as a percentage of disposable income among all European Union states. The cost of maintaining a home comes to 37% for average households, soaring to 65% for those close to the poverty line, the annual study found. The respective average rates in the EU are 22.2% and 41%. The survey counts costs as rent for tenants or mortgage payments for owners, spending on heating, electricity, water and sewage, and telephony, as well as building maintenance and other expenditures.

The continual decline in household revenues – mainly through cuts to salaries and pensions – coupled with the steady increase in other costs such as power rates and heating oil, meanwhile, is putting an increasing number of households at serious risk. Denmark comes second on the list, with 30% of people’s disposable income going into the maintenance of their home, followed by Germany with 28%. Both of these countries, however, have a low rate of home ownership compared with Greece, so the cost of rent takes up a bigger chunk of housing expenditure. This also suggests that Greece’s high rate is due to the decline in incomes after the outbreak of the financial crisis and the spike in unemployment, rather than to an increase in expenditure.

According to the latest available data, from the 2011 census, the rate of people living in their own homes comes to 73.2%, while 21.7% live in rented properties. In Germany, home ownership amounts to just 45.4% and in Denmark it stands at 51%. According to EU data in 2012, Greece also had the highest share of people overburdened by housing costs at 33.1%. This country also tops other unenviable lists, as it has the highest rate of people with unpaid utilities (31.8%), as well as of mortgage borrowers with arrears and of tenants owing rent (both around 15%). The rate of bad loans has soared in recent years, with nonperforming mortgages climbing from 3.6% in 2008 to 28.1% of all mortgages in end-2014.

Read more …

Britons will take to the streets.

Osborne Calls Emergency July Budget To Reveal Next Wave Of Austerity (Guardian)

George Osborne will reveal how the government plans to cut £12bn from Britain’s welfare bill when he announces a fresh wave of austerity measures in his second budget in less than four months on 8 July. The chancellor said he wanted to make a start delivering on the commitments made in the Conservative party manifesto and pledged that his package would be a budget for “working people”. Announcing his decision in an article in the Sun, Osborne said he would provide details of how the government plans to eliminate the UK’s budget deficit – forecast to be £75bn this year – and run a surplus by the end of the parliament.

“On the 8th of July I am going to take the unusual step of having a second budget of the year – because I don’t want to wait to turn the promises we made in the election into a reality … And I can tell you it will be a budget for working people.” Treasury sources said the budget would address Britain’s poor productivity record, which has held back growth in living standards, and would also announce plans to create 3m new apprenticeships. However, the centrepiece of the package will be a fresh bout of austerity, with Osborne keen to get unpopular measures out of the way early in the parliament, in readiness for pre-election tax cuts once the public finances have improved.

Read more …

“In 1946 there were roughly 2.5 million children between the ages of 0 and 5 living in the Soviet Union. There should have been around 6.5 million.”

Russia is a Product of WWII, In Terms of Demographics (Adomanis)

The human costs of the war really do beggar belief. The first and most obvious costs are the people (primarily men between the ages of 19 and 40) who were actually killed in combat. And, as you might expect, these losses were positively enormous: in some age cohorts, fully half the men who should have been alive in 1946 were not. Somewhat surprisingly the biggest absolute and proportional losses seem to have fallen on those men who were roughly 30 years old when the war started. In most cinematic depictions of the war that I’ve seen the average rank and file soldier is presented as a fresh-faced recruit straight out of high school, but this evidently isn’t a particularly accurate presentation of what actually happened.

Another thing that was somewhat surprising was the relative paucity of losses among the female part of the population. The German occupation of the Baltics, Ukraine, and large sections of European Russia was famously barbaric. Civilians living in those areas were treated brutishly, often for a period of many years. Any number of films display in quite excoriating detail the horrific ways in which the Nazis treated the people whom they occupied. But unlike the entire generation of young men that was “missing” as a result of the war, from a demographic standpoint Soviet women were not impacted to nearly the same degree. Given what I had read about the egregious losses among civilians in places like Leningrad, Stalingrad, and Rostov this was unexpected.

But what really blew me away was the “unseen” demographic cost of the war: those children that would have been born had pre-war fertility patterns been sustained throughout the 1940’s. Here the losses are even more nightmarish than those suffered by young males of prime combat age. In 1946 there were roughly 2.5 million children between the ages of 0 and 5 living in the Soviet Union. There should have been around 6.5 million. These losses of four million lost births won’t show up anywhere on a monument or a casualty roster, but that doesn’t make them any less real. Indeed, from the standpoint of their impact on Russia’s future they were likely even more significant than the millions of young men who died in combat, permanently lowering Russia’s potential population.

Read more …

WIll there be more of these cases coming soon?

Poland Pays $250,000 To Alleged Victims Of CIA Rendition And Torture (Guardian)

Poland is paying a quarter of a million dollars to two terror suspects allegedly tortured by the CIA in a secret facility in this country – prompting outrage among many here who feel they are being punished for American wrongdoing. Europe’s top human rights court imposed the penalty against Poland, setting a Saturday deadline. It irks many in Poland that their country is facing legal repercussions for the secret rendition and detention programme which the CIA operated under then-President George W Bush in several countries across the world after the 9/11 attacks. So far no US officials have been held accountable, but the European court of human rights has shown that it does not want to let European powers that helped the programme off the hook.

The court also ordered Macedonia in 2012 to pay €60,000 to a Lebanese-German man who was seized in Macedonia on erroneous suspicion of terrorist ties and subjected to abuse by the CIA. The Polish foreign ministry said on Friday that it was processing the payments. However, neither Polish officials nor the US embassy in Warsaw would say where the money is going or how it was being used. For now, it remains unclear how a European government can make payments to two men who have been held for years at Guantánamo with almost no contact to the outside world. Even lawyers for the suspects were tight-lipped, though they said the money would not be used to fund terrorism.

The European court of human rights ruled last July that Poland violated the rights of suspects Abu Zubaydah and Abd al-Rahim al-Nashiri by allowing the CIA to imprison them and by failing to stop the “torture and inhuman or degrading treatment” of the inmates. It ordered Warsaw to pay €130,000 to Zubaydah, a Palestinian, and €100,000 to Nashiri, a Saudi national charged with orchestrating the attack in 2000 on the USS Cole that killed 17 US sailors. Poland appealed against the ruling but lost in February. The foreign minister, Grzegorz Schetyna, said at the time that “we will abide by this ruling because we are a law-abiding country”. The country apparently received millions of dollars from the United States when it allowed the site to operate in 2002 and 2003, last year’s report on the renditions program by the US Senate intelligence committee said in a section that appears to refer to Poland though the country name was redacted.

Read more …

Default.

Ukraine GDP Drops 17.6%, Prices Rise 61% (FT)

Crunch talks on Ukraine’s national debt hang in the balance after the finance minister warned creditors that “all options were on the table” as the economic outlook for the war-torn country worsens. Natalie Jaresko made the comments ahead of a restructuring deadline next month. They came as official figures showed Ukraine experienced an even deeper slump than expected in the first quarter, with gross domestic product shrinking 17.6% year on year. The central bank had previously estimated a 15% contraction. The scale of the slump deepened international concerns over the country’s economy. Figures showed inflation spiked to some 61% in April, because of sharp increases in utility tariffs on top of the weakness of the national currency, the hryvnia.

Ukraine’s government is struggling to convince creditors to accept a haircut as part of plans to restructure $23bn of debt. The atmosphere surrounding the talks has become increasingly acrimonious as both sides this week issued statements accusing the other of failing to engage “substantively” with the process. The stand-off over Ukraine’s debt restructuring, alongside the Greek debt crisis, leaves the international community facing potential default risks by two European countries. Analysts suggested Ms Jaresko’s reference to “all options being on the table” was a hint the government was prepared if necessary to impose a moratorium or suspension of debt servicing.

Failure to agree a restructuring with debtholders by June could put at risk the next tranche of a $17.5bn loan from the IMF. The loan is part of a broader $40bn assistance programme that includes $7.5bn in bilateral aid, but also assumes a $15bn debt restructuring over four years that Kiev says should include a haircut, reductions in the coupon, and maturity extensions. [..] In March, credit rating agency Moody’s announced that Ukraine’s chances of defaulting on its debt were “virtually 100 per cent”.

Read more …

Rajoy is not going to like this.

Anti-Poverty Crusader Leads Race To Be Barcelona’s Next Mayor (Guardian)

As one of the founders of the Mortgage Victims’ Platform, Ada Colau has spent the past six years battling the most visible scars of Spain’s economic crisis, from growing inequality to home evictions. Now the 41-year-old activist could become Barcelona’s next mayor. Polls have put Colau, and the Barcelona en Comú (Barcelona in Common) citizen platform she leads, in the top spot in the runup to Spain’s regional and municipal elections. A grassroots coalition of several political parties, including Podemos, and thousands of citizens and activists, Barcelona en Comú has become the brightest hope for the many in Spain pushing for democratic regeneration.

Crowd-funded and guided by a code of ethics composed by its members, the group promises to focus on job creation, combat growing inequality in the city and usher in a culture of transparency and anti-corruption measures in the city’s institutions. “We want to show that you can do politics another way,” Colau told the Guardian. “It’s a historic opportunity.” If they win, the group’s members have prepared a to-do list for its first months in power – what Colau calls “commonsense measures” – ranging from limiting her monthly salary to €2,200 to eliminating official cars and expense budgets for attending meetings. The details of any meetings involving city officials would be posted online, they say. The thorny issue of tourism will also be tackled, with an effort to design a more sustainable model for the city.

“Tourism is out of control,” said Colau, pointing to areas such as the historical centre that have become saturated with hotels and tourist apartments. Rents have rocketed as a result and neighbourhoods and small businesses have been pushed out of the area. “Everyone wants to see the real city, but if the centre fills up with multinationals and big stores that you can find in any other city, it doesn’t work,” she said. Colau’s voice rises with excitement as she muses about the possibility of being elected on 24 May. “What most excites us is the idea that Barcelona could become a world reference as a democratic and socially just city. Barcelona has the resources, the money and the skills. The only thing that has been missing to date has been the political will.”

Read more …

“CNN in direct transmissions assures that since the 1990s America has been leading humanitarian actions, and not wars, that from military planes fall angels and not bombs!”

US Anger With RT Will Start World War Three – Emir Kusturica (Sputnik)

World War Three will break out when the US finally tires of the RT TV channel, and decides to bomb it; in retaliation, Russia will destroy CNN, writes film director Emir Kusturica, in an article published on Thursday. “Everything is different to how it was during the Cold War! Because of that it is useless to talk about a return to how things used to be, and listen to Henry Kissinger scare us. In the meantime, China has become the strongest world economy, Russia has recovered from Perestroika, India is growing into a genie! Military experts don’t argue that Americans have the most organized army, but there remains the unsolvable puzzle for NATO generals, who have called one of the Russian rockets ‘SATAN.'”

“The devil never comes alone! At the same time with this rocket and numerous innovations, the TV Channel RT has also appeared among the Russian arsenal.” “The program is broadcast in English, and watched by around 700 million people in 200 countries. The secret success of this television is the smashing of the Hollywood-CNN stereotype of the good and bad guys, where blacks, Hispanics, Russians, Serbs are the villains, and white Americans, wherever you look, are OK!” “Congressman, and those in the State Department are continually upset by RT,” writes Kusturica, adding that the US Secretary of State is “the loudest.”

“Kerry and the congressmen are bothered by the fact that RT sends signals that the world is not determined by the fatalism of liberal capitalism, that the US is leading the world into chaos, that Monsanto is not producing healthy food, that Coca-Cola is ideal for cleaning automobile alloys and not for the human stomach, that in Serbia the percentage of people who die from cancer has risen sharply due to the 1999 NATO bombings, that the social map of America is falling from day to day, that the fingerprints of the CIA are on the Ukrainian crisis, and that BlackWater fired at the Ukrainian police, and not Maidan activists.”

In contrast, writes the film director, “CNN in direct transmissions assures that since the 1990s America has been leading humanitarian actions, and not wars, that from military planes fall angels and not bombs!” “As time goes on RT will ever more demystify the American Dream and in primetime will reveal the truth hidden for decades from the eyes and heart of average Americans, in their own homes, in perfect English, better than they use on CNN.”

Read more …

How sugar bankrupts societies.

Food and Finance: Create A Revolution With Your Shopping Trolley (Berrino)

When we think of health, most of the time we are thinking of treatments and about patients getting better. Basically we’re thinking about the effects of bad health. Hardly ever do we think of the causes. It’s really complicated to intervene on the causes. That means making changes to the economy that is making us sick. It means altering the very structure of the society in which we live. The air that we breathe, the food that we eat – these are the poisons that make us sick. The medical doctor can only treat the patient, and that is often the last hope, for instances for cases of tumours. The lawmaker should be protecting the citizens, and should be using preventative measures to safeguard health.

However this involves clashing with a variety of multinationals, with the effects of globalisation, with the criminal financial world that not doesn’t mind who it offends and doesn’t even know of the existence of ethics. And in the face of these obstacles, the medical doctor can do very little. The only true remedy is information. Prevent bad health by having access to information, and by your lifestyle. Any diabetes specialist will tell you that sugar is bad for you, but we are bombarded with advertisements for sweet snacks and sugary drinks. These are especially targeted at children who are the most vulnerable. Health care, food, and public spending are all interconnected.

from “Pappa Mundi“ by Francesco Galietti: “It could seem paradoxical, but the structural solution to the crisis in public financing is also linked to the solution of the food issue. In most of the Western World, the public spending that’s classed as “health care” is concentrated on the treatment of pathologies (diabetes, high blood pressure, cancers) and these are linked to the unrestrained consumption of sugars, fats, etc. This has been confirmed in the public consultation that took place in the first quarter of 2014 for the World Health Organization guidelines on the consumption of sugars. In the thoughtful report of a research project issued by their think-tank – the McKinsey Global Institute: obesity has become much more than a cultural problem or one due to the lack of knowledge about foods.

Today, the impact from obesity is roughly $2.0 trillion, or 2.8% of global GDP. This is the impressive figure combining falls in productivity, health-care costs and various types of investment to mitigate the impact. The order of magnitude is roughly equivalent to the global impact from armed violence, war, and terrorism.“ It then goes on to say: “Thus it is not surprising to witness the growing interest and the possible boom in the use of surrogate natural sugars (like stevia) by global giants like Coca-Cola and Pepsi. Nor is it surprising to see the outcry from the associations of sugar producers who are reluctant to take the blame for the excesses of individual people as well as for the gaping holes in national accounts … The more people get hold of the idea that unhealthy foods have negative repercussions even for the badly organised public finances, the more the producers of unhealthy foods will start to be targeted by national governments. “

Read more …

“Humans are subject to intense status quo bias. Especially on the conservative end of the psychological spectrum — which is the direction all humans move when they feel frightened or under threat..”

The Awful Truth About Climate Change No One Wants To Admit (Vox)

There has always been an odd tenor to discussions among climate scientists, policy wonks, and politicians, a passive-aggressive quality, and I think it can be traced to the fact that everyone involved has to dance around the obvious truth, at risk of losing their status and influence. The obvious truth about global warming is this: barring miracles, humanity is in for some awful shit. We recently passed 400 parts per million of CO2 in the atmosphere; the status quo will take us up to 1,000 ppm, raising global average temperature (from a pre-industrial baseline) between 3.2 and 5.4 degrees Celsius.

That will mean, according to a 2012 World Bank report, “extreme heat-waves, declining global food stocks, loss of ecosystems and biodiversity, and life-threatening sea level rise,” the effects of which will be “tilted against many of the world’s poorest regions,” stalling or reversing decades of development work. “A 4°C warmer world can, and must be, avoided,” said the World Bank president. But that’s where we’re headed. It will take enormous effort just to avoid that fate. Holding temperature down under 2°C would require an utterly unprecedented level of global mobilization and coordination, sustained over decades. There’s no sign of that happening, or reason to think it’s plausible anytime soon. And so, awful shit it is. [..]

The sad fact is that no one has much incentive to break the bad news. Humans are subject to intense status quo bias. Especially on the conservative end of the psychological spectrum — which is the direction all humans move when they feel frightened or under threat — there is a powerful craving for the message that things are, basically, okay, that the system is working like it’s supposed to, that the current state of affairs is the best available, or close enough. To be the insisting that, no, things are not okay, things are heading toward disaster, is uncomfortable in any social milieu — especially since, in most people’s experience, those wailing about the end of the world are always wrong and frequently crazy.

Read more …

Access to water will decline sharply going forward.

Without Universal Access To Water, There Can Be No Food Security (Guardian)

Ensuring universal access to water is vital in order to address food security and improve nutrition, yet recognition of the links between water and food are too often missed. A major report on water for food security and nutrition, launched on Friday by the high-level panel of experts on food security and nutrition (HLPE), is the first comprehensive effort to bring together access to water, food security and nutrition. This report goes far beyond the usual focus on water for agriculture. Safe drinking water and sanitation are fundamental to human development and wellbeing. Yet inadequate access to clean water undermines people’s nutrition and health through water-borne diseases and chronic intestinal infections.

The landmark report, commissioned by the committee on world food security (CFS), not only focuses on the need for access, it also makes important links between land, water and productivity. It underlines the message that water is integral to human food security and nutrition, as well as the conservation of forests, wetlands and lakes upon which all humans depend. Policies and governance issues on land, water and food are usually developed in isolation. Against a backdrop of future uncertainties, including climate change, changing diets and water-demand patterns, there has to be a joined-up approach to addressing these challenges.

There are competing demands over water from different sectors such as agriculture, energy and industry. With this in mind, policymakers have to prioritise the rights and interests of the most marginalised and vulnerable groups, with a particular focus on women, when it comes to water access. There is vast inequality in access to water, which is determined by socio-economic, political, gender and power relations. Securing access can be particularly challenging for smallholders, vulnerable and marginalised populations and women.

Read more …

May 152015
 
 May 15, 2015  Posted by at 10:04 am Finance Tagged with: , , , , , , , , , , , ,  1 Response »


G. G. Bain Police machine gun, New York 1918

Every Speculative Bubble Rests On Some Kind Of A Fairy Tale (G&M)
Banks Seek Waivers Ahead Of Forex Guilty Pleas (Reuters)
How China’s Banks Hide Trillions In Credit Risk – Full Frontal (Zero Hedge)
Max Keiser: ‘Britain Is The Epicentre Of Financial Fraud’ (Newsweek)
EU Prevents Greece From Implementing Reforms: Varoufakis (EFE)
Varoufakis Refuses Any Bailout That Would Send Greece In ‘Death Spiral’ (Guar.)
Greece To Privatize Port, Airports In Concession To Creditors (Bloomberg)
Varoufakis Says Debt Swap Fills Draghi’s ‘Soul With Fear’ (Reuters)
Greek Government Defends Itself Over Central Bank Tensions (Reuters)
Syriza Highlights ‘Red Lines’ In Negotiations, Calls On People (Kathimerini)
Syriza and Greece: Dancing with Austerity (Village.ie)
Greece Signs EBRD Deal Worth €500 Million A Year (Reuters)
You Can’t Read The TPP, But These Huge Corporations Can (Intercept)
Secrets, Betrayals and Merkel’s Risky Silence in the NSA Scandal (Spiegel)
Flash Crash Patsy Complained Over 100 Times About Real Market Manipulators (ZH)
Monsanto’s Syngenta Gambit Hinges On Sale Of Seed Businesses (Reuters)
A Third Of Europe’s Birds Is Under Threat (Guardian)
Your Attention Span Is Now Less Than That Of A Goldfish (OC)

“Every speculative bubble rests on some kind of a fairy tale.. And now it is the faith in the central-planning capabilities of global central bankers. When the loss of confidence in the Fed, the ECB etc. begins, the stampede out of stocks and bonds will start.”

Every Speculative Bubble Rests On Some Kind Of A Fairy Tale (G&M)

Government bonds regarded as among the safest in the developed world have become subject to violent price swings typically associated with more speculative assets. Yields on German 10-year bunds, the benchmark for the euro zone, shot up more than 20% at one point Tuesday, in a selloff described by Goldman Sachs analysts as “vicious.” As recently as last month, the same debt reached a record-low yield of 0.05%. At the other end of the confidence scale, Greek bonds strengthened slightly, reflecting renewed optimism that the embattled leftist government could cobble together a deal with euro-zone finance ministers that would get the bailout cash flowing again into its nearly empty coffers. But deal or no deal, the chances of a Greek default remain high. And despite the efforts of European authorities to contain any fallout and safeguard the euro, a spillover to other battered members of the euro club can’t be ruled out.

“There are a lot of rotten assets out there, and ultimately you have to have a reckoning,” warned Alex Jurshevski at Recovery Partners, who advises governments and corporations on debt restructuring. Although most analysts doubt this would trigger a seismic global financial shock, the risk of contagion is more than trivial, as underscored by the current sovereign-bond rout – with a loss in value of about $450-billion across global markets in just three weeks. “There’s a lot of risk in any of the markets that have been subjected to artificial downward pressure on interest rates,” Mr. Jurshevski said. Worries about sovereign debt have been around since European nations first latched on to this instrument as a relatively low-cost way of meeting the high costs of waging wars and undertaking other expensive projects.

Within four years after the newly minted Bank of England issued such bonds in 1694, government debt ballooned to £16-million from £1.25-million. By the middle of last year, government-related debt around the world totalled $58-trillion (U.S.), a 76% increase since the end of 2007, according to a report by McKinsey Global Institute aptly titled “Debt and (not much) deleveraging.” The ratio of all debt to GDP jumped 17 %age points to a whopping 286%. Since the Great Recession, debt has been expanding faster than the economy in every developed nation on the planet, led by a huge expansion of public-sector borrowing.

“Every speculative bubble rests on some kind of a fairy tale, a story the bubble participants believe in and use as rationalization to buy extremely overvalued stocks or bonds or real estate,” Mr. Vogt argued. “And now it is the faith in the central-planning capabilities of global central bankers. When the loss of confidence in the Fed, the ECB etc. begins, the stampede out of stocks and bonds will start. I think we are very close to this pivotal moment in financial history.”

Read more …

Commit to crimes and demand BAU in the same breath.

Banks Seek Waivers Ahead Of Forex Guilty Pleas (Reuters)

Banks want assurances from U.S. regulators that they will not be barred from certain businesses before agreeing to plead guilty to criminal charges over the manipulation of foreign exchange rates, causing a delay in multibillion-dollar settlements, people familiar with the matter said. In an unprecedented move, the parent companies or main banking units of JPMorgan Chase, Citigroup, RBS, Barclays and UBS are likely to plead guilty to rigging foreign exchange rates to benefit their transactions. The banks are also scrambling to line up exemptions or waivers from the Securities and Exchanges Commission and other federal regulators because criminal pleas trigger consequences such as removing the ability to manage retirement plans or raise capital easily.

In the past, waivers have generally been granted without a hitch. However, the practice has become controversial in the past year, particularly at the SEC, where Democratic Commissioner Kara Stein has criticized the agency for rubber stamping requests and being too soft on repeat offenders. Negotiating some of the waivers among the SEC’s five commissioners could prove challenging because many of these banks have broken criminal or civil laws in the past that triggered the need for waivers. Many of the banks want an SEC waiver to continue operating as “well-known seasoned issuers” so they can sell stocks and debt efficiently, people familiar with the matter said.

Such a designation allows public companies to bypass SEC approval and raise capital “off the shelf” – a process that is speedier and more convenient. Several of the people said another waiver being sought by some banks is the ability to retain a safe harbor that shields them from class action lawsuits when they make forward-looking statements. The banks involved are also seeking waivers that will allow them to continue operating in the mutual fund business, sources said. At least some of the waivers at issue in the forex probe will need to be put to a vote by the SEC’s five commissioners. No date has been set yet..

Read more …

“..loan loss reserves aren’t even sufficient to cover NPLs + special mention loans, let alone defaults on a portion of the 38% of credit risk carried off the books..”

How China’s Banks Hide Trillions In Credit Risk – Full Frontal (Zero Hedge)

There are several takeaways here. First – and most obvious – is the fact that accurately assessing credit risk in Chna is extraordinarily difficult. What we do know, is that between forced roll-overs, the practice of carrying channel loans as “investments” and “receivables”, inconsistent application of loan classification norms, and the dramatic increase in off balance sheet financing, the ‘real’ ratio of non-performing loans to total loans is likey far higher than the headline number, meaning that as economic growth grinds consistently lower, the country’s lenders could find themselves in deep trouble especially considering the fact that loan loss reserves aren’t even sufficient to cover NPLs + special mention loans, let alone defaults on a portion of the 38% of credit risk carried off the books.

The irony though is that while China clearly has a debt problem (282% of GDP), it’s also embarking on a concerted effort to slash policy rates in an effort to drive down real rates and stimulate the flagging economy, meaning the country is caught between the fallout from a shadow banking boom and the need to keep conditions loose because said boom has now gone bust, dragging credit growth down with it. In other words, the country is trying to deleverage and re-leverage at the same time. A picture perfect example of this is the PBoC’s effort to facilitate a multi-trillion yuan refi program for China’s heavily-indebted local governments. The idea is to swap existing high yield loans (accumulated via shadow banking conduits as localities sought to skirt borrowing limits) for traditional muni bonds that will carry far lower interest rates.

So while the program is designed to help local governments deleverage by cutting hundreds of billions from debt servicing costs, the CNY1 trillion in new LGB issuance (the pilot program is capped at 1 trillion yuan) represents a 150% increase in supply over 2014. Those bonds will be pledged as collateral to the PBoC for cheap cash which, if the central bank has its way, will be lent out to the real economy. So again, deleveraging and re-leveraging at the same time. This is just one of many ‘rock-hard place’ dynamics confronting the country as it marks a difficult transition from a centrally planned economy based on credit and investment to a consumption-driven model characterized by the liberalization of interest and exchange rates.

Read more …

‘If you see me walking the streets of your town, then you’re probably screwed’.

Max Keiser: ‘Britain Is The Epicentre Of Financial Fraud’ (Newsweek)

A general election, Benjamin Disraeli once observed, “inflames the passions of every class of the community. Even the poor,” he added, “begin to hope.” In 2015, Max Keiser argues, the power of global markets has rendered election fever something of an anachronism: “Tony Blair personified the shift away from democracy, towards control by bankers.” In modern politics, the prime minister “is really taking orders from finance”. “What if Miliband had won?” “There’s an impending scheme called TTIP (Transatlantic Trade and Investment Partnership, a proposed EU-US agreement) whereby all complaints – against US companies fracking in Britain, say – would go to a global tribunal, moderated by corporations. They don’t care who the prime minister is. “Why should we?” David Cameron’s role, “is being eroded to the point of insignificance”.

Keiser, 55, is a New York University graduate and former high-achieving Wall Street trader whose mischievous wit and renegade instincts have made him one of the most widely viewed broadcasters on the planet. His flagship show, Keiser Report, is carried by Russian state-funded channel RT; for that alone, some fellow-Americans consider him a traitor. But Keiser connects with a predominantly youthful audience otherwise indifferent to economics. “Rage against kleptocrats is building incrementally,” says Keiser, a tireless scourge of JP Morgan, Lehman Brothers and HSBC. “All over the world, people have had enough.” Untroubled by controversy, Keiser conducted the 2011 interview with Roseanne Barr during which she explained that a fitting reward for “banksters” would be to bring back the guillotine.

He once advised Cameron to “go back to Eton and get some of that back-stall shower pleasure”. When we first met, three years ago, just after Keiser moved to London with co-presenter and wife Stacy Herbert, he told me that the modern voter was worse off than a medieval serf. “Back then,” he said, “at least the process of theft was transparent. The barons whacked you over the head, then took all your money. The mode of larceny has changed, that’s all.” What he calls “the Thatcher-Reagan market model” has, he says, “been consigned to the dustbin. There’s no growth. There’s quantitative easing, which causes deflation. The global economy is collapsing.”

The EU, as Keiser likes to describe it, “poses as an elite club; actually it’s a leper colony where everyone’s comparing who has the most fingers left”. “Could France, say, go bankrupt?” “Absolutely. The forces killing Greece are active in France, Italy and Spain.” The EU, he says, “could be viewed as The Fourth Reich. Germany is a superpower. The Greek crisis is great for them – it keeps the euro low and German exports cheap. When countries like France go broke, EU federalisation will proceed through Berlin.”

Read more …

“So far, none of the many planned reforms have been implemented because the partners first wanted a broad and comprehensive agreement..”

EU Prevents Greece From Implementing Reforms: Varoufakis (EFE)

Greek Finance Minister Yanis Varoufakis said on Thursday that its European partners have prevented the Greek government from legislating many necessary reforms, and stressed that he would only sign an agreement that aims at economic sustainability, Efe news agency reported. So far, none of the many planned reforms have been implemented because the partners first wanted a broad and comprehensive agreement, and believed that any legislation would constitute a unilateral act, Varoufakis argued at a conference organised in the Greek capital by The Economist weekly.

The minister said that from the beginning, creditors rejected proposals to negotiate and regulate in parallel, an action that, in his view, would have helped to create confidence between Greece and its partners. Varufakis stressed that Greece was determined to reform everything in the country, noting that if Greece did not reform, it would sink. However, he stressed that he would not sign any agreement inconsistent with macroeconomics or unsustainable, and accepting conditions that cannot be met, such as had been down in the past. The error of the past, he explained, was that every negotiation looked only for what to do to make the next bailout payment instead of seeking solutions to pursue economic recovery.

Read more …

Oh boy: “[Draghi] received a rapturous welcome from Christine Lagarde, who introduced him as “maestro” – the nickname once given to Alan Greenspan. “Those who know you understand that you are a man of outstanding insight, fierce determination, and above all, courage.”

Varoufakis Refuses Any Bailout That Would Send Greece In ‘Death Spiral’ (Guar.)

Greece’s embattled finance minister, Yanis Varoufakis, stepped up his war of words with eurozone policymakers on Thursday, saying he wished his country still had the drachma, and would not sign up to any bailout plan that would send his country into a “death spiral”. With Greece facing a severe cash crisis as it struggles to secure a rescue deal from its creditors, Varoufakis – who has been officially sidelined from the debt negotiations – told a conference in Athens that he would reject any agreement in which “the numbers do not add up”. Greek GDP figures, published on Wednesday, revealed that the economy has already returned to recession. “I wish we had the drachma, I wish we had never entered this monetary union,” Varoufakis said.

“And I think that deep down all member states with the eurozone would agree with that now. Because it was very badly constructed. But once you are in, you don’t get out without a catastrophe”. He also warned that a mooted proposal for a bond swap, to ease Athens’ cash-crunch, was likely to be rejected, because it struck “fear into the soul” of European Central Bank president Mario Draghi. Despite his comments Greece on Thursday offered a concession to its international lenders by pushing ahead with the sale of its biggest port, Piraeus. Greece has asked three firms to submit bids for a majority stake in the port, a senior privatisation official told Reuters, unblocking a major sale of a public asset as creditors demand economic reforms from Athens.

Draghi, who was in Washington on Thursday to deliver a lecture on monetary policy, pointedly failed to mention the ongoing Greek crisis. He received a rapturous welcome from Christine Lagarde, the managing director of the International Monetary Fund, who introduced him as “maestro” – the nickname once given to Federal Reserve chairman Alan Greenspan. “Those who know you understand that you are a man of outstanding insight, fierce determination, and above all, courage. You can call a spade a spade without putting any of your cards on the table,” she said.

Read more …

“It’s “definite” that Greece won’t proceed with selling other state assets on a list that had been agreed on by the previous government..”

Greece To Privatize Port, Airports In Concession To Creditors (Bloomberg)

Greece will continue with efforts to privatize the country’s largest port and regional airports as it seeks ways to attract investment for other state assets, Economy Minister George Stathakis said, in a government concession in talks with its creditors. The privatization process that is already underway for the Piraeus Port Authority, operator of Greece’s largest harbor, and for 14 regional airports will continue, Stathakis said today in an interview in Tbilisi, Georgia. “We’re trying to revise some elements of these privatizations in order to improve them and I think we’ll get a sensible agreement for both.” A sale of the Piraeus Port would be a reversal on the part of Greece’s Syriza party-led government, which had earlier pledged to block such moves.

As part of ongoing negotiations to unlock aid to Europe’s most-indebted nation, Greek’s European creditors have asked for more specific policy proposals in areas including labor market deregulation, a pension-system overhaul, sales tax reform and privatization of state-held assets. Still, Stathakis said the government doesn’t plan to sell other assets at the moment.The Piraeus Port sale “is part of the bailout negotiations,” and the fact that the government “agrees to privatize the port is a compromise to creditors,” government spokesman Gabriel Sakellaridis told reporters in Athens Thursday. A venture led by Fraport won the right in November 2014 to use, operate and manage the 14 regional airports after it offered €1.2 billion for 40 years and promised to pay an annual, guaranteed leasing fee of €22.9 million.

Fraport also pledged to make €330 million in investments over the next four years. Greece is talking to Fraport and a decision should be reached “very soon.” It’s “definite” that Greece won’t proceed with selling other state assets on a list that had been agreed on by the previous government such as water companies, the post office or Public Power Corp, Stathakis said. “We’re trying to work on a different model than privatizing to attract capital and investment such as for the country’s railways and other ports” and Greece is looking at “alternative options to 100% privatization.” The sale of land at Hellenikon, site of Athens’s old airport that is Europe’s largest unused tract of urban real estate, “is an issue under discussion,” Stathakis said. A venture led-by Lamda Development last year agreed to buy the property for €915 million while also committing to spend €1.2 billion on infrastructure at the site.

Read more …

“..such a swap of our own new bonds with these bonds … would feed Mr. Weidmann with excuses to create problems with the ECB’s QE.”

Varoufakis Says Debt Swap Fills Draghi’s ‘Soul With Fear’ (Reuters)

Repayment of what Greece owes to the ECB should be pushed into the future, but it is not an option because it fills ECB chief Mario Draghi’s “soul with fear”, Greece’s finance minister said on Thursday. Yanis Varoufakis said Draghi, president of the ECB, cannot risk irritating Germany with such a debt swap because of Berlin’s objection to his bond-buying program. Varoufakis first raised the idea of swapping Greek debt for growth-linked or perpetual bonds when his leftist government came to power earlier this year, But Athens has since dropped the proposal after it got a cool reception from eurozone partners.

The outspoken minister, who has been sidelined in talks with EU and IMF lenders, brought it up again on Thursday, saying €27 billion of bonds owed to the ECB after €6.7 billion worth are repaid in July and August should be pushed back. “What must be done (is that) these €27 billion of bonds that are still held by the ECB should be taken from there and sent overnight to the distant future,” he told parliament. “How could this be done? Through a swap. The idea of a swap between the Greek government and the ECB fills Mr. Draghi’s soul with fear. Because you know that Mr. Draghi is in a big struggle against the Bundesbank, which is fighting against QE. Mr. Weidmann in particular is opposing it.”

Varoufakis was referring to the ECB’s quantitative easing (QE) or bond-buying plan and Bundesbank President Jens Weidmann’s unabashed criticism of it. Varoufakis said the bond-buying plan is “everything for Mr. Draghi” but that “allowing such a swap of our own new bonds with these bonds … would feed Mr. Weidmann with excuses to create problems with the ECB’s QE.” Prime Minister Alexis Tsipras’s government stormed to power in January promising it would end austerity and demand a debt writeoff from lenders to make the country’s debt manageable. It has spoken little about debt relief in recent months as it tries to focus on reaching a deal with lenders on a cash-for-reforms deal, which has proved difficult amid a deadlock on pension and labor issues.

Read more …

I have the impression Syriza is being very polite on this issue.

Greek Government Defends Itself Over Central Bank Tensions (Reuters)

Greece’s leftist government on Thursday sought to deflect criticism over tensions with the Bank of Greece, saying it respected the bank’s independence but was free to castigate the governor for actions he took as finance minister. Governor Yannis Stournaras’s relations with the government have come under scrutiny in recent days after a newspaper accused him of undermining Greece’s talks with creditors and government officials openly criticized him on other issues. “The Greek government hasn’t opened any issue with Mr. Stournaras. If issues have surfaced, it wasn’t due to the government’s initiative,” government spokesman Gavriil Sakellaridis told reporters. “The issue of the central bank’s independence, which is fully respected by the Greek government, is above all an issue for the central bank to defend.” [..]

Stournaras was appointed central bank governor last June. Before that he was finance minister in the conservative-led government, where he spearheaded Greece’s return to the bond markets in April 2014 after a four-year exile. But he also drew criticism from anti-bailout groups for implementing harsh spending cuts demanded by the EU and IMF. Energy Minister Panagiotis Lafazanis this week was quoted as saying Stournaras’s role in winding down ATEbank – a small lender that gave loans to farmers – in 2012 was a “scandal.” “The criticism by Mr. Lafazanis towards Mr. Stournaras refers to the period that he was finance minister,” Sakellaridis said. “Obviously, today he is a central banker but there can be and should be political criticism over the period that he was a finance minister.”

Interior Minister Nikos Voutsis this week also questioned why Stournaras – who suggested Greece tap an IMF holding account to repay €750 million to the fund this week and avoid default – had not mentioned the funds earlier. The latest tensions flared when the Efimerida ton Syntakton newspaper reported over the weekend the Bank of Greece in an e-mail to journalists leaked economic data including deposit outflows during Tsipras’s first 100 days in power. Hours later, officials at Tsipras’s office called on the central bank to deny the report, saying the report, if true, “constitutes a blow to the central bank’s independence.” The Bank of Greece has denied that either Stournaras’s office or the bank’s press office sent such an e-mail.

Read more …

“Now is the time for the people to join the battle..”

Syriza Highlights ‘Red Lines’ In Negotiations, Calls On People (Kathimerini)

Even as negotiations with Greece’s creditors enter a critical phase, the political secretariat of SYRIZA has indicated that the party will not back down from its so-called red lines, reaffirming pre-election promises to protect pensioners and workers. In a statement issued late on Thursday after a stormy session of senior party cadres, the secretariat said, “the red lines of the government are also red lines of the Greek people, expressing the interests of workers, the self-employed, pensioners, farmers and young people.” Underlining the need for the debt-racked country to return to a path of growth and social justice, the statement referred to “the persistence of creditors on enforcing the memorandum program of the Samaras government” whom it accused of exercising pressure through politics and by restricting liquidity.

The fixation on austerity was “paving the way for the far-right,” it added. The secretariat stressed that the demands of creditors “cannot be accepted, adding that SYRIZA MPs and officials would continue efforts to inform the Greek people and to invite them to join “a mobilization toward the victory of democracy and dignity.” “Now is the time for the people to join the battle,” it said. The statement followed a feverish session during which Deputy Prime Minister Yiannis Dragasakis is said to have come under fire by many SYRIZA officials for making concessions to creditors. Senior SYRIZA MP and Parliament Speaker Zoe Constantopoulou was said to be among those who claimed the government has ceded too much ground from its pre-election pledges.

Read more …

Excellent longish essay. “We come with arguments, they reject them, then they say, ‘you’re wasting time’. What does that mean? It’s just saying, agree with us. You’re wasting time between getting elected and doing what we say”.

Syriza and Greece: Dancing with Austerity (Village.ie)

Dimitrios Tzanakopoulos is Alexis Tsipras’ Chief of Staff. A serious Marxist theorist with an utterly coherent anti-capitalist worldview, he is at the very heart of the new government, directing the affairs of the Prime Minister’s office. He remains “optimistic that there will be a deal” with the partners. “Europe needs to ask if austerity is the future. If not, there must be a solution to these social catastrophes. SYRIZA has promised to find one and this is what we will do”. In many ways the government’s line in negotiations mirrors his Althusserian politics. It views instability as the most important threat for the ruling class and capital accumulation. The election of SYRIZA brought such instability, inserting an unpredictable and politically divergent player into decision-making in Europe.

So, the logic goes, the number one goal of European elites will be to overthrow the government. Not by violent means but by a soft coup, which they are currently attempting to execute by combination of economic strangulation and political humiliation. This instability thesis is a profound challenge to the dominant narrative of capitalism today, which sees it as a system based on risk and reward. But actually it has a long history as a critique, with even moderate figures like Keynes noting instability’s effects on the “animal spirits” of the economy. The prevalence of the word “confidence” in contemporary discourse evidences the degree to which economic and financial players value security. Therefore if they cannot overthrow SYRIZA, and if no capitulation is forthcoming, the team around Alexis Tsipras believe that European elites and the IMF will compromise.

This is because the third option, the last on the table, brings about an explosion of instability: the threat of Grexit from the eurozone. This opinion is shared by Loudovikos Kotsonopoulos, party intellectual and senior advisor in the Economy Ministry. “My prediction is that there will be a compromise. European elites fear a geopolitical realignment. It is very difficult for the European Union to suffer a defeat of such magnitude as a departure of one of its members. Until now the only direction was countries coming into the EU. If this ceased to be the only option it would have significant ramifications. I’m not sure that they can manage such a defeat, and neither are they. But they know as well that we are in trouble if we exit the euro. So it is tense. What are the sides going to give? And how can this be presented as a victory for both?”.

Dimitris Ioannou, writer for party publication Enthemata, is more sceptical about a compromise. “We come with arguments, they reject them, then they say, ‘you’re wasting time’. What does that mean? It’s just saying, agree with us. You’re wasting time between getting elected and doing what we say”.

Read more …

Peanuts, but nice peanuts.

Greece Signs EBRD Deal Worth €500 Million A Year (Reuters)

Greece signed an investment deal worth up to €500 million a year with the European Bank for Reconstruction and Development (EBRD) on Thursday, gaining a rare financial endorsement from the region for its attempts to remain solvent.The EBRD and Greece formally signed the five-year agreement at the development bank’s annual meeting in Georgia. It was approved by the bank’s shareholders in March.“It could help the country’s economic recovery significantly,” Greece’s Economy Ministry said in a statement.The ministry added it should boost the funding options of Greek businesses, especially the small and medium-sized ones that have been hit the hardest by the country’s economic crisis.

The EBRD’s decision to start lending in Greece comes after years of debate at the bank about whether a member of the world’s most advanced monetary union fits with the bank’s role of helping countries make the transition to market economies.The head of the bank, Suma Chakrabarti, has said he hopes to have the first Greek projects in place in coming months but admits Athens leaving the euro would complicate things.New EBRD forecasts on Thursday predicted Greece’s economy would stagnate this year and the bank’s staff warned if it left the euro, the situation would be far worse both for itself and the countries around it.

Read more …

Congress can’t even read it unhindered. But GE, Apple, Nike and Walmart can.

You Can’t Read The TPP, But These Huge Corporations Can (Intercept)

[..] who can read the text of the TPP? Not you, it’s classified. Even members of Congress can only look at it one section at a time in the Capitol’s basement, without most of their staff or the ability to keep notes. But there’s an exception: if you’re part of one of 28 U.S. government-appointed trade advisory committees providing advice to the U.S. negotiators. The committees with the most access to what’s going on in the negotiations are 16 “Industry Trade Advisory Committees,” whose members include AT&T, General Electric, Apple, Dow Chemical, Nike, Walmart and the American Petroleum Institute. The TPP is an international trade agreement currently being negotiated between the US and 11 other countries, including Japan, Australia, Chile, Singapore and Malaysia.

Among other things, it could could strengthen copyright laws, limit efforts at food safety reform and allow domestic policies to be contested by corporations in an international court. Its impact is expected to be sweeping, yet venues for public input hardly exist. Industry Trade Advisory Committees, or ITACs, are cousins to Federal Advisory Committees like the National Petroleum Council that I wrote about recently. However, ITACs are functionally exempt from many of the transparency rules that generally govern Federal Advisory Committees, and their communications are largely shielded from FOIA in order to protect “third party commercial and/or financial information from disclosure.” And even if for some reason they wanted to tell someone what they’re doing, members must sign non-disclosure agreements so they can’t “compromise” government negotiating goals. Finally, they also escape requirements to balance their industry members with representatives from public interest groups.

Read more …

Angela needs to be careful.

Secrets, Betrayals and Merkel’s Risky Silence in the NSA Scandal (Spiegel)

The world of politics abounds with tales of secrets and betrayals, of collective silence and the indiscretion of individuals. Tales of trust and mistrust. The shadowy world of espionage is no different — its secrets and betrayals legendary. But Sigmar Gabriel’s treachery stands out nonetheless. The German vice chancellor recently announced that Angela Merkel had twice assured him that the NSA and Germany’s foreign intelligence agency, the Bundesnachrichtendienst (BND), had never spied on German companies. In fact, in 2008 the Americans began reneging on agreements and going too far – much too far. They spied on aviation giant Airbus, among others. In August 2013, Angela Merkel had her then Chief of Staff Ronald Pofalla announce that the NSA was doing “nothing that damaged German interests.”

In fact, the Chancellery knew better. But Merkel refrained from taking action, opting instead to navigate her way through the situation by saying nothing. Nearly two years ago, after the information leaked by Edward Snowden first surfaced, she said she didn’t really know what it was all about. The message she’s been conveying ever since is that it’s all terribly technical and not all that important, really. The chancellor’s strategy had the desired effect. The public saw her as a victim. The general election in 2013 should have been dominated by the NSA spying scandal, but Merkel emerged unscathed, triumphant. Newspapers like the conservative Frankfurter Allgemeine Zeitung naively wrote that secret services just happen to spy — and, after all, we need intelligence, so what is one to do?

But the intelligence services and the US had overreached. Merkel could have told them exactly how far was too far. She could have backed their activities and at the same time made sure they didn’t get out of hand. In other words, she could have taken charge. When Merkel assumed office in 2005, she took an oath vowing to protect the German people from harm. It’s her job to protect German companies and the public when US secret services act as though Germany is not a sovereign nation. But people in power often fail to notice when the very quality that brought about their rise to the top turns into a weakness, a danger and even their ultimate undoing.

Merkel tends to lead by stealth. She doesn’t care for rhetoric and confrontation and she avoids quick decisions. These might not be bad qualities, but they don’t suit a head of government. Many of her predecessors loved nothing more than decisiveness and debate. It was why they sought power in the first place. But Merkel seems to worry that she will make enemies with plain speaking, so she chooses to remain close-lipped in crises such as this one.

Read more …

“As for Sarao’s complaints going anywhere else: fear not, they will – just as soon as the market crashes.”

Flash Crash Patsy Complained Over 100 Times About Real Market Manipulators (ZH)

Several weeks ago, when the CFTC and DOJ’s laughable attempt to scapegoat the May 2010 flash crash on the actions of a live-in-his-parents-basement UK trader, we explained “Why Sarao Is The Flash Crash Patsy: He Threatened To Expose The “Mass Manipulation Of High Frequency Nerds.” It now turns out that he not only threatened to expose the real market manipulators, but he acctually did it. More than 100 times.

Navinder Singh Sarao, the trader arrested last month on U.S. charges he manipulated futures prices and contributed to the May 2010 “flash crash,” leveled claims of similar misconduct against other traders before his arrest. Mr. Sarao complained to the Chicago Mercantile Exchange, where he traded futures contracts, more than 100 times over the past several years about traders he believed were engaging in manipulative conduct, people familiar with the matter said. His last complaint came just weeks before he was arrested on Justice Department charges, one of the people said.

Previously released documents have shown Mr. Sarao urging exchanges to target high-frequency trading practices he viewed as manipulative, but the frequency and extent of his complaints weren’t known. His complaints underscore the extent to which Mr. Sarao viewed his own trading as a legitimate counter to other high-speed traders. Mr. Sarao appears to have filed an unusually large volume of complaints. “That would be considered a high number,” said Ray Cahnman, a longtime futures trader and chairman of the proprietary trading firm Transmarket. “Most people would break down before they get to 100 because they realize the complaints aren’t going anywhere,” he said.

Sarao’s complaints got him somewhere: straight to prison. And now we know why. As for Sarao’s complaints going anywhere else: fear not, they will – just as soon as the market crashes. Because not only will the next market crash be epic, it will be blamed entirely on the same HFTs that for the past 7 years worked in tandem with the central banks – the source of all capital misallocation decisions – in the creation of the biggest asset bubble of all time.

Read more …

You may know Syngenta under any one of these names: Imperial Chemical Industries, Novartis, AstraZeneca, Geigy, Sandoz, Ciba.

Monsanto’s Syngenta Gambit Hinges On Sale Of Seed Businesses (Reuters)

U.S. seeds giant Monsanto is trying to line up buyers for assets worth up to $8 billion to appease competition authorities before making a fresh takeover approach for Swiss Syngenta, possibly within three weeks, industry sources said. Monsanto is expected to tap German chemicals group BASF, an existing joint venture partner, as it seeks a buyer for the U.S. seeds business of Syngenta, which can’t be part of its proposed takeover, sources said. The St. Louis-based group is after Syngenta for its industry-leading crop chemicals, driven by the idea that seeds and pesticides will be better sold and developed together.

Monsanto produces glyphosate, or Roundup, the world’s most widely used broad-spectrum herbicide, and has engineered a range of proprietary crops that resist it. Syngenta closely integrated its seeds and crop chemicals operations in 2011 and Monsanto is expected to unravel some of the main strategic decisions that shaped the group over the last four years – selling off seeds and merging Syngenta’s crop chemicals with Monsanto’s seeds. Global antitrust authorities are expected to demand remedies to reshape the balance of power in the crop protection industry before any combination is allowed.

Syngenta’s management will not want to be seen backing a deal that is then shot down by antitrust watchdogs, two industry sources said. Monsanto commands about a quarter of the $40 billion global seeds market while Syngenta’s own seeds business has a global market share of 8%. The Swiss group’s seeds business could be worth between $6 billion and more than $8 billion, according to analysts. It will have to be sold because authorities are expected to block Monsanto from entrenching its dominance of the U.S. soy and corn seeds market.

Read more …

“Of 804 natural habitats assessed by the European Environment Agency for the report, 77% were deemed to be in a poor condition..”

A Third Of Europe’s Birds Under Threat (Guardian)

One in three European birds is endangered, according to a leaked version of the most comprehensive study of Europe’s wildlife and natural habitats ever produced. The EU State of Nature report, seen by the Guardian, paints a picture of dramatic decline among once common avian species, and also warns that ecosystems are struggling to cope with the impact of human activity. Turtle dove populations have plunged by 90% or more since 1980 and could soon be placed on the International Union for the Conservation of Nature’s (IUCN) ‘red list’ of threatened species. Numbers of skylark and ortolan bunting, a songbird illegally hunted and eaten whole in France, have fallen by around half.

Of 804 natural habitats assessed by the European Environment Agency for the report, 77% were deemed to be in a poor condition, with almost a third having deteriorated since a study in 2006. Just 4% were found to be improving. The wide-ranging technical survey made use of data compiled by 27 EU countries between 2007-2012, and will be released by the European Commission later this year. “The report clearly shows that Europe’s wildlife and natural habitats are in crisis,” said Andreas Baumueller, the head of WWF Europe’s natural resources unit. “Our habitats are slowly dying and our natural capital – reflected by species such as birds and butterflies – is being put under enormous pressure from unsustainable agriculture and land use policies.”

The study finds that intensive farming and changes to natural terrain pose the greatest threat to Europe’s flora and fauna, even though biodiversity loss costs the EU an estimated €450bn per year, or 3% of GDP. Agriculture accounts for two-thirds of EU land use. The destruction or conversion of grasslands, heathlands and scrub to grow more crops – often using pesticides – has decimated many bird populations. Monoculture farming, changes in grazing regimes, and the removal of natural vegetation and landscape have added to the pressure. The report also lists changes to waterways, fragmentation of habitats and human activities such as hunting, trapping, poisoning and poaching as specific threats to birdlife.

Read more …

Ha!

Your Attention Span Is Now Less Than That Of A Goldfish (OC)

People now have shorter attention spans than goldfish — and our always-on portable devices may be to blame, a new study suggests. The study from Microsoft draws on surveys of more than 2,000 Canadians who played games online in order to determine the impact that pocket-sized devices and the increased availability of digital media and information are having on everyday life. Researchers also did in-lab monitoring, using electroencephalograms (EEGs) to monitor brain activity of 112 people. Among the findings of the 54-page study was that, thanks to our desire to always be connected, people can multi-task like never before. However, our attention spans have fallen from an average of 12 seconds in the year 2000 to just eight seconds today.

A goldfish is believed to have a nine-second attention span on average, the study says. “Canadians with more digital lifestyles (those who consume more media, are multi-screeners, social media enthusiasts, or earlier adopters of technology) struggle to focus in environments where prolonged attention is needed,” reads the study. “While digital lifestyles decrease sustained attention overall, it’s only true in the long-term. Early adopters and heavy social media users front load their attention and have more intermittent bursts of high attention. They’re better at identifying what they want/don’t want to engage with and need less to process and commit things to memory.”

Microsoft’s data is supported by similar findings released by the National Centre for Biotechnology Information and the National Library of Medicine in the U.S. Among the most concerning findings of the study is our declining ability to sustain our focus during repetitive activities: 44% of respondents said they had to concentrate really hard to stay focused on tasks, while 37% said they were unable to make the best use of their time, forcing them to work late evenings and or weekends.

Read more …

Mar 192015
 
 March 19, 2015  Posted by at 1:09 am Finance Tagged with: , , , , , , ,  5 Responses »


John M. Fox National Peanut Corp. store on Broadway, NY 1947

Let’s start with defining what an ‘investor’ really is. A reasonable definition of an investor seems to be ‘someone who puts money into risk bearing assets that promise to produce financial gains through – increased – productivity’.

If we can agree on that, then furthermore I think we can all agree that investors need markets. And not only that, but they need functioning markets. What defines ‘functioning’ here is that ‘investors’ need to be able to discern what the value is of the assets they have already purchased and/or are thinking of purchasing in the future.

But we haven’t had any functioning markets since at least 2008. There is no price discovery left, nobody knows the actual value of anything anymore, and ‘traders’ pour money into all sorts of ‘assets’ without having one single clue as to what they are really worth. They don’t even care about the real value of the ‘assets’ they purchase. They don’t have to, because the game’s so obviously rigged and distorted.

There is no risk left in the assets, productivity – i.e. the added value – has long since ceased to be an issue, and that leaves financial gains as the only point of our definition above. But that must of necessity also mean that whoever trades in these non-functioning markets – preferably with ‘money’ borrowed on the cheap -, is not an investor.

So what are the people who do trade, while still calling themselves investors? Are they then mere ‘traders’? That doesn’t quite seem to fit.

What are they then? It may sound a bit harsh to claim they are all just plain grifters, but maybe that’s not too far off the truth after all.

One might conclude, when looking at the excessive attention ‘everyone’ paid yet again today to Janet Yellen and the Fed, waiting breathlessly to see if she utters the word ‘patience’, that those people who call themselves ‘investors’ are not even grifters, they’re nothing but yet another group of lazy bums waiting for government – and/or central bank – hand-outs.

Just much bigger hand-outs than people receive who are on foodstamps (and now you know where that much maligned inequality comes from). But they’re still hand-outs.

Nobody puts money into worthy (for lack of a better term), innovative, productive projects anymore, everyone just waits for what the Fed says and plays it safe (hand-outs). The Fed has thus eroded the investment world, and indeed the entire investment market model.

And that will come back to bite everyone. There is no more money flowing into any ‘worthy’ initiatives, it’s all going into whatever makes most money fastest, screw – increased – productivity. And since price discovery no longer exists, worthy initiatives will receive funding only through some freak accident (like a billionaire with Alzheimer’s), not by design, not through the inherent benefits of the investment model. Which is all but dead.

This cannot but have far reaching consequences, because we no longer have a model in which the best and brightest and hardest working amongst us can and will get funding to build their dreams. All money goes into either ‘Tech Boom The Sequel’, or is spent betting against whatever trend looks fit to fall first. Or a combination of the two.

The smarter amongst you, and I have to doubt that there are too many, will understand that the Fed ‘protection racket’ that has existed for years, is about to come to an end. It’s you against Wall Street now, and most of you don’t stand a chance in that arena.

A rate hike, any rate hike, or two, is the (re-)start of price discovery, at a time when everyone is ‘invested’ in ‘assets’ for which price discovery was never even considered at the time of purchasing. How fast can you unload? Who’s going to be the buyer? Are there enough fools greater than you left?

Maybe I should feel better knowing how much y’all stand to lose soon, but I don’t, because I also know how much everyone else stands to lose who already don’t have anything but debt. Emerging markets are going to get obliterated, all sorts of funds and levels of government, domestic and abroad, are going to get crushed – resulting in more services getting cut for the poor -, and so, whether you like it or not, are most Americans and Europeans who fancy calling themselves ‘investors’.

They’re not. They’re just a bunch of grifters and bums. They couldn’t (have) survive(d) in a marketplace that has actual price discovery. They couldn’t have borne the losses and recuperated. Not the way real investors do.

I found this a good and somewhat amusing summary of the feeling before Yellen’s speech today, as expressed yesterday via MarketWatch:

‘Hell Will Break Loose’ If Fed Loses Patience

It could go either way, according to the Fly from the iBankCoin blog, who spoke of extremes. “If we find out this Wednesday that [Janet Yellen] is not, in fact, patient, hell will break loose and 66 seals of hell will be broken — paving way for actual centaurs to roam, wall-kicking people in the faces with their hooves,” he wrote. “On the other hand, if Janet is patient and says so, we’re all going to make an absurd amount of money.”

Having a rigged, distorted system that fakes being a market and makes a bunch of grifters a lot of money, is not how you build a functioning society.

Oh, and you know what the worst thing of all is – if it can get any worse -? If the Fed and other central banks, post-2008, would have simply let the markets sort things out, most of the ‘money’ that has now been so horribly dislocated and mis-invested and debt-riddled, would never have existed in the first place.

The S&P would have been at 500 or so, bonds would have ‘normal’ prices and yields, actual investors would have taken their losses, and we would have had at least some sparks of brightness to look forward to. As things are, there’s only the headlights of that highspeed train coming at us from the other side of the tunnel.