Feb 082017
 
 February 8, 2017  Posted by at 9:21 am Finance Tagged with: , , , , , , , , , ,  


Dorothea Lange Rear window tenement dwelling, 133 Avenue D, NYC 1936

This Is How Out-Of-Whack US Trade Relationships Really Are (WS)
John Kelly, Homeland Security Chief, Says Travel Ban Rolled Out Too Quickly (WSJ)
Trump Travel Ban: Judges Skeptical About Arguments On Executive Order (G.)
‘Trump Makes Sense To A Grocery Store Owner’ – Taleb (Hindu)
Do Not Let Elliott Abrams Anywhere Near The State Department (Rand Paul)
EU Faces Crisis As IMF Warns Greek Debts Are On ‘Explosive’ Path (Tel.)
Greece’s Debt Costs Rise Sharply As Worries Grow Over IMF Role (G.)
Don’t Sell the Euro Short. It’s Here to Stay. (Eichengreen)
Money Is Pouring Out Of China, And The Government Can’t Stop It (R.)
China’s Reserves Approach Breaking Point As Another Devaluation Looms (BBG)
Russia Shows Why China Should Just Stop Burning Up Its Reserves (BBG)
Cracks Are Appearing In Australia’s Trillion-Dollar Property Debt Pile (BBG)
Putin Orders Russian Air Force To Prepare For ‘Time Of War’ (Ind.)
Controversial Dakota Pipeline To Go Ahead After Army Approval (R.)
Why Should A Libertarian Take Universal Basic Income Seriously? (Dolan)

 

 

“It never was a big deal because growing imports were portrayed as healthy demand in the US. The world loved it.”

This Is How Out-Of-Whack US Trade Relationships Really Are (WS)

2016 marked another banner year for US trade, a banner year largely for other countries that at the initiative of Corporate America, whose supply chains weave all over the world, managed to load the US up with their merchandise. According to the Commerce Department’s report today, the US trade deficit in goods and services rose to $502.3 billion in 2016, the highest in four years. Exports of goods and services fell $52 billion in 2016 year-over-year to $2.21 trillion, and imports fell $50 billion to $2.71 trillion. That both exports and imports fell is a sign of weakening world trade, lackluster demand globally, and lousy economic growth in the US, where GDP in 2016 inched up by a miserable 1.6%, matching the growth rate of 2011, both having been the lowest growth rates since 2009.

Exports add to the economy and to GDP; imports subtract from GDP. And it’s a big number: the trade deficit in 2016 amounted to 2.7% of GDP. In overly simplified, scribbled-on-a-napkin-after-the-third-beer math: had trade been balanced, with imports about equal to exports, GDP growth would have been 2.7 percentage points higher in 2016. So 4.3%! OK, we’re dreaming. But that’s how a massive trade deficit whacks the economy. The overall trade balance is composed of trade in goods and services. It used to be years ago when the trade deficit in goods began to balloon that it was no big deal because America was exporting innovative services, such as complex financial services, and they would make up for the deficit in old-fashioned goods.

They did lessen the pain for a little while, and then they didn’t. And soon, even the overall US trade deficit ballooned, but it was no big deal because soaring imports showed that the US economy was healthy and brimming with consumer demand. Year after year, we heard this from economists and politicians. Beyond that, apathy was palpable. No one cared. It’s just the way it is. Dreaming of balanced trade was like so 1980s or whatever. Meanwhile, Corporate America was fine-tuning its game of offshoring production and importing from cheaper countries. The entire business model of Wal-Mart depends on it. US supply chains wind all over the globe, in search of the lowest production costs, whether it’s consumer gadgets or automotive components. It never was a big deal because growing imports were portrayed as healthy demand in the US. The world loved it.

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Kelly’s a straight shooter. Wonder how long he can last.

John Kelly, Homeland Security Chief, Says Travel Ban Rolled Out Too Quickly (WSJ)

Homeland Security Secretary John Kelly told Congress the Trump administration should have taken more time to inform Congress before implementing its controversial executive order temporarily blocking entry of people from seven nations. “The thinking was to get it out quick so potentially people coming here to harm us would not take advantage” of a delay, Mr. Kelly told the House Homeland Security Committee on Tuesday. In his first congressional appearance as a cabinet member, Mr. Kelly offered a forceful defense of the order, saying it wasn’t a ban on Muslims as critics have charged, but a “temporary pause” on immigrants and visitors from countries about whose residents the U.S. can’t access solid information. He sought to take responsibility for the chaotic rollout, saying the confusion was “all on me.”

“Going forward, I would have certainly taken some time to inform the Congress and certainly that’s something I’ll do in the future,” he said. The Wall Street Journal and others have reported that Mr. Kelly had little input in the order or its rollout, which was directed by the White House. The order, issued on the afternoon of Friday, Jan. 27, resulted in initial confusion and confrontation at airports around the country, as some travelers were detained for hours or sent away and protesters gathered at terminals to denounce the new rules. A federal court in Seattle temporarily put the order on hold on Friday, citing potential legal concerns. That action prompted President Donald Trump to question the judge’s credentials and say he could be to blame in the event of a terrorist attack. Mr. Kelly waded into that debate on Tuesday, likening judges to academics removed from on-the-ground realities.

“I have nothing but respect for judges, but in their world it’s a very academic, very almost in-a-vacuum discussion, and of course, in their courtrooms, they are protected by people like me, so they can have those discussions,” he said. “They live in a different world than I do. I’m paid to worst-case it, he’s paid to, in a very academic environment, make a call.” [..] Committee chairman Rep. Michael McCaul (R., Texas) said he backed the executive order, which a court order has put on hold. But he said it was poorly implemented. He said some U.S. permanent residents who are citizens of the targeted countries were initially not allowed to return to the country, while foreigners who aided the U.S. military and students attending American schools were “trapped overseas.”

“I applaud you for quickly correcting what I consider errors,” Mr. McCaul said. The congressman said he had suggested the approach President Donald Trump took when Mr. Trump was a candidate. His goal, Mr. McCaul said, was to help reframe the proposal from what Mr. Trump initially described as a Muslim ban, an approach he thought would have been unconstitutional.

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It’s great to have the courts discuss this. That’s where it belongs. If Trump can win, we will know just how broad US presidents’ power had become, before Trump. And we can judge whether we like things that way. He either has the authority, or he doesn’t. That should be clear from the law, not a matter of taste or preference.

Trump Travel Ban: Judges Skeptical About Arguments On Executive Order (G.)

A lawyer seeking to reinstate Donald Trump’s travel ban was grilled by a panel of three judges on Tuesday, facing questions over the president’s inflammatory campaign promise to close America’s borders to Muslims. August Flentje, of the Department of Justice, was put on the spot over why seven Muslim-majority countries had been targeted in Trump’s executive order, as well as past statements made by the president and his ally Rudy Giuliani. The hour-long hearing before the San Francisco-based ninth circuit court of appeals was the most significant legal battle yet over the ban. The judges said they would try to deliver a ruling as soon as possible but gave no indication of when. Flentje, reportedly called up for the hearing at short notice, asked the judges for a stay on the temporary restraining order placed on Trump’s travel ban by district court judge James Robart last week.

[..] During a hearing conducted by telephone between various locations, Flentje described the ban as putting a “temporary pause” on travelers from countries that “pose special risk”. He said the seven countries targeted had “significant terrorist presence” or were “safe havens for terrorism”. Trump’s actions were “plainly constitutional”, Flentje argued, as the president sought to strike a balance between welcoming visitors and securing the nation of the risk of terrorism. “The president has struck that balance,” he said. “The district court order upset that balance.” Flentje argued that the district court restraining order was too broad, giving rights to people “who have never been to the United States” and “really needs to be narrowed”. Judge Michelle Friedland asked: “Are you arguing then that the president’s decision in the regard is unreviewable?”

Flentje replied: “Yes, there are obviously constitutional limitations.” But Judge William Canby pointed out that people from the seven countries already could not come into the country without a visa and were subject to “the usual investigations”. How many of these people had committed terrorist attacks in the US, he wondered, before pointing out it was none. Flentje pointed to Congress’s determination that they were countries of concern, an argument that Judge Richard Clifton dismissed as “pretty abstract”. Trying to regain ground, the lawyer said: “Well, I was just about to at least mention a few examples. There have been a number of people from Somalia connected to al-Shabaab [an Islamist militant group] who have been convicted in the United States.” Friedland, who was appointed by Barack Obama, interjected: “Is that in the record? Can you point us to what, where in the record you are referring?” Flentje admitted: “It is not in the record.”

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“..if you went to the local souk [bazaar] in Aleppo and brought one of the retail shop owners, he would do the same thing Trump is doing. Like making a call to Boeing and asking why are we paying so much..”

‘Trump Makes Sense To A Grocery Store Owner’ – Taleb (Hindu)

In Skin in the Game, you seem to build on theories from The Black Swan that give a sense of foreboding about the world economy. Do you see another crisis coming? Oh, absolutely! The last crisis [2008] hasn’t ended yet because they just delayed it. [Barack] Obama is an actor. He looks good, he raises good children, he is respectable. But he didn’t fix the economic system, he put novocaine [local anaesthetic] in the system. He delayed the problem by working with the bankers whom he should have prosecuted. And now we have double the deficit, adjusted for GDP, to create six million jobs, with a massive debt and the system isn’t cured. We retained zero interest rates, and that hasn’t helped. Basically we shifted the problem from the private corporates to the government in the U.S. So, the system remains very fragile.

You say Obama put novocaine in the system. How will the Trump administration be able to address this? Of course. The whole mandate he got was because he understood the economic problems. People don’t realise that Obama created inequalities when he distorted the system. You can only get rich if you have assets. What Trump is doing is put some kind of business sense in the system. You don’t have to be a genius to see what’s wrong. Instead of Trump being elected, if you went to the local souk [bazaar] in Aleppo and brought one of the retail shop owners, he would do the same thing Trump is doing. Like making a call to Boeing and asking why are we paying so much.

You’re seen as something of an oracle, given that you saw the 2008 economic crash coming, you predicted the Brexit vote, the outcome of the Syrian crisis. You said the Islamic State would benefit if Bashar al-Assad was pushed out and you predicted Trump’s win. How do you explain it? Not the Islamic State, but al-Qaeda at the time, and I said the U.S. administration was helping fund them. See, you have to have courage to say things others don’t. I was lucky financially in life, that I didn’t need to work for a living and can spend all my time thinking. When Trump was running for election, I said what he says makes sense to a grocery store owner. Because the grocery guy can say Trump is wrong because he can see where he is wrong. But with Obama, he can’t understand what he’s saying, so the grocery man doesn’t know where he is wrong.

Is it a choice between dumbing down versus over-intellectualisation, then? Exactly. Trump never ran for archbishop, so you never saw anything in his behaviour that was saintly, and that was fine. Whereas Obama behaved like the Archbishop of Canterbury, and was going to do good but people didn’t feel their lives were better. As I said, if it was a shopkeeper from Aleppo, or a grocery store owner in Mumbai, people would have liked them as much as Trump. What he says makes common sense, asking why are we paying so much for this rubbish or why do we need these complex taxes, or why do we want lobbyists. You can call Trump’s plain-speaking what you like. But the way intellectuals treat people who don’t agree with them isn’t good either. I remember I had an academic friend who supported Brexit, and he said he knew what it meant to be a leper in the U.K. It was the same with supporting Trump in the U.S.

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Amen to that.

Do Not Let Elliott Abrams Anywhere Near The State Department (Rand Paul)

I hope against hope that the rumors are wrong and that President Donald Trump will not open the State Department door to the neocons. Crack the door to admit Elliott Abrams and the neocons will scurry in by the hundreds. Neoconservative interventionists have had us at perpetual war for 25 years. While President Trump has repeatedly stated his belief that the Iraq War was a mistake, the neocons (all of them Never-Trumpers) continue to maintain that the Iraq and Libyan Wars were brilliant ideas. These are the same people who think we must blow up half the Middle East, then rebuild it and police it for decades. They’re wrong and they should not be given a voice in this administration.

One of the things I like most about President Trump is his acknowledgement that nation building does not work and actually works against the nation building we need to do here at home. With a $20 trillion debt, we don’t have the money to do both. I urge him to keep that in mind this week when he meets with Elliott Abrams, the rumored pick for second in command to the Secretary of State. Abrams would be a terrible appointment for countless reasons. He doesn’t agree with the president in so many areas of foreign policy and he has said so repeatedly; he is a loud voice for nation building and when asked about the president’s opposition to nation building, Abrams said that Trump was absolutely wrong; and during the election he was unequivocal in his opposition to Donald Trump, going so far as to say, “the chair in which Washington and Lincoln sat, he is not fit to sit.”

Why then would the president trust him with the second most powerful position in the State Department? Abrams was equally dismissive throughout Trump’s entire candidacy. As a Never-Trumper, he repeatedly said he would neither vote for Clinton nor Trump. He likened the choice to the one the nation faced of McGovern vs. Nixon. I voted for Rex Tillerson for secretary of state because I believe him to have a balanced approach to foreign policy. My hope is that he will put forward a realist approach. I don’t see Abrams as part of any type of foreign policy realism. Elliott Abrams is a neoconservative too long in the tooth to change his spots, and the president should have no reason to trust that he would carry out a Trump agenda rather than a neocon agenda. But just as importantly, Congress has good reason not to trust him – he was convicted of lying to Congress in his previous job.

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It’s not only a broken record, it’s a really bad song too.

EU Faces Crisis As IMF Warns Greek Debts Are On ‘Explosive’ Path (Tel.)

The EU faces a looming crisis which could threaten the sustainability of the eurozone as the IMF has warned Greece’s debts are on an “explosive” path despite years of attempted austerity and economic reforms. Global financiers at the IMF are increasingly unwilling to fund endless bailouts for the eurozone’s most troubled country, passing more of the burden onto the EU – at a time when Germany does not want to keep sending cash to Athens. The assessment opens up a fresh split with Europe over how to handle Greece’s massive public debts, as the IMF called on Europe to provide “significant debt relief” to Greece – despite Greece’s EU creditors ruling out any further relief before the current rescue programme expires in 2018. Jeroen Dijsselbloem, the Eurogroup President repeated that position last night, saying there would be no Greek debt forgiveness and dismissing the IMF assessment of Greece’s growth prospects as overly pessimistic.

“It’s surprising because Greece is already doing better than that report describes,” said Mr Dijsselbloem, who chairs meetings of eurozone finance ministers, adding that Greece was on track for a “pretty good recovery at the moment”. The renewed divisions over how to handle the Greek debt crisis has raised fresh questions over whether the IMF will be a full participant in the next phase of the Greek rescue – a key condition for backing from the German and Dutch parliaments. As Angela Merkel, the German chancellor, fights a tough reelection battle, Germany is particularly reluctant to send funds directly to Greece, with populist parties in Germany arguing that the payments amount to an unfair bailout from hard-working Germans to less deserving Greeks.

The IMF split came as Mrs May last night comfortably defeated a Brexit rebellion in the Commons as MPs rejected Labour plans to give Parliament a “meaningful” vote on the terms of a final deal. Despite suggestions that up to 30 Tory MPs could defy their party whip and back the Labour amendment just seven chose to do so. Mrs May stemmed the rebellion after the Government pledged to hold a vote in Parliament on the deal before it is sent to the European Parliament. However ministers said that MPs would have to “take or leave it”, meaning that Mrs May is prepared to walk away from Europe without a deal if Parliament rejects it. A fresh crisis over Greek debt could be triggered as soon as in July when Greece is due to repay some €7bn to its creditors – money the country cannot pay without a fresh injection of bailout cash.

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As they do the same thing again and again, things only get worse. And then they have to do it again.

Greece’s Debt Costs Rise Sharply As Worries Grow Over IMF Role (G.)

Fresh worries over Greece’s debts have pushed the country’s borrowing costs sharply higher amid renewed insistence from Athens it will not swallow further austerity demands from international lenders. The yields on two-year government bonds jumped to their highest level since last June and went above 10% to reflect growing anxiety on financial markets over Greece’s ability to keep up to date with debt repayments. Yields on 10-year government bonds were also higher at above 7.8%, the highest close since November. The renewed focus on Greece’s debts came as the International Monetary Fund revealed its board was split over how far spending cuts in the country should go, raising fresh doubts over its participation in rescue plans for the struggling Greek economy.

The fund has made repeated warnings that Greece’s debt burden of about €330bn is unsustainable despite the government pushing through spending cuts and tax increases that have badly hit popularity ratings for the government of prime minister Alexis Tsipras. The IMF declined to join other international lenders – the ECB and the EU – in funding the country’s third bailout, agreed in August 2015, and it is currently deciding whether to take part in a new chunk of rescue funds needed by mid-2018. Germany has warned the IMF’s involvement is crucial if support for Greece is to continue. News of a split on the IMF board raised new questions over whether Germany will see its wish granted for the fund joining the next rescue. In its latest annual review of the Greek economy, the IMF revealed that its board members were in disagreement over whether Athens should enforce even more austerity to satisfy its lenders.

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Barry Eichengreen basically says the euro will stay because of fear (of the consequences of leaving). That doesn’t seem a very stable foundation.

Don’t Sell the Euro Short. It’s Here to Stay. (Eichengreen)

Two forms of glue hold the euro together. First, the economic costs of break-up would be great. The minute investors heard that Greece was seriously contemplating reintroducing the drachma with the purpose of depreciating it against the euro, or against a “new Deutsche mark,” they would wire all their money to Frankfurt. Greece would experience the mother of all banking crises. The “new Deutsche mark” would then shoot through the roof, destroying Germany’s export industry. More generally, those predicting, or advocating, the euro’s demise tend to underestimate the technical difficulties of reintroducing national currencies. They suggest briefly imposing capital controls to prevent holders of euros from fleeing while the new money, electronic or other, is quickly put in place.

This ignores the complexity of actually removing controls once they are adopted. Recall the experiences of Iceland and Cyprus, which required years, not days, to completely remove their “temporary” controls. The proponents advocate quickly restructuring the debts of banks, firms and households with euro-denominated liabilities, without realizing that one person’s debt is another’s asset. Moreover, because borrowing and lending occurs across borders, agreement on debt restructuring will require lengthy negotiation between countries if the country abandoning the euro is to avoid harsh retaliatory measures. This process would make the U.K.’s Brexit negotiations look like a stroll in the park.

For southern European countries, there is an additional complication. They would have a massive bill to the ECB, and by implication to the other member states that are shareholders in the ECB, in settlement of their so-called Target2 balances, liabilities incurred as a result of cross-border payments in central bank money. ECB President Mario Draghi recently made clear that countries abandoning the euro would be presented with this bill. For Italy, to pick a case not entirely at random, those balances currently stand at €360 billion ($383 billion), or approximately €6,000 for every man, woman and child. That’s about 10 times on a per capita basis what the U.K. likely owes the EU as alimony for its divorce. And if a country like Italy chooses to default on its Target2 obligations, it will be unceremoniously kicked out of the EU.

This brings us to the second form of glue: namely that European countries, Britain aside, still attach very considerable value to EU membership. That membership matters even more now that that President Trump has cast NATO into doubt and the United States is no longer seen as a reliable ally. The example of U.K. Prime Minister Theresa May, reduced to cozying up to Mr. Trump and Turkish Prime Minister Recep Tayyip Erdogan, is not one that many other European politicians care to follow. In a 2007 article, I too made a bet — namely that the euro, while flawed, wasn’t going away. I argued that it is the roach motel of currencies. Like the Hotel California of the song: you can check in, but you can’t check out. For 10 years I’ve been right. To be sure, past performance is no guarantee of future returns, as any prudent investor knows. Even so, unlike ambassador-in-waiting Malloch, I continue to think that shorting the euro is bad advice.

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And this is before Trump.

Money Is Pouring Out Of China, And The Government Can’t Stop It (R.)

China’s foreign exchange reserves unexpectedly fell below the closely watched $3 trillion level in January for the first time in nearly six years, even as authorities tried to curb outflows by tightening capital controls. Reserves fell by $12.3 billion in January to $2.998 trillion, compared with a drop of $41 billion drop in December. Economists polled by Reuters had forecast forex reserves would fall by about $10.5 billion to $3 trillion. While the $3 trillion mark is not seen as a firm “line in the sand” for Beijing, concerns are swirling in global financial markets over the speed at which the country is depleting its ammunition to defend the currency and staunch capital outflows.

Some analysts fear a heavy and sustained drain on reserves could prompt Beijing to devalue the currency. The yuan fell 6.6% against the rising dollar in 2016, its biggest annual drop since 1994. For 2016 as a whole, China burned through nearly $320 billion of reserves, on top of a record drop of $513 billion in 2015. The yuan has found some respite in recent weeks as the dollar retreated, helped also by recent steps to curb capital outflows. But analysts expect downward pressure on the yuan to resume, especially if the U.S. continues to raise interest rates, which would likely trigger fresh capital outflows from emerging economies such as China and test its enhanced capital controls.

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“What was presented as a gradual depreciation of the yuan last year was in reality a significant 6% weakening of the currency versus the dollar as China’s domestic woes mounted. A collapse of the crawling peg could lead to yuan depreciation that is three times as large.”

China’s Reserves Approach Breaking Point As Another Devaluation Looms (BBG)

In his first few weeks in office, President Donald Trump has ordered the U.S. to withdraw from the Trans-Pacific Partnership and confirmed his intention to renegotiate the North American Free Trade Agreement. The consensus is that it won’t be long before he turns his focus to China, which he calls a currency manipulator. China can weather such criticism, for now. But if Trump’s threats of trade sanctions and 45% tariffs become real, the economic impact for the world’s second-biggest economy would be meaningful and could upend financial markets, potentially leading to a global recession. With economic growth already slowing and capital fleeing the nation, China’s $11 trillion economy is operating from a position of weakness.

Here’s how it plays out: As the world’s dominant reserve currency, the dollar has no peer. IMF data show that the greenback accounts for 63.3% of global foreign-exchange reserves, with the euro next at 20.3%, followed by the British pound and Japanese yen, both at 4.5%. That means that in times of crisis, the dollar benefits from global investors seeking a haven, even if the strife and the the uncertainty emanates from the U.S. It’s possible that a trade war would drive flows into the dollar, putting upward pressure on the currency at the expense of other exchange rates. That would be on top of the natural demand for the greenback created by the anticipation of significant fiscal stimulus floated by the Trump administration and a faster pace of interest-rate increases by the Federal Reserve.

In terms of China, it’s important to remember that the yuan’s external value is managed by authorities in a way that isn’t compatible with a sharp appreciation pressure of the dollar vis-à-vis all other currencies. The currency is managed to achieve a stable, effective, trade-weighted exchange rate and to foster a gently crawling peg relative to the dollar. That peg would be threatened if a trade war weakened China’s economy at a faster rate than forecast. What was presented as a gradual depreciation of the yuan last year was in reality a significant 6% weakening of the currency versus the dollar as China’s domestic woes mounted. A collapse of the crawling peg could lead to yuan depreciation that is three times as large.

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The ruble lost 50% vs the USD. A similar path for the yuan would be catastrophic.

Russia Shows Why China Should Just Stop Burning Up Its Reserves (BBG)

China has wiped out about a quarter of the world’s heftiest foreign-currency stockpile over the past 18 months in its quest to keep the yuan stable. According to Commerzbank, such intervention is futile. Data Tuesday showed China’s foreign reserves slipped below $3 trillion in January, the first time they’ve breached that psychologically potent level in almost six years. Yet the experiences of some fellow BRICs show that drawing down the stockpile will probably have little effect on the currency’s long-term fate, Hao Zhou, Commerzbank’s Singapore-based senior emerging-markets economist, wrote in a research note late Tuesday.

While efforts by Russia and Brazil in recent years might have cushioned the blow of currency declines, they couldn’t change the market’s dynamics. In Russia’s case, a collapse in oil prices and the imposition of economic sanctions over the Crimea crisis proved more powerful drivers than the sale of a third of the country’s foreign-currency hoard between April 2013 and March 2015. The ruble fell more than 50% versus the dollar in the period.

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Get out while you can.

Cracks Are Appearing In Australia’s Trillion-Dollar Property Debt Pile (BBG)

The Reserve Bank of Australia frequently seeks feedback on the health of the economy. It might want to call the debt counsellors soon. Homeowners, consumers and property investors around Australia are making more calls to financial helplines as three warning signs back up the spike in demand: mortgage arrears are creeping up, lenders’ bad debt provisions have increased and personal insolvencies are near an all-time high. “It’s steadily out of control – I don’t know of too many financial counselling services where demand doesn’t exceed supply,” said Fiona Guthrie, chief executive officer of Financial Counselling Australia, who says the biggest increase in calls is from people suffering mortgage stress. “There are more people who have got mortgages that they can’t afford to pay.”

Australia’s households are among the world’s most-indebted after bingeing on more than $1 trillion of mortgages amid a housing boom that’s fizzled out in parts of the country, but still roaring in Sydney and Melbourne. While most are capably servicing their debts, a worsening of credit metrics has seen executives and analysts take a more cautious tone. It’s also a key factor in the central bank’s rate decisions this year, as RBA governor Philip Lowe places financial stability at the forefront of monetary policy. The concerns are understandable. Australians’ private debt has soared to 187% of their income, from about 70% in the early 1990s, encouraged by low interest rates. In a November speech, Lowe said that while most households are managing these levels of debt, many feel they are closer to their borrowing capacity than they once were.

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Odd that this reaches the press.

Putin Orders Russian Air Force To Prepare For ‘Time Of War’ (Ind.)

Russia’s air force has been ordered to prepare for a “time of war”. President Vladimir Putin has ordered a “snap check” of the country’s armed forces, accoording to defense minister Sergey Shoigu. As well as checking whether agencies and troops are ready for battle, the same order will ensure that systems are ready to fight, according to state news agency TASS. Those preparations have already begun, according to Russian ministers. “In accordance with the decision by the Armed Forces Supreme Commander, a snap check of the Aerospace Forces began to evaluate readiness of the control agencies and troops to carry out combat training tasks,” he said, according to TASS.

“Special attention should be paid to combat alert, deployment of air defense systems for a time of war and air groupings’ readiness to repel the aggression,” Shoigu added. The preparations come amid increasing concern about tensions between Russia and many of the world’s largest superpowers. Donald Trump has both condemned Russia’s military campaigns and been criticised for being too close to the country’s leaders, and Russia itself is standing in an increasingly tense relationship with some Nato countries. The country has been increasing movement of its military including the launch of the biggest Arctic military push since the fall of the Soviet Union, last month. It has also revealed plans to expand its military over 2017, including a huge boost in the number of tanks, armoured vehicles and aircraft controlled by the company.

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Really? Trump is willing to strongarm veterans and Native Americans? Bad PR.

Controversial Dakota Pipeline To Go Ahead After Army Approval (R.)

The U.S. Army will grant the final permit for the controversial Dakota Access oil pipeline after an order from President Donald Trump to expedite the project despite opposition from Native American tribes and climate activists. In a court filing on Tuesday, the Army said that it would allow the final section of the line to tunnel under North Dakota’s Lake Oahe, part of the Missouri River system. This could enable the $3.8 billion pipeline to begin operation as soon as June. Energy Transfer Partners is building the 1,170-mile (1,885 km) line to help move crude from the shale oilfields of North Dakota to Illinois en route to the Gulf of Mexico, where many U.S. refineries are located. Protests against the project last year drew drew thousands of people to the North Dakota plains including Native American tribes and environmental activists, and protest camps sprung up.

The movement attracted high-profile political and celebrity supporters. The permit was the last bureaucratic hurdle to the pipeline’s completion, and Tuesday’s decision drew praise from supporters of the project and outrage from activists, including promises of a legal challenge from the Standing Rock Sioux tribe. “It’s great to see this new administration following through on their promises and letting projects go forward to the benefit of American consumers and workers,” said John Stoody, spokesman for the Association of Oil Pipe Lines. The Standing Rock Sioux, which contends the pipeline would desecrate sacred sites and potentially pollute its water source, vowed to shut pipeline operations down if construction is completed, without elaborating how it would do so.

The tribe called on its supporters to protest in Washington on March 10 rather than return to North Dakota. “As Native peoples, we have been knocked down again, but we will get back up,” the tribe said in the statement. “We will rise above the greed and corruption that has plagued our peoples since first contact. We call on the Native Nations of the United States to stand together, unite and fight back.” Less than two weeks after Trump ordered a review of the permit request, the Army said in a filing in District Court in Washington D.C. it would cancel that study. The final permit, known as an easement, could come in as little as a day, according to the filing. There was no need for the environmental study as there was already enough information on the potential impact of the pipeline to grant the permit, Robert Speer, acting secretary of the U.S. Army, said in a statement.

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The case is not that hard to make. You just need to erase the ideological resistance.

Why Should A Libertarian Take Universal Basic Income Seriously? (Dolan)

In a recent post on EconLog, Bryan Caplan writes, “I’m baffled that anyone with libertarian sympathies takes the UBI [universal basic income] seriously.” I love a challenge. Let me try to un-baffle you, Bryan, and the many others who might be as puzzled as you are. Here are three kinds of libertarians who might take a UBI very seriously indeed. Philosophical issues aside, what galls many libertarians most about government is the failure of many policies to produce their intended results. Poverty policy is Exhibit A. By some calculations, the government already spends enough on poverty programs to raise all low-income families to the official poverty level, even though the poverty rate barely budges from year to year. Wouldn’t it be better to spend that money in a way that helps poor people more effectively?

A UBI would help by ending the way benefit reductions and “welfare cliffs” in current programs undermine work incentives. When you add together the effects of SNAP, TANF, CHIP, EITC and the rest of the alphabet soup, and account for work-related expenses like transportation and child care, a worker from a poor household can end up taking home nothing, even from a full-time job. A UBI has no benefit reductions. You get it whether you work or not, so you keep every added dollar you earn (income and payroll taxes excepted, and these are low for the poor). But, wait, you might say. Why would I work at all if you gave me a UBI? That might be a problem if you got your UBI on top of existing programs, but if it replaced those programs, work incentives would be strengthened, not weakened.

In which situation would you be more likely to take a job: one where you get $800 a month as a UBI plus a chance to earn another $800 from a job, all of which you can keep, or one where your get $800 a month in food stamps and housing vouchers, and anything extra you earn is taken away in benefit reductions? Or, you might say, a UBI might be fine for the poor, but wouldn’t it be unaffordable to give it to the middle class and the rich as well? Yes, if you added it on top of all the middle-class welfare and tax loopholes for the rich that we have now. No, if the UBI replaced existing tax preferences and other programs that we now lavish on middle- and upper-income households. Done properly, a UBI would streamline the entire system of federal taxes and transfers without any aggregate impact on the federal budget.

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Apr 112015
 
 April 11, 2015  Posted by at 7:08 pm Finance Tagged with: , , , , , ,  


G. G. Bain Goose Creek, houses on the water, Jamaica Bay, Long Island 1910

Euro’s Reserve Status Jeopardized As Central Banks Dump Holdings (Blooomberg)
Why The Euro Could Fall Even Further (CNBC)
Putin’s New Problem Is The Strong Ruble (Bloomberg)
Greece: The Next Deadline Approaches (CNBC)
Greek Finance Minister Steers Debt Talk His Way (NY Times)
100,000 Italians Sign Petition For Eurozone Exit Referendum (RT)
PetroChina Overtakes Exxon Mobil To Become World’s Biggest Energy Company (RT)
China Bears on Wrong End of $4 Trillion Rally Refuse to Go Away (Bloomberg)
WWII Reparations: Rare Footage From Greece’s Occupation By The Nazis (KTG)
EU Leaders Snub Moscow World War II Commemorations (Spiegel)
Obama Says ‘Days Of Meddling’ In Latin America Are Past (BBC)
Sneak Peek At Pope’s Crusade (Paul B. Farrell)
Agriculture Poses Immense Threat To Environment (EurActiv)
California’s New Era of Heat Destroys All Previous Records (Bloomberg)

“As a reserve currency, the euro is falling apart..”

Euro’s Reserve Status Jeopardized As Central Banks Dump Holdings (Blooomberg)

Quantitative easing may be helping Europe achieve its economic targets, but it’s also undermining the long-term viability of the euro by tarnishing its allure as a global reserve currency. Central banks cut their euro holdings by the most on record last year in anticipation of losses tied to unprecedented stimulus. The euro now accounts for just 22% of worldwide reserves, down from 28% before the region’s debt crisis five years ago, while dollar and yen holdings have both climbed, the latest data from the IMF show. “As a reserve currency, the euro is falling apart,” said Daniel Fermon, a strategist at SocGen. “As long as you have full quantitative easing, there’s no need to invest. The problem for the moment is we don’t see a floor for the currency. Money’s flowing out.”

ECB President Mario Draghi has in the past welcomed the drop-off in reserve managers’ holdings because a weaker exchange rate makes the continent more competitive. Yet firms including Mizuho Bank Ltd. warn the currency’s waning popularity reflects a more lasting loss of confidence in an economy that shrank in two of the past three years. “Global reserve managers may be thinking the euro is going to sink economically if it continues this way,” said Daisuke Karakama, the Tokyo-based chief market economist at Mizuho and a former European Commission official. With yen allocations rising, “they may be expecting Japan’s positive economic growth to continue as a result of” that nation’s record stimulus, Karakama said.

The decline in euro reserves suggests other central banks consider the ECB’s €1.1 trillion of QE bond purchases, which started a month ago, to be the biggest threat to the currency’s global status since its 1999 debut. Greece’s debt woes aren’t helping, either. The ECB ramped up the emergency funding available to Greek banks Thursday to alleviate the country’s worsening liquidity issues amid drawn- out negotiations over its bailout. All this is prompting banks from Citigroup, the world’s biggest foreign-exchange trader, to Goldman Sachs to predict the euro will fall below parity with the dollar this year, from a 12-year low of $1.0458 last month and $1.0617 Friday.

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Plenty reasons.

Why The Euro Could Fall Even Further (CNBC)

It’s been a one-way euro trip lower. The common currency has fallen every day this week, and is now near the lowest levels in 12 years. Now, currency traders are keenly watching American economic data, as better news about the economy could lead the euro drop to intensify. It all comes down to expectations about the Federal Reserve’s next move. Most market participants believe the Fed will raise short-term rate targets this year. That should help the U.S. dollar and hurt the euro, as it means that holding dollars will produce greater returns than holding euros, increasing demand for the greenback.

Expectations about a June Fed move have been tamped down due to a bevy of soft economic readings, most conspicuously the March jobs number. But this week, the Fed minutes and hawkish words from William Dudley have told investors that a June hike is still on the table, according to Boris Schlossberg of BK Asset Management. Dudley, the generally dovish New York Fed president, told Reuters on Wednesday that depending on how the data develops, a June move could be “still in play.” In the week ahead, Schlossberg says the biggest data point he will watch is Tuesday’s retail sales report. If it indicates that “the U.S. consumer finally started to spend, then dollar bulls run wild, and we may see 1.0500 break” on the euro, which is currently a bit below 1.0600 per dollar.

That’s because better data could serve to convince traders that the much-awaited Fed move will come sooner than previously anticipated. However, some traders say the move is overdone. “This short-term move is technical, so I expect to see the euro bounce and the dollar pull back off of the recent move,” said David Seaburg at Cowen.

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Not that big a problem. It allows for the interest rate to come down further.

Putin’s New Problem Is The Strong Ruble (Bloomberg)

Vladimir Putin is facing a problem few could have anticipated: The ruble is becoming too strong. Last year’s worst-performing major currency is this year’s best and while that’s buoying the nation’s bonds, driving yields to the lowest in four months, it’s also crimping Russia’s export revenue. Even though oil is little changed in dollars this year, the price when converted to rubles has plunged to the lowest since 2011. The currency rout in 2014 helped Russia to keep its budget deficit within 1% of GDP as the ruble weakened in lockstep with a 50% slump in oil. Now, with the cease-fire in Ukraine and the allure of higher-yielding assets attracting investors to ruble debt, the government is seeing the opposite effect.

“The current ruble level is already uncomfortable for the budget considering the oil price in rubles is already low,” Vladimir Bragin, head of research at Alfa Capital in Moscow, said by phone on Thursday. “In order to reach macroeconomic stability, Russia needs to limit its budget deficit and a weaker ruble is an easy way to do that.” The ruble’s 14% gain this month is making it easier for central bank Governor Elvira Nabiullina to push ahead with rate cuts this year after she hoisted the benchmark to 17% in December to stem the currency’s slide. Nabiullina lowered the rate by 3 percentage points so far in 2015.

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“The prospect of a negotiated exit within a month is now close to 40%..”

Greece: The Next Deadline Approaches (CNBC)

Greece repaid one of its key loans on Thursday, but with the country’s coffers still close to empty, the government may merely have earned short-term respite. As the holiday of the Orthodox Easter Weekend approaches, newly minted Prime Minister Alexis Tsipras and Finance Minister Yanis Varoufakis are unlikely to be unwinding for the long weekend. Greece has been given six working days by the euro zone technical staff of the Euro Working Group to come up with proposals for a reform agenda—on which further financial aid is conditional—ahead of a key meeting of euro zone finance ministers on April 24 in Riga, Latvia. The struggling Greek economy still needs financial support. It faces two redemptions of bills for a total of €2.4 billion as soon as April 14 and 17.

“Euro area finance ministers are probably at the end of their tether, after ten weeks of the new government’s foot-dragging and game-playing, and any sympathy for the Greek position has long disappeared,” the economic research team at Daiwa wrote in a research note. Tsipras is barely off the plane from a trip to Russia, which seemed on the surface to have achieved little in terms of concrete promises from Russia to assist Greece in the event of it defaulting on its debt repayments, leaving the euro or losing financial support from its creditors.

Economists are now increasingly taking the possibility of a “Grexit”, deemed incredibly unlikely by many just a couple of years ago. The risk of Greece defaulting on its debt repayments is now 50-50%, according to UBS, although its analysts argue that default does not necessarily mean euro zone exit. The prospect of a negotiated exit within a month is now close to 40%, according to Gabriel Sterne, head of global macro research at Oxford Economics. And capital controls – limits on the amount of money that can be taken out of the country—usually a sign of severe economic distress—are just “one more turn of the financial screw away” he added.

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“After five years of austerity imposed by creditors, “the word ‘reform’ resonates in Greece like the word ‘democracy’ in Iraq,” he said. “It’s a dirty word.”

Greek Finance Minister Steers Debt Talk His Way (NY Times)

You would never know from his demeanor that Yanis Varoufakis, the celebrity Greek finance minister, was carrying the weight of a nation on his shoulders. In fact, you could be forgiven for thinking that it was his country’s uncompromising creditors who were on the defensive. On Thursday, at a conference of economic luminaries, Mr. Varoufakis was working hard to divert the discussion from Greece’s shrinking financial freedom and fears that it might default. (He had a bit of wind at his back with news that Greece on this same day had just met its deadline for repaying a €460 million, or $491 million, loan installment to the IMF. Rather than concede any Greek missteps, Mr. Varoufakis wanted to assess the flaws of the eurozone that he said had been revealed by the 2008 global meltdown and its aftermath.

“There is no doubt that if we had a federal republic, if we had a United States of Europe, we would not be here discussing the Greek crisis, the eurozone crisis, banking union or anything of the sort,” he said in an onstage conversation with the Nobel laureate Joseph E. Stiglitz, at a conference of the Institute for New Economic Thinking. “Unfortunately,” he added, “the way we designed the eurozone, it was crying out for a crisis.” Mr. Varoufakis, as is now well known, became finance minister in January as part of the Syriza-led leftist government of Prime Minister Alexis Tsipras, which came to power promising voters to renegotiate the €240 billion international bailout, whose terms Athens blames for sending the economy into a tailspin and leaving more than 50% of Greek youth jobless.

When Mr. Stiglitz asked him how Greece’s creditors could have repeatedly overestimated the country’s ability to grow under the terms of the bailout, Mr. Varoufakis replied, “I think it’s the politics of denial.” Even making Thursday’s payment to the I.M.F. required scraping together money from the government’s dwindling resources. It staved off a default for now, but did nothing to solve the bigger problem: that the government is running out of cash to meet obligations like paying pensions and the wages of public employees. To obtain another tranche of desperately needed bailout funds, Greece still has to persuade its highly skeptical creditors — which also include the ECB and the European Commission — that Athens has a credible economic overhaul plan. [..]

Mr. Varoufakis, 54, comes across as a sort of debonair Mr. Spock, a financial Vulcan of the eurozone. Dressed in a dark jacket with his trademark casual, open-collared shirt, he speaks clearly about the currency bloc’s awkward truths, avoiding the jargon and evasiveness that normally characterizes the region’s dreary politics. Appearing on a separate panel with Mr. Varoufakis on Thursday, the Irish central bank chief, Patrick Honohan, referred to the “glass being half full” after Ireland’s bailout and tentative recovery. “I don’t like the metaphor,” Mr. Varoufakis said. “In the case of my country, the glass is broken.”

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“..Italy’s debt increased dramatically after the introduction of the euro..”

100,000 Italians Sign Petition For Eurozone Exit Referendum (RT)

Italy’s Five Star Movement (M5S) party has collected more than 100,000 signatures on a petition calling for a law that would allow a referendum on withdrawal from the eurozone. M5S MP Carlo Sibila says he expects a referendum to take place at the start of next year. Though the petition has already surpassed the required amount of signatures needed for the initiative, Sibila said that he hopes it will gather another 50,000 by early May in order to highlight the issue. “Who wants to stay in euro? This is the main question,” Sibila told RT. “But we don’t want to get out just like this – we want a program and a discussion, and then let the citizens decide. It’s really necessary today as the situation in Italy is going from bad to worse where jobs and economy are concerned.” The Italian constitution, however, does not provide for the cancellation of international agreements through referenda.

According to Sibila, Italy’s debt increased dramatically after the introduction of the euro. He also noted that Italy’s unemployment rate hovers around 12.7%, the sixth highest in the EU. “We can’t have our own fiscal policy, but without the euro it is possible in Italy,” Sibila said. The Five Star Movement, formed in 2009 by comedian and activist Beppe Grillo, finished second in the 2014 European Parliament election with 21% of the vote. Sibila stressed that M5S does not seek to leave the European Union, but merely to leave the currency union. “Italian citizens need to have the right to decide if they want to stay inside or outside the monetary union,” Sibila told RT. “We are not questioning the EU, it is only the monetary union.” Italy joined the Eurozone in 1999, and the currency was introduced into circulation three years later.

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“..the Chinese company’s Class-A shares have gained 61% since last April..”

PetroChina Overtakes Exxon Mobil To Become World’s Biggest Energy Company (RT)

The capitalization of China’s biggest oil producer PetroChina reached $352.8 billion during Thursday trading in Shanghai, surpassing ExxonMobil as the world’s most valuable energy company for the first time since 2010. The market cap of America’s Exxon reached $352.6 billion in Shanghai Thursday trading, Bloomberg reports. PetroChina’s market cap has gone up 13.81% in the last 12 months while Exxon’s market value has fallen by 14%, following the slump in oil prices. Moreover, the Chinese company’s Class-A shares have gained 61% since last April. The last time PetroChina was more valuable than Exxon was at the close of trading on June 25, 2010, according to Bloomberg.

“PetroChina has multiple positives at the moment: it’s got a reform story, it’s also listed in Hong Kong, and China has more freedom for mainland fund managers in the works,” said Mark Matthews head of Asia research at Bank Julius Baer & Co. in Singapore. “China is also planning to transfer stakes in state-owned enterprises away from their regulator, which will on the whole be positive for SOEs,” he added. Oil companies across the world have been facing difficult times since crude prices started to plunge last summer. ExxonMobil’s adjusted net income of $6.3 billion in the fourth quarter was the lowest since a loss in the final three months of 2009, according to Bloomberg data. PetroChina’s net profit was $1.8 billion in the same period.

The Shanghai Composite closed at its highest level in seven years on Thursday gaining about 88% over the past year as the best performer among major indexes. Meanwhile, the Chinese yuan has declined 0.1% versus the dollar in the past year. PetroChina is the listed arm of state-owned China National Petroleum Corporation (CNPC), with almost all of its operating profit coming from the exploration and production sector along with a small contribution from its natural gas and pipeline unit.

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Some bubbles these days take on grotesque proportions.

China Bears on Wrong End of $4 Trillion Rally Refuse to Go Away (Bloomberg)

Bull markets are always tough on short sellers. This one in China right now, though, is proving downright brutal. Bearish wagers on the Shanghai Stock Exchange have climbed threefold in the past nine months and reached a record 6.09 billion yuan ($981 million) on Wednesday, a period in which the benchmark equity index jumped 94%. Across the border in Hong Kong, where the Hang Seng Composite Index has surged 7.6% in just the past two days, the gauge’s 20 most-shorted stocks surged 18% on average. The gains show the dangers of betting against a Chinese market where new investors are flocking to stocks at a record pace and traders have taken out an unprecedented 1.06 trillion yuan of debt in Shanghai to amplify their buying power.

While technical indicators show shares in both the mainland and Hong Kong are more vulnerable to a reversal than any other market, Marco Polo Pure Asset Management says bears may be setting themselves up for more losses if China’s stimulus efforts produce an economic recovery later this year. “It’s not a market you want to bet against,” said Aaron Boesky, who oversees about $125 million as the chief executive officer of Marco Polo in Hong Kong. The firm’s Pure China fund was the top performer in the second half of 2014 among China-focused hedge funds tracked by AsiaHedge Intelligence. “I can respect people who might want to stay out of it, because it is a very volatile market, even for local Chinese,” he said. “Staying out is respectable. Shorting it could be suicidal.”

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“Greece lost 13% of its population during WWII..”

WWII Reparations: Rare Footage From Greece’s Occupation By The Nazis (KTG)

Greek Defense Ministry has published a video with rare footage from the occupation of Greece by the Nazis during the World War II. Among others, the footage shows children suffering from malnutrition and emaciated adults, victims of the Great Famine during the Nazi occupation. The video should be seen in the context of the Greek claim of €278.7 billion in WWII reparations from Germany. According to the video voice-over, the Enforced Loan by the Nazis was to blame for the mass starvation of estimated 300,000 people in Athens alone. “The agreement of 14 March 1942 foresaw that Greece paid to its occupiers 1.5 billion drachmas per month, a total of 3.5 billion USD, according to the Dollar value of 1938.

The current value of the enforced loan is 54 billion euro without the interest. The agreement had to be implemented retrospectively as of 1.1. 1942. The agreement was signed by Germany and Italy and Greece was notified later. Two agreement modifications were added on 2. December 1942, with the effect that Germany had to start repaying the loan by April 1943. Germany paid back two installments only. In the Peace Paris Treaties (1947) Greece claimed 14 billion USD in war reparations, but the allies reduced the Greek claim down to 7.1 billion USD.” According to the video “Greece lost 13% of its population during the WWII. One part was lost in the battlefield, but the largest part due to Famine and the Nazis’ atrocities.”

The Great Famine, the period of mass starvation during the occupation of Greece by the powers of Axis – the fascist Italy and the Nazi Germany – hit especially the urban areas and some islands. The Great Famine was initiated by a large scale plunder by the Axis forces and as soon as the German army entered Athens 0n 27. April 1941. The Nazis confiscated fuel and all means of transportation, including fishing boats, preventing any transfer of food and other supplies and seized strategic industries. They proceeded with the wholesale and food looting , unemployment and hyperinflation skyrocketed, the black market flourished. The price of bread was increased 89-fold from April 1941 to June 1942.

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“Since it was declared an official holiday in 1965, May 9, with its spontaneous gatherings of veterans in the streets, public festivals and gun salutes in the evening, has in fact become Russia’s most moving holiday..”

EU Leaders Snub Moscow World War II Commemorations (Spiegel)

This Monday, Russia President Vladimir Putin visited the cemetery in the village of Marfino, not far from the old western Russian city of Staraya Russa, where he placed a bouquet of red roses. Then he met with veterans of the “Great Patriotic War,” the term Russians use to describe their battle against Hitler. It would be hard to find another part of Russia that is as saturated with the blood of that war than the earth around Staraya Russa. Officially, 850,000 soldiers died there during the two-and-a-half-year German occupation. The real figure is probably higher, because the Red Army long attempted, albeit unsuccessfully, to fend off repeated attacks by the enemy along the northwestern front.

The encounter near Marfino was one of the events with which the Russian president is preparing his country for May 9, which marks the anniversary of the end of the war with Hitler’s Germany. It is “our country’s most important and most honest holiday,” Putin said in Staraya Russa. “It is the day of the great victory.” The end of the war will be commemorated in Russia for the 70th time this year. Since it was declared an official holiday in 1965, May 9, with its spontaneous gatherings of veterans in the streets, public festivals and gun salutes in the evening, has in fact become Russia’s most moving holiday — and perhaps the only one that has truly united the people. The victory over Hitler happened three generations ago.

Still, during Putin’s visit to Staraya Russa, the veterans reminded him of the words of military commander Alexander Suvorov, who said that a war is not over “until the last soldier has been buried.” Last year, search teams recovered the remains of 12,900 fallen soldiers from swamps near Novgorod, the forests of Smolensk and the region around St. Petersburg.

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Right. Sure.

Obama Says ‘Days Of Meddling’ In Latin America Are Past (BBC)

US President Barack Obama has told Latin American leaders that the days when his country could freely interfere in regional affairs are past. He was speaking just before the seventh Summit of the Americas was due to kick off in Panama City. Mr Obama and Cuban leader Raul Castro will meet face-to-face for the first time since a December detente. But their much-anticipated meeting could be overshadowed by tensions between the US and Venezuela. Mr Obama told a forum of civil society leaders in Panama City that “the days in which our agenda in this hemisphere presumed that the United States could meddle with impunity, those days are past”.

At past Summits of the Americas, which bring together the leaders of North, Central and South America, the US has come in for criticism for its embargo against Cuba and its objection to having Cuba participate in the gatherings. This seventh summit is the first which Cuba will attend and much of the attention will be focussed on the body language between the former foes. The meeting will the be first formal encounter between the leaders of the US and Communist-run Cuba in more than five decades. Mr Obama stressed that he hoped the thaw in relations would improve the lives of the Cuban people. “Not because it’s imposed by us, the United States, but through the talent and ingenuity and aspiration and the conversation among Cubans, among all walks of life. So they can decide what is the best course of prosperity.”

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“If we destroy Creation … Creation will destroy us..”

Sneak Peek At Pope’s Crusade (Paul B. Farrell)

Here’s a sneak peak of Pope Francis’s historic “Climate Change Encyclical,” soon to be released, complete with talking points for his upcoming address to the joint session of Congress. We’ll analyze them: The encyclical’s likely headline: “Safeguard Creation … We are the custodians of Creation … If we destroy Creation … Creation will destroy us,” a public warning often repeated by the pontiff this past year, a message certain to intensify the anger of GOP climate-science deniers, Big Oil, Koch Bros, Exxon Mobil and most fossil-fuel firms, as well as their banks, investors owning their stocks and capitalists everywhere. Here’s why: Pope Francis’s much-anticipated encyclical will be broadcast worldwide to billions, including 5,000 bishops, 400,000 priests and 1.2 billion members of the Roman Catholic Church.

He will be encouraging his army of the faithful to take strong action, fight climate change and global warming threats to the environment. The encyclical will also be translated into hundreds of languages and broadcast worldwide. At the same time, Pope Francis will be lobbying heads of state and religious leaders, and inspiring billions of people worldwide, encouraging them to join this revolution. This historic encyclical will also set the stage for everything else Pope Francis has planned in 2015. He’s a man with a mission to save the world from the accelerating threats to the planet’s natural resources. More immediate, the encyclical will serve as major talking points for his address to the joint session of Congress in September, his address to the United Nations General Assembly in New York and his December message to the historic UN Climate Conference in Paris. Many of his points on the environment are already well known.

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“.. instead of realising initial plans to stop and reverse the trend of species loss by 2010, more and more species are disappearing from the agrarian landscape..”

Agriculture Poses Immense Threat To Environment (EurActiv)

Conventional agriculture is causing enormous environmental damage in Germany, warns a study by the country’s Federal Environment Agency, saying a transition to organic farming and stricter regulation is urgently needed. EurActiv Germany reports. Spanning over 50% of the country, agriculture takes up by far the biggest amount of land in the country, and is one of its most important economic sectors. But intensive farming still harms the environment to an alarming extent, according to a study conducted by the Federal Environment Agency (UBA). The use of pesticides and fertilisers as well as intensive animal husbandry, have a negative impact on humans and nature, the 40-page document indicates. “Over the last 30 years, innovation and technical progress in most sectors has led to great successes in reducing the amount of substance that reaches the environment.

But agriculture emissions show only marginal improvements,” the study’s authors write. One of the most controversial issues concerns greenhouse gas emissions. According to the researchers, the use of moors and clear-cutting for agriculture, as well as fertilisers, soil cultivation and animal husbandry produce a high level of emissions that impact the climate. In 2012, agriculture-related emissions were around 70 million tonnes of CO2 equivalent – about 7.5% of the year’s total greenhouse gas emissions. This means that after industry, which made up 84%, agriculture was the second largest emitter in Germany. Biodiversity is also threatened by intensive farming. Agriculture burdens the environment with nitrogen, phosphorus and heavy metals. Broad-spectrum pesticides not only wipe out parasites, but also kill other beneficial insects.

As a result, this has adverse effects on birds and other mammals, who lose their food resources. The unfortunate result is that instead of realising initial plans to stop and reverse the trend of species loss by 2010, more and more species are disappearing from the agrarian landscape. The authors write that excessive nitrogen emissions are still alarmingly high, with 60% of nitrogen emissions originating from agriculture. Still, the country’s nitrogen surplus has been stagnating at a high level for years. At an average of 97 kg per hectare, it exceeds the German government’s target value within the sustainability strategy by almost 20 kg per hectare. As a result, agriculture, with a share of 57%, is the nation’s largest source of nitrogen emissions into the environment.

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A lot more serious than people seem to think.

California’s New Era of Heat Destroys All Previous Records (Bloomberg)

The California heat of the past 12 months is like nothing ever seen in records going back to 1895. The 12 months before that were similarly without precedent. And the 12 months before that? A freakishly hot year, too. What’s happening in California right now is shattering modern temperature measurements—as well as tree-ring records that stretch back more than 1,000 years. It’s no longer just a record-hot month or a record-hot year that California faces. It’s a stack of broken records leading to the worst drought that’s ever beset the Golden State. The last 12 months were a full 4.5 degrees Fahrenheit (2.5 Celsius) above the 20th century average. Doesn’t sound like much? When measuring average temperatures, day and night, over extended periods of time, it’s extraordinary.

On a planetary scale, just 2.2 degrees Fahrenheit is what separates the hottest year ever recorded (2014) from the coldest (1911). California’s drought has already withered pastures and forced farmers to uproot orchards and fallow farmland. It’s costing the state billions each year that it goes on. Governor Jerry Brown issued an executive order this month for the first mandatory statewide water restrictions in U.S. history, with $10,000-a-day penalties against water agencies that fail to reduce water use by 25%. California has seen droughts before with less rainfall, but it’s the heat that sets this one apart. Higher temperatures increase evaporation from the soil and help deplete reservoirs and groundwater. The reservoirs are already almost half empty this year, and gone is the snowpack that would normally replenish lakes and farmlands well into June.

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Apr 082015
 
 April 8, 2015  Posted by at 10:21 am Finance Tagged with: , , , , , , , ,  


Harris&Ewing Less taxes, more jobs, US Chamber of Commerce campaign 1939

It wouldn’t be a first, but it would certainly be a – bigger – shock. That is to say, the Bank of England hijacked the head of Canada’s central bank some time ago, but, while unexpected enough, that would pale in comparison to the US hiring the present Governor of the Russian central bank, Elvira Sakhipzadovna Nabiullina. It would still seem to be a mighty fine idea, though.

Not that I think it will happen, not to worry if you think Yellen is just what it takes at the Fed. But Nabiullina is both razor sharp and fiercely independent. Yellen is obviously neither; she’s a cog in a machine that huffs and puffs and pumps and dumps to make sure her overlords in the blissful world of US finance make ever more profit no matter how bad things get in American society.

There’s no need to be particularly sharp in order to play that role, and she was picked exactly because she’s NOT independent. Or let’s just say she’s a good listener.

Nabiullina is a whole different story. Not that I have much confidence in western readers understanding that this is so, let alone why. Not after the 24/7 highly public media campaigns and sanctions and oil price wars and Ukraine war talk and chest thumping directed at Putin and Russia, and after everything else that we don’t even know that plays out behind the veils.

Enjoy your conspiracies while you can, I’d say. Because despite more than a year of intense efforts to make Russia look like the empire of unspoken evil, financial markets, yes, the same ones Yellen manipulates at her lords’ bidding, have now made the Russian ruble and the Moscow stock exchange the biggest winners so far this year.

And that is due to a substantial extent to Elvira Nabiullina. You see, if she were just a blind or scared servant of Putin, or of his economic ideas, that would mean it was he who masterminded the resurrection of the currency and the stock market.

Think about it: that should make one really scared of Vladimir Vladimirovych. If besides all his other qualities, pursuits and activities (whether you see them in a positive light or not), he could also do that: save a $2 trillion economy from intense outside attacks.

Fear not: Putin is a mere mortal human being. One quality he does possess, however (he wouldn’t last in his position for 5 minutes if he didn’t), is a keen sense of who he can trust. And he trusts Elvira Nabiullina. She’s only been central bank governor since 2013, when she wasn’t even 50 years old, but she’s been a confidant for quite a while, most importantly as Putin’s private economic advisor in the years leading up to her present job.

You can all look up her career on Google or Wikipedia, interesting, but not overly so. What’s really important in Nabiullina’s career are two defining moments. Moments that make her stand out, and that define the relationship she has with Putin.

Sure, you can claim that she’s less independent than Yellen at the Fed, but who do you think you’re kidding? Yes, she has a hot line phone on her desk, and everyone is ushered out of the room when Putin calls her on that phone. But Yellen has hot lines to the US Treasury as well as to Jamie Dimon and Lloyd Blankfein and whoever lead those other banks and primary dealers. Independence?

So, to get to those two moments that define Elvira Nabiullina. The first was described by Bloomberg last month. In mid December 2014, the ruble was under vicious attack from financial markets. Nabiullina had already spent tens of billions of dollars in foreign reserves to prop it up. Then, on December 16, she, in a move nobody had foreseen, yanked up the interest rate in one fell swoop from 10.5% to 17%.

And here it comes: after that she did nothing. Not a thing. No more foreign reserves. Bloomberg quoted her as saying: ‘Speculators needed a cold shower’.

Mario Draghi said in 2012 he would do ‘whatever it takes to preserve the euro’. Nabiullina didn’t even have to say it.

The attack on the ruble was over. In January she lowered the interest rate to 15%, it’s at 13% now. Nabiullina says she expects it to be at 9% by the end of the year. The ruble is up 19% against the US dollar in 2015. No other currency has that record.

Did Putin order her to do this? No. They talked about it, and a lot, no doubt. But he knows she knows better. And he trusts her.

The second big moment came over the past few days, when Nabiullina announced that Russia will not get on the global central bank QE treadmill. Her reasoning, as Bloomberg reports, is that she sees problems with using debt to spur growth (eat your heart out, Krugman):

Nabiullina Sees ‘Limits’ in Using Debt Financing to Fund Growth

Russian central bank Governor Elvira Nabiullina raised questions about the use of debt financing to fund economic growth, underscoring the need to harness long-term capital as investment slumps. “We need to think about some other ways to finance growth, because financing economic growth with debt, in my opinion, has its limits,” Nabiullina said at a conference in Moscow on Thursday. “There won’t be long-term investment growth in Russia” without such sources of financing as pension savings and life insurance, she said.

“An excessive debt burden may be not only a catalyst for development and investment but also a hindrance,” Nabiullina said. Regardless of the high level of interest rates, the ratio of debt to Ebitda (Earnings Before Interest, Taxes, Depreciation and Amortization) “is already a considerable burden for companies, entire industries,” she said. Banking loans account for 57.6% of the Russian economy, according to Nabiullina. “Mandatory pension savings are of critical importance for sources of long-term financing and Russia’s capital markets,” the governor said.

Let me add some more from Reuters, so you get the full picture:

Russian Central Bank Chief Confident On Inflation, Banks, Ruble

“The acceleration of inflation… has in our view a temporary character. We expect quite a rapid fall in inflation if there are no new unforeseen circumstances..” Nabiullina said the central bank would continue cutting interest rates insofar as inflation risks receded. The bank has already cut rates twice this year. “On the whole we judge the situation in the banking sector as stable,” she said. “The banking sector maintains a substantial capital buffer and the banking sector is able to counter serious shocks even if crisis phenomena deepen.”

She said central bank stress tests showed that even if the oil price were to fall to $40 per barrel the sector would maintain capital levels above the regulatory minimum. Nabiullina also said the factors which had been weighing on the rouble had now passed, saying that repayments of foreign debts could be financed without this having a significant effect on the rouble’s value. “Thus the influence of those factors which were influencing the exchange rate and inflation last year are gradually receding to nothing..”

The entire financial markets attack ‘gradually receding to nothing’. The girl got style. Here’s thinking Nabiullina is right on this one too. Crippling sanctions? Crippling oil prices? Russia has survived it all so far.

There may well be negative growth in the country this year. But even if that were so, who would you choose to deal with that where you live? Yellen, Bernanke, Mario Draghi? Or would you go with a woman who’s shown she can not only think outside the box, but act outside of it too?! Who has both the guts and and the brains for it?!

She may well be one of Putin’s biggest weapons if the west elects to continue pestering Russia. It seems obvious: we need to hire her. But, caveat, to serve the American people, not Wall Street. Then again, I don’t think she’d want to do either.

Dec 262014
 
 December 26, 2014  Posted by at 12:27 pm Finance Tagged with: , , , , , , , , , ,  


Marion Post Wolcott “Center of town. Woodstock, Vermont. Snowy night” 1940

SF Fed Warns US Stock Values Will Be Cut In Half In Next Decade (Zero Hedge)
Dipping Into Auto Equity Devastates Many US Borrowers (NY Times)
First Oil, Now US Natural Gas Plunges Off The Chart (WolfStreet)
China Eases Again, Sets Non-Bank Deposit Reserve To Zero (Zero Hedge)
Russia Says Ruble Crisis Over As Reserves Dive, Inflation Climbs (Reuters)
Reuters Objectively Sees Russia’s Options as Losing or Losing Badly (Beversdorf)
Japan No A Longer Nation Of Savers, For First Time Ever (MarketWatch)
Japan’s Savings Rate Turns Negative, Wages Fall in Abe Challenge (Bloomberg)
Japan Struggles to Escape Recession as Production Drops (Bloomberg)
Greece to the Eurozone’s Rescue (Bruegel)
Is George Osborne A Closet Keynesian? (Project Syndicate)
Ukraine Peace Talks Focus on Prisoner Swap Before New Year Break (Bloomberg)
Ukraine’s Anti-Corruption Agency Could Be Led By US Citizen (TASS)
Correcting Scrooge’s Economics (Mises Inst.)
Waiting for the Sunrise (John Michael Greer)
World War I’s Christmas Truce, 100 Years Ago (Klein)
CDC Reports Potential Ebola Exposure In Atlanta Lab (WaPo)
Sierra Leone Declares Three-Day Lockdown In North To Contain Ebola (BBC)

More virtual wealth destruction.

SF Fed Warns US Stock Values Will Be Cut In Half In Next Decade (Zero Hedge)

When “the retirement of the baby boomers is expected to severely cut U.S. stock values in the near future,” is the ominous initial sentence from no lesser maintainer-of-the-status-quo than the San Francisco Fed’s research department, one begins to recognize the Federal Reserve’s overall need to hyper-inflate asset prices at whatever cost for fear of the ‘wealth’ destruction looming. As the following study reports, projected declines in stock values – based on the latest demographic and valuation data – have become even more severe. Our current estimate suggests that the P/E ratio of the U.S. equity market could be halved by 2025 relative to its 2013 level. Excerpted from FRBSF’s Global Aging: More Headwinds for U.S. Stocks? (Liu, Spiegel, & Wang)…

Demographic patterns have a strong historical relationship with equity values in the United States (Liu and Spiegel 2011). In particular, the ratio of those people who are the prime age to invest in stocks to those who are the prime age to sell has historically served as a strong predictor of U.S. equity values as measured by price/earnings (P/E) ratios.

Research suggests one reason for this close relationship is a person’s life-cycle pattern of investing. An individual’s financial needs and attitudes toward risk change over the years. As retirement approaches, individuals become less willing to tolerate investment risks, so they begin to sell off stocks. Thus, the aging of the baby boomers and the broader shift of age distribution in the population should have a negative effect on capital markets (Abel 2001). In theory, global demographic changes may further impact U.S. equity values. For example, Krueger and Ludwig (2007) demonstrate that U.S. returns can import the adverse impact of population aging in other countries.

Since the study by Liu and Spiegel (2011), U.S. stock values have increased markedly. Between 2010, which is the end of their sample, and 2013, the S&P 500 Index has increased by 47% and the P/E ratio has increased from around 15 to nearly 17. However, the bearish predictions in Liu and Spiegel (2011), which were based solely on projected aging of the U.S. population, have worsened. Indeed, extending the Liu-Spiegel model’s sample through 2013 suggests that the P/E ratio will decline even more, from about 17 in 2013 to 8.23 in 2025, before recovering to 9.14 in 2030.

Following Liu and Spiegel (2011), we use Bloomberg’s P/E ratio for the United States, which is the ratio of the end-of-year S&P 500 Index levels and the average earnings per share over the previous 12 months. We measure the age distribution using the ratio of “middle-age” people between 40 and 49 years—the group most likely to buy stocks—to those in the “old-age” group from 60 to 69 years—the prime age to sell. We call this measure the M/O ratio.

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Incredible that such things are allowed to exist in a supposedly civilized nation.

Dipping Into Auto Equity Devastates Many US Borrowers (NY Times)

The rusting 1994 Oldsmobile sitting in a driveway just outside St. Louis was an unlikely cash machine. That was until the car’s owner, a 30-year-old hospital lab technician, saw a television commercial describing how to get cash from just such a car, in the form of a short-term loan. The lab technician, Caroline O’Connor, who needed about $1,000 to cover her rent and electricity bills, believed she had found a financial lifeline. “It was a relief,” she said. “I did not have to beg everyone for the money.” Her loan carried an annual interest rate of 171%. More than two years and $992.78 in debt later, her car was repossessed. “These companies put people in a hole that they can’t get out of,” Ms. O’Connor said. The automobile is at the center of the biggest boom in subprime lending since the mortgage crisis. The market for loans to buy used cars is growing rapidly.

And similar to how a red-hot mortgage market once coaxed millions of borrowers into recklessly tapping the equity in their homes, the new boom is also leading people to take out risky lines of credit known as title loans. They are, roughly speaking, the home equity loans of subprime auto. In these loans, which can last as long as two years or as little as a month, borrowers turn over the title of their cars in exchange for cash — typically a%age of the cars’ estimated resale values. “Turn your car title into holiday cash,” TitleMax, a large title lender, declares in a recent television commercial, showing a Christmas stocking overflowing with money. More than 1.1 million households in the United States used auto title loans in 2013, according to a survey by the Federal Deposit Insurance Corporation — the first time the agency has included the loans in its annual survey.

Title loans are becoming an increasingly prevalent form of high-cost, short-term credit in subprime finance, as regulators in a number of states crack down on payday loans. For many borrowers, title loans, also sometimes known as motor-vehicle equity lines of credit or title pawns, are having ruinous financial consequences, causing owners to lose their vehicles and plunging them further into debt. A review by The New York Times of more than three dozen loan agreements found that after factoring in various fees, the effective interest rates ranged from nearly 80% to more than 500%. While some loans come with terms of 30 days, many borrowers, unable to pay the full loan and interest payments, say that they are forced to renew the loans at the end of each month, incurring a new round of fees.

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“None of the fancy charts natural gas drillers have shown to investors work at these prices.”

First Oil, Now US Natural Gas Plunges Off The Chart (WolfStreet)

Friday, natural gas futures plunged 6%. Monday morning, when folks were thinking about the beautiful Santa Rally, NG futures plunged nearly 10% to $3.12 per million Btu, the lowest since January 10, 2013. But the crazy day had just begun. NG bounced off and jumped nearly 4%, only to give up much of it later. Tuesday morning, as I’m finishing this up, NG continues to decline, now at $3.11/mmBtu. Down 30% from a month ago. NG demand peaks when the heating season starts. It’s a bet on the weather. Our gurus forecast warmer than normal temperatures across the country, so prices plunged. Or shorts piled into the pre-holiday session with exaggerated effect to make a quick buck. Here is what this 30-day, 30% plunge looks like (each bar = 5 hours):

Whatever the cause, NG has traded below the cost of production of many wells for years. That lofty $4.40/mmBtu on the left side in the chart above is still below the cost of production for many wells. The price simply fell from bad to terrible. To make the equation work, drillers have shifted from shale formations that produce mostly “dry” natural gas to formations that also produce a lot of liquids, such as oil, natural gasoline, propane, butane, or ethane that were fetching a much higher price. Thus, they’d be immune to the low price of NG. They pitched this strategy to investors to attract ever more money and keep the fracking treadmill going.

Much of this new money was in form of junk debt. Now energy companies account for over 15% of the Barclays U.S. Corporate High-Yield Bond Index – up from less than 5% in 2005. But there is no respite for the American oil patch. The price of oil has plunged 50% since June, the price of propane is down 50% since its recent high in mid-September, and natural gasoline is down 32% since recent high in mid-November. None of the fancy charts natural gas drillers have shown to investors work at these prices.

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“.. shadow banking is being tamed ..”

China Eases Again, Sets Non-Bank Deposit Reserve To Zero (Zero Hedge)

Four years ago, on Christmas Day in 2010, China shocked the world when, unexpectedly, hiked its lending and deposits rates by 0.25% in order to battle inflation – only its second such hike in the prior 3 years. Since then things for the global economy haven’t done exactly as expected, and certainly not for China, which as the following chart of constantly downward-revised IMF growth forecasts, has seen its growth rate tumble from double digits to just hanging on to 7%, and dropping fast.

Fast forward to last night, when in another Christmas surprise, China once again decided to adjust the cost of money, only this time instead of hiking it eased, and in an effort to shore up the world’s second-largest economy, China Business News reported that: PBOC WAIVES RESERVE REQUIREMENT FOR NON-BANK DEPOSIT. As WSJ adds, at a meeting with big financial institutions on Wednesday, the People’s Bank of China told participants that they will soon be able to add deposits from nonbank financial institutions to their calculations of their loan-to-deposit ratios, according to the executives. The move would add considerably to the banks’ deposits and allow them to lend more. Why is this a major development? Because as we reported over a month ago, “China’s Shadow Banking Grinds To A Halt As Bad Debt Surges Most In A Decade” in which we explained:

As the following chart shows the main reason for China’s relentless slowdown in its growth pace, which only two years ago was expected to rebound back into the double digits soon (at least according to the IMF), is the ongoing contraction in credit formation, which rising at 13.2% for new loans and 15.4% for TSF outstanding, was the lowest credit expansion recorded in China also since 2005.

So what is the main culprit for the contraction in China’s all important credit formation? In two words: shadow banking. As Bank of America summarizes “shadow banking is being tamed” because “the changing structure of TSF suggests that Beijing’s efforts in controlling some types of shadow banking have made some achievements. Two major drivers for the steep decline of TSF from Sept to Oct were the falling of non-discounted bills (down RMB241bn) and falling trust loans (down RMB22bn). By contrast, new corporate bonds were at RMB242bn, a sharp rise from RMB151bn in Sept.”

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Tad optimistic?!

Russia Says Ruble Crisis Over As Reserves Dive, Inflation Climbs (Reuters)

Russia said on Thursday its currency crisis was over even though its forex reserves have plunged and annual inflation has climbed above 10%, adding to the problems facing the government as it fights its worst economic crisis since 1998. The ruble plunged to all-time lows last week on heavy falls in the price of oil, the backbone of the Russian economy, and Western sanctions over the Ukraine crisis that made it near impossible for Russian firms to borrow on Western markets. But it has since rebounded sharply after authorities took steps to halt its slide and bring down inflation, which after years of stability threatens President Vladimir Putin’s reputation for ensuring the country’s prosperity. Those measures included a hike in interest rates to 17% from 10.5%, curbs on grain exports and informal capital controls.

“The key rate was raised in order to stabilise the situation on the currency market. … That period has already, in our opinion, passed. The ruble is now strengthening,” Finance Minister Anton Siluanov told the upper house of parliament on Thursday. He added that interest rates would be lowered if the situation remained stable. Standard & Poor’s said this week it could downgrade Russia to junk as soon as January due to a rapid deterioration in “monetary flexibility”. Keen to avert a downgrade, Russia said it had started talks with ratings agencies to explain the government’s actions. Siluanov said the budget deficit next year would be “significantly more” than the 0.6% of gross domestic product originally planned. The ruble slumped to 80 per dollar in mid-December from an average of 30-35 in the first half of 2014. It has strengthened in the last few days to trade as strong as 52 per dollar on Thursday, in part thanks to government pressure on exporters to sell hard currency.

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“Sometimes this is done without violence when the Alpha simply knows he is no longer top dog and he moves on. Often times it ends is horrible violence.”

Reuters Objectively Sees Russia’s Options as Losing or Losing Badly (Beversdorf)

Clearly Russia’s future has very little to do with the Western world and so they have no motive to start wars with the West. There is nothing to gain by doing so. However, they have every motive to defend themselves against Western aggression. And so if you see Russian aggression with the West it can only be defensive in nature. Nations (other than North Korea) do not act in a way that is to the detriment of its political class. Because warring with the West presents no possible upside but significant downside for Russia and her leaders, they will actually be willing to do everything in their power to prevent such a scenario. However, as we discussed above, the Western Alliance has only one option to secure its global control and that is to contain China and the only way to contain China is via Russian energy.

Thus, the Western Alliance has every reason to war with Russia. Behaviour (for rational minds) is always logical and so we can use logic to come to the truth about behaviour by looking at the logical results of actions. If an action seems to be detrimental to a particular subject nation’s political class, then the action would be illogical and thus will not be taken. If an action is the only course of survival for a nation, or more pertinently its political class, then you can be damn certain that action will be taken. Looking at the Russian conflict then from a logical context, it really becomes not up for debate that the Western Alliance must be the aggressor.

But so ok, we are doing what we need to in order to secure our dominance and perhaps there are working class folks that may agree with such a policy. Sounds simple enough according to John Lloyd. As he lays out, the two options for Putin and Russia are to either lose or lose badly. But when John pulls his head out his ass or decides to speak with some integrity rather than selling himself out as a politician’s town crier he will admit that things won’t be so simple. China’s future growth is dependent on Russian energy, and so on Russia itself. As such, China will never allow the Western Alliance to crush Russia as China understands the end objective is not a containment of Russia but China itself.

I made the point in the previous article that China will not only step in economically, which we’ve already seen by example with the signed energy deals and now explicitly stating they will back the Russian economy but, if comes to it, China will be prepared to step in militarily, they have no choice. That is a very scary WWIII proposition and one might wonder why in the hell are we headed in that direction? It is obviously not something citizens of any involved countries would want. Again the reason goes back to that very natural process of Alpha selection. It requires a final fight of the Alpha dog, the one in which he loses his reign of power to a new more impressive Alpha dog. Sometimes this is done without violence when the Alpha simply knows he is no longer top dog and he moves on. Often times it ends is horrible violence.

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A major shift. Japan’s model has been held up by savers investing in sovereign bonds.

Japan No A Longer Nation Of Savers, For First Time Ever (MarketWatch)

Japan, long held up as a model of thrift and a “nation of savers,” is no longer saving, according to data cited Friday in the Nikkei Asian Review. For the fiscal year that ended in March, Japan’s household savings rate dropped to negative 1.3%, according to Cabinet Office statistics released Thursday. The result represented “the first time the ratio entered negative territory since the government started compiling comparable data in fiscal 1955,” the Nikkei reported. Part of the drop was likely due to a spending binge ahead of the nationwide consumption-tax hike on April 1, but the report also cited a broad drawdown of savings by Japan’s elderly.

The figure has special significance for Japan, as much of the government’s huge debt is funded by the nation’s own savers. “If fewer people buy government bonds, it would feed latent upward pressures for long-term interest rates,” the report quoted Goldman Sachs Japan’s Masahiro Nishikawa as saying. On the other hand, any threat to low interest rates seemed distant Friday, with several reports noting that the yield on the benchmark 10-year Japanese government bond TMBMKJP-10Y, -3.96% had hit its lowest level in history the previous day, amid extended ultra-easy policy from the central bank.

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“The savings rate in the year through March was minus 1.3%, the first negative reading in data back to 1955 ..”

Japan’s Savings Rate Turns Negative, Wages Fall in Abe Challenge (Bloomberg)

Japanese drew down savings for the first time on record while wages adjusted for inflation dropped the most in almost five years, highlighting challenges for Prime Minister Shinzo Abe as he tries to revive the world’s third-largest economy. The savings rate in the year through March was minus 1.3%, the first negative reading in data back to 1955, the Cabinet Office said. Real earnings fell 4.3% in November from a year earlier, a 17th straight decline and the steepest tumble since December 2009, the labor ministry said today. A higher sales tax combined with the central bank’s record easing are driving up living costs, squeezing household budgets and damping consumption. Abe’s task is to convince companies to agree to higher wages in next spring’s labor talks to sustain a recovery.

“Households are suffering from a decline in real income,” said Hiromichi Shirakawa, an economist at Credit Suisse. Abe is trying to generate a virtuous cycle in the economy, where higher incomes fuel consumer spending, which in turn prompts companies to boost investment and wages. Last week he secured a pledge from business leaders to do their best to boost pay next year. The government will aim for wages to increase faster than inflation next year, Economy Minister Akira Amari said last week. BOJ Governor Haruhiko Kuroda said yesterday he’d watch the spring wage talks “with strong interest.” The savings rate, which the Cabinet Office calculates by dividing savings by the sum of disposable income and pension payments, peaked at 23.1% in fiscal 1975.

As Japan’s population ages, its growing ranks of elderly are tapping their savings, according to the Cabinet Office. Consumers also ran down savings to make purchases ahead of a sales tax-increase in April, the first since 1997. The shrinking workforce is intensifying a labor shortage that Kuroda has said will prompt an increasing number of companies to boost pay to secure workers. Today’s data showed there were 1.12 jobs available for every person seeking a position, the most since 1992. The jobless rate, at 3.5%, remained at lows unseen since 1997.

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Kuroda makes things worse, fast.

Japan Struggles to Escape Recession as Production Drops (Bloomberg)

Japan’s inflation slowed for a fourth month in November, and industrial production and retail sales unexpectedly dropped, pointing to further weakness in an economy Prime Minister Shinzo Abe is trying to revive from recession. Output fell 0.6% in November from a month earlier, the trade ministry said today, against a median estimate of a 0.8% increase in a Bloomberg News survey of economists. Retail sales slid 0.3%, while consumer prices excluding fresh food rose 2.7% from a year earlier. Real wages fell the most since 2009. With little sign of a rebound in domestic demand, the world’s third-largest economy may rely on exports to avert a third straight quarterly contraction in the final three months of the year.

Today’s reports add pressure on Abe, whose government tomorrow will unveil a stimulus package, and who pledged growth-inducing structural changes after winning re-election this month. “Companies have to see a recovery in domestic consumption before boosting production,” said Minoru Nogimori, an economist at Nomura Holdings Inc., noting any rebound in the economy in the fourth quarter “will be far from strong.” With oil prices weighing on inflation, the BOJ is likely to boost stimulus again, probably around October, he said. [..] Stripped of the effect of April’s sales-tax increase, core consumer prices – the Bank of Japan’s key measure – rose 0.7%, moving further away from the BOJ’s 2% goal. Tumbling oil prices could push Japan’s inflation as low as 0.5% by the middle of next year, according to economists.

BOJ Governor Haruhiko Kuroda said yesterday that over the longer term, cheaper oil will support the economy and spur consumer prices. Energy prices dropped 1.2% from a month earlier, according to today’s data. The price of Dubai crude oil – a benchmark for Middle East supply to Asia – has lost about a half of its value in the past year. Japan’s gasoline prices declined the most in almost six years last week. “Japan, a commodity-importing country, gains a large advantage from the decline in crude oil prices,” Kuroda said in a speech to business leaders yesterday in Tokyo. The decline “will lead to an increase in underlying prices from a somewhat longer-term perspective,” he said.

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“Today, the only right way forward is for the troika to allow Greece to repay its official creditors in, say, 100 years.”

Greece to the Eurozone’s Rescue (Bruegel)

The European Commissioner for Economic and Financial Affairs, Pierre Moscovici’s unnecessary—and unseemly—visit to Athens served to spotlight Europe’s corrosive politics. Mr. Moscovici chose to all but endorse Antonio Samaras, the beleaguered Greek Prime Minister, who promises to play by the European Union’s dysfunctional rules. And the Commissioner described as “suicidal” the positions held by the opposition party Syrzia, which may well lead the next government and correctly deems the EU’s rules to be intolerant. His boss, European Commission President Jean-Claude Juncker, weighed in by expressing his preference for Greece to be led by “known” faces. Greece should not have been a member of the eurozone. But after the German Chancellor Helmut Kohl ensured Italy’s inclusion in May 1998, Spain and Portugal were waived in. So, the inevitable Greek entry came in 2002.

By then, any vestige of economic good sense in the euro’s construction had been abandoned in the name of peace and friendship, a cause that Moscovici and Juncker presumably seek to promote. From October 2009, when Greek authorities acknowledged that they had lied about their fiscal accounts, to May 2010, the claim was that the problem would go away without external help. When eventually the troika—the European Commission, the European Central Bank, and the International Monetary Fund—put together a large bailout fund, the manifestly untenable claim was that Greece would repay its private creditors in full. In July 2011, the repayment terms on the troika’s debt were eased, but it was too little too late. Large losses were eventually imposed on private Greek creditors but not before harsh austerity caused an extraordinary slump in growth and lasting misery.

Pretty much every time there was a choice between the right and wrong decision, the wrong one was taken. Today, the only right way forward is for the troika to allow Greece to repay its official creditors in, say, 100 years. This will effectively mean debt forgiveness but the cosmetics may help German leaders tell their citizens that they will be repaid. But, of course, the system fights back all rational thinking. Ireland and Portugal will yelp that they also deserve more relief on their troika borrowings. More fundamentally, the forgiveness will directly contravene the Lisbon Treaty’s no-bailout provision, which prevents one member state from paying another’s debts. That would call into question the constitutionality of the European Stability Mechanism, which was approved by the European Court of Justice on the basis that the loans from the facility would be repaid with an “appropriate margin.”

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“There is a school of thought that holds that commitment, not achievement, gives a policy credibility.”

Is George Osborne A Closet Keynesian? (Project Syndicate)

There is a growing apprehension among Britain’s financial pundits that chancellor George Osborne is not nearly as determined to cut public spending as he pretends to be. He sets himself deadlines to balance the books, but when the date arrives, with the books still unbalanced, he simply sets another. Consider some fiscal arithmetic. When Osborne became chancellor in 2010, the budget deficit – spending minus revenue – was £153bn, or 10.2% of GDP. He promised that by 2015 the deficit would stand at only £37bn, or 2.1% of GDP – equivalent to balancing current spending and revenue. Instead, the deficit for 2014-2015 is expected to be £97bn. The conclusion of Osborne’s balancing act has been postponed until the 2019-2020 budget. Osborne talks about the need to cut spending, but his actions say otherwise.

Though he vowed to reduce spending by more than £100bn by now, he has cut less than half of that, simply extending his five-year rolling programme of cuts for another few years. As a result, Osborne, the poster child for British austerity, is starting to look like a closet Keynesian. There is a school of thought that holds that commitment, not achievement, gives a policy credibility. For example, the Bank of England is committed to achieve 2% inflation “in the medium term”. Annual inflation has not been 2% at any time in the last six years, but it is possible that the BoE’s commitment has had some effect in lowering interest rates. Osborne’s defenders might make the same argument for his fiscal policy. A credible policy of fiscal consolidation, they might say, will have the same exhilarating effect on confidence as fiscal consolidation itself.

Economists call this the “signalling effect”. If you announce that you intend to balance the books over five years and pencil in a lot of spending cuts, consumers, relieved of their fears of future tax increases, will start spending more freely. This will cause national income to rise, and, with luck, the budget deficit will start shrinking, more or less according to plan, without requiring any, or much, retrenchment. In its emphasis on the importance of the signal, economics enters postmodernist territory. The signal – in this case the promise to balance the books – creates the reality. People start behaving as though the books were balanced, ignoring the fact that they are not. When one believes the narrative, one acts in ways that make it come true.

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Can the west screw this up too?

Ukraine Peace Talks Focus on Prisoner Swap Before New Year Break (Bloomberg)

Envoys to Ukraine peace talks are discussing an exchange of prisoners before the New Year, according to a separatist leader, as Russia criticized the country for having “NATO ambitions.” The talks may continue for about two days and no agreements have been reached yet, Alexander Zakharchenko, leader of the self-proclaimed Donetsk People’s Republic, told the pro-Russian rebels’ news website. Ukraine, Russia and the Organization for Security and Cooperation in Europe sent representatives to Minsk, Belarus, yesterday to hold the first of two planned rounds of talks. The participants, including separatist negotiators, left the venue without commenting to reporters.

“The main task at the moment is to stop the violence,” Alexei Panin, deputy director of the Center for Political Information, a Moscow-based research group, said by phone. A two-week truce has tempered the bloodshed in a conflict that has killed more than 4,700 people since April in fighting between government forces and separatists in Ukraine’s eastern Donetsk and Luhansk regions. The talks cleared the last objections to a swap of 150 prisoners for 225, Zakharchenko said. Ukraine’s Security Service reiterated commitment to an “all-for-all” exchange, RIA Novosti reported.

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The insanity continues.

Ukraine’s Anti-Corruption Agency Could Be Led By US Citizen (TASS)

A former US federal prosecutor Bohdan Vitvitsky, who has Ukrainian roots, could be appointed as the director of Ukraine’s newly-created Anti-Corruption Bureau, local media reported on Friday. Officials from the Ukrainian presidential administration are currently in talks with Vitvitsky, who has not yet made a final decision saying that he “still has no guarantees that the position is independent.” Another candidate for the top post is former Georgian President Mikheil Saakashvili, the reports say. The candidacy has been proposed by a member of a tender commission, Yury Butusov. The ex-Georgian leader, who is now on the run and has recently failed to receive a US working visa, has not yet taken a decision, saying that he is waiting for “a more specific proposal.” Saakashvili will have to take Ukraine’s citizenship and in line with an anti-corruption law to settle the issues over closing criminal cases against him in his home country, including on abuse of power.

In October, Ukrainian President Petro Poroshenko signed a package of anti-corruption laws, including on creating the National Anti-Corruption Bureau in Ukraine. The agency will be charged with exposing, preventing and investigating corruption cases in the country. Poroshenko also suggested that a foreigner could lead the newly-created agency. Foreigners have been already appointed as ministers in the Ukrainian government. President Poroshenko earlier signed a law on granting Ukrainian citizenship to US national Natalya Yaresko, Lithuanian Aivaras Abromavichus and Georgian Alexander Kvitashvili, who head the country’s finance, health and economic development ministries, respectively. Ukraine’s Opposition Bloc and Yulia Tymoshenko’s Batkivshchyna party are against the work of foreigners in the Ukrainian government, saying that Kiev wants to absolve itself of the responsibility for what is happening in the country.

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“What right have you to be merry? What reason have you to be merry? You’re poor enough.” To this Fred replies, “What right have you to be dismal? What reason have you to be morose? You’re rich enough.”

Correcting Scrooge’s Economics (Mises Inst.)

As Charles Dickens himself admits, Ebenezer Scrooge is a thoroughly peaceful man, guilty of no true crime, who has robbed no one. Therefore, we must conclude that his wealth is a sign of his ability to please at least some people, and as Michael Levin notes: “Dickens doesn’t mention Scrooge’s satisfied customers, but there must have been plenty of them for Scrooge to have gotten so rich.” But as he is a person with bad manners and a disagreeable personality, many have conflated Scrooge’s personality traits with his business practices, although the two are unrelated phenomena. As a miser and businessman, Scrooge provides numerous valuable services to the community including, as Walter Block has shown, driving down prices and making liquidity available to those who, unlike the wrongly maligned misers, have been either unwilling or unable to save in comparable amounts.

His business prowess notwithstanding, however, a closer look at Scrooge’s economics suggests some significant blind spots in several areas. Scrooge, as displayed in many of his comments and observations, misunderstands some key economics concepts. Indeed, Scrooge’s ignorance in these areas may contribute to his bad habit of assuming that others are taking advantage of him, or are too foolish or lazy to attain what Scrooge has. As Carl Menger demonstrated long ago, value is subjective and different persons value goods differently depending on the person’s goals in life. Does the person want to raise a family? Perhaps he wishes to be an independent scholar who devotes all his time to reading and research. Perhaps he wishes to be a hermit who prays most of the day. Money prices reflect these goals, and a hermit will value a video game console differently from a gamer. But of course not everything can be calculated in terms of money prices. A like or dislike of Christmas, for example, cannot be calculated this way.

Scrooge, who is apparently not a Christmas enthusiast, greatly values money, and likes to have plenty of it handy. But why? If we accept the analysis of Scrooge’s former fiancée, (a fairly reliable source on that period in his life) she suggests that Scrooge “fear[s] the world too much” and that all his other hopes “have merged into the hope of being beyond the chance of its sordid reproach.” So here we see the real root of Scrooge’s fondness of money. In Human Action, Ludwig von Mises explained that human action stems from a desire to “remove unease” about one’s present situation. With Scrooge we see (if his fiancée is to be believed) that the thought of being destitute is a source of constant unease for him. Thus, he desires to build as much wealth as possible in the hope of being beyond the possibility of poverty.

As Scrooge’s primary goals is poverty avoidance, this colors how he views all economic action. His peers tend to not recognize this in him, either dismissing his as simply “odious,” as Mrs. Cratchit does, or as unhappy. In fact, as Levin demonstrates, Scrooge appears rather content with his situation at this point, although, unfortunately — just as Scrooge’s colleagues and family members do not appreciate his ranking of values — Scrooge does not seem to appreciate that others might value money for different reasons. This is demonstrated in an early exchange with Scrooge’s nephew. When wished a merry Christmas by his nephew Fred, Scrooge retorts “What right have you to be merry? What reason have you to be merry? You’re poor enough.” To this Fred replies, “What right have you to be dismal? What reason have you to be morose? You’re rich enough.”

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“.. political and business interests responded to the peak by redefining what counts as crude oil, pouring just about any flammable liquid they could find into the world’s fuel tank ..”

Waiting for the Sunrise (John Michael Greer)

… the coming of 2015 marks a full decade since production of conventional petroleum worldwide hit its all-time peak and began to decline. Those who were around in the early days of the peak oil scene, as I was, will doubtless recall how often and eagerly the more optimistic members of that scene insisted that once the peak arrived, political and business interests everywhere would be forced to come to terms with the end of the age of cheap abundant energy. Once that harsh but necessary awakening took place, they argued, the transition to sustainable societies capable of living within the Earth’s annual budget of sunlight would finally get under way.

Of course that’s not what happened. Instead, political and business interests responded to the peak by redefining what counts as crude oil, pouring just about any flammable liquid they could find into the world’s fuel tank—ethanol, vegetable oil, natural gas liquids, “dilbit” (diluted bitumen) from tar sands, you name it—while scraping the bottom of the barrel for petroleum via hydrofracturing, ultradeep offshore wells, and other extreme extraction methods. All of those require much higher inputs of fossil fuel energy per barrel produced than conventional crude does, so that a growing fraction of the world’s fossil fuel supply has had to be burned just to produce more fossil fuel. Did any whisper of this far from minor difficulty find its way into the cheery charts of “all liquids” and the extravagantly rose-colored projections of future production?

Did, for example, any of the official agencies tasked with tracking fossil fuel production consider subtracting an estimate for barrels of oil equivalent used in extraction from the production figures, so that we would have at least a rough idea of the world’s net petroleum production? Surely you jest. The need to redirect an appreciable fraction of the world’s fossil fuel supply into fossil fuel production, in turn, had significant economic costs. Those were shown by the simultaneous presence of prolonged economic dysfunction and sky-high oil prices: a combination, please note, that last appeared during the energy crises of the 1970s, and should have served as a warning sign that something similar was afoot. Instead of paying attention, political and business interests around the world treated the abrupt fraying of the economy as a puzzling anomaly to be drowned in a vat of cheap credit—when, that is, they didn’t treat it as a public relations problem that could be solved by proclaiming a recovery that didn’t happen to exist.

Economic imbalances accordingly spun out of control; paper wealth flowed away from those who actually produce goods and service into the hands of those who manipulate fiscal abstractions; the global economy was whipsawed by convulsive fiscal crisis in 2009 and 2009, and shows every sign of plunging into a comparable round of turmoil right now.

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Another story on the theme, after yesterday’s long one.

World War I’s Christmas Truce, 100 Years Ago (Klein)

Five months into World War I, the Christmas spirit took hold in the most unlikely of places—the bloody Western Front. In a series of spontaneous ceasefires, soldiers laid down their arms to sing carols, exchange gifts and even play soccer with the enemy. On the centennial of the Christmas Truce of 1914, look back at the sudden outbreak of peace that brought a brief moment of cheer to a grim war. Charles Brewer never expected to be spending Christmas Eve nearly knee-deep in the mud of northern France. Stationed on the front lines, the 19-year-old British lieutenant with the Bedfordshire Regiment of the 2nd Battalion shivered in a trench with his fellow soldiers. After Great Britain entered World War I in August 1914, many of them had expected that they would make quick work of the enemy and be home in time for Christmas.

Nearly five months and 1 million lives later, however, the Great War had bogged down in intractable trench warfare with no end in sight. Although disappointed to be far from home on Christmas Eve, Brewer at least took solace in the fact that the perpetual rain, which made moving through the trenches as much of a slog as the war itself, had finally abated on the moonlit night. All was jarringly quiet on the Western Front when a British sentry suddenly spied a glistening light on the German parapet, less than 100 yards away. Warned that it might be a trap, Brewer slowly raised his head over the soaked sandbags protecting his position and through the maze of barbed wire saw a sparkling Christmas tree.

As the lieutenant gazed down the line of the German trenches, a whole string of small conifers glimmered like beads on a necklace. Brewer then noticed the rising of a faint sound that he had never before heard on the battlefield – a Christmas carol. The German words to “Stille Nacht” were not familiar, but the tune—“Silent Night”—certainly was. When the German soldiers finished singing, their foes broke out in cheers. Used to returning fire, the British now replied in song with the English version of the carol.

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Better be careful.

CDC Reports Potential Ebola Exposure In Atlanta Lab (WaPo)

Researchers studying Ebola in a highly secure laboratory mistakenly allowed potentially lethal samples of the virus to be handled in a much less secure laboratory at the Centers for Disease Control and Prevention in Atlanta, agency officials said Wednesday. One technician in the second laboratory may have been exposed to the virus and about a dozen other people have been assessed after entering the facility unaware that potentially hazardous samples of Ebola had been handled there. The technician has no symptoms of illness and is being monitored for 21 days. Agency officials said it is unlikely that any of the others who entered the lab face potential exposure. Some entered the lab after it had been decontaminated.

Officials said there is no possible exposure outside the secure laboratory at CDC and no exposure or risk to the public. “At this time, we know of only the one potential exposure,” CDC Director Tom Frieden said in a telephone interview. The mistake took place Monday afternoon. It was discovered by laboratory scientists Tuesday and within an hour reported to agency leaders. The error, which is under internal investigation, was reported to Secretary of Health and Human Services Sylvia Mathews Burwell and to a program that has oversight over pathogens such as Ebola and anthrax.

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Nothing has been solved.

Sierra Leone Declares Three-Day Lockdown In North To Contain Ebola (BBC)

Sierra Leone has declared lockdown of at least three days in the north of the country to try to contain the Ebola epidemic. Shops, markets and non-Ebola related travel services will be shut down, officials said. Sierra Leone has already banned many public Christmas celebrations. More than 7,500 people have died from the outbreak in West Africa so far, the Word Health Organization (WHO) says, with Sierra Leone the worst hit. Sierra Leone has the highest number of Ebola cases in West Africa, with more than 9,000 cases and more than 2,400 deaths since the start of the outbreak. The other countries at the centre of the outbreak are Liberia and Guinea.

Alie Kamara, resident minister for the Northern Region, told AFP news agency that most public gatherings would be cancelled. “Muslims and Christians are not allowed to hold services in mosques and churches throughout the lockdown except for Christians on Christmas Day”, he said. No unauthorised vehicles would be allowed to operate “except those officially assigned to Ebola-related assignments” he added. The lockdown would operate for at least three days but this could be extended if deemed necessary, officials said. Sierra Leone has been in a state of emergency since July. The outbreak began a year ago in the West African country of Guinea, but only gained international attention in early 2014.

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Dec 182014
 
 December 18, 2014  Posted by at 11:43 am Finance Tagged with: , , , , , , , ,  


Lewis Wickes Hine News of the Titanic and possible survivors 1912

Fed Calls Time On $5.7 Trillion Of Emerging Market Dollar Debt (AEP)
Bankers See $1 Trillion of Investments Stranded in the Oil Fields (Bloomberg)
Oil Could Fall To $30 A Barrel: Emirates Boss (CNBC)
Oil-Led Slump Spurring Fastest Investor Exit Since 2008 (Bloomberg)
The Fracturing Energy Bubble Is the New Housing Crash (David Stockman)
Yellen Makes It Clear That Fed’s Patience on Rates Has Limits (Bloomberg)
Putin Says Russia Mustn’t Waste Reserves on Ruble as Economy Sinks (Bloomberg)
Putin Predicts Economy Will Recover In Two Years (WaPo)
Western Nations Want To Chain The Russian Bear And Have It Stuffed: Putin (RT)
Can Anybody Find Me … A Central Banker To Love? (Dmitry Orlov)
Traders Betting Russia’s Next Move Will Be to Sell Gold (Bloomberg)
Greece Faces Crisis On Rising Prospect Of Snap Election (CNBC)
EU’s Greek Drama Needs A Final Act (Bloomberg ed.)
$1.3 Trillion In Secret Cash Sneaked Out Of China In The Last 10 Years (Quartz)
Dark Pools in Spotlight as EU Moves to Bolster Markets (Bloomberg)
Uruguay Takes on London Bankers, Marlboro Mad Men and the TPP (Truthout)
Swiss National Bank Imposes Negative Interest Rate (Bloomberg)
The Fed Is Sitting On a $191 TRILLION Time Bomb (Phoenix)
2014 Warmest Year In Europe Since 1500s (FT)
‘Vast Stores’ Of World’s Oldest Water (BBC)

“World finance is rotating on its axis. The stronger the US boom, the worse it will be for those countries on the wrong side of the dollar”. [..] “Pimco’s Emerging Market Corporate Bond Fund bled $237m in November, and the pain is unlikely to stop as clients discover that 24% of its portfolio is in Russia.”

Fed Calls Time On $5.7 Trillion Of Emerging Market Dollar Debt (AEP)

The US Federal Reserve has pulled the trigger. Emerging markets must now brace for their ordeal by fire. They have collectively borrowed $5.7 trillion in US dollars, a currency they cannot print and do not control. This hard-currency debt has tripled in a decade, split between $3.1 trillion in bank loans and $2.6 trillion in bonds. It is comparable in scale and ratio-terms to any of the biggest cross-border lending sprees of the past two centuries. Much of the debt was taken out at real interest rates of 1% on the implicit assumption that the Fed would continue to flood the world with liquidity for years to come. The borrowers are “short dollars”, in trading parlance. They now face the margin call from Hell as the global monetary hegemon pivots. The Fed dashed all lingering hopes for leniency on Wednesday. The pledge to keep uber-stimulus for a “considerable time” has gone, and so has the market’s security blanket, or the Fed Put as it is called. Such tweaks of language have multiplied potency in a world of zero rates.

Officials from the Bank for International Settlements say privately that developing countries may be just as vulnerable to a dollar shock as they were in the Fed tightening cycle of the late 1990s, which culminated in Russia’s default and the East Asia Crisis. The difference this time is that emerging markets have grown to be half the world economy. Their aggregate debt levels have reached a record 175% of GDP, up 30percentage points since 2009. Most have already picked the low-hanging fruit of catch-up growth, and hit structural buffers. The second assumption was that China would continue to drive a commodity supercycle even after Premier Li Keqiang vowed to overthrow his country’s obsolete, 30-year model of industrial hyper-growth, and wean the economy off $26 trillion of credit leverage before it is too late.

These two false assumptions have blown up simultaneously, the effects threatening to feed on each other with wicked force. Russia’s Vladimir Putin could hardly have chosen a worse moment to compound his woes by tearing up the international rulebook and seizing chunks of territory from Ukraine, a country that gave up its nuclear weapons after a pledge by Russia in 1994 to uphold its sovereign borders. Stress is spreading beyond Russia, Nigeria, Venezuela and other petro-states to the rest of the emerging market nexus, as might be expected since this is a story of evaporating dollar liquidity as well as a US shale supply-glut. Turkey relies on imports for almost all its energy and should be a beneficiary of lower crude prices. Yet the Turkish lira has fallen 12% since the end of November. The Borsa Istanbul 100 index is down 20% in dollar terms. Indonesia had to intervene on Wednesday to defend the rupiah. Brazil’s real has fallen to a 10-year low against the dollar, as has the index of emerging market currencies. Sao Paolo’s Bovespa index is down 23% in dollars in three weeks.

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Hey!, that’s my line!

Bankers See $1 Trillion of Investments Stranded in the Oil Fields (Bloomberg)

There are zombies in the oil fields. After crude prices dropped 49% in six months, oil projects planned for next year are the undead – still standing upright, but with little hope of a productive future. These zombie projects proliferate in expensive Arctic oil, deepwater-drilling regions and tar sands from Canada to Venezuela. In a stunning analysis this week, Goldman Sachs found almost $1 trillion in investments in future oil projects at risk. They looked at 400 of the world’s largest new oil and gas fields — excluding U.S. shale – and found projects representing $930 billion of future investment that are no longer profitable with Brent crude at $70. In the U.S., the shale-oil party isn’t over yet, but zombies are beginning to crash it. The chart below shows the break-even points for the top 400 new fields and how much future oil production they represent. Less than a third of projects are still profitable with oil at $70. If the unprofitable projects were scuttled, it would mean a loss of 7.5 million barrels per day of production in 2025, equivalent to 8% of current global demand.

Making matters worse, Brent prices this week dipped further, below $60 a barrel for the first time in more than five years. Why? The U.S. shale-oil boom has flooded the market with new supply, global demand led by China has softened, and the Saudis have so far refused to curb production to prop up prices. It’s not clear yet how far OPEC is willing to let prices slide. The U.A.E.’s energy minister said on Dec. 14 that OPEC wouldn’t trim production even if prices fall to $40 a barrel. An all-out price war could take up to 18 months to play out, said Kevin Book, managing director at ClearView Energy, a financial research group in Washington. If cheap oil continues, it could be a major setback for the U.S. oil boom. In the chart below, ClearView shows projected oil production at four major U.S. shale formations: Bakken, Eagle Ford, Permian and Niobrara. The dark blue line shows where oil production levels were headed before the price drop. The light blue line shows a new reality, with production growth dropping 40%.

Even $75 Oil Crashes the Shale-Oil Party

The Goldman tally takes the long view of project finance as it plays out over the next decade or more. But the initial impact of low prices may be swift. Next year alone, oil and gas companies will make final investment decisions on 800 projects worth $500 billion, said Lars Eirik Nicolaisen, a partner at Oslo-based Rystad Energy. If the price of oil averages $70 in 2015, he wrote in an email, $150 billion will be pulled from oil and gas exploration around the world. An oil price of $65 dollars a barrel next year would trigger the biggest drop in project finance in decades, according to a Sanford C. Bernstein analysis last week.

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Yeah, that strong dollar again …

Oil Could Fall To $30 A Barrel: Emirates Boss (CNBC)

The airline industry is set to reap the benefits of lower oil prices, which could fall to as low as $30 a barrel, according to the chief executive of Emirates Airline. “I’ve always thought personally it go well down to 30 again, but we’ll see,” Tim Clark, president and CEO of Emirates Airline, told CNBC in an exclusive interview. “I’ve always said the realistic price for out-of-ground: $70. Should never, ever have been above that.” Although there may be significant volatility across asset classes in the short term, Clark said that a lower oil price would bring back confidence and investment for the aviation industry in the long term. “At the moment we’ve got all sorts of issues. This gives the global economy a fighting chance in the next 18 months to 2 years to get back on a reasonable footing,” he told CNBC.

However Clark argued the gains for Emirates Airlines in particular was currently limited by the strength of the dollar, which was having an impact on the firm’s ability to realize profits in countries like Russia and Australia. In November, the Dubai-based carrier reported a net profit of $514 million, up 8% from the same period last year. Of the $12 billion in revenues, fuel prices accounted for 38% of operating costs. “But if fuel falls to 50 or goes below – then of course the business will pick up. Much will depend how long it lasts,” he said. The International Air Transport Association this month revised its outlook for 2015, forecasting the industry to post global net profit of $25 billion, up from $19.9 billion this year.

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Everything must fall.

Oil-Led Slump Spurring Fastest Investor Exit Since 2008 (Bloomberg)

Investors are exiting commodities at the fastest pace in six years, betting a slump in prices isn’t over as corn, oil and gold drop close to their cost of production. Open interest in raw-material futures and options is down 5.9% since June, heading for the biggest second-half slump since 2008, exchange data show. U.S. exchange-traded products tracking metals, energy and agriculture saw net withdrawals of $563.9 million in 2014, marking the first two-year slump since the funds were created a decade ago. Commodities are under pressure from many sides. Collapsing oil prices are driving bearish sentiment because energy is used to produce or deliver almost everything, according to SocGen. Low inflation and higher interest rates create an “ugly scenario” for gold, says Bank of America. And weaker currencies in countries that produce everything from soybeans to iron ore mean supplies will continue to climb, Goldman Sachs predicts.

“Now is not a time to be overweighting commodities,” Sameer Samana, a senior international strategist at Wells Fargo Advisors LLC in St. Louis, which oversees $1.4 trillion, said in a Dec. 17 telephone interview. “For now, the outlook is still negative. It wouldn’t surprise us to see prices go down even further. We wouldn’t be taking any tactical positions.” The Bloomberg Commodity Index of 22 products slumped 13% this year, heading for a fourth straight annual drop that will be the longest since the gauge’s inception in 1991. Brent crude tumbled 45%, the biggest loss among the raw materials, after trading below $60 a barrel this week for the first time in five years. Crude, gasoline and heating oil led this year’s declines as an increase in U.S. drilling sparked a surge in output and a price war with producers in OPEC. About 65% of the $20 billion withdrawn from passive-commodities investment this year was driven by energy losses, Aakash Doshi, a Citigroup vice president, said in a Dec. 15 report.

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Not exactly a new comparison, but a thorough analysis, especially of the housing crash.

The Fracturing Energy Bubble Is the New Housing Crash (David Stockman)

Let’s see. Between July 2007 and January 2009, the median US residential housing price plunged from $230k to $165k or by 30%. That must have been some kind of super “tax cut”. In fact, that brutal housing price plunge amounted to a $400 billion per year “savings” at the $1.5 trillion per year run-rate of residential housing turnover. So with all that extra money in their pockets consumers were positioned to spend-up a storm on shoes, shirts and dinners at the Red Lobster. Except they didn’t. And, no, it wasn’t because housing is a purported “capital good” or that transactions are largely “financed” at upwards of 85% leverage ratios. None of those truisms changed consumer incomes or spending power per se. Instead, what happened was the mortgage credit boom came to a thundering halt as the subprime default rates became visible. This abrupt halt to mortgage credit expansion, in turn, caused the whole chain of artificial economic activity that it had funded to rapidly evaporate.

And it was some kind of debt boom. The graph below is for all types of mortgage credit including commercial mortgages, and appropriately so. After all, the out-of-control strip mall construction during that period, for example, was owing to the unsustainable boom in home construction – especially the opening of “new communities” in the sand states by the publicly traded homebuilders trying to prove to Wall Street they were “growth machines”. Soon Scottsdale AZ and Ft Myers FL were sprouting cookie cutter strip malls to host “new openings” for all the publicly traded specialty retail chains and restaurant concepts – along with those lined-up in a bulging IPO pipeline. These step-children of the mortgage bubble were also held to be mighty engines of “growth”. Jim Cramer himself said so – he just forgot to mention what happens when the music stops.

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“The second half of the year we are getting higher rates and the market has to price that in.”

Yellen Makes It Clear That Fed’s Patience on Rates Has Limits (Bloomberg)

Federal Reserve Chair Janet Yellen restored clarity to the central bank’s monetary policy plans, saying it was on course to raise interest rates, though not right away, after officials issued a statement that some Fed-watchers found confusing. Yellen told reporters following a two-day meeting that the Fed is likely to hold rates near zero at least through the first quarter. She also laid out the economic parameters that would need to be met for liftoff to begin later in the year and said that rates probably would be raised gradually thereafter. They may not return to more normal levels until 2017, she added. “The statement was a bit clumsy, while I thought Yellen was very clear,” said Eric Green, head of U.S. rates and economic research at TD Securities USA in New York, who formerly worked at the New York Fed. “The second half of the year we are getting higher rates and the market has to price that in.”

The dollar and yields on Treasury securities rose in response, as investors in those markets processed the likelihood of rate increases by the Fed. The greenback gained against most currencies, with the Bloomberg Dollar Spot Index increasing to almost a five-year high. Yellen’s comments came after a Federal Open Market Committee statement that former Fed official Robert Eisenbeis also called “clumsy.” With investors focused on whether policy makers would retain their stated intention to hold rates near zero for a “considerable time,” the FOMC instead tried to straddle keeping the phrase in and taking it out. The Fed said it can be “patient” in its approach to raising the benchmark lending rate from a range of zero to 0.25%, where it has been since December 2008. At the same time, policy makers said that language was “consistent” with their prior guidance that rates would be held near zero for a “considerable time” after they ended their asset purchases in October.

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He doesn’t even seem fazed.

Putin Says Russia Mustn’t Waste Reserves on Ruble as Economy Sinks (Bloomberg)

President Vladimir Putin said Russia shouldn’t waste currency reserves protecting the ruble as the country braces for a recession brought on by the collapse of the oil price and sanctions over the Ukraine conflict. “Under the most negative external economic scenario, this situation can last two years,” Putin said today at his annual press conference in Moscow. “If the situation is very bad, we will have to change our plans, cut some things.” The president criticized the central bank for not acting faster to support the ruble, which has dropped more than 40% since June as oil trades near a five-year low and sanctions over the Ukraine conflict hit the economy. Putin – who in his wide-ranging news conference with hundreds of reporters sparred with a Ukrainian journalist, reeled off statistics on the fall harvest and spoke about guiding gifted children – vowed to guide the country through the current crisis in the same way he steered Russia through the 2008 financial crisis.

The country’s reserves have declined by a fifth to $416 billion over the past year as the central bank tried in vain to defend the currency. Russia won’t force exporters to exchange revenue earned in foreign currency to prop up the ruble, he said. Putin, who has enjoyed near-record approval ratings since Russia annexed Ukraine’s Crimea peninsula in March, today accused the U.S. and European Union of using the Ukraine conflict as way to contain Russia as they have done since the end of the Cold War through the expansion of NATO, comparing the current situation to a new division akin to the Berlin Wall. “Our partners didn’t stop, they saw themselves as victors, an empire, and all others are vassals and have to be subdued,” Putin said. “The crisis in Ukraine should make our partners understand that it’s time to stop building walls.”

After an emergency meeting, the central bank announced the largest interest rate increase since Russia’s 1998 default in the early hours of Dec. 16, increasing the key rate by 6.5 percentage points to 17%. That failed to halt the slide in the ruble, which at one point during the day fell to a record of 80 per dollar, from 34 half a year ago. It rebounded 12% yesterday after the Finance Ministry pledged to use as much as $7 billion to support the currency. The Russian currency lost about 3% today to 62 rubles to the dollar. The central bank also announced steps yesterday to stabilize the banking system, including allowing lenders to use a third-quarter exchange rate – before the acceleration in the ruble’s decline – to value risk-weighted assets.

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“I believe about two years is the worst case scenario. After that, I believe growth is imminent.”

Putin Predicts Economy Will Recover In Two Years (WaPo)

Russian President Vladimir Putin, under pressure to show how to pull Russia out of its economic crisis, predicted Thursday the country will recover in two years at the most, despite a looming recession, a severely weakened ruble and growing fears about the country’s financial instability. Speaking at his annual year-end news conference, during which he took questions directly from the national and foreign press, Putin said the Russian central bank and the government were taking adequate measures to support the ruble. Putin’s news conference came as Russia suffers through its worst economic challenges since Putin came to power 15 years ago.

“Rates of growth may be slowing down, but the economy will still grow and our economy will overcome the current situation,” Putin said at the televised news conference. “I believe about two years is the worst case scenario. After that, I believe growth is imminent.” A steady depreciation of the ruble has been underway for the last several months, fueled by falling oil prices and Western economic sanctions over Russia’s involvement in Ukraine. But it turned into wild swings in the exchange rate over the past few days, with rates peaking at almost 80 rubles to the dollar Tuesday after the central bank dramatically raised interest rates. The ruble lost more ground against the dollar Thursday, more than 2% weaker on the day, despite central bank action to shore up the currency, which is around 45% down against the dollar this year.

Putin had been silent as the currency collapsed this week before recovering some ground. He acknowledged partly that Russia had helped to lay the groundwork for the current crisis, by having an economy that was not as diverse as it could have been. But in general, he blamed “external factors, first and foremost” for creating Russia’s situation – and continued to be defiant, blaming the West for intentionally trying to weaken Russia and foment problems, economic and otherwise, in the country. “No matter what we do they are always against us,” Putin said, one of a series of observations directed at how he said the West has been treating Russia.

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“.. even if “the Russian bear” started “sitting tight… and eating berries and honey,” this would not stop pressure being applied against the country.”

Western Nations Want To Chain The Russian Bear And Have It Stuffed: Putin (RT)

Western nations want to chain “the Russian bear,” pull out its teeth and ultimately have it stuffed, Russian President Vladimir Putin warned. He said anti-Russian sanctions are the cost of being an independent nation. Putin used the vivid metaphor of a “chained bear” during his annual Q&A session with the media in Moscow in response to a question about whether he believed that the troubles of the Russian economy were payback for the reunification with Crimea. “It’s not payback for Crimea. It’s the cost of our natural desire to preserve Russia as a nation, a civilization and a state,” Putin said. The president said that even if “the Russian bear” started “sitting tight… and eating berries and honey,” this would not stop pressure being applied against the country. “They won’t leave us alone. They will always seek to chain us. And once we are chain, they’ll rip out our teeth and claws. Our nuclear deterrence, speaking in present-day terms,” Putin said.

“As soon as this [chaining the bear] happens, nobody will need it anymore. They’ll stuff it. And start to put their hands on his Taiga [Siberian forest belt] after it. We’ve heard statements from Western officials that Russia’s owning Siberia was not fair,” he exclaimed. “Stealing Texas from Mexico – was that fair? And us having control over our own land is not fair. We should hand it out!” The West had an anti-Russian stance long before the current crisis started, Putin said. The evidence is there, he said, ranging from“direct support of terrorism in the North Caucasus,” to the expansion of NATO and the creation of its anti-ballistic missile system in Eastern Europe, and the way the western media covered the Olympic Games in Sochi, Putin said.

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“Putin said he knows who they are. I hope that they are wearing adult diapers. I wouldn’t be at all surprised if they get Khodorkovskied before too long.”

Can Anybody Find Me … A Central Banker To Love? (Dmitry Orlov)

Some people are starting to loudly criticize Putin for his inaction; but what can he do? Ideologically, he is a statist, and has done a good job of shoring up Russian sovereignty, clawing back control of natural resources from foreign interests and curtailing foreign manipulation of Russian politics. But he is also an economic liberal who believes in market mechanisms and the free flow of capital. He can’t go after the bankers on the basis of ideology alone, because what ideological differences are there? And so, once again, he is being patient, letting the bankers burn the old “wooden” ruble all the way to the ground, and their own career prospects in the process. And then he will step in and solve the ensuing political problem, as a political problem rather than as a financial one.

This strategy carries a very substantial opportunity cost. After all, if the central bank acted on behalf of regular Russians and their employers, it could take some very impressive and effective steps. For instance, it could buy out western-held Russian debt and declare force majeur on its repayment until financial sanctions against Russia are lifted. It could drop its interest rate for specifically targeted domestic industries—those involved in import replacement. And, most obviously, it could very effectively curtail the activities of well-connected financial insiders aimed at destroying the value of the ruble. Putin said he knows who they are. I hope that they are wearing adult diapers. I wouldn’t be at all surprised if they get Khodorkovskied before too long.

This conversion of an insoluble financial problem into a mundane political problem may take a bit of time, but once it has run its course the longer-term prognosis is still reasonably good. Russia has very low government debt, huge gold reserves, and in spite of the much lower price of oil its energy exports are still profitable. You see, at the wellhead Russian oil costs much less than shale oil in the US, or Canadian tar sands, or Norwegian off-shore oil, and so the Russian oil industry can survive a period of low oil prices, whereas these other producers may no longer be around by the time the price of oil recovers.

Because the ruble has dropped even more than oil, the Russian treasury is going to be flush with tax receipts, and won’t have to try to finance a budget deficit. The 18% or so of revenue that the Russian treasury gets from energy exports is significant, but even more significant are the remaining 82%, much of which come from payroll taxes (some of the lowest in Europe, by the way). And therein lies a bigger danger: that because of loss of access to western sources of financing due to the sanctions, coupled with central bank shenanigans with hiking rates instead of dropping them, Russia’s domestic economy will experience a severe downturn.

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Not impressed by the experts here. Russia’s access to dollars has been cut, and they need something to trade in. Moreover, they’ve seen this coming, hence the tripling of reserves over the past decade.

Traders Betting Russia’s Next Move Will Be to Sell Gold (Bloomberg)

Russia’s surprise interest-rate increase failed to stop the plummeting ruble. Another tool available to repair economic havoc caused by sanctions and falling oil prices: selling gold. Russia holds about 1,169.5 metric tons of the precious metal, the central bank said last month. That’s about 10% of its foreign reserves, according to the London-based World Gold Council. The country added 150 tons this year through Nov. 18, central bank Governor Elvira Nabiullina told lawmakers. The Bank of Russia declined to comment on its gold reserves. Russia’s cash pile has dropped to a five-year low as its central bank spent more than $80 billion trying to slow the ruble’s retreat. The currency’s collapse combined with more than a 40% tumble in oil prices this year is robbing Russia of the hard currency it needs in the face of sanctions imposed after President Vladimir Putin’s annexation of Crimea. A fall in gold prices signals that traders are betting that the country will tap its reserves, according to Kevin Mahn at Hennion & Walsh Asset Management.

“Russia is at a critical juncture and given the sanctions placed upon them and the rapid decline in oil prices, they may be forced to dip into their gold reserves,” Mahn said. “If it happens it will push gold lower.” “There are a number of ways that they could use their gold,” Robin Bhar, an analyst at SocGen in London, said today by phone. “They could use it as collateral for bank loans, or for loans from multi-lateral agencies. They could sell it directly in the market if they want to raise foreign-exchange” reserves, including to get more dollars, he said. If Russia decides to sell, the figures to confirm the move wouldn’t be available for a few months, Bhar said. Selling gold is usually “one of the last weapons” for central banks because some use the metal to help back their currencies, George Gero at RBC Capital Markets in New York, said in a telephone interview.

“They are probably still accumulating gold and keeping it for a bigger crisis,” he said. Russia has tripled its gold reserves since 2005, according to data compiled by Bloomberg. Its holdings compare with about 70% for the U.S. and Germany, the biggest bullion holders, the World Gold Council data show. “Russia has been adding to their gold through the turmoil, and it’s their reserve asset, so they would utilize it ultimately,” Michael Widmer, metals strategist at Bank of America Corp. in London, said in a phone interview. “Utilizing can mean a whole range of things. They could use it to raise cash, or use it as swap, or use it as collateral.”

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Time to hike up the fear campaign.

Greece Faces Crisis On Rising Prospect Of Snap Election (CNBC)

An early general election in Greece is looking more likely than ever after the first round of a snap presidential election failed to win the government support on Wednesday. Prime Minister Antonis Samaras’s preferred candidate for president – Stavros Dimas – failed to gain the required 200 votes in the first round of a snap presidential election, gaining only 160 votes. The result raises the chance of a general election, and there is a distinct possibility that the left-wing, anti-austerity party Syriza could win such a vote – potentially putting the country’s international bailout into jeopardy. Syriza currently holds a 3.6-percentage-point lead over the ruling conservatives, a poll published after the first round of a presidential vote on Wednesday showed, Reuters reported. “There’s no doubt that Syriza has had all the momentum politically in the last year to 18 months in Greece and the unpopularity of the bailout is something that is very (prevalent) with Greeks,” David Lea, senior analyst at Control Risks, told CNBC’s “Capital Connection” on Wednesday.

The party has always said it would scrap Greece’s tough austerity policies which were a condition of its two 240 billion euro ($296 billion) bailouts implemented by the International Monetary Fund, European Central Bank and European Commission. Greece is approaching the end of its bailout program, but still needs to implement further austerity measures in order to receive a last tranche of aid from lenders. There will be two further rounds of voting on December 23 and December 29, and if the Greek parliament fails to elect a new president in those votes, a general election will automatically be called. The number of votes a candidate needs drops to 180 in the final round on December 29, but with Greece’s political system as fractious as ever, it looks unlikely that Dimas will gain the support that he needs, analysts said. Lea said it was not “realistic” to expect that Dimas could gain enough votes in the presidential election.

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A load of baloney from Bloomberg’s editorial staff. That new editor in chief certainly hasn’t raised quality so far. Calling Syriza ‘neo-marxist’ is simply emptily leading and insinuating. There’s a lot of that at Bloomberg.

EU’s Greek Drama Needs A Final Act (Bloomberg ed.)

Judging from Wednesday’s vote in the Greek parliament, Prime Minister Antonis Samaras may not get the mandate he wants to keep economic austerity measures in place and avoid defaulting on the country’s debt. His would be the responsible path, but it’s easy enough to see why Greeks wouldn’t want to follow it. The dispute is haunting international investors again because the European Union in general, and Germany in particular, refuses to write off any part of Greece’s sovereign debt. Yet, as most economists acknowledge, the country can never emerge from under its current debt pile -now close to 180% of gross domestic product. And the prospect of endless years of austerity spent in the attempt is political poison. Samaras brought forward Wednesday’s vote for a new president, the first of three, as a vote of confidence. He is essentially daring members of parliament to reject his candidate, Stavros Dimas, because that would force new parliamentary elections – elections that the anti-austerity, neo-Marxist Syriza coalition might win.

Judging by this first vote, in which Dimas secured just 160 votes, it’s going to be an uphill struggle. To win in the third round later this month, Dimas will need 180 votes. Greece, Europe and the bond markets have been on this brink before. Yet each time the circumstances are a little different. For one thing, after six years of austerity policies mandated by the bailout agreement – which have shrunk output and real wages by 20% – the country is now exhausted. The Greek economy may be growing again, but 1 in 4 Greeks are still out of work, and more than 70% of them are long-term unemployed. Those are just numbers, of course, and Greece had certainly been living beyond its means. But what has austerity meant for ordinary Greeks? For one thing, they have gone without adequate health care. Budget cuts have slashed state spending on health by 25%, and on mental health, in particular, by half. Suicides have risen by 45%. HIV infections have increased 10-fold (as needle and condom programs have been reduced). And malaria has returned after 40 years.

With mainstream political parties offering more of the same austerity – even now that the government is running a primary budget surplus – many Greeks are looking to Syriza. It promises to boost spending, reverse the budget cuts, provide free electricity, and yet somehow avoid a formal default or a return to the drachma from the euro. The party says it will persuade international creditors to restructure Greece’s debt and fund Syriza’s spending spree. That’s nuts, of course, except for the restructuring part, which is exactly what Greece’s creditors should do. The country has already secured some debt relief, from private creditors, not to mention €240 billion in bailout loans from the EU and the IMF. Yet the bailout also rescued the German and French banks that loaned Greece money. So restructuring would not only be good for the euro area, but it would also fairly share more of the pain.

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“.. the government’s June 2013 crackdown on fake trade invoicing caused a seize-up in liquidity, pushing banks close to a meltdown.”

$1.3 Trillion In Secret Cash Sneaked Out Of China In The Last 10 Years (Quartz)

China’s capital account might be closed—but it’s not that closed. Between 2003 and 2012, $1.3 trillion slipped out of mainland China – more than any other developing country – says a report by Global Financial Integrity (GFI), a financial transparency group. The trends illuminate China’s tricky balancing act of controlling the economy and keeping it liquid. GFI says the most common way money leaks out in the developing world is through fake trade invoices. The other big culprit is “hot money,” likely due to corruption – which GFI gleans from inconsistencies in balance of payments data. In China, both activities have picked up since 2009. In fact, $725 billion – more than half of the outflows from the last decade – has left since 2009, just after the Chinese government launched its 4 trillion yuan ($586 billion) stimulus package.

Even after that wound down, the government encouraged investment to boost the economy, prodding its state-run banks to lend. Since loan officers dish out credit to the safest companies—those with political backing—this overwhelmingly benefited government officials and their cronies. That’s left small private companies so starved for capital that they’ll pay exorbitant rates for shadow-market loans, which a lot of China’s sketchy trade invoicing outflows likely sneaked back in to speculate on shadow finance and profit from the appreciating yuan. Corrupt officials, meanwhile, shifted their ill-gotten gains into overseas real estate and garages full of Bentleys. Those re-inflows inflate risky debt and had driven up the yuan’s value, threatening export competitiveness.

China’s leaders were not exactly happy about this, and in March its central bank drove down the value of the currency in order to discourage hot money speculation on the yuan’s appreciation. China’s policies leave it with few other options. To avoid the economic nosedive that likely would follow if the bad debt got written down, China’s leaders have the banks extending and re-extending loans, hoping to deleverage gradually. That requires an ever-ballooning supply of money, though. The slowing of China’s trade surplus and foreign direct investment inflows leaves the financial system dependent on new sources of money—like speculative inflows from fake trade invoicing. The danger of this is apparent already. For example, the government’s June 2013 crackdown on fake trade invoicing caused a seize-up in liquidity, pushing banks close to a meltdown.

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“If you play poker with all your cards showing, you can’t bluff.” Told you it was a casino …

Dark Pools in Spotlight as EU Moves to Bolster Markets (Bloomberg)

If you play poker with all your cards showing, you can’t bluff. Traders accustomed to operating in Europe’s dark pools, where buy and sell orders are hidden, say a transparency drive by regulators may similarly deprive them of the secrecy they need to shield their trades from competitors. That could drain the liquidity, and the life, from some of the region’s biggest markets, they say. The European Securities and Markets Authority plans to release draft standards as early as tomorrow that flesh out European Union law. Regulators say the rules, which seek to cap equity trading in dark pools and push more swaps trades on to regulated platforms, will make markets more resilient during crises and less prone to abuse. Some brokers counter that the move will backfire by making trading too expensive.

“The new transparency requirements in the non-equity markets have the capacity to introduce fundamental change to the way dealers do business,” said Peter Bevan, a financial regulation partner at law firm Linklaters LLP in London. “Pre-trade transparency is not such a novelty in the equity markets, but nevertheless there are important changes such as the availability of waivers for the so-called dark pools.” The push to shine light into dark pools is part of a broader overhaul of financial-market rules that takes effect in 2017. While the updated Markets in Financial Instruments Directive, known as MiFID II, has been approved, a host of technical details are still needed for its implementation.

The law expands market disclosure on multiple fronts. For equities, it seeks to cap dark-pool trading by forcing transactions on to recognized platforms and curbing an existing system of waivers from pre-trade transparency rules. These plans include a “double volume cap” that restricts how much traders can rely on two of the waivers. For over-the-counter derivatives, the EU rules will force trading in standard types of contacts on to regulated platforms and require traders to make public some price information before and after the trade. A system of waivers will apply to limit the scope of the disclosure rules, including exemptions for less often traded – known as illiquid – instruments and bulk orders.

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Uruguay has become an interesting nation.

Uruguay Takes on London Bankers, Marlboro Mad Men and the TPP (Truthout)

What the hell is happening in tiny Uruguay? South America’s second smallest country, with a population of just 3.4 million, has generated international headlines out of proportion to its size over the past year by becoming the first nation to legalize marijuana in December 2013, by welcoming Syrian refugees into the country in October 2014 and by accepting the first six US prisoners resettled to South America from the Guantánamo Bay prison on December 6, 2014. Outgoing President Jose Mujica, a colorful former Tupamaros rebel who was imprisoned and brutally tortured by the military during the era of the disappeared in the 1970s under US-supported Operation Condor in Uruguay, Chile, Argentina and other nations of the Southern Cone, is a favorite media subject and has been at the center of these actions.

Yet an even larger story with deeper historical roots and global implications is unfolding simultaneously in Uruguay with minimal media attention. Uruguay has spent the last decade quietly defying the new transnational order of global banks, multinational corporations and supranational trade tribunals and is now in a fight for its survival as an independent nation. It is a rich and important story that needs to be told. For the past 10 years, Uruguayans have been conducting a left-leaning experiment in economic and social democracy, turning themselves into a Latin American version of Switzerland in the process. Under the leadership of the left-leaning Broad Front party, the International Monetary Fund (IMF) reports that Uruguay has enjoyed annual economic growth of 5.6% since 2004, compared to 1.2% annual growth over the last five years in Switzerland.

The Swiss have decriminalized marijuana and gay marriage. Uruguay has legalized both. Prostitution is legal in both countries, and each provides universal health care. According to the Happy Planet Index, Uruguay has the same low per capita environmental footprint as Switzerland, with a similarly widespread sense of well-being among its people in spite of significantly lower per capita GDP. Yet unlike Switzerland, with its highly developed financial services sector and, until recently, safe haven tax policies for global capital, Uruguay has become a prime target for the wrath of multinational corporations and the London bankers who fund them.

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Switzerland feels quite cramped these days.

Swiss National Bank Imposes Negative Interest Rate (Bloomberg)

The Swiss National Bank imposed the country’s first negative deposit rate since the 1970s as the Russian financial crisis and the threat of further euro-zone stimulus heaped pressure on the franc. A charge of 0.25% on sight deposits, the cash-like holdings of commercial banks at the central bank, will be introduced as of Jan. 22, the Zurich-based institution said in a statement today. That’s the same day as the European Central Bank’s next decision. The SNB move follows Russia’s surprise interest-rate increase earlier this week and hints at the investment pressures that resulted after that decision failed to stem a run on the ruble. Combined with the imminent threat of quantitative easing from the ECB, Swiss officials acted at a time when the franc was stuck too close for comfort near its 1.20 per euro ceiling. [..]

“This is not the magic bullet, but will buy them time,” said Peter Rosenstreich, head of market strategy at Swissquote in Gland, Switzerland. “This will relieve pressure from the floor in the short term, but not in the long term.” “Over the past few days, a number of factors have prompted increased demand for safe investments,” the SNB said. “The introduction of negative interest rates makes it less attractive to hold Swiss franc investments, and thereby supports the minimum exchange rate.”

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But I still think a rate hike is exactly what’s coming.

The Fed Is Sitting On a $191 TRILLION Time Bomb (Phoenix)

Stocks are bouncing today because the Fed will wrap up its monthly FOMC meeting and make a public statement this afternoon. Stocks have been rallying into FOMC meetings for the last three years, so traders are now conditioned to buy stocks in anticipation of this. The prime focus for the markets is whether the Fed continues to state that it will raise rates after “a considerable time.” The reality is that the Fed cannot and will not raise rates anywhere near normal levels at any point because doing so would blow up the financial system. Let’s walk through this together. Currently, the US has over $17 trillion in debt. The US can never pay this off. That is not some idle statement… we issued over $1 trillion in NEW debt in the last eight weeks simply because we don’t have the money to pay off the debt that is coming due from the past.

Since we don’t have that kind of money, the US is now simply issuing NEW debt to raise the money to pay back the OLD debt. This is why the Fed NEEDS interest rates to be as low as possible… any slight jump in rates means that the US will rapidly spiral towards bankruptcy. Indeed, every 1% increase in interest rates means between $150-$175 billion more in interest payments on US debt per year. So the Fed wants interest rates low because it makes the US’s debt load much more serviceable. This is why the Fed keeps screwing around with language like “after a considerable time” despite the fact that rates should already be markedly higher based on the Taylor Rule as well as the state of the US economy: it’s all a ruse to pretend the Fed has a real choice in the matter.

However, there’s an even bigger story here. Currently US banks are sitting on over $236 trillion in derivatives trades. Of this, 81% ($191 TRILLION) are based on interest rates. Put another way, currently US banks have bet an amount equal to over 1,100% of the US GDP on interest rates. Guess which banks did this? The BIG FIVE: JP Morgan, CitiGroup, Goldman Sachs, and Bank of America. In other words… the Too Big To Fails… the very banks that the Fed has bailed out, and done everything it can to prop up. What are the odds that the Fed is going to raise rates significantly and risk blowing up these firms? Next to ZERO. Forget about the Fed’s language and its FOMC meeting. The real story is the $100 trillion bond bubble (more like the $200 trillion interest rate bubble based on bonds). When it breaks, it doesn’t matter what the Fed says or does.

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And globally.

2014 Warmest Year In Europe Since 1500s (FT)

Climate change is very likely to have helped make 2014 Europe’s warmest year since the 1500s, scientists have found. In a move that could eventually pave the way for law suits against companies burning fossil fuels, researchers at Oxford university found global warming had increased the risk of such a record being set by at least a factor of 10. Other teams working independently in The Netherlands and Australia said the odds had been boosted by 35 to 80 times. Though there are still two weeks of the year left, temperatures have already been so high in so many countries that 2014 is expected to be the hottest on record in Europe and globally. Climate scientists have said for decades the carbon dioxide emissions produced by burning coal, oil and gas are warming global temperatures. But until recently they have been reluctant to blame global warming for specific weather extremes.

This is starting to change as researchers deploy increasingly sophisticated computer models to compare the chances of such anomalies occurring with and without the influence of humans on the climate. Environmental lawyers are already watching developments in this emerging field of so-called climate attribution science closely, to see if it opens the way for legal action against large fossil fuel companies. “In the early 1900s, before global warming played a significant role in our climate, the chances of getting a year as warm as 2014 were less than 1-in-10,000. In fact, the number is so low that we could not compute it with confidence,” said Geert Jan van Oldenborgh, a climate scientist at KNMI, the Royal Netherlands Meteorological Institute. The institute calculated global warming made this year’s high temperatures in Europe at least 80 times more likely.

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Fascinating story.

‘Vast Stores’ Of World’s Oldest Water (BBC)

The world’s oldest water, which is locked deep within the Earth’s crust, is present at a far greater volume than was thought, scientists report. The liquid, some of which is billions of years old, is found many kilometres beneath the ground. Researchers estimate there is about 11m cubic kilometres (2.5m cu miles) of it – more water than all the world’s rivers, swamps and lakes put together. The study was presented at the American Geophysical Union Fall Meeting. It has also been published in the journal Nature. The team found that the water was reacting with the rock to release hydrogen: a potential food source. It means that great swathes of the deep crust could be harbouring life. Prof Barbara Sherwood Lollar, from the University of Toronto, in Canada, said: “This is a vast quantity of rock that we’ve sometimes overlooked both in terms of its ability to tell us about past processes – the rocks are so ancient they contain records of fluid and the atmosphere from the earliest parts of Earth’s history.

“But simultaneously, they also provide us with information about the chemistry that can support life. “And that’s why we refer to it as ‘the sleeping giant’ that has been rumbling away but hasn’t really been characterised until this point.” The crust that forms the continents contains some of the oldest rocks on our planet. But as scientists probe ever deeper – through boreholes and mines – they’re discovering water that is almost as ancient. The oldest water, discovered 2.4km down in a deep mine in Canada, has been dated to between one billion and 2.5bn years old. Prof Chris Ballentine, from the University of Oxford, UK, said: “The biggest surprise for me was how old this water is. The water reacts with the rocks to create hydrogen – a potential food source for life. “That water is down there is no surprise – water will percolate down into the rock porosity. “But for it to be preserved and kept there for so long is a surprise. “So when you think about what’s down beneath your feet, it’s more exciting than just some rock.”

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Dec 172014
 
 December 17, 2014  Posted by at 12:30 pm Finance Tagged with: , , , , , , ,  


Russell Lee Proprietor of small store in market square, Waco, Texas Nov 1939

Oil Plunge Sets Stage for Energy Defaults (Bloomberg)
Crude Collapse Prompts Great Rotation Into Cash (CNBC)
U.S. Talking Oil Exports Just When World Needs It Least
The Impact of Oil On US Growth (John Mauldin)
Airlines Poised for $12 Billion Global Windfall on Oil Collapse (Bloomberg)
Eight Things I Wish for Wall Street (Michael Lewis)
Regional Banks Key To Wall Street Win On Derivatives (Reuters)
Outspooking Lehman: Could A Russian Default Be In The Cards? (Zero Hedge)
Western Banks Curtail Flow of Cash to Russian Entities (WSJ)
Investors Take Cover From Russia Crisis, Oil Slide (Reuters)
Raiffeisen, SocGen Plummet as Ruble Slide Triggers Bank Worries (Bloomberg)
Plunging Ruble Unsettles Russians, Poses Test for Putin (WSJ)
Feast Turns To Famine For China Trusts (FT)
Giant China Mall Developer Prepares For The End Of Urbanization (Reuters)
Asia Isn’t Ready for a China Crash (Bloomberg)
Europe May Have A Big, Fat Greek Problem (MarketWatch)
Samaras Seeks Greek Parliament’s Backing to Stop Syriza (Bloomberg)
Brussels: Austerity Is For The Little People (RT)
UK Bank Stress Tests: RBS And Lloyds Struggle While Co-Op Fails (Independent)
Philanthropy’s Not Just Charity From The Rich: It’s Self-Serving (Satyajit Das)
California’s Water Woes Quantified (BBC)

No kidding!

Oil Plunge Sets Stage for Energy Defaults (Bloomberg)

Bond investors, already stung by the biggest losses from U.S. energy company debt in six years, are facing more pain as the plunge in oil leads analysts to predict defaults may more than double. While bond prices suggest traders see defaults rising to 5% to 6%, UBS AG said it may actually end up being as high 10% if prices of West Texas Intermediate crude approach $50 a barrel and stay there. Debt research firm CreditSights predicts a jump to 8% from 4%. A borrowing binge by energy companies in recent years to finance new sources of oil has pushed a measure of leverage among the lowest-rated firms above its 2009 peak, according to CreditSights.

The $203 billion of bonds outstanding have lost 14% this quarter and are poised for their worst performance since the end of 2008, Bank of America Merrill Lynch index data show. More than $40 billion of value already has been wiped out, Bloomberg index data show. “The bid for yield caused a lack of discrimination across credits and sectors and people were buying whatever was available,” UBS AG credit strategist Matthew Mish said in a telephone interview from New York. “When you transform from a low-default regime to high default, the re-pricing of risk can be pretty aggressive.” Energy-sector bonds have delivered 14% losses to investors this quarter and are on track for the worst performance since the three months ended December 2008, Bank of America Merrill Lynch index data show.

The decline in the debt, which makes up 15% of the U.S. high-yield bond market, has pushed yields among all junk issues to 7.4%, up from a June low of 5.69% and the most in more than two years, the data show. The yield premium investors demand to hold energy company debt rather than government securities has surged to 10.5 percentage points on average, past the 10-point limit considered distressed, according to data compiled by Bloomberg. About $300 billion of securities linked to 512 bonds across all industries trade as distressed, compared with about 150 six months ago.

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And not a word on their losses?

Crude Collapse Prompts Great Rotation Into Cash (CNBC)

Despite the volatile swings in global equities, fund managers are still confident in stocks but the falling oil price is pushing them to add to their cash holdings, a leading industry survey has found. Cash now makes up 5% of fund manager portfolios on average, according to fund managers polled by the Bank of America Merrill Lynch. Almost a third of those surveyed have hiked their cash positions and are now overweight relative to their benchmarks, as they close out commodity positions. Some 36% of the 214 panelists surveyed for the bank’s monthly fund manager poll, who are collectively running $604 billion, now view oil as undervalued following its recent price crash.

This reading is up over 20 percentage points since October and reflects oil’s lowest level since 2009. Meanwhile, investors have bolstered their positions in European equities. “We are seeing capitulation out of energy and materials to the benefit of the dollar, cash, euro zone stocks and global tech and discretionary stocks,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Research. “The prospect of European Central Bank (ECB) quantitative easing (QE) has brought growing consensus on European equities, but the weakening business cycle and falling commodity prices are working against true earnings recovery,” said European equity and quantitative strategist at the bank, Manish Kabra.

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I say let the US subsidize exports and make the mess complete.

U.S. Talking Oil Exports Just When World Needs It Least

The U.S. Congress is talking about allowing unfettered oil exports for the first time in almost four decades. Its timing couldn’t be worse. There’s space in the global market for 1 million to 1.5 million barrels a day of U.S. crude if the ban vanishes, Energy Information Administration chief Adam Sieminski told a congressional subcommittee at a Dec. 11 hearing. That would be less than 2% of worldwide demand. With prices sliding amid a glut, the figure is bound to be even smaller, according to consultants including Wood Mackenzie. As members of Congress promise more hearings on repealing the restrictions on oil exports, the world is awash in the stuff. Global prices have fallen by almost half since June to the lowest in five years amid slower demand growth and rising supply.

What’s more, the kind of crude flowing in record volumes from U.S. shale plays is already abundant in the market. “If they dropped the export ban today, how much crude would get exported?” Harold York at WoodMacKenzie said. “Today? I say none. At these prices, why would a barrel leave?” Global crude prices have fallen 48% to below $60 for the first time since 2009. Producers say the U.S. shale boom may falter if they can’t reach overseas markets, while refiners fight to keep the limits, which have reduced domestic costs and allowed them to export record amounts of gasoline and diesel. [..] Congress will hold more discussions on repealing the law in 2015, Representative Ed Whitfield, a Republican and chairman of the House Energy and Power Subcommittee, said at the Dec. 11 hearing in Washington.

Sieminski said his export estimates, which come to about 15% of U.S. production at most, were based on demand at foreign refineries for light oil. About 15% of global refining capacity is designed for light oil, compared with about 30% of production, York and his colleague Michael Wojciechowski said by e-mail. During the meeting, Sieminski described the amount of potential shipments abroad as being “more to the lower end than to the upper end” of the range. “The kind of oil we have in surplus here is a light, sweet crude, and the market for that is not unlimited,” he said. “So the question is, how much of that could you put out on the global market” before it’s saturated, he said.

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“Given present supply and demand characteristics, oil in the $40 range is entirely plausible.”

The Impact of Oil On US Growth (John Mauldin)

Texas has been home to 40% of all new jobs created since June 2009. In 2013, the city of Houston had more housing starts than all of California. Much, though not all, of that growth is due directly to oil. Estimates are that 35–40% of total capital expenditure growth is related to energy. But it’s no secret that not only will energy-related capital expenditures not grow next year, they are likely to drop significantly. The news is full of stories about companies slashing their production budgets. This means lower employment, with all of the knock-on effects. [..] This is a movie we’ve seen before, and we know how it ends. Texas Gov. Rick Perry has remarkable timing, slipping out the door to let new governor Greg Abbott to take over just in time to oversee rising unemployment in Texas. The good news for the rest of the country is that in prior Texas recessions the rest of the country has not been dragged down. [..]

With all that as a backdrop, let us return to our original task, which was to think about what will impact the US and global economies in 2015. I’ve been talking to friends and contacts who are serious players in the energy-production sector. This is my takeaway. The oil-rig count is already dropping, and it will continue to drop as long as oil stays below $60. That said, however, there is the real possibility that oil production in the United States will actually rise in 2015 because of projects already in the works. If you have already spent (or committed to spend) 30 or 40% of the cost of a well, you’re probably going to go ahead and finish that well. There’s enough work in the pipeline (pardon the pun) that drilling and production are not going to fall off a cliff next quarter. But by the close of 2015 we will see a significant reduction in drilling.

Given present supply and demand characteristics, oil in the $40 range is entirely plausible. It may not stay down there for all that long (in the grand scheme of things), but it will reduce the likelihood that loans of the nature and size that were extended the last few years will be made in the future. Which is entirely the purpose of the Saudis’ refusing to reduce their own production. A side benefit to them (and the rest of the world) is that they also hurt Russia and Iran. Employment associated with energy production is going to fall over the course of next year.

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Brave talk, but those long term contracts and hedges may end up costing a lot of money.

Airlines Poised for $12 Billion Global Windfall on Oil Collapse (Bloomberg)

Airlines around the world are poised for a $12 billion windfall as the global oil crash cuts bills for jet fuel, the biggest expense in an industry that was battered by surging commodity prices last decade. The savings promise to produce fatter profits and, in the U.S., rewards for shareholders through sweetened dividends or stock buybacks. Missing out so far are consumers, because many carriers are still filling seats without having to resort to discounts. Unlike 2008 and 2009, when sagging travel demand damped the boost from fuel plunging 51% from its peak, crude’s collapse to a five-year low is providing a tailwind for airlines posting record earnings. Profits in 2015 will swell 25% to $25 billion, according to the International Air Transport Association, the trade group for the world’s major airlines.

“They’re dancing in the aisles of their planes,” said George Hobica, president of ticket-price website Airfarewatchdog.com. “All the production in the United States, shale oil and the fact that OPEC has not increased production — maybe high oil was an aberration.” Investors are welcoming a respite from Brent crude that averaged more than $100 a barrel in 2012 and 2013. Led by China Eastern and Air China, the Bloomberg World Airlines Index has soared 25% this quarter while Brent tumbled 37%. “The price slump could hardly have come at a better time for Southeast Asian airlines,” said Peter Harbison, executive chairman of CAPA Centre for Aviation in Sydney. “They have got themselves to a stage where they can be profitable with $100 oil, so for the time being, they will be net beneficiaries.”

U.S. carriers strengthened by mergers since 2008 are also poised to take advantage of the new era. American Airlines, which doesn’t hedge its fuel purchases, said it may save more than $2 billion next year. Even with losses because of fuel contracts pegged to higher prices, Delta said it expects to pay about $1.7 billion less for jet kerosene in 2015 while Southwest forecast savings of $1 billion. “Falling oil prices are a fantastic thing,” Southwest Chief Executive Officer Gary Kelly said last week in an interview.

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Glorious piece by Michael Lewis. Don’t miss.

Eight Things I Wish for Wall Street (Michael Lewis)

It’s a wonderful life on Wall Street, yet here is a holiday wish list to make it even better.

1. The financial sector rids itself of anyone with even the faintest reason to believe that he or she is unusually clever.

All those who have scored highly on standardized tests, or been invited to join Mensa, or finished in the top quartile of any graduating class will be banned. Most of our recent financial calamities — collateralized debt obligations, credit default swaps on subprime mortgage bonds, trading algorithms that prey on ordinary investors, the gaming of rating companies’ models, the rigging of the Greek government’s books so the country might disguise its true indebtedness — required a great deal of ingenuity. Lesser minds would have been incapable of causing so much damage.

Of course, it’s not easy to prevent clever people from working in finance, or from doing anything else they want to do. Perhaps now more than ever, clever people are habituated to being paid to ignore the spirit of any rule — which is one reason they have become such a problem on Wall Street. Upon seeing a new rule they do not think, “What social purpose does this serve, and how can I help it to do the job?” They think, “How can I game it?” If it pays to disguise their intellects, clever people will do it better than anyone else. Without further regulation, our entire society would soon be operating in the spirit of the Philadelphia 76ers: Kids tanking the SAT, parents choosing high schools that guarantee failure, intellectual prodigies scheming to gain entry to Chico State. No single rule, by itself, is capable of protecting the rest of us from their intellects. We’ll need more rules.

2. No person under the age of 35 will be allowed to work on Wall Street.

Upon leaving school, young people, no matter how persuasively dimwitted, will be required to earn their living in the so-called real economy. Any job will do: fracker, street performer, chief of marketing for a medical marijuana dispensary. If and when Americans turn 35, and still wish to work in finance, they will carry with them memories of ordinary market forces, and perhaps be grateful to our society for having created an industry that is not subjected to them. At the very least, they will know that some huge number of people — their former fellow street performers, say — will be seriously pissed off at them if they do risky things on Wall Street to undermine the real economy. No one wants a bunch of pissed-off street performers coming after them. To that end …

3. Women will henceforth make all Wall Street trading decisions.

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It was a thoroughly planned strategy.

Regional Banks Key To Wall Street Win On Derivatives (Reuters)

A top Democrat in the U.S. House of Representatives on Tuesday said unpopular Wall Street banks got a long-sought rollback to Dodd-Frank reforms through Congress last week partly by leveraging the influence of smaller banks that hold greater sway with lawmakers. “They have been working for a long time, trying different strategies on it,” California Representative Maxine Waters said in an interview. “The big banks are in trouble with most legislators… so they put the regional banks in front of them in order to gain more support.” Citigroup and JPMorgan wanted to turn back a provision in the Dodd-Frank law that would have forced banks to push derivatives trading into separate units. The “push out” rule would have boosted banks’ trading costs. The rollback was included in the $1.1 trillion spending package passed by Congress that funds most government agencies through September 2015. Wall Street banks launched a full-court press this year to get the provision into that bill, lawmakers and congressional aides said.

Banks wanted a vehicle most lawmakers would feel compelled to vote for before the rule took effect in July 2015. “They knew this was a must-pass bill,” Waters said. The derivatives rider, first offered by Kansas Republican Representative Kevin Yoder, was agreed on by a bipartisan team negotiating the omnibus spending package. Many Democrats criticized it as going easy on Wall Street. Appropriators said they fought off worse changes to the law and won higher funding for two key regulators. Jamie Dimon, chief executive of JPMorgan, personally called lawmakers before they voted on the package. President Barack Obama dispatched a top deputy Thursday to encourage House Democrats to vote for the compromise. But in interviews after the bill passed, bank lobbyists and Hill staffers said the words “Wall Street” were anathema to most lawmakers. They said banks such as SunTrust and Fifth Third, which had ties to local lawmakers, actually got the changes across the finish line.

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“Hope is not a strategy when it comes to Russia at present.”

Outspooking Lehman: Could A Russian Default Be In The Cards? (Zero Hedge)

(Via Mint – Blain’s Extra Porridge, “Nazhmite Lyubuyu Stavku…“) Extra Comment – this might be getting serious. Russia’s markets have been spanked hard despite last night’s hike. 19% currency crash and 13% down stocks in a session. Ouch! Cumulatively, over the past few weeks stocks, oil and the Ruble are off 50% plus, and bonds off 40%. This morning felt like free-fall. Expect more action from the Russians to stave off economic catastrophe… imminent capital controls are rumoured, but markets are demonstrating a massive loss of confidence. Lots of old market hands are talking about how its similar to the Russia default and crash of ‘98 all over again.. Actually.. its worse. Much worse.

The scale and speed of the current collapse is a magnitude greater, and the effects are accelerated and magnified by the utter absence of liquidity, and by the political stakes at play. Lots of comments about how a Russian crisis might play out and what cornered Putin may do – or be forced into. Let’s not speculate, but it seems pretty clear that any Western support to calm the crisis and stabilise markets would come at a very high personal cost to Putin. That would be a good point to get selectively involved.

It’s too early. We’ve seen a few cautious buyers get wallpapered with Russian and Ukraine paper – and done decent amount of business, but generally none of the main distressed players feel it’s yet time to get involved. “Don’t expect a V-Shaped recovery – its different and aint going to happen..” said one manager. Hope is not a strategy when it comes to Russia at present. The big risk is whether the Russian meltdown can be contained within the borders of the Rodina. All kinds of no-see-ems suggest themselves. What are potential knock-ons into other markets? Perhaps Russians having to unwind London Property, (we understand Russians have been very big buyers in recent weeks prefiguring potential exchange controls), or further ructions in Europe? We’re already concerned European sovereign debt is poised on a knife-edge between brutal reality and over-inflated hopes for QE. A strong nudge from a conflagurating Russia and bang goes Italy?

Or will it come from safe-haven flight triggering sell-offs across every asset class in a replay of 2008? Could a Russia default that will outspook the Lehman apocalypse be on the cards? So much for dull Christmas markets…

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This is why Russia started trading in gold.

Western Banks Curtail Flow of Cash to Russian Entities (WSJ)

Global banks are curtailing the flow of cash to Russian entities, a response to the ruble’s sharpest selloff since the 1998 financial crisis. Such banks as Goldman Sachs Group Inc. this week started rejecting requests from institutional clients to engage in certain ruble-denominated repurchase agreements and other transactions designed to raise cash, according to people familiar with the matter. Bankers and traders say the moves to restrict some ruble transactions have become increasingly widespread among major Western financial institutions this week, even as the same institutions continue to try to profit from the ruble’s wild swings. The moves, which the banks are deploying to protect themselves against further swings in the currency, have the potential to add to the strain on Russia’s financial system. Goldman in recent days largely stopped doing longer-term ruble-denominated repurchase agreements, or repos, in which securities or other assets are swapped in exchange for cash, said a person familiar with the matter.

The Wall Street bank is still doing short-duration ruble repos, those that mature in less than a year, this person said. Online foreign-exchange broker FXCM said Tuesday that, due to the ruble’s volatility, it will stop trading services for the ruble against the dollar as of Wednesday. In a statement, FXCM said it was halting the services in part because “most Western banks have stopped pricing USD/RUB.” Other banks, including Bank of America and Citigroup, haven’t changed their trading with Russia or in rubles, according to people familiar with those banks. The volatility in the ruble exchange rate, which reached a record level above 80 rubles to the dollar before retreating to about 71, is starting to take a toll on the currency markets’ infrastructure. Traders said Tuesday that liquidity in the market had largely evaporated, as speculators refrained from trading. In one sign of the banking industry’s hasty retreat, the London-based manager of an emerging-markets hedge fund said Tuesday that he couldn’t get any banks to trade Russian government bonds with him.

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Oil and Yellen.

Investors Take Cover From Russia Crisis, Oil Slide (Reuters)

An uneasy hush settled over Asian markets on Wednesday as a brewing financial crisis in Russia and the rout in oil prices sent investors scurrying for the cover of top-rated bonds. Yields on British, German and Japan sovereign debt had all hit record lows while long-dated U.S. and Australian yields reached their lowest since 2012. Asian share markets were mixed with Japan’s Nikkei recouping a sliver of its recent hefty losses. MSCI’s index of Asia-Pacific shares outside Japan slipped 0.6% to a nine-month trough. In Europe, the FTSE is seen opening down 0.9%, the DAX 1.2% and the CAC 1.6%. The stakes were all the greater as the U.S. Federal Reserve’s last policy meeting of the year could well see it drop a commitment to keeping rates low for a “considerable period”.

That would be taken as a step toward raising interest rates, even as growth in the rest of the world sputters and falling commodity prices add to the danger of disinflation. A new wrinkle was the risk of financial contagion spreading from Russia where an emergency hike in interest rates failed to stop the ruble’s descent to new lows. It was quoted around 68.00 to the dollar, having been as far as 80.00 at one stage on Tuesday as speculation mounted that Moscow will have to tighten further or perhaps impose capital controls. The urge to close leveraged positions caused collateral damage to the dollar as investors had been very long of the currency in anticipation of further gains, and helped the euro up to $1.2510.

The rush from risk tended to benefit the safe haven yen, with the dollar back at 116.79 having been atop 118.00 on Tuesday. The commodity linked Australian dollar also took a dive to a five-year trough of $0.8157. A year-end dearth of liquidity was leading to wild moves in even the most staid of assets. The oil-exposed Norwegian crown for instance, hit an all time low by one measure on Tuesday after carving out the widest daily trading range since the global financial crisis. “The combination of the rouble crisis and poor liquidity broadly resulted in a period of total dysfunction across global FX and rate markets,” reported analysts at Citi.

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Exposure to Russia is huge for European banks, when compared to US banks. Europe may well turn on the US over sanctions.

Raiffeisen, SocGen Plummet as Ruble Slide Triggers Bank Worries (Bloomberg)

Raiffeisen Bank and Societe Generale, the European banks with most at stake in Russia, led European lenders lower as the ruble continued its slide today, defying a surprise rate increase. Raiffeisen fell as much as 10.3% to 11.40 euros in Vienna, the lowest level since it went public in 2005. Societe Generale dropped as much as 7.3% to €31.85, hitting the lowest intraday level since August 2013. The STOXX 600 Banks index was 1.4% lower at 2:25 p.m. in London. “More fundamental concerns are building over the outlook for Russia’s economy and the likely policy response,” Neil Shearing, an economist at Capital Economics in London, wrote in a note to clients.

“There remains a huge amount of uncertainty at this juncture, but the key point is that there are no benign scenarios. Even if the ruble does stabilize over the coming weeks, the economic crisis facing Russia has much further to run.” Societe Generale is the bank that has the biggest absolute exposure to Russia, at €25 billion ($31 billion), according to Citigroup analysts. That’s equivalent to 62% of the Paris-based bank’s tangible equity. Raiffeisen has €15 billion at risk in Russia, almost twice its tangible equity, and it also has the biggest exposure to Ukraine, with €4.9 billion, according to Citigroup. UniCredit, the third European bank strongly invested in the former Soviet Union, has €18 billion at stake in Russia, or 40% of its tangible book value, Citigroup said.

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Obvious.

Plunging Ruble Unsettles Russians, Poses Test for Putin (WSJ)

As Russian President Vladimir Putin has ratcheted up the conflict with the West for most of the year, the economic fallout on ordinary Russians has been limited. Suddenly, though, the plunging ruble is reawakening fears of rising prices and the kind of financial crisis Mr. Putin has sought to put behind his country. As the ruble hit a record low, falling as much as 20% against the dollar Tuesday, Moscow residents rushed to buy electronics and other big-ticket items and drained rubles from ATMs to swap them for dollars and euros – signaling a new feeling of vulnerability among Russians and a fresh challenge to their leader. From St. Petersburg to Siberia, money changers ran out of foreign currency and were raising exchange rates. Sberbank , Russia’s state savings bank, and Alfa Bank, Russia’s largest private lender, said they were experiencing a rush for dollars and euros. “

The demand is enormous. People are bringing piles, huge piles of cash. It is madness,” said Kamila Asmalova, a manager at Sberbank. The branch ran out of foreign currency by 2 p.m., she said. Lanta Bank, a midsize Moscow lender, said its foreign counterparts would be unable to send foreign currency Wednesday as aircraft that typically transport cash are full. Apple said it halted online sales in the country because of the ruble’s volatility, and IKEA announced it would raise prices there. The ruble’s continued fall despite the Russian central bank’s move to raise interest rates to 17% rippled across global markets Tuesday, fueling a selloff in emerging market currencies and stocks. [..] economists say the Russian central bank’s rate gambit is certain to push the country’s faltering economy into recession by raising borrowing costs. Even before the rate increase, the central bank estimated the economy could contract as much as 4.7% next year if oil remains around $60 a barrel.

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And those trusts were very important in developing the country.

Feast Turns To Famine For China Trusts (FT)

China’s once high-flying trust industry has seen its fortunes reverse this year as a slowing economy and competition for investor funds curb growth. Trust loans outstanding increased for 33 straight months through June this year, helping China’s trust sector surpass the insurance industry as the largest category of financial institution by assets, behind commercial banks. But figures released on Friday showed trust loans falling for a fifth straight month, the longest run of declines since 2010. Overall trust assets, which include loans, publicly traded securities and private equity-style investments, rose at their slowest pace in over two years in the third quarter, figures from the China Trustee Association show.

“The economy has cooled down,” said Deng Jugong, a senior trust industry executive who asked that his employer not be named. “Companies’ demand for finance isn’t very intense.” Just a year ago, trust companies were riding a wave of growth. In 2010, as regulators tried to rein in the explosion in bank credit resulting from the country’s 4 trillion yuan ($645 billion) economic stimulus plan, banks turned to trusts to help them comply with lending controls. Trust companies bought loans from banks and packaged them into high-yielding wealth management products, which they marketed to bank clients as a higher yielding substitute for traditional savings deposits. Trust assets surged to 10.3 trillion yuan at the end of 2013, from just 2.9 trillion yuan in 2011.

Now, however, the central bank has cut interest rates and is urging banks to lend more in a bid to temper an investment slowdown in real estate and manufacturing. “We can’t even push our own loans out the door,” said a banker in Shanghai. “Where are we going to find projects to make trust loans?” At the same time, trust companies are facing increased competition from upstart firms offering savers new forms of high-yielding investment products. Ironically, trust companies — which were often accused of regulatory arbitrage for performing bank-like functions free from the regulatory limits on traditional banks — are warning about the risks of even more lightly regulated peer-to-peer lenders. “As long as there’s profit to be made, people will swarm towards it like wasps,” said Mr Deng. “This P2P market looks very chaotic. But we trust companies have to get approval from the bank regulator.”

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That would be something. The numbers are wild: “The number of people moving to cities has slowed to 17 or 18 million annually, down from 20 million at the peak ..” Try that 10 years in a row.

Giant China Mall Developer Prepares For The End Of Urbanization (Reuters)

The billionaire behind shopping mall developer Dalian Wanda says China’s era of rapid urbanization will end within a decade, so he is speeding up his company’s shift toward tourism and entertainment after a $3.7 billion initial public offering. Wang Jianlin became China’s fourth-richest man in part by following the migration of 300 million people into cities. His Dalian Wanda Commercial Properties, which debuts on the Hong Kong stock exchange on Dec. 23, owns 159 Wanda Plaza shopping centers across 109 Chinese cities, including 88 projects under construction. “The industry has to seize the last 10 years to transform,” Wang told a business summit in Beijing on Saturday. “Once the urbanization rate hits around 70%, urbanization will be basically completed. Then there may be no more chances.” About 54% of China’s 1.4 billion people now live in cities, and Beijing has set a target of 60% by 2020.

City dwellers earn and spend more, which is critical as China shifts to consumption-led growth instead of manufacturing. Wang’s view is more bearish than some of his property industry peers who see the benefits of urbanization lasting longer. Yu Liang, president of China’s biggest residential developer,China Vanke, said in May that the “golden era” was over although migration to cities would boost the industry for another 15 years. The number of people moving to cities has slowed to 17 or 18 million annually, down from 20 million at the peak, said Tang Wang, a China economist at UBS in Hong Kong. A big obstacle for workers wanting to move to cities from the countryside is that the government restricts the number of people who can obtain “hukou” residency benefits such as affordable housing and schooling in metropolitan areas. “It’s not really about people going to the city but people staying in the city,” Tang said.

In the boom years, Dalian Wanda opened malls primarily in fast-growing provincial cities instead of focusing on Shanghai and Beijing. Close ties with local governments helped Wang obtain cheap land for malls, and he expanded quickly. Dubbed “Nouveau Riche Plaza” by netizens, Wanda Plazas – which typically house a cinema, children’s arcade, karaoke bar and hypermarket – are dominated by premium local and mid-tier international fashion brands. A 27% drop in first-half 2014 revenue illustrates why Dalian Wanda is keen to change course now. The company blamed fewer project completions and lower selling prices, a symptom of China’s weakening property market. “This path (of rapid expansion) cannot be sustained,” Wang said. “China’s land resources, China’s fiscal resources and China’s markets won’t be able to support it.”

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The world as a whole isn’t.

Asia Isn’t Ready for a China Crash (Bloomberg)

As China’s first full year of rebalancing draws to close, how has President Xi Jinping done? Reasonably well, it seems. Growth appears to be moderating gently, stocks continue to soar and most economists still foresee a soft landing rather than market-shaking meltdown for the world’s second-largest economy. Next year, however, Xi’s team will have to get to the hard stuff: taming an opaque, unwieldy financial system. My question isn’t so much whether China will or won’t crash. It’s whether the rest of Asia is ready for the possibility of 5% or even 4% Chinese growth, as predicted by pundits like Larry Summers and Marc Faber. It’s almost certainly not. Historically, hedge funds betting against China haven’t done very well. This week, in fact, the government is expected to revise 2013 GDP figures upward by as much as $275 billion, which on paper should help meet its target of 7.5% growth for the year.

For anyone who thinks China is operating even close to that number, though, I have two words: iron ore. Even more than the precipitous drop in oil, the halving of prices for these pivotal rocks and minerals as well as a 44% plunge in oil and tumble in coal and other commodities suggests that China may be braking rapidly. It’s important to remember that however large, China’s economy is no more developed than South Korea’s was when it imploded in 1997. The Chinese financial system is less evolved than that of the Philippines and less open than Indonesia’s. Beijing’s $3.9 trillion of currency reserves are useful when market turmoil hits, as has happened in emerging markets this week. But that stash is dwarfed by the $19 trillion in credit extended by the banking system since the 2008 Lehman crisis, according to Charlene Chu of Autonomous Research Asia. And remember: China’s vast and opaque shadow-banking system obscures Beijing’s true liabilities.

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We have hope.

Europe May Have A Big, Fat Greek Problem (MarketWatch)

Greece is back in the epicenter of a political drama, with fears that the latest development could spread to the rest of the eurozone. After the Greek government decided to push forward the date of a presidential vote, now scheduled for Wednesday, investors have been forced to consider the implications of a deadlock in parliament, which could end up leading to snap elections in January. The biggest fear is that far-left party Syriza could win an early-2015 election, fueling fresh concerns about Greece’s bailout program and whether the country will stay in the eurozone. “Recent developments in Greece are worrisome to investors. Many fear that the political challenges in Greece could lead to its ultimate exit from the monetary union and default,” analysts at Brown Brothers Harriman said in a research note earlier this week. Just how worrisome these developments are to investors is illustrated in the chart below.

Traders in Europe first got a chance to react to the news on Tuesday morning last week and the initial reaction was run. In that one day, Greece’s Athex Composite index tanked 13%, marking the worst day ever for the benchmark, according to FactSet data. It also dragged down the pan-European Stoxx Europe 600 index, which took a 2.3% dive. For the full week, the Greek index plunged 20%, making it the worst performer in Europe. The wider market rout in Europe was also partly due to the continued slump in oil prices.

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Anything to stay in power.

Samaras Seeks Greek Parliament’s Backing to Stop Syriza (Bloomberg)

Greek Prime Minister Antonis Samaras faces the first real test of sentiment among lawmakers today as he begins the process of trying to elect a new head of state. Lawmakers will hold the first of three possible votes at about 7 p.m. in Athens, with Samaras needing the support of 200 members in the 300-seat chamber to confirm his nominee, Stavros Dimas. The prime minister, whose governing coalition controls 155 votes in the parliament, needs to secure the appointment to avoid a snap election and will have his best chance of success on Dec. 29 when he’ll need the backing of just 180 lawmakers. “Most of them will be keeping their cards close to their chest,” Costas Panagopoulos, chief executive officer at Alco, an Athens-based polling company, said. “

If Dimas gets below 160 votes then things are really difficult. But essentially we’re talking about 30 or so that we’re not sure about, and they won’t reveal their intentions on the first vote.” Samaras triggered a selloff in the country’s stocks and bonds last week when he decided to bring forward the vote on a new president. Opinion polls indicate that the opposition party Syriza, which wants to roll back many of the budget cuts Samaras pushed through to obtain international aid, would start favorite. The yield on benchmark Greek 10-year bonds rose to 9.06% yesterday. Still, that was eclipsed by three-year notes yielding 10.83%, a sign that investors are concerned the government may default.

The Athens Stock Exchange index, which dropped 20% last week, fell 0.3%. A tally of more than 170 votes for Samaras’s candidate would be positive for markets, according to Athanasios Vamvakidis, head of G-10 foreign-exchange strategy at Bank of America Merrill Lynch in London. “What could improve the government’s chances is if they promise early elections in September,” he said. “That could give some independents and smaller parties an excuse to argue they just want to address the negative market reaction.”

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“Exploiting the democratic deficit means turning a rubber stamp into a genuine bludgeon to impoverish society.”

Brussels: Austerity Is For The Little People (RT)

With remarkable timing as nations look at belt tightening, the EU decides to expand its contentious budget once again… Exploiting the democratic deficit means turning a rubber stamp into a genuine bludgeon to impoverish society. Nowhere is this more apparent than in that most detached of anti-democratic institutions – the EU – where the political class are locked in a consistently pointless “something must be done” spiral, creating endless edicts, red tape, and spending which almost, but not quite, entirely fails to sustainably help anybody or anything. When it comes to absurdly mismanaged institutions, the EU is a perfect storm of incompetence colliding with the defiantly ill-conceived zeitgeist of a swaggeringly arrogant caste who believe they can better spend other people’s money than the overtaxed citizens themselves.

This train crash of fiscal mismanagement on a broad European canvas has resulted in the EU racking up unpaid bills of 23.4 billion euros ($29 billion). Even as recently as 2010, the EU only owed five billion euros! To be clear, this isn’t borrowing. That is the mega-curse of spendthrift national governments after decades of indulging in unsustainable spending programs. Rather, this is just unpaid bills – you know, for multiple presidents and their motorcades or private jets – not to mention subsidizing nebulous projects across the EU and indeed beyond (half a billion on puppet theaters and agitprop in Ukraine in recent years, for instance). Oddly enough, the EU’s own auditors remain spectacularly unimpressed by the lack of sound financial controls. They have to date failed to sign off any EU accounts for the past 19 years (out of 19 audits…at least Brussels is somehow consistent).

The whole issue underpins not merely the sheer fecklessness of the dysfunctional EU apparatus, but this rampant incompetence clearly sews the seeds for the pompous “union’s” upcoming demise. After months of wrangling and demands by national government leaders that the EU budget must be clipped to reflect the straitened times, European politicians have just reached an agreement on a new budget for 2015 which neatly demonstrates the remoteness of the Brussels bubble from the reality of life stranded in Europe’s lost decade amongst the continent’s unemployed millions. The blob wins again – and in true EU fashion, the MEPs will rubber stamp the deal next week when the EuroParliament spends another wasteful week in Strasbourg.

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The UK has placed an insane bet on being the no. 1 finance center. The degree of insanity shows in state-backed banks barely passing a moderate stress test.

UK Bank Stress Tests: RBS And Lloyds Struggle While Co-Op Fails (Independent)

Lloyds and Royal Bank of Scotland have barely managed to pass stress tests by the Bank of England examining their resilience in a doomsday scenario of plunging house prices and rising rates. Meanwhile, the Co-op Bank, which had warned that it was likely to fail, was the only one of eight lenders involved to slip up, RBS secured what amounted to a pass only by taking measures to update its capital plan while the tests were held in April. Co-op is working on a new set-up, but it is not expected to have to raise fresh funds even though the tests found its capital would be all but exhausted in the Bank’s stress scenario. Threadneedle Street does not like to talk in terms of pass and fail, but the wafer-thin margins by which the two state-backed banks got through raised concerns in the City over how long it will take for them to start paying dividends again. Both will have to secure permission from the Prudential Regulation Authority, which will make the decision at board level.

Critics said the tests demonstrated that the taxpayer will still ultimately have to act as back-stop in a repeat of the financial crisis of 2007-08. The tests gauged banks’ ability to withstand a 35% fall in house prices and a spike in inflation leading to a rise in interest rates to 4.2%. They were significantly tougher than those imposed by Europe last year. RBS, Lloyds and Co-op were always going to find them difficult because they are more exposed to the housing market than other British banks and are still rebuilding their capital. The trio said they are stronger than they were at the start of the process. Bank of England governor Mark Carney described the exercise as “a demanding test”. He added: “The results show that the core of the banking system is significantly more resilient, that it has the strength to continue to serve the real economy even in a severe stress, and that the growing confidence in the system is merited.”

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“Philanthropy points to weaknesses in the taxation system in redistributing wealth and financing social projects.”

Philanthropy’s Not Just Charity From The Rich: It’s Self-Serving (Satyajit Das)

In an environment of concern about growing inequality, plutocrats, the top 1% or perhaps 0.1% of the population, argue that philanthropy can address the issue of income and wealth distribution, financing initiatives in a variety of social and cultural areas. In reality, it is an exercise in damage control against any backlash by the less well-off. Its perspectives are self-serving, promoting views beneficial to the business and financial interests of the wealthy. The paradox of philanthropy is that enrichment by various means paves the way for conspicuous generosity. A blogger put it more bluntly: “The uber-rich try to do good once they have done their damage… I admire [Bill] Gates and [Warren] Buffett for their generosity… but loathe the system that put them at the top of the food chain.” It is trickle-down economics.

As the humourist Will Rogers joked during the Great Depression: “Money was all appropriated for the top in hopes that it would trickle down to the needy.” Few individuals or corporations “give away” their money. It is placed in tax-efficient trusts or foundations, with the donor retaining substantial control. Contributions are generally tax deductible or protect wealth from the ravages of death, inheritance or estate duties. The trust or foundation also provides employment and status for the donor, his or her family and associates. Donations and good works ensure business advantages and a post-retirement role. Many legally reduce their tax liabilities. Increasingly, sophisticated international tax planning allows profits to be shifted from high-tax to low-tax jurisdictions, using licensing of registered patents, copyrights or trademarks, or intra-group financing arrangements.

Stateless and virtual internet-based firms have become masters of tax as well as information technology. They claim that they are not “doing evil”, rather engaging in “self-taxation”, substituting philanthropic contributions for taxes. This allows them to target areas of specific interest to their owners and managers. In effect, private interests, rather than elected governments, determine how our taxes should be spent. Philanthropy points to weaknesses in the taxation system in redistributing wealth and financing social projects. It undermines government policy, allowing private interests to determine priorities. Donors are free to channel funds to their chosen causes, some noble, some hubristic and some just plain odd. The investment banker Ace Greenberg donated $1m to a hospital so that homeless men could get free Viagra.

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Time to start a camel import business.

California’s Water Woes Quantified (BBC)

Scientists have assessed the scale of the epic California drought and say it will require more than 40 cubic km of water to return the US state to normal. The figure was worked out by weighing the land from space. The American West Coast has been hit by big storms in recent days, but this rainfall is only expected to make a small dent in California’s problems. Researchers described their research at the American Geophysical Union’s Fall Meeting in San Francisco. The US space agency (Nasa) used its Gravity Recovery and Climate Experiment (Grace) satellites in orbit to help make the calculations. These spacecraft measure the very subtle variations in Earth’s gravity as they fly around the globe. This shifting tug results from changes in mass, and this is influenced by the rise and fall in the volume of water held in the land.

Figures quoted by Nasa on Tuesday are for California’s Sacramento and San Joaquin river basins – the state’s “water workhorses”. Grace data indicates total water storage in these basins – that is all snow, surface water, soil moisture and ground water combined – has plummeted by roughly 15 cubic km a year. This number is not far short of all the water that runs through the great Colorado River (nearly 20 cubic km), which is one of the primary sources for import into the state. Jay Famiglietti from Nasa’s Jet Propulsion Laboratory (JPL) in Pasadena, California said: “We’ve shown that it’s now possible to explicitly quantify previously elusive drought indictors like the beginning of the drought or the end of the drought, and importantly the severity of the drought in any point in time.

“That is, we can now begin to answer the question: how much water will it take to end the drought? “We show for the current drought this quantity peaked in 2014 at 42 cubic km of water. That’s 11 trillion gallons, or about one-and-a-half times the volume of Lake Mead. “So, no – the recent rains have not put an end to the current drought at all, but they are certainly welcome.” Rather worryingly, a lot of the deficit – two-thirds – is accounted for by reductions in ground water, which constitutes an unsustainable level of extraction. “Ground water is a strategic reserve in times of drought and we need to be very careful how we manage it,” Dr Famiglietti told BBC News.

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Dec 032014
 
 December 3, 2014  Posted by at 12:25 pm Finance Tagged with: , , , , , , , , , ,  


Harris&Ewing National Emergency War Garden Commission display, Wash. DC 1918

New US Oil And Gas Well November Permits Tumble Nearly 40% (Reuters)
Think Collapsing Oil Is Bullish? Think Again (MarketWatch)
Deficit Spending And Money Printing: A German Point Of View (Salzer)
OPEC Is Wrong To Think It Can Outlast US On Oil Prices (MarketWatch)
Oil War Slams Venezuela, Probability of Default Soars to 84% (Wolfstreet)
Why Oil Is Finally Declining, Which May Lead to Disaster (Lee Adler)
The Financialization of Oil (CH Smith)
Oil, the Ruble and Putin Are All Headed for 63. A Russian Joke (Bloomberg)
What Low Oil Prices Mean For The Environment (Reuters)
French Bank Tells Investors To Dump UK Assets (CNBC)
Australia Headed Into Perfect Storm In 2015 (CNBC)
If Deflation Is So Terrible, Why Are Spain, Greece Growing? (MarketWatch)
Eurozone Business Activity Slumps To 16-Month Low (CNBC)
Non-Eurozone Czech Central Banker: We Need ECB Easing Too (CNBC)
The Gold Fairy Tale Fails Again (Barry Ritholtz)
Stop Talking about NATO Membership for Ukraine (Spiegel)
We Are Starting To Learn Who Owns Britain (Monbiot)
Mediterranean Diet Keeps People ‘Genetically Young’ (BBC)
Olive Oil Prices Soar After Bad Harvest (Guardian)
Stephen Hawking Warns Artificial Intelligence Could End Mankind (BBC)

Putting a brave face on the desperate hope for higher prices, soon. Or else.

New US Oil And Gas Well November Permits Tumble Nearly 40% (Reuters)

Plunging oil prices sparked a drop of almost 40% in new well permits issued across the United States in November, in a sudden pause in the growth of the U.S. shale oil and gas boom that started around 2007. Data provided exclusively to Reuters on Tuesday by industry data firm Drilling Info Inc showed 4,520 new well permits were approved last month, down from 7,227 in October. The pullback was a “very quick response” to U.S. crude prices, which settled on Tuesday at $66.88, said Allen Gilmer, chief executive officer of Drilling Info. New permits, which indicate what drilling rigs will be doing 60-90 days in the future, showed steep declines for the first time this year across the top three U.S. onshore fields: the Permian Basin and Eagle Ford in Texas and North Dakota’s Bakken shale. The Permian Basin in West Texas and New Mexico showed a 38% decline in new oil and gas well permits last month, while the Eagle Ford and Bakken permit counts fell 28% and 29%, respectively, the data showed.

That slide came in the same month U.S. crude oil futures fell 17% to $66.17 on Nov. 28 from $80.54 on Oct. 31. Prices are down about 40% since June. U.S. prices fell below $70 a barrel last week after the Organization of Petroleum Exporting Countries agreed to maintain output of 30 million barrels per day. Analysts said the cartel is trying to squeeze U.S. shale oil producers out of the market. Total U.S. production reached an average of 8.9 million barrels per day in October, and is expected to surpass 9 million bpd in December, the highest in decades, according to the U.S. Energy Information Administration. Gilmer said last month’s pullback in permits was more about holding off on drilling good locations in a low-price environment than breaking even on well economics. “I think in this case this was just a quick response, saying ‘there are enough drill sites in the inventory, let’s sit back, take a look and see what happens with prices,'” he said.

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Hey, that’s my headline!

Think Collapsing Oil Is Bullish? Think Again (MarketWatch)

The biggest story of 2014 isn’t the end of quantitative easing. It’s the unrelenting collapse in oil prices, and what that means for stock markets worldwide. The meme out there? Falling oil is bullish. After all, the more oil falls, the more consumers and companies save. I’m sorry, but there are a number of flaws with this argument. First of all, falling oil can be bullish, but collapsing oil tends to historically be very bearish. Many major corrections and bear markets have been preceded by oil in a precipitous fall. Second, people forget that several state budgets actually rely on tax revenue that is derived from oil drilling and exploration activities. If that tax revenue collapses because those companies collapse on that oil decline, what’s the response by those states? Raises taxes on, you guessed it, consumers.

Third, you might want to be careful what you wish for when it comes to falling oil prices. A good amount of many junk-debt indices is made up of energy-sector bonds. Junk-debt spreads have been widening, and should defaults occur in the energy space, that could serve as a butterfly effect for all bonds. The biggest thing that counters the “collapsing oil is bullish” meme is the behavior of defensive sectors of the stock market, which our equity sector ATAC Beta Rotation Fund BROTX, +0.68% has the ability to position all in to based on our proprietary risk trigger. If indeed falling oil were bullish, shouldn’t more cyclical areas of the market rally on that? If falling oil were bullish, shouldn’t U.S. small-cap stocks — which are heavily dependent upon domestic U.S. revenue growth — be substantially outperforming?

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And that’s my line! “Why do we insist upon economic growth, if we don’t actually need the products which are additionally produced every year?” Good to see I’m not the only one writing about that.

Deficit Spending And Money Printing: A German Point Of View (Salzer)

What we experience today is completely contrary to the German (maybe not the U.S.) understanding of the role of the Central Bank. The ECB has now assumed a role not only to protect the value of our common currency against inflation but also to take action as if it is responsible to create economic growth and full employment with instruments like money printing, zero interest rates and unlimited investments in bonds which the free market is rejecting.

We pay a high price for the chimera that we need constant economic growth and that it is a stigma if our GDP-growth is only 1.5% p.a. Can’t we accept that after 50 years of undisturbed peace and continuous prosperity we have reached a certain degree of personal satisfaction where we don’t need a new car every year, another cell-phone, additional furniture, more TV-sets, more laptops etc, etc.

Why do we insist upon economic growth, if we don’t actually need the products which are additionally produced every year? Is it really worth it to increase the already heavy burden of public debt, which our children must service someday, by accepting even more debt in a vain effort to increase public demand? Let’s instead be happy with zero GDP growth, zero inflation and zero growth of public debt! That could be a more rational solution. Why don’t we consider it?

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To what extent is North Dakota spinning its numbers? ” .. the state of North Dakota says the average cost per barrel in America’s top oil-producing state is only $42 [..] In McKenzie County, which boasts 72 of the state’s 188 oil rigs, the average production cost is just $30, the state says.”

OPEC Is Wrong To Think It Can Outlast US On Oil Prices (MarketWatch)

Give Saudi Arabia credit: Whoever sets oil-production policy for the desert kingdom has guts. Unfortunately, the sheiks have made what’s likely to become a sucker’s bet. You know this part already, but the 12-nation Organization of the Petroleum Exporting Countries last week declined to cut production, sending Brent crude oil futures tumbling to their cheapest point since 2009. The Saudis appear to be spoiling for a fight, trying to find out exactly how cheap oil must be to force surging U.S. shale-oil production to seize up like an unlubricated engine. “Naimi declares price war on U.S. shale oil,” a Reuters headline shouted, referring to Saudi Arabia Oil Minister Ali al-Naimi. But there are at least three big problems with this strategy.

One, North American crude isn’t as expensive to produce as it used to be. Two, there’s more than you think in the pipeline to make it even cheaper. And third, OPEC nations, including Saudi Arabia, have squandered their edge in cheap oil supplies on welfare states rulers can’t easily cut back. In 2012, when U.S. shale burst into public consciousness, common wisdom was that it would cost at least $70 to $75 a barrel to produce. As recently as last week, saying U.S. producers could tolerate $60 oil seemed aggressive. But data from the state of North Dakota says the average cost per barrel in America’s top oil-producing state is only $42 — to make a 10% return for rig owners. In McKenzie County, which boasts 72 of the state’s 188 oil rigs, the average production cost is just $30, the state says.

Another 27 rigs are around $29. That’s part of why oil companies aren’t cutting capital spending much — and they say they can keep production rising without spending more, by getting more out of wells they have already drilled. A key example is mega-independent Devon, which produces about 200,000 of the 9 million-plus barrels the U.S. drills each day. Devon wouldn’t give an interview, but said last month that it expects production to rise 20%-25% next year with little growth in capital spending. It has room to work because its pretax cash profit margins have widened by 37% in the first nine months of this year, to almost $30 per barrel of oil equivalent. More than half its 2015 production is protected by hedges if prices stay below $91 a barrel, the company says.

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Can the CIA finally take over?

Oil War Slams Venezuela, Probability of Default Soars to 84% (Wolfstreet)

OPEC member Venezuela has one of the largest oil and natural gas proven reserves in the world. It’s the 12th largest producer in the world. It’s still one of the top suppliers of crude oil to the US. Oil produces 95% of Venezuela’s export earnings. Oil and gas account for 25% of GDP. Oil is Venezuela’s single most important product. Oil is its critical source of foreign currency with which to pay for all manner of imported consumer and industrial products. But the price of oil has plunged 35% since June. Venezuela was already in trouble before the price of oil plunged. The fracking boom in the US and the tar-sands boom in Canada have been replacing Venezuelan imports of crude to the US for years.

The Keystone pipeline, if Congress approves it, will replace costly oil trains to move Canadian tar-sands crude to US refineries, making it even more competitive with Venezuelan crude. Shipments of crude from Venezuela to the US will continue to dwindle. Venezuela’s budget deficit is 16% of GDP, the worst in the world. Inflation is running at a white-hot 63%, also the worst in the world. The economy is heavily subsidized, but now the money for the subsidies is running out. Currency controls have been instituted to shore up the Bolivar. But instead, they’re strangling what is left of the economy. Anti-government protests and riots burst on the scene earlier this year as the exasperated people couldn’t take it any longer. The scarcity of even basic consumer products such as toothpaste and toilet paper has now spread across the spectrum, including medical supplies. Next year, scarcity is going to be even worse.

Venezuelan economist Angel Garcia Banchs worries that “what’s coming to Venezuela is chaos that will probably lead to barbarity and people looting.” It doesn’t help the budget that the government sells its most valuable export commodity at heavily subsidized prices at home, based on a special though iffy deal: the people get cheap energy, and in return, hopefully, they don’t riot, or outright revolt. The hope is that the government gets to stay in power a little longer even as it is going bankrupt. Yet social spending isn’t going to get cut, promised President Nicolas Maduro on state TV on Friday. “If we had to cut anything in our budget, we would cut extravagances, we would cut our own salaries as high officials, but we will never cut one Bolivar of the money that goes to education, food, housing, the missions of our nation,” he said.

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“For the biggest speculators and financiers in the world, oil was a money substitute, a hedge against the massive money printing campaigns of the Fed, the BoJ, and the ECB.”

Why Oil Is Finally Declining, Which May Lead to Disaster (Lee Adler)

The price of oil has finally started to obey the law. What law is that? The Law of Supply and Demand. Thanks to the US fracking boom that has done this (see chart) to US production, the supply of oil worldwide has outstripped demand since 2012. So why haven’t prices fallen before this summer? And are falling oil prices now a good thing? Or not? While US production was exploding, other countries had level or declining production. Meanwhile consumption was falling in developed nations, but the developing world more than made up for that. Worldwide consumption has been steadily increasing since 2009. However, because of the US fracking boom, with the exception of 2011 supply has exceeded demand. Prices should have been declining since 2012, right? After the oil price bubble peaked in 2008, the price of oil did crash when demand dropped. That drop in demand created a huge oversupply just as the US fracking boom was in its infancy.

Then the Fed and its cohort central banks started printing money helter skelter in 2009. The results showed up not only in world stock markets but in commodities as well, particularly oil. The price of oil rose in spite of the fact that world oil production continued to outstrip demand. For the biggest speculators and financiers in the world, oil was a money substitute, a hedge against the massive money printing campaigns of the Fed, the BoJ, and the ECB. It worked for a while, and the oil market even helped in 2011 when supply fell below consumption for a year. But then the US production increase again overran world wide consumption.

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Prices don’t have to sink further to cause mayhem, they only need to stay where they are now.

The Financialization of Oil (CH Smith)

Like home mortgages, oil has been viewed as a “safe” asset. The financialization of the oil sector has followed a slightly different script but the results are the same: A weak foundation of collateral is supporting a mountain of leveraged, high-risk debt and derivatives. Oil in the ground has been treated as collateral for trillions of dollars in junk bonds, loans and derivatives of all this new debt. The 35% decline in the price of oil has reduced the underlying collateral supporting all this debt by 35%. Loans that were deemed low-risk when oil was $100/barrel are no longer low-risk with oil below $70/barrel (dead-cat bounces notwithstanding). Financialization is always based on the presumption that risk can be cancelled out by hedging bets made with counterparties.

This sounds appealing, but as I have noted many times, risk cannot be disappeared, it can only be masked or transferred to others. Relying on counterparties to pay out cannot make risk vanish; it only masks the risk of default by transferring the risk to counterparties, who then transfer it to still other counterparties, and so on. This illusory vanishing act hasn’t made risk disappear: rather, it has set up a line of dominoes waiting for one domino to topple. This one domino will proceed to take down the entire line of financial dominoes. The 35% drop in the price of oil is the first domino. All the supposedly safe, low-risk loans and bets placed on oil, made with the supreme confidence that oil would continue to trade in a band around $100/barrel, are now revealed as high-risk. [..]

The failure of one counterparty will topple the entire line of counterparty dominoes. The first domino in the oil sector has fallen, and the long line of financialized dominoes is starting to topple. Everyone who bought a supposedly low-risk bond, loan or derivative based on oil in the ground is about to discover the low risk was illusory. All those who hedged the risk with a counterparty bet are about to discover that a counterparty failure ten dominoes down the line has destroyed their hedge, and the loss is theirs to absorb. All the analysts chortling over the “equivalent of a tax break” for consumers are about to be buried by an avalanche of defaults and crushing losses

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Putin is still very popular in Russia. Western media will tell you that’s because of domestic propaganda, but they themselves engage in anti-Putin propaganda over here.

Oil, the Ruble and Putin Are All Headed for 63. A Russian Joke (Bloomberg)

Heard the one about Vladimir Putin, the oil price and the ruble’s value against the dollar? They will all hit 63 next year. That’s the joke doing the rounds of the Kremlin as the Russian government digs in to weather international sanctions over the conflict in Ukraine. According to at least five people close to Putin, pressure from the U.S. and Europe is galvanizing Russians to withstand a siege on their economy. The black humor is part of an image of defiance not seen since the Cold War. As the economy enters its first recession in more than five years, the ruble depreciates to records and money exits the country, Putin’s supporters are closing ranks and say he’s sure to run for another six-year term in 2018. “We are becoming poorer, our savings vanish, prices grow, however we see an opposite effect to the one that is wanted by people who wish to see Putin knocked down,” said Olga Kryshtanovskaya, a sociologist studying the elite at the Russian Academy of Sciences. The jokes just underline their determination to stand till the end, she said.

Putin celebrates his 63rd birthday on Oct. 7. The price of Brent crude sank to a five-year low of $67.53 a barrel this week. The ruble has dropped to near 55 to the dollar from as strong as 34 less than six months ago, meaning it needs to lose another 13% to complete the joke. A friend of Putin who spoke on condition of anonymity said sanctions won’t work because the U.S. and European Union don’t understand the Russian mentality. The country endured the Leningrad siege for more than two years during World War II and will survive this too, he said. “The West is wrong in its understanding of the motivation Putin and his inner circle have,” said Evgeniy Minchenko, head of the International Institute of Political Expertise in Moscow. “They think Putin is a businessman, that money is the most important thing for him and that by pressing him and his allies financially they will break them.”

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Not much so far.

What Low Oil Prices Mean For The Environment (Reuters)

Are low oil prices good or bad for the environment? From one perspective, they’re bad: lower oil prices mean lower gas prices, which in turn encourage people to drive rather than use more environmentally friendly means of transportation. But in the case of U.S. shale oil, lower prices are good for Mother Earth, if only temporarily. Oil prices have been falling steadily since June, and given OPEC’s recent decision not to curb production, it seems they’ll remain low for a while. As Myles Udland pointed out in Business Insider last week, a lot of shale projects have break-even prices beneath the $80-per-barrel price level, but producers become less and less incentivized to start new projects as prices fall. [..] shale drilling permits fell 15% across 12 major shale formations in October, a sign that shale producers are willing to slow their rapid expansion until they can get more bang for their buck. It comes down to opportunity cost.

As Harold Hamm, an early shale pioneer who has lost $10 billion since August (let that sink in), told Bloomberg, “Nobody’s going to go out there and drill areas, exploration areas and other areas, at a loss. They’ll pull back and won’t drill it until the price recovers. That’s the way it ought to be.” Many see OPEC’s refusal to curb output as a multi-billion-dollar game of chicken with U.S. shale producers, whose booming production can be credited with the recent fall in world oil prices. Early evidence shows that it may be working—for now; fuelfix.com reported yesterday that Texas shale permits were down 50% in November. Ultimately, the case can be made that low oil prices are bad for the environment, as they encourage more oil use now, which makes investments in alternative energy less urgent. And the shale isn’t going anywhere–it’s just waiting there patiently for prices to become sufficient for new extraction projects.

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“Stay away from U.K. assets into the 7 May elections ..”

French Bank Tells Investors To Dump UK Assets (CNBC)

French bank Société Générale has told investors to steer clear of U.K. assets and sell sterling, because “zero” reform and political deadlock pose key risks to the country’s economy. “Stay away from U.K. assets into the 7 May elections,” the SocGen global asset strategy team, led by Alain Bokobza, said in the bank’s 2015 outlook. “In the U.K., 2015 will be marked by the General Election, triggering some volatility and pushing the risk premium on the FTSE 100 higher as the debate on the European Union exit gains momentum.” As such, Bokobza recommended: “Minimal exposure to U.K. assets as political deadlock and delayed tightening by the Bank of England should lead to a weakening of sterling.”

This warning comes despite the U.K.’s robust economic growth compared with the euro zone. U.K. GDP grew by 0.7% in the third quarter on the previous quarter, while the euro zone and France grew by just 0.2% and 0.3% respectively over the same period. But the French banking group insisted that U.K. assets remained risky, and had continually underperformed. “We have been underweight on U.K. assets in the last quarters, with little reason for regret. In particular, U.K. equities are underperforming all developed markets, and a lower GBP/USD is one of our strategic calls (with a 1.50 target),” the bank’s asset strategy team said. “So far there has been zero structural reform and no improvement in twin deficits or exports despite a significant devaluation of the currency. Also, the spillover effects of weak euro zone fundamentals have been underestimated. We are concerned, and therefore seek to protect our asset allocation.”

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The perils of having just one main client.

Australia Headed Into Perfect Storm In 2015 (CNBC)

Australia’s economy will undergo a crucial stress test in 2015, faced with a triple whammy from the lagged impact of plunging commodity prices, sharp declines in mining investment and renewed fiscal tightening, says Goldman Sachs. “The challenges are now widely known…but these challenges still lie mainly ahead for Australia rather than behind,” Tim Toohey, chief economist, Australia at Goldman Sachs wrote in a note on Wednesday. On top of the these headwinds, the economy also needs to contend with tighter financial conditions and lower levels of housing investment, said Toohey, factors that had previously helped to offset the slump in the mining sector. The bank expects GDP growth to average just 2.0% next year, down from an estimated 2.9% in 2014, as the economy continues to search for new growth drivers.

The decline in mining investment will continue to be a major drag on the economy, leaving commodity exports and consumption to pick up the slack, the bank said. Australia’s third quarter GDP data published on Wednesday pointed to a sluggish domestic economy, suggesting rebalancing away from mining-driven growth is taking longer than hoped. The economy expanded 2.7% on year in the three months to September, undershooting expectations for growth of 3.1%, as construction spending fell while sliding export prices hit incomes. “This GDP result concurs broadly with the perceived wisdom on the Australian economy, albeit with perhaps a little more domestic weakness than expected, said David de Garis, director and senior economist at National Australia Bank.

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A perfect example of why seeing deflation only as falling prices is so completely useless and dumbing. If you refuse to look a WHY prices fall, you never learn a thing, and you will always be behind. Apart from the fact that the idea of Greece and Spain doing well can easily be refuted by 1000 other data sources, looking at one day or week or month tells you nothing. You need to look at consumer spending over at least the past few years. That would also show more respect for the 25% of the working population, and 50% of youth, who are unemployed in both countries.

If Deflation Is So Terrible, Why Are Spain, Greece Growing? (MarketWatch)

Prices are starting to fall across the European continent. Mass unemployment, and a grinding recession are forcing companies with too much capacity to charge less for their products. Company profits will soon be collapsing, while government debt ratios threaten to spiral out of control. The threat of deflation is so worrying, the European Central Bank is expected to throw everything in its armory to prevent it, and to get prices rising again. It may even move towards full-blown quantitative easing as early as Thursday. But here’s a puzzle. The two countries with the worst deflation in Europe are Greece and Spain. And two of the countries with the best growth? Funnily enough, that also happens to be Greece and Spain. So if deflation is so terrible, how come those two are recovering fastest?

The answer is that deflation is not nearly as bad as it sometimes made out to be by mainstream economists. The real problem is debt. But if that is true, perhaps the eurozone would be better off trying to fix its debt crisis than campaigning to raise prices — especially as it probably won’t have much success with that anyway. There is no question that the eurozone is sliding inexorably towards deflation. Only last week, we learned that the inflation rate across the zone ratcheted down to 0.3% last month, from 0.4% a month earlier, and a significantly lower figure than the market expected. It has been going steadily down for some time. Consumer inflation has not hit the ECB’s target level of 2% since the start of 2013. It has been falling steadily since it peaked at 3% in late 2011

It would be rash to expect that to change any time soon. The oil price has collapsed, and other commodity prices are coming down as well. That will all feed into the inflation rate. Retail sales are still weak, and unemployment is still rising. People who have lost their job don’t spend money — and companies don’t hike prices when the shops are empty.

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Super Mario to the rescue.

Eurozone Business Activity Slumps To 16-Month Low (CNBC)

Business activity in the euro zone fell to a 16-month low in November, according to data released on Wednesday, confirming fears that the region’s economy is faltering. Final euro zone composite Purchasing Manager’s Index (PMI) data from Markit came in at 51.1 in November, below flash estimates of 51.4 released last month. It marks a fall from October’s final reading of 52.1. The composite reading measures both manufacturing and services activity, with the 50-point mark separating contraction from expansion. The figures could put more pressure on the ECB to increase stimulus measures ahead of its next monetary policy announcement on Thursday. There is growing pressure on the bank to start buying government bonds, although Germany has opposed the move to date.

The euro zone data was preceded by disappointing services PMI figures for Germany and France, the euro zone’s largest and second-largest economies respectively. The slowdown across the 18-country region reflected weakness in new order inflows, as new business fell for the first time since July last year. Job creation also remained near-stagnant, Markit said. Chris Williamson, chief economist at Markit, said there were “worrying signs” of economic performance deteriorating in the euro zone’s core countries, which, if sustained, “could drive the region back into recession.” “France remains the biggest concern, suffering an ongoing decline in business activity, but growth has also slowed to the weakest for one-and-a-half years in Germany,” he added.

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“ECB easing is necessary for us, we are closely related with the euro zone and ECB easing should, in the long run, generate more demand in the euro zone, which is helpful for us ..”

Non-Eurozone Czech Central Banker: We Need ECB Easing Too (CNBC)

As the European Central Bank’s (ECB) next policy meeting looms, the governor of the Czech central bank has insisted that further euro zone easing will have “necessary” knock-on benefits for the Czech Republic. The ECB is expected to leave monetary policy unchanged on Thursday, although there are growing calls for the bank to launch a full-blown quantitative easing package. ECB President Mario Draghi is likely to wait until the new year before deciding on sovereign bond-buying measures – a move that Czech National Bank (CNB) Governor Miroslav Singer said he supported. “It (further easing) is helpful for us. ECB easing is necessary for us, we are closely related with the euro zone and ECB easing should, in the long run, generate more demand in the euro zone, which is helpful for us,” Singer told CNBC.

Speaking from the CNB in Prague, Singer said that easing could take some time to filter through to some weaker parts of the euro zone, but added that a weaker euro would help “shield” the Czech Republic’s economy by giving some of the region’s biggest countries a boost. The Czech Republic is a member of the European Union, but doesn’t yet use the euro. Its currency is called the Czech koruna. The euro has weakened against the dollar and other currencies since the summer, falling to a two-year low against the greenback last month after Draghi hinted that the bank was prepared to undertake more stimulus. Singer added that a weaker euro had helped boost countries like Germany, which price their exports in euros. A weaker euro makes euro zone exports cheaper in the global market.

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Barry shares my worries.

The Gold Fairy Tale Fails Again (Barry Ritholtz)

Yesterday, oil rallied 4.3% and gold gained 3.6% as commodities had an up day after a long and painful fall. The fascinating aspect of the trading wasn’t the $45 pop in gold, nor the even greater%age rally in oil, but the accompanying narrative. (As of this writing, each has giving up about half of those gains). When it comes to speculating, especially in precious metals, it is all about storytelling. Over the years, I have tried to remind investors of the dangers of the narrative form (See this, this and this). Following a storyline is a recipe for losing money. Why? The spoken word emerged eons ago and narration was a convenient way to pass along information from person to person, generation to generation. Your DNA is coded to love a good yarn of heroes and villains and conflicts to resolve, preferably in a way that is both exciting and memorable. However, your genetic makeup wasn’t created with the risks and rewards of capital markets in mind. When it comes to being suckers for storytelling, I have been especially critical of the gold bugs.

Since 2011, the gold narrative has been a money loser, the secular bull market for the metal clearly over. However, gold often provides a plethora of teachable moments. I want to point out several recent gold narratives that have been dangerous to investors. One of my favorite narratives involves the SPDR Gold Shares, an exchange-traded fund. The history of this ETF is a fascinating tale, well told by Liam Pleven and Carolyn Cui of the Wall Street Journal. Since its peak in September 2011, GLD has declined 37%. As we discussed almost a year ago, the most popular gold narrative was that the Federal Reserve’s program of quantitative easing would lead to the collapse of the dollar and hyperinflation. “The problem with all of this was that even as the narrative was failing, the storytellers never changed their tale. The dollar hit three-year highs, despite QE. Inflation was nowhere to be found,” I wrote at the time.

More recently, the narrative has shifted. Switzerland was going to save gold based on a ballot proposal stipulating that the Swiss National Bank hold at least 20% of its 520-billion-franc ($538 billion) balance sheet in gold, repatriate overseas gold holdings and never sell bullion in the future. This was going to be the driver of the next leg up in gold. Except for the small fact that the “Save Our Swiss Gold” proposal was voted down, 77% to 23%, by the electorate. Why anyone believed this fairy tale in the first place is beyond me. Surveys of voters suggested that the ballot proposal was likely to fail. And yet there’s muddled thinking about gold among the bears too. Short sellers loaded up on bets that gold would plummet, a mistake in its own right since the outcome was all but foretold. When the collapse failed to materialize as the ballot initiative lost, the shorts had to cover their errant bets, sending spot prices higher (temporarily it seems).

Why do these narratives all tend to fail? For the most part, they reflect information that is already in prices. Markets are far from perfectly efficient (they are kinda- sorta-eventually-almost efficient). But they are more efficient than many seem to assume. What’s that you say? Consumers in China and India are big buyers of gold? You mean, the way they always have been? Indeed, most of the recent narratives contain information that is already reflected in prices. Yesterday, I read a breaking news article that said India’s decision to lift gold import restrictions would have a big, positive impact on prices. The problem with that narrative is that India eased import limits in May – and it moved gold prices higher by all of 0.5%.

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The Germans don’t like what NATO is up to.

Stop Talking about NATO Membership for Ukraine (Spiegel)

Just to be sure there is no misunderstanding: Vladimir Putin bears primarily responsibility for the new Cold War between the West and Russia. These days, you have to make that clear before criticizing Western policies so as not to be shoved into the pro-Putin camp. When NATO foreign ministers meet in Brussels today, the question of Ukraine’s possible future membership in the alliance is not on the agenda. It will, however, overshadow the meeting — and that is the fault of two politicians. During an interview with German public broadcaster ZDF on Sunday night, Ukrainian President Petro Poroshenko said he would like to hold a referendum on NATO membership at some point in the future. And new NATO General Secretary Jens Stoltenberg apparently had nothing better to do than to offer Poroshenko his verbal support and to reiterate the right of every sovereign nation in Europe to apply for NATO membership.

As if that weren’t enough, Stoltenberg added in comments directed at Moscow that “no third country outside NATO can veto” its enlargement. In the current tense environment, open speculation about possible Ukrainian membership in NATO is akin to playing with fire. German Chancellor Angela Merkel proposed the former Norwegian prime minister as NATO chief because he is considered to be a far more level-headed politician than predecessor Anders Fogh Rasmussen. But since he took the helm, differences between the two have been difficult to identify. Hawkish statements made by NATO’s top military commander, Philip Breedlove, haven’t done much to ease the situation either. Why is it even necessary for NATO officers to comment so frequently about Ukraine? Since the outbreak of the crisis, the alliance has expressed the opinion that the conflict cannot be resolved through military means. If that’s true, then wouldn’t it be better if Stoltenberg, Breedlove and company kept quiet?

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“David Cameron has been just as generous with our money: as he cuts essential services for the poor, he has almost doubled the public subsidy for English grouse moors, and frozen the price of shotgun licences, at a public cost of £17m a year.”

We Are Starting To Learn Who Owns Britain (Monbiot)

Bring out the violins. The land reform programme announced last week by the Scottish government is the end of civilised life on Earth, if you believe the corporate press. In a country where 432 people own half the private rural land, all change is Stalinism. The Telegraph has published a string of dire warnings – insisting, for example, that deer stalking and grouse shooting could come to an end if business rates are introduced for sporting estates. Moved to tears yet? Yes, sporting estates – where the richest people in Britain, or oil sheikhs and oligarchs from elsewhere, shoot grouse and stags – are exempt from business rates, a present from John Major’s government in 1994. David Cameron has been just as generous with our money: as he cuts essential services for the poor, he has almost doubled the public subsidy for English grouse moors, and frozen the price of shotgun licences, at a public cost of £17m a year.

But this is small change. Let’s talk about the real money. The Westminster government claims to champion an entrepreneurial society of wealth creators and hardworking families, but the real rewards and incentives are for rent. The power and majesty of the state protects the patrimonial class. A looped and windowed democratic cloak barely covers the corrupt old body of the nation. Here peaceful protesters can still be arrested under the 1361 Justices of the Peace Act. Here the Royal Mines Act 1424 gives the crown the right to all the gold and silver in Scotland. Here the Remembrancer of the City of London sits behind the Speaker’s chair in the House of Commons to protect the entitlements of a corporation that pre-dates the Norman conquest. This is an essentially feudal nation.

It’s no coincidence that the two most regressive forms of taxation in the UK – council tax banding and the payment of farm subsidies – both favour major owners of property. The capping of council tax bands ensures that the owners of £100m flats in London pay less than the owners of £200,000 houses in Blackburn. Farm subsidies, which remain limitless as a result of the Westminster government’s lobbying, ensure that every household in Britain hands £245 a year to the richest people in the land. The single farm payment system, under which landowners are paid by the hectare, is a reinstatement of a medieval levy called feudal aid, a tax the vassals had to pay to their lords.

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Sounds good, tastes good too.

Mediterranean Diet Keeps People ‘Genetically Young’ (BBC)

Following a Mediterranean diet might be a recipe for a long life because it appears to keep people genetically younger, say US researchers. Its mix of vegetables, olive oil, fresh fish and fruits may stop our DNA code from scrambling as we age, according to a study in the British Medical Journal. Nurses who adhered to the diet had fewer signs of ageing in their cells. The researchers from Boston followed the health of nearly 5,000 nurses over more than a decade. The Mediterranean diet has been repeatedly linked to health gains, such as cutting the risk of heart disease. Although it’s not clear exactly what makes it so good, its key components – an abundance of fresh fruit and vegetables as well as poultry and fish, rather than lots of red meat, butter and animal fats – all have well documented beneficial effects on the body. Foods rich in vitamins appear to provide a buffer against stress and damage of tissues and cells. And it appears from this latest study that a Mediterranean diet helps protect our DNA.

The researchers looked at tiny structures called telomeres that safeguard the ends of our chromosomes, which store our DNA code. These protective caps prevent the loss of genetic information during cell division. As we age and our cells divide, our telomeres get shorter – their structural integrity weakens, which can tell cells to stop dividing and die. Experts believe telomere length offers a window on cellular ageing. Shorter telomeres have been linked with a broad range of age-related diseases, including heart disease, and a variety of cancers. In the study, nurses who largely stuck to eating a Mediterranean diet had longer, healthier telomeres. No individual dietary component shone out as best, which the researchers say highlights the importance of having a well-rounded diet.

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But then this does not help. Especially for the poor in southern Europe.

Olive Oil Prices Soar After Bad Harvest (Guardian)

Take it easy with the salad dressing: the price of Italian olive oil has more than doubled in the past year to its highest level in a decade as the impact of drought and a fruit fly infestation has hit production. The price of extra virgin oil from Spain, the world’s biggest producer, is also up 15% year-on-year after olive trees across the Mediterranean suffered from drought and extreme heat in May and June, their peak blooming period when moisture is vital to develop a good crop. Analysts began warning that prices would rise this summer, but the cost of Italian extra virgin olive oil soared by nearly a quarter in November compared with October as the poor state of the harvest became clear, according to market analysts Mintec. Loraine Hudson at Mintec said demand could outstrip supply over the next year as Italian production would be down 35% and global production down 19% to 2.5m tonnes at a time when global consumption is rising.

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“It would take off on its own, and re-design itself at an ever increasing rate ..”

Stephen Hawking Warns Artificial Intelligence Could End Mankind (BBC)

Prof Stephen Hawking, one of Britain’s pre-eminent scientists, has said that efforts to create thinking machines pose a threat to our very existence. He told the BBC:”The development of full artificial intelligence could spell the end of the human race.” His warning came in response to a question about a revamp of the technology he uses to communicate, which involves a basic form of AI. But others are less gloomy about AI’s prospects. The theoretical physicist, who has the motor neurone disease amyotrophic lateral sclerosis (ALS), is using a new system developed by Intel to speak.

Machine learning experts from the British company Swiftkey were also involved in its creation. Their technology, already employed as a smartphone keyboard app, learns how the professor thinks and suggests the words he might want to use next. Prof Hawking says the primitive forms of artificial intelligence developed so far have already proved very useful, but he fears the consequences of creating something that can match or surpass humans. “It would take off on its own, and re-design itself at an ever increasing rate,” he said. “Humans, who are limited by slow biological evolution, couldn’t compete, and would be superseded.”

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