Lewis Wickes Hine News of the Titanic and possible survivors 1912
“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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• 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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• ‘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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