Oct 082018
 
 October 8, 2018  Posted by at 9:18 am Finance Tagged with: , , , , , , , , , , , , ,  


Paul Gauguin The Great Buddah 1897

 

ACT NOW IDIOTS (BBC)
World Must Take ‘Unprecedented’ Steps To Avert Worst Of Global Warming (R.)
Energy Sector’s Carbon Emissions To Grow For Second Year Running (G.)
Clouds Gather Over The IMF’s Paradise (O.)
US Inflation Is The World’s Most Important Economic Variable (CNBC)
Ron Paul: US Barreling Towards A Stock Market Plunge Of At Least 50% (CNBC)
China Stocks Return From Holiday, Tumble 3% As PBOC Eases Bank Rates (MW)
FBI’s Smoking Gun: Redactions (Solomon)
Italy’s Di Maio Predicts ‘Political Earthquake’ For European Union (RT)
Salvini Resists Germany’s Plans To Send Migrants Back To Italy (RT)
Austerity Is The Wrong Prescription For The World’s Wellbeing (G.)
Greece ‘to Claim €280 Billion’ in War Reparations from Germany (GR)
‘The World Is Against Them’: New Era Of Cancer Lawsuits Threaten Monsanto (G.)

 

 

Sure, but do what? Has anyone defined that?

ACT NOW IDIOTS (BBC)

It’s the final call, say scientists, the most extensive warning yet on the risks of rising global temperatures. Their dramatic report on keeping that rise under 1.5 degrees C states that the world is now completely off track, heading instead towards 3C. Staying below 1.5C will require “rapid, far-reaching and unprecedented changes in all aspects of society”. It will be hugely expensive, the report says, but the window of opportunity is not yet closed. After three years of research and a week of haggling between scientists and government officials at a meeting in South Korea, the Intergovernmental Panel on Climate Change (IPCC) has issued a special report on the impact of global warming of 1.5C.

The critical 33-page Summary for Policymakers certainly bears the hallmarks of difficult negotiations between climate researchers determined to stick to what their studies have shown and political representatives more concerned with economies and living standards. Despite the inevitable compromises, there are some key messages that come through loud and and clear. “The first is that limiting warming to 1.5C brings a lot of benefits compared with limiting it to 2 degrees. It really reduces the impacts of climate change in very important ways,” said Prof Jim Skea, who is a co-chair of the IPCC.

“The second is the unprecedented nature of the changes that are required if we are to limit warming to 1.5C – changes to energy systems, changes to the way we manage land, changes to the way we move around with transportation.” “Scientists might want to write in capital letters, ‘ACT NOW IDIOTS’, but they need to say that with facts and numbers,” said Kaisa Kosonen, from Greenpeace, who was an observer at the negotiations. “And they have.” The researchers have used these facts and numbers to paint a picture of the world with a dangerous fever, caused by humans. We used to think if we could keep warming below 2 degrees this century then the changes we would experience would be manageable.

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The IPCC’s estimates have been off by a large margin. Political pressure?

World Must Take ‘Unprecedented’ Steps To Avert Worst Of Global Warming (R.)

Society would have to enact “unprecedented” changes to how it consumes energy, travels and builds to meet a lower global warming target or it risks increases in heat waves, flood-causing storms and the chances of drought in some regions as well as the loss of species, a U.N. report said on Monday. Keeping the Earth’s temperature rise to only 1.5 degrees Celsius (2.7 degrees Fahrenheit) rather than the 2C target agreed to at the Paris Agreement talks in 2015, would have “clear benefits to people and natural ecosystems,” the United Nations Intergovernmental Panel on Climate Change (IPCC) said on Monday in a statement announcing the report’s release.

The IPCC report said at the current rate of warming, the world’s temperatures would likely reach 1.5C between 2030 and 2052 after an increase of 1C above pre-industrial levels since the mid-1800s. Keeping the 1.5C target would keep the global sea level rise 0.1 meter (3.9 inches) lower by 2100 than a 2C target, the report states. That could reduce flooding and give the people that inhabit the world’s coasts, islands and river deltas time to adapt to climate change.

The lower target would also reduce species loss and extinction and the impact on terrestrial, freshwater and coastal ecosystems, the report said. “There were doubts if we would be able to differentiate impacts set at 1.5C and that came so clearly. Even the scientists were surprised to see how much science was already there and how much they could really differentiate and how great are the benefits of limiting global warming at 1.5 compared to 2,” Thelma Krug, vice-chair of the IPCC, told Reuters in an interview. “And now more than ever we know that every bit of warming matters,” Krug said.

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And after all the big words, here is reality.

Energy Sector’s Carbon Emissions To Grow For Second Year Running (G.)

Carbon emissions from the energy sector are on track to grow for the second year running, in a major blow to hopes the world might have turned the corner on tackling climate change. Preliminary analysis by the world’s energy watchdog shows the industry’s emissions have continued to rise in 2018, suggesting that an increase last year was not a one-off. The finding comes as the world’s leading climate scientists issue a landmark report on whether the world can meet a tougher global warming target, of limiting temperature rises to 1.5C.

Dr Fatih Birol, the executive director of the International Energy Agency (IEA), told the Guardian: “When I look at the first nine months of data, I expect in 2018 carbon emissions will increase once again. This is definitely worrying news for our climate goals. We need to see a steep decline in emissions. We are not seeing even flat emissions.” Emissions largely flatlined in 2014–16 after climbing for decades, raising hopes that global action on climate change was beginning to turn the tide – but in 2017 they grew by 1.4%.

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Silliest metaphor ever? “..while it is tempting to sail alone, countries must resist the siren call of self-sufficiency – because as the Greek legends tell us, that leads to shipwreck..”

Clouds Gather Over The IMF’s Paradise (O.)

On Tuesday, the [IMF] will update its World Economic Outlook and has already warned that the effects of rising debt and trade wars are affecting the global projections. Last week, the IMF’s head, Christine Lagarde, said the outlook “has become less bright”, despite projections during the summer that there would be 3.9% growth for 2018 and 2019. [..] Adding to Lagarde’s comments, there were warnings last week in the IMF’s global financial stability report, which said there was a risk of another financial meltdown because both governments and regulators have failed to put in place needed reforms to protect the system. Lagarde said that while expansion of the global economy was running at its fastest rate in seven years, there were signs of slowdown.

In September, factory activity dropped as a result of changes in trading with the US – and Donald Trump did not escape (admittedly veiled) criticism. The growing use of trade barriers had resulted in a drop in imports and exports, Lagarde said, and investment and manufacturing output had also been hit. Trump has consistently championed unilateral trade deals in an effort to further his “America First” agenda. “History shows that, while it is tempting to sail alone, countries must resist the siren call of self-sufficiency – because as the Greek legends tell us, that leads to shipwreck,” said Lagarde. Also central to the concerns about the future of the global economy are debt levels, currently well above those seen at the time of the 2008 crash. The IMF warned that there was a risk that unregulated parts of the financial system could trigger a panic.

The rise of unregulated “shadow banks” and the lack of restrictions on insurers and asset managers were pinpointed as concerns – as was the growth of global banks to a scale larger than 2008 and the fear that they are again “too big to fail”. Lagarde has said she is concerned that the total value of global debt has risen by 60% in the last 10 years to reach an all-time high of £139tn. As central banks in more advanced economies raised interest rates, attracting investors back to them, she said, developing countries were suffering. “That process could become even more challenging if it were to accelerate suddenly. It could lead to market corrections, sharp exchange rate movements, and further weakening of capital flows.”

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I think perhaps it’s that 1.5ºC one?!

US Inflation Is The World’s Most Important Economic Variable (CNBC)

U.S. inflation is the world’s most important economic variable. That proposition is explained by its corollary: Rising inflation is the only problem the U.S. Federal Reserve cannot solve by increasing its money supply. The Fed can deal with structural problems in credit markets by means of enhanced supervision, regulatory provisions and, all else failing, by open-ended lending in cases of systemic threats to the financial system’s stability. But none of those measures are applicable to situations of accelerating inflation and a deteriorating outlook for the value of fixed-income assets. That is a problem the Fed must address with sustained liquidity withdrawals, increasing credit costs and the ensuing growth recession of the U.S. economy.

[..] U.S. inflation has reached a point in an accelerating economy where the Fed needs to step in with a prompt and credible action to anchor inflation expectations. Markets are signaling that such measures are long overdue. The Fed is now well beyond the stage where it could think of fine tuning the economic activity in an environment of stable costs and prices. The U.S. economy is moving along at twice the rate of its noninflationary growth potential. That is unsustainable. As in the past, the restoration of American price stability will lead to a growth recession of unknown amplitude and duration.

The global reach of the dollar, and of the American financial system, are direct and powerful channels through which the Fed’s rising interest rates will affect demand, output and employment in the rest of the world. Those who think that they can avoid the impact of U.S. monetary policies should think again. The dollar remains an irreplaceable linchpin to the international monetary system. And that’s the way it will be for the foreseeable future. There is simply no viable alternative to the dollar’s global role as a unit of account, a means of payment, a transactions currency and a store of value.

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The name is Bonds. Sovereign bonds.

Ron Paul: US Barreling Towards A Stock Market Plunge Of At Least 50% (CNBC)

Ron Paul believes the bond trading pits are giving investors a dire message about the state of the nation’s economy. According to the former Republican Congressman from Texas, the recent jump in Treasury bond yields suggest the U.S. is barreling towards a potential recession and market meltdown at a faster and faster pace. And, he sees no way to prevent it. “We’re getting awfully close. I’d be surprised if you don’t have everybody agreeing with what I’m saying next year some time,” he said last Thursday on CNBC’s “Futures Now.”

His remarks came as the benchmark 10-Year Treasury yield, which moves inversely to its price, rallied to seven year highs, intensifying fears over rising inflation. It may be beneficial for personal savings accounts, but it could deliver irrevocable damage to those in adjustable mortgages, or for auto buyers looking to finance a new vehicle. “It can be pretty well validated by looking at monetary history that when you inflate the currency, distort interest rates and live beyond your means and spend too much, there has to be an adjustment,” he said. “We have the biggest bubble in the history of mankind.”

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The world’s fastest growing economy for years now needs stimulus.

China Stocks Return From Holiday, Tumble 3% As PBOC Eases Bank Rates (MW)

Chinese stocks led weaker action across Asia markets on Monday, as traders returned to work after a weeklong holiday, brushing aside the latest rate cut by the People’s Bank of China. Chinese stocks returned from the Golden Week holiday with opening declines of 2% after last week’s wide selling in Asia and a U.S.-listed benchmark of mainland companies falling nearly 5%. The major indexes in both Shanghai and Shenzhen were last down around 3%. On Sunday, the PBOC made a one percentage-point cut in banks’ reserve-requirement ratios. The central bank was widely expected to cut the metric again before year-end amid ongoing stimulus efforts.

But Monday was expected to be an up-and-down day as investors try and price in not just what’s happened so far this month but also what continues to lie ahead on the trade front. “This monetary policy tweak is the fourth in 2018 and despite the weakening Yaun and the Feds embarking on a more aggressive rate hike tangent than expected, suggests the Pboc are putting their greatest energies behind stimulating the flagging economy as opposed to the U.S.-China trade wars or Fed policy for that matter,” said Stephen Innes, head of trading APAC, at OANDA. A survey of China’s service sector came in mixed, with the sector expanding at a faster pace in September, but a subindex of employment abruptly contracted, falling to its lowest level since March 2016.

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Declassify!

FBI’s Smoking Gun: Redactions (Solomon)

To declassify or not to declassify? That is the question, when it comes to the FBI’s original evidence in the Russia collusion case. The Department of Justice (DOJ) and the FBI have tried to thwart President Trump on releasing the evidence, suggesting it will harm national security, make allies less willing to cooperate, or even leave him vulnerable to accusations that he is trying to obstruct the end of the Russia probe. Before you judge the DOJ’s and FBI’s arguments — which are similar to those offered to stop the release of information in other major episodes of American history, from the Bay of Pigs to 9/11 — consider Footnote 43 on Page 57 of Chapter 3 of the House Intelligence Committee’s report earlier this year on Russian interference in the 2016 presidential election.

Until this past week, the footnote really had garnered no public intrigue, in part because the U.S. intelligence community blacked out the vast majority of its verbiage in the name of national security before the report was made public. From the heavy redactions, all one could tell is that FBI general counsel James Baker met with an unnamed person who provided some information in September 2016 about Russia, email hacking and a possible link to the Trump campaign. Not a reporter or policymaker would have batted an eyelash over such a revelation. Then, last Wednesday, I broke the story that Baker admitted to Congress in an unclassified setting — repeat, in an unclassified setting — that he had met with a top lawyer at the firm representing the Democratic National Committee (DNC) and received allegations from that lawyer about Russia, Trump and possible hacking.

It was the same DNC, along with Hillary Clinton’s presidential campaign, that funded the unverified, salacious dossier by a British intel operative, Christopher Steele, that became a central piece of evidence used to justify the FBI surveillance of the Trump campaign in the final days of the election And it was the same law firm that made the payments for the dossier research so those could be disguised in campaign spending reports to avoid the disclosure of the actual beneficiaries of the research, which were Clinton and the DNC. And it was, in turns out, the same meeting that was so heavily censored by the intel agencies from Footnote 43 in the House report — treated, in other words, as some big national security secret.

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He might well be right.

Italy’s Di Maio Predicts ‘Political Earthquake’ For European Union (RT)

The bloc may expect a “political earthquake” after the 2019 European Parliament election, Italy’s Deputy Prime Minister Luigi Di Maio warned. Di Maio said he believes that what happened in Italy after the general election in March 4, when the popular vote brought an unlikely coalition of two anti-establishment parties to power, will happen in the whole Europe. The pro-EU centrist parties shrank significantly as a result of the latest Italian parliamentary elections. With the plebiscite that is scheduled for May next year “there will be a political earthquake at the European level,” Di Maio, who is also the Minister of Economic Development and the head of the Five Star Movement (M5S), stated. “All the rules will change,” the Italian high-ranking politician promised.

The Italian government and the EU authorities are at loggerheads over Rome’s targeted budget deficit at 2.4 percent of the GDP that exceeds the limits set by the EU. Rome believes that the forthcoming elections would favor the opponents of austerity. “The Europe of bankers, founded on mass immigration and economic insecurity, keeps on threatening and insulting Italians and their government? Relax, in six months 500 million voters will fire them. We keep going,” Italian Interior Minister Matteo Salvini said.

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“Rome fears that Germany might eventually attempt to send back to Italy as many as 40,000 people..”

Salvini Resists Germany’s Plans To Send Migrants Back To Italy (RT)

Rome has still not reached an agreement with Berlin on the repatriation of asylum seekers who had first registered in Italy, Interior Minister Matteo Salvini said, vowing to close airports to German flights transferring refugees. “If someone in Berlin or Brussels thinks of dumping dozens of migrants in Italy via unauthorized charter flights, they should know that there is not and there will be no airport available,” Salvini said in a statement, adding that Italy will “close the airports” just as it earlier closed its ports to NGO vessels carrying migrants rescued in the Mediterranean. His sharp statement comes in response to the rumors first circulated by the Italian La Repubblica daily that Germany plans to speed up repatriation procedures ahead of the regional elections in the state of Bavaria, the home state of the Interior Minister Horst Seehofer.

The first charter flight carrying asylum seekers from Germany to Italy is reportedly scheduled for Tuesday, October 9, the media reported. Other media reports set the date of the flight on Thursday, October 11. Germany’s refugee and migration agency, the BAMF, allegedly already sent “dozens of letters” to the would-be repatriates informing them about the planned transfers to Italy, according to La Repubblica. Earlier, the German dpa news agency also said that such a flight is scheduled for “the coming days.” This information, however, was neither confirmed nor denied by the German authorities. Rome fears that Germany might eventually attempt to send back to Italy as many as 40,000 people, who arrived there from the southern European country, the Italian media report.

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“The country’s death rate had risen by about 5.6% in the decade running up to the first bailout in 2010 but then jumped by 17.6% in the six years that followed.”

Austerity Is The Wrong Prescription For The World’s Wellbeing (G.)

Greece, which endured a slump longer and deeper than the Great Depression in the US, was forced by the so-called troika of the IMF, the EU and the ECB to cut health expenditure at a time when other European countries were raising theirs. Under Greece’s bailout, health spending fell from 9.8% of GDP in 2008 to 8.1% in 2014, a time when national output was contracting rapidly. The country’s death rate had risen by about 5.6% in the decade running up to the first bailout in 2010 but then jumped by 17.6% in the six years that followed. The rate rose three times faster than the rate in Western Europe overall.

[..] The troika’s austerity programme helped French and German banks avoid losses on their loans but at the expense of a rising Greek death rate. That has resulted in 50% less public hospital funding in 2015 than 2009, hospitals being left without basic supplies, the long-term unemployed stripped of their health insurance and those on low pay finding drugs more expensive because of a 20% cut in the minimum wage. The number of individuals with unmet healthcare needs has nearly doubled since 2010, with a considerable fraction reporting cost as the main reason for not receiving the recommended healthcare services.

Greece is not short of healthcare expertise. It has the second highest number of doctors per 1,000 people in the EU but that medical workforce has been forced to watch impotently as the health system has descended into chaos and people have died when they could have been saved. For the past eight years, Greece has been used in a laboratory experiment to test out a theory. The evidence from the report in the Lancet could hardly be clearer. Austerity kills.

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Not a chance, but kudos for trying.

Greece ‘to Claim €280 Billion’ in War Reparations from Germany (GR)

Greece is about to launch a campaign to claim €280 billion ($323 billion) in war reparations from Germany, reports Der Spiegel. The German magazine notes that as long as Greece was dependent on EU support, Prime Minister Alexis Tsipras had avoided raising the issue. But now, after the end of the third bailout program, Athens is ready to take initiatives to claim the money, it says. The issue is resurfacing a few days before the official visit of Germany’s President Frank-Walter Steinmeier to Athens where he will meet the President of the Republic Prokopis Pavlopoulos and Tsipras. Der Spiegel says it is no coincidence that the two highest ranking Greek politicians have both raised the issue in the last few days.

It marks the beginning of a long campaign, which, according to the German magazine, will start in November. The Greek Parliament will endorse an audit report ready since August 2016, according to which Greece is entitled to €269.5 billion of repairs from the Second World War. In addition, Greece demands the repayment of a €10.3 billion occupation loan. The report remained under wraps throughout the last two years, but Tsipras seems ready to bring it back to the surface and start a campaign for war reparations, says Der Spiegel. In the second phase, Greece intends to present its arguments at world organizations such as the European Parliament, the European Council, and the UN.

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8,700 plaintiffs.

‘The World Is Against Them’: New Era Of Cancer Lawsuits Threaten Monsanto (G.)

[Dewayne Johnson’s] award of $289m, which included $250m in punitive damages, is a game-changer for the 46-year-old, who will leave behind a wife and three children. But Monsanto is fighting to keep it from him. “It’s a big red flag for the company,” said Jean M Eggen, professor emerita at Widener University Delaware Law School: “It brings more people out who might not otherwise sue.” Roughly 8,700 plaintiffs have made similar cases in state courts across the country, alleging that exposure to glyphosate-based herbicides led to various types of cancer. The impact could be huge if Monsanto continues to fight and lose in jury trials, and an accumulation of wins could force the company to consider settling with plaintiffs. “It could become very costly,” said Eggen, comparing the fight to the tobacco industry, which aggressively fought cases in court but eventually decided settlements were the best option. “It’s really a business decision.”

Monsanto may ultimately consider changing the labels to warn consumers about cancer risks and work to settle with consumers who have had high exposures, said Lars Noah, University of Florida law professor: “It’s sort of a wake-up call that their strategy was unrealistic.” Of the thousands of cases, there are more than 10 trials on track to start in 2019 and 2020, with court battles ramping up in California, Montana, Delaware, Kansas City and St Louis (where Monsanto is headquartered). Farmers, gardeners, government employees, landscapers and a wide range of others have alleged that Monsanto’s products sickened them or killed their loved ones. “This is a tremendous number of trials for one year and will allow plaintiffs to get critical evidence in front of juries – evidence not seen before,” said the attorney Aimee Wagstaff.

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Oct 072018
 
 October 7, 2018  Posted by at 9:10 am Finance Tagged with: , , , , , , , , , , ,  


Vincent van Gogh Autumn landscape 1885

 

Turkish Police Suspect Saudi Journalist Khashoggi Was Killed At Consulate (MME)
Interpol Asks China For Information On Its Missing President (CBS/AP)
Brett Kavanaugh Sworn In As 114th Supreme Court Justice (ZH)
Hot Jobs Market, Trade Tensions May Be Lethal Combo – Stephen Roach (CNBC)
Former Fed Governor Warns Of “Several Decade Cold War” With China (ZH)
China Pumps $109bn Into Economy As Trade War Bites (G.)
Theresa May Bids For Centre Ground With Appeal To Labour Voters (O.)
Italy Debt Crisis Flares Up, Banks Get Hit, Showdown with EU Intensifies (DQ)
Migrants Fight To Save Italian Mayor Who Gave Them A New Home (G.)
Major Climate Report Will Slam The Door On Wishful Thinking (Vox)

 

 

Tureky will issue statement(s) later. If this is true, it should lead to very strong condemnation of Saudi.

“Khashoggi had been “brutally tortured, killed and cut into pieces. Everything was videotaped to prove the mission had been accomplished and the tape was taken out of the country”.

Turkish Police Suspect Saudi Journalist Khashoggi Was Killed At Consulate (MME)

Turkish authorities suspect that missing Saudi journalist Jamal Khashoggi, who disappeared four days ago after entering Saudi Arabia’s consulate in Istanbul, was killed inside the consulate, two Turkish sources told Reuters on Saturday. “The initial assessment of the Turkish police is that Mr Khashoggi has been killed at the consulate of Saudi Arabia in Istanbul. We believe that the murder was premeditated and the body was subsequently moved out of the consulate,” one of the sources, a Turkish official, said. A senior Turkish police source told MEE that Khashoggi had been “brutally tortured, killed and cut into pieces. Everything was videotaped to prove the mission had been accomplished and the tape was taken out of the country”.

Khashoggi’s disappearance is likely to further deepen divisions between Turkey and Saudi Arabia, Reuters said. Relations were already strained after Turkey sent troops to the Gulf state of Qatar last year in a show of support after its Gulf neighbours, including Saudi Arabia, imposed an embargo on Doha. Police said about 15 Saudis, including officials, came to Istanbul on two private flights on Tuesday and were at the consulate at the same time as the journalist. They left again the same day, according to AFP. Their diplomatic bags could not be opened, a security ource told MEE, but Turkish intelligence was sure that Khashoggi’s remains were not in them.

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“The newspaper said that upon landing last week Meng was “taken away” for questioning by what it said were “discipline authorities.”

Interpol Asks China For Information On Its Missing President (CBS/AP)

Interpol has made a formal request to China for information about its missing Chinese president who seemingly vanished on a trip home. The agency said in a statement it “looks forward to an official response from China’s authorities to address concerns over the president’s well-being.” Interpol said it used law enforcement channels to submit its request about the status of Meng Hongwei. Meng’s wife says she hasn’t heard from him since he left Lyon at the end of September. French authorities say he boarded a plane and arrived in China, but the 64-year-old’s subsequent whereabouts are unknown. France has launched its own investigation.

“France is puzzled about the situation of Interpol’s president and concerned about the threats made to his wife,” its foreign ministry said, without providing any details. Meng is also a vice minister for public security in China, which has yet to comment. Previously, Interpol had said that reports about Meng’s disappearance were “a matter for the relevant authorities in both France and China.” The South China Morning Post, a Hong Kong newspaper, has suggested that Meng may have been the latest target of an ongoing campaign against corruption in China.

The newspaper said that upon landing last week Meng was “taken away” for questioning by what it said were “discipline authorities.” The term usually describes investigators in the ruling Communist Party who probe graft and political disloyalty. The Central Commission for Discipline Inspection, the party’s secretive internal investigation agency, had no announcements on its website about Meng and couldn’t be reached for comment. Meng is the first from his country to serve as Interpol’s president, a post that is largely symbolic but powerful in status. Because Interpol’s secretary general is responsible for the day-to-day running of the agency’s operations, Meng’s absence may have little operational effect.

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Need a new way to select Supreme Court judges. The Court must be perceived as neutral, or it loses credibility.

Brett Kavanaugh Sworn In As 114th Supreme Court Justice (ZH)

The drama of Judge Brett Kavanaugh’s confirmation to the US Supreme Court finally ended on Saturday afternoon, when without any last-minute surprises, the US Senate voted Kavanaugh to become the 114th Justice to the US Supreme Court in a major victory for both the Republican party and President Trump. Kavanaugh was confirmed as expected in a 50-48 vote, the narrowest margin for any justice since the 19th century. In a rare move, Alaska senator Lisa Murkowski was the only Republican senator to oppose Kavanaugh on Saturday, but she formally voted “present” to offset the absence of GOP Sen. Steve Daines who left Washington, D.C., on Friday to fly to Montana for his daughter’s wedding.

West Virginia Senator Joe Manchin, who is up for reelection in a state Trump won by more than 40 points in 2016, was the only Democratic senator to support Kavanaugh’s nomination. As The Hill reports, republicans used Manchin’s support to tout Kavanaugh’s nomination as “bipartisan,” but the razor-thin vote margin marks the closest successful Supreme Court vote since Stanley Matthews was confirmed in a 24-23 vote in 1881. In the ends, it doesn’t matter how they got there: Kavanaugh’s confirmation will be a crowning victory for Trump and McConnell, fulfilling a top campaign promise for the president and a critical priority for the Kentucky Republican. Kavanaugh’s ascension to the high court will ensure a conservative majority for decades to come, an outcome that McConnell especially has focused on during his long tenure as the top Senate Republican.

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Roach knows China. He doesn’t think they’ll give in.

Hot Jobs Market, Trade Tensions May Be Lethal Combo – Stephen Roach (CNBC)

There’s a growing risk that trade tensions between the world’s two largest economies may converge with other factors to disrupt the global economy — and knock the historic U.S. stock market rally off its stride, according to one of the world’s leading authorities on Asia. Yale University senior fellow Stephen Roach is worried the US-China trade war is putting sand in the gears of global supply chains, which has been playing a vital force in keeping price pressures in check. Roach referred to the threat as one of the “more destructive” layers of the trade war for stocks.

“You’ve got potentially a lethal combination between a hot labor market in an unwinding of the supply chain effects on the global front which could give you a surprising surge in inflation that the Fed is not positioned to really address with its still very, very low federal funds rate,” he warned Friday on CNBC’s “Trading Nation.” He added: “For every point of slack in advanced economies, the value chains hold down overall inflation by about 9/10s of a point.”

Roach, who served as Morgan Stanley Asia chairman for five years, believes Wall Street and policy makers are largely underestimating the impact of the trade tensions. Despite the new deal to replace the North America Free Trade Agreement, Roach isn’t optimistic the U.S. is any closer to a resolution with China. “The whole hope from the Trump administration is that China will be quickly beaten into submission as they did with supposedly Mexico and Canada,” said Roach. “The odds of a long disruption are high.”

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Economic cold war.

Former Fed Governor Warns Of “Several Decade Cold War” With China (ZH)

Former Fed governor Kevin Warsh warned on Thursday that the US-China relationship is “probably as poor as” it has ever been since former President Richard Nixon and Henry Kissinger developed strategic relations between both countries in the early 1970s. “We’re at the risk of a real cold war” between the world’s two largest economies, said Warsh who had been on President Trump’s list for Fed chairman before Jerome Powell was chosen. “The last 30 years we’ve been living and breathing globalization as if it’s an inevitable force,” but now, it seems the six-decade-long bubble has finally popped.

Bank of Americas says trade wars and deteriorating relations with China have been some of the reasons for the decline in globalism. Especially, US tariff duties collected, % of total imports have surged under the Trump administration. “Protectionism has cross-party support in the US, and nationalist parties continue to gain in Europe. Further action on China ($200bn), autos ($350bn), NAFTA ($690bn) could raise US tariff revenue as % total imports to levels not seen since 1946,” said BofA. During the CNBC interview, Wash used the term “cold war” to describe the economic standoff, not the decades-long “mutually assured destruction” nuclear stalemate with Russia. “We are probably on the precipice of a brand new relationship with the Chinese,” Warsh told CNBC. He asked: “Could we be at the beginning of a 10- or 20-year cold war?” If so, an economic cold war between the countries could have major implications for the global economy like causing a global growth scare and repricing risk assets.

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Fourth reserve requirement ratio cut this year. That’s not a game they can play forever.

China Pumps $109bn Into Economy As Trade War Bites (G.)

China has slashed the amount of cash some of its banks must hold in reserve as Beijing’s leadership seeks to bolster a flagging economy. As higher US interest rates and fears of a trade war piles pressure on economies around the world, China’s central bank said on Sunday that it was cutting the reserve requirement ratios (RRRs) by 1% from 15 October to lower financing costs and spur growth in the world’s second-biggest economy. The reserve cut, the fourth by the People’s Bank of China (PBOC) this year, came after Beijing pledged to speed up plans to invest billions of dollars in infrastructure projects as the economy shows signs of cooling further.

Investment growth has slowed to a record low and net exports have been a drag on growth in the first half of ther year. China releases a snapshot of its services sector on Monday, which will be closely watched for signs of slower growth. The injection of cash into the economy, which will be 750bn yuan ($109.2 billion), will also boost hopes that the negative impact of higher US tariffs on Chinese exports can be eased. The cut, which was announced on the last day of China’s week-long national day holiday, showed the central bank was probably worried about the impact of “external shocks” to markets such as a speech last week by US vice president Mike Pence criticising Beijing, said Zhang Yi, chief economist at Zhonghai Shengrong Capital Management.

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This will get ugly. Trying to split Labour. Anti-semitism accusations have been prepared.

Theresa May Bids For Centre Ground With Appeal To Labour Voters (O.)

Theresa May today delivers an extraordinary appeal to wavering Labour supporters to switch to the Conservatives as she attempts to portray her party as the only option for moderate and patriotic voters. Writing exclusively in today’s Observer the prime minister says that if people who have previously backed Labour look again at her government’s programme, including pledges to increase house building and manage markets where necessary, they will find that it is not driven by ideology, but by beliefs and values that the vast majority could support. Seeking to reclaim the One Nation mantle for the Tories, May writes: “I want voters who may previously have thought of themselves as Labour supporters to look at my government afresh. They will find a decent, moderate and patriotic programme that is worthy of their support.”

She argues that in an era in which traditional political allegiances count for less, the Tories now have a responsibility “on our shoulders” to offer a home to millions of former Labour voters who are unhappy with the party’s move left under Jeremy Corbyn. May’s pitch for the centre ground will enrage many Labour supporters who see her as a supporter of eight years of Tory austerity and the architect of the hostile environment for immigrants. It comes amid rumours in Westminster that disgruntled groups of Labour, Tory and Liberal Democrat MPs could try to form a new party on the centre ground to appeal to voters who regard the Tories as too pro-Brexit and right wing, and dislike the leftwing agenda of Corbyn.

[..] Reacting to her initial pitch for centre ground voters in her conference speech last Wednesday, former Labour home secretary David Blunkett said May was clearly laying a trap for his party. “This is a well tried tactic, attempting to achieve two things at the same time,” Blunkett said. “The first is to appear to move sufficiently on to Labour territory to seem reasonable and moderate while at the same time trying to push Labour further from the mainstream. We must avoid this trap, because it is a trap. “We need to be much more sure-footed in demonstrating where the Conservatives have stolen our clothes. And we need to reassure people that we won’t allow these blatant Conservative tactics to push Labour into adopting policies even more extreme and outside the mainstream.”

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The ECB buys Italian bonds like crazy. What will they do?

Italy Debt Crisis Flares Up, Banks Get Hit, Showdown with EU Intensifies (DQ)

As tensions between Rome and Brussels escalate, and uncertainty grows about Italy’s economic future, investors are dumping Italian debt, causing bond values to fall and yields to rise. That, in turn, is hitting banks’ funding costs and their capital cushions. On average, banks are estimated to already have lost 40 basis points of their core capital in the second quarter and another 8 bps in the third.As their capital base shrinks, banks are less able to write down bad loans — of which there are still frighteningly many — or issue new loans. According to analysts at Morgan Stanley, Banco BPM SpA, Banca Monte dei Paschi di Siena (MPS) SpA and UBI Banca SpA are the most vulnerable of Italy’s largest lenders due to the size of their holdings of government debt.

It is this outsized exposure of Italian banks to Italian debt that makes any sudden deterioration in the value of Italian bonds so dangerous. The banking sector hold around 18% of all of the nation’s public debt. It’s the reason why, as investors abandon Italian bonds en masse, the shares of Italy’s banks are also nose-diving, with the stock of recently rescued Monte dei Paschi di Siena leading the way down having lost more than half its value year-to-date. The chart below shows how the FTSE Italy Banks Index has plunged 29% since early May (black line), while the Italian government 10-year yield (red line) has nearly doubled from 1.8% to 3.4%, practically in tandem:

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Always put people first, no matter what your politics.

Migrants Fight To Save Italian Mayor Who Gave Them A New Home (G.)

In 2009, shortly after his re-election as mayor and several years after he embarked on a policy of welcoming migrants as a means of reversing depopulation in his town, Domenico Lucano was shot at through the window of a restaurant where he was eating with friends. As if to ram home their opposition to his plans, the local mafia also poisoned two of his dogs. Unperturbed, Lucano responded by installing a billboard at the entrance of the town, saying: “Riace – a town of hospitality.” The sign remains today, as does one on the main square that lists the 20 countries people have come from – Eritrea, Somalia, Nigeria, Pakistan, to name a few. Riace, a tiny hilltop town in Italy’s southern Calabria region, has become famous for its much-lauded model of integration, which began in the late 1990s and continues to this day.

But last week, Lucano, the man credited with changing the lives of Italians and foreigners through an initiative that breathed new life into a dying economy, was put under house arrest for allegedly abetting illegal immigration. On Saturday, lending their support to a man dismissed by far-right politician Matteo Salvini as worth “zero”, hundreds of people turned out in support of the mayor and his leadership. Invariably described as altruistic and honest, they struggle to comprehend how Lucano, 60, can have his liberty stripped from him while people belonging to the mafia, a scourge of Italy’s south, roam free. “Mafiosi kill, yet a mayor who does good is arrested? It doesn’t make any sense,” said Elisabetta, who asked for her surname not to be used.

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The worst wishful thinking is that we will replace fossil fuels with some other form of energy and go on growing the way we have. Fewer emissions is useful, fewer expectations is essential.

Major Climate Report Will Slam The Door On Wishful Thinking (Vox)

The leading international body of climate change researchers is preparing to release a major report Sunday night on the impacts of global warming and what it would take to cap warming at 1.5 degrees Celsius, or 2.7 degrees Fahrenheit, above preindustrial levels, a goal that looks increasingly unlikely. The report is from the Intergovernmental Panel on Climate Change, an international consortium of hundreds of climate researchers convened by the United Nations. Authors are meeting this week in Incheon, South Korea, to finalize their findings, but Climate Home News obtained an early leaked draft.

Why examine the prospects for limiting global warming to 1.5°C? Because under the Paris agreement, countries agreed that the goal should be to limit warming to below 2°C by 2100, with a nice-to-have target of capping warming at 1.5°C. According to the drafts, the report finds that it would take a massive global effort, far more aggressive than any we’ve seen to date, to keep warming in line with 1.5°C — in part because we are already en route to 3°C of warming. And even if we hit the 1.5°C goal, the planet will still face massive, devastating changes. So it’s pretty grim. But this is also a thunderous call to action, laying out what tools we have at our disposal (we have plenty) to mitigate global warming and to accelerate the turn toward cleaner energy. Let’s walk through the basics.

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Oct 242015
 
 October 24, 2015  Posted by at 10:03 am Finance Tagged with: , , , , , , , , , , ,  


William Henry Jackson Hospital Street, St. Augustine, Florida 1897

China Cuts Interest Rates, Reserve Ratios to Counter Slowdown (Bloomberg)
China Interest Rate Cut Fuels Fears Over Ailing Economy (Guardian)
Why The Chinese Rate Cut Will Not Slow China’s Economic Decline (Coward)
Reactions To Rate Cut: “China Is Getting More And More Desperate” (Zero Hedge)
China Takes ‘Riskiest’ Step by Ending Deposit-Rate Controls (Bloomberg)
Draghi’s Signal Adds $190 Billion to Negative-Yield Universe (Bloomberg)
Eurozone Crosses Rubicon As Portugal’s Anti-Euro Left Banned From Power (AEP)
Italy ex-PM Monti: Ignoring Greek Referendum A Violation Of Democracy (EurActiv)
Rare Metals: The War Over the Periodic Table (Bloomberg)
$6.5 Billion in Energy Writedowns and We’re Just Getting Started (Bloomberg)
Greece’s Creditors Demand Further Reform (La Tribune)
Investment Grade Ain’t What It Used to Be in Nervous Bond Market (Bloomberg)
An All Too Visible Hand (WSJ)
EU Negotiators Break Environmental Pledges In Leaked TTIP Draft (Guardian)
Populist, Pernicious and Perilous : Germany’s Growing Hate Problem (Spiegel)
Germany To Push For Compulsory EU Quotas To Tackle Refugee Crisis (Guardian)
Worried Slovenia Might Built Fence To Cope With Migrant Crisis (Reuters)

This cannot end well.

China Cuts Interest Rates, Reserve Ratios to Counter Slowdown (Bloomberg)

China’s central bank cut its benchmark lending rate and reserve requirements for banks, stepping up efforts to cushion a deepening economic slowdown. The one-year lending rate will drop to 4.35% from 4.6% effective Saturday the People’s Bank of China said on its website on Friday. The one-year deposit rate will fall to 1.5% from 1.75%. Reserve requirements for all banks were cut by 50 basis points, with an extra 50 basis point reduction for some institutions. The PBOC also scrapped a deposit-rate ceiling. The expanded monetary easing underscores the government’s determination to meet its 2015 growth target of about 7%. Moderated consumer inflation and a deeper slump in producer prices have given policy makers room for further easing.

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If growth numbers were anywhere near the IMF’s predictions, China wouldn’t be cutting rates.

China Interest Rate Cut Fuels Fears Over Ailing Economy (Guardian)

China fuelled fears that its ailing economy is about to slow further after Beijing cut its main interest rate by 0.25 percentage points. The unexpected rate cut, the sixth since November last year, reduced the main bank base rate to 4.35%. The one-year deposit rate will fall to 1.5% from 1.75%. The move follows official data earlier this week showing that economic growth in the latest quarter fell to a six-year low of 6.9%. A decline in exports was one of the biggest factors, blamed partly by analysts on the high value of China’s currency, the yuan. The rate cut sent European stock markets higher as investors welcomed the boost from cheaper credit in China, together with the hint of further monetary easing by the European Central Bank president, Mario Draghi, on Thursday.

Investors were also buoyed by the likelihood that the US Federal Reserve would be forced to signal another delay to the first US rate rise since the financial crash of 2008-2009 until later next year. The FTSE 100 was up just over 90 points, or 1.4%, at 6466, while the German Dax and French CAC were up almost 3%. The People’s Bank of China’s last rate cut in August triggered turmoil in world markets after Beijing combined the decision with a 2% reduction in the yuan’s value. Shocked at the prospect of a slide in the Chinese currency, investors panicked and sent markets plunging. Some economists have warned that the world economy is about to experience a third leg of post-crash instability after the initial banking collapse and eurozone crisis.

The slowdown in China, as it reduces debts and a dependence for growth on investment in heavy industry and property, will be the third leg. World trade has already contracted this year with analysts forecasting weaker trade next year. The IMF in July trimmed its forecast for global economic growth for this year to 3.1% from 3.3% previously, mainly as a result of China’s slowing growth. The Washington-based fund also warned that the weak recovery in the west risks turning into near stagnation. At its October annual meeting, it said growth in the advanced countries of the west is forecast to pick up slightly, from 1.8% in 2014 to 2% in 2015 while growth in the rest of the world is expected to fall from 4.6% to 4%.

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“The continued and dramatic slowing of the Chinese economy in the years ahead is baked in the cake.”

Why The Chinese Rate Cut Will Not Slow China’s Economic Decline (Coward)

Today the Peoples Bank of China cut the benchmark interest rate by .25% and lowered banks’ reserve requirements by .5%. The measure is supposed to spur growth and make life a little easier on debt-ridden Chinese companies. In the immediate term it may give a slight boost to the economy, but there is no chance this measure, or others like it, will keep the Chinese economy from slowing much further in the years ahead. Let us explain… The continued and dramatic slowing of the Chinese economy in the years ahead is baked in the cake. For the last decade Chinese growth has been fueled by investment in infrastructure (AKA fixed capital formation). In an effort to sustain a high level of growth massive and unprecedented investment in fixed capital was carried out and fixed investment has now become close to 50% of the Chinese economy.

On the flip side, consumption as a% of GDP has shrunk from about 46% of GDP to only 38% of GDP. Most emerging market countries run with fixed investment of around 30-35% of GDP and with consumption accounting for about 40-50% of GDP – exactly the opposite dynamic of the Chinese economy. China has run into a ceiling in terms of the percentage of the economy accounted for by fixed investment and now fixed investment must shrink to levels more appropriate for China’s stage of economic development. This necessarily implies a slowing of the Chinese economy from what the government says is near 7% to something closer to 2-4%, and that is in the optimistic scenario in which consumption growth picks up the pace to mitigate the slowdown in investment.

This is why cuts in rates mean practically nothing for China’s long-term economic prospects. In the short-term rate cuts may postpone corporate bankruptcies by allowing companies to refinance debt at lower rates. Rate cuts may also make housing more affordable, on the margin. But these are cyclical boosts that act as tailwinds to China’s economic train.

No amount of wind, save a hurricane, is going to keep the train from slowing. As a reminder, it has not been working…

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“..easing shows China is “getting more and more desperate” and that “things are really bad there.”

Reactions To Rate Cut: “China Is Getting More And More Desperate” (Zero Hedge)

To say that China, which a few days ago reported GDP of 6.9% which “beat” expectations and which a few hours ago reported Chinese home prices rose in more than half of tracked cities for the first time in 17 months, stunned everyone with its rate cut on Friday night, meant clearly for the benefit of US stocks, as well as the global commodity market, is an understatement: nobody expected this. As a result strategists have been scrambling to put China’s 6th rate cut in the past year (one taking place just ahead of this weekend’s Fifth plenum) in context. Here are the first responses we have seen this morning. First, from Vikas Gupta, executive vice president at Arthveda Fund Management, who told Bloomberg that “China rate cut will spur fund flows to EMs.” He adds that “the move rules out U.S. rate increase this yr; Fed’s “hands are getting tied” concluding that “easing shows China is “getting more and more desperate” and that “things are really bad there.”

While there is no debate on just how bad things in China are, one can disagree that the Fed’s hands are tied – after all the Fed’s biggest “global” concern was China. The PBOC should have just taken that concern off the table. The second reaction comes from Citi’s Richard Cochinos: “Bottom line: Impacts of China rate announcements on the G10 are falling. Investors remain cautious ahead of this weekend’s announcements, and what policy cuts imply for the region. One day after a dovish ECB, China cuts interest rates by 25bp and RRR cut by 50bps. Accommodative policy begets accommodative policy it seems. Our economics team has been expecting further policy accommodation out of China, the issue was just a matter of timing.

Unlike other major central banks, the PBOC doesn’t announce policy on a set schedule – but this doesn’t mean there isn’t a pattern to it. Before today, it had announced cuts to the RRR or interest rate six times in 2015 – the last being on 25 August. So today was a surprise in terms of action, but not completely unexpected. We prefer to see the easing can be seen in the larger picture of China adjusting to weaker growth in a systematic and controlled manner, rather than a reaction to a new economic shock.”

This view helps explain the muted reaction in the G10. So far, AUDUSD (0.27%) and USDJPY (0.18%) have borne the bulk of price action, but we note price action so far is muted relative to April, June or August. Clearly stimulus is beneficial to both Japan and Australia – but we are cautious not to sound too optimistic. Today’s rate cut comes ahead of this weekend’s Fifth plenum, and previous ones haven’t been sufficient to reverse the economic slowdown. Additionally, this weekend it has been expected GDP targets for the next 5-years will be announced (currently at 7%, but broadly expected to fall), along with other fiscal plans and goals. Without knowing the full baseline of what China expects and is working towards, it is difficult to chase price action. The main drivers of EM Asia lower has been poor growth and trade in the region – hence we main cautious. Policy adjustments now could be a way to soften the impact of further weak economic growth.

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Will adding more leverage save Beijing?

China Takes ‘Riskiest’ Step by Ending Deposit-Rate Controls (Bloomberg)

China scrapped a ceiling on deposit rates, tackling what the central bank has called the “riskiest” part of freeing up the nation’s interest rates. The move came as the central bank cut benchmark rates and banks’ reserve requirements to support a faltering economy. The changes take effect on Saturday, the People’s Bank of China said in a statement on Friday. Scrapping interest-rate controls boosts the role of markets in the economy, part of efforts by Premier Li Keqiang to find new engines of growth. While officials must be on guard for any excessive competition for deposits that could increase borrowing costs for companies or lead to lenders going bust, weakness in the economy may be mitigating the risks.

Ending the ceiling is an important milestone but comes in the wake of “a tremendous amount of deposit-rate liberalization over the last several years,” especially in the shape of wealth management products, according to Charlene Chu at Autonomous Research Asia. Wealth products issued by Internet firms are increasingly siphoning away deposits, making rate controls less effective and adding urgency to accelerating reform, the central bank said in a question-and-answer statement after the move. History shows that the best time to deregulate rates is when they’re being cut and inflation is easing, it said. The risks may not be as high as they would’ve been two or three years ago, because competition for deposits has cooled, with weaker demand for funding and a decline in banks’ willingness to lend, Chu, formerly of Fitch Ratings, said ahead of the PBOC announcement. Banks aren’t fully using the deposit-rate flexibility that they already have, she said.

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Remember that Draghi et al have no idea what the effect of negative rates will be. None. All they have is theories.

Draghi’s Signal Adds $190 Billion to Negative-Yield Universe (Bloomberg)

With his confirmation that policy makers had discussed cutting the region’s deposit rate, Mario Draghi extended the euro area’s negative yield universe by $190 billion. Those comments by the ECB chief on Thursday sparked a rally that left yields on German sovereign securities at less than zero for as long as six years. Across the currency bloc, the value of securities issued by governments at negative yields rose to $1.57 trillion, from $1.38 trillion before Draghi’s comments. That’s equivalent to about a quarter of the market. German and French two-year yields set fresh record-lows Friday, while their longer-dated peers pared weekly gains. Draghi also said the ECB will re-examine its quantitative-easing plan in December.

“This is certainly an exceptional environment,” said Christian Lenk at DZ Bank in Frankfurt. “We have to admit that the discussion about the deposit rate being cut further came as a surprise. It takes the curve very much into negative territory. In the time being the short-end looks a bit artificial.” Germany’s two-year yield was little changed at minus 0.32% as of 9:58 a.m. London time, after earlier reaching a record-low minus 0.348%. The price of the 0% security maturing September 2017 was at 100.605% of face value. French two-year yields dropped to a record minus 0.292% on Friday, also below the current level of the deposit rate, which is at minus 0.20%. There are about $752 billion of securities in the euro region with yields below that rate, making them ineligible for the ECB’s €1.1 trillion bond-buying plan

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Next major Brussels headache: “Public debt is 127pc of GDP and total debt is 370pc, worse than in Greece. Net external liabilities are more than 220pc of GDP.”

Eurozone Crosses Rubicon As Portugal’s Anti-Euro Left Banned From Power (AEP)

Portugal has entered dangerous political waters. For the first time since the creation of Europe’s monetary union, a member state has taken the explicit step of forbidding eurosceptic parties from taking office on the grounds of national interest. Anibal Cavaco Silva, Portugal’s constitutional president, has refused to appoint a Left-wing coalition government even though it secured an absolute majority in the Portuguese parliament and won a mandate to smash the austerity regime bequeathed by the EU-IMF Troika. He deemed it too risky to let the Left Bloc or the Communists come close to power, insisting that conservatives should soldier on as a minority in order to satisfy Brussels and appease foreign financial markets. Democracy must take second place to the higher imperative of euro rules and membership.

“In 40 years of democracy, no government in Portugal has ever depended on the support of anti-European forces, that is to say forces that campaigned to abrogate the Lisbon Treaty, the Fiscal Compact, the Growth and Stability Pact, as well as to dismantle monetary union and take Portugal out of the euro, in addition to wanting the dissolution of NATO,” said Mr Cavaco Silva. “This is the worst moment for a radical change to the foundations of our democracy. “After we carried out an onerous programme of financial assistance, entailing heavy sacrifices, it is my duty, within my constitutional powers, to do everything possible to prevent false signals being sent to financial institutions, investors and markets,” he said. Mr Cavaco Silva argued that the great majority of the Portuguese people did not vote for parties that want a return to the escudo or that advocate a traumatic showdown with Brussels.

This is true, but he skipped over the other core message from the elections held three weeks ago: that they also voted for an end to wage cuts and Troika austerity. The combined parties of the Left won 50.7pc of the vote. Led by the Socialists, they control the Assembleia. The conservative premier, Pedro Passos Coelho, came first and therefore gets first shot at forming a government, but his Right-wing coalition as a whole secured just 38.5pc of the vote. It lost 28 seats. The Socialist leader, Antonio Costa, has reacted with fury, damning the president’s action as a “grave mistake” that threatens to engulf the country in a political firestorm. “It is unacceptable to usurp the exclusive powers of parliament. The Socialists will not take lessons from professor Cavaco Silva on the defence of our democracy,” he said.

Mr Costa vowed to press ahead with his plans to form a triple-Left coalition, and warned that the Right-wing rump government will face an immediate vote of no confidence. There can be no fresh elections until the second half of next year under Portugal’s constitution, risking almost a year of paralysis that puts the country on a collision course with Brussels and ultimately threatens to reignite the country’s debt crisis. The bond market has reacted calmly to events in Lisbon but it is no longer a sensitive gauge now that the ECB is mopping up Portuguese debt under quantitative easing. Portugal is no longer under a Troika regime and does not face an immediate funding crunch, holding cash reserves above €8bn. Yet the IMF says the country remains “highly vulnerable” if there is any shock or the country fails to deliver on reforms, currently deemed to have “stalled”. Public debt is 127pc of GDP and total debt is 370pc, worse than in Greece. Net external liabilities are more than 220pc of GDP.

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“Europe has steadily departed from its principal founding goals, democracy, human rights and freedoms and the prosperity of its people and its societies..”

Italy ex-PM Monti: Ignoring Greek Referendum A Violation Of Democracy (EurActiv)

By disregarding the resounding ‘No’ of the recent Greek referendum, Europe clearly violated democracy, said the former Italian premier, Mario Monti. At the “Regaining Public Trust in Europe” event organised this week in Brussels by Friends of Europe, Zoe Konstantopoulou, the former speaker of the Greek Parliament, strongly criticized the EU institutions for the unfolding humanitarian crisis in Greece. “Would you trust the EU if they told you that your vote or the court decisions in your countries do not matter?”, Konstantopoulou wondered. Zoe Konstantopoulou served as a speaker of the Greek parliament under the first term of Syriza coalition government and was a close ally of the Greek premier, Alexis Tsipras.

But shortly after the deal agreed on between Athens and its international creditors this summer, Konstantopoulou resigned from Syriza, and joined the newly established leftist Popular Unity party led by former energy minister Panagiotis Lafazanis. In the recent snap election in Athens, Popular Unity did not manage to enter the Greek parliament, scoring below the required 3% threshold. Konstantopoulou and Monti had a vivid dialogue during the panel discussion. The former Greek lawmaker was quite critical of the EU, and said that at times when the democratic principles of the EU are shaken, “it is our duty to speak clearly and honestly”.

“Europe has steadily departed from its principal founding goals, democracy, human rights and freedoms and the prosperity of its people and its societies,” she stressed. Konstantopoulou noted that “Greeks have been sacrificed and crucified for more than 5 years now, to pay a debt which has been evaluated to be wholly unsustainable ever since 2010 to the knowledge of the IMF and the EU.” “And it was baptised as public, although it was initially private, involving private banks in Germany, France and Greece,” she added.

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Must. Read. Whole. Article.

Rare Metals: The War Over the Periodic Table (Bloomberg)

A little past 9:30 on the morning of Sept. 7, 2010, a Japanese Coast Guard vessel in the East China Sea spots a Chinese fishing trawler off the coast of islands, known as Senkaku in Japanese and Diaoyu in Chinese. The Japanese have little tolerance for such incursions in the Senkakus, which they annexed in 1895 after the Sino-Japanese War. But recently China has asserted claims to these islands extending hundreds of years earlier. The island dispute is wrapped up in a morass of misunderstanding and oneupmanship, with an eye toward the rich seabed resources nearby. When you ask Japanese officials about the territorial dispute, they will look at you as if it is almost insulting to answer the question. “It’s our land,” one government official told me, as if an American diplomat had been asked if Hawaii is part of the US.

On that morning, the Japanese vessel pulls alongside the smaller Chinese trawler and blares messages to the crew in Chinese from loudspeakers: “You are inside Japanese territorial waters. Leave these waters.” Videos from the day show that instead of leaving, the Chinese boat bends toward the stern of the Japanese cutter, hitting it and then sailing on. Forty minutes later, the same captain veers into another Japanese coast guard ship. Tokyo has managed previous incursions with little fanfare. However, the newly elected Democratic Party of Japan detained the trawler’s crew and captain. It planned to put the captain on trial. China retaliated by detaining four Japanese citizens.

Then, on Sept. 21, Japanese trading houses informed its Ministry of Economy, Trade and Industry that China was refusing to fill orders for rare-earth elements – a set of 17 different, obscure rare metals. What seemed like a battle over seabed resources became a new conflict, one that is potentially far larger, a War over the Periodic Table. Japanese officials and manufacturers were frightened. These elements – essential materials in Japan’s high-tech industry, well known for its high quality components – were virtually all produced in China. Beijing never acknowledged an export ban or said it would use the rare-metal trade as a political weapon. But no other country reported such delays. And Beijing never explained why all 32 of the country’s rare-earth exporters halted trade on the same day.

Restricting these exports was an astute move if Beijing’s goal was to escalate the political conflict between the two countries without the use of force. Tokyo worried that rare earths were just the beginning of what China might withhold because China is also the leading global producer of 28 advanced metals also vital to Japanese industry. Bowing to Beijing’s pressure, Tokyo quickly released the Chinese captain. But the damage to Japan and the rare-earth market had only just begun. Prices for rare earths started to climb, some as much as 2,000% over the next year and a half. Prices have since returned to lower levels, and China changed its export regime after being found in violation of global trade rules last year. But the lessons from this episode have not yet been fully realized as a fundamental market instability remains. A little perspective is in order.

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It’s already much much more.

$6.5 Billion in Energy Writedowns and We’re Just Getting Started (Bloomberg)

The oil and gas industry’s earnings season is barely underway, and already there’s been $6.5 billion in writedowns. On Thursday, Freeport-McMoRan reported a $3.7 billion charge for the third quarter, while Southwestern Energy – which has a market value of $4.5 billion – booked $2.8 billion. And that’s just the beginning. Barclays estimated in an Oct. 21 analysis that there could be $20 billion in charges among just six companies. Southwestern’s writedown was double Barclays’ forecast. Oil prices have tumbled 44% in the past year, and natural gas is down 35%, making the write-offs a foregone conclusion from an accounting standpoint. The companies use an accounting method that requires them to recognize a charge when estimates of future cash flow from their properties falls below what the companies spent buying and developing the acreage. The predictions of future cash flow have fallen along with prices.

Since it’s no secret oil and gas prices have plunged, “the majority of write-offs are typically non-events,” said Barclays’ analysts led by Thomas R. Driscoll in the report. Southwestern’s shares have declined 64% in the past year, and Phoenix-based Freeport-McMoRan’s are down 61%. Barclays predicted ceiling-test impairments for Apache, Chesapeake Energy , Devon Energy, Encana and Newfield. All five companies are scheduled to report third-quarter results in November. “Many companies will have writedowns as the price of oil is about half of where it once was and gas is also down,” Timothy Parker at T. Rowe Price said in an e-mail. “However, it won’t generally hurt the companies because very few have debt covenants that are linked to book value, which the writedowns affect.”

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The troika wants to evict Greeks from their homes.

Greece’s Creditors Demand Further Reform (La Tribune)

The European institutions and the IMF are increasing their demands on Greece, despite the recent reforms adopted by the Greek parliament. Athens can hardly afford to resist. Our partner La Tribune reports. Discussions between Greece and its creditors are tense, despite the major reforms accepted by the Greek parliament, the Vouli, on Monday (19 October). The talks between Greece and the new institutional ‘quartet’ began on Wednesday (21 October). The old troika of the Commission, the ECB and the IMF has been joined by the European Stability Mechanism (ESM). On Wednesday afternoon, Olga Gerovasili, a spokesperson for the Greek government, spoke of a “very hard battle” with the institutions.

At the heart of this battle are the Greek banks, which were severely weakened by the massive withdrawal of deposits in the first half of this year. Added to this is the increasing cost of debt. According to the Bank of Greece, in 2014 this represented 34% of the total deposits held by all the Hellenic banks put together. This figure has risen since 2014, and will continue to rise as Greek GDP contracts in 2015 and 2016. Fewer deposits mean more toxic debt: the Greek banking system needs a bailout. The Greek government says it needs a recapitalisation fund of €25 billion. But the creditors clearly hope to provide only the bare minimum. As the supervisor of the process, the ECB plans to carry out an asset quality review (AQR) to determine exactly how much money the banks need before bailing them out.

But the conditions attached to this bailout may create a raft of other problems. Greece’s creditors are now demanding that borrowers who cannot afford to repay their loans be evicted from their homes. The vacated properties would then be sold in order to settle the exact payment due on each loan. Up to now, households with modest incomes have been protected from eviction as long as their main residence was worth less than €250,000; a measure that has helped to keep many families hit by unemployment off the streets. But the creditors want this limit lowered so more bank loans can be recovered in this way. Olga Gerovasili said that the government was “fighting to maintain the protection of main residences”.

A similar issue arose in Cyprus last year. The Cypriot parliament refused to implement the tougher eviction conditions demanded by the troika, and the ECB responded by excluding Cyprus from its quantitative easing programme. The troika then froze all transfers to Nicosia, pushing the island to the verge of bankruptcy. Under pressure from the government, the parliament finally accepted the demand to make evictions easier to carry out.

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Where and why debt deflation starts: “Companies have increased leverage massively, and that is starting to catch up..”

Investment Grade Ain’t What It Used to Be in Nervous Bond Market (Bloomberg)

After six years of a credit boom in which investors distinguished less and less between ratings, rewarding companies across the spectrum with favorable borrowing costs, the market is becoming more discriminating. Fear of low growth, which has largely been focused on the riskiest of energy companies, is spilling over to other industries and into the lower rungs of investment grade as the strength of balance sheets comes back into focus. Just being investment grade, it seems, isn’t good enough anymore. “The chickens are coming home to roost,” said Freddie Offenberg at Andres Capital Management. “Companies have increased leverage massively, and that is starting to catch up, especially given the worries in the economy.” Earnings for Standard & Poor’s 500 companies contracted 1.7% last quarter, the most since 2009.

And more than half of companies in the index that reported earnings this quarter have disappointed analysts’ sales expectations. The credit-ratings companies have noticed: There have been 1.6 investment-grade companies upgraded for every one downgraded so far this year, compared with last year’s 3.5-1 ratio. “It’s not time to panic, but the market is paying closer attention to performance and quality, and rightly so,” said David Leduc at Standish Mellon Asset Management. Companies like Fossil are paying nearly half a percentage point more for their debt since May, based on secondary prices of comparable securities, according to Bank of America Merrill Lynch Indexes. Companies with the best balance sheets, such as Microsoft and Johnson & Johnson, only pay 0.05 percentage point more.

Among companies that have had to pay up in debt markets is Hewlett-Packard. The Baa2 rated computer maker sold $14.6 billion of bonds on Sept. 30 that yielded half apercentage point more than the average for bonds with similar ratings and maturities in the secondary market, according to Bank of America Merrill Lynch index data. That’s not good news for companies that still need to raise debt to finance $356 billion of takeovers that are expected to be completed by the end of the year. This includes Charter Communications, which is attempting to complete its $55.1 billion takeover of Time Warner Cable with the lowest investment-grade rating from S&P and Fitch Ratings, and a junk rating from Moody’s Investors Service.

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“On the basis of its record, the financial system as constituted in the years 1900-1913 must be considered to have been successful to an extent rarely equalled in the United States.”

An All Too Visible Hand (WSJ)

When Woodrow Wilson signed the Federal Reserve Act into law in 1913, the dollar was defined as a weight of gold. You could exchange the paper for the metal, and vice versa, at a fixed and statutory rate. The stockholders of nationally chartered banks were responsible for the solvency of the institutions in which they owned a fractional interest. The average level of prices could fall, as it had done in the final decades of the 19th century, or rise, as it had begun to do in the early 20th, without inciting countermeasures to arrest the change and return the price level to some supposed desirable average. The very idea of a macroeconomy—something to be measured and managed—was uninvented. Who or what was in charge of American finance? Principally, Adam Smith’s invisible hand.

How well could such a primitive system have possibly functioned? In “The New York Money Market and the Finance of Trade, 1900-1913,” a scholarly study published in 1969, the British economist C.A.E. Goodhart concluded thus: “On the basis of its record, the financial system as constituted in the years 1900-1913 must be considered to have been successful to an extent rarely equalled in the United States.” The belle epoque was not to be confused with paradise, of course. The Panic of 1907 was a national embarrassment. There were too many small banks for which no real diversification, of either assets or liabilities, was possible. The Treasury Department was wont to throw its considerable resources into the money market to effect an artificial reduction in interest rates—in this manner substituting a very visible hand for the other kind.

Mr. Lowenstein has written long and well on contemporary financial topics in such books as “When Genius Failed” (2000) and “While America Aged” (2008). Here he seems to forget that the past is a foreign country. “Throughout the latter half of the nineteenth century and into the early twentieth,” he contends, “the United States—alone among the industrial powers—suffered a continual spate of financial panics, bank runs, money shortages and, indeed, full-blown depressions.” If this were even half correct, American history would have taken a hard left turn. For instance, William Jennings Bryan, arch-inflationist of the Populist Era, would not have lost the presidency on three occasions. Had he beaten William McKinley in 1896, he would very likely have signed a silver-standard act into law, sparking inflation by cheapening the currency. As it was, President McKinley signed the Gold Standard Act of 1900, which wrote the gold dollar into the statute books.

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Well, that’s a surprise…

EU Negotiators Break Environmental Pledges In Leaked TTIP Draft (Guardian)

The EU appears to have broken a promise to reinforce environmental protections in a leaked draft negotiating text submitted in the latest round of TTIP talks in Miami.. In January, the bloc promised to safeguard green laws, defend international standards and protect the EU’s right to set high levels of environmental protection, in a haggle with the US over terms for a free trade deal. But a confidential text seen by the Guardian and filed in the sustainable development chapter of negotiations earlier this week contains only vaguely phrased and non-binding commitments to environmental safeguards. No obligations to ratify international environmental conventions are proposed, and ways of enforcing goals on biodiversity, chemicals and the illegal wildlife trade are similarly absent.

The document does recognise a “right of each party to determine its sustainable development policies and priorities”. But lawyers say this will have far weaker standing than provisions allowing investors to sue states that pass laws breaching legitimate expectations of profit. “The safeguards provided to sustainable development are virtually non-existent compared to those provided to investors and the difference is rather stark,” said Tim Grabiel, a Paris-based environmental attorney. “The sustainable development chapter comprises a series of aspirational statements and loosely worded commitments with an unclear dispute settlement mechanism. It has little if any legal force.” The document contains a series of broadly sympathetic statements about the importance of conservation and climate action.

But it offers no definitions of what core terms – such as “high levels of protection” for the environment or “effective domestic policies” for implementing them – actually mean. Last year, more than a million people across Europe signed a petition calling for the Transatlantic Trade and Investment Partnership (TTIP) talks to be scrapped. Their concern was that multinationals could use the treaty’s investor-state dispute settlement (ISDS) provisions to sue authorities in private tribunals, not bound by legal precedent. In one famous case, Lone Pine launched an unresolved $250m suit against the state of Quebec after it introduced a fracking moratorium, using ISDS provisions in the North American Free Trade Agreement (Nafta).

US officials maintain that few such cases are ever likely to be brought under the TTIP, which could wipe away tariffs in the world’s largest ever free trade deal. However, environmental cases accounted for 60% of the 127 ISDS cases already brought against EU countries under bilateral trade agreements in the last two decades, according to Friends of the Earth Europe. Europe’s taxpayers paid out at least $3.5bn to private investors as a result.

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Seen this before: “..a shift in norms that will be difficult to get back under control.”

Populist, Pernicious and Perilous : Germany’s Growing Hate Problem (Spiegel)

Germany these days, it seems, is a place where people feel entirely uninhibited about expressing their hatred and xenophobia. Images from around the country show a level of brutalization that hasn’t been witnessed for some time, and attest to primitive instincts long believed to have been relegated to the past in Germany. The examples are as myriad as they are shocking, and include the bloody attack in Cologne as well as the mock gallows for Angela Merkel and her deputy Sigmar Gabriel carried by a demonstrator at a Pegida rally in Dresden on Oct. 12.

But they also include the abuse shouted at the German chancellor when she visited a refugee hostel in Heidenau near Dresden in August, where she was called a “slut” and other insults, or the placards held aloft by demonstrators on the first anniversary of the Pegida rallies listing the supposed “enemies of the German state” – Merkel, Gabriel and their “accomplices.” The lack of inhibition when it comes to vicious tirades took on a whole new scale on Monday, when Turkish-born German author and Pegida supporter Akif Pirincci, said there are other alternatives in the refugee crisis, but “the concentration camps are unfortunately out of action at the moment.”

There have been more than twice as many attacks on refugee hostels during the first nine months of this year as in the whole of 2014. The rising tide of hatred is now reaching the politicians many hold responsible for the perceived chaos besetting Germany. The national headquarters of Merkel’s conservative Christian Democratic Union (CDU) party in Berlin fields thousands of hate mails every week. As the architect of the “we can do it” policy of allowing masses of refugees into the country, Chancellor Merkel is their primary target. Within the SPD, it is General Secretary Yasmin Fahimi, whose father is Iranian. “Open the doors to the showers, fire up the ovens. They’re going to be needed,” read one recent anonymous mail addressed to her.

The hatred comes in many forms. It’s expressed on the streets and on the Internet. Sometimes it’s loud. Other times it’s unspoken. It eminates from every class and every section of society. According to studies conducted by Andreas Zick, the respected head of the Institute for Interdisciplinary Research on Conflict and Violence at the University of Bielefeld, who has been researching German prejudices against different groups for many years, almost 50% of Germans harbor misanthropic views. Zick warns of a shift in norms that will be difficult to get back under control.

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Rinse and repeat?!

Germany To Push For Compulsory EU Quotas To Tackle Refugee Crisis (Guardian)

Germany is to push for more ambitious and extensive common European policies on the refugee crisis, according to policymakers in Berlin, with compulsory and permanent EU quotas for sharing probably hundreds of thousands of people to be brought to Europe directly from the Middle East. New European powers replacing some national authority over border control, and the possible raising of a special EU-wide levy to fund the new policies are also on Berlin’s agenda. The plans, being prepared in Berlin and Brussels, are certain to trigger bitter resistance and major clashes within the EU. Berlin backs European commission plans to make the proposed scheme “permanent and binding”. But up to 15 of 28 EU countries are opposed.

The plans will not apply to the UK as it is not part of the EU’s passport-free Schengen zone and has opted out of EU asylum policy, saying it will not take part in any proposed European refugee-sharing schemes. Angela Merkel, appears determined to prevail, as she grapples with a crisis that will likely define her political legacy. The German chancellor is said to be angry with the governments of eastern and central Europe who are strongly opposed to being forced to take in refugees. She is said to resent that these EU member states are pleading for “solidarity” against the threats posed by Russia and Vladimir Putin while they resist sharing the burdens posed by the refugee crisis. EU government leaders agreed last month to share 160,000 asylum seekers already inside the EU, redistributing them from Greece and Italy over two years.

But the decision had to be pushed to a majority vote overruling the dissenters, mainly in eastern Europe, with the Hungarian prime minister, Viktor Orban, accusing Merkel of “moral imperialism” by forcing the issue. It is highly unusual in the EU for sensitive issues of such deep national political impact to be settled by majority voting. But Berlin appears prepared to go there if no consensus can be reached. The opponents of quotas insist last month’s decision was a one-off. But according to policymakers in Berlin, Merkel now wants to go much further, shifting the emphasis of burden-sharing from redistribution of refugees inside the EU to those collecting en masse in third countries, notably Turkey where more than two million Syrians are hosted.

Under one proposal being circulated in Berlin, the EU would strike pacts with third countries such as Turkey agreeing to take large but unspecified numbers of refugees from them directly into Europe. In return the third country would need to agree on a ceiling or a cap for the numbers it can send to Europe and commit to keeping all other migrants and refugees, and accommodate them humanely. This effectively means Europe will be financing large refugee camps in those third countries, which will also be obliged to take back any failed asylum seekers returned from Europe.

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Foreign cops on sovereign territory?

Worried Slovenia Might Built Fence To Cope With Migrant Crisis (Reuters)

Slovenia said it will consider all options, including fencing off its border with Croatia, if European leaders fail to agree a common approach to the migrant crisis as thousands stream into the ex-Yugoslav republic. Migrants began crossing into Slovenia last Saturday after Hungary closed its border with Croatia. The Slovenian Interior Ministry said that a total of 47,000 had entered the country since Saturday, including some 10,000 in the past 24 hours. A Reuters cameraman said about 3,000 people broke the fence at the border crossing at Sentilj and walked in to Austria on Friday morning. Slovenian officials said the country is too small and does not have enough resources to handle such large numbers of people. Prime Minister Miro Cerar accused Croatia of transporting too many people too quickly to Slovenia.

When asked if there was the possibility of building a fence on the border, Cerar told Slovenian state TV: “We are considering also those options.” “At first we are seeking a European solution. If we lose hope on the European level, if we do not get enough on Sunday … then all options are possible as that would mean that we are on our own,” Cerar said. Several European leaders are due to meet in Brussels on Sunday under the auspices of the European Commission to discuss the latest developments in the migrant crisis, Europe’s biggest since World War. [..] According to Slovenia’s interior ministry, the cost of fencing off the 670-km long border with Croatia would be about €80 million. Slovenia has asked for the EU for assistance and officials said Austria, Germany, Italy, France, Hungary, the Czech Republic, Slovakia and Poland offered to send police reinforcements.

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Aug 262015
 
 August 26, 2015  Posted by at 11:13 am Finance Tagged with: , , , , , , , ,  


Russell Lee Sharecropper mother teaching children in home, Transylvania, LA. Jan 1939

China Stocks Slump as Rate Cut Fails to Stop $5 Trillion Rout (Bloomberg)
US Stock Rally Fails; Day Ends With Vicious Selloff (MarketWatch)
Bubbles Don’t Correct, They BURST! (Harry Dent)
Why China Had To Crash Part 1 (Steve Keen)
Why Worries About China Make Sense (Martin Wolf)
China Cuts Rates To Stem Crisis, But Doubts Grow On Foreign Reserve Buffer (AEP)
The Most Surprising Thing About China’s RRR Cut (Zero Hedge)
China’s Journey from New Normal to Stock Market Crisis Epicenter (Bloomberg)
A Warning on China Seems Prescient: Ken Rogoff (Andrew Ross Sorkin)
China Meltdown Leaves Global Carmakers Burned (Bloomberg)
Chinese Central Banker Blames Fed For Market Rout (Xinhua)
Chinese Authorities Escalate Blame Game as Stock Slide Worsens (Bloomberg)
The Undocumented Italian Government (M5S Senate)
Europe’s Religious War on Debt Must Be Overcome, French EconMin Says (Bloomberg)
What Germany Can Learn From LBJ (Denis Macshane)
Our Athens Spring (Yanis Varoufakis)
Saudi Arabia Seeks Advice on Budget Cuts in Wake of Oil Crash (Bloomberg)
Balkan States Snub Greece In Talks On Immigration (Kath.)
Merkel Tells Germans Refugee Crisis Is Unworthy of Europe (Bloomberg)

It doesn’t matter what they do anymore.

China Stocks Slump as Rate Cut Fails to Stop $5 Trillion Rout (Bloomberg)

China’s stocks extended the steepest five-day drop since 1996 in volatile trading as lower interest rates failed to halt a $5 trillion rout. The Shanghai Composite Index fell 1.3% to 2,927.29 at the close, after rising as much as 4.3% and declining 3.9%. The cuts in borrowing costs and lenders’ reserve ratios were announced hours after the benchmark measure closed with a 7.6% drop on Tuesday. Chinese equities have lost half their value since mid-June, as margin traders closed out bullish bets and concern deepened that valuations are unjustified by the weak economic outlook. The government has halted intervention in the equity market this week as policy makers debate the merits of an unprecedented rescue, according to people familiar with the situation.

“The prevailing sentiment is still that investors want to cash out, whatever the government does,” said Ronald Wan, chief executive at Partners Capital International in Hong Kong. “Confidence is already damaged. Doubts over the effectiveness of policies are getting bigger. The market will remain under selling pressure for a while.” The People’s Bank of China said it will cut the one-year lending rate by 25 basis points to 4.6% and lower the required reserve ratio by 50 basis points for all banks. The move, which follows the biggest devaluation of the yuan in two decades earlier this month, comes amid signs of decelerating growth for the world’s second-biggest economy.

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Weird moves both in the US and China the morning after.

US Stock Rally Fails; Day Ends With Vicious Selloff (MarketWatch)

In a dramatic reversal to a morning rally, U.S. stocks relinquished all of their opening gains, and then some, to finish with sharp losses. The main indexes began trimming gains in afternoon trade, falling into negative territory ahead of the closing bell as selling accelerated in the final hour. “We would have preferred stocks open flat and rally into the close. Today’s action is not a good news for those who were expecting a V-shaped recovery,” said Michael Antonelli, equity sales trader at R.W Baird & Co. “Unlike the pullback last October, this correction has a serious tone to it — there are serious global growth issues that are not going to be resolved any time soon. We expect the correction to last longer,” Antonelli added.

Trading on Wall Street remained volatile, with the CBOE Volatility index VIX, otherwise known as the Wall Street’s fear gauge, trading at 36, the highest level since 2011. The S&P 500 turned big gains into losses and closed down 25.59 points, or 1.4%, at 1,867.61. Utilities and telecoms saw the biggest losses. The benchmark index is firmly in correction territory, having fallen 12% from its peak reached on May 21. On a%age basis, Tuesday’s move marked the largest swing in the index, before closing negative, since October 2008 during the financial crisis. The Dow Jones Industrial Average which at session highs was up more than 400 points, ended with a loss of 204.91 points, or 1.3%, at 15,666.44. The Nasdaq Composite ended the day down 19.76 points, or 0.4% at 4,506.49.

“The kind of volatility we saw over the past week is normal historically. This is what risk premium means,” said Colleen Supran, a principal at San Francisco-based Bingham, Osborn & Scarborough. “We don’t know whether the correction is over or not, but usually when volatility picks up, it gains momentum,” Supran said.

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And don’t you forget it.

Bubbles Don’t Correct, They BURST! (Harry Dent)

We’re not the least bit unclear about why this unprecedented stimulus has only created mediocre 2% growth and little to no inflation. It’s turned into one big game of “Whack-a-Mole” with the economy. They take one bubble burst, whack it with massive money creation, and then create the next bubble, wait for it to burst, and whack that one too. What they can’t seem to get through their heads is – you can’t keep a bubble going forever! We had the stock bubble in 1987, the tech bubble of early 2000, the real estate bubble in early 2006, another stock bubble into 2007, oil in mid-2008, gold in mid-2011 – and now, a final stock bubble into 2015. They’ve all burst, or are still bursting!

Oil’s down more than 65% from its secondary peak in 2011 and was down 80% from its all-time high in 2008. Gold’s down 40% from its 2011 high. Bubbles typically crash 70% to 80% before they fully deleverage. But when they burst, they usually kick off with a 20% to 50% slide right out the gate – most often within a matter of months. Oil will keep falling – likely to $32 in the next month or so, crushing the fracking industry, and obliterating economies in the Middle East, Russia, and even Canada. At the rate it’s been falling –$38 now – $32 is probably a conservative estimate! We’ll see what John Kilduff, the oil guru for CNBC, says at our Irrational Economic Summit in two weeks. I’ve been predicting for many years that oil will eventually hit $10 to $20. How will the frackers survive that? Simple: They won’t!

China’s stock market will also keep crashing – it’s already down 42%. When it does, its real estate will follow – with devastating consequences to real estate in the U.S. and the globe. And over the next several years, we’ll see the greatest global crash in real estate in modern history. Even if stocks manage one more rally, there’s no avoiding the economic landmines all over. Over the last few trading days, we’ve seen how investors react to poor economic news. The truth is that the markets are finally getting what we’ve been saying about the vicious cycle of China slowing. It hurts commodity prices and crushes emerging countries. No kidding!

When this bubble economy fueled through zero interest rates and endless QE finally does burst, it will only be worse. This whole ordeal has taken longer than we would have initially expected from history. But it was unprecedented that central banks would come together on a global scale to fight a natural bubble-burst cycle with such massive money printing.

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Private debt.

Why China Had To Crash Part 1 (Steve Keen)

In this post I consider the economy in general: I’ll cover asset markets in particular in the next column, but you’ll need to understand today’s post to comprehend the stock and property market dynamics at play. Having said that, the Shanghai Index fell another 7.5% on Tuesday, after losing 8.5% on Monday, and is now down over 45% from its peak—so I’ll try to write the stock-market-specific post by tomorrow. In this post I’ll show, very simply, why a slowdown in the rate of growth of private debt will cause a crisis, if both the level and the rate of change of debt are high at the time of the slowdown. Engineers should find this argument easy to understand and informative, but tedious to read because the logic is so obvious. Economists are probably going to find it almost impossible to comprehend, clearly wrong, and they will probably be enraged by it.

So who should you trust if you’re neither? Firstly, think of how often you successfully trust engineers every time you operate a domestic appliance, hop in your car, drive over a bridge, or fly between continents. Then think how often you have unsuccessfully trusted economists (when I’m asked socially what I do for a living, I describe myself as an “anti-economist”—before I elaborate that I am a Professor of Economics but regard the dominant school of thought in economics as dangerously deluded). Finally, work out which profession you’d rather trust if the two groups disagree—even when we’re talking just economics. OK, preliminaries over. Now for the logic.

Demand is strictly monetary: there is some barter, but in the vast majority of cases, purchases of both goods and assets requires money. And there are two main private sources of money: you can either spend money you already have, or you can borrow from a bank. When you borrow from a bank, you increase your spending power without reducing anybody else’s: the bank records a new asset on one side of its ledger (the debt you now owe to the bank) and a new liability (the additional amount of money in your deposit account). When you spend that borrowed money, it becomes income for someone else. So total expenditure and income in our economy is the sum of the turnover of existing money, plus the change in private debt (I’m leaving the government and external sectors out of the argument for now).

Mainstream economists will already be screaming at this point, because they believe in a fallacious model of money called “Loanable Funds” in which banks are just intermediaries and lending is a transfer of money between savers and lenders. They continue to believe this model even though the Bank of England has said very loudly that it is wrong. Engineers should be waiting for stage two of the argument (the full mathematical argument will be published in the Review of Keynesian Economics in October).

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“If they are worried enough to bet on such a forlorn hope, the rest of us should worry, too.”

Why Worries About China Make Sense (Martin Wolf)

I am neither intelligent enough to understand the behaviour of “Mr Market” — the manic-depressive dreamt up by investment guru, Benjamin Graham — nor foolish enough to believe I do. But he has surely been in a depressive phase. Behind this seem to be concerns about China. Is Mr Market right to be anxious? In brief, yes. One must distinguish between what is worth worrying about and what is not. The decline of the Chinese stock market is in the second category. What is worth worrying about is the scale of the task confronting the Chinese authorities against their apparent inability to deal well with the bursting of a mere stock market bubble. Stock markets have indeed been correcting, with the Chinese market in the lead. Between its peak in June and Tuesday, the Shanghai index fell by 43%.

Yet the Chinese stock market remains 50% higher than in early 2014. The implosion of the second Chinese stock market bubble within a decade still seems unfinished. The Chinese market is not a normal one. Even more than most markets, this is a casino in which each player hopes to find a “greater fool” on whom to offload overpriced chips before it is too late. Such a market is bound to be extremely volatile. But its vagaries should tell one little about the wider Chinese economy. Nevertheless, events in the Chinese market are of wider significance in two related ways. One is that the Chinese authorities decided to stake substantial resources and even their political authority on their (unsurprisingly unsuccessful) effort to stop the bubble’s collapse. The other is that they must have been driven to do so by concern over the economy.

If they are worried enough to bet on such a forlorn hope, the rest of us should worry, too. Nor is this the only way in which the behaviour of the Chinese authorities gives reason for concern. The other was the decision to devalue the renminbi on August 11. In itself this, too, is an unimportant event, with a cumulative devaluation against the US dollar of just 2.8% so far. But it has significant implications. The Chinese authorities want room to slash interest rates, as happened this Tuesday. Again, that underlines their concerns about the health of the economy. Another possible implication is that Beijing might seek a revival of export-led growth. I find this hard to believe, since the global consequences would be devastating.

But it is reasonable at least to worry about this destabilising possibility. A last possible implication is that the Chinese authorities are preparing to tolerate capital flight. If so, the US would be hoist by its own petard. Washington has sought capital account liberalisation by China. It might then have to tolerate a destabilising short-term consequence: a weakening renminbi.

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After the foreign reserves, la deluge!

China Cuts Rates To Stem Crisis, But Doubts Grow On Foreign Reserve Buffer (AEP)

China has injected $100bn of liquidity into the country’s financial system and cut interest rates to records lows in a “shock-and-awe” bid to restore confidence, but worries persist that even this may not be enough to avert a crunch as capital flight surges. The move came as the authorities abandoned their futile efforts to shore up the stock market, allowing the Shanghai Composite index of equities to plummet by a further 7.6pc on Tuesday. It has tumbled by 22pc in the past four trading days. Mark Williams from Capital Economics said Beijing has made a strategic decision to let the stock market find its own level after the fiasco of recent weeks, switching stimulus instead to the broader economy. The central bank (PBOC) cut the reserve requirement ratio (RRR) for lenders by 50 basis points to 18pc, freeing up roughly $100bn of fresh funds.

It also cut the one-year lending rate by 25 points to 4.6pc. Mr Williams said the combined cuts are rare and amount to a dose of “shock and awe” in Chinese policy language. “It is a statement that policymakers mean business,” he said. Wei Yao from Societe Generale said the RRR cut was “absolutely necessary” to stop liquidity drying up and to reverse the passive tightening over recent weeks caused by capital outflows. It may not be enough to add any net stimulus to the economy. “Liquidity conditions are still under immense pressure,” she said. The PBOC has intervened heavily on the exchange markets to defend the yuan, drawing down reserves at a blistering pace. The unwanted side-effect is to tighten monetary policy. It is a textbook case of why it can be so difficult for a country to deploy foreign reserves – however large on paper – in a recessionary downturn.

The great unknown is exactly how much money has been leaving the country since the PBOC stunned markets by ditching its dollar exchange peg on August 11, and in doing so set off a global crash. Some reports suggest that the PBOC has already burned through $200bn in reserves since then. If so, this would require a much bigger cut in the RRR just to maintain a neutral setting. Wei Yao said the strategy of the Chinese authorities is unworkable in the long run. If they keep trying to defend the exchange rate, they will continue to bleed reserves and will have to keep cutting the RRR in lockstep just to prevent further tightening. They may let the currency go, but that too is potentially dangerous. She said China can use up another $900bn before hitting safe limits under the IMF’s standard metric for developing states.

“The PBOC’s war chest is sizeable, but not unlimited. It is not a good idea to keep at this battle of currency stabilisation for too long,” she said. Citigroup has also warned that China’s reserves – still the world’s largest at $3.65 trillion but falling fast – are not as overwhelming as they appear, given the levels of short-term external debt. The border line would be $2.6 trillion. “There are reasons to question the robustness of China’s reserves adequacy. By emerging market standards China’s reserves adequacy is low: only South Africa, Czech Republic and Turkey have lower scores in the group of countries we examined,” it said.

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Epitomizing ‘pushing on a string’.

The Most Surprising Thing About China’s RRR Cut (Zero Hedge)

[..] how does one reconcile China’s reported detachment from manipulating the stock market having failed to prop it up with the interest rate cut announcement this morning. The missing piece to the puzzle came from a report by SocGen’s Wai Yao, who first summarized the total liquidity addition impact from today’s rate hike as follows “the total amount of liquidity injected will be close to CNY700bn, or $106bn based on today’s onshore exchange rate.” And then she explained just why the PBOC was desperate to unlock this amount of liquidity: it had nothing to do with either the stock market, nor the economy, and everything to do with the PBOC’s decision from two weeks ago to devalue the Yuan. To wit:

In perspective, the PBoC may have sold more official FX reserves than this amount since the currency regime change on 11 August.

Said otherwise, SocGen is suggesting that China has sold $106 billion in Treasurys in the past 2 weeks! And there is the punchline. It explains why the PBOC did not cut rates over the weekend as everyone expected, which resulted in a combined 16% market rout on Monday and Tuesday – after all, the PBOC understands very well what the trade off to waiting was, and it still delayed until today by which point the carnage in local stocks was too much. Great enough in fact for China to not have eased if stabilizing the market was not a key consideration.

In other words, today’s RRR cut has little to do with net easing considerations, with the market, or the economy, and everything to do with a China which is suddenly dumping a record amount of reserves as it scrambles to stabilize the Yuan, only this time in the open market!

The battle to stabilise the currency has had a significant tightening effect on domestic liquidity conditions. If the PBoC wants to stabilise currency expectations for good, there are only two ways to achieve this: complete FX flexibility or zero FX flexibility. At present, the latter is also increasingly unviable, since the capital account is much more open. Therefore, the PBoC has merely to keep selling FX reserves until it lets go.

And since it can’t let go now that it has started off on this path, or rather it can but only if it pulls a Swiss National Bank and admit FX intervention defeat, the one place where the PBOC can find the required funding to continue the FX war is via such moves as RRR cuts.

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I don’t see how Bloomberg can provide a viable assessment of China while continuing to quote a 7% GDP growth rate for Q1 2015.

China’s Journey from New Normal to Stock Market Crisis Epicenter (Bloomberg)

“When the wind of change blows, some build walls while others build windmills.” In late January, Chinese Premier Li Keqiang shared that proverb with global leaders in a keynote speech at the World Economic Forum in Davos. China was in windmill mode, committed to structural reform “no matter how difficult.” The “new normal” called for more moderate, consumer-led growth. The financial system would be modernized and the country aimed to shift away from its excessive reliance on debt-fueled, infrastructure-powered growth that had led to industrial overcapacity and an epic credit bubble. Better still, the makeover would be pulled off smoothly: “What I want to emphasize is that regional or systemic financial crisis will not happen in China, and the Chinese economy will not head for a hard landing,” Li said.

Roughly seven months later, China finds itself at the epicenter of a global stock market rout that has vaporized $8 trillion in wealth. Nobody is quite sure whether the world’s No. 2 economy is really growing at 7%, as official figures suggest, or 6% — or actually careening toward a hard landing. Authorities are now quietly rolling out China’s biggest stimulus effort since the 2008 global financial crisis in an effort to put a floor under a weakening economy. Interest rates have been cut to record lows, banks are being encouraged to lend and new infrastructure spending is being rolled out. The confidence Li exuded in January has given way to policy zig-zags and mixed messages about the commitment of President Xi Jinping’s government to reform.

The tale of how Chinese leaders have dealt with decelerating growth, debt pressures, a stock market crash and its sudden currency shift is instructive for investors, executives and policy makers puzzled by the trajectory of this all-important, $10 trillion economy. It didn’t take long for economic trouble to surface. In April, Li met a group of local government officials in Changchun, the capital city of Jilin province that shares a border with North Korea. Li, 60, wanted to take the pulse of the region’s economy – and the news wasn’t encouraging. Known as China’s rust belt due to its state-dominated heavy industry and manufacturing sector, Jilin was among the worst performing economies in the country. It grew at 5.8% during the year’s first three months compared with 7% for the national economy. Neighboring Heilongjiang province grew by 4.8% and Liaoning by 1.9%.

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The ‘real’ media recognize only the ‘real’ experts when it comes to these things. It makes no difference what I’ve said about China through the years. But that does say something about everyone involved.

A Warning on China Seems Prescient: Ken Rogoff (Andrew Ross Sorkin)

[..] Mr. Rogoff is not the first person to identify China as a potential risk. Earlier this year, this column highlighted the views of Henry M. Paulson Jr., the former Treasury secretary and a Sinophile, who said, “Frankly, it’s not a question of if, but when, China’s financial system will face a reckoning and have to contend with a wave of credit losses and debt restructurings.” And the hedge fund manager James Chanos has been sounding the alarm on China for years, recently declaring, “Whatever you might think, it’s worse.” There are, of course, significant political reasons China needs to convince the world and its own citizens that it can manage its convulsing financial markets and slowing economy.

“Financial meltdown leads to a social meltdown, which leads to a political meltdown,” Mr. Rogoff said. “That’s the real fear.” Mr. Rogoff pointed to another factor that has contributed to China’s financial woes. “The crisis in Tianjin fed into the mix,” he said, referring to the deadly explosion on Aug. 12 in the port city, which killed more than 100 people. Mr. Rogoff said the explosion had undermined the credibility of the Chinese government because so many questions remained unanswered, and the response had been inadequate. So does Mr. Rogoff believe that China is headed for a terrible “hard landing” that will lead to a global recession?

Well, despite the market tumult and his persistent warnings, Mr. Rogoff says he believes that the last several weeks have raised the prospects of a meaningful crisis. But with China’s trillions of dollars in reserves, he thinks the country may have sufficient tools to prevent a calamity that spreads across the globe — at least for now. “If you had to bet,” Mr. Rogoff said, “you’d still bet they’d pull it out.”

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All together to the bottom of the pond.

China Meltdown Leaves Global Carmakers Burned (Bloomberg)

When a chemical warehouse in Tianjin, China, exploded this month, destroying some 10,000 parked vehicles, cynics suggested that the disaster might actually be for the best, given the massive glut of unsold cars sitting on Chinese lots. Yet with the turmoil in China’s stock markets continuing to pummel the troubled auto sector, it seems that any true industry correction will require a considerably larger explosion. The situation leaves the world’s biggest automakers torn between their desire for short-term dominance in China and the need for a painful correction to stabilize the world’s largest car market for them. There is no understating the importance of China to the big car producers: With only 106 cars per 1,000 Chinese right now, analysts say demand still has the potential to exceed 35 million units by 2020.

Yet rising inventories have been putting pressure on new-car dealers, resulting in severe price-cutting and open rebellion between the China Automobile Dealers Association and manufacturers late last year. By last month, when China’s stock market began melting down, import car dealers were facing as much as 143 days of supply. With new car sales falling nearly 7% in July and headed toward their first net-negative year in recent memory, it seems likely that oversupply will haunt China’s auto market for the foreseeable future. Global automakers have begun responding by cutting production at existing plants, and Toyota has extended production stoppages at its Tianjin joint venture.

An index of 23 major Chinese automotive joint ventures shows they are operating plants at less than full capacity for the first time ever. (The Chinese government mandates that all foreign investors have domestic joint partners.) The two biggest foreign players, GM and Volkswagen, have also slashed prices in hopes of turbocharging demand. But the effectiveness of these moves will depend on how large of a hole the automakers have dug for themselves. It seems pretty clear that Volkswagen has been overstating its Chinese sales numbers by booking 60,000 to 100,000 vehicles per year as “unsold deliveries.” In the race to dominate Chinese and global sales rankings, automakers seem to have been delivering cars without buyers, potentially creating an oversupply time-bomb.

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And every other party too. Everyone but Xi and Li.

Chinese Central Banker Blames Fed For Market Rout (Xinhua)

A researcher with China’s central bank on Tuesday blamed wide expectation of a Fed rate rise in September for the global market rout. Yao Yudong, head of the People’s Bank of China’s Research Institute of Finance, said the expected Fed rate hike next month had been the “trigger” for the wild market swings. Analysts worried that the Fed rate hike could accelerate the plunge of U.S. stocks and trigger a sell-off of assets worldwide and even a new global credit crisis. Yao said the Fed should remain patient before the U.S. inflation reaches 2%. Earlier, analysts said the devaluation of Chinese currency the Renminbi triggered the plunge and the weakening of bulk commodities and currencies in other countries.

China’s benchmark Shanghai Composite Index sank 7.63% to close at 2,964.97 points on Tuesday. It has lost 26% in the past six trading days. Overnight, the Dow tumbled 588 points, or 3.58%, to 15,871, after sliding more than 1,000 points, or 6% at the opening. Li Qilin, analyst with Minsheng Securities, said the small devaluation of Renminbi could have slightly weighed on stock markets, but it could not explain the huge sell-off in the United States and other countries. Li said the liquidity crunch is a bigger culprit. The global rout has little to do with economic fundamentals and the Asian financial crisis would not be repeated, Capital Economics said in a research note. But it said if the market plunge continues worldwide, the Fed might postpone its rate hike.

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“In fact, they have to be responsible for the market crisis. It’s the authorities trying to act like a referee and a player at the same time.”

Chinese Authorities Escalate Blame Game as Stock Slide Worsens (Bloomberg)

Faced with a renewed stock market slide that has wiped out $5 trillion in trading value, China is again on the prowl for scapegoats. Authorities announced a probe of allegations of market malpractice involving the stocks regulator on Tuesday, while the official Xinhua News Agency called for efforts to “purify” the capital markets. The news service also carried remarks by a central bank researcher attributing the global rout to an expected Federal Reserve rate increase. The Shanghai Composite Index has plunged more than 40% from its peak, after concerns over the Chinese economy helped snap a months-long rally encouraged by state-run media. Authorities have repeatedly blamed market manipulators and foreign forces since the sell off began in June and led officials to launch an unprecedented stocks-support program.

Now, after suspending that program, the administration has embarked on a new round of allegations and fault-finding. “The authorities have been too involved in the stock market and now they’re trying to pass the responsibilities to others,” said Hu Xingdou, an economics professor at the Beijing Institute of Technology. “In fact, they have to be responsible for the market crisis. It’s the authorities trying to act like a referee and a player at the same time.” Police are investigating people connected to the China Securities Regulatory Commission, Citic Securities and Caijing magazine on suspicion of offenses including illegal securities trading and spreading false information, Xinhua reported. They’re probing suspects linked to the CSRC, including a former employee, over insider trading and forging official document stamps, Xinhua said.

Eight people at Citic Securities are suspected of illegal securities trading and the Caijing employees are under investigation for allegedly fabricating and spreading fake stock and futures trading information. Citic Securities said Wednesday in a statement posted to the Shanghai stock exchange that it hasn’t received notice related to the report and said the company’s operating as normal. Caijing in a statement Wednesday confirmed a reporter had been summoned by police. The magazine said it didn’t know the reason and would cooperate with authorities. Meanwhile, Xinhua published a commentary urging stricter enforcement to cleanse the markets. “We have reason to believe that more criminals and their hidden crimes will be exposed,” it said. “We also believe judicial departments will investigate thoroughly and impose punishments no matter who is involved in crimes.”

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Who rules Italy?

Undocumented Italian Government (M5S Senate)

Yesterday, those in command in Europe gave our President of the Council a resounding slap in the face to remind him of his duties: The German Chancellor Angela Merkel, and the French President Francoise Hollande, spoke out at the end of a bilateral meeting discussing immigration and they asked the Italian government to apply “the EU law in relation to asylum.” Thus they were pointing out that the current government is just not doing that. In fact the premier has shown himself to be completely incapable of managing the immigration phenomenon. Merkel and Hollande are asking Italy to “open up new registration centres for immigrants so that it will then be possible to take precise decisions” as regards requests for political asylum.

Whereas, right now, a great number of people arriving in Italy are not being registered and identified, and this is creating an unmanageable situation as well as a really serious danger for internal security. A reprimand that sounds like the Italian government is getting its knuckles rapped, a humiliating gesture that reminds us of those famous little smiles from Ms. Merkel and Mr. Sarkozy in 2011 in relation to the permier at that time, Silvio Berlusconi, and for an Italy that, because of him, was not considered to be a credible interlocutor.
Now, as then, Italy is not considered to be up to the challenge and the premier, just like Berlusconi before him, is being humiliated by France and Germany in press conferences.

On the other hand, the failure of the Italian government is visible to everyone: the management of immigrants has been shown to be a rich business opportunity for the Mafias, as heard in the telephone intercepts of conversations with Salvatore Buzzi and the investigation into “Cara di Mineo”, the biggest immigrant reception centre in the whole of Europe, and even though the M5S has made many requests on this issue, the government has still not given any responses. Thanks to the premier, we find we have another immigration emergency that is uncontrolled to such an extent that it brings shame on the country, and just as at the time of the Berlusconi government, it is berated by the good and the great in Europe.

How long does Italy have to go on being subjected to this sort of humiliation? And when will it finally get the Dublin Regulation re-discussed? Because it’s clear that anyone arriving in Italy needs to be identified, but it’s equally clear that there should then be a quota system to allocate people to different countries in Europe – and this has been forcefully requested by the M5S.

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Division in the ranks.

Europe’s Religious War on Debt Must Be Overcome, French EconMin Says (Bloomberg)

Europe must end its “religious war” over debt, French Economy Minister Emmanuel Macron said. Macron outlined his approach to the euro area’s financial woes at a conference of German diplomats Tuesday, pitting what he termed debt-scolding Calvinists against over-indulgent Catholics. The two factions mirror the perceived rough divide between German-led budget disciplinarians in the north and Europe’s more indebted Mediterranean south. Speaking in Berlin, Macron at first needled the Calvinists with an articulation of a rigid view of debt. “Some people, some member states, failed,” Macron said in English. “They didn’t respect their commitments. They have to pay it till the end of their life.”

On the opposite end are the Catholics, “definitely France is on this side,” with an arguably more sanguine perspective on profligacy, Macron said. “We failed, but we go to church, we explain the situation and we can start another week the day after,” he said. The 21st-century version of the religious schism comes a month after German-backed austerity in the latest Greek crisis prevailed over calls by France and like-minded euro-area member states to ease off on the policy. “Probably, we have to find the balance between these two approaches,” Macron said in the speech, which was punctuated by calls for Franco-German unity, at times in German.

Five centuries after the Protestant Reformation plunged Europe into religious conflict and seven decades after the end of World War II, Macron said the entrenched positions on economic and fiscal policy pose the biggest barrier to genuine unity today. The result is discord at the conference table in Brussels, with Calvinists predestined to favor tighter budgets and Catholics offering forgiveness for rule-breaking — “with this kind of step-by-step approach, finding a solution, but at the last moment,” Macron said. Chancellor Angela Merkel, a Lutheran pastor’s daughter, has consistently advocated a “step-by-step” approach to solving the euro area’s debt crisis focused on austerity and economic overhauls.

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Be nice. Every leader’s first requirement.

What Germany Can Learn From LBJ (Denis Macshane)

The point is not whether this or that particular charge raised against Germany is on target — or justified. What matters is that it is being leveled at all. U.S. Democrats, at the time of their pursuit of the American war in Vietnam, had some reason to feel unjustifiably targeted. After all, it took some chutzpah on the part of France’s de Gaulle to advance all those charges against Washington. It was an act of astounding arrogance on the part of the president in Paris! Vietnam had landed like a hot potato in the lap of the Americans, who — if anything — had stumbled into this French post-colonial minefield far too naïvely. Still, LBJ held the line. He resisted the temptation to give back in kind, an example that Wolfgang Schäuble should take to heart.

LBJ would not have patronized or sneered at Yanis Varoufakis, Schäuble’s former Greek counterpart. That Schäuble did just serves to show that the German finance minister, despite his long experience in politics, still has some lessons to learn. True leaders just don’t retort in kind. For all their obsessing about Greece, Germans need to properly consider larger issues as well. This may still be somewhat unfamiliar territory for them, given that their leadership role in Europe is still a new-ish thing. In that context, consider this latest development: The eurozone’s disastrous handling of the Greek crisis plays right into the hands of Brexit proponents in the U.K.. The heavily anti-EU Chancellor in the early 1990s, Norman Lamont, is now Varoufakis’ new best friend. He regales anybody and everybody in the U.K. with arguments for why the eurozone cannot work.

For more effect, Lamont also reminds everybody of his conviction that the German bullies are back in business (just as they were in 1992, when the U.K. was expelled from the European Exchange Rate Mechanism). Not one to be left behind, Britain’s Labour party may be poised to elect a leader who is very anti-eurozone in discipline. For the first time since 1950, being anti-German is fashionable in British political discourse again. This is not all poor Wolfgang Schäuble’s fault — far from it. All I can say, as a friend of Germany (and of the Greek people), as well as someone who does not want the U.K. to quit Europe, is that I am very worried. I find no language emanating from Berlin that is reassuring. And yet, reassuring others in moments of crisis, and showing at least a modicum of magnanimity toward those in serious trouble, is precisely what a leading nation must do.

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“If it is true that elections cannot change anything, we should be honest to our citizens and tell them that. ”

Our Athens Spring (Yanis Varoufakis)

When in my first Eurogroup meeting, back in February, I suggested to finance ministers a compromise between the existing Troika Austerity Program and our newly elected government’s reform agenda, Michel Sapin took the floor to agree with me – to argue eloquently in favour of common ground between the past and the future, between the Troika program and our new government’s election manifesto which the Greek people had just endorsed. Germany’s finance minister immediately intervened: “Elections cannot change anything!”, he said. “If every time there is an election the rules change, the Eurozone cannot function.”

Taking the floor again, I replied that, given the way our Union was designed (very, very badly!), maybe Dr Schauble had a point. But I added: “If it is true that elections cannot change anything, we should be honest to our citizens and tell them that. Maybe we should amend Europe’s Treaties and insert into them a clause that suspends the democratic process in countries forced to borrow from the Troika. That suspends elections till the Troika decides they can be held again. Why should we put our people through the rituals of costly elections if elections cannot change anything? But”, I asked my fellow ministers, “is this what Europe has come to colleagues? Is this what our people have signed up to?” Come to think of it, this admission would be the best gift ever to the Communist Party of China which also believes elections are a dangerous complication getting in the way of efficient government.

Of course they are wrong. As Churchill said, democracy is a terrible system. But it is the best of all alternatives, in terms of its long-term economic efficiency too. A frozen silence followed for a few seconds in the Eurogroup. No one, not even the usually abrasive Mr Djisselbloem, could find something to say until some Eastern European colleague broke the silence with another incantation from the Troika’s Austerity Book of Psalms. From the corner of my eye I could see Michel Sapin looking desolate. I was reminded of something he had said to me in Paris, when we first met at his office: “France is not what it used to be.”

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Here’s some advice: Run for your lives, House of Saud.

Saudi Arabia Seeks Advice on Budget Cuts in Wake of Oil Crash (Bloomberg)

Saudi Arabia is seeking advice on how to cut billions of dollars from next year’s budget because of the slump in crude prices, according to two people familiar with the matter. The government is working with advisers on a review of capital spending plans and may delay or shrink some infrastructure projects to save money, the people said, asking not to be identified as the information is private. The government is in the early stages of the review and could look at cutting investment spending, estimated to be about 382 billion riyals ($102 billion) this year, by about 10% or more, the people said. Current spending on areas such as public sector salaries wouldn’t be affected, the people said.

The Arab world’s largest economy is expected to post a budget deficit of almost 20% of gross domestic product this year, according to the International Monetary Fund. With income from oil accounting for about 90% of revenue, a more than 50% drop in prices in the past 12 months has put pressure on the nation’s finances. The country has raised at least 35 billion riyals from local bond markets this year, the first time it has issued securities with a maturity of over 12 months since 2007. “This is a response to the lower oil prices but also to the fact that capital spending has been growing strongly over the past few years,” Fahad Alturki, chief economist and head of research at Jadwa Investment said.

“Although a cut in capital spending will impact economic growth, the non-oil sector is not as reliant on government spending as it was 20 or 30 years ago.” Capital investment accounts for less than half the government’s outgoings, with current spending estimated at 854 billion riyals, according to a report issued by Samba Financial. Saudi Arabia needs “comprehensive energy price reforms, firm control of the public sector wage bill, greater efficiency in public sector investment,” the IMF said this month. “The sharp drop in oil revenues and continued expenditure growth would result in a very large fiscal deficit this year and over the medium term, eroding the fiscal buffers built up over the past decade.”

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Blame games.

Balkan States Snub Greece In Talks On Immigration (Kath.)

Greece has been left out of an unfolding campaign by Balkan countries to forge a coordinated response to a torrent of migrants and asylum seekers fleeing war and poverty in the Middle East and Africa, Kathimerini understands. Meanwhile, although officials in Brussels admit that debt-wracked Greece, on the European Union’s external frontier, has had to shoulder an unprecedented burden, sources note overall frustration over the government’s failure to implement an action plan to deal with the problem. Greece may have to face an EU fine over the failure, the same source said. During a visit to the Former Yugoslav Republic of Macedonia (FYROM), Austrian Foreign Minister Sebastian Kurz called for “coordinated action across Europe” while urging Greece to control its borders more effectively.

“It’s also the fault of Greece if there is no support for the refugees there,” the Austrian said. Also speaking from Skopje, Bulgarian Foreign Minister Daniel Mitov pledged his country’s support for FYROM in dealing with mounting pressure while calling for cooperation between the states of the region – but he did not name Greece. Thinly disguised criticism of Athens came from FYROM Foreign Minister Mitko Cavkov, too, who noted it was “absurd that the problem is caused by an EU member-state.” Cavkov said that interior ministers from FYROM, Austria, Hungary and Serbia will soon meet in Skopje to decide further action. In an interview with German newspaper Handelsblatt, Serbian Prime Minister Aleksandar Vucic said Greek authorities “are unwilling to record asylum seekers because in that way Greece goes down as their EU entry point.”

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It’s unworthy of Merkel more than anything else. No leadership in sight.

Merkel Tells Germans Refugee Crisis Is Unworthy of Europe (Bloomberg)

German Chancellor Angela Merkel said the region’s refugee crisis is unworthy of European values and will require a bigger effort to aid those seeking safe haven. At a town-hall meeting in the western city of Duisburg, Merkel said Tuesday that Germany must ease the process for setting up asylum centers and pledged more financial backing to tackle the crisis. Earlier, her spokesman said Merkel will visit a refugee shelter in Heidenau, the eastern German town near Dresden where anti-immigrant riots erupted last week. “Europe is facing a situation that’s unworthy of Europe,” Merkel said. “The federal government will need to strengthen its support for states and municipalities. We can’t just keep going in normal mode.”

Merkel and French President Francois Hollande, the leaders of Europe’s two biggest economies, pledged on Monday a united response to the influx, saying the refugees need to be distributed more equally among the 28 European Union countries. Hollande said Europe is facing “exceptional circumstances.” Merkel didn’t cite an amount for extra spending needed for Germany to deal with an expected 800,000 fleeing war and poverty who are expected to arrive this year. The cost may be €10 billion, compared to €2 billion in 2014, the Die Zeit newspaper has estimated.

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Aug 262015
 
 August 26, 2015  Posted by at 9:23 am Finance Tagged with: , , , , , , ,  


Russell Lee Hollywood, California. Used car lot. 1942

Look, it’s very clear where I stand on China; I’ve written a lot about it. And not just recently. Nicole Foss, who fully shares my views on the topic, reminded me the other day of a piece I wrote in July 2012, named Meet China’s New Leader : Pon Zi. China has been a giant lying debt bubble for years. Much if not most of its growth ‘miracle’ was nothing but a huge credit expansion, with an outsize role for the shadow banking system.

A lot of this has remained underreported in western media, probably because its reporters were afraid, for one reason or another, to shatter the global illusion that the western financial fiasco could be saved from utter mayhem by a country producing largely trinkets. Even today I read a Bloomberg article that claims China’s Q1 GDP growth was 7%. You’re not helping, boys, other than to keep a dream alive that has long been exposed as false.

China’s stock markets have a long way to fall further yet. This little graph from the FT shows why. The Shanghai Composite closed down another 1.27% today at 2,927.29 points. If it ‘only’ returns to its -early- 2014 levels, it has another 30% or so to go to the downside. If inflation correction is applied, it may fall to 1,000 points, for a 60% or so ‘correction’. If we move back 10 or 20 years, well, you get the picture.

That is a bursting bubble. Not terribly unique or mind-blowing, bubbles always burst. However, in this instance, the entire world will be swept out to sea with it. More money-printing, even if Beijing would attempt it, no longer does any good, because the Politburo and central bank aura’s of infallibility and omnipotence have been pierced and debunked. Yesterday’s cuts in interest rates and reserve requirement ratios (RRR) are equally useless, if not worse, if only because while they may provide a short term additional illusion, they also spell loud and clear that the leadership admits its previous measures have been failures. Emperor perhaps, but no clothes.

Every additional measure after this, and there will be many, will take off more of the power veneer Xi and Li have been ‘decorated’ with. Zero Hedge last night quoted SocGen on the precisely this topic: how Beijing painted itself into a corner on the RRR issue, while simultaneously spending fortunes in foreign reserves.

The Most Surprising Thing About China’s RRR Cut

[..] how does one reconcile China’s reported detachment from manipulating the stock market having failed to prop it up with the interest rate cut announcement this morning. The missing piece to the puzzle came from a report by SocGen’s Wai Yao, who first summarized the total liquidity addition impact from today’s rate hike as follows “the total amount of liquidity injected will be close to CNY700bn, or $106bn based on today’s onshore exchange rate.” And then she explained just why the PBOC was desperate to unlock this amount of liquidity: it had nothing to do with either the stock market, nor the economy, and everything to do with the PBOC’s decision from two weeks ago to devalue the Yuan. To wit:

In perspective, the PBoC may have sold more official FX reserves than this amount since the currency regime change on 11 August.

Said otherwise, SocGen is suggesting that China has sold $106 billion in Treasurys in the past 2 weeks! And there is the punchline. It explains why the PBOC did not cut rates over the weekend as everyone expected, which resulted in a combined 16% market rout on Monday and Tuesday – after all, the PBOC understands very well what the trade off to waiting was, and it still delayed until today by which point the carnage in local stocks was too much. Great enough in fact for China to not have eased if stabilizing the market was not a key consideration.

In other words, today’s RRR cut has little to do with net easing considerations, with the market, or the economy, and everything to do with a China which is suddenly dumping a record amount of reserves as it scrambles to stabilize the Yuan, only this time in the open market!

The battle to stabilise the currency has had a significant tightening effect on domestic liquidity conditions. If the PBoC wants to stabilise currency expectations for good, there are only two ways to achieve this: complete FX flexibility or zero FX flexibility. At present, the latter is also increasingly unviable, since the capital account is much more open. Therefore, the PBoC has merely to keep selling FX reserves until it lets go.

And since it can’t let go now that it has started off on this path, or rather it can but only if it pulls a Swiss National Bank and admit FX intervention defeat, the one place where the PBOC can find the required funding to continue the FX war is via such moves as RRR cuts.

Ambrose Evans-Pritchard, too, touches on the subject of China’s free-falling foreign reserves.

China Cuts Rates To Stem Crisis, But Doubts Grow On Foreign Reserve Buffer

The great unknown is exactly how much money has been leaving the country since the PBOC stunned markets by ditching its dollar exchange peg on August 11, and in doing so set off a global crash. Some reports suggest that the PBOC has already burned through $200bn in reserves since then. If so, this would require a much bigger cut in the RRR just to maintain a neutral setting. Wei Yao said the strategy of the Chinese authorities is unworkable in the long run.

If they keep trying to defend the exchange rate, they will continue to bleed reserves and will have to keep cutting the RRR in lockstep just to prevent further tightening. They may let the currency go, but that too is potentially dangerous. She said China can use up another $900bn before hitting safe limits under the IMF’s standard metric for developing states.

“The PBOC’s war chest is sizeable, but not unlimited. It is not a good idea to keep at this battle of currency stabilisation for too long,” she said. Citigroup has also warned that China’s reserves – still the world’s largest at $3.65 trillion but falling fast – are not as overwhelming as they appear, given the levels of short-term external debt. The border line would be $2.6 trillion. “There are reasons to question the robustness of China’s reserves adequacy. By emerging market standards China’s reserves adequacy is low: only South Africa, Czech Republic and Turkey have lower scores in the group of countries we examined,” it said.

It is a dangerous game they play, that much should be clear. And you know what China bought those foreign reserves with in the first place? With freshly printed monopoly money. Which is the same source from which the Vinny the Kneecapper shadow loans originated that every second grandma signed up to in order to purchase ghost apartments and shares of unproductive companies.

And that leads to another issue I’ve touched upon countless times: I can’t see how China can NOT descend into severe civil unrest. The government at present attempts to hide its impotence and failures behind the arrest of all sorts of scapegoats, but Xi and Li themselves should, and probably will, be accused at some point. They’ve gambled away a lot of what made their country function, albeit not at American or European wealth levels.

If the Communist Party had opted for what is sometimes labeled ‘organic’ growth (I’m not a big afficionado of the term), instead of ‘miracle’ Ponzi ‘growth’, if they had not to such a huge extent relied on Vinny the Kneecapper to provide the credit that made everything ‘grow’ so miraculously, their country would not be in such a bind. It would not have to deleverage at the same blinding speed it ostensibly grew at since 2008 (at the latest).

There are still voices talking about the ‘logical’ aim of Beijing to switch its economy from one that is export driven to one in which the Chinese consumer herself is the engine of growth. Well, that dream, too, has now been found out to be made of shards of shattered glass. The idea of a change towards a domestic consumption-driven economy is being revealed as a woeful disaster.

And that has always been predictable; you can’t magically turn into a consumer-based economy by blowing bubbles first in property and then in stocks, and hope people’s profits in both will make them spend. Because the whole endeavor was based from the get-go on huge increases in debt, the just as predictable outcome is, and will be even much more, that people count their losses and spend much less in the local economy. While those with remaining spending power purchase property in the US, Britain, Australia. And go live there too, where they feel safe(r).

I fear for the Chinese citizen. Not so much for Xi and Li. They will get what they deserve.