Dec 162014
 
 December 16, 2014  Posted by at 11:16 am Finance Tagged with: , , , , , , , , ,  2 Responses »


DPC Conover Building, Third and Main, Dayton, Ohio 1904

Oil Has Become The New Housing Bubble (CNBC)
Oil’s Crash Is the Canary In the Coal Mine for a $9 Trillion Crisis (Phoenix)
Oil Slides Below $55 as U.S. Output Seen Steady Amid OPEC Fight (Bloomberg)
Brent Seen Falling to $50 in 2015 as OPEC Fails to Act (Bloomberg)
Crash-O-Matic Finance (James Howard Kunstler)
Russia Central Bank Raises Interest Rate To 17% On Ruble Collapse (Guardian)
How China’s Interest-Rate Cut Raised Borrowing Costs (Bloomberg)
China Manufacturing In Contraction (BBC)
Why Paul Krugman Is Wrong (AEP)
You Are Hereby Baffled With Bullshit (Zero Hedge)
Bill Gross: US Structural Growth Rate To Be About 2% Or Less (CNBC)
Did Wall Street Need the Swaps Budget to Hedge Against Oil Plunge? (Yves)
Greek Central Bank Boss Warns Of ‘Irreparable’ Economic Damage (BBC)
German Economy at Risk of Downturn as Growth Seen Weak at Best
Russia Says US, NATO Increased Spy Flights Seven-Fold (Bloomberg)
All I Want for Christmas is a (Real) Government Shutdown (Ron Paul)
Peat Is Amazon’s Carbon Superstore (BBC)
Denmark Claims North Pole Via Greenland Ridge Link (AP)
Welcome To Manus, Australia’s Asylum Seeker Dumping Ground Gulag (Guardian)
Only Five Northern White Rhinos Now Exist On The Entire Planet (MarketWatch)
Is The Lima Deal A Travesty Of Global Climate Justice? (Guardian)
Bad News For Florida: Models Of Greenland Ice Melting Could Be Way Off (NBC)

And there’s another nice comparison.

Oil Has Become The New Housing Bubble (CNBC)

The same thing that happened to the housing market in 2000 to 2006 has happened to the oil market from 2009 to 2014, contends well-known trader Rob Raymond of RCH Energy. And he believes that just as we witnessed the popping of the housing bubble, we are in the midst of the popping of the energy bubble. “It’s the outcome of a zero interest rate policy from the Federal Reserve. What’s happened from 2009 to 2014 is, the energy industry has outspent its cash flow by $350 billion to go drill all these wells, and create this supply ‘miracle,’ if you will, in the United States,” Raymond said Thursday on CNBC’s “Futures Now.” “The issue with this has become, what were houses in Florida and Arizona in 2000 to 2006 became oil wells in North Dakota and Texas in 2009 to 2014, and most of that was funded in the high-yield market and by private equity.”

And now that a barrel of West Texas Intermediate crude oil has fallen from $100 to $60 in five months, those energy producers are in trouble. “The popping of the credit bubble in the energy industry as a result of the downside volatility in oil is likely to result in a collapse of the U.S. rig count,” Raymond said. “From a longer-term standpoint, what it does is it really impairs the industry’s ability to invest capital.” That said, when it comes to the price of a barrel of oil itself, Raymond expects to see a rebound once U.S. production dries up. “We live in a $90 to $100 world,” he said. “We just don’t live in it today.”

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Phoenix confirms what I’ve been saying all along; the problem is not oil.

Oil’s Crash Is the Canary In the Coal Mine for a $9 Trillion Crisis (Phoenix)

The Oil story is being misinterpreted by many investors. When it comes to Oil, OPEC matters, as does Oil Shale, production cuts, geopolitical risk, etc. However, the reality is that all of these are minor issues against the MAIN STORY: the $9 TRILLION US Dollar carry trade. Drilling for Oil, producing Oil, transporting Oil… all of these are extremely expensive processes. Which means… unless you have hundreds of millions (if not billions) of Dollars in cash lying around… you’re going to have to borrow money. Borrowing US Dollars is the equivalent of shorting the US DOLLAR. If the US Dollar rallies, then your debt becomes more and more expensive to finance on a relative basis. There is a lot of talk of the “Death of the Petrodollar,” but for now, Oil is priced in US Dollars. In this scheme, a US Dollar rally is Oil negative. Oil’s collapse is predicated by one major event: the explosion of the US Dollar carry trade. Worldwide, there is over $9 TRILLION in borrowed US Dollars that has been ploughed into risk assets.

Energy projects, particularly Oil Shale in the US, are one of the prime spots for this. But it is not the only one. Emerging markets are another. Just about everything will be hit as well. Most of the “recovery” of the last five years been fueled by cheap borrowed Dollars. Now that the US Dollar has broken out of a multi-year range, you’re going to see more and more “risk assets” (read: projects or investments fueled by borrowed Dollars) blow up. Oil is just the beginning, not a standalone story. If things really pick up steam, there’s over $9 TRILLION worth of potential explosions waiting in the wings. Imagine if the entire economies of both Germany and Japan exploded and you’ve got a decent idea of the size of the potential impact on the financial system And that’s assuming NO increased leverage from derivative usage. The story here is not Oil; it’s about a massive bubble in risk assets fueled by borrowed Dollars blowing up. The last time around it was a housing bubble. This time it’s an EVERYTHING bubble. And Oil is just the canary in the coalmine.

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No bottom in sight.

Oil Slides Below $55 as U.S. Output Seen Steady Amid OPEC Fight (Bloomberg)

Oil in New York fell below $55 a barrel for the first time in more than five years amid speculation that U.S. producers may further increase output as they battle OPEC for market share. Crude in London traded below $60. West Texas Intermediate futures dropped as much as 2.1%, after closing yesterday at the lowest level since May 2009. U.S. crude drillers are benefiting as costs fall almost as quickly as prices, according to Goldman Sachs Group Inc. Brent, the benchmark for more than half the world’s oil, may decline to $50 a barrel in 2015, a Bloomberg survey of analysts showed. Oil has slumped almost 45% this year as OPEC sought to defend market share amid a U.S. shale boom that’s exacerbating a global glut.

The group, responsible for about 40% of the world’s supply, will refrain from curbing output even if crude drops to $40 a barrel, according to the United Arab Emirates. “It seems like the market is no longer able to respond to the issue of oversupply,” Hong Sung Ki, a commodities analyst at Samsung Futures Inc. in Seoul, said by phone. “On the demand side, the global economy continues to slow while it takes time for U.S. shale production to pull back on the supply side.” West Texas Intermediate for January delivery fell as much as 66 cents to $55.25 a barrel in electronic trading on the New York Mercantile Exchange and was at $55.62 at 1:18 p.m. Singapore time. It decreased $1.90 to $55.91 yesterday. The volume of all futures traded was about 3% above the 100-day average. Prices are set for the biggest annual loss since a 54% collapse in 2008.

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Almost there. What happens after is a more interesting question.

Brent Seen Falling to $50 in 2015 as OPEC Fails to Act (Bloomberg)

Crude oil prices are poised to fall below half where they were six months ago, before producers begin dealing with a global glut. Brent, the global benchmark, will slide to as low as $50 a barrel in 2015, according to the median in a Bloomberg survey of 17 analysts, down from the $115.71 a barrel high for the year on June 19. The grade has already collapsed 47% since then and needs to fall further before producers clear the current glut, said five out of six respondents who gave a reason. Brent futures sank in the weeks after the Organization of Petroleum Exporting Countries decided to maintain output even as the highest U.S. production in three decades swells a global surplus. The organization will stand by its decision even if prices fall to $40, United Arab Emirates Energy Minister Suhail Al-Mazrouei said.

“This won’t stop until oil producers are on their backs,” Bjarne Schieldrop, chief commodities analyst at SEB AB, Sweden’s fourth-biggest bank, said by phone from Oslo. “There will be better demand in the second half, hopefully some demand effects from lower prices, and definitely softer growth in U.S. shale.” The group decided at the Nov. 27 meeting to keep output unchanged to protect OPEC’s market share, even if it has a negative effect on crude prices, the official Kuwait News Agency reported, citing Oil Minister Ali al-Omair. The U.S. pumped 9.12 million barrels a day in the period ended Dec. 5, the most in weekly Energy Information Administration started in 1983. The gain came as horizontal drilling and hydraulic fracturing unlocked supplies from shale formations including the Eagle Ford in Texas and the Bakken in North Dakota.

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“In the good old days of the late 20th century, before Federal Reserve omnipotence, they could depend on a regular annual interest rate churn of between 5 and 10% and do what they had do – write pension checks, pay insurance claims, and pay clients, with a little left over for company salaries.”

Crash-O-Matic Finance (James Howard Kunstler)

“Oil prices have dropped $50 a barrel. That may not sound like much. But when you take $107 and you take $57, that’s almost a 47% decline…!”
–James Puplava, The Financial Sense News Network

May not sound like much? I guess when you hunker down in the lab with the old slide rule and do the math, wow! Those numbers really pop! This, of course, is the representative thinking out there. But then, these are the very same people who have carried pompoms and megaphones for “the shale revolution” the past couple of years. Being finance professionals they apparently failed to notice the financial side of the business, for instance the fact that so much of the day-to-day shale operation was being run on junk bond financing. It all seemed to work so well in the eerie matrix of zero interest rate policy (ZIRP) where investors desperate for “yield” — i.e. some return more-than-zilch on their money — ended up in the bond market’s junkyard. These investors, by the way, were the big institutional ones, the pension funds, the insurance companies, the mixed bond smorgasbord funds.

They were getting killed on ZIRP. In the good old days of the late 20th century, before Federal Reserve omnipotence, they could depend on a regular annual interest rate churn of between 5 and 10% and do what they had do – write pension checks, pay insurance claims, and pay clients, with a little left over for company salaries. ZIRP ruined all that. In fact, ZIRP destroyed the most fundamental index in the financial universe: the true cost of borrowing money. In doing so, it twerked and torqued the concept of “risk” so badly that risk no longer had any meaning. In “risk-on” financial weather, there was no longer any risk. Imagine that? It also destroyed the entire relationship between borrowed money and the cost-structure of the endeavors it was borrowed for. Take shale oil, for instance.

The fundamental limiting factor for shale oil was that the wells were only good for about two years, and then they were pretty much shot. So, if you were in that business, and held a bunch of leases, you had to constantly drill and re-drill and then drill some more just to keep production up. The drilling cost between $6 and $12-million per well. What happened the past seven years is that the drillers and their playmates on Wall Street hyped the hoo-hah out of the business — it was a shale revolution! In a few short years they drilled to beat the band and the results seemed so impressive that investment money poured into the sector like honey, so they drilled some more. It was going to save the American way of life. We were going to be “energy independent,” the “new Saudi America.” We would be able to drive to Wal-Mart forever!

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Let’s all open a bank account in Russia.

Russia Central Bank Raises Interest Rate To 17% On Ruble Collapse (Guardian)

Russia’s central bank has taken drastic action to halt the rouble’s freefall on the foreign exchanges by raising interest rates by 6.5 percentage points to 17%. After a day of turmoil dominated by fears that a crashing global oil price would devastate Russia’s energy-dominated economy, an after-hours meeting of the central bank in Moscow decided emergency action was needed to prevent the rouble’s collapse. The bank said the increase in borrowing costs – which will deepen Russia’s recession if sustained for a prolonged period – was needed to end currency depreciation and to combat inflation. Higher interest rates tend to make currencies more attractive to foreign investors and the rouble rose against the dollar in the wake of the surprise announcement. Earlier, a 10% fall in the value of the rouble against the dollar had badly rattled global markets, with the FTSE 100 index in London closing at its lowest level of 2014.

Investors dumped shares as they weighed up the risk that a deepening economic crisis would destabilise Russia and make it more difficult for the west to deal with its president, Vladimir Putin, adding to geopolitical tensions in eastern Europe and the Middle East. The huge jump in interest rates was seen by analysts as an attempt by the central bank to show that it was determined to protect the rouble. A smaller one-point rise to 10.5% last week had failed to impress financial markets at a time when the price of oil was plunging to a five and a half year low. Earlier, Russia bought roubles for dollars on the foreign exchanges but failed to prevent the biggest one-day decline in the currency since Russia’s debt default in 1998. The fall meant it took 63 roubles to buy a dollar, a decline of 45% since the start of a year that has seen the price of oil drop from $115 a barrel (£73) to barely $60 a barrel.

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“We don’t think the call for aggressive interest rate or reserve-requirement ratio cuts are well-grounded under current circumstances, as it could fuel bubbles in stocks.”

How China’s Interest-Rate Cut Raised Borrowing Costs (Bloomberg)

What if a central bank cut interest rates and borrowing costs rose? Since the People’s Bank of China surprised markets with the first benchmark rate reduction in two years on Nov. 21, the five-year sovereign bond yield climbed 15 basis points, that for similar AAA corporate notes surged 37 and AA debt yields jumped 76. While finance companies did start charging less for mortgages, their funding costs rose as the one-week Shanghai interbank lending rate added 37 basis points. The PBOC move misfired as it triggered an 18% surge in the Shanghai Composite Index of shares, prompting investors to raise cash by selling bonds and seeking loans, driving interest rates higher. Costs for riskier issuers of notes rose as regulators banned the use of riskier debt as collateral for financing. Investors dialed back expectations for further monetary easing as policy makers seek to cool the stock rally. “Financing costs moved in the opposite way than the central bank wished,” said Deng Haiqing at Citic Securities, China’s biggest brokerage.

“We don’t think the call for aggressive interest rate or reserve-requirement ratio cuts are well-grounded under current circumstances, as it could fuel bubbles in stocks.” The central bank reduced the one-year benchmark lending rate by 40 basis points to 5.6% and the deposit rate by 25 basis points to 2.75% starting from Nov. 22. The one-week Shanghai Interbank Offered Rate climbed to 3.59% on Dec. 12, the highest since Aug. 29, while the yield on top-rated five-year company bonds rose to 5.17% on Dec. 10, the highest since Sept. 18. The outstanding value of shares bought with borrowed money climbed to a record 122 billion yuan ($19.7 billion yuan) on Dec. 9, helping lift the benchmark stock index 39% this year. “The fund flows into the stock market could nurture prosperity in the capital market, but the real economy may not necessarily benefit in the short term,” Haitong Securities analysts wrote in a note on Dec. 7. “On the contrary, it could lead to further scarcity of funds, leading to an increase in interest rates.”

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More confirmation of what I’ve been saying for a long time.

China Manufacturing In Contraction (BBC)

China’s factory activity is in contraction, based on a private survey, reinforcing calls for more stimulus. The HSBC/Markit manufacturing purchasing manager’s index’s initial reading fell to 49.5 in December from November’s final reading of 50. A reading above 50 indicates expansion, while one below 50 points to contraction on a monthly basis. China will release its official PMI reading for December in the new year. The state’s official PMI came in at 50.3 for November. This morning’s latest reading from HSBC marks a seven-month low. Qu Hongbin, Chief Economist for China at HSBC said “Domestic demand slowed considerably and fell below 50 for the first time since April 2014. Price indices also fell sharply. The manufacturing slowdown continues in December and points to a weak ending for 2014.”

Earlier this week, China’s central bank said growth could slow to 7.1% next year from about 7.4% this year, because of a property market slump. Growth in the world’s second largest economy fell to 7.3% in the third quarter, which was the slowest pace since the global financial crisis. The risk that China might miss its official growth target of 7.5% this year for the first time in 15 years is growing because economic data is weaker than expected, economists said. A struggling property market, uneven export growth and cooling domestic demand and investment are some of the major factors weighing on overall growth. Last month the People’s Bank of China cut its one year deposit rate to 2.75% from 3.0% to try to revive its economy.

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I thought they were twins?! But Ambrose here just about does a Steve Keen as far as banks’ role in money supply is concerned.

Why Paul Krugman Is Wrong (AEP)

Professor Paul Krugman is the world’s most influential commentator on economic issues by a wide margin. It is a well-deserved ascendancy. He is brilliant, wide-ranging, readable, and the point of his rapier is very sharp. He correctly predicted and described the Long Slump; though whether he did so entirely for the right reasons is an interesting question. He demolished claims by hard-money totemists that zero rates and quantitative easing would lead to spiralling inflation in a global liquidity trap, as he calls it – or in a China-led world of excess supply and deficient demand, as others would put it. He correctly scolded those who claimed that rich developed countries with their own sovereign currencies are at risk of a bond market crisis unless they retrench into the downturn, or might go the way of Greece. So it is disconcerting to find myself on the wrong side of his biting critique. On other occasions I might submit to his Nobel authority, bruised, but wiser. This time I stand my ground.

The dispute is over whether central banks can generate inflation even when interest rates are zero. He says they cannot do so, and that it is jejune to float such an outlandish idea. Monetary policies are to all intents and purposes impotent at that point. He goes on to suggest that the historical and global evidence has demonstrated this beyond any possible doubt, and here he ventures into flinty terrain. Let me counter – and I will return to this – that his own theoretical model of how the economy works has broken down in one key respect over the last six years. Things are happening that he strongly implied would not and could not happen. He has so far been frugal in acknowledging the limitations of his theory, let alone in exploring why it has gone wrong. He has fallen back to a default setting: the IS-LM model. Developed in 1936, it defines the relationship between interest rates and real output. He returns to the IS-LM invariably and reflexively, almost as if were a religious incantation.

He rebukes me for quoting Tim Congdon from International Monetary Research, specifically for invoking traditional monetary theory to suggest that QE can work even when bond yields are hyper-compressed. The precise quote: “The interest rate is totally irrelevant. What matters is the quantity of money. Large scale money creation is a very powerful weapon and can always create inflation.” Mr Congdon’s claim is a self-evident truism. Central banks can always create inflation if they try hard enough. As Milton Friedman said, they can print bundles of notes and drop from them helicopters. The modern variant might be a $100,000 electronic transfer into the bank account of every citizen. That would most assuredly create inflation. I don’t see how Prof Krugman can refute this, though I suspect that he will deftly change the goal posts by stating that this is not monetary policy. To anticipate this counter-attack, let me state in advance that the English language does not belong to him. It is monetary policy. It is certainly not interest rate policy.

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Fun with US stats.

You Are Hereby Baffled With Bullshit (Zero Hedge)

Just in case you were confidently reflecting on America’s decoupling recovery… we present – today’s baffle ’em with bullshit meme:

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“Gross said it would be “very difficult” for oil prices to stabilize.”

Bill Gross: US Structural Growth Rate To Be About 2% Or Less (CNBC)

Bill Gross said in an exclusive interview with CNBC on Monday that economic growth will likely fall to 2%. “Yes, we’re starting from a 3% growth economy that will probably persist for another quarter or so,” he said. “We get back to a relatively new structural growth rate, which is not 3 but probably 2 or even less. “He attributed the decline to falling oil prices, which in turn affects industries such as fracking. Oil’s slide also “determines currency movements,” setting off a chain reaction. “Then financial markets try and readjust,” he said. “Hedge funds reduce leverage and sell other positions.”

Gross said it would be “very difficult” for oil prices to stabilize. Financial conditions are also a problem, Gross said. “Why would the Federal Reserve raise interest rates in order to slow economic growth if in fact inflation was moving lower? They have a dual mandate from that standpoint,” he said. “I think the market basically doesn’t respect the second part of that mandate.” He also sees the 10-year yield holding near 2%.”I think high quality bonds are a safe bet, just not a high returning bet,” he said.

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Interesting point from Yves Smith.

Did Wall Street Need the Swaps Budget to Hedge Against Oil Plunge? (Yves)

Conventional wisdom among banking experts is that Wall Street’s successful fight last week to get a pet provision into the must-pass budget bill (or in political junkies’ shorthand, Cromnibus) as more a demonstration of power and a test for gutting Dodd Frank than a fight that mattered to them. But the provision they got in, which was to undo a portion of Dodd Frank that barred them from having taxpayer-backstopped deposits fund derivative positions, may prove to be more important than it seemed as the collateral damage from the 40% fall in oil prices hits investors and intermediaries. Mind you, all the howling by Big Finance over this measure can’t be seen as an indicator of its importance. Yes, they have been trying to get this passed for two years. In fact, as Akshat Tewary of Occupy the SEC points out:

The provision that just got passed by the House (Section 630 of the Cromnibus) is identical to another bill already passed by the House last year – HR 992 (Swaps Regulatory Improvement Act). So the House has basically passed the same bill twice. Last year the Senate wouldn’t approve it and the banks were not happy…so the Republicans thought they would hide it in the budget bill so the Senate was forced to approve it this time.

Industry participants view any incursion on their right to make profit (as in pay themselves big bonuses) as a casus belli. That leads to regular histrionics about minor restrictions, like the TARP’s pathetically weak limits on executive bonuses. Exerts on regulation said that the Dodd Frank provision at issue, known as derivatives push-out, was simply about the big US financial firms keeping their profit margins via continued access to cheap funding. Banks weren’t barred from engaging in this type of business but they’d have to do it in different legal entities.

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Election propaganda wars.

Greek Central Bank Boss Warns Of ‘Irreparable’ Economic Damage (BBC)

Greece’s economy faces “irreparable” damage from the ongoing political crisis, the boss of its central bank has warned. “The crisis in recent days is now taking serious dimensions…and the risk of irreparable damage for the Greek economy is now great,” said Yannis Stournaras. Greek politicians will start voting on Wednesday for a new Greek president. There will be a snap general election if the government nominee loses. The political uncertainty has rattled Greek markets over the past week. Greece’s economy emerged from a six-year long recession in the first quarter of the year.

However, the size of Greece’s economy is still about a quarter below the peak it reached before the severe recession and debt crisis triggered by the global financial crash. And conservative Prime Minister Antonis Samaras’s decision to call an early vote in parliament to elect a new president has caused fresh concerns. His conservative-led coalition needs the support of other parties if its candidate is to obtain the backing of MPs. On Thursday an official in the governing coalition said it was still short of the support needed to stop the government collapsing in the parliamentary vote. Greece’s government has warned of a catastrophe if snap elections are called and left-wing anti-bailout party Syriza wins, but Syriza has accused the government of fear mongering.

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“The German “data are consistent with only marginal gross-domestic-product growth in the fourth quarter at best ..”

German Economy at Risk of Downturn as Growth Seen Weak at Best

German private-sector growth slowed to the weakest in 18 months in December, increasing the risk that a soft phase will turn into a more pronounced economic downturn. Markit Economics said a Purchasing Managers Index for manufacturing and services fell to 51.4 this month from 51.7 in November. Economists forecast an increase to 52.3. A factory gauge rose to 51.2 from 49.5, crossing the 50 mark that divides expansion from contraction, while a measure for services fell to 51.4 from 52.1. While German data showed this month that the economy, Europe’s largest, had a modest start into the last quarter of the year, the Bundesbank has pointed to signs that growth could strengthen. As the rest of the euro area struggles to expand and inflation hovers close to zero, the European Central Bank has held out the prospect of expanding its range of asset-purchases next year.

The German “data are consistent with only marginal gross-domestic-product growth in the fourth quarter at best,” said Oliver Kolodseike, an economist at London-based Markit. “The possibility of a renewed downturn at the start of next year is clearly becoming more and more likely, especially if the survey data continue to disappoint.” The German economy narrowly escaped recession in the third quarter, recording growth of 0.1% after shrinking by the same extent in the April-June period. Economists predict growth of 0.2% in the final three months of the year. Companies signaled a second consecutive monthly decline in new business in December, citing a lack of investment and increased competition, according to today’s report.

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“NATO jets escorted Russian planes 140 times in 2014, a 70% increase on the previous year, while they flew missions that were “in strict compliance with international rules ..”

Russia Says US, NATO Increased Spy Flights Seven-Fold (Bloomberg)

Russia has reported a seven-fold increase in reconnaisance missions by U.S. and NATO aircraft near its border on the Baltic Sea since April as tensions flared over the crisis in Ukraine. Russian fighter jets also flew more than 300 missions in response to NATO and other foreign military aircraft approaching the country’s borders this year, compared with more than 200 in 2013, Lieutenant-General Mikhail Mizintsev, head of the Russian Defense Ministry’s joint military command center, said. The sharp increase in air activity by NATO and countries including Sweden and Finland is taking place without “any mutual exchange of information,” Mizintsev said today in his first interview with foreign media. “All achievements in the field of trust-building and voluntary transparency that NATO and Russia have formed over the years have ceased.” Russia’s disclosures about NATO activities around its borders come as it’s embroiled in the worst standoff since the Cold War with the U.S. and its allies over the conflict in Ukraine.

It mirrors NATO reports of a jump in Russian military flights close to the borders of member states. The number of flights by NATO’s tactical aircraft close to the borders of Russia and Belarus doubled to about 3,000 this year, Mizintsev said. He rejected NATO’s claim that it had intercepted Russian aircraft some 400 times this year, a 50% increase on 2013. NATO jets escorted Russian planes 140 times in 2014, a 70% increase on the previous year, while they flew missions that were “in strict compliance with international rules,” Mizintsev said. NATO will remain vigilant in tracking Russian flights, Secretary General Jens Stoltenberg told reporters today after a meeting at the military alliance’s Brussels headquarters with Ukrainian Prime Minister Arseniy Yatsenyuk. Mizintsev said Russia registered 55 cases of foreign jets flying in “dangerous proximity” to its long-range military aircraft, at a distance of less than 100 meters, in 2013-14. Russia’s missions were “as risky as NATO aircraft flights near the Russian border can be considered risky,” he said.

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Amen.

All I Want for Christmas is a (Real) Government Shutdown (Ron Paul)

The political class breathed a sigh of relief Saturday when the US Senate averted a government shutdown by passing the $1.1 trillion omnibus spending bill. This year’s omnibus resembles omnibuses of Christmas past in that it was drafted in secret, was full of special interest deals and disguised spending increases, and was voted on before most members could read it. The debate over the omnibus may have made for entertaining political theater, but the outcome was never in doubt. Most House and Senate members are so terrified of another government shutdown that they would rather vote for a 1,774-page bill they have not read than risk even a one or two-day government shutdown. Those who voted for the omnibus to avoid a shutdown fail to grasp that the consequences of blindly expanding government are far worse than the consequences of a temporary government shutdown.

A short or even long-term government shutdown is a small price to pay to avoid an economic calamity caused by Congress’ failure to reduce spending and debt. The political class’ shutdown phobia is particularly puzzling because a shutdown only closes 20% of the federal government. As the American people learned during the government shutdown of 2013, the country can survive with 20% less government. Instead of panicking over a limited shutdown, a true pro-liberty Congress would be eagerly drawing up plans to permanently close most of the federal government, staring with the Federal Reserve. The Federal Reserve’s inflationary policies not only degrade the average American’s standard of living, they also allow Congress to run up huge deficits.

Congress should take the first step toward restoring a sound monetary policy by passing the Audit the Fed bill, so the American people can finally learn the truth about the Fed’s operations. Second on the chopping block should be the Internal Revenue Service. The federal government is perfectly capable of performing its constitutional functions without imposing a tyrannical income tax system on the American people. America’s militaristic foreign policy should certainly be high on the shutdown list. The troops should be brought home, all foreign aid should be ended, and America should pursue a policy of peace and free trade with all nations. Ending the foreign policy of hyper-interventionism that causes so many to resent and even hate America will increase our national security.

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And what do you think happens when the water evaporates as temperatures rise?

Peat Is Amazon’s Carbon Superstore (BBC)

The most dense store of carbon in Amazonia is not above ground in trees but below ground in peatlands, a study has calculated. An international team of researchers said their work, which uses satellite data and field measurements, provides the “most accurate estimates to date”. Protecting these landscapes is vital if efforts to curb climate change are to be successful, they added. The findings appear in the journal Environmental Research Letters. Writing in the paper, the scientists observed: “This investigation provides the most accurate estimates to date of the carbon stock of an area that is the largest peatland complex in the Neotropics.” They said it also confirmed “the status of the [Pastaza-Marañón foreland basin in north-west Peru] as the most carbon-dense landscape in Amanozia”.

“We expected to find these peatlands but what was more of surprise was how extensive they were, and how much this relatively small area contributed to Peru’s carbon stock,” explained co-author Freddie Draper from the University of Leeds. The 120,000 sq km basin accounts for just about 3% of the Peruvian Amazon, yet it stores almost 50% of its carbon stock, which equates to about three billion tonnes. Mr Draper told BBC News that the team used a new approach to produce their figures: “We used quite a novel method, combining a lot of field data – for about 24 months, we measured how deep the peat was, how dense it was and how much of it was carbon. “That measured how much carbon was in the ground, and then we estimated how much carbon was in the trees.

“Probably the most novel part, because the study covered such a large area, we used different satellite products (radar and images) to identify where these peatlands were.” The team said that the basin remains “almost entirely intact”, but threats are increasing. “Maintaining intact peatlands is crucial for them to continue to act as a carbon sink by continuing to form peat and contribute fully to regional habitat and species diversity,” explained co-author Katy Roucoux from the University of St Andrews. Dr Roucoux told BBC News that scientists are still learning about the contribution these landscapes make to the global carbon cycle. “An important issue is the extent to which the peatland ecosystems are continuing to lock up and store carbon as peat today. It certainly looks as though they are as the environmental conditions are right, ie water-logged.”

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It will take forever to solve this issue.

Denmark Claims North Pole Via Greenland Ridge Link (AP)

Scientific data shows Greenland’s continental shelf is connected to a ridge beneath the Arctic Ocean, giving Danes a claim to the North Pole and any potential energy resources beneath it, Denmark’s foreign minister said. Foreign Minister Martin Lidegaard said Denmark will deliver a claim on Monday to a United Nations panel in New York that will eventually decide control of the area, which Russia and Canada are also coveting. The five Arctic countries – the United States, Russia, Norway, Canada and Denmark – all have areas surrounding the North Pole, but only Canada and Russia had indicated an interest in it before Denmark’s claim. Lidegaard told the AP that the Arctic nations so far “have stuck to the rules of the game” and he hoped they would continue to do so.

In 2008, the five pledged that control of the North Pole region would be decided in an orderly settlement in the framework of the United Nations, and possible overlapping claims would be dealt with bilaterally. Interest in the Arctic is intensifying as global warming shrinks the polar ice, opening up possible resource development and new shipping lanes. The area is believed to hold an estimated 13% of the world’s undiscovered oil and 30% of its untapped gas. Lidegaard said he expects no quick decisions, with other countries also sending in claims. “This is a historical milestone for Denmark and many others as the area has an impact on the lives of lot of people. After the U.N. panel had taken a decision based on scientific data, comes a political process,” Lidegaard told The Associated Press in an interview on Friday. “I expect this to take some time. An answer will come in a few decades.”

Read more …

Oh boy …

Welcome To Manus, Australia’s Asylum Seeker Dumping Ground Gulag (Guardian)

The 60,000 people of Manus province, a remote island outpost of Papua New Guinea, had no say in the decision by Australian and local leaders to detain, process and at least temporarily resettle foreign asylum seekers on their shores. “We heard about it on the radio,” says Nahau Rooney, a pioneering political leader, former PNG justice minister and Manus’ most famous daughter. In the 14 months since Australia’s “PNG solution” was brokered, sending asylum seekers trying to reach Australia by boat to Manus for processing and eventual resettlement in PNG, the operation has also sent a tsunami of change crashing through every dimension of island life. It has delivered a booming economy, jobs and desperately needed services.

It has also brought social and environmental damage, deaths, dislocation, disputes and deep anxiety about what will come next. What is certain is that life in Manus will never be the same. […] Two years ago there were only a couple of flights a week to faraway Manus province. Today aircraft sweep in every day over the Bismarck Sea, crossing 370km of open water from the Papua New Guinea mainland to bump down on a strip carved into the jungle by Japanese soldiers 72 years ago. It’s here, since November 2012, that more than 1,650 asylum seekers who once tried to sail to a new life in Australia have instead found themselves unloaded on to PNG soil. Most of the first wave, about 300, did fly back to Australia for processing when the regional resettlement arrangement with PNG was signed in August 2013.

But under its terms all who have arrived since have been assured that even if they are ultimately recognised as refugees, they will never live in Australia. PNG will be their home. None of these asylum seekers have yet been released, though this is said to be close. Two have died. More than 240 have flown away again, “voluntary returns” to their homelands. At last count 1,056 remain in detention, 20 minutes from where they landed. They are held in a compound at a place called Lombrum. Though it long predates them, the name in local language refers to the bottom of a canoe where captives are kept. Momote airport has also seen the coming and going of the legions of guards, tradespeople, medics, interpreters and officials required to wrangle, secure, house, assess and care for the asylum seekers.

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Well, done, y’all!

Only Five Northern White Rhinos Now Exist On The Entire Planet (MarketWatch)

One of six known remaining northern white rhinoceroses died at the San Diego Zoo Safari Park on Sunday. The rhino, Angalifu, was around 44 and died of old age, the Associated Press reported. “Angalifu’s death is a tremendous loss to all of us,” said the park’s curator, Randy Rieches, in a statement, according to the AP. “Not only because he was well-beloved here at the park but also because his death brings this wonderful species one step closer to extinction.” The zoo took to Twitter to memorialize Angalifu and draw attention to the plight of the northern white rhino via the #EndExtinction hashtag:

The white rhino is the second largest land mammal and has two subspecies: the northern and southern white rhino. The southern white is currently classified as “near threatened,” with a population of about 20,000, according to the World Wildlife Fund. With the death of Angalifu, only five northern white rhinos exist — all of them in captivity. There are no northern white rhinos known to be in the wild. Of the remaining rhinos, one is at the same San Diego zoo, another is at a zoo in the Czech Republic, and three are at a wildlife conservancy in Kenya.

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Of course it is, there’s no other way. These kinds of conferences never solve a thing.

Is The Lima Deal A Travesty Of Global Climate Justice? (Guardian)

At one point on Saturday night it looked quite likely that the Lima climate talks would collapse in disarray. Instead of the harmony expected between China and the US following their pre-talks pact, the world’s two largest economies were squaring off; workmen were dismantling the venue; old faultlines between rich and poor countries were opening up again and some countries’ delegations were rushing to catch their planes. In the end, after a marathon 32-hour session where everyone stared into the abyss of total failure, a modicum of compromise prevailed. Some deft changes of emphasis in the revised text and the inclusion of key words such as “loss” and “damage” proved just enough for diplomats to bodge a last-minute compromise. There were cheers and tears as the most modest of agreements was reached. The Peruvian president of the UN climate change convention, or Cop20, could say without irony: “With this text, we all win without exception.”

Not so. Countries may technically still be on track to negotiate a final agreement in Paris next year, but the gaps between them are growing rather than closing and the stakes are getting higher every month. We have now reached the point where everyone can see clearly that whatever ambition there once was to respect science and try to hold temperatures to an overall 2C rise has been ditched. We also know that developing countries will not get anything like the money they need to adapt their economies and infrastructure to climate change and that those countries that have been historically responsible for getting the world into its current climate mess will be able to do much what they like. As it stands, 21 years of tortuous negotiations may have actually taken developing countries backwards on tackling climate change.

From an imperfect but legally binding UN treaty struck in 1992, in which industrialised countries accepted responsibility and agreed to make modest but specific cuts over a defined period, we now have the prospect of a less than legally binding global deal where everyone is obliged to do something but where the poor may have to do the most and the rich will be free to do little. In 1992, rich countries were obliged to lead and to help the poor, but we now have a situation where those who had little or no historical responsibility for climate change are likely to cut emissions the most. This travesty of global climate justice, say many developing countries, is largely the fault of the US, which, backed by Britain and others industrialised countries like Canada and Australia, has helped build up distrust in developing countries by continually trying to deregulate the international climate change regime by weakening the rules, shifting responsibility to the south and making derisory offers of financial help.

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“Existing computer models may be severely underestimating the risk to Greenland’s ice sheet..”

Bad News For Florida: Models Of Greenland Ice Melting Could Be Way Off (NBC)

Existing computer models may be severely underestimating the risk to Greenland’s ice sheet — which would add 20 feet to sea levels if it all melted — from warming temperatures, according to two studies released Monday. Satellite data were instrumental for both studies — one which concludes that Greenland is likely to see many more lakes that speed up melt, and the other which better tracks large glaciers all around Earth’s largest island. The lakes study, published in the peer-reviewed Nature Climate Change, found that what are called “supraglacial lakes” have been migrating inland since the 1970s as temperatures warm, and could double on Greenland by 2060. The study upends models used by the Intergovernmental Panel on Climate Change because they “didn’t allow for lake spreading, so the work has to be done again,” study co-author Andrew Shepherd, director of Britain’s Centre for Polar Observation and Modelling, told NBCNews.com.

Those lakes can speed up ice loss since, being darker than the white ice, they can absorb more of the sun’s heat and cause melting. The melt itself creates channels through the ice sheet to weaken it further, sending ice off the sheet and into the ocean. “When you pour pancake batter into a pan, if it rushes quickly to the edges of the pan, you end up with a thin pancake,” study lead author Amber Leeson, a researcher at Britain’s University of Leeds, explained in a statement. “It’s similar to what happens with ice sheets: The faster it flows, the thinner it will be. “When the ice sheet is thinner,” she added, “it is at a slightly lower elevation and at the mercy of warmer air temperatures than it would have been if it were thicker, increasing the size of the melt zone around the edge of the ice sheet.”

The mix of IPCC models have Greenland contributing 8.7 inches to global sea level rise by 2100 without the doubling of supraglacial lakes, but the team fears that a doubling could add almost as much as that over the next century. Such a rise in sea level would have serious repercussions for heavily populated low-lying areas, like Florida or Bangladesh, which could see beach and barrier island erosion and salt water encroachment, scientists say. The glaciers study, published in the peer-reviewed Proceedings of the National Academy of Sciences, used NASA satellite data to reconstruct how the height of the ice sheet has changed at nearly 100,000 locations from 1993 to 2012.

The team found significant variations that aren’t factored in by existing computer models for future changes on Greenland because they focus on just four glaciers. “The problem is that these models have been applied to four glaciers only, one of which has not been changing much, to predict how these glaciers may change in the future,” Kees van der Veen, a study co-author and University of Kansas geographer, told NBCNews.com. “Results for these four glaciers have been extrapolated to the entire ice sheet to estimate the contribution of the entire ice sheet to sea level rise,” he adds. “Our results show that this is not appropriate because of how differently individual glaciers have changed over the last decade.”

Read more …

Dec 142014
 
 December 14, 2014  Posted by at 9:33 pm Finance Tagged with: , , , , , , ,  16 Responses »


DPC Mott Street, Chinatown, New York 1900

Where are you going, America?

I don’t like to discuss politics too much. There are not enough smart, kind and honest people in politics wherever I look in the world for me to want to have anything to do with that game. I’d just spend all my time wondering what kind of mindset it takes to want to tell other people what to do, and be in control of the millions, billions and trillions of dollars that are taken from these people on a daily, yearly, basis.

Not that all of them politicians are bad, but those who have genuinely good intentions get drowned out, within seconds, by the ones for whom the need to have power over others is more important than anything else. And as I said, on the whole they’re not very smart. It’s for instance a very bad idea to let you countries’ economic policies be decided by the very people who make the decisions today.

They have no clue what they’re talking about. So they get advisors who they feel do know, and these advisors all come from the same small niche of society that steer everybody’s hard-earned cash towards that same small niche of society. 99% of economists are religious nuts who do even the Roman Catholic church one better because they chart graphs to ‘prove’ their beliefs are true -or even provable-.

They adapt the world to their theories, not the other way around, as physicists do. They pretend their field is a science, but, other than the graphs, it has none of the characteristics of a science. Falsifiability is not a term one can let loose on economics; within minutes, there’d be nothing left.

The other advisors politicians have when it comes to economic policies are bankers, who are convinced banks are the most important institutions and edifices in the world, just like priests and vicars would have described their churches and cathedrals not long ago. That is why last week we saw a spending bill being shoved through US Congress and Senate that includes parts openly written by Citigroup lobbyists, and which puts the risk of over $300 trillion in derivatives on American taxpayers’ shoulders.

America is a democracy in name only. And I often ask myself why Americans take that lying down. Why they think they don’t have to fight for their rights and their freedoms the way the founders did. Do they think they’re special, are they so full of themselves, and full of ‘it’, that they think it’s okay to let their rights being taken away from them, and their children, the same rights so many Americans died for in earlier days?

When you try and see things that way, what else do present day US citizens deserve than what’s coming to them? You can’t have freedom, and you can’t have rights, if you’re not willing to fight for them. And that doesn’t mean sending a bunch of your low-down poorest young people to some faraway desert, it means keeping in touch with what’s happening in your own town and county and state and country. And raising your voice if you don’t like what you see.

There’s a Senate report – many years too late – that confirms the CIA and other parties tortured often innocent people in the name of the United States, and that means you, in incredibly cruel ways reminiscent perhaps most of Medieval times or even before that, before man allegedly became civilized, but for which, by the looks of it, nobody will to be prosecuted in the US.

Letting people die of torture, and then afterwards finding out it was just another case of mistaken identity, has become acceptable in America. Congratulations. We’ve come a long way.

There’s the incredible story of the Ukraine, in which the Senate just days ago called for more economic sanctions vs Russia, and full-blown lethal military aid for Ukraine, where US patsies have taken over even more government positions by being handed hundreds of millions of dollars and fresh Kiev passports, and where now Russia will be forced to counteract, against its will.

Why do Americans allow for that to happen in their name? Don’t they care what other people in the world, in which they’re hugely outnumbered, since less than 1 in 20 is American, think about them? Don’t they care about the effect of harassing others incessantly for the purpose of enriching US companies?

Or do Americans think their superior weaponry allows them to do whatever they want to whoever they want to do it to? Somehow, that, too, is reminiscent of the Middle Ages. America hasn’t won an actual war since 1945, because bigger armies don’t win wars anymore. Having the biggest guns doesn’t either. Nuclear weapons are too destructive for that.

Ron Paul seems to be the only US politician who has any idea of what the US should stand for, who understands that empire building is a really bad idea with all the nukes around, and that coalition building and friendship with other peoples and nations is a much better way to keep Americans safe and -relatively – prosperous. And Ron Paul is getting on; who’ll stand up in his place?

But the biggest issues for Americans are not abroad, they’re right at home. As evidenced by Ferguson, by Eric Garner, and by the mass demonstrations in the past days. The problem is, since the 1960s people have turned their focus so much towards money and so far away from their personal rights and freedoms, and those of others, that one or two or ten demonstrations won’t make a difference anymore.

I was watching something on the 1964 Klan killing of three civil rights workers in the town of Philadelphia, Mississippi the other day, of Dr. King’s role, of how the entire town knew who was guilty but shut up. And I wondered what exactly America has achieved since then, what has changed and what is better 50 years on.

And sure enough I found my answer, in a graph of all places. It this doesn’t hurt your sense of justice, and your sense of pride to be an American, I don’t know what would. Nor do I understand, if you choose to keep silent, where you think this will lead in the future. What can you possibly say when you let these numbers sink in?

Dec 062014
 
 December 6, 2014  Posted by at 12:01 pm Finance Tagged with: , , , , , , , ,  1 Response »


Louise Rosskam General store in Lincoln, Vermont Jul 1940

The ‘You Want Fries With That?’ Jobs Report (CNBC)
Full-Time Jobs Down 150K, Participation Rate Stays At 35-Year Lows (Zero Hedge)
US Factory Orders Tumble, Miss By Most Since January (Zero Hedge)
The New Economics Of Oil (Economist)
More than $150 Billion of Oil Projects Face the Axe in 2015 (Reuters)
Energy Bond Crash Contagion Suggests Oil Will Stay Lower For Longer (Zero Hedge)
Natural Gas: The Fracking Fallacy (Nature)
Draghi’s Authority Drains Away As Half ECB Board Joins Mutiny (AEP)
EU Sanctions Relief For Russia’s Top Banks, Oil Companies (RT)
Crashing Yen Leads To Record Number Of Japanese Bankruptcies (Zero Hedge)
A Comprehensive Breakdown of America’s Economic House of Cards (Beversdorf)
S&P Wakes Up, Cuts Italy to One Notch Above Junk (WolfStreet)
Russia’s Gazprom Receives Prepayment From Ukraine For Gas Supplies (Reuters)
Reckless Congress ‘Declares War’ on Russia (Ron Paul)
Chief Constable Warns Against ‘Drift Towards (Thought) Police State’ (Guardian)
The Tragedy of America’s First Black President (Spiegel)
Adapting To A Warmer Climate To Cost Three Times As Much As Thought (Guardian)
One Man’s 40-Year Fight Against Africa’s Ivory Poachers (John Vidal)

“Friday’s turbocharged jobs headline came thanks to seasonal adjustments and other wizardry at the Bureau of Labor Statistics ..”

The ‘You Want Fries With That?’ Jobs Report (CNBC)

Consider it a brutal lesson in government math. Friday’s turbocharged jobs headline came thanks to seasonal adjustments and other wizardry at the Bureau of Labor Statistics, which reported that U.S. job growth hit 321,000 even as the unemployment rate held steady at 5.8%. Those numbers, courtesy of establishment survey estimates, sound nice on the surface, and they certainly present reasons if not for unbridled optimism then at least confidence that the job market continues to mend and is on a pretty steady trajectory higher. However, the household survey, which is an actual head count, presents details that show there’s still plenty of work to do. A few figures to consider: That big headline number translated into just 4,000 more working Americans. There were, at the same time, another 115,000 on the unemployment line. That disparity can be explained through an expanding labor force, which grew 119,000, though the participation rate among that group remained at 62.8%, which is just off the year’s worst level and around a 36-year low.

But wait, there’s more: The jobs that were created skewed heavily toward lower quality. Full-time jobs declined by 150,000, while part-time positions increased by 77,000. Analysts, though, mostly gushed over the report. Fixed income strategist David Harris at Schroders said it was “unquestionably strong and significantly exceeded expectations.” Economist Lindsey Piegza at Sterne Agee called it “impressive,” while Paul Ashworth at Capital Economics termed the headline gain “massive” with “labor market conditions improving at breakneck speed.” As for the unseemly nature of the internals, Michelle Meyer of BofAML said the “gift” of a report should override those concerns. “Household jobs were only up 4,000, which on the surface is a disappointment. However, this follows an outsized gain of 683,000 in October and 232,000 in September, leaving the three-month moving average still up a healthy 306,000,” Meyer said in a report for clients. “The monthly survey of household jobs tends to be quite noisy, suggesting caution when reacting to a given month of data.”

But there were several other points not to like in the report. Families, for instance, also were under pressure: There were 110,000 fewer married men at work, while married women saw their ranks shrink by 59,000. And there was an exceedingly huge disparity between expectations and results: ADP’s report Wednesday showed just 208,000 new private sector positions, compared with the 314,000 in the BLS report. That’s a miss of 51%, the worst showing for ADP’s count since April 2011 even though the firm has touted its partnership since then with Moody’s Analytics as a way to make its count more accurate. Some Wall Street analysts had been scaling back their calls, and Goldman Sachs, which has had a good history of picking the number, was expecting gains of 220,000. Even the most buoyant economist on the street, Joe LaVorgna at Deutsche Bank, was looking for 250,000. [..]

Finally, there was a rather startling numerical coincidence: That same 321,000 figure was repeated later in the report—as the total number of bar and restaurant jobs created over the past 12 months. Taken in total, a peek beneath the hood of these numbers suggests a job market that still has a ways to go.

Read more …

“.. the Household Survey was nowhere close to confirming the Establishment Survey data, suggesting jobs rose only by 4K from 147,283K to 147,287K, and furthermore, the breakdown was skewed fully in favor of Part-Time jobs, which rose by 77K while Full-Time jobs declined by 150K.”

Full-Time Jobs Down 150K, Participation Rate Stays At 35-Year Lows (Zero Hedge)

While the seasonally-adjusted headline Establishment Survey payroll print reported by the BLS moments ago may be indicative of an economy which the Fed will soon have to temper in an attempt to cool down, a closer read of the November payrolls report shows several other things that were not quite as rosy. First, the Household Survey was nowhere close to confirming the Establishment Survey data, suggesting jobs rose only by 4K from 147,283K to 147,287K, and furthermore, the breakdown was skewed fully in favor of Part-Time jobs, which rose by 77K while Full-Time jobs declined by 150K.

And then for those keeping tabs on the composition of the labor force, the same adverse trends indicated over the past 4 years have continued, with the participation rate remaining flat at 62.8%, essentially the lowest print since 1978, driven by a 69K worker increase in people not in the labor force.

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” .. the only other time we had 3 straight months of factory orders declines was in the recession and the 2012 decline was saved by QE3.”

US Factory Orders Tumble, Miss By Most Since January (Zero Hedge)

But, but, but payrolls data was awesome!! US Factory Orders tumbled -0.7% in October (missing 0.0% expectations) for the 3rd month in a row (for the first time since June 2012). Rather notably, the only other time we had 3 straight months of factory orders declines was in the recession and the 2012 decline was saved by QE3. The data was ugly across the board: Non-durable orders -1.5%, non-defense, ex-air tumbled -1.6%, and inventories-to-shipments levels are at the year’s highs. More problematically for GDP enthusiasts, October inventories of manufactured nondurable goods decreased -0.5% to $249.0 billion driven by petroleum and coal products (but wait, lower oil prices are unequivocally good right?)

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The Economist has no idea what is going on. Not the first time. All they see is a rising global GDP because of lower oil prices.

The New Economics Of Oil (Economist)

The official charter of OPEC states that the group’s goal is “the stabilisation of prices in international oil markets”. It has not been doing a very good job. In June the price of a barrel of oil, then almost $115, began to slide; it now stands close to $70. This near-40% plunge is thanks partly to the sluggish world economy, which is consuming less oil than markets had anticipated, and partly to OPEC itself, which has produced more than markets expected. But the main culprits are the oilmen of North Dakota and Texas. Over the past four years, as the price hovered around $110 a barrel, they have set about extracting oil from shale formations previously considered unviable. Their manic drilling – they have completed perhaps 20,000 new wells since 2010, more than ten times Saudi Arabia’s tally – has boosted America’s oil production by a third, to nearly 9m barrels a day (b/d). That is just 1m b/d short of Saudi Arabia’s output. The contest between the shalemen and the sheikhs has tipped the world from a shortage of oil to a surplus.

Cheaper oil should act like a shot of adrenalin to global growth. A $40 price cut shifts some $1.3 trillion from producers to consumers. The typical American motorist, who spent $3,000 in 2013 at the pumps, might be $800 a year better off—equivalent to a 2% pay rise. Big importing countries such as the euro area, India, Japan and Turkey are enjoying especially big windfalls. Since this money is likely to be spent rather than stashed in a sovereign-wealth fund, global GDP should rise. The falling oil price will reduce already-low inflation still further, and so may encourage central bankers towards looser monetary policy. The Federal Reserve will put off raising interest rates for longer; the European Central Bank will act more boldly to ward off deflation by buying sovereign bonds.

There will, of course, be losers. Oil-producing countries whose budgets depend on high prices are in particular trouble. The rouble tumbled this week as Russia’s prospects darkened further. Nigeria has been forced to raise interest rates and devalue the naira. Venezuela looks ever closer to defaulting on its debt. The spectre of defaults and the speed and scale of the price plunge have unnerved financial markets. But the overall economic effect of cheaper oil is clearly positive. Just how positive will depend on how long the price stays low. That is the subject of a continuing tussle between OPEC and the shale-drillers. Several members of the cartel want it to cut its output, in the hope of pushing the price back up again. But Saudi Arabia, in particular, seems mindful of the experience of the 1970s, when a big leap in the price prompted huge investments in new fields, leading to a decade-long glut. Instead, the Saudis seem to be pushing a different tactic: let the price fall and put high-cost producers out of business. That should soon crimp supply, causing prices to rise.

Read more …

But this the reality: loss of investment, defaults and job losses.

More than $150 Billion of Oil Projects Face the Axe in 2015 (Reuters)

Global oil and gas exploration projects worth more than $150 billion are likely to be put on hold next year as plunging oil prices render them uneconomic, data shows, potentially curbing supplies by the end of the decade. As big oil fields that were discovered decades ago begin to deplete, oil companies are trying to access more complex and hard to reach fields located in some cases deep under sea level. But at the same time, the cost of production has risen sharply given the rising cost of raw materials and the need for expensive new technology to reach the oil. Now the outlook for onshore and offshore developments – from the Barents Sea to the Gulf or Mexico – looks as uncertain as the price of oil, which has plunged by 40% in the last five months to around $70 a barrel.

Next year companies will make final investment decisions (FIDs) on a total of 800 oil and gas projects worth $500 billion and totalling nearly 60 billion barrels of oil equivalent, according to data from Norwegian consultancy Rystad Energy. But with analysts forecasting oil to average $82.50 a barrel next year, around one third of the spending, or a fifth of the volume, is unlikely to be approved, head of analysis at Rystad Energy Per Magnus Nysveen said. “At $70 a barrel, half of the overall volumes are at risk,” he said. Around one third of the projects scheduled for FID in 2015 are so-called unconventional, where oil and gas are extracted using horizontal drilling, in what is known as fracking, or mining. Of those 20 billion barrels, around half are located in Canada’s oil sands and Venezuela’s tar sands, according to Nysveen.

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“.. credit markets – the most sensitive to cashflows at this stage – are signalling either prices have considerably further to fall or will remain at these thinly-profitable-if-at-all prices for considerably longer ..”

Energy Bond Crash Contagion Suggests Oil Will Stay Lower For Longer (Zero Hedge)

When we first explained to the public that the excessive leverage and currently squeezed cashflow of many US oil producers could “trigger a broader high-yield market default cycle,” the world’s smartest TV-anchors shrugged off lower oil prices as ‘unequivocally good’ for all. Now, as a 40% collapse in new well permits and liquidations occurring at the well-head, the world outside of credit markets is starting to comprehend the seriousness of the crash of a sector that was responsible for 93% of jobs created in this ‘recovery’. The credit risk of HY energy corporates has more than doubled to a record 815bps (over risk-free-rates) crushing any hopes of cheap funding/rolling debt loads. Suddenly expectations of 1/3rd of energy firms restructuring is not so crazy… The chart below suggests another problem for hopers… credit markets – the most sensitive to cashflows at this stage – are signalling either prices have considerably further to fall or will remain at these thinly-profitable-if-at-all prices for considerably longer…

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.. “we’re setting ourselves up for a major fiasco“ ..

Natural Gas: The Fracking Fallacy (Nature)

When US President Barack Obama talks about the future, he foresees a thriving US economy fuelled to a large degree by vast amounts of natural gas pouring from domestic wells. “We have a supply of natural gas that can last America nearly 100 years,” he declared in his 2012 State of the Union address. Obama’s statement reflects an optimism that has permeated the United States. It is all thanks to fracking — or hydraulic fracturing — which has made it possible to coax natural gas at a relatively low price out of the fine-grained rock known as shale. Around the country, terms such as ‘shale revolution’ and ‘energy abundance’ echo through corporate boardrooms.

Companies are betting big on forecasts of cheap, plentiful natural gas. Over the next 20 years, US industry and electricity producers are expected to invest hundreds of billions of dollars in new plants that rely on natural gas. And billions more dollars are pouring into the construction of export facilities that will enable the United States to ship liquefied natural gas to Europe, Asia and South America. All of those investments are based on the expectation that US gas production will climb for decades, in line with the official forecasts by the US Energy Information Administration (EIA). As agency director Adam Sieminski put it last year: “For natural gas, the EIA has no doubt at all that production can continue to grow all the way out to 2040.”

But a careful examination of the assumptions behind such bullish forecasts suggests that they may be overly optimistic, in part because the government’s predictions rely on coarse-grained studies of major shale formations, or plays. Now, researchers are analysing those formations in much greater detail and are issuing more-conservative forecasts. They calculate that such formations have relatively small ‘sweet spots’ where it will be profitable to extract gas. The results are “bad news”, says Tad Patzek, head of the University of Texas at Austin’s department of petroleum and geosystems engineering, and a member of the team that is conducting the in-depth analyses. With companies trying to extract shale gas as fast as possible and export significant quantities, he argues, “we’re setting ourselves up for a major fiasco”.

Read more …

“.. a full six months after Mr Draghi first talked loosely of a €1 trillion blitz to head off deflation risks [..] the ECB balance sheet has shrunk by over €100bn.”

Draghi’s Authority Drains Away As Half ECB Board Joins Mutiny (AEP)

The European Central Bank is facing a full-blown leadership crisis. Mario Draghi’s authority is ebbing, with powerful implications for financial markets and the long-term fate of monetary union. Both Die Zeit and Die Welt report that three members of the ECB’s six-strong executive board refused to sign off on Mr Draghi’s latest statement, an unprecedented mutiny in the sanctum sanctorum of the ECB’s policy making machinery. The dissenters are reportedly Germany’s Sabine Lautenschläger, Luxembourg’s Yves Mersch, and more surprisingly France’s Benoît Cœuré, an indication that Paris is still hoping to avoid a breakdown in relations with Berlin over the management of EMU. The reality is that a full six months after Mr Draghi first talked loosely of a €1 trillion blitz to head off deflation risks, almost nothing has actually happened. The ECB balance sheet has shrunk by over €100bn. Talk has achieved a weaker euro but that is not monetary stimulus. It does not offset the withdrawal of $85bn of net bond purchases by the US Federal Reserve for the global economy as a whole.

It is a zero-sum development. The clash comes at a delicate moment amid Italian press reports that Mr Draghi may soon go home, drafted to take over the Italian presidency as the 89-year old Giorgio Napolitano prepares to step down. Such an outcome is unlikely. Yet there is no doubt that Mr Draghi has pressing family reasons to return to Rome, and he barely disguises his irritation with Frankfurt any longer. This incendiary column in the ARD Tagesschau gives a flavour of what is being said in Germany. Fairly or not, Mr Draghi is accused of losing his temper, refusing to listen to objections, cutting off Bundesbank chief Jens Weidmann, and retreating to a “narrow kitchen cabinet”. The latest dispute was over a change in the wording of the ECB statement on its balance sheet. While it appears semantic and trivial – whether the €1 trillion boost is “expected” or “intended” – the underlying clash is serious. The hawks will not be bounced into full-fledged quantitative easing before they are ready. They are patently playing for time, still hoping that the Rubicon may never be crossed.

Mrs Lautenschläger raised eyebrows last weekend by violating the pre-meeting ‘Purdah’, warning that the bar on QE is still very high. She decried “activism” for the sake of it and warned that QE would do more harm than good at this point. Purchases of government bonds amount to fiscal transfer. They create a “serious incentive problem”, she said. She is of course backed by the Bundesbank’s Jens Weidmann, who said this morning that monetary policy is too loose for German needs – even as the Bundesbank halves its economic growth forecast for Germany to 1pc next year, and even as the share of goods in Germany’s price basket in deflation reaches 31.2pc. Mr Weidmann says the crash in oil prices is a “mini-stimulus”, seeming to imply that it therefore reduces any need for QE. The Germans suspect that Mr Draghi is trying rush through sovereign QE so that there will be a lender of last resort in place for Club Med bonds next year as banks sell their holdings, following the repayment of ECB loans (LTROs).

Italian lenders have doubled their portfolio of Italian state bonds (BTPs) to roughly €400bn since Mr Draghi launched his first €1 trillion carry trade three years ago. Mediobanca expects this to fall by €100bn in 2015. Who is going to buy this flood of supply on the market, and at what price? Mr Draghi made clear that the ECB can override Germany on bond purchases if need be. “We don’t need to have unanimity,” he said, though he could hardly have answered otherwise when questioned explicitly on the point. One can imagine the scandal if he had suggested instead that Germany has a veto.

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Seen any coverage of this in the western press?

EU Sanctions Relief For Russia’s Top Banks, Oil Companies (RT)

The European Union has amended sanctions against Russia’s biggest lenders like Sberbank and VTB on long-term financing, and eased some sanctions on the oil industry. The EU says Russia’s biggest lenders – Sberbank, VTB, Gazprombank, Vnesheconombank and Rosselkhozbank – will now be allowed access to long –term financing should the solvency of their European subsidiaries be at risk. The announcement released Friday refers to “loans that have a specific and documented objective to provide emergency funding to meet solvency and liquidity criteria for legal persons established in the Union, whose proprietary rights are owned for more than 50% by any entity referred to in Annex III [Russian banks – Ed.].” The EU has also specified the terms and conditions on which it can lift the ban on providing equipment for oil exploration.

Its supply is still banned to Russia itself, or the exclusive economic zone and offshore territories. However, EU said it may “grant an authorization where the sale, supply, transfer or export of the items is necessary for the urgent prevention or mitigation of an event likely to have a serious and significant impact on human health and safety or the environment.” This basically clarifies the position of the latest set of EU sanctions. The notion of “Arctic oil exploration” means the embargo is applied to oil exploration on the offshore Arctic. “Deep water exploration” means any operation extracting oil carried out deeper than 150 meters below the surface.

The sanctions target the finance, energy and defense sectors. In July 2014 the EU issued a “sectoral list” which includes Sberbank, VTB, Gazprombank, Russian Agricultural Bank (Rosselkhozbank) and Vnesheconombank. The lenders were cut off from long-term (over 30 days) international financing. The EU has banned three Russian energy companies Rosneft, Gazpromneft and Transneft from raising long-term debt on European capital markets. It has also halted services Russia needs to explore oil and gas in the Arctic, deep sea and shale extraction projects. On Friday Russia’s gas major Gazprom said it had inked a €390 million loan agreement with UniCredit bank. The EU however refused to comment on the news, with the EU foreign affairs department saying that the implementation of adopted restrictive measures is the responsibility of each EU country’s national authorities.

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Well done Shinzo!

Crashing Yen Leads To Record Number Of Japanese Bankruptcies (Zero Hedge)

Last week, Zero Hedge first showed a chart so simple, even a Krugman could get it: at this point (and really ever since USDJPY 110 and higher), any incremental Yen devaluation is destructive for the Japanese economy, leading to an unprecedented surge in corporate bankruptcies and, ultimately, economic depression.

The obvious logic here led even the Keynesian studs at Goldman to declare that “Further yen depreciation could be a net burden.” Unfortunately for Abe and Kuroda, halting the Yen devaluation here would be suicide, as Japan now needs its currency to devalue every single day to mask the fact of the underlying economic devastation, or else the Japanese people may (and should) vote Abe out, which would lead to a prompt end to Abenomics, an epic collapse in the Nikkei, and put thousands of weak-Yen chasing Mrs. Watanabes in margin call purgatory. Sadly, that will not happen. We say “sadly” because an end end to Abenomics, which is really Krugmanomics now, is the only thing that could save Japan now. And just to prove that, here is Japan Times confirming what we said, with a report that “Corporate bankruptcies linked to the yen’s slide hit a new record in November, highlighting the strains on small and midsize companies as Prime Minister Shinzo Abe campaigns for re-election on his deflation-busting economic strategy.”

42 of the companies that failed in November cited the weakened currency as a contributing cause, bringing total bankruptcies associated with the yen so far this year to 301, almost triple that of the same period in 2013, according to a survey by Teikoku Databank Ltd. It said surging costs of imported food, metals and construction materials are squeezing small companies. The yen broke through 120 per dollar on Thursday in New York for the first time since 2007, as Abe’s handpicked Bank of Japan governor pumps a record amount of funds into the economy to stoke inflation. [..] “The business conditions for small and medium-size companies are severe,” said Norio Miyagawa, an economist at Mizuho Securities Co. “The more the yen weakens, the more the drawbacks will become evident, unless the benefits big companies are seeing spill over to consumption through an increase in wages.”

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“There is simply no way to escape the need for ever more debt once you get locked into this economic catch 22.”

A Comprehensive Breakdown of America’s Economic House of Cards (Beversdorf)

If we face the worse case projection, let’s call it 200% debt to GDP by 2039, 10 yr Treasuries cannot be more than around 2% yield in order to remain within the historical debt service to GDP range. This is where things really break down. Because if we cannot entice lenders today at 2.5% or 3% interest with 70% debt to GDP there is simply no way lenders will be attracted at 2% with debt to GDP at 200%. So let’s think about what this means. Now the CBO budget projections predict deficits will increase forever after 2018. And we will see why this is true shortly. This will require massive amounts of debt over the next 25 years.

And if we don’t have willing lenders we’re back to monetizing most of that debt as we’ve done for the past several years. This means massive amounts of money printing. And so we put ourselves into a downward spiral of devaluation, which means inflation. Inflation perpetuates larger deficits as spending increases and even more money printing and so the downward spiral worsens. This will be made much worse by the winding down currently taking place of the petrodollar as demand for dollars will see significant declines. Alternatively to monetizing debt, we can raise interest rates to attract lenders to the market. Let’s say we get to the 20 year average of 7.5%. That means 7.5% of 200% of GDP, so 15% of GDP. Well, we’ve already stated that total tax revenues equate to about 17% of GDP.

This means total debt service will eat up virtually every bit of tax revenue, again leading to massive deficits so even more debt will be required to cover all other expenditures. That leads to more borrowing and worsening balance sheet metrics requiring even higher interest rates. And so we can see very quickly this alternative also leads to a downward spiral. Further, we see that under both scenarios of monetizing debt or incentivizing lenders, a debt driven economy will result in endlessly rising deficits requiring ever more debt. There is simply no way to escape the need for ever more debt once you get locked into this economic catch 22.

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And bond yields keep falling … A topsy turvy world, until it turns back around and right side up with a vengeance.

S&P Wakes Up, Cuts Italy to One Notch Above Junk (WolfStreet)

Italy has one of the most troubled economies in the EU. Businesses and individuals are buckling under confiscatory taxes that everyone is feverishly trying to dodge. Banks are stuffed with non-performing loans that have jumped 20% from a year ago. The economy is crumbling under an immense burden of government debt that, unlike Japan, Italy cannot slough off the easy way by devaluing its own currency and stirring up a big bout of inflation – because it doesn’t have its own currency. Devaluation and inflation used to be Italy’s favorite methods of dealing with its economic problems. It went like this: Politicians made promises that they knew couldn’t be kept but that bought a lot of votes. When everything ground down as industries were getting hammered by competition from across the border, the government stirred up inflation, and then over some weekend, the lira would be devalued.

It was bitter medicine. It was painful. It didn’t even cure anything. It impoverished the people. But it temporarily made Italy competitive with its neighbors once again. Most recently, Italy devalued in 1990 and then again 1992 against the European Exchange Rate Mechanism, a predecessor to the euro. Having to take this bitter medicine time and again had made Italians the most eager to adopt the euro. The idea of a currency that would be out of reach of politicians and that would function as a reliable store of value, run by the Germans as if it were the mark, and in turn, keep politicians honest – all that seemed like paradise. But it just hasn’t kept Italian politicians honest. Only this time, their favorite tools are gone. The economy is now a mess.

Economic “growth” has been negative or zero for the last 13 quarters. And the country’s debt, no matter of how hard the government tries to fudge the numbers, just keeps ballooning. So, on Friday, ratings agency Standard & Poor’s woke up and cut Italy’s sovereign credit rating to BBB–, just one notch above junk, which is the dreaded BB. It cited the economy’s perennial shrinkage and lousy competitiveness. The deteriorating economic fundamentals and a political unwillingness to address the deficit were making the mountain of public debt increasingly unsustainable. The ECB has been busy doing “whatever it takes” to keep the cost of funding this wobbly construct as low as possible. It lowered its own benchmark interest rate to near zero. It instituted negative deposit rates, it’s contemplating a big round of QE, all to keep Italy (and some of its cohorts) afloat a little while longer.

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Wonder where they got the money.

Russia’s Gazprom Receives Prepayment From Ukraine For Gas Supplies (Reuters)

Russian natural gas producer Gazprom said on Saturday it had received a prepayment of $378.22 million from Ukraine for natural gas supplies, paving the way for the first shipments to Kiev since Moscow cut supplies in June. Ukraine’s state energy firm, Naftogaz, said on Friday it had transferred the sum to Gazprom for December. A Gazprom spokesman confirmed the money had been received. In line with a deal signed by Naftogaz and Gazprom in October, flows to Ukraine from Russia, which were severed in a dispute over prices and debts, will resume within 48 hours from when the Russian firm receives the transfer. Naftogaz did not say how much gas it planned to buy, but earlier the energy ministry said this could be about 1 billion cubic metres. Russian news agencies also put the amount at 1 billion cubic metres on Saturday.

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Ron Paul has had it right all the way since this nonsense started. But the Putin bashing in the western media keeps running at a fever pitch.

Reckless Congress ‘Declares War’ on Russia (Ron Paul)

Today the US House passed what I consider to be one of the worst pieces of legislation ever. H. Res. 758 was billed as a resolution “strongly condemning the actions of the Russian Federation, under President Vladimir Putin, which has carried out a policy of aggression against neighboring countries aimed at political and economic domination.” In fact, the bill was 16 pages of war propaganda that should have made even neocons blush, if they were capable of such a thing. These are the kinds of resolutions I have always watched closely in Congress, as what are billed as “harmless” statements of opinion often lead to sanctions and war. I remember in 1998 arguing strongly against the Iraq Liberation Act because, as I said at the time, I knew it would lead to war. I did not oppose the Act because I was an admirer of Saddam Hussein – just as now I am not an admirer of Putin or any foreign political leader – but rather because I knew then that another war against Iraq would not solve the problems and would probably make things worse.

We all know what happened next. That is why I can hardly believe they are getting away with it again, and this time with even higher stakes: provoking a war with Russia that could result in total destruction! If anyone thinks I am exaggerating about how bad this resolution really is, let me just offer a few examples from the legislation itself: The resolution (paragraph 3) accuses Russia of an invasion of Ukraine and condemns Russia’s violation of Ukrainian sovereignty. The statement is offered without any proof of such a thing. Surely with our sophisticated satellites that can read a license plate from space we should have video and pictures of this Russian invasion. None have been offered. As to Russia’s violation of Ukrainian sovereignty, why isn’t it a violation of Ukraine’s sovereignty for the US to participate in the overthrow of that country’s elected government as it did in February?

We have all heard the tapes of State Department officials plotting with the US Ambassador in Ukraine to overthrow the government. We heard US Assistant Secretary of State Victoria Nuland bragging that the US spent $5 billion on regime change in Ukraine. Why is that OK? The resolution (paragraph 11) accuses the people in east Ukraine of holding “fraudulent and illegal elections” in November. Why is it that every time elections do not produce the results desired by the US government they are called “illegal” and “fraudulent”? Aren’t the people of eastern Ukraine allowed self-determination? Isn’t that a basic human right? The resolution (paragraph 13) demands a withdrawal of Russia forces from Ukraine even though the US government has provided no evidence the Russian army was ever in Ukraine. This paragraph also urges the government in Kiev to resume military operations against the eastern regions seeking independence.

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Wise man. So no-one will listen.

Chief Constable Warns Against ‘Drift Towards (Thought) Police State’ (Guardian)

The battle against extremism could lead to a “drift towards a police state” in which officers are turned into “thought police”, one of Britain’s most senior chief constables has warned. Sir Peter Fahy, chief constable of Greater Manchester, said police were being left to decide what is acceptable free speech as the efforts against radicalisation and a severe threat of terrorist attack intensify. It is politicians, academics and others in civil society who have to define what counts as extremist ideas, he says. Fahy serves as chief constable of Greater Manchester police and also has national counter-terrorism roles. He is vice-chair of the police’s terrorism committee and national lead on Prevent, the counter radicalisation strategy. He stressed he supported new counter-terrorism measures unveiled by the government last week, including bans on alleged extremist speakers from colleges.

Fahy said government, academics and civil society needed to decide where the line fell between free speech and extremism. Otherwise, he warned, it would be decided by the security establishment, so-called “securocrats”, including the security services, government and senior police chiefs like Fahy. Speaking to the Guardian, Fahy said: “If these issues [defining extremism] are left to securocrats then there is a danger of a drift to a police state”. He added: “I am a securocrat, it’s people like me, in the security services, people with a narrow responsibility for counter-terrorism. It is better for that to be defined by wider society and not securocrats.” Fahy said officers were also having to decide issues such as when do anti-gay or anti-women’s rights sentiments cross the line, as well as when radical Islam veers into extremism: “There is a danger of us being turned into a thought police,” he said. “This securocrat says we do not want to be in the space of policing thought or police defining what is extremism.”

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Der Spiegel has a go at this. Interesting in that it is a view from abroad, but not all that good.

The Tragedy of America’s First Black President (Spiegel)

At the beginning of his term, Barack Obama likely never imagined that a new wave of violence would take place during his presidency. But it is not an accident. After all, he himself raised hopes that progress would be made. Yet after six years in office, little has changed for blacks in the US. Obama held the speech that raised the hopes of black Americans on March 18, 2008 as a candidate in Philadelphia. It was a reaction to comments made by his Chicago pastor and friend Jeremiah Wright, who had accused the US government of crimes against blacks. “God damn America … for killing innocent people,” he intoned from the pulpit in a sermon that threatened to derail Obama’s candidacy. “The profound mistake of Reverend Wright’s sermons is not that he spoke about racism in our society,” Obama said in his speech. “It’s that he spoke as if our society was static; as if no progress has been made; as if this country … is still irrevocably bound to a tragic past.”

Obama was referring to a time when blacks were forced to serve whites as slaves; a time when they weren’t even second-class citizens, instead being treated as commodities to be raised and sold at market. But he also was referring to the decades leading up to the 1960s when blacks were not allowed to use the same park benches as whites and were forced to sit at the back of the bus. In that speech, Obama promised to create “a more perfect union,” in reference to the preamble of the US Constitution. He sought to finally fulfill the promise made 50 years earlier by fellow Democrat Lyndon B. Johnson. In remarks at the signing of the Civil Rights Bill on July 2, 1964, Johnson said he hoped to “eliminate the last vestiges of injustice in our beloved country” and to “close the springs of racial poison.” Many observers believe that Obama’s speech was a decisive factor in his becoming the first black president in American history half a year later. It is still widely considered to be one of his best.

But the final push to realize Johnson’s dream has still not taken place. The situation today gives the impression that African-Americans are adequately represented “without giving them the possibility to really take advantage” of that representation, says Kareem Crayton, a law professor at the University of North Carolina. Eduardo Bonilla-Silva, sociology professor at Duke University, agrees. “Having a black president doesn’t mean much in our day-to-day lives.” [..] “It’s the age of Obama, and yet civil rights have gone backwards. What went wrong? asked the New Republic on its cover in August. The issue, which appeared after Michael Brown’s death in Ferguson, spoke of a “new racism.” Indeed, the kinds of deadly events that took place in Ferguson and Cleveland have now convinced many blacks that it wasn’t Obama who was right back in the spring of 2008. Rather, it was his angry pastor, Jeremiah Wright.

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Attempts to put numbers on this don’t strike me as useful, they’ll just change all the time anyway. It seems far more important to make clear that this is not about money.

Adapting To A Warmer Climate To Cost Three Times As Much As Thought (Guardian)

Adapting to a warmer world will cost hundreds of billions of dollars and up to three times as much as previous estimates, even if global climate talks manage to keep temperature rises below dangerous levels, warns a report by the UN. The first United Nations Environment Programme (Unep) ‘Adaptation Gap Report’ shows a significant funding gap after 2020 unless more funds from rich countries are pumped in to helping developing nations adapt to the droughts, flooding and heatwaves expected to accompany climate change. “The report provides a powerful reminder that the potential cost of inaction carries a real price tag. Debating the economics of our response to climate change must become more honest,” said Achim Steiner, Unep’s executive director, as ministers from nearly 200 countries prepare to join the high level segment of UN climate talks in Lima, Peru, next week.

“We owe it to ourselves but also to the next generation, as it is they who will have to foot the bill.” Without further action on cutting greenhouse gas emissions, the report warns, the cost of adaptation will soar even further as wider and more expensive action is needed to protect communities from the extreme weather brought about by climate change. Delegates from the Alliance of Small Islands States at the UN climate conference in Lima, which opened on Monday, are already feeling those impacts. They have appealed for adaptation funds for “loss and damage” as their homelands’ very existence is threatened by rising sea levels. “We’re keen to see the implementation of the Green Climate Fund – we’re still waiting,” Netatua Pelesikoti, director of the climate change office at the Secretariat of the Pacific Environment Programme, referring to a fund set up to hope poorer countries cope with global warming.

“The trickle down to each government in the Pacific is very slow but we can’t abandon the process at this stage,” said the Tongan delegate. Rich countries have pledged $9.7bn to the Green Climate Fund but the figure is well short of the minimum target of $100bn each year by 2020. The Adaptation Gap Report said adaptation costs could climb to $150bn by 2025/2030 and $250-500bn per year by 2050, even based on the assumption that emissions are cut to keep temperature rises below rises of 2C above pre-industrial levels, as governments have previously agreed. However, if emissions continue rising at their current rate – which would lead to temperature rises well above 2C – adaptation costs could hit double the worst-case figures, the report warned.

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We need a lot more people like this man, or we will see the twilight of Africa’s wildlife in our lifetimes.

One Man’s 40-Year Fight Against Africa’s Ivory Poachers (John Vidal)

Most tourists who walk into Hong Kong’s many licensed ivory stores and carving factories, browse the displays of statues, pendants and jewellery and accept the official assurances that it all comes from sustainable sources. But not the reserved middle-aged man who last month went into a Kowloon shop. What started with a few polite questions about the provenance of the objects on show turned swiftly to confrontation. Within minutes he was furious and the owner had threatened to call the police. Having spent nearly 40 years trying to protect elephants and other African wildlife from poachers, Richard Bonham says he was shocked to see, for the first time, the Hong Kong stores where most of the world’s ivory ends up. The statistics, he says, show that Africa’s elephant population has crashed from 1.3 million in 1979 to around 400,000 today.

In the last three years alone, around 100,000 elephants have been killed by poachers and more are now being shot than are being born. Rhinos are on the edge too. For a Hong Kong shopkeeper, each trinket is something to profit from. But for Bonham, they tell a story of cruelty, desperation and exploitation. “I wanted to see for myself. Yes, I was angry. There’s no other word for it. I saw the shops with huge stocks that, despite the import ban, are not dwindling. Yet the [Hong Kong] government has chosen not to recognise or address the lack of legitimacy of their trade. “The experience of seeing the end destination of ivory was important to me. It completed the circle from seeing elephant herds, stampeding in terror at the scent of man, from seeing the blood-soaked soil around lifeless carcasses to whimsical trinkets in glass display cases.”

In London last week to receive the Prince William lifetime achievement award conservation, he produced a Hong Kong government document that showed how the former British colony holds over 100 tonnes of ivory stocks despite a 25-year-old import ban that was meant to eliminate all stocks 10 years ago. It is proof, he says, that the Hong Kong government knows that its traders have been topping up their stocks with “black”, or illegal ivory from poached elephants, yet do nothing. Back in Africa, he said, the trade ends in carnage and impoverished environments. “I have watched elephants in the Selous game reserve in Tanzania drop from over 100,000 animals to probably less than 10,000 today and that number is still falling. During a one-hour drift down the Rufiji river three years ago I was seeing up to six different elephant herds coming down to drink.

Now I see none – they’ve gone, back to dust and into the African soil, with their ivory shipped off to distant lands. There is a silence on that river that will take decades to return – if at all.” But despite the statistics, he says he is upbeat for conservation, at least in the Amboseli national park in Kenya, where he lives among the Maasai. “It’s not all bad news, it’s not too late. We have got poaching there more or less under control. We are seeing elephants on the increase and lions, that 15 years ago where on the verge of local extinction, have increased by 300%. But probably more importantly we are seeing local communities setting aside land for conservancies and wildlife.

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Nov 082014
 
 November 8, 2014  Posted by at 1:07 pm Finance Tagged with: , , , , , , , , , , ,  3 Responses »


Russell Lee Auto transport passing through Eufaula, Oklahoma Feb 1940

For Wall Street, It’s Not Politicians That Matter, But Profits (MarketWatch)
Ron Paul: Two- Party US Political System In Reality A Monopoly (RT)
Majority Of New October Jobs Pay Below Average Wage (MarketWatch)
When Will Americans Ever Get Raises? (BW)
Only 92.4 Million Americans Not In Labor Force (Zero Hedge)
US Shale Drillers Idle Rigs From Texas to Utah Amid Oil Rout (Bloomberg)
Transocean Takes $2.76 Billion Charge Amid Rig Glut (Bloomberg)
Consumer Credit in US Climbs on Demand for Car, Student Loans (Bloomberg)
Fannie-Freddie CEOs Tout Do-It-Yourself Housing Finance Overhaul (Bloomberg)
China Export, Import Growth Slows, Reinforcing Signs Of Fragility (Reuters)
El-Erian: Strong Dollar Could Derail The Recovery (CNBC)
G20 Experts To Act On Corporations’ Internal Loans That Help Cut Tax (Guardian)
Luxembourg, The Country Where Accountants Outnumber Police 4:1 (Guardian)
The $9 Billion Witness: Meet JPMorgan Chase’s Worst Nightmare (Matt Taibbi)
Russia, China Close To Reaching 2nd Mega Gas Deal (RT)
Catalans Recast Spanish History in Drive for Independence (Bloomberg)
Greek Minister: Markets Are Sending Us A Message (CNBC)
Danish Women Urged to Drop Work Till 2015 to Protest Pay Gap (Bloomberg)
Drones Over French Nuclear Sites Prompt Parliamentary Probe (Bloomberg)

“.. much of Wall Street’s profit engine isn’t sustainable. For most of the last two years, too-big-to-fail bank profits haven’t been driven by banking, they’ve been driven by sharp increases in investment banking”.

For Wall Street, It’s Not Politicians That Matter, But Profits (MarketWatch)

There’s been much in the way of speculation about how the Republican sweep in Tuesday’s midterms may impact Wall Street — the industry. Some believe a shift in control will help. Others are less sure. Both may miss a bigger point: big financial firms are on a cyclical high that isn’t built to last. David Reilly and John Carney argue that big banks are unlikely to get big breaks from Congress even though Republicans have tended to be softer on regulation. Writing for the Wall Street Journal’s “Heard on the Street” section, Reilly and Carney note “reviving the debate over financial reform could also resurrect the question of what to do about too-big-to-fail banks and renew calls for them to be broken up.” On the flip side, MarketWatch’s Philip van Doorn writes that many banks may be able to lift dividends if the new Republican leadership in the U.S. Senate follows through on promises to ease restrictions on capital requirements. Both camps make strong arguments. And they’re not really in opposition.

Tuesday’s victory by Republicans opens the door for eased banking rules, but it comes with risk of a political backlash. Investors may be better served by looking at some trends in the industry to gauge just how profitable the big six — Bank of America, Citigroup, Goldman Sachs, J.P. Morgan, Morgan Stanley and Wells Fargo may perform in the future. On the plus side, the stream of positive economic data, including Friday’s jobs report, is likely to lead the Federal Reserve to keep its distance from quantitative easing and enter a new phase of rate increases that, in turn, would boost interest rates paid on loans and other credit instruments. This has been a big drag on bank industry profits since the financial crisis and recession. That’s the good news. The potential bad news is that much of Wall Street’s profit engine isn’t sustainable. For most of the last two years, too-big-to-fail bank profits haven’t been driven by banking, they’ve been driven by sharp increases in investment banking: underwriting equity and debt offerings and advising on mergers and acquisitions.

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“What do they do with our young people? They send them all around the world, getting involved in wars and telling them they have to have democratic elections ..”

Ron Paul: Two- Party US Political System In Reality A Monopoly (RT)

Former Congressman Ron Paul told RT in the midst of Tuesday’s midterm elections that the “monopoly” system run by the leaders of the two main parties is all too evident as Americans go to the polls this Election Day. “This whole idea that a good candidate that’s rating well in the polls can’t get in the debate, that’s where the corruption really is,” Paul, the 79-year-old former House of Representatives lawmaker for Texas, told RT during Tuesday’s special midterm elections coverage. “It’s a monopoly…and they don’t even allow a second option,” he said. “If a third party person gets anywhere along, they are going to do everything they can to stop that from happening,” the retired congressman continued.

Paul, a longtime Republican, has been critical of the two-party dichotomy that dominates American politics for decades, and once ran as the Libertarian Party’s nominee for president of the United States. While third-party candidates continue to vie against the left and right establishment, however, Paul warned RT that even the two-party system as Americans know it is in danger. “What do they do with our young people? They send them all around the world, getting involved in wars and telling them they have to have democratic elections,” he told RT. “But here at home, we don’t have true Democracy. We have a monopoly of ideas that is controlled by the leaders of two parties. And they call it two parties, but it’s really one philosophy.”

All hope isn’t lost, however; according to Paul, American politics can still be changed if individuals intent on third-party ideas introduce their ethos to the current establishment. Americans can “fight to get rid of the monopoly of Republicans and Democrats,” Paul said, or “try to influence people with ideas and infiltrate both political parties.” With respect to the midterm elections, though, Paul told RT that he’s uncertain what policies will prevail this year — excluding, of course, an obvious win for the status quo. “I think the status quo is pretty strong right now, and I imagine that the status quo is going to win the election tonight,” he said Tuesday afternoon.

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Erosion presented as recovery.

Majority Of New October Jobs Pay Below Average Wage (MarketWatch)

The U.S. is becoming an engine of job creation once again, but it’s more like a four-cylinder instead of an eight-cylinder one. The 214,000 gain in new jobs in October marked the ninth straight month in which net hiring topped 200,000. The last time that happened was in 1994. Yet only about 40% of the new jobs created in October were in fields that pay above the average hourly U.S. wage of $24.57. That’s down from 60% in September. The mediocre nature of many new jobs and slow wage growth are perhaps the biggest obstacle to a full-blown economic recovery. The biggest increase in hiring in October occurred at restaurants and bars, which added a seasonally adjusted 42,000 positions. Retailers hired 27,000 workers. Temps accounted for 15,000 jobs. Transport — think package deliverers — took on 13,000 new employees. All these industries pay less than the national average.

Some of the new jobs are also unlikely to last long. Restaurants and retailers, for example, tend to beef up staff ahead of the holidays and slim down after New Year’s. Temp jobs, on the other hand, have often been converted into full-time positions. Companies use temps sometimes as a trial for a full-time job. Whatever the case, it’s not a good idea to give too much weight to the composition of hiring in any one month. Some 60% of the 256,000 jobs created in September, for instance, were in fields that pay above the average U.S. wage. That’s higher than normal. There’s also been a pronounced shift in 2014 toward higher paying jobs vs. the prior year. A MarketWatch analysis shows that roughly 58% of the new jobs created this year pay above the average hourly wage, compared to less than 50% in 2013. Still, both the composition of jobs and the trend in hourly pay bear close watching over the next few months. Both have to improve to get the U.S. economy fully back on track more than five years after the recovery started.

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“The unemployment rate is no longer a sufficient statistic.” An accurate gauge of the market, he says, must include people who’ve given up looking for work and those working in part-time or low-paying jobs because they can’t find anything else”.

When Will Americans Ever Get Raises? (BW)

Americans are overdue for a fatter paycheck: Average earnings haven’t risen in more than six years. The labor market is finally recovering—the unemployment rate is down to 5.9% from 8.2% in July 2012—and that usually pushes up wages. But it’s not clear that job growth will translate into pay increases in 2015. In an August speech, Federal Reserve Chair Janet Yellen speculated that “pent-up wage deflation” might have held wages down during the recovery. What does that mean? “In a downturn, employers may need to cut wages, but they are reluctant to do so,” says San Francisco Fed economist Mary Daly. They prefer laying people off, which they believe tends to have less impact on workforce morale, she says. The result is that when the economy recovers, employers are slower to raise pay than if they had imposed cuts during the slump.

Daly says wages were slow to increase after the past three recessions, too. She estimates that unemployment will have to fall to 5.2% before wages begin rising. Even a drop to that level might not be low enough to spur gains. Dartmouth economist Daniel Blanchflower says the labor market is in worse shape than the unemployment rate suggests. “Something changed in 2010,” he says. “The unemployment rate is no longer a sufficient statistic.” An accurate gauge of the market, he says, must include people who’ve given up looking for work and those working in part-time or low-paying jobs because they can’t find anything else. Measures that include discouraged workers, such as the labor force participation rate, have worsened since 2008. Blanchflower says pay won’t increase until the slack is absorbed, and he can’t predict when that might happen.

Today’s unusually high long-term unemployment could keep wages low for years, according to Till von Wachter, an economist at the University of California at Los Angeles. People who’ve been out of work for six months or more “may have seen their skills deteriorate,” he says, “and some job losers found their previous occupation is no longer available and skills not in demand. This happens in every recession, but this last one was worse because there was more job loss.” He estimates that each additional month you’re unemployed after the first month lowers your next job’s pay by almost 1%.

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Smells like recovery?!

Only 92.4 Million Americans Not In Labor Force (Zero Hedge)

Following last month’s total collapse in the participation rate, dropping to 36 year lows, this month there was a modest improvement in the composition of the labor force, with the Household Survey suggesting the ranks of the Employed rose by 683K people, while the Unemployed actually declined by 267K, leading to a drop of the people not in the labor force to 92.378 million from 92.584 million. In other words, a little over 101 million Americans are unemployed or out of the labor force. Still, if only looking at this metric, the Fed would likely have no choice but to proceed with a rate hike in the first half of 2015.

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“There’s no doubt about it now. We’re already down 49 rigs since the peak in October. It’ll have fallen by more than 100 rigs by the end of year.”

US Shale Drillers Idle Rigs From Texas to Utah Amid Oil Rout (Bloomberg)

The shale-oil drilling boom in the U.S. is showing early signs of cracking. Rigs targeting oil sank by 14 to 1,568 this week, the lowest since Aug. 22, Baker Hughes said yesterday. The Eagle Ford shale formation in south Texas lost the most, dropping nine to 197. The nation’s oil rig count is down from a peak of 1,609 on Oct. 10. Drillers are slowing down as crude prices tumbled 24% in the past four months. Transocean said yesterday that its earnings would take a hit by a drop in fees and demand for its rigs. The slide threatens to curb a production boom in U.S. shale formations that has helped bring prices at the pump below $3 a gallon for the first time since 2010 and shrink the nation’s dependence on foreign oil imports. “We are officially seeing the slowdown in oil drilling,” James Williams, president of energy consulting company WTRG Economics, said yesterday. “There’s no doubt about it now. We’re already down 49 rigs since the peak in October. It’ll have fallen by more than 100 rigs by the end of year.”

Orices are down 17% in the past year. Executives at several large U.S. shale producers, including Chesapeake Energy and EOG Resources, have vowed to maintain or even raise production as they reported earnings this week. They say their success in bringing down costs means they can make money even if prices slump further. The oil rig count will drop to 1,325 by the middle of next year amid lower prices, Genscape, an energy data company said in a report. Drillers from Apache to Continental Resources have said this week that they’re laying down rigs in some oil plays. Transocean, owner of the biggest fleet of deep-water drilling rigs, is delaying the release of its Q3 results after saying its earnings would be hit by $2.76 billion in charges from a decline in the value of its contracts drilling business and a drop in rig-use fees. Transocean’s competitors will probably have to take similar measures as “this is going to be an industry wide phenomenon,” Goldman Sachs said in a research note yesterday.

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The shale mirage makes its first victims. Many will follow.

Transocean Takes $2.76 Billion Charge Amid Rig Glut (Bloomberg)

Transocean, owner of the biggest fleet of deep-water drilling rigs, is feeling the effect of an industrywide glut in the expensive vessels just as crude-oil prices tumble. The company will delay posting third-quarter results after saying earnings would be hit by $2.76 billion in charges from a decline in the value of its contracts-drilling business and a drop in rig-use fees. Shares in the Vernier, Switzerland-based company, which pushed back the release of its earnings report to Monday instead of today, fell 0.7% to $29.71 at the close in New York. Oil’s decline to a four-year low in recent months has caused companies to consider spending cuts, which would further reduce demand for rigs and the rates Transocean can charge to lease them to explorers. The drop in prices comes after rig contractors responded to rising demand during the past few years with the biggest batch of construction orders for rigs since the advent of deep-water drilling in the 1970s.

“Ouch,” analysts from Tudor Pickering Holt & Co. wrote in a note to investors today. The announcement “reflects the reality of this oversupplied floater rig market globally.” Other rig owners may also face writedowns, Waqar Syed, an analyst at Goldman Sachs Group Inc., wrote today in a note to investors. Among those that may be affected are Diamond Offshore Drilling, Noble, Ensco, Rowan and Atwood Oceanics, he wrote. “This is going to be an industrywide phenomenon for the next few years,” Syed wrote. “Companies that have spent substantial amounts in the past 10-15 years in upgrading their 1970-1980 vintage rigs may face some writedowns.” Noble regularly does impairment tests on its assets, said John Breed, a company spokesman. “With the current figuration of the Noble fleet, it seems like a major writedown wouldn’t be something we would be looking at.”

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More debt. Which is a good thing, right?

Consumer Credit in US Climbs on Demand for Car, Student Loans (Bloomberg)

Consumer borrowing increased at a faster rate in September as American households took out loans for cars and education. The $15.9 billion increase in credit followed a revised $14 billion advance in August, the Federal Reserve reported today in Washington. Non-revolving loans, including borrowing for motor vehicles and college tuition, rose $14.5 billion in September. Gains in the labor market and stock portfolios, the lowest gasoline prices in four years, and cheap borrowing costs are giving Americans the confidence to borrow. Faster wage growth would provide a bigger boost for households wary of taking on more debt. The September gain in consumer borrowing was in line with the $16 billion median forecast of 34 economists in a Bloomberg survey. Estimates ranged from increases of $12 billion to $22 billion.

The report doesn’t track mortgages, home-equity lines of credit and other debt secured by real estate. Revolving credit, which includes credit-card balances, climbed $1.4 billion after a $201 million decline in August, today’s Fed figures showed. The September gain in non-revolving credit followed a $14.2 billion increase in the prior month. Today’s report showed that student loans in the third quarter increased to $1.3 trillion from $1.27 trillion in the prior three months. Borrowing for the purchase of motor vehicles climbed to $940.9 billion last quarter from $918.7 billion from April through June. Auto sales cooled in September to a 16.3 million annualized rate, capping the best quarter for the industry in more than eight years, according to data from Ward’s Automotive Group.

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The guys brought in to dissolve the GSEs now want to keep them running. The neverending nightmare, courtesy of lenders who want to offload shaky loans to the government.

Fannie-Freddie CEOs Tout Do-It-Yourself Housing Finance Overhaul (Bloomberg)

The top executives of Fannie Mae and Freddie Mac, brought in to be stewards until the government figures out how to shut them down, are increasingly sounding like they think the two companies should continue to exist. Timothy J. Mayopoulos of Fannie Mae and Donald Layton of Freddie Mac today both pointed to steps they’re taking to boost stability and competition in the mortgage market, while stopping short of urging lawmakers to drop plans for an overhaul that would put them out of business. “People should recognize that there’s a lot of reform that’s already underway at Fannie Mae,” Mayopoulos said in a telephone interview. “There have been a lot of proposals for substantial changes to housing finance. People need to make sure whatever is put in place is practical and it can work.”

Fannie Mae and Freddie Mac, which were taken into U.S. conservatorship in 2008 amid soaring losses on subprime loans, reported third-quarter financial results today that will see them send a combined $6.8 billion to the Treasury before the end of the year. The payments stem from terms of their $187.5 billion bailout requiring them to turn over all profits. With the latest installments, Fannie Mae, which had a third-quarter profit of $3.9 billion, and Freddie Mac, which reported $2.8 billion, will have sent taxpayers $38 billion more than they took in the aid. The payments are considered to be a return on the U.S. investment and not a repayment, which means there’s no legal avenue for them to exit conservatorship. Changing the bailout terms is one area where lawmakers could help, Mayopoulos said. “That’s something that Congress will ultimately need to address if this company’s going to continue to operate,” he said. “It’s very difficult without capital.”

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‘Fragility’, spoken like a true spinner.

China Export, Import Growth Slows, Reinforcing Signs Of Fragility (Reuters)

Annual growth in China’s exports and imports slowed in October, data showed on Saturday, reinforcing signs of fragility in the world’s second-largest economy that could prompt policymakers to roll out more stimulus measures. Exports have been the lone bright spot in the last few months, perhaps helping to offset soft domestic demand, but there are doubts about the accuracy of the official numbers amid signs of a resurgence of speculative currency flows through inflated trade receipts. Exports rose 11.6% in October from a year earlier, slowing from a 15.3% jump in September, the General Administration of Customs said. The figure was slightly above market expectations in a Reuters poll of a 10.6% rise.

A decline in China’s leading index on exports in October pointed to weaker export growth in the next two to three months, the administration said. “The economy still faces relatively big downward pressure as exports face uncertainties while weak imports indicate sluggish domestic demand,” said Nie Wen, an economist at Hwabao Trust in Shanghai. “The central bank may continue to ease policy in a targeted way.” Imports rose an annual 4.6% in October, pulling back from a 7% rise in September, and were weaker than expected. That left the country with a trade surplus of $45.4 billion for the month, which was near record highs.

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Really? Recovery?

El-Erian: Strong Dollar Could Derail The Recovery (CNBC)

Mohamed El-Erian, the chief economic adviser to Allianz, has warned that policymakers don’t understand how much of a risk a strong dollar and volatile currency markets could pose to market “soundness” and the economic recovery. The former Pimco chief executive and co-chief investment officer said volatility had returned to currency markets as central banks diverge in their response to lackluster growth and deflation. This could result in “excessive movements” in currencies becoming a risk themselves, he said. “This (the strong dollar) is a key issue and I don’t think this is an issue that the markets or the policy makers have understood enough as yet—we have gone from a world where there was relative harmony in what central banks were doing—to a world where there was diverging direction and for good reasons: the economies are doing different things,” he told CNBC on Friday.

“If the other parts of the policy apparatus do not respond, then the only market that accommodates these divergent trends is the currency markets. I could tell you that, as someone who participates in the markets, this poses a threat to volatility and market soundness as a whole and the sorts of excessive movements that may result in currencies becoming a risk themselves to economic recovery,” he added. El-Erian’s comments come as the the Russian rouble tumbled to new lows on Friday before bouncing back. The rouble hit its weakest-ever level against the U.S. dollar early on Friday, sliding to 48.6, before recovering to trade at 46.2 within a few hours – 1.3% higher on the day.

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There are far more tricks than regulators.

G20 Experts To Act On Corporations’ Internal Loans That Help Cut Tax (Guardian)

Tax experts responsible for the G20-led shakeup of international tax rules are discussing radical measures to bar global corporations from using internal loans, that bear no relation to their borrowing needs, in order to avoid tax. If adopted, the move could wipe out vast swaths of the financial industry at a stroke in countries such as Switzerland and Luxembourg, which have for years courted the intra-group financing offices of multinational firms by operating friendly local tax regimes. Raffaele Russo, one of the OECD tax experts leading the reform programme that has come in response to increasingly aggressive tax planning by multinationals, told the Guardian that if the proposals were backed, “this will be the end of [tax] base erosion and profit shifting using intra-group financing”. Measures to tackle multinationals taking large tax deductions for interest payments on loans within the same group are hinted at in a report published in September.

It said: “A formulary type of approach which ties the deductible interest payments to external debt payments may lead to results that better reflect the business reality of multinational … groups.” While other measures are also on the table, pressure to take radical steps to stamp out intra-group loans contrived for tax avoidance has grown this week after revelations about tax agreements rubber-stamped by the Luxembourg tax office. Luxembourg finance minister Pierre Gramegna used a public session during a meeting of European finance ministers in Brussels to deliver a statement in reaction to this week’s revelations about tax agreements with multinationals. “My country [has] come under scrutiny in the latest days. The rulings of Luxembourg are being done according to the national laws of Luxembourg and also according to international conventions. What is being done is totally legal.” He acknowledged rulings and weak tax treaties had led to “situations where companies are paying no taxes or very little taxes [which] is obviously not a good result”.

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Sounds dull. But profitable.

Luxembourg, The Country Where Accountants Outnumber Police 4:1 (Guardian)

Welcome to Luxembourg, where accountants outnumber the police by four to one – and people enjoy some of the highest living standards in the world. “Conquer the world from your Luxembourg headquarters,” is the title of one government-sponsored marketing brochure promoting the Grand Duchy and its “business-friendly legal and fiscal framework”. “Political decision-makers are very accessible to companies,” it promises. The big four accountancy firms tend to agree, if a 2009 presentation by PricewaterhouseCoopers is anything to go by: the authorities are “flexible and welcoming”, “easily contactable” and offer “a readiness for dialogue and quick decision-making” it said in the document, part of a trove of documents obtained by the International Consortium of Investigative Journalists and shared with the Guardian. The big four are huge global enterprises that employ 750,000 people in total and have combined earnings of $117bn (£74bn), according to the latest figures – making them bigger than the economy of Angola.

Their footprint is especially large in Luxembourg, where they employ 6,200 people – among a population of 550,000. The Grand Duchy’s economy has come to be dominated by high finance since the decline of its steel factories. Today, financial services are Luxembourg’s biggest earner, accounting for more than a third of the national income. Almost half the workforce are foreigners, with 44% of employees commuting in daily from France, Germany and Belgium. Despite the financial crisis, accountancy has been booming. Deloitte has increased its Luxembourg staff by 142% in less than a decade to 1,700. PwC is comfortably ahead of Deloitte, its nearest rival. The biggest of the big four, which once described itself as “an ambassador of Luxembourg abroad”, it employs more people in Luxembourg than the country’s police force: it has 2,300 staff, while the gendarmerie has 1,600 officers. That makes it the country’s ninth largest employer, behind steelmaker ArcelorMittal and French bank BNP Paribas.

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Good to see Taibbi back at Rolling Stone, and back to what he does best.

The $9 Billion Witness: Meet JPMorgan Chase’s Worst Nightmare (Matt Taibbi)

She tried to stay quiet, she really did. But after eight years of keeping a heavy secret, the day came when Alayne Fleischmann couldn’t take it anymore. “It was like watching an old lady get mugged on the street,” she says. “I thought, ‘I can’t sit by any longer.'” Fleischmann is a tall, thin, quick-witted securities lawyer in her late thirties, with long blond hair, pale-blue eyes and an infectious sense of humor that has survived some very tough times. She’s had to struggle to find work despite some striking skills and qualifications, a common symptom of a not-so-common condition called being a whistle-blower. Fleischmann is the central witness in one of the biggest cases of white-collar crime in American history, possessing secrets that JPMorgan Chase CEO Jamie Dimon late last year paid $9 billion (not $13 billion as regularly reported – more on that later) to keep the public from hearing.

Back in 2006, as a deal manager at the gigantic bank, Fleischmann first witnessed, then tried to stop, what she describes as “massive criminal securities fraud” in the bank’s mortgage operations. Thanks to a confidentiality agreement, she’s kept her mouth shut since then. “My closest family and friends don’t know what I’ve been living with,” she says. “Even my brother will only find out for the first time when he sees this interview.” Six years after the crisis that cratered the global economy, it’s not exactly news that the country’s biggest banks stole on a grand scale. That’s why the more important part of Fleischmann’s story is in the pains Chase and the Justice Department took to silence her.

She was blocked at every turn: by asleep-on-the-job regulators like the Securities and Exchange Commission, by a court system that allowed Chase to use its billions to bury her evidence, and, finally, by officials like outgoing Attorney General Eric Holder, the chief architect of the crazily elaborate government policy of surrender, secrecy and cover-up. “Every time I had a chance to talk, something always got in the way,” Fleischmann says. This past year she watched as Holder’s Justice Department struck a series of historic settlement deals with Chase, Citigroup and Bank of America. The root bargain in these deals was cash for secrecy. The banks paid big fines, without trials or even judges – only secret negotiations that typically ended with the public shown nothing but vague, quasi-official papers called “statements of facts,” which were conveniently devoid of anything like actual facts.

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Going strong. What sanctions?

Russia, China Close To Reaching 2nd Mega Gas Deal (RT)

Moscow and Beijing have agreed many of the aspects of a second gas pipeline to China, the so-called western route. It’s in additional to the eastern route which has already broken ground after a $400 billion deal was clinched in May. “We have reached an understanding in principle concerning the opening of the western route,” the Russian President told media ahead of his visit on November 9-11 to the Asia Pacific Economic Conference (APEC). “We have already agreed on many technical and commercial aspects of this project laying a good basis for reaching final arrangements,” the Russian President added.

In May, China and Russia signed a $400 billion deal to construct the Power of Siberia pipeline, which will annually deliver 38 billion cubic meters (bcm) of gas to China. The Power of Siberia, the eastern route, will connect Russia’s Kovykta and Chaynda fields with China, where recoverable resources are estimated at about 3 trillion cubic meters. The opening of the western route, the Altai, would link Western China and Russia and supply an additional 30 bcm of gas, nearly doubling the gas deal reached in May. When the Altai route is complete China will become Russia’s biggest gas customer. The ability to supply China with 68 bcm of gas annually surpasses the 40 bcm it supplies Germany each year.

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The victor writes the history.

Catalans Recast Spanish History in Drive for Independence (Bloomberg)

In a former market hall in Barcelona, Catalans are busy championing a historic defeat. A museum and cultural center built around the 300-year-old ruins of the city aims to educate visitors about the 1714 siege during the War of Spanish Succession. The battle lasted more than a year and destroyed the old neighborhood amid “epic and heroic resistance,” according to the center’s pamphlet. For Catalan nationalists, the defeat marks the end of their region’s freedom and the beginning of their domination by Madrid. For others, there’s a catch: the version of events on display at the museum, funded by the regional government that’s been pushing for an independence referendum, is unrecognizable to most historians outside Catalonia. “It’s science fiction,” said Alejandro Quiroga, a lecturer in Spanish history at Newcastle University in England who comes from Madrid. “The distortions are tremendous. That’s part of the process of nation building.”

As they develop a narrative around national identity, arguments over the interpretation of history have for decades dogged the Catalan nationalists. Barcelona’s leadership gained control of education under the constitutional settlement that followed the death in 1975 of General Francisco Franco, who had banned the use of the Catalan language. The movement has transformed into a full-blown campaign to leave Spain over the past three years. This weekend, activists will hold an unofficial independence vote in defiance of a Spanish court ruling and the Madrid government. “It fits in with my nationalistic feelings,” said Eugenio Suarez, 61, an industrial engineer who visited the museum on Oct. 14, a little over a year after it first opened. “I am a nationalist for other reasons, so I come here to remember what Barcelona and Catalonia was and still is.” In the northeast of the country, Catalonia is the largest economic region, where output per capita is 17% above the European Union average compared with 5% below for Spain as a whole.

The risk of political upheaval temporarily halted a rally in Spanish bonds last month. Unionists and some historians say that successive regional governments have contributed to building a Catalan majority by promoting a partial, at times false, version of the region’s history through its schools and cultural institutions. In Spanish history books, Felipe V’s troops overran Barcelona at the end of a 14-month siege, bringing an end to the war. The way the Catalan nationalists tell it, that defeat marks the end of a golden age for Catalonia. The attack “led to the capitulation of Barcelona and the loss of Catalonia’s freedoms,” says the leaflet handed out to visitors at the center in the El Born district. The museum shows “the vibrant and dynamic Barcelona of 1700,” while the defeat “is a symbol of the historic fight of the citizens to defend the constitutions and institutions of the country.”

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” .. a warning for Greek politicians to “stop promising people things that we cannot deliver. Then things are going to go wrong.”

Greek Minister: Markets Are Sending Us A Message (CNBC)

As Greece waits to hear whether it will be allowed to withdraw early from a bailout program that saved the country from insolvency, its minister of public order said a recent rise in Greek interest rates is a warning that the country can’t undo reforms. Minister Vassilis Kikilias, on a visit to New York and Washington, D.C., said investors’ negative reaction toward Greece in recent weeks wasn’t due only to its attempt to leave the bailout ahead of schedule, but also about “global” events in the markets. He did add, however, that it was also a warning for Greek politicians to “stop promising people things that we cannot deliver. Then things are going to go wrong.”

Greek stocks and government bonds sold off when Greek Prime Minister Antonis Samaras announced he would try to leave the multibillion-dollar bailout program early. The European Commission took up consideration of the proposal this week. But yields also rose on fears there will be snap elections in the spring and the leader of the radical left, Alexis Tsipras, might win the election. He is currently leading in the polls. Kikilias said he hopes and believes there won’t be an election next year. A goal of the government, he said, is to change the structure of the Greek government in order to have more consistent elections cycles.

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“Go to a tropical island for the rest of the year!”

Danish Women Urged to Drop Work Till 2015 to Protest Pay Gap (Bloomberg)

Women, take today off! In fact, take the rest of the year off! Danish unions representing more than 1.1 million private and public employees, at least half the country’s workforce, are urging women members to do just that – and only half in jest – to protest a 17% pay gap to men. “It’s a way to remove the gender pay gap in a split second,” Lise Johansen, head of the campaign for the Danish Confederation of Trade Unions, said in a telephone interview. “Go to a tropical island for the rest of the year!” While “everyone knows it’s a joke,” the protest, now in its fifth year, highlights the challenges Denmark faces even as it ranks among the countries with the smallest pay disparities, Johansen said.

Scandinavian countries have been the most successful in closing the gender gap, the World Economic Forum said in a report last week. Denmark ranked number five in the study of 142 countries, trailing Iceland, Finland, Norway – where the government has recently made military service mandatory for women – and Sweden. Yet in terms of wage equality for similar work, Denmark ranked 38, according to the report.

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This weird story just keeps going. Latest drone was spotted yesterday.

Drones Over French Nuclear Sites Prompt Parliamentary Probe (Bloomberg)

French parliament will hold hearings this month on the threat posed by drones to nuclear installations even as the mystery of who is behind a series of flights over more than a dozen sites remains unsolved. Reactor builder Areva confirmed today a drone had been spotted over one of its sites while two more plants operated by Electricite de France (EDF) were visited by the remote-controlled flying objects this week. Over a little more than a month, drones have been seen at 14 of EDF’s 19 plants, according to a person familiar with the events. The flights are “irresponsible,” deputy Jean-Yves Le Deaut, a member of the Socialist Party, said by telephone. “It’s giving people ideas and suggests parallels with cyber-attacks.”

The lawmaker will head a one-day public hearing Nov. 24 into whether drone flights can be dangerous to atomic installations. Organized by the parliament’s office for evaluation of scientific and technological choices, OPECST, it will include representatives from the country’s nuclear and drone industries as well as security experts, he said. “Nuclear isn’t for staging a video game,” Le Deaut said. “It’s urgent to stop this mess.” The flights haven’t so far inflicted damage nor has anyone publicly claimed responsibility. While Interior Minister Bernard Cazeneuve has said an inquiry is underway, the flights have continued for more than a month, the latest at the Areva installation last night. Two men are being investigated for flying an aircraft in a protected zone near EDF’s Belleville-sur-Loire nuclear plant, AFP reported, citing Bourges prosecutor Vincent Bonnefoy. The incident isn’t related to the flights at other nuclear sites, he was quoted as saying.

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 March 21, 2014  Posted by at 4:07 pm Finance Tagged with: , , ,  4 Responses »


Marjory Collins Cooperative grocery store, Greenbelt, MD May 1942

Let me start off by saying that I don’t mean any disrespect to the families and loved ones of the passengers and crew on board the missing Malaysian plane. I just wish I didn’t have the insistent impression I’m the only one who doesn’t mean disrespect. But if this story can teach us one thing it’s that we have further mastered the art of all too easily turning genuine human misery into a made for 24/7 TV void. Channel after channel treats its emptiness-hungry viewers to hour after hour of experts, graphs, maps, photographs, and they all manage to show us absolutely nothing.

CNN might as well be airing footage of the Great Lakes, it wouldn’t make one iota of difference. Dozens of camera teams talking heads and pundits are sent to interminable Kuala Lumpur press ops where nothing is said simply because there is nothing to be said, while dozens of other teams are sent to cover search and rescue missions in any part of any ocean that any expert may have mentioned as a possible site to find debris. Any debris.

When Ted Turner started CNN there was no such thing as reality TV. And it still took a remarkably long time for TV makers to clue in on the most important lesson 24-hour news had in store: that people simply love to watch absolutely nothing, as long as it’s on, and the screen flickers. That this is perhaps a little disrespectful to the potential victims and their families and friends is something that doesn’t seem to occur to neither viewers nor TV makers. The camera crews and everyone around them probably even feel by now that they’re part of the story, and that they’re helping in getting the mystery solved.

So here goes another aerial shot of the Indian Ocean, or the Pacific, or the local pond, that shows what might be a piece of the plane, or it might not, with the same grainy resolution and clarity that we’ve come to know from the snapshots taken by holiday goers who claimed that dot in the middle was the monster of Loch Ness.

Disgrace, embarrassment, shame.

I’m not the biggest Ron Paul fan on the planet, I think he’s alright but he exhibits a few too many traits of a fossil for my taste. But today America should be proud they have the man, because he’s the only one in the crowd who dares speak truth to power, and does so in the elegant, concise and eloquent manner used exclusively by those who have nothing to hide and therefore don’t need to choose their words with the utmost care. Dr. Paul needs only 1:20 min to explain what is going on in Ukraine: “I think it was wrong for us to get involved and participate in the overthrow of their government. We spent over $5 billion with our NGOs to agitate and get rid of an elected government [..] … it would be best for us to stay out.” Listen to Ron Paul, America, and remember what he says next time Obama or any other politician talks about Ukraine and Russia:

As I said, I think Dr. Paul is a bit of a fossil, but in my book he’s 1000% better than that other Fossil on the Hill, John McCain, who compared Putin to Stalin and Hitler, both of whom as we all know he knew personally, and forgot to mention Genghis Khan and Attila the Hun, presumably because he’s repressed the memories of the time he spent as their PoW. McCain has now outlived Methuselah by a century or two, with a brain degraded enough to fool himself into thinking he’s still serving the American people, and you just sense in the air that he’s desperate to throw some bombs on someone’s head one more time. It’s the very desire that might be keeping him alive.

And there are many Americans who believe McCain and all the rest of them when they talk about how bad a man Putin is. And what an awfully illegal act it was for the Crimeans to hold a referendum on where they want their land to belong. And what a great thing it is for Washington to declare sanctions against Putin’s cabal of oligarchs, even though most of them were installed by Washington itself in the early 1990s when Yeltsin held his boozed up yardsale, and it was Putin who reined them in.

Ron Paul says that “the best part about this whole story is that the market is going to overrule the rhetoric of both sides”, but I’m afraid that may be a while yet. Watching EU leaders like Van Rompuy and Barroso announce their version of sanctions gives me the eerie feeling they’re wallowing far too much in their new found sense of power, that allows them to finally harm someone else than a few down on their luck Greeks or Italians, and they may long for more of the same.

These guys are well capable of painting Europe into a corner they won’t be able to walk out of without more, and more severe, damage being done. And they find kindred spirits in McCain and many other US “leaders” who see this as an opportunity to live out the same power fantasies they satisfy twice a week as they have their naked sorry asses whipped in one of Madame X’s dungeons. There is a reason why these people rise to their positions of power, and it’s not intelligence. And the fact that they are where they are is dangerous; the mindset that makes them rise to those positions is the same one that loves to inflict pain .

These people are a disgrace, they embarrass everyone they represent, and every European and American should be ashamed of having them speak in their name. And Ron Paul may be a bit of a fossil, but he doesn’t have that mindset, he’s not a power starved psychopath.

Ron Paul Warns “We’re Just Stirring Up Trouble In Crimea” (CNBC)

“I think it was wrong for us to get involved and participate in the overthrow of the government,” exclaims Ron Paul in this brief clip, adding the US is “stirring up trouble in Crimea.” The American people are “tired of it,” and “it would be best for us to stay out.” The US doesn’t need another war – and certainly can’t afford it – and “we don’t want trade wars.” Simply put, he concludes, “it’s best we stay out.”

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We’re Next In Line For Collapse (SovereignMan)

As any long-time reader of this column knows, we routinely draw from historical lessons to highlight that this time is not different. Throughout the 18th century, for example, France was the greatest superpower in Europe, if not the world. But they became complacent, believing that they had some sort of ‘divine right’ to reign supreme, and that they could be as fiscally irresponsible as they liked.

The French government spent money like drunken sailors; they had substantial welfare programs, free hospitals, and grand monuments. They held vast territories overseas, engaged in constant warfare, and even had their own intrusive intelligence service that spied on King and subject alike. Of course, they couldn’t pay for any of this. French budget deficits were out of control, and they resorted to going heavily into debt and rapidly debasing their currency. Stop me when this sounds familiar. The French economy ultimately failed, bringing with it a 26-year period of hyperinflation, civil war, military conquest, and genocide.

History is full of examples, from ancient Mesopotamia to the Soviet Union, which show that whenever societies reach unsustainable levels of resource consumption and allocation, they collapse. I’ve been writing about this for years, and the idea is now hitting mainstream. A recent research paper funded by NASA highlights this same premise.

According to the authors:

“Collapses of even advanced civilizations have occurred many times in the past five thousand years, and they were frequently followed by centuries of population and cultural decline and economic regression.”

The results of their experiments show that some of the very clear trends which exist today– unsustainable resource consumption, and economic stratification that favors the elite– can very easily result in collapse. In fact, they write that “collapse is very difficult to avoid and requires major policy changes.” This isn’t exactly good news.

But here’s the thing– between massive debts, deficits, money printing, war, resource depletion, etc., our modern society seems riddled with these risks. And history certainly shows that dominant powers are always changing. Empires rise and fall. The global monetary system is always changing. The prevailing social contract is always changing. But there is one FAR greater trend across history that supercedes all of the rest… and that trend is the RISE of humanity. Human beings are fundamentally tool creators. We take problems and turn them into opportunities. We find solutions. We adapt and overcome.

The world is not coming to an end. It’s going to reset. There’s a huge difference between the two. Think about the system that we’re living under. A tiny elite has total control of the money supply. They wield intrusive spy networks and weapons of mass destruction. The can confiscate the wealth of others in their sole discretion. They can indebt unborn generations. Curiously, these are the same people who are so incompetent they can’t put a website together. It’s not working. And just about everyone knows it.

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Beijing allows its banks to start borrowing in the bond markets? What a great idea …..

China Stocks Rise Most in Four Months on Easing Bank Funding

China’s stocks rallied, sending the benchmark index to its biggest gain in four months, amid speculation the government is loosening funding restrictions for property developers and banks to support economic growth. Shanghai Pudong Development Bank and Industrial Bank both surged at least 6.6%. The China Securities Regulatory Commission said after exchanges closed that lenders can issue preferred shares. China Vanke Co. and Poly Real Estate Group Co. jumped more than 6% after the Shanghai Securities News reported regulators are reviewing financing applications from “many” listed developers.

The Shanghai Composite Index climbed 2.7% to 2,047.62 at the close, the biggest gain since Nov. 18, after reaching record-low valuations yesterday. Policy makers are trying to bolster real estate and financial companies as the economy slows and bad debts increase. Allowing lenders to sell preferred shares would give them a new way to meet long-term fundraising requirements.

“Investors hear talk that banks may be the first to be included in the preferred-shares program,” said Xu Shengjun, analyst at Jianghai Securities in Shanghai. “Investors are hoping this will bring a lot of benefits to the companies, including boosting their capital.” The Shanghai index has dropped 3.2% this year as analysts cut their estimates for 2014 economic growth, the nation suffered its first onshore corporate bond default and an unlisted developer collapsed. Today’s announcement on preferred shares follows a government statement this week that China will speed up construction projects to bolster the economy.

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Oh wait, but they already had too much debt …

Tumbling Chinese Yuan Sets Off ‘Carry Trade’ Rout, Triggers Derivatives Contracts (AEP)

China’s yuan has suffered its biggest one-week fall in 20 years, nearing key trigger levels that threaten a wave of forced selling and mounting stress for those with dollar debts. The jitters come amid reports of fire-sales of Hong Kong property by Chinese investors desperate to raise cash, some slashing their prices by 20pc for a quick sale. A liquidity squeeze in mainland China has already led to the collapse of Zhejiang Xingrun real estate this week with $570m of debts, the biggest property failure so far.

The yuan weakened sharply on Thursday to 6.23 against the dollar and has now lost 3pc since January, a clear break with China’s long-standing policy of slow appreciation. Geoffrey Kendrick, from Morgan Stanley, said the currency has broken through the 6.20 level where a cluster of structured products are triggered. These are known as losses on target redemption funds. The losses have already hit $3.5bn.

The latest move creates a potential “non-linear movement” that could push the yuan rapidly to the next level at 6.38, where estimated losses would reach $7.5bn, and from there jump to 6.50. Mr Kendrick said banks in Singapore, Taiwan and South Korea are heavily exposed, but there could also be a serious fallout for Chinese airlines, shipping and property companies, as well as a nexus of finance built around use of copper and iron as collateral.

Chinese companies have borrowed $1.1 trillion on the Hong Kong markets, a quarter from UK-based banks. There is complex web “carry trade” of positions in which investors borrow in dollars to buy yuan assets, often with leverage. These trades are highly vulnerable to a dollar squeeze as the US Federal Reserve brings forward its plans for rate rises. Morgan Stanley said the Chinese central bank may have to intervene to shore up the yuan by selling some of its US dollar bonds if the slide goes much further. The authorities spent $80bn in June/July 2012 to defend its currency band.

For now China seems to be weakening the yuan deliberately. Mark Williams and Qinwei Wang, from Capital Economics, said the data flow suggests that the central bank bought $25bn of foreign bonds last month in order to force down the currency. The motive is to teach speculators a lesson and curb hot money inflows.

However, suspicions are also are growing that China’s authorities have quietly switched to a devaluation policy to buffer the shock to the economy as they attempt to curb excess credit, even though this would risk a clash with Washington. “The more they undershoot their growth target, the more tempting it may look to have a weaker currency to help out,” said Kit Juckes, from Societe Generale.

Premier Li Keqiang said on Thursday that China would take steps quickly to “stabilise growth and boost domestic demand”, a sign Beijing is worried that tightening may have gone too far. Credit Agricole expects the central bank to slash the reserve requirement ratio for banks by 200 basis points this year.

Morgan Stanley said China is approaching a “Minsky Moment”, a turning point when credit bubbles implode under their weight. “There is evidence that this debt growth has become excessive and non-productive. It now takes four renminbi of debt to create one renminbi of GDP growth from a nearly 1:1 ratio in the early and mid-2000s.” “It is clear to us that speculative and Ponzi finance dominate China’s economy at this stage. The question is when and how the system’s current instability resolves itself,” said the bank. “A disorderly unwind could take Chinese growth down to 4pc in a shorter time frame with potentially disastrous consequences for levered Chinese assets (banks, property) and the entire commodity supply chain,” it said.

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Governments serve to make bad situations worse.

China Moving Closer To Unleashing Fresh Stimulus (CNBC)

China’s slowing economy has stoked chatter among economists that Beijing is moving closer to unleashing fresh monetary and potential fiscal stimulus measures as soon as next quarter. There are increasing concerns over growth among the leaders, said Zhiwei Zhang, chief China economist at Nomura, citing discussions at the State Council’s weekly meeting on Wednesday.

In a statement following the meeting, Premier Li Keqiang said the government should roll out measures as soon as possible to stabilize growth and boost domestic demand, according to state news agency Xinhua. “This reinforces our view of policy easing picking up in the second quarter,” Zhang said.

Nomura expects the People’s Bank of China (PBoC) will cut banks’ reserve requirement ratio (RRR) – or the amount of cash they must set aside as reserves – by 50 basis points in the second quarter and by another 50 basis points in the third quarter. The central bank last cut its RRR in May 2012. The RRR now stands at 20%, near its record level of 21.5%. The likelihood of an interest rate cut is rising as well, said Zhang. However, he noted that it is not yet in the bank’s baseline forecast.

Societe Generale holds a similar view, forecasting a 50 basis point RRR cut early in the second quarter, in order to offset potential capital outflows. “The recent economic deceleration has indeed been more than what Beijing is willing to tolerate in the short term,” the bank said.

According to some market watchers, the PBoC’s decision to widen the yuan trading band over the weekend – following a spate of disappointing economic data – could also be part of the government’s efforts to stabilize growth. Economic indicators such as retail spending and industrial output for January-February, for example, came in well below market expectations.

“While band widening itself has little impact on the economy, the possible consequence could be used to stabilize the growth. The weak economic data implies that it is unlikely to see CNY appreciation and capital inflows after the band widening,” said Haibin Zhu, chief China economist at JPMorgan wrote in a report over the weekend. If this is the case, “CNY depreciation could support exports, and capital outflow will drain domestic liquidity and open the window for RRR cuts by the PBoC,” he said.

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Too much debt? Well, you can bet against that. And hope it’s not another too big to fail set-up.

Global Funds Double China Bond Holdings as Default Starts (Bloomberg)

Foreign investors boosted purchases of China’s onshore bonds by 16% this year as some funds look at the yuan’s drop as a buying opportunity. They increased their holdings to a record 384.1 billion yuan ($62 billion) as of Feb. 28 from 331.9 billion yuan at the end of 2013, according to data from China Central Depository & Clearing Co. and the Shanghai Clearing House. Schroder Investment Management Ltd. says renminbi debt is attractive after the currency’s 2.8% loss this year, Stratton Street Capital LLP is applying to enter the onshore market and Western Asset Management Co. doesn’t expect long-term depreciation.

“It has definitely become interesting at these levels to accumulate currency positions,” said Rajeev De Mello, who manages $10 billion as Singapore-based head of Asian fixed income at Schroder. He is considering adding to his yuan holdings after paring them in February.

Policy makers in the world’s second-largest economy are seeking to discourage the accumulation of debt by allowing companies to default and by introducing more volatility in exchange rates and borrowing costs. JPMorgan Chase & Co. said in a note after the central bank doubled the yuan’s daily trading limit to 2% on March 17 that the currency will strengthen to 5.95 per dollar by the end of this year from 6.2275 yesterday. China’s 10-year sovereign bond yield is 4.52%, compared with 2.77% for similar U.S. Treasuries.

“Yields at 4% and the currency’s appreciation prospects make Chinese government bonds extremely attractive compared to the nations with the same rating elsewhere in the world,” said Andy Seaman, London-based partner and fund manager at Stratton Street, which oversees $1.5 billion. Overseas investors currently hold just 1.3% of the total 28.9 trillion yuan of onshore debt, with 77% of that either sovereign bonds or notes issued by China’s three policy banks, according to Bloomberg calculations. In the U.S., overseas buyers account for 47% of Treasuries.

China controls access to its domestic markets through the Qualified Foreign Institutional Investors program. As of last month, the State Administration of Foreign Exchange had approved $52.3 billion investment quotas for QFIIs, up from $40.8 billion a year earlier. The foreign-exchange regulator also approved 180.4 billion yuan in investment by Renminbi QFIIs while China Securities Regulatory Commission Chairman Xiao Gang said on March 11 that more foreign institutional investors will be allowed to enter the local market.

“As the world’s second-largest economy, and one that still has a lot of growth potential, China is significantly under allocated in global assets,” said Wang Ming, marketing director at Shanghai Yaozhi Asset Management LLP, which oversees 2 billion yuan of fixed-income investments. “Bonds are a relatively safe choice, and demand will grow as the country further opens its market, perhaps regardless of interest-rate differentials.”

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The American illusion of recovery may yet have many unintended consequences. Or is this intentional?

Emerging Markets Face Ordeal By Fire As Yellen Turns Tough (AEP)

In a normal world the US Federal Reserve would barely cause a ripple by tweaking its interest rate forecast a year or two ahead. But we are not in normal world. We are facing a confluence of events somewhat like 1998 when Fed tightening turned the East Asian crisis into a global credit event. We all forget now that Alan Greenspan told emerging markets to drop dead at his Humphrey Hawkins testimony that year – saying he was more concerned about US inflation – and drop dead is exactly what they then did. (The Fed soon had to slash interest rates to avert a global crash)

Janet Yellen now says interest rates could start rising “around six months” after the Fed stops tapering bod purchases (later this year). This is a minor shock. The markets were expecting a much longer lead time as you can see from the chart below. She tried to wind back comment during her press conference but by then it was too late. Markets were already looking at the Fed’s now famous “dot chart” showing that rates were likely to be 1% by the end of 2015 and 2.25% by the end of 2016, significantly higher than expected.

The market reaction has been swift. Yields on 5-year US Treasuries surged 15% in short order, with ripple effects through the global system. Yields have come down a bit since but then net effect as of writing is a jump in 10-yields by the following amounts in basis points: Philippines 21, Indonesia 15, Turkey 14, US 12, Hong Kong 12, Brazil 12, UK 11, Germany 7.

No doubt other factors are at work in each country but this looks like the start of a global squeeze. All we need now is a serious rise in the dollar and we will start to see the next leg of an emerging market shake-out.
The China carry trade is already going bad as the yuan continues its six-week slide, leaving us wondering what will happen to the $1.1 trillion dollar loans through Hong Kong – clearly now the epicentre of the next storm.

EM bulls will argue that developing countries are far less vulnerable this time because their governments no longer borrow in dollars. This debate has become a little stale. The counter-argument – made by the BIS and the IMF – is that private companies in many of these countries do indeed borrow in dollars and on a huge scale. There has been a $4 trillion flow of funds into EM since 2009 and a fair chunk is fickle money chasing yield. [..]

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A lot of EU nations will come to regret the day they handed over control of their financial systems to Brussels. But it’ll be too late.

Europe Strikes Deal To Complete Banking Union (Reuters)

Europe took the final step to complete a banking union on Thursday with an agency to shut failing euro zone banks, but there will be no joint government back-up to pay the costs of closures. The breakthrough ends an impasse with the European Parliament, which persuaded euro zone countries to strengthen the scheme. It completes the second pillar of banking union, which starts at the end of the year when the European Central Bank takes over as watchdog. The accord means that the ECB has the means to shut banks it decides are too weak to survive, reinforcing its role as supervisor as it prepares to run health checks on the still fragile sector.

ECB President Mario Draghi said that plans to allow the new ‘resolution’ or clean-up fund to borrow to top itself up looked promising and that the decision-making scheme to shut a bank had been streamlined. “The point we’ve always made that we need a mechanism that is properly funded and the agreement actually improves the existing funding,” Draghi told journalists as he entered a meeting of European Union leaders. “All in all we made progress for a better banking union.” Michel Barnier, the European commissioner in charge of regulation, said the scheme would help to bring “an end to the era of massive bailouts”. “The second pillar of banking union will allow bank crises to be managed more effectively,” he said.

Thursday’s agreement makes it harder for EU countries to challenge the ECB if the central bank triggers bank closures, and establishes a common 55 billion euro back-up fund over eight years – quicker than planned but far longer than the ECB’s watchdog had hoped. But the new system, which Barnier conceded was not ‘perfect’, has shortcomings. For one, the ‘resolution’ fund is small and would, in the view of the ECB watchdog, be quickly spent. To remedy that the fund will be able to borrow to replenish spent money. Euro zone governments will not, however, club together to make it cheaper and easier for it to do so.

The 18 euro zone countries do not intend to cover jointly the cost of dealing with individual bank failures, a central tenet of the original plan for banking union. Germany resisted pressure from Spain and France to make such a concession. Its finance minister Wolfgang Schaeuble welcomed new rules forcing bank creditors to take losses and that “the mutualised liability … remained ruled out” – a reference to sharing the burden of a bank collapse. Neither will there be any joint protection of deposits.

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This is a great story. The Bank of England announces a QE program. Which means they’ll start buying bonds at elevated prices. So a trader, in that spirit, raises the price of bonds he intends to sell them, but fumbles the moment he does it. He ends up with losses and a ban instead of free money.

Trader Banned For Trying To Profit From QE (PA)

A former Credit Suisse trader who saw the Bank of England’s quantitative easing (QE) programme as “cake” to profit from has been fined nearly £700,000 by the City regulator after rigging the price of UK bonds. Mark Stevenson, a bond trader with nearly 30 years’ experience, was also banned from the industry by the Financial Conduct Authority (FCA) after his attempt to exploit the £375bn programme intended to help nurse the economy back to health. The FCA found that he artificially ramped up the price of a £1.2bn holding in a set of gilts hours before he intended to sell them to the Bank.

His unusual trading was reported within 40 minutes and officials at Threadneedle Street decided not to buy the gilt, which it had been due to buy as part of QE. The FCA found the trading had the potential to affect taxpayers, since if the Bank had overpaid for the bond its losses would be shouldered by the Treasury. Details of the episode in October 2011 surfaced publicly last summer when the Bank’s executive director for markets, Paul Fisher, told MPs that claims about the “thoroughly reprehensible” allegations had been referred to the regulator.

On Thursday the FCA announced that Stevenson, who left Credit Suisse last December, had been fined £662,700 after qualifying for a 30% discount from a potential £946,800 fine because he agreed to settle at an early stage. It is the first enforcement action for manipulation of the gilt market, and comes in the wake of a series of market-rigging scandals. Banks have been fined billions for manipulation of the Libor interbank lending rate and world regulators are investigating allegations of foreign exchange rate rigging that threaten to become at least as serious.

Tracey McDermott, the FCA’s director of enforcement, said: “Stevenson’s abuse took advantage of a policy designed to boost the economy with no regard for the potential consequences for other market participants and, ultimately, for UK taxpayers. “He has paid a heavy price for his actions. Fair dealing is at the heart of market integrity. This case sends a clear message about how seriously the FCA views attempts to manipulate the market.” The FCA described Stevenson’s actions as “particularly egregious”. It added that the episode was the action of one trader on one day, and there was no evidence of collusion with other banks.

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Banned Trader Did BOE’s Job For It, But Too Well (Bloomberg)

Market manipulation has been on my mind a lot recently so I guess it’s worth explaining what it is. In simple form, market manipulation is:

• buying a lot of an asset,
• with the goal of pushing its price up,
• so you can sell it at that higher price to a price-insensitive buyer.

Or vice versa, with selling.1 If you think you’ve spotted market manipulation, a useful question to ask is, “who is the price-insensitive buyer?”2 Because buying a lot of an asset with the goal of pushing its price up and then, just, like, selling a lot of it on the market is not in general a positive expectation strategy.

You know who is a great price-insensitive buyer? A major central bank that has embarked on a program of quantitative easing. The goal of quantitative easing is to push bond prices up (interest rates down), so sort of by definition the bank is not trying to buy bonds cheaply. If it was trying to buy bonds cheaply, it would not announce the quantitative easing in advance. Really, its goals are the opposite: Not only would it rather push prices up than buy cheaply; it would rather push prices up than buy at all. If the Fed could say “quantitative easing, go, move rates down by 50 basis points,” it would be happy to do that without buying bonds.

Here is a U.K. Financial Conduct Authority action against a former Credit Suisse trader who manipulated gilt prices during a Bank of England quantitative easing auction in 2011. The trader, Mark Stevenson, was fined 662,700 pounds and banned from the industry, and, fair enough, he did bad:

Mr Stevenson, an experienced bond trader formerly employed by Credit Suisse Securities (Europe) Limited (“CSSEL”), bought £331 million of the UKT 8.75% 2017 (the “Bond”), a UK government gilt, between 09:00 and 14:30 on 10 October 2011. The Bond was relatively illiquid and Mr Stevenson’s purchases represented approximately 2,700% of the average daily volume traded for the Bond in the previous four months and 92% of the value of the Bond purchased in the IDB market on 10 October 2011. The price and yield of the Bond significantly outperformed all gilts of similar maturity on 10 October 2011, as a direct result of Mr Stevenson’s trading.

He then tendered it into the quantitative easing auction at the end of that day, and … oops! The BOE decided to be price-sensitive, for the only time ever,3 because this bond’s price got really out of whack, and because other dealers called the BOE to complain, as you’d expect them to:

By 09:39 (38 minutes after Mr Stevenson began trading in the Bond), a market participant had telephoned the BOE regarding the Bond’s outperformance. Several other market participants telephoned the BOE throughout the day, suggesting that the Bond had been “squeezed”, “rammed”, and that someone “was messing around with” it.

No honor among thieves etc. So the BOE didn’t buy any of the bond that Stevenson was trading, its price got right back into whack, and Stevenson lost a lot of money:

Remember up is down, so that blue line going down at the beginning of the day was Stevenson pushing up the price of his favorite bond, and that line shooting up at the end of the day was him realizing that he’d made a terrible mistake and dumping his bonds until they got back in line with all the other bonds. You can’t tell for certain, but it sure looks like he sold his bonds at lower prices (higher yields) than he bought them at. Also: Fined and banned from the industry!

One lesson here is, if you’re going to manipulate markets, you should be really sure that your price-insensitive buyer is in fact price-insensitive,4 and a buyer. A bigger lesson is that hogs get slaughtered. [..]

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High-Speed Trading Inquiry Is Going Nowhere Fast (Bloomberg)

New York Attorney General Eric Schneiderman has set himself the noble goal of making financial markets safer for the small investor. Unfortunately, his latest foray into the world of high-frequency trading will achieve little or nothing toward that end.

Schneiderman announced this week that he is scrutinizing what has become a common practice: Some traders get privileged access to market data by paying to place their computer systems inside exchanges’ premises or by subscribing to faster and more detailed data feeds. Because this allows them to act on information that others don’t have, Schneiderman sees it as akin to insider trading.

To put Schneiderman’s view in the proper context, it helps to understand a bit about how high-speed trading works. Consider two securities, both of which are supposed to track the S&P 500 stock index. From one second to the next, their prices move in lockstep. At shorter time intervals, measured in the thousandths of a second, incoming orders might push up the price of one before the other has time to catch up. This creates an opportunity: By selling at the higher price and buying at the lower price, a trader can make a quick profit.

Such opportunities — and other, less-perfect arbitrages — are estimated to be worth billions of dollars a year, but only to those fast enough to seize them. Hence, high-speed traders are willing to spend a lot on being the first to know when an opportunity appears, and to get their orders to the front of the line. Much of that money goes into computer systems, software and ultrafast data links, such as a microwave link that can carry data from New York to Chicago in a matter of several milliseconds. Some also goes to pay for the proprietary data feeds and privileged server parking that trouble Schneiderman. (Bloomberg LP, the parent of Bloomberg News, provides its clients with access to some proprietary exchange feeds.)

The high-speed traders’ advantage might seem unfair, but it’s not unfair in the same way as insider trading. In the latter case, privileged information is available only to a limited group — company executives, for example — who break the law if they use it to make money at the expense of less-informed investors. In the former, the information is available to anyone willing to pay. It’s akin to paying an airline for the privilege to board a flight early, or — just to emphasize a previously disclosed interest — to buying a subscription to a Bloomberg terminal.

On a more practical level, most of the advantage will remain even if Schneiderman manages to make access to information more equal — as he has already done by pressuring news-release distributors Business Wire and Marketwired to get rid of their direct feeds. High-frequency traders will still be a lot faster than investors who don’t make the same investments in technology. Eliminating the advantage would require draconian measures.

The more important issue is whether, in their incessant efforts to identify opportunities and get to the front of the line, high-frequency traders are harming others or presenting a threat to the financial system. Research suggests that they can actually help individual investors by lowering transaction costs and making sure market prices accurately reflect available information. But they might also make trading more expensive for institutions, such as mutual funds and pension plans, by anticipating and piling in ahead of big trades. Most troubling is the possibility that many algorithms interacting at such speed might bring about a market meltdown, of the kind that nearly occurred in the Flash Crash of 2010.

If Schneiderman’s investigation helps answer those questions, it will do investors a service. So far, it seems to be going in a different direction — fast.

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Mt.Gox Says It Found 200,000 Bitcoins In ‘Forgotten’ Wallet (Reuters)

Mt.Gox said on Friday it found 200,000 “forgotten” bitcoins on March 7, a week after the Tokyo-based digital currency exchange filed for bankruptcy protection, saying it lost nearly all the 850,000 bitcoins it held, worth some $500 million at today’s prices. Mt.Gox made the announcement on its website. Online sleuths had noticed around 200,000 bitcoins moving through the crypto-currency exchange after the bankruptcy filing.

The exchange, headed by 28-year-old Frenchman Mark Karpeles, said the bitcoins were found in an old-format online wallet which it had thought no longer held any bitcoins, but which it checked again after its bankruptcy filing. “On March 7, 2014, Mt.Gox confirmed that an old format wallet which was used prior to June 2011 held a balance of approximately 200,000 BTC,” the statement said. It added that it moved the 200,000 bitcoins from online to offline wallets on March 14-15 “for security reasons.” “These bitcoin movements, including the change in the manner in which these coins were stored, had been reported to the court and the supervisor by counsels,” it noted.

Many of Mt.Gox’s 127,000 creditors, who feared they had lost their investments when the exchange filed for bankruptcy, are skeptical about what the exchange has said happened to the bitcoins it had. In its bankruptcy filing, Mt. Gox also said $28 million was “missing” from its Japanese bank accounts.

On Thursday, a U.S. judge in Chicago overseeing a class action against Mt.Gox revised a previous order, allowing some of the exchange’s bitcoin movements to be tracked. “Today in court we got relief … specifically to track the 180,000 bitcoins, which we’ve been monitoring. Hours later, Mt. Gox claimed it “found” these bitcoins … it appears Mt.Gox realized we were close and decided to acknowledge that it owned these 180,000-200,000 bitcoins,” Steven L. Woodrow, a partner at law firm Edelson, told Reuters vin emailed comments.

Edelson is representing Illinois resident Gregory Greene, who proposed the class action over what he claims is a massive fraud. Mt. Gox blamed the loss of 750,000 bitcoins belonging to its customers and 100,000 of its own on hackers who attacked its software. Bitcoin is bought and sold on a peer-to-peer network independent of central control. Its value soared last year, and the total worth of bitcoins is now about $7 billion.

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