Jul 262020
 


Elaine de Kooning Fairfield Porter #1 1954

 

 

It won’t come as a surprise to anyone that the first half of 2020 has brought, among many other things, renewed calls for the demise of the US dollar. It’s been pretty much a non-stop call for over a decade now, and longer. But this time, like all previous ones, I’m thinking: I don’t see it. I guess my first question is always: please explain why the dollar would collapse before the euro does.

For one thing, the dollar would have to collapse/default against one or more “entities”. The dollar is not like one of those highrises that collapse upon themselves. It will have to default or collapse against something(s) else. Since it is the world reserve currency, that means there would have to be a replacement reserve currency. Yes, that could also be for example gold or SDR’s, or even a basket of currencies, and something like that may happen eventually, but it doesn’t appear in the cards in the short run.

There are really only two candidates for the role, and neither looks at all fit to play it. The euro may have some ambitions in that direction, but it has far too many problems still. The yuan/renminbi certainly has such ambitions, but the Communist party refuses to let it get on stage to show what it’s got. As I recently wrote:

 

The main sticking point for Beijing is a conundrum it cannot solve. The CCP wants to have BOTH a global currency AND total control over that currency. It will have to choose between the two, and cannot make up its mind. So it pretends it doesn’t have to choose. Sure, there has been some advancement for the yuan, but I bet most of that is on the back of the Belt and Road (BRI), and that will turn out to be one of the main victims of the coronavirus. The BRI is China’s very clever way of exporting its overproduction, but potential buyers have other things on their mind today.


Meanwhile, even with that, the yuan is used in only 1.8% of cross-currency payments. [..] The sudden, and rushed, take-over of Hong Kong with the new security law will not help China’s plans to be accepted internationally. [..] The world’s large investors will not put their money into something that Xi Jinping can declare devalued by 50% on a rainy morning when he sees fit. He will have to cede that kind of control.

The euro has made some gains vs the USD recently, going from 1.07 to 1.16 or so, but that means very little once you look at the broader picture. Moreover, the reason the financial press provides for -much of- those gains, which is that the EU supposedly showed “unity” in its recent Recovery Fund talks, is bollocks.

If it showed one thing, it was a lack of unity. That’s why these were the longest talks they ever had. And if this had not been Angela Merkel’s last hurrah, they might not have agreed at all. They paid off the Frugal Four to the tune of hundreds of millions, and that’s how they got a deal. Horse traders.

A simple screenshot from Bloomberg of the USD vs EUR over the last five years makes clear why the recent changes are no big deal. (All BBG screenshots are from July 24 just before 10 AM EDT and all cover a 5 year period.)

 

 

A reserve currency has two roles: being the currency that most international trade is conducted in, and -closely related- being the currency that countries hold most as foreign exchange (FX) reserves. After WWII, the US dollar became the most important currency for trade more or less by default, a position that it greatly strengthened with the petrodollar.

A 2015 SWIFT paper provides details about the US dollar’s share of international trade:

The US dollar prevails as the dominant international trade currency, with a 51.9% share of the value of international currency usage in 2014. The euro is second, with a 30.5% share of the total value. The British pound is third, with a 5.4% share of the total value, followed by Asian currencies such as the Japanese yen and the Chinese yuan.

That’s from five years ago, but things won’t have changed much. The system is complex and inert, it has a very strong resistance against large and sudden changes. (Do note that the euro’s share of international trade is substantially skewed because it includes payments between countries that use the euro as their currency, plus those EU countries that don’t -yet-). Single market, international trade.

And then there’s the dollar’s FX role.

In September 2019, Eswar Prasad at Brookings reported that the dollar’s share of global FX reserves remains around 65%.

The drop from 66 percent in 2015 to 62 percent in 2018, is probably a statistical artifact related to changes in the reporting of reserves. Compared with 2007, however, the dollar’s share of global FX reserves has declined by 2 percentage points while the euro’s share is down 6 percentage points. Over this period, the Japanese yen’s share has risen by 2 percentage points, while other less prominent reserve currencies have increased their total share by 4 percentage points. The renminbi, which was not an official reserve currency in 2007, now accounts for 2 percent of global FX reserves. [..] .. the euro has stumbled, the renminbi has stalled, and dollar supremacy remains unchallenged.

[..] In July 2019, China’s total official reserve assets amounted to just over $3.2 trillion, of which $3.1 trillion (97 percent of the total) was held in the form of FX reserves. Gold holdings amounted to about $89 billion [..] Coming amid rising trade tensions with the U.S., the 5 percent increase in China’s gold stock and the 24 percent increase in the value of its official gold holdings during 2019 have been interpreted as a sign of China’s attempting to diversify its reserve holdings away from U.S. dollars.

If this interpretation was indeed correct, China has a long way to go. Gold now accounts for 3 percent of China’s gross international reserves. From a global financial market perspective, and especially relative to its overall international reserves, the $18 billion increase in the value of China’s gold reserves during 2019 is trivial; it barely registers as a shift in the composition of China’s overall reserves.

Assuming that China still holds 58 percent of its FX reserves in dollar-denominated assets, the value of those assets in July 2019 was $1.8 trillion. So, the value of its gold reserves, $94 billion, is a mere one twentieth of that of China’s dollar-denominated reserves.

With the euro and yuan out of the way as potential reserve currency candidates, we can take a look at gold. Senior commenter Dr.D at the Automatic Earth recently wrote: “As advertised, the US$ is defaulting. What? Where? US$ has been cut in half compared to Silver in 3 months. US$ has been cut in half compared to BTC in 3 months. US$ has been cut in half compared to Gold in 4 years.

Like many people talking about a USD demise, perhaps that’s too much of a dollar-centric view and conclusion. Surely gold and silver can rise vs the USD without announcing an imminent collapse of the latter. And since precious metals tend to go up in times of uncertainty, and COVID has brought shovels full of just that, you would expect them to rise.

Therefore you would have to also look at how they do vs for example the euro, before concluding anything. Note: I didn’t include Bitcoin because it’s too new and volatile. Makes me think of the Lindy Effect, often cited by Nassim Taleb, the idea that the older something is, the longer it’s likely to be around in the future.

Here are a few more Bloomberg screenshots. And yes, gold has done well vs the USD in, say, the past two years, no doubt.

 

 

But gold has pretty much followed the exact same pattern vs the euro:

 

 

Silver has done even better, more recently, vs the USD, though compared to where it was in 2016 it’s not that big a step (barely more than 10%):

 

 

And the pattern of silver vs the euro is so similar it’s almost eery.

 

 

I don’t see anything there that would make me think the dollar is collapsing, no more than the euro is. What I see is gold and silver rising. People move into precious metals, perceived as safe havens; they always do when the world is in turmoil. And don’t forget there are trillions in additional recent central bank money sloshing around that have to move somewhere.

As for the changes of the USD vs the euro: we’ve already seen that they are not exceptional. Losing a few percent vs the euro will not collapse the dollar.

Also, there’s something missing in the discussion as far as I’ve seen: the option that it’s the US itself that wants a lower dollar at this point in time, and actively works to get it lower. A strong dollar works for a strong economy, but not for one weakened by a pandemic and an acrimonious political climate.

But the US has borrowed so much money!, you say. Yes, but so have Europe, and Japan, and China, everyone has who could.

 

A little more about gold, since some are clamoring for a return to the gold standard. Which is not likely, because too many parties would resist, either for ideological or practical reasons. But say you would consider it, then you would as one of the first things you do, look at gold reserves. Here are the top ten gold holding countries per March 2020, as assembled by TradingEconomics.com:

 

 

Note: Britain is not there, because “Between 1999 and 2002 the Treasury sold 401 tonnes of gold – out of its 715-tonne holding – at an average price of $275 an ounce, generating about $3.5bn during the period.” (BBC). Gold is at $1,900 today. Nuff said.

The US gold reserves are so large it would appear to give them an unfair advantage if a gold standard were considered. Same as they have in the current set-up. Then again, if you insert population numbers into the equation, Germany, Italy, Switzerland, even the Netherlands, have more in relative terms. Question is: where does that leave all the others?

Long story short: I don’t see a US dollar default or collapse in the near future. But by all means enlighten me.

 

 

 

 

We try to run the Automatic Earth on donations. Since ad revenue has collapsed, your support is now an integral part of the interaction you have with us.

Thank you.

 

 

It’s very bad luck to draw the line
On the night before the world ends
We can draw the line some other time

X – Some other time

 

 

Support the Automatic Earth in virustime.

 

Apr 162020
 


Dorothea Lange Richmond, California 1942

 

Coronavirus Testing Hits Dramatic Slowdown In US (Pol.)
Antibody Tests For Coronavirus Can Miss The Mark (NPR)
The Coronavirus Is Particularly Unkind To Those Who Are Obese (LAT)
New York Taps Mckinsey To Develop ‘Trump-Proof’ Economic Reopening Plan (R.)
New Zealand PM: Many Restrictions To Be Kept In Place When Lockdown Ends (R.)
Investors Are Underestimating The Economic Shock The World Is Facing (AEP)
Trump Threatens To Adjourn Congress Over ‘Scam’ Preventing Appointments (R.)
US Coronavirus Small-Business Program Funding Nearly Spent (LAT)
Real Time US Labor Market Estimates During 2020 Coronavirus Outbreak (Bick)
Overcapacity/Oversupply Everywhere: Massive Deflation Ahead (CHS)
US Opposition Seen Stalling Major IMF Liquidity Boost (R.)
We Scientists Said Lock Down. But UK Politicians Refused To Listen (G.)
Inception (Ben Hunt)
The Golden Rule (Ben Hunt)
Major Blow To Keystone XL Pipeline As Judge Revokes Key Permit (G.)
FBI Repeatedly Warned Steele Dossier Fed By Russian Misinformation (Solomon)

 

 

We are facing prolonged discussions and chaos about testing. Everyone wants to reopen their economies, but that is not feasible if there is no testing. Nobody wants to go to a bar or an office or factory floor if they can catch a deadly virus there. Very few people will volunteer to sit on, or work on, a plane or train under such conditions, and few countries would welcome travelers anyway.

But from what I gather, testing facilities and capacities are few and far between, other than perhaps in Wuhan or maybe maybe Seoul. Testing 1% of people doesn’t get you anywhere, not with 15-50% of people being asymptomatic carriers infecting others around them.

Many countries claim they don’t need to do more testing, and most do that only because they can’t. And then you get into antibodies testing, and you find the mess and uncertainties are even bigger there. The entire situation screams for one thing: lockdown, minimize contact, but that’s what they all want to get away from.

 

• US records nearly 2,600 #coronavirus deaths in 24 hours – a new record and the heaviest daily toll of any country, Johns Hopkins University reports.

• The total number of US deaths is now 28,326 — higher than any other nation

 

 

Cases 2,094,884 (+ 80,884 from yesterday’s 2,014,000)

Deaths 135,569 (+ 7,977 from yesterday’s 127,592)

 

 

 

From Worldometer yesterday evening -before their day’s close- (Note: Brazil and Russia are climbing fast)

 

 

From Worldometer – NOTE: mortality rate for closed cases remains at 21% –

 

 

From SCMP:

 

 

From COVID19Info.live:

 

 

 

 

How accurate is it anyway?

Coronavirus Testing Hits Dramatic Slowdown In US (Pol.)

The number of coronavirus tests analyzed each day by commercial labs in the U.S. plummeted by more than 30 percent over the past week, even though new infections are still surging in many states and officials are desperately trying to ramp up testing so the country can reopen. One reason for the drop-off may be the narrow testing criteria that the Centers for Disease Control and Prevention last revised in March. The agency’s guidelines prioritize hospitalized patients, health care workers and those thought to be especially vulnerable to the disease, such as the elderly. Health providers have been turning away others in part due to shortages of the swabs used to collect samples.

It’s not clear whether demand has peaked among the groups on the CDC’s priority list. But after being overwhelmed for weeks, commercial labs say they are now sitting with unused testing capacity waiting for samples to arrive. The continued glitches in the U.S. testing system are threatening to impede attempts to reopen the economy and return to normal life. Expanding testing as much as possible is essential so officials have enough data to determine when it’s safe to lift social distancing measures and allow people to go back to work. Continued testing beyond that point will help officials detect — and stamp out — sparks that could set off new outbreaks. FDA Commissioner Stephen Hahn told POLITICO on Tuesday the White House Coronavirus Task Force is continuing to discuss whether changes to the testing criteria are warranted.

“This is part of an ongoing discussion that we’re having,” he said. “People are working overtime on that one.” Hahn’s comments came as the American Clinical Laboratory Association reported that the number of samples commercial labs handle each day fell from 108,000 on April 5 to 75,000 by April 12. The group’s members, including commercial giants Quest and LabCorp, analyze about two-thirds of all coronavirus tests in the U.S. “ACLA members have now eliminated testing backlogs, and have considerable capacity that is not being used,” ACLA President Julie Khani told POLITICO. “We stand ready to perform more testing and are in close communication with public health partners about ways we can support additional needs.”

Read more …

You couldn’t create a bigger mess if you tried with all your might.

Antibody Tests For Coronavirus Can Miss The Mark (NPR)

Dozens of blood tests are rapidly coming on the market to identify people who have been exposed to the coronavirus by checking for antibodies against it. The Food and Drug Administration doesn’t set standards for these kinds of tests, but even those that meet the government’s informal standard may produce many false answers and provide false assurances. The imperfect results could be a big disappointment to people who are looking toward these tests to help them return to something resembling a normal life. First of all, it’s not clear whether someone who has antibodies to the coronavirus in their blood is actually immune. Your body produces these antibodies within about a week of infection.

In many other diseases, people do have a period of immunity after they have been exposed to a microbe and recover from illness. But that has not been demonstrated yet with the coronavirus. Another problem is that test results are wrong much more frequently than you might expect. While tests may truthfully say they are more than 90% accurate, in practical use they can often perform far below that level. [..] Dr. Jeremy Gabrysch runs a mobile medical service in Austin, Texas. He got a supply of antibody tests made by a major Chinese manufacturer and says he has tested several hundred people in the last few days. “We offer the test for people who may have suspected they might have had coronavirus back in February or March when testing with the nasal swab [and PCR diagnostic test] was very limited,” he says. The charge: $49 a test.

Gabrysch says he only tests people when he has other evidence they might have been exposed. “If they had an illness that sounds like it could have been coronavirus and they had a positive antibody test, then it’s very likely that this is a true positive, that they indeed had COVID-19,” he says. The test he’s using, produced by Guangzhou Wondfo Biotech in China, boasts a specificity of 99%, which means it only falsely says a blood sample contains antibodies against the coronavirus 1% of the time. But despite that impressive statistic, a test like that is not 99% correct, and in fact in some circumstances could be much worse.

That’s because of this counterintuitive fact: The validity of a test depends not only on the technology, but how common the disease is in the population you’re sampling. “It is kind of a strange thing,” admits Dr. H. Gilbert Welch, a scientist at Brigham and Women’s Hospital in Boston who studies issues surrounding tests and screening. “An antibody test is much more likely to be wrong in a population with very little COVID exposure.” This is a result of statistics, rather than the technology of any given test.

Read more …

But not those above 65. A very curious finding.

The Coronavirus Is Particularly Unkind To Those Who Are Obese (LAT)

America’s obesity epidemic appears to be making the coronavirus outbreak more dangerous — and potentially more deadly — in the United States, new research suggests. For younger and middle-aged adults in particular, carrying excess weight may significantly boost the likelihood of becoming severely ill with COVID-19. The evidence for this comes from thousands of COVID-19 patients who sought treatment in emergency departments in New York, and it’s prompting alarm among doctors and other health experts. In the U.S., 42.4% of adults have obesity, which means their body-mass index, or BMI, is 30 or more.

In one of two new studies released this week, COVID-19 patients who were younger than 60 and had a BMI between 30 and 34 were twice as likely as their non-obese peers to be admitted to the hospital for acute care instead of being sent home from the ER. They were also 1.8 times more likely to require critical care in a hospital’s intensive care unit. More severe obesity posed an even greater risk to COVID-19 patients in this under-60 age group. When these patients had a BMI of 35 or higher, they were 2.2 times more likely than their non-obese peers to need standard hospital care and 3.6 times more likely to end up in the ICU. “Obesity appears to be a previously unrecognized risk factor for hospital admission and need for critical care,” wrote the authors of the study published this month in the journal Clinical Infectious Diseases.

But that only applies to relatively younger patients; among those ages 65 and older, there was no link between obesity status and hospital care. The authors, from New York University’s Grossman School of Medicine, suggested that the country’s high prevalence of obesity might be nudging rates of severe illness and death higher in the U.S. than in South Korea, China and Italy, where obesity rates are lower. The results also give doctors a new way to predict which COVID-19 patients who are not yet senior citizens run a higher risk of hospitalization and critical illness. “Unfortunately, obesity in people <60 years is a newly identified epidemiologic risk factor,” wrote the researchers, who included 3,615 patients in their study.

Read more …

We need more Wall Street.

New York Taps Mckinsey To Develop ‘Trump-Proof’ Economic Reopening Plan (R.)

New York Governor Andrew Cuomo has hired high-powered consultants to develop a science-based plan for the safe economic reopening of the region that can thwart expected pressure from President Donald Trump to move more rapidly, state government sources told Reuters on Wednesday. Cuomo, along with many other U.S. governors, shut his state economy to limit the spread of the deadly COVID-19 virus and has warned that he is are prepared to keep businesses shut – perhaps for several months more – unless he can assure public safety. Governors from seven East Coast states formed a coalition on Monday, led by New York, to develop a joint reopening plan. Three governors from the West Coast formed a similar plan. The 10 states, mostly led by Democrats, together make up 38% of the U.S. economy.


As part of Cuomo’s effort, McKinsey & Company is producing models on testing, infections and other key data points that will underpin decisions on how and when to reopen the region’s economy, the sources said. Cuomo has also recalled three former top aides: Bill Mulrow, a senior adviser at Blackstone Group; Steven Cohen, an executive vice president and CEO of MacAndrews & Forbes Inc; and Larry Schwartz, a deputy Westchester County executive. Deloitte is also involved in developing the regional plan, a source said. The goal is to “Trump-proof” the plan, said an adviser to New Jersey Governor Phil Murphy. “We think Trump ultimately will blink on this, but if not, we need to push back, and we are reaching out to top experts and other professionals to come up with a bullet-proof plan,” to open on the state’s terms, said a Cuomo adviser.

Read more …

Please don’t claim you’re about to eliminate the virus. Ramp up testing as of your life depended on it.

New Zealand PM: Many Restrictions To Be Kept In Place When Lockdown Ends (R.)

New Zealand Prime Minister Jacinda Ardern said on Thursday that significant restrictions would be kept in place even if the country eases the nationwide one-month lockdown enforced to beat the spread of the coronavirus. New Zealand introduced its highest, level 4 lockdown measures in March, under which offices, schools and all non-essential services like bars, restaurants, cafes and playgrounds were shut down. A decision on whether to lift the lockdown would be made on April 20. The measures were tougher than most other countries, including neighbouring Australia, where some businesses were allowed to operate.


Ardern said if New Zealand moves to the lower level 3 of restriction, it would permit aspects of the economy to reopen in a safe way but there will be no “rush to normality”. “We have an opportunity to do something no other country has achieved, eliminating the virus,” Ardern said at a news conference. New Zealand reported 15 new cases of COVID-19 on Thursday, taking the total to 1,401 in a nation of about 5 million people. There have been nine deaths. Ardern said under level 3, some people could return to work and businesses reopen if they are able to provide contactless engagement with customers. Shops, malls, hardware stores and restaurants will remain shut but can permit online or phone purchases.

Read more …

It’s been a while since I saw a piece by Ambrose Evans-Pritchard. Very much stuck in business-only mode.

Investors Are Underestimating The Economic Shock The World Is Facing (AEP)

Investors are repeating the mistake they made all through February and early March. They are again underestimating the immense economic shock of COVID-19. Can there be any parallel in market history to the surreal clash of narratives we saw this week? Global bourses soared even as the International Monetary Fund painted a series of scenarios ranging from dire – the most violent slump since the Great Depression – to catastrophic, with all the potential chain-reactions spelt out in its Global Financial Stability Report. Yet Goldman Sachs tells us that COVID-19 is under control and the worst is over. “The number of new active cases looks to be peaking globally, projections of cumulative fatalities and peak healthcare usage are coming down,” it says.

From this breathtaking premise, Wall Street’s fashion leader argues that we should “look through” the Great Lockdown to sunlit uplands ahead, anticipating a further 8% rise in the S&P 500 index by the end of the year. We can disregard normal bear market rules. This time we will avoid the textbook sequence of events in recessions: a swift crash followed by a torrid buy-the-dip rebound, and then a slow downward grind over months as reality hits home, ending only in capitulation at far lower levels. Authorities have spared us such a fate by rescuing everything immediately. “The Fed and Congress have precluded the prospect of a complete economic collapse,” it says.

I agree that $5 trillion of central bank QE, vast fiscal packages (10% of GDP in the US), and blanket guarantees, have averted disaster. They have – in a disjointed way – bought time and given us a chance of emerging from this global sudden stop without irreparable damage to the productive system. What is surely wrong is to imagine that this pandemic is a one-off shock lasting three months or so, followed by an early release from lockdowns and a swift return to near normality. The first glimpses of antibody data – such as Denmark’s test on blood donors – show that we are nowhere near the safe threshold of herd immunity.

They confirm fears that the mortality rate is at least 1% of infections and that therefore no democracies can let the virus run its course without overwhelming their health services and destroying their political legitimacy. The supposed trade-off between lives and the economy is an illusion. The most certain way to turn this crisis into a depression is to give up too soon, as Spain is already doing, and Donald Trump is itching to do. We would end up in the worst of all worlds, with multiple waves, and another forced closure of the economy to avert a winter tsunami, requiring trillions more in fiscal relief. [..] “We need a vaccine. Until we get one, the stock markets are in cloud-cuckoo land,” says professor Anthony Costello from University College London.

Read more …

That wouldn’t be wise.

Trump Threatens To Adjourn Congress Over ‘Scam’ Preventing Appointments (R.)

U.S. President Donald Trump threatened on Wednesday to shut down Congress so he could fill vacancies in his administration without Senate confirmation, saying he was frustrated lawmakers were not in Washington to vote on his nominees for federal judgeships and other government positions. “The current practice of leaving town, while conducting phony pro forma sessions, is a dereliction of duty that the American people cannot afford during this crisis,” an angry Trump told reporters at his daily White House briefing on the coronavirus crisis. “It is a scam that they do. It’s a scam and everyone knows it, and it’s been that way for a long time,” Trump said. No U.S. president has ever used the authority, included in the Constitution, to adjourn both chambers of Congress if they cannot agree on a date to adjourn.


It was not immediately clear if Congress’ current absence from Washington because of the global pandemic could be classified as being due to a failure to agree on an adjournment date. The Senate and House of Representatives have both announced plans to return to Washington on May 4, and had been scheduled to be out of Washington for two weeks in April for their annual Easter break even before the coronavirus crisis. Senate Majority Leader Mitch McConnell discussed nominations with Trump on Wednesday and promised to find ways to confirm those “considered mission-critical” to the pandemic, a McConnell spokesman said. “However, under Senate rules, that would take consent from Democratic leader Chuck Schumer,” the spokesman said.

Read more …

It was obvious before it started that it would be a mess.

US Coronavirus Small-Business Program Funding Nearly Spent (LAT)

Democrats and the Trump administration were at a stalemate Wednesday over how to resupply the popular Paycheck Protection Program, which helps small businesses cope during the coronavirus pandemic and is due to run out of money as soon as Wednesday night. The standoff came as Senate Democrats pushed the administration to lay the groundwork for how the nation may reemerge from social distancing and stay-at-home orders. Republicans and Democrats agree they need to provide more funding to the Paycheck Protection Program, which offers forgivable loans to help small businesses maintain their payrolls amid the deep economic fallout from the coronavirus. But the GOP balked at additional Democratic demands, such as tagging some of the funding for businesses that don’t have an existing relationship with a bank that supply the loans.

Participating banks have largely given preference to their current customers. As of 9 p.m. Eastern time Wednesday, the Small Business Administration had approved 1.5 million applications totaling more than $324 billion of the $349 billion that Congress authorized in last month’s $2.2-trillion coronavirus relief package, according to the agency. Sen. Marco Rubio (R-Fla.), chairman of the Senate committee with jurisdiction over small business, said that the program is expected to “grind to a halt” Wednesday evening as it hits its spending limit. “Now 700,000 small business applications are in limbo & no new loans will be made until the game of chicken in Congress ends,” Rubio said on Twitter. “Inexcusable.”

[..] The standoff over the funding program comes as Democrats on Wednesday released a national coronavirus testing strategy, arguing that they’re filling a void left by the Trump administration, which hasn’t released a plan to scale up COVID-19 testing to allow Americans to return to work and school. “The U.S. lags the world in testing and we lead the world in COVID-19 cases,” said Sen. Debbie Stabenow (D-Mich.). “We are raising the alarm bells.” [..] Sens. Lamar Alexander (R-Tenn.) and Roy Blunt (R-Mo.), chairmen of two Senate committees responsible for health policy and spending, have said they want to make COVID-19 antibody testing free to all Americans. They acknowledged the need for widespread testing before people will feel comfortable resuming normal activities outside their homes. But Alexander said the money Congress has already authorized should be used to ramp up testing — not new funding.

Read more …

It takes weeks for jobs numbers to come out. That is too long in virustime. These guys try to fill the gap.

Real Time US Labor Market Estimates During 2020 Coronavirus Outbreak (Bick)

Labor market statistics for the United States are collected once a month and published with a three week delay. In normal times, this procedure results in timely and useful statistics. But these are not normal times. Currently, the most recent statistics refer to the week of March 8- 14; new statistics will not be available until May 8. In the meantime, the Coronavirus outbreak has shut down a substantial portion of the U.S. economy. More timely and frequent data on the impact on the labor force would surely be useful for both policy makers and the broader public. Our core survey closely follows the CPS, which allows us to construct estimates consistent with theirs. The first wave of our survey covers the week of March 29-April 4. Our findings reveal unprecedented changes in the US labor market since the most recent CPS data were collected:

1. The employment rate decreased from 72.7% to 60.7%, implying 24 million jobs lost.
2. The unemployment rate increased from 4.5% to 20.2%.
3. Hours worked per working age adult declined 25% from the second week of March. Half of this decline is due to lower hours per employed as opposed to lower employment.
4. Over 60% of work hours were from home, compared with roughly 10% in 2017-2018.
5. Those who still have their jobs are working fewer hours; 21% report a decline in earnings.
6. Declines were most pronounced for workers who were female, older, and less educated.

Effective policies require timely and accurate data on the scale of the downturn, yet traditional data sources are only made available at a significant lag. For example, the March 2020 Employment Situation report by the the Bureau of Labor Statistics (BLS) only reflected labor market outcomes from the week ending Friday March 13, which precedes most major developments related to the outbreak. The April 2020 Employment Situation report will reflect labor market outcomes from the third week of April, but is not scheduled for release until May 8. The gap between the data needs of policymakers and the time lag of traditional data sources has left policymakers “flying blind” to a significant degree. The goal of this project is to help fill that void. [..]

Our major findings for the last week of March are as follows.
1. Dramatic reductions in employment. (a) We find an employment rate of 60.7% during the first week of April, compared with 72.7% in the second week of March, implying 24 million fewer workers. (b) We find an unemployment rate of 20.2% during the first week of April, compared with 4.5% in the second week of March. One positive note is that over half of the unemployed reported being temporarily laid off, suggesting that many could return to work quickly if conditions improve.

2. Even larger declines in aggregate labor supply than implied by employment alone. (a) Hours worked per working age adult declined 25% from March. In the first week of April, individuals worked 20.4 hours on average, compared with 27.5 weekly hours in the second week of March. (b) Hours worked per employed declined 12% from March. Even those who are still employed are working 4.5 fewer hours per week, a reduction of over half a day of work. This implies that just under half of the decline in hours per working age adult were due to reductions in hours worked per employed, and are therefore not reflected in changes to the employment rate.

3. Unprecedented increase of the share of hours worked from home. (a) We find that 63.8% of work hours were from home during the first week of April, compared with roughly 10% in the Spring of 2017 and 2018.

4. Lower earnings even for individuals still working the same job as in February. (a) We find that 21.9% of workers still working the same job as in February experienced a reduction in their earnings last week compared to February. About half of these reported that their reduction in earnings was 50% or larger. (b) At the same time, 11% of workers with the same job as in February report higher weekly earnings last week compared with February. 5. Disparities in labor market outcomes by sex, age, education, race, and hourly status. (a) Although negative effects are widespread, they are more pronounced among workers who are female, older, and less educated.

Read more …

Charles is right. Restart the whole circus now and there will be no buyers.

Overcapacity/Oversupply Everywhere: Massive Deflation Ahead (CHS)

Oil is the poster child of the forces driving massive deflation: overcapacity / oversupply and a collapse in demand. Overcapacity / oversupply and a collapse in demand are not limited to the crude oil market; rather, they are the dominant realities in the global economy. Yes, there are shortages in a few high-demand areas such as PPE (personal protective equipment), but across the entire spectrum of global supply and demand, there is nothing but a vast sea of overcapacity / oversupply and a systemic decline in demand as far as the eye can see. Here’s a partial list of commodities that are in Overcapacity / oversupply:

1. Overvalued assets 2. Overpriced income streams (as income craters, so will the asset generating the income) 3. Labor: low-skill everywhere, high-skill in sectors experiencing systemic collapse in demand 4. AirBnB and other vacation rental properties 5. Overpriced flats, condos and houses 6. Overpriced rental apartments 7. Overpriced commercial office space 8. Overpriced retail space 9. Overpriced used vehicles 10. Overpriced collectibles

I think you get the idea. Should China restart its export factories, then almost everything being manufactured will immediately be in oversupply, as the global export sector was plagued with mass overcapacity long before the Covid-19 pandemic crushed demand. Incomes will crater as revenues and profits crash, small businesses close their doors, never to re-open, local governments tighten spending, and whatever competition still exists will relentlessly push the price of labor, goods and services lower. Globalization has generated hyper-specialization in local and regional economies, stripping them of resilience. Fully exposed to the demand flows of a globalized class of consumers with surplus discretionary income, regions specialized in tourism, manufacturing, commodity mining, etc.

All these regions are now facing a structural collapse of global demand, and they have no diversified local economy to cushion the blow to jobs, incomes, profits and tax revenues. Thousands of small business that could barely squeak through a 20% decline in revenues are facing a 50% or more decline as far as the eye can see. With costs such as rent, labor, fees, taxes and healthcare at nosebleed levels, an enormously consequential number of small businesses globally cannot survive more than a modest, brief drop in revenues, as their costs remain high even as their sales plummet: costs are sticky, profits slide quickly to zero and beyond.

Read more …

No, I don’t like Soros being involved, and no, I don’t like the US squeezing Iran in virustime.

But most of all, all countries should think twice before letting the IMF have anything to do with their money supply. It doesn’t come free.

US Opposition Seen Stalling Major IMF Liquidity Boost (R.)

U.S. opposition is expected to prevent the International Monetary Fund this week from deploying one of its most powerful tools to help countries fight the coronavirus: creating a new allocation of Special Drawing Rights. The move, akin to a central bank “printing” new money, has been advocated by economists, finance ministers and non-profit groups to provide as much as $500 billion in urgently-needed liquidity for the IMF’s 189 member countries. SDRs, based on dollars, euro, yen, sterling and yuan, are the IMF’s official unit of exchange. Member countries hold them at the Fund in proportion to their shareholdings. The IMF last approved a $250-billion new allocation of SDRs in 2009, during the last financial crisis, boosting liquidity for cash-strapped countries. Doing so again now could provide more flexibility to the 100 countries that have already sought IMF emergency loans and grants, and allow new lending to countries with “unsustainable” debt burdens, such as Argentina.


An SDR expansion has attracted some celebrity advocates, such as investor George Soros and U2 lead singer Bono’s ONE anti-poverty organization, along with trade unions and faith-based groups. Finance officials will debate the issue during this week’s virtual IMF and World Bank Spring Meetings, but multiple sources familiar with the Fund’s deliberations say the United States, the IMF’s dominant shareholder, actively opposes such a move. The Trump administration opposes providing countries such as Iran and China with billions of dollars in new resources with no conditions, two of the sources said. [..] The U.S. Treasury Department would prefer to see the IMF focus on using its $1 trillion in existing resources, including $100 billion in emergency loans and grants, to aid countries’ health responses to the crisis, the sources said.

Read more …

You would think this should wake up Britain. But what are the odds?

We Scientists Said Lock Down. But UK Politicians Refused To Listen (G.)

In mid-February a colleague mentioned that for the first time in his life he was more concerned than his mother, who had been relatively blase about the risks of Covid-19. It felt odd for him to be telling her to take care. We are both professors in a department of infectious disease epidemiology, and we were worried. Two months on, that anxiety has not gone, although it’s also been joined by a sense of sadness. It’s now clear that so many people have died, and so many more are desperately ill, simply because our politicians refused to listen to and act on advice. Scientists like us said lock down earlier; we said test, trace, isolate. But they decided they knew better.

Am I being unfair? The government assures us that its decisions and timing are based on science, as if it is a neutral, value-free process resulting in a specific set of instructions. In reality, the science around coronavirus is in its infancy and developing daily, with researchers across the world trying to understand how the virus spreads, how the body responds – and how to treat it and control it. The speed at which our knowledge has increased is impressive, from the sequencing of the virus in January through to having candidate vaccines in early February.

Mathematical models are being refined to predict the extent and speed of spread and estimate the impact of control methods. My own group is studying the response of communities, showing how the epidemic is amplifying existing social inequalities. People with the lowest household income are far less likely, but no less willing, to be able to work from home or to self-isolate. But while scientists carry out observations and experiments, testing, iterating and discovering new knowledge, it is the role of policymakers to act on the best available evidence. In the context of a rapidly growing threat, that means listening to experts with experience of responding to previous epidemics.

Read more …

Ben Hunt is angry enough to start a revolution. While he’s also running a program delivering masks and other PPE to medical workers.

Inception (Ben Hunt)

The past few months are not a litany of errors and honest mistakes by the institutions we have charged with protecting us from disease and ruin. They are a litany of betrayals, and their Answers – their False Stories – have been revealed as lies. First we’re going to vaccinate ourselves to their Answers, to their False Stories, so that we think for ourselves again. Without this, we will inevitably fall back into the patterns of crony capitalism and obscene financialization that got us here in the first place. It’s a vaccine that we don’t administer anymore … an intentional decision by the high-functioning sociopaths and political entrepreneurs who rule us, of course.

Like all effective vaccines, it mimics the virus itself in its ability to trigger a physiological response in us. They want to nudge you into allegiance to a policy or a vote or a party. We want to un-nudge you into independence of spirit and thought. They want to infect you with an Answer. We want to innoculate you with a Process. The Process is one of the Old Stories. It is, in fact, the Oldest Story of what makes for a good and just human society. It is a narrative that has directly motivated hundreds of millions of people to organize themselves in hundreds of thousands of beneficial social forms, large and small, for thousands of years. We’re going to use that incepted Process to burn down these systems of iniquity from within and below.

We’re going use that incepted Process to build something better together, as brothers and sisters exercising our birthright – our autonomy of mind. I’m going to tell you exactly how we’re going to develop millions and millions of doses of the Old Story vaccine, and I’m going to tell you exactly how we’re going to administer them and exactly how we are going to change the world from below and from within. And you won’t believe me.

I mean, this happens all the time. I will sit down with someone and walk them through the entire plan … how we’re developing the science of what Isaac Asimov called “psychohistory”, how that gives us the ability to not only measure the narratives of social control that oligarchic institutions broadcast but also to design effective jamming narratives of our own, how we create a decentralized epistemic community of distributed trust and mutual support that we call the Pack, how we burn down these oligarchic institutions from below by jamming their Answers and from within by replacing the current sociopathic leadership with members of the Pack … and it is literally as if a switch goes off in their head and their eyes go dim. But then I’ll say “yada-yada-Trump” or “yada-yada-Biden” or “yada-yada-the-Fed” or “yada-yada-Bitcoin” and they’ll perk right up again!

Read more …

I’m cheating a bit. This is part of the article above, Inception. But the article is long and this is a very good bit.

“What is hateful to you, do not do to your neighbor. That is the whole Torah; the rest is commentary. Now go and learn it.”

The Golden Rule (Ben Hunt)

It’s the Golden Rule. It’s the Oldest Story of fundamental human ethics. You can find it in ancient Egyptian stories, preserved in papyri from the Middle Kingdom. You can find it in the ancient Sanskrit epic “Mahabarata”, as the way in which dharma manifests itself in human affairs. You can find it in the ancient Greek writings of Thales and Pythagoras. You can find it in the ancient Persian texts of Zoroaster. But here’s my favorite: A gentile came before two teachers, Shammai the strict and Hillel the tolerant, and to each in turn said, “I will convert to Judaism if you can teach me the whole Torah while I stand on one foot.” Shammai chased him away. But Hillel said to the gentile, “What is hateful to you, do not do to your neighbor. That is the whole Torah; the rest is commentary. Now go and learn it.” The rest is commentary.


The Golden Rule is all you need to know to organize a good and just society. Everything else, all of the rules and principles and books and words and laws that engulf us … ALL of it … is just commentary. The Golden Rule is the vaccine. The Golden Rule is the simplest and most powerful form of the idea of reciprocity, ready and primed for inception in every human dreamer. The Golden Rule is the formal description of empathy. The Golden Rule is the only law of the Pack. The Golden Rule IS the full hearts of Clear Eyes, Full Hearts, Can’t Lose. The Golden Rule is the meme that we’re going to inject in a mass-customized way straight into everyone’s veins with the Narrative Machine. And then YOU are going to burn down the current system of oligarchic iniquity from below and within. And then YOU are going to change the world. All on your own. With no centralized organization and no Answer imposed from above.

Read more …

Note that this takes place as the world is fast running out of space to store oil reserves in. I’m waiting for numbers of fully loaded tankers floating off ports for weeks or months.

Major Blow To Keystone XL Pipeline As Judge Revokes Key Permit (G.)

The controversial Keystone XL tar sands pipeline has been dealt a major setback, after a judge revoked a key permit issued by the US Army Corps of Engineers without properly assessing the impact on endangered species. In a legal challenge brought by a coalition of environmental groups, a federal judge in Montana ordered the Army Corps to suspend all filling and dredging activities until it conducts formal consultations compliant with the Endangered Species Act. The ruling revokes the water-crossing permit needed to complete construction of the pipeline, and is expected to cause major delays to the divisive project. Keystone XL is a 1,179-mile pipeline which would transport around 830,000 barrels of oil a day from the tar sands in Alberta, Canada to Nebraska, eventually heading to refineries on the Gulf Coast.


Campaigners welcomed Wednesday’s ruling as a victory for tribal rights and environmental protection. “The court has rightfully ruled against the Trump administration’s efforts to fast track this nasty pipeline at any cost. We won’t allow fossil fuel corporations and backdoor politicians to violate the laws that protect people and the planet,” said Tamara Toles O’Laughlin of environmental group 350.org Judith LeBlanc, director of the Native Organizer Alliance, said: “The revoking of the permit is a victory for treaty rights and democracy. Tribal nations have a renewed opportunity to exercise our legal and inherent rights to protect the water of the Missouri river bioregion for all who live, farm and work on the land.”

Read more …

Prepare to hear much more about this from Horowitz. Someone will do a major write-up.

FBI Repeatedly Warned Steele Dossier Fed By Russian Misinformation (Solomon)

The FBI received repeated warnings dating to 2015 that Christopher Steele, the ex-British spy it used to build a case against President Trump, had concerning contacts with Russian oligarchs and intelligence figures that might call into question the credibility of his intelligence reporting, newly declassified documents showed Monday. The suspect sources included a person described as a strong supporter of Hillary Clinton’s campaign and a Russian intelligence figure under separate counterintelligence investigation by the FBI, the memos show. And the red flags included a warning that Russian intelligence appeared to be aware as early as July 2016 that Steele was working on a U.S. election-related investigation, making him susceptible to misinformation.

The revelations are found in newly declassified footnotes from Justice Department Inspector General Michael Horowitz’s December, 2019 report about failures in the Russia probe that included using false evidence to secure a FISA warrant against Trump campaign adviser Carter Page in October 2016. Some of those red flags were raised prior to the bureau’s decision to rely on Steele’s dossier as key evidence in seeking the FISA warrant targeting the Trump campaign in the final days of the 2016 election, and nearly all were raised before Special Counsel Robert Mueller opened his probe in spring 2017.

For instance, FBI officials urged in 2015 that Steele undergo a re-evaluation as an informant (a “validation review,” in spy parlance) after the bureau’s transnational organized crime office learned that he had received contact from five Russian oligarchs, all of whom wanted to have contact with the bureau. “The report noted that Steele’s contact with 5 Russian oligarchs in a short period of time was unusual and recommended that a validation review be completed on Steele because of this activity,” one footnote stated.

Read more …

 

We would like to run the Automatic Earth on people’s kind donations. Ads no longer pay for all you read, your support has become an integral part of the process.

Thanks everyone for your generous donations.

 

 

 

 

 

 

US Bureau of Prisons:

 

 

 

 

Support the Automatic Earth. It’s good for your mental health.

 

Aug 262019
 


Joan Miro The farmer’s wife 1923

 

In Jackson Hole on Friday, Bank of England’s outgoing governor Mark Carney talked about a Synthetic Hegemonic Currency (SHC) that the world ‘must’ create, and I thought: that sounds as creepy as anything Halloween. Now, Carney is a central banker as well as a former Giant Squid partner, hence a certified cultist, but still.

He even mentioned Facebook’s Libra ‘currency’ as some sort of example for something that should replace the US dollar internationally. And that replacement is allegedly needed because countries are hoarding dollars. And/or “protecting themselves by racking up enormous piles of dollar-denominated debt.” Whichever comes first, I guess?!

I’ve read quite a few comments on Carney’s speech, but far as I’ve seen they all ignore one aspect of it: the current shape and form of globalization. See, Carney can see only one thing: more centralization, more things moving more in the same direction. Remember, he’s the man who with Michael Bloomberg in 2016 wrote “How To Make A Profit From Defeating Climate Change”. Aka things are worth doing only if they make you richer.

It’s a state of mind that works fine when you’re inside a system and an echo chamber, when you’re a central banker or a corporate banker. But there’s nothing that indicates it’s a useful state of mind when the system you’re serving must undergo change. What is as true when it comes to climate change as it is for changing the entire global economy. Carney’s got blinders on.

 

World Needs To End Risky Reliance On US Dollar: BoE’s Carney

Carney [..] said the problems in the financial system were encouraging protectionist and populist policies. [..] Carney warned that very low equilibrium interest rates had in the past coincided with wars, financial crises and abrupt changes in the banking system. As a first step to reorder the world’s financial system, countries could triple the resources of the IMF to $3 trillion as a better alternative to countries protecting themselves by racking up enormous piles of dollar-denominated debt.

In other words, to reorder the world’s financial system, you must put a ton of money into a fund that has served (and failed) to uphold the old system. Really?

“While such concerted efforts can improve the functioning of the current system, ultimately a multi-polar global economy requires a new IMFS (international monetary and financial system) to realize its full potential,” Carney said. China’s yuan represented the most likely candidate to become a reserve currency to match the dollar, but it still had a long way to go before it was ready. The best solution would be a diversified multi-polar financial system, something that could be provided by technology, Carney said.

There is no doubt that the present system is a little off balance, that the USD’s role in the financial system is way bigger then America’s share of global trade. But the yuan is completely unfit as a reserve currency because it’s not freely traded. And whether “technology” could “provide a diversified multi-polar financial system” (quite the statement) is very much in question. Perhaps that is true in theory, but Carney’s claims are not only about theory -anymore-.

Facebook’s Libra was the most high-profile proposed digital currency to date but it faced a host of fundamental issues that it had yet to address. “As a consequence, it is an open question whether such a new Synthetic Hegemonic Currency (SHC) would be best provided by the public sector, perhaps through a network of central bank digital currencies,” Carney said.

 

The most fundamental issue about Libra would appear to be that it doesn’t exist. Then there are a whole slew of other issues, like why should Facebook and its partners play any role at all in finance. Because they’re such benign enterprises who focus on guarding your privacy? Why Carney would present it as a potential ‘solution’ is totally unclear, other than Libra is something that could fit inside his echo chamber.

I’m still nervous about crypto, too many things still go wrong, too many thefts, too many things too many people don’t understand. But I would support Bitcoin over Carney’s “network of central bank digital currencies” any day. Because that’s the creepiness of this “Synthetic Hegemonic Currency” in all its infamy.

Carney and his echo chamber banker mates seek control, we get it. But that doesn’t mean we want them to have it. Look at the present system, which they created, and the failure of which necessitates the creation of yet another system. And then they want to control that one too?

 

But that’s still all a bit of a sideshow. I’m thinking Carney is not just wearing blinders, he’s simple too late. The globalization that his proposals might serve is already past its peak. He may not be able to see beyond it, but we should.

Globalization is a process, it’s something that moves, it can’t stand still. And now that it’s fully reached China, there’s nowhere else for it to go. Sure, there are some smaller countries that might be willing to produce at even lower prices, like Vietnam or Cambodia, but they could never do it at the same scale as China has.

The same goes for Africa. Moving the entire manufacturing capacity to Africa that was transferred from the west to China starting 20-30 years ago, would be such a logistical nightmare nobody would seriously consider it, And so we have come to a standstill. Globalization can no longer move, because it has nowhere to move to. The world is as fully globalized as it ever will be. But globalization is a process.

Perhaps counterintuitively, the only thing it can really do is to move back. For a number of different reasons, I think that’s exactly what will happen. And I don’t think that’s all that bad. Trump is of course already preparing part of that move with his tariffs war. But it can, and I’m quite sure will, go much further.

If globalization only means, and is restricted to, the transfer of manufacturing anything and everything from the US and Europe to China, and that’s what it appears to mean, the drawback for the former(s) is painfully obvious. So is the one for the planet.

 

It may make sense to produce high end products, like intricate complex electronics, in one location in the world, but why on earth should China produce our underwear? Yeah, they can do it cheaper, sure, but the main effect of that is it kills our jobs. The narrative about this over the past few decades has been that we were building a ‘knowledge economy’ or a ‘service economy’, but that’s a whole lot of BS.

Not only do we now depend on China to make our underwear, all those panties and shorts and shirts have to be hauled halfway across the planet by fossil-fuel-powered behemoth container ships. While we could make them right where we live, pay people a living wage to do it, and lower pollution in the process. Not a hard choice, even if your boxers would cost a dollar more.

And whether you worry about the planet and climate and species extinction or not, enough people do to make it an ever growing factor in decision making on these topics. And there’s more. Henry Ford understood it: people must be paid enough to afford your products if your business is to be successful. The whole “globalization” towards lower wage countries has not only lowered prices in the US and Europe, but also wages.

And that in turn has opened the way towards higher pay for executives, higher stock prices and dividends etc., in other words towards more inequality. Very few people understand the mechanics that drive this, but more of them will and must as their wages become the same as those in China.

 

So anyway, Mark Carney’s grand Synthetic Hegemonic plans are too little too late. Not that that will keep him from blabbing about them, he represents the ruling classes after all, which are doing just fine and would like to be doing even finer. But even he, and they, cannot deny that globalization is like a shark that dies when it can no longer move. Scary movie title: Globalization Never Sleeps…

And Trump plays his role in this just dandy. Not that he’s the smartest guy around, far from it, but he does recognize how globalization hurts America. And that China, a third world country not long ago, is now perhaps the world’s largest economy and will have to be subject to entirely different rules and scrutiny than in, say, 1980.

China must open up its economy to US and EU products, or the latter must close theirs to what China produces. That’s what the trade war, and/or the currency war, the whole enchilada, is about. And perhaps it needed an elephant like Trump to say it, but that’s not important. The entire world economy has reached the limits of its lopsided-ness , and the imbalance must be fixed. Simple stuff.

I’ve been using underwear as an example, but we all know -or we could- how much of what we purchase daily comes from China. Well, that, too, like globalization, and because of it, has reached its peak. We will make our own underwear again. It that a bad thing? How? Henry Ford would have understood it is not, even if he might have been the first to move his production lines to Shenzhen if he would have had the option.

Ford understood the link between prices and wages, but that knowledge appears to be gone. Except perhaps in China, but their model relies exclusively on exports and that can’t last either. Ford sought to sell his cars to his own workers. Which is just about the very opposite of what today’s financial elites are after, and why Carney wants a -belated- Synthetic Hegemonic Currency.

See the point? I predict Carney and his ilk will propose a cloud-based world currency soon, ‘guaranteed’ by -probably- the IMF’s Special Drawing Rights (SDR), but that is totally unfit for the role they have in mind.

Because you don’t need such a currency to pay for the underwear that’s produced by your neighbors just down the road. You only need it for the underwear that comes from China.

 

 

 

 

Oct 012016
 
 October 1, 2016  Posted by at 9:26 am Finance Tagged with: , , , , , , , , , , ,  Comments Off on Debt Rattle October 1 2016


Lewis Wickes Hine Drift Mouth, Sand Lick Mine, near Grafton, West Virginia 1908

Why You Should Be Skeptical Of That $5.4 Billion Deutsche Settlement (CNBC)
A Deutsche Bank Settlement Rumor Overshadows US Equities (R.)
Deutsche Bank Takes a Lashing From the German Public (WSJ)
Trump Will Win, Unless the S&P Rallies in October (BBG)
Global Trade Crashes Back To “Very Old Normal” (ZH)
Global Corporate Default Tally By Far Highest Since 2009 (Barron’s)
US, Canadian IPOs Raise Lowest Annual Total Since 1990 (BBG)
US Consumer Spending Drops, Clouds Fed Rate Hike Outlook (R.)
China’s Yuan Joins Elite Club Of IMF Reserve Currencies (R.)
State Spending Keeps China’s Industrial Sector Humming in September (WSJ)
Has Vancouver Found The Solution To A Super-Heated Housing Market? (G.)
Bundesbank President Rejects Calls for German Stimulus (WSJ)
The “Pardon Snowden” Case Just Got Stronger (Cato)
Brexit Is A ‘Once-in-a-Generation’ Chance To Save UK’s WIldlife (Ind.)
Bees Added To US Endangered Species List For The First Time (G.)
Elephants Have Learned To Avoid Poachers By Hanging Out With Rangers (Konbini)

 

 

A planted rumor. “..if the number was correct, under German capital market rules Deutsche Bank would be required to confirm the amount by now..”

Why You Should Be Skeptical Of That $5.4 Billion Deutsche Settlement (CNBC)

Shares of Deutsche Bank were leaping in New York trade Friday on a report that it was near a settlement with the U.S. Department of Justice, but there’s reason to be skeptical about the number being cited. Shares of Deutsche Bank have extended their gains, up about 14% in afternoon trading, after an AFP report that Germany’s biggest bank is close to a $5.4-billion dollar settlement with the Justice Department over mortgage bonds. […] But if the number was correct, under German capital market rules Deutsche Bank would be required to confirm the amount by now. Its failure to do so indicates the number is not correct.

Any eventual settlement, however, would almost certainly be well below the reported $14-billion opening bid by the Department of Justice in its talks with Deutsche. Deutsche Bank is not publicly commenting on the supposed $5.4-billion figure. The capital market rules say the bank would have to react almost immediately to a report on such a settlement. That’s why two weeks ago, after The Wall Street Journal reported on the initial $14-billion figure, Deutsche Bank quickly put out a release confirming the news. “The negotiations are only just beginning,” Deutsche Bank said at the time. “The bank expects that they will lead to an outcome similar to those of peer banks which have settled at materially lower amounts.”

Read more …

Far from over: “Once they come to some resolution on the difference between what they are charged, $14 billion, and what they are going to pay, call it $5 or $6 billion, the market is going to be afraid there is a problem..”

A Deutsche Bank Settlement Rumor Overshadows US Equities (R.)

Deutsche Bank will likely cast a pall over equity markets next week as the largest German lender navigates a possible multi-billion dollar settlement with the U.S. Department of Justice over the sale of mortgage-backed bonds. Deutsche shares traded in the United States hit a record low on Thursday, falling as much as 24% since the DOJ asked the bank to pay $14 billion to settle charges related to its sale of toxic mortgage bonds before the financial crisis. But the stock had its best day in five years Friday, on record volume, after news agency AFP reported that Deutsche was nearing a much-lower $5.4 billion settlement with the DOJ. Analysts at Morgan Stanley estimated Deutsche could pay about $6 billion to settle with the DOJ. Stocks on Wall Street broadly tracked Deutsche over the past few days and will likely continue to do so, analysts say.

“While it is in the headlines, it is an overhang,” said Art Hogan at Wunderlich Securities in New York. “Once they come to some resolution on the difference between what they are charged, $14 billion, and what they are going to pay, call it $5 or $6 billion, the market is going to be afraid there is a problem,” Hogan said. Deutsche’s market capitalization of near $18 billion makes it much smaller than its U.S. peers like Bank of America, at $155 billion, or Citi, at $133 billion. However its trading relationships with the world’s largest financial institutions make a potential breakdown at Deutsche a bigger risk to the wider financial system than any other global bank, the International Monetary Fund said in June. “Its world print and eurocentric role are unrivaled, so it is going to drive the narrative next week,” said Peter Kenny at Global Markets Advisory Group in New York.

Read more …

Merkel’s room to move is shrinking.

Deutsche Bank Takes a Lashing From the German Public (WSJ)

Deutsche Bank is getting rough treatment in the market. It is also having a hard time with its own public. The lender, founded in 1870, has turned from an object of patriotic pride into what critics on both sides of the political spectrum openly deride as a national embarrassment. Multibillion-dollar losses last year, investigations into misconduct around the world, concerns about its capital cushion and rich pay have made Deutsche Bank a handy target for left-leaning critics that accuse it of short-term thinking and greed. Many on the far right, meanwhile, regard Deutsche Bank as German in name only. Three out of its past four chief executives have been foreigners, including current CEO John Cryan, helping detractors tar it as the embodiment of out-of-control stateless capitalism.

The sentiment isn’t confined to political circles. A TNS Emnid poll for news magazine Focus conducted on Wednesday and released on Friday showed that 69% of respondents opposed any kind of state aid for Deutsche Bank, with only 24% in favor. “People feel it’s simply unacceptable that banks should be exempted from business risks,” said Frank Decker, politics professor at Rheinische Friedrich-Wilhelms-University in Bonn. [..] the lack of support at home, along with strict bailout rules Germany has backed for banks in the European Union, could limit the government’s room for maneuver should Deutsche Bank end up in a position that it does need help.

Despite the trauma of the financial crisis, large institutions such as Deutsche Bank haven’t learned any lessons, said Manfred Güllner, head of the Forsa polling group, making any bailout a tougher sell than in 2008. “While the returns on savings keep falling in a bottomless pit—and now into negative territory—the banks, as always, keep conducting their risky speculative businesses,” the populist Alternative for Germany party said in a Facebook post Thursday. “Whenever they get in trouble, the politicians are always there to help with taxpayers’ money.”

Read more …

“When the stock market ends up for the three-month period, the Democrat wins. When it’s negative, the Republican wins.”

Trump Will Win, Unless the S&P Rallies in October (BBG)

October is the bad boy of the stock market. The Panic of 1907, the Crash of 1929, Black Monday in 1987. It’s notable for another reason, too. The performance of Standard & Poor’s 500-stock index from July 31 to Oct. 31 has a curious way of predicting the winner of the presidential election. As with every prediction, take it with a giant grain of salt. But the pattern is solid, as shown in this chart by Sam Stovall, equity strategist for S&P Global Market Intelligence1. When the stock market ends up for the three-month period, the Democrat wins.

When it’s negative, the Republican wins. Since this July 31, the S&P is in slightly negative territory. Two times the pattern didn’t hold were in 1968 and 1980, when influential third-party candidates were in race, including George Wallace, who took about 14% of the popular vote in ’68. The pattern also failed in 1956, which Stovall says could be attributed to geopolitical events putting the markets on edge. That was the year of the Suez Crisis and the Hungarian Uprising, he noted.

Read more …

“What if the last 30 years of exuberant world trade growth was the ‘outlier’..”

Global Trade Crashes Back To “Very Old Normal” (ZH)

“Get used to it” is the message from Goldman Sachs when it comes to the collapse in global trade… What if the last 30 years of exuberant world trade growth was the ‘outlier’ and we are now reverting to the pre-Greenspan normal? As Goldman’s Goohoon Kwon explains, a low trade beta may be normal:

“Finally, another explanation for the trade slowdown is that it simply represents a return to normal. Historical trade data show that the global trade beta was slightly higher than 1 in the early 1950s before rising gradually due to a series of extraordinary events. In the 1960s-1980s, it rose to around 1.5, boosted by multilateral efforts for trade reforms, which reduced average tariffs from 35% in 1947 to 6.4% at the start of the of the Uruguay Round (1986-94) of global trade negotiations. Thereafter, the breakup of the Soviet Union enabled global trade to expand rapidly in the 1990s, and the WTO entry of China in 2001 helped sustain the trade beta at around 2 in the 2000s. There is therefore an argument that a series of largely one-off factors drove the trade beta to unusually high levels.”

And as Goldman warns, there is limited upside to global trade from here…

“Given these structural forces, the outlook for global trade remains weak in our view, though it might rebound somewhat in the short term. Asian trade is likely to recover moderately in coming years, helped by the eventual dissipation of capacity overhangs in China and reductions in internal imbalances in the economy. And further trade liberalization, including in services, presents upside for global trade. However, the restructuring of overcapacity sectors seems to be proceeding slowly so far in Asia, as reflected in low and still-falling capacity utilization in China and Korea. Moreover, the current political backdrops in the major economies suggest that another major push for trade liberalization might be off the table, at least for now.”

Read more …

By far the worst year since 2009.

Global Corporate Default Tally By Far Highest Since 2009 (Barron’s)

Three corporate defaults in the past week, two metals companies and one telecom firm, brought the total number of defaults around the world to 130. That’s a lot more than last year. Diane Vazza, head of S&P Global Fixed Income Research says: “The default tally is 60% higher than the count at this time in 2015 and has surpassed the total number of defaults recorded in full-year 2015, 113 defaults. The last time the global tally was higher at this point in the year was in 2009, when it reached 223 during the financial crisis.” Energy and commodity-related firms make up over half of the defaults; 70% are U.S. companies. Vazza notes: “As of Aug. 31, 2016, the global speculative-grade default rate for the energy and natural resources sector was 17.9%–more than seven times higher than the default rate of all other sectors.”

Read more …

How to make a pretty awful number sound good.

US, Canadian IPOs Raise Lowest Annual Total Since 1990 (BBG)

It’s been a paltry year for initial public offerings. Fewer than 135 companies have made their debuts in U.S. and Canada, putting 2016 on pace to be the slowest for IPOs since 1990, according to data compiled by Bloomberg. With $14.4 billion raised so far, we’re also on track to witness the lowest annual total on that score since 1990. For the companies that have made it to market, the dearth of activity has helped underpin demand. That’s especially true in the case of tech IPOs, where (as my colleague Shira Ovide has written) the paucity of new issues has left investors scrambling for any new listing, driving valuations to potentially unsustainable levels.

Nutanix, a tech unicorn that priced Thursday evening, will likely continue the trend, with its shares poised for a surge when they begin trading Friday. But another crop of listings – backed by private equity – has also done well out of the chute this year, and may offer the potential for more lasting gains. On average, new issues of private-equity backed companies have rallied 34.5% this year through Thursday, topping the 28.2% average return for all U.S. and Canadian IPOs during the same period, according to data compiled by Bloomberg.

Read more …

David Stockman put it like this: “They shopped till they dropped.”

US Consumer Spending Drops, Clouds Fed Rate Hike Outlook (R.)

U.S. consumer spending fell in August for the first time in seven months while inflation showed signs of accelerating, mixed signals that could keep the Federal Reserve cautious about raising interest rates. The Commerce Department said on Friday that consumer spending, which accounts for more than two-thirds of U.S. economic activity, fell 0.1% last month after accounting for inflation. Analysts polled by Reuters had expected a 0.1% gain. “Consumers took a breather in August,” said Chris Christopher of IHS Global Insight. Fed Chair Janet Yellen said last week she expected the U.S. central bank would raise rates once later this year to keep the economy from eventually overheating.

Prices for fed funds futures suggest investors see almost no chance of a hike at the Fed’s next policy meeting in early November and roughly even odds of an increase at its mid-December meeting, according to CME Group. The dollar was little changed against a basket of currencies while U.S. stock prices were trading higher. Consumer spending, which has been robust in recent months, partially offset the drag from weak business investment and falling inventories in the second quarter when the economy expanded at a lackluster 1.4% annual rate.

Read more …

A mixed blessing.

China’s Yuan Joins Elite Club Of IMF Reserve Currencies (R.)

China’s yuan joins the IMF’s basket of reserve currencies on Saturday in a milestone for the government’s campaign for recognition as a global economic power. The yuan joins the U.S. dollar, the euro, the yen and British pound in the IMF’s special drawing rights (SDR) basket, which determines currencies that countries can receive as part of IMF loans. It marks the first time a new currency has been added since the euro was launched in 1999.The IMF is adding the yuan, also known as the renminbi, or “people’s money”, on the same day that the Communist Party celebrates the founding of the People’s Republic of China in 1949.

“The inclusion into the SDR is a milestone in the internationalization of the renminbi, and is an affirmation of the success of China’s economic development and results of the reform and opening up of the financial sector,” the People’s Bank of China said in a statement. China will use this opportunity to further deepen economic reforms and open up the sector to promote global growth, the central bank added. The IMF announced last year that it would add the yuan to the basket, so actual inclusion is not expected to impact financial markets. But it puts Beijing’s often opaque economic and foreign exchange policy in the international spotlight as some central banks add yuan assets to their official reserves.

Critics argue that the move is largely symbolic and the yuan does not fully meet IMF reserve currency criteria of being freely usable, or widely used to settle trade or widely traded in financial markets. U.S. Republican presidential nominee Donald Trump has said he will formally label China a currency manipulator if he wins November’s election. China stunned investors by devaluing the currency last year and the yuan has since weakened to near six-year lows, adding to worries about already feeble global growth. Some China watchers also fear that Beijing’s commitment to further market opening and financial sector reforms will fade after its diplomatic success, despite repeated reassurances from Beijing it will continue with the process.

Read more …

Now that China has entered the IMF basket, it’ll get much harder to keep this up: “It’s very clear that this sort of continued funding of industrial overcapacity sectors is unsustainable.”

State Spending Keeps China’s Industrial Sector Humming in September (WSJ)

Activity in China’s crucial industrial sector appeared to stabilize last month, with an official index on manufacturing holding steady, buoyed by state spending on infrastructure. China’s official manufacturing purchasing managers index was unchanged at 50.4 in September compared with August, the National Bureau of Statistics reported Saturday. The gauge has remained above 50, which separates expansion from contraction, for six out of the past seven months. The September reading matched a median forecast of 50.4 by 11 economists polled by The Wall Street Journal.

Subindexes gave mixed readings. One measured new orders weakening, while another for production showed improvement; both remained above 50. The official nonmanufacturing PMI edged up to 53.7 in September from 53.5 in August. Economists said stepped-up bank lending and spending on government projects is helping to steady an economy that got off to a wobbly start to the year and has been slowing overall in recent years. “You’re seeing a bit of a credit-fueled holding pattern,” said Angus Nicholson, an analyst with IG Markets. “The question is: when does that turn around and when are they going to cut credit? It’s very clear that this sort of continued funding of industrial overcapacity sectors is unsustainable.”

Read more …

Better question: do other cities have the guts to follow suit?

Has Vancouver Found The Solution To A Super-Heated Housing Market? (G.)

There is a city which is suffering a worse property bubble than Sydney, whose residents are more priced-out than Londoners, and where there is a greater divide between the housing haves and have-nots than even San Francisco. That city is Vancouver, and in response to these mounting challenges, the west-coast Canadian metropolis recently imposed an extraordinary new tax on foreign buyers – whose impact is now being watched closely by other cities grappling with bloated property markets. On 2 August, Vancouver introduced a tax on anyone from outside Canada wanting to buy a home in its super-heated market. In future, city authorities said, if you weren’t Canadian, you would have to pay an extra 15% on the purchase price.

The impact has, by some measures, been more startling than campaigners could have hoped for. The price of the average detached home reportedly slumped by an astonishing 16.7% in August alone to C$1.47m (£856,000), according to the Real Estate Board of Greater Vancouver. Some agents are reporting that the market has gone from red hot to stone cold in a matter of weeks. British Columbia’s premier, Christy Clark, who introduced the tax, told reporters there will be no going back on it. “The prices were going up way too fast and if we helped slow that down, that’s good,” she said. In the year before the tax, prices in the city were galloping ahead at a rate of 39% a year amid widespread concern that investors, from China in particular, were pricing out local residents.

It is a concern echoed in cities across the Pacific Rim. In June, Sydney introduced a 4% stamp duty surcharge on foreigners buying homes; the following month, Melbourne hiked stamp duty rates from 3% to 7% for foreign buyers – in both cases to deter rampant property speculation. Queensland, whose capital is Brisbane, has followed suit with an extra 3% duty surcharge that will be slapped on “foreign persons” buying residential property and land from 1 October. In Auckland, New Zealand – currently the world’s frothiest property market – property investors are, as of last month, required to put down at least 40% of the purchase price in cash.

Read more …

By ignoring Germany’s role in destroying the Greek and Italian economies, Weidmann ensures the downfall of the eurozone, and thereby of Germany itself.

Bundesbank President Rejects Calls for German Stimulus (WSJ)

It’s absurd to ask Germany’s government to spend more to bolster eurozone growth, German Central Bank President Jens Weidmann said on Thursday, rejecting growing pressure on Berlin to loosen its purse strings. Speaking in the German capital, Mr. Weidmann said a fiscal stimulus program in Germany was unnecessary given the nation’s robust economy, and would have few positive effects for other countries anyway. Earlier this month, ECB President Mario Draghi joined the chorus of voices that have criticized Germany for reining in its spending at a time of weak economic growth. “Countries that have fiscal space should use it,” Mr. Draghi said at a news conference. “Germany has fiscal space.”

But Mr. Weidmann argued that Germany’s national debt was already high, and the country’s aging population “calls for lower rather than higher debts.” Mr. Draghi tempered his remarks on Wednesday after a meeting in Berlin with German lawmakers, who grilled him over the ECB’s easy-money policies and their impact on German savers and banks. “Germany does have fiscal space [but] we need to be nuanced,” Mr. Draghi said. “I never argued for irresponsible fiscal expansion.”

Read more …

It couldn’t be more obvious.

The “Pardon Snowden” Case Just Got Stronger (Cato)

Yesterday, the Department of Justice Inspector General (DoJ IG) issued a long overdue Congressionally-mandated report on FBI compliance with the PATRIOT Act’s Section 215 “business records” provision between 2012 and 2014. It is the first such report issued that covers the initial period of Edward Snowden’s revelations about widespread domestic mass surveillance by the federal government. Since his indictment for leaking the information to the press, Snowden’s lawyers have argued that he should not be prosecuted under the WW I-era Espionage Act because his revelations served the public interest. The DoJ IG report provides the clearest evidence yet that Snowden’s lawyers are correct (p. 6):

“In June 2013, information about the NSA’s bulk telephony metadata program was publicly disclosed by Edward Snowden. These disclosures revealed, among other things, that the FISA Court had approved Section 215 orders authorizing the bulk collection of call detail records. The telephony metadata collected by the NSA included information from local and long-distance telephone calls, such as the originating and terminating telephone number and the date, time, and duration of each call. The disclosures prompted widespread public discussion about the bulk telephony metadata program and the proper scope of government surveillance, and ultimately led Congress to end bulk collection by the government in the USA Freedom Act.”

Public discussion of the controversy. Very public action by Congress to change the law, addressing at least one major abuse brought to light by Snowden. And there was more (p. 33):

“An [National Security Division] Deputy Unit Chief noted that the number of business records orders reached its peak in 2012 and has declined annually since then, and that the number of [Electronic Communication Transation] requests has declined more than other types of requests. The Deputy Unit Chief said that the Snowden revelations have played a role in this decline, both in terms of the stigma attached to use of Section 215 and increased resistance from providers. The Deputy Unit Chief stated, “I think that it’s possible that folks … have decided it’s not worth pursuing [business records orders], you know, obviously things haven’t been great with providers since Snowden either.” ”

Translation: Snowden’s actions forced companies like Verizon, Yahoo and others to grow a spine and start defending the Fourth Amendment rights of their customers. Earlier this month, a group of non-governmental organizations and individuals launched a campaign to get President Obama to pardon Snowden before he leaves office. We now have the department seeking Snowden’s prosecution offering unambigous evidence that his whistleblowing actions served the public interest. Obama should direct DoJ to drop the case or he should pardon Snowden. Either approach would be in the public interest, just as Snowden’s actions were.

Read more …

if there’s anyone left claiming to be surprised by Brexit, they must be blind.

Record Numbers Left Homeless After Eviction By Private Landlords In UK (G.)

Record numbers of families are becoming homeless after being evicted by private landlords and finding themselves unable to afford a suitable alternative place to live, government figures show. The end of an assured shorthold tenancy (AST) was cited by nearly a third of the 15,170 households in England who were classed as homeless in the three months to June – a number that was up 10% on the same period last year. The problem was particularly acute in London, accounting for 41% of all homelessness acceptances in the capital during the period, according to figures from the Department for Communities and Local Government (DCLG). The end of an AST has rapidly become the single biggest cause of homelessness in recent years, triggered by spiralling rent rises and cuts to housing benefit support.

In 2010 just 11% of homeless acceptances in England were caused by the end of an AST. The government’s statistical release states: “Affordability [of housing] is an increasingly significant issue, as more households facing the end of a private tenancy are unable to find an alternative without assistance.” Bob Blackman, a Tory backbencher who has drawn up a private member’s bill seeking to require councils to do more to help households at risk of losing their homes, said: “It is a national disgrace when we have the highest number of people in employment ever, we have a low rate of unemployment, that we still have people sleeping rough. Goodness knows what will happen if there is a recession.”

Read more …

Not if and when the present political climate perseveres.

Brexit Is A ‘Once-in-a-Generation’ Chance To Save UK’s WIldlife (Ind.)

Brexit will be a “once-in-a-generation chance” to reverse the huge decline in Britain’s wildlife, according to four of the UK’s leading environmental groups. The RSPB, WWF UK, National Trust and The Wildlife Trusts said the British countryside was “key to our identity as a nation” and farmers had the ability address the “urgent challenge of restoring nature”. They called on the Government to replace the much-criticised EU Common Agricultural Policy subsidy system with a British one that pays farmers to maintain “high environmental standards”. Earlier this month, the State of Nature 2016 report – produced by more than 50 organisations – concluded the UK was one of the “most nature-depleted countries in the world”. More than one in seven species face extinction and more than half are in decline.

However, in its response to the conservation groups’ call, the Government insisted the natural environment was “cleaner and healthier than at any time since the industrial revolution”. The National Farmers Union (NFU) said its members understood “the importance of protecting the environment” and complained that some organisations were making suggestions about agricultural policy “without speaking to those the policy most affects”. In a joint statement, called A new policy for our countryside, the four conservation groups said the UK’s departure from the EU “will be one of the most defining events for farming and our environment in living memory”. “[It] provides an unprecedented opportunity to revitalise our countryside in a way that balances the needs of everyone, for generations to come,” they said.

Read more …

We have created far too great a distance between ourselves and the world that gives us life.

Bees Added To US Endangered Species List For The First Time (G.)

Seven types of bees once found in abundance in Hawaii have become the first bees to be added to the US federal list of endangered and threatened species. The listing decision, published on Friday in the Federal Register, classifies seven varieties of yellow-faced or masked bees as endangered, due to such factors as habitat loss, wildfires and the invasion of non-native plants and insects. The bees, so named for yellow-to-white facial markings, once crowded Hawaii and Maui but recent surveys found their populations have plunged in the same fashion as other types of wild bees – and some commercial ones – elsewhere in the United States, federal wildlife managers said.

Placing yellow-faced bees under federal safeguards comes just over a week since the US Fish and Wildlife Service proposed adding the imperilled rusty patched bumble bee, a prized but vanishing pollinator once found in the upper midwest and north-eastern United States, to the endangered and threatened species list. One of several wild bee species seen declining over the past two decades, the rusty patched bumble bee is the first in the continental United States formally proposed for protections. The listing of the Hawaii species followed years of study by the conservation group Xerces Society, state government officials and independent researchers. The Xerces Society said its goal was to protect nature’s pollinators and invertebrates, which play a vital role in the health of the overall ecosystem.

Read more …

Nice, but that’s just a few of them. I think we’re going to end up sending our armies, our children and grandchildren, to Africa and far beyond, to the oceans, to try and keep alive enough of what preceded us on this planet in order to guarantee our own species can survive. But I can’t say I have high hopes.

Elephants Have Learned To Avoid Poachers By Hanging Out With Rangers (Konbini)

In an effort to protect diminishing elephant herds in the Democratic Republic of Congo’s Virunga National Park, a Kenyan conservation group fitted elephants with collars so they could monitor and track them in real time. Save the Elephants claim some of the herds they track have started changing their behavior to avoid dangerous areas, which the team believes is an adaptation to poaching. “Several elephant families [were seen] clustered around ranger posts, suggesting they had learned to distinguish the heavily armed rangers as harmless,” STE founder Iain Douglas-Hamilton said. In one rebel-afflicted area, elephants had even started hanging out at ranger checkpoints where huge trucks of charcoal and hardwood rumble through every few minutes.

“Yet somehow the elephants sensed that they were safe there and walked close to the voluble rangers.” Elephants that are able to distinguish rangers from poachers represent an incredible feat of animal ingenuity, but according to experts, it’s all quite understandable. According to My Green World, these mammals are similar to gorillas, in that they’re “smart, sensitive, loyal and aware.” But while this is great news for elephants (and bad news for outsmarted poachers), there’s still the matter of curbing the ongoing colossal hunting epidemic. Africa had 1.3 million elephants in the 1970s, but today there are only 500,000. So there is still quite a way to go before elephants can be taken off the endangered species list.

Read more …

Sep 072016
 
 September 7, 2016  Posted by at 9:15 am Finance Tagged with: , , , , , , , , , , ,  2 Responses »


Harris&Ewing “Congressional Union for Woman Suffrage” 1916

Why More QE Won’t Work: Debt Is Cheap But Equity Is Expensive (BBG)
ECB Set To Extend QE Well Into Next Year As It Fights Deflation (CNBC)
Could the ECB Start Buying Stocks? (WSJ)
Now Companies Are Getting Paid to Borrow (WSJ)
Message to the Fed: We’re not in Kansas Anymore (Farmer)
China Grabs Bigger Slice Of Shrinking Global Trade Pie (BBG)
Why China Isn’t a Financial Center (Balding)
Time to Worry: Stocks and Bonds Are Moving Together (WSJ)
First Factories, Now Services Signal Cracks in US Economy (BBG)
New Zealand Tops World House Price Increase (G.)
EU Ethics Watchdog Intervenes Over Former EC Chief Barroso’s Goldman Job (G.)
How Snowden Escaped (NaPo)
Greece Overhauls Refugee Center Planning As Islands Appeal For Help (Kath.)
UK Immigration Minister Confirms Work To Start On £1.9 Million Calais Wall (G.)
Nearly Half Of All Refugees Are Now Children (G.)

 

 

Pretending you can save an economy by buying already overpriced stocks is absolute lunacy.

Why More QE Won’t Work: Debt Is Cheap But Equity Is Expensive (BBG)

As central banks in Europe and Japan gear up to further expand quantitative-easing policies, market participants have issued a flurry of stark warnings about the potentially-negative unintended consequences, from the hit to pension funds to the risk of fueling market bubbles. But the more-prosaic prognostication — that further easing simply won’t stimulate slowing economies by reviving enfeebled corporate investment — may be the hardest-hitting retort from the perspective of central banks in the U.K., euro-area and Japan. While a clutch of reasons for moribund business investment in advanced economies have been advanced, central banks would do well to wake up to another typically over-looked cause, according to a new report from Citigroup.

Corporate investment faces a financing hurdle as the weighted-average cost of capital for companies (known as WACC) remains elevated thanks to the stubbornly high cost of equity, Hans Lorenzen, Citi credit analyst, said in a report published this week. The report pleads with central banks to forgo further asset purchases, citing diminishing returns from such stimulus programs and their questionable efficacy more generally. Corporates aren’t feeling the financing benefits offered by the global fall in real long-term interest rates thanks to a historically-high equity risk premium — which, in simple terms, is the excess return the stock market is expected to earn over a perceived risk-free rate, Lorenzen said.

Although companies typically aren’t dependent on equity issuance to fund investment programs – relying instead on fixed-income markets – the equity risk premium is an important factor influencing investment decisions made by company boards. The higher the cost of equity, the higher the theoretical overall cost of capital for corporates. In other words, investments that don’t on paper appear to make returns materially greater than the company’s WACC will face financing challenges.

Read more …

Only thing is, we know it’s useless-at least for what it purports to be aimed at.

ECB Set To Extend QE Well Into Next Year As It Fights Deflation (CNBC)

The ECB is expected to extend its trillion-euro bond-buying program beyond March 2017 and announce to expand the universe of eligibile bonds as part of its seemingly never-ending struggle to kickstart the euro zone’s economy. The central bank and its President Mario Draghi has been trying to push inflation back to its goal of below but close to 2 percent with a plethora of measures and instruments ranging from negative deposit rates to spur lending, a QE program that has been buying €80 billion ($89 billion) in bonds every month and interest rates close to zero – but without a breakthrough success. Analysts believe the ECB’s governing council has its work cut out when it meets to decide on monetary policy Thursday.

The headline rate of inflation remained unchanged at 0.2% in August. Core, or underlying inflation, which excludes energy, goods, alcohol and tobacco, fell from 0.9% in July to 0.8%, according to Eurostat. The eurozone economy slowed slightly in August as Germany’s services sector faltered, according to surveys of purchasing managers, expanding at the weakest pace in 19 months. Amid the factors for the cooling of the economy is the UK’s decision to leave the EU which may have dampened the currency area’s modest recovery. “We think the ECB will expand the duration of its QE programme from March 2017 currently to September 2017,” Nick Kounis at ABN Amro writes. “The ECB will most likely also need to announce changes to its QE programme to increase the universe of eligible assets as it will not be able to meet even its current targets under the current structure.”

Read more …

It could, but it’s the worst thing it could do.

Could the ECB Start Buying Stocks? (WSJ)

Central banks have become some of the biggest investors in bond markets. Now some in the financial markets think stocks should benefit more from their largess. Some economists say the ECB, which meets Thursday to decide if it should expand its current bond-buying program, should invest in equities. The reason: It is running out of bonds to buy. A move by the ECB into equities would have big implications for Europe’s stock markets, which have been rocked by a series of shocks this year, from volatility in China to Britain’s vote to leave the EU. The prospect of billions of euros flowing into equities could prop up prices, much as ECB bond purchases have done for debt securities. The signaling effect from the ECB’s unlimited money-printing power may also limit downturns in equities.

Stock purchases don’t appear to be on the near-term agenda. But ECB officials haven’t ruled them out, and the idea could gain steam if they continue to undershoot their 2% inflation target. Some central banks already invest in equities. Switzerland’s central bank has accumulated over $100 billion worth of stocks, including large holdings in blue-chip U.S. companies such as Apple and Coca-Cola. If the ECB decides to raise its stimulus by extending its current bond program, as many analysts expect, fresh questions will be raised about how it will continue to find enough bonds to buy. The bank is already purchasing €80 billion a month of corporate and public-sector bonds to reduce interest rates across the eurozone. Its holdings of public-sector debt reached €1 trillion last week, the ECB said Monday.

Read more …

The ECB is keeping sick companies alive, destroying price discovery in the process.

Now Companies Are Getting Paid to Borrow (WSJ)

Investors are now paying for the privilege of lending their money to companies, a fresh sign of how aggressive central-bank policy is upending conventional patterns in finance. German consumer-products company Henkel AG and French drugmaker Sanofi each sold no-interest bonds at a premium to their face value Tuesday. That means investors are paying more for the bonds than they will get back when the bonds mature in the next few years. A number of governments already have been able to issue bonds at negative yields this year. But it is a rare feat for companies, which also ask investors to bear credit risk.

Yields on corporate debt have plunged in recent months as investors have pushed up prices in the scramble for returns. Roughly €706 billion of eurozone investment-grade corporate bonds traded at negative yields as of Sept. 5, or over 30% of the entire market, according to trading platform Tradeweb, up from roughly 5% of the market in early January. [..] Tuesday’s deals, however, are among just a handful of corporate offerings that have actually been sold at negative yields. They include offerings of euro-denominated bonds earlier this year by units of British oil giant BP and German auto maker BMW, according to Dealogic. Germany’s state rail operator, Deutsche Bahn, also has issued euro-denominated bonds at negative yields.

The ECB launched its corporate bond-buying program in early June and had bought over €20 billion of corporate bonds as of Sep. 2. Most of its purchases came in secondary markets, where investors buy and sell already issued bonds. The central bank meets Thursday and will decide if it should expand its current bond-buying program. The purchases have helped set off a burst of issuance following the traditional summer lull in local capital markets. Last month was the busiest August on record for new issuance of euro-denominated, investment grade corporate debt, according to Dealogic.

Read more …

Kansas is all they know.

Message to the Fed: We’re not in Kansas Anymore (Farmer)

There is a lasting and stable connection in data between changes in the interest rate and changes in the unemployment rate. Past data suggest that if the Fed were to raise the interest rate at its next meeting, unemployment would increase and output growth would slow. It is fear of that outcome that causes central bank doves to be reluctant to raise the interest rate. But although an interest rate increase has preceded a slowdown by approximately three months in past data, there is a connection at longer horizons between inflation and the T-bill rate. That connection, sometimes called the Fisher relationship after the American economist Irving Fisher, arises from the fact that, risk-adjusted, T-bills and equities should pay the same rate of return.

The one-year real return on a T-bill is the difference between the interest rate and the expected one-year inflation rate. The one-year real return on holding the S&P 500 is the gain you can expect to make from buying the market today and selling it one year later. Economic theory suggests that the gap between those two expected returns arises from the fact that equities are riskier than T-bills, and importantly, the gap cannot be too big. Therein lies the policy maker’s conundrum. To hit an inflation target of 2%, the T-bill rate must be 2% higher than the underlying risk adjusted real rate: policy makers call this rate r*. There is some evidence that r* is currently very low currently, possibly zero or even negative. But if the Fed were to raise the policy rate to 2% at the next meeting, they are terrified that they might trigger a recession.

Let’s examine that argument. The fact that a rate rise caused a slowdown in past data does not mean that a rate rise will cause a slowdown in future data. This time really is different. It is different because in 2008 the Fed expanded its policy options. Before 2008 the interest rate set by the Fed was the Federal Funds Rate (FFR). That is the overnight rate at which commercial banks can borrow or lend to each other. Before 2008, there was a large and active Fed funds market used by commercial banks to meet reserve requirements. Commercial banks are required to hold roughly 10% of their balance sheets in the form of reserves. In the past, because reserves did not pay interest, banks kept them to a minimum. Excess reserves for much of the post-war period were essentially zero. Firms and households hold cash because they need liquid assets to facilitate trade. But cash is costly to hold because a firm must forgo investment opportunities. In the parlance of economic theory, we say that the FFR is the opportunity cost of holding money.

Read more …

Trade wars and currency wars a-coming.

China Grabs Bigger Slice Of Shrinking Global Trade Pie (BBG)

China is eating up a larger chunk of the world’s shrinking trade pie. Brushing off rising wages, a shrinking workforce and intensifying competition from lower cost nations from Vietnam to Mexico, China’s global export share climbed to 14.6% last year from 12.9% a year earlier. That’s the highest proportion of world exports ever in IMF data going back to 1980. Yet even as its export share climbs globally, manufacturing’s slice of China’s economy is waning as services and consumption emerge as the new growth drivers. For the global economy, a slide in China’s exports this year isn’t proving any respite as an even sharper slump in its imports erodes a pillar of demand.

Those trends are likely to be replicated in August data due Thursday. Exports are estimated to fall 4% from a year earlier and imports are seen dropping 5.4%, leaving a trade surplus of $58.85 billion, according to a survey of economists by Bloomberg News as of late Tuesday. While China’s advantage in low-end manufacturing has been seized upon by Donald Trump’s populist campaign for the U.S. presidency, the shift into higher value-added products from robots to computers is also pitting China against developed-market competitors from South Korea to Germany. A weaker yuan risks exacerbating global trade tensions, which became a hot button issue at the G-20 meeting in Hangzhou over cheap steel shipments.

“All the talk we have heard over the last few years about China losing its global competitive advantage is nonsense,” said Shane Oliver, head of investment strategy at AMP Capital Investors in Sydney. “This will all further fuel increasing trade tensions as already evident in the U.K. with the Brexit vote and in the U.S. with the support for Trump’s populist protectionist platform.”

Read more …

Many voices proclaim that China’s foray into SDRs will lead to the end of the USD. Balding sees it differently. SDRs signal China’s weaknesses.

Why China Isn’t a Financial Center (Balding)

Amid all the buzz about China’s hosting the G-20 summit in Hangzhou – all the accords, arguments and alleged snubs – another symbolically significant event was largely obscured. Last week, the World Bank issued bonds denominated in Special Drawing Rights, or SDRs, in China’s interbank market. Beginning in October, the yuan will be included in the basket of currencies used to set the SDRs’ value. To China, this symbolizes its status as a rising power. I’d argue that it instead symbolizes why China is struggling to become a global financial center. Beijing conceived of SDRs as something of a compromise. It would like the global monetary system to be less reliant on the U.S. dollar and more favorable toward its own currency.

Yet it continues to impose capital controls, which limit the yuan’s usage overseas, and it doesn’t want to let the yuan’s value float freely, which would be a prerequisite to its becoming a true reserve currency. China saw SDRs as a way to split the difference, to create a competitor to the dollar and maintain a fixed exchange rate at the same time. The problem is that there’s almost no conceivable reason to use them. SDRs were created as a synthetic reserve asset by the IMF decades ago, under the Bretton Woods system. No country uses them for normal business, and no government is likely to issue bonds denominated in them except for political reasons, as the World Bank is doing. Companies won’t use them either. If a firm wants to borrow to build a plant in Japan, it will issue a bond in yen so it can repay in yen.

If its customers are global, surely an ambitious investment bank would be willing to build a customized currency portfolio index that would match its needs. Rather than using the SDR’s weighting of currencies, the company could sell a bond in a synthetic index of anything: a 25% split between dollars, euros, yen and reals, say. No customer pays in SDRs; why bind yourself to repaying debts in them? The reason China is pushing SDRs is that it hopes to gain the prestige of a global currency without facing the financial pressure to let the yuan float freely or to loosen capital controls. It wants the benefits of global leadership, in other words, but would prefer to avoid the drawbacks. This is precisely the attitude that’s hindering China’s rise as a global financial center.

Read more …

Distortion is all we have left.

Time to Worry: Stocks and Bonds Are Moving Together (WSJ)

Wall Street traders and fund managers returning from the summer break are likely to focus on the obvious: a series of central-bank meetings in coming weeks and the imminent U.S. election. They also should be paying close attention to some unusual behavior in the market, where the changing relationship between bonds and stocks may be a sign of trouble ahead. A generation of traders have grown up with the idea that stock prices and bond yields tend to rise and fall together, as what is good for stocks is bad for bonds (pushing the price down and yield up), and vice versa. This summer, the relationship seems to have broken down in the U.S. Share prices and bond yields moved in the same direction in just 11 of the past 30 trading days, close to the lowest since the start of 2007.

This is far from unprecedented. But since Lehman Brothers failed in 2008, such a swing in the relationship has been unusual and suggests prices are being driven by something other than the balance of hope and fear about the economy. It has tended to coincide with times of deep discontent in markets, notably the 2013 “taper tantrum,” when bond yields briefly surged after Federal Reserve officials signaled they would soon end stimulus, and last year’s brief bubble in German bunds. The simplest explanation is that expectations of interest rates being lower for longer—some central bankers have suggested lower forever—pushes the price of everything up, and yields down.

When the focus is on the discount rate used to value all assets, bond and stock prices rise and fall together, creating the inverse relationship between bond yields and shares. Such a focus on monetary policy isn’t healthy. It leaves markets more exposed to sudden shocks, both from changes in policy and from an economy to which less attention is being paid. “It’s a somewhat mercurial thing, but there are big shifts [in correlations], and being on the right side of those big shifts is important,” said Philip Saunders at Investec Asset Management. “You do see some brutal price action at these correlation inflection points.”

Read more …

What? We have enough waiters?

First Factories, Now Services Signal Cracks in US Economy (BBG)

Some cracks could be starting to appear in the picture of an otherwise resilient U.S. economy. An abrupt drop in the Institute for Supply Management’s services gauge on Tuesday to a six-year low is the latest in a string of unexpectedly weak data for August. Other less-than-stellar figures include an ISM factory survey showing a contraction in manufacturing; a cooling of hiring; automobile sales falling short of forecasts; and an index of consumer sentiment at a four-month low. While there is hardly any evidence that growth is falling off a cliff, the run of disappointing figures make it tougher to argue that the underlying momentum of the world’s largest economy is holding up.

It also potentially complicates the task of Federal Reserve policy makers, who are debating whether to raise interest rates as soon as this month; traders’ bets on a September move faded further after the report on service industries, which make up almost 90% of the economy. “The latest set of ISM numbers is shockingly weak,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York. “It certainly gives the doves at the Fed more ammunition. It makes the Fed’s conversation at the September meeting that much more contentious.” The ISM’s non-manufacturing index slumped to 51.4, the lowest since February 2010, from 55.5 in July, the Tempe, Arizona-based group reported. The figure was lower than the most pessimistic projection in a Bloomberg survey.

The ISM measures of orders and business activity skidded by the most since 2008, when the U.S. was in a recession. Readings above 50 indicate expansion. Stocks fell, bonds climbed and the dollar weakened against most of its major peers after the data were released.

Read more …

AKA New Zealand has world’s biggest housing bubble.

New Zealand Tops World House Price Increase (G.)

New Zealand has the world’s most frenetic property market, with prices in Auckland now outstripping London, and possibly dashing the hopes of British buyers hoping to escape Brexit. In a global ranking of house price growth by estate agents Knight Frank, New Zealand was second to Turkey, but once the impact of inflation was stripped out it came top with 11% annual growth. Canada was the only other country to see price growth of 10% or more over the past year. It also recorded the fastest price rises of any country over the past three months. Meanwhile once white-hot property markets in the far east are cooling fast. Taiwan saw price falls of 9.4% over the past year, putting it at the bottom of Knight Frank’s ranking. Hong Kong and Singapore have also seen significant reductions in house prices.

Auckland is at the centre of an extraordinary property boom, with separate data revealing that the city’s average house price last month hit NZ$1m (£550,000) for the first time. The country’s QV house price index found that the typical Auckland home was valued at NZ$1,013,632 in August, an increase of 15.9% over the year. That’s just under £560,000 and higher than the average London property price of £472,384 according to data. Spiralling prices – up NZ$20,000 a month over the past quarter – and the falling pound are likely to deter Britons hoping to emigrate.

Read more …

After the fact.

EU Ethics Watchdog Intervenes Over Former EC Chief Barroso’s Goldman Job (G.)

The EU’s ethics watchdog is to look into the former European commission president José Manuel Barroso’s new job with Goldman Sachs, which includes advising the investment bank and its clients on Brexit. In a letter to Barroso’s successor, Jean-Claude Juncker, the EU ombudsman, Emily O’Reilly, said Barroso’s appointment as non-executive chairman of Goldman raised widespread concerns. She cited “understandable international attention given the importance of his former role and the global power, influence, and history of the bank with which he is now connected”. Her intervention comes after EU staff launched a petition calling on EU institutions to take “strong exemplary measures” against Barroso including the loss of his pension while he works for Goldman.

The petition now has more than 120,000 signatures. O’Reilly told Juncker that public unease will be exacerbated by the fact that Barroso is to advise Goldman Sachs on Britain’s exit from the EU. She warned of the danger of a breach of ethics in his interaction with former colleagues, including the EU’s chief Brexit negotiator, Michel Barnier, a former special adviser to Barroso. O’Reilly said new guidance was needed to ensure that EU staff were “not affected by any possible failure on Mr Barroso’s part to comply with his duty to act with integrity”. Barroso joined Goldman less than two years after leaving office at the European commission, but after the 18-month cooling-off period stipulated by European rules.

Read more …

Great story from an unlikely source, Canada’s right-wing National Post.

How Snowden Escaped (NaPo)

Edward Snowden, a former U.S. intelligence contractor, became the most wanted fugitive in the world after leaking a cache of classified documents to the media detailing extensive cyber spying networks by the U.S. government on its own citizens and governments around the world. To escape the long arm of American justice, the man responsible for the largest national security breach in U.S. history retained a Canadian lawyer in Hong Kong who hatched a plan that included a visit to the UN sub-office where the North Carolina native applied for refugee status to avoid extradition to the U.S.

Fearing the media would surround and follow Snowden — making it easier for the Hong Kong authorities to arrest the one-time CIA analyst on behalf of the U.S. — his lawyers made him virtually disappear for two weeks from June 10 to June 23, 2013, before he emerged on an Aeroflot airplane bound for Moscow, where he remains stranded today in self-imposed exile. “That morning, I had minutes to figure out how to get him to the UN, away from the media, and out of harm’s way with the weight of the U.S. government bearing down on him. I did what I had to do, and could do, to help him,” Robert Tibbo, the whistleblower’s lead lawyer in Hong Kong told the Post in a wide-ranging interview, the first detailing the chaotic days of Snowden’s escape three years ago. “They wanted the data and they wanted to shut him down. Our greatest fear was that Ed would be found.”

The covert scheme to dodge U.S. attempts to arrest Snowden could have been ripped from the pages of a spy thriller. The fugitive was disguised in a dark hat and glasses and transported by car at night by two lawyers to safe houses on the crowded and impoverished fringes of Hong Kong. Snowden hunkered down in small, cluttered, dingy rooms where as many as four people shared less than 150 square feet. Batteries were removed from cellphones when they gathered, burner phones were used to place calls, SIM cards were exchanged and sophisticated computer encryption was used to communicate when face-to-face meetings were not possible. Snowden rarely ventured out, and only at night where he could easily be lost among the many other asylum seekers. “Nobody would dream that a man of such high profile would be placed among the most reviled people in Hong Kong,” recalled Tibbo, a Canadian-born and educated barrister who has practiced law for 15 years. “We put him in a place where no one would look.”

Read more …

It is criminal that Europe doesn’t reach out to help. But we still do. Click here and Please Help The Automatic Earth Help The Poorest Greeks And Refugees! This works! No governments, no NGOs. Thats means no overhead, no salaries, just help.

Greece Overhauls Refugee Center Planning As Islands Appeal For Help (Kath.)

Government officials on Tuesday determined which reception centers for migrants across the country are to close and where new, improved facilities are to open but did not determine a time-frame, even as authorities on the Aegean islands warn of dangerously cramped and tense conditions in local camps. More than 12,500 migrants are currently living in reception centers on five Aegean islands – Lesvos, Chios, Kos, Leros and Samos – and hundreds more are arriving every day from neighboring Turkey. Spyros Galinos, the mayor of Lesvos, which is hosting 5,484 migrants, wrote to Alternate Migration Policy Minister Yiannis Mouzalas on Tuesday to express his concern about the “extremely dangerous conditions” on the island.

He asked the minister for the immediate transfer of migrants from Lesvos to other facilities on the mainland “to avert far worse developments.” However, decongesting facilities on the islands is part of the government’s broader overhaul of a network of reception centers spread across the country. An aide close to Mouzalas determined on Tuesday which camps in northern Greece will close and which will be improved but did not say when this would happen. Among the facilities that are to close are those in Sindos and Oraiokastro, near Thessaloniki, and in Nea Kavala, near Kilkis. Reception centers in Diavata and Vassilika, also in northern Greece, are to be upgraded.

A new reception center for minors is to start operating at the Amygdaleza facility, north of the capital, next Monday. Meanwhile, sources said on Tuesday that child refugees will start attending Greek schools at the end of this month. The 22,000 child refugees currently in Greece will be inducted into the school system in groups. Those aged between 4 and 7 will attend kindergartens to be set up within migrant reception centers. Children aged 7 to 15 will join classes at public schools near the reception centers where they are staying. And unaccompanied minors aged 14 to 18 will be able to join vocational training classes if they so desire.

Read more …

A tangible monument to incompetence and spectacular failure.

UK Immigration Minister Confirms Work To Start On £1.9 Million Calais Wall (G.)

Work is about to begin on “a big, new wall” in Calais as the latest attempt to prevent refugees and migrants jumping aboard lorries heading for the Channel port, the UK’s immigration minister has confirmed. Robert Goodwill told MPs on Tuesday that the four-metre high wall was part of a £17m package of joint Anglo-French security measures to tighten precautions at the port. “People are still getting through,” he said. “We have done the fences. Now we are doing the wall,” the new immigration minister told the Commons home affairs committee. Building on the 1km-long wall along the ferry port’s main dual-carriageway approach road, known as the Rocade, is due to start this month.

The £1.9m wall will be built in two sections on either side of the road to protect lorries and other vehicles from migrants who have used rocks, shopping trolleys and even tree trunks to try to stop vehicles before climbing aboard. It will be made of smooth concrete in an attempt to make it more difficult to scale, with plants and flowers on one side to reduce its visual impact on the local area. It is due to be completed by the end of the year. The plan has already attracted criticism from local residents who have started calling it “the great wall of Calais”.

Read more …

What do you call a world that refuses to protect its children?

Nearly Half Of All Refugees Are Now Children (G.)

Children now make up more than half of the world’s refugees, according to a Unicef report, despite the fact they account for less than a third of the global population. Just two countries – Syria and Afghanistan – comprise half of all child refugees under protection by the United Nations High Commissioner for Refugees (UNHCR), while roughly three-quarters of the world’s child refugees come from just 10 countries. New and on-going global conflicts over the last five years have forced the number of child refugees to jump by 75% to 8 million, the report warns, putting these children at high risk of human smuggling, trafficking and other forms of abuse.

The Unicef report – which pulls together the latest global data regarding migration and analyses the effect it has on children – shows that globally some 50 million children have either migrated to another country or been forcibly displaced internally; of these, 28 million have been forced to flee by conflict. It also calls on the international community for urgent action to protect child migrants; end detention for children seeking refugee status or migrating; keep families together; and provide much-needed education and health services for children migrants. “Though many communities and people around the world have welcomed refugee and migrant children, xenophobia, discrimination, and exclusion pose serious threats to their lives and futures,” said Unicef’s executive director, Anthony Lake.

“But if young refugees are accepted and protected today, if they have the chance to learn and grow, and to develop their potential, they can be a source of stability and economic progress.”

Read more …

Aug 022016
 
 August 2, 2016  Posted by at 9:10 am Finance Tagged with: , , , , , , ,  2 Responses »


Lewis Wickes Hine ‘Hot dogs’ for fans waiting for gates to open at Ebbets Field 1920

Asia Stocks Fall as Japan Awaits Stimulus (BBG)
Japanese Bonds Are Plunging, Australia’s Surge To Record (BBG)
China Debt Situation Gets Worse And Other EMs Start To Struggle (VW)
China Set For Special Drawing Rights Bond Issues (SCMP)
China Regulator Shutters 10,000 Funds (R.)
Student-Loan Defaulters in a Standoff With Federal Government (WSJ)
The State Of Europe’s Banks Is Far From Steady (CNBC)
UniCredit Shares Fall Sharply After European Bank Stress Tests (G.)
UK PM May Revives Industrial Policy Killed Off By Thatcher 30 Years Ago (R.)
Home Ownership In England At Lowest Level In 30 Years (G.)
South Korea Halts Sale of 80 Volkswagen Models Over Emissions Scandal (AFP)
Aid Workers Try To Convert Muslim Refugees At Greek Camp (G.)
New Greek Bailout Finds IMF In A Political Bind (AFP)
Let the Games Begin! (Jim Kunstler)

 

 

With the BOJ running out of playing field, what goood can Abe do?

Asia Stocks Fall as Japan Awaits Stimulus (BBG)

Asian stocks fell for the first time in seven days, retreating from an almost one-year high, as Japanese shares slid ahead of the announcement of a $274 billion stimulus package and a slump in oil weighed on energy and commodity companies. The MSCI Asia Pacific Index dropped 0.4% to 136.85 as of 9:03 a.m. in Tokyo after closing Monday at the highest since Aug. 17. Material and industrial shares led losses on the regional gauge, while energy producers also retreated, after crude sank into a bear market and sank below $40 a barrel for the first time since April on Monday. Japan’s Topix index lost 0.8% as investors weighed earnings and the government was poised to give details on steps to bolster an economy threatened by a strengthening yen and weak consumer spending.

Asian equities have extended their July rally, which was the best month since March, on the prospect of more global stimulus. The regional gauge has now shrugged off the fallout of Britain’s vote to leave the European Union and is up 3.7% for the year. Still, oil’s fall of more than 20% from its June high is muddying the waters and raising concerns about the recovery of the global economy. Crude’s decline “will probably weigh on sentiment a little bit and we may see some risk-off moves associated with that,” James Woods, a strategist at Rivkin Securities in Sydney, said by phone. “We’ll have an update from Shinzo Abe in Japan today, just running through the measures of the 28 trillion yen stimulus package. It’s really what’s going to dictate risk sentiment today.”

Read more …

Yikes.

Japanese Bonds Are Plunging, Australia’s Surge To Record (BBG)

Japanese bonds are plunging. Australia’s surged to a record. Blame it all on central banks. Benchmark sovereign notes in Japan headed for their biggest loss in three years on speculation the central bank will amend its unprecedented debt-purchase plan as soon as September. Australian yields tumbled to levels never seen before as the Reserve Bank cut interest rates in response to inflation running below its target. The divergence highlights the potency central banks have over their bond markets, even when analysts are questioning the limits of monetary policy. The Reserve Bank of Australia, with a benchmark of 1.5%, still has room to cut. PIMCO said the Bank of Japan – which is buying 80 trillion yen ($780 billion) a year of bonds and uses negative interest rates – has pushed policy as far as it can.

“The financial markets are being driven by what the central banks are doing,” said Roger Bridges at Nikko Asset Management in Sydney. “The central bank here has room to cut if necessary. In Japan, the policy options are deemed to be running out.” [..] Japanese policy makers fueled speculation they’re running out of options when they finished a meeting last week and opted against extending their two main tools, the bond purchases and negative interest rates, even as the inflation rate falls further below zero. They also announced a review of the effectiveness of the central bank’s policies. “We have probably seen the low of the yield of the super long JGBs,” Tomoya Masanao, Pimco’s head of portfolio management in Japan, wrote. “The BOJ hit its limit,” he wrote in a report on the company’s website last week.

Read more …

Let’s see the NPLs in the shadow system.

China Debt Situation Gets Worse And Other EMs Start To Struggle (VW)

One article this month pretty much summed up the overbuilding issue in China. In aggregate, Chinese cities are planning for 3.4 billion people in 2030. That’s three times the existing population and forecast population growth is minimal. Peak urbanisation may have arrived for China, the substantial slowdown in wage inflation is a strong indicator that the demand for labour is flat at best. This aligns with recent reports of a substantial increase in the unemployment rate. The city of Tieling is one example of what happens when a construction and manufacturing bubble pops. Remember that local governments earn most of their revenues from property development activities, which would fall flat if urbanisation stops.

A collapse in revenue would make debt servicing problematic, which is particularly concerning as local governments have seen an enormous increase in their debt issuance in 2015 and 2016. This includes continuing to build coal fired power plants when the existing plants are running at low capacity. Local governments are blocking lenders from withdrawing credit in order to protect jobs at zombie companies. 7.5% of companies in China are believed to be economically unviable, with medium and large state owned entities the worst.

Last month I wrote about the first non-performing loan securitisations in China and it looks like this process is ramping up. The Agricultural Bank of China is planning to sell a US$1.6b securitisation of non-performing loans which includes the underlying loans being marked down to 29% of face value. The other big way that banks are planning to clean up their loan books is debt to equity swaps, which are expected to start soon. There’s plenty to worry about with peer to peer lending and a crackdown is coming for wealth management products. In order to reduce fraud in these areas executives are being given tours of prisons, as a reminder of what might happen to them when investors lose money.

Read more …

I talked about this yesterday in Why Should The IMF Care About Its Credibility? I don’t see it becoming a major issue any time soon, if at all.

China Set For Special Drawing Rights Bond Issues (SCMP)

China might take another big step forward this month in its long-term aim to forge an IMF money system into the world’s dominant currency. Mainland media group Caixin reported that the World Bank planned to issue bonds denominated in Special Drawing Rights in China as early as the end of this month. It said policy bank China Development Bank was also planning an SDR bond issue. The SDR is a unit of money created by the IMF and defined by a weighted average of various convertible currencies. Market traders questioned the real purpose of such bonds, saying the SDR had little use in investment and trade. China has long had an obsession with the IMF’s SDR and wants to reduce the global reliance on the US dollar.

The IMF agreed last November to add the yuan to its SDR basket of currencies and offered the weighting as the third-biggest in the group, which Beijing saw as a triumph in its push for the yuan to have greater global influence. But the yuan later came under heavy depreciation pressure amid massive capital outflows, raising doubts about its credibility as a global currency. Beijing then began to publish its foreign exchange reserves, overseas investment and payments denominated in SDR. Central bank governor Zhou Xiaochuan said in April that the People’s Bank of China was studying the feasibility of issuing SDR bonds in China. If the World Bank issue went ahead, it would be one month before the yuan was formally included in the currency basket.

Bank of China researcher Zhao Xueqing said the timing was proper because the IMF was looking for ways to expand the use of the monetary unit. However, one Shanghai-based trader at a major bank said the issue would be more symbolic than meaningful. “It’s more like China wanting to show it has a big role in the global financial market”, she said. “But who will buy them? How will they be priced and transacted? … Even yuan-denominated bonds issued by foreign institutions are not actively traded.” An in-house economist at a Shenzhen-based domestic bank said:“I doubt there is any meaningful use to the issuing of such bonds. If such bonds were worth investing in, why hasn’t there been any active issues or transactions in much more mature countries before?”

Read more …

China’s financial world is still Wild East. Lots of abuse and losses for grandma’s.

China Regulator Shutters 10,000 Funds (R.)

China’s funds regulator said on Monday it has canceled the licenses of over 10,000 funds, amid a crackdown on the country’s poorly regulated fund management sector, which has been dogged by runaway managers and misappropriation of investments. The move comes after the hedge fund industry was thrown into disarray earlier this year as managers rushed to comply with stringent new rules. “Some funds registered in reality had no intention of getting into the business,” the Asset Management Association of China (AMAC) said. “Some engaged in illegal fundraising for illegal and criminal activities under the guise of funds, cheating the public,” the note added. New rules introduced by AMAC that took effect in July require fund managers to fully disclose their investment risks, review the identities of investors, and set up special accounts to manage capital.

Read more …

Something will have to give. The numbers are getting out of hand.

Student-Loan Defaulters in a Standoff With Federal Government (WSJ)

The letters keep coming, as do the emails. They head, unopened, straight into Jason Osborne’s trash and deleted folder. The U.S. government desperately wants Mr. Osborne and his wife to start repaying their combined $46,500 in federal student debt. But they are among the more than seven million Americans in default on their loans, many of them effectively in a standoff with the government. These borrowers have gone at least a year without making a payment—ignoring hundreds of phone calls, emails, text messages and letters from federally hired debt collectors. Borrowers in long-term default represent about 16% of the roughly 43 million Americans with student debt, now totaling $1.3 trillion across the U.S., and their numbers have continued to climb despite the expanding labor market.

Their failure to repay—in many cases due to low wages or unemployment, in other cases due to outright protest at what borrowers see as an unfair system—threatens to leave taxpayers on the hook for $125 billion, the total amount they owe. The Osbornes say they are the victims of a for-profit school that made false promises and a predatory lender—the government. “Do you think I’m going to give them one penny I’m making to pay back the loan for a job I’m never going to hold?” said Mr. Osborne, 45, who studied to be a health-care worker but can’t find a job as one. The rising number of borrowers in default weakens the economy as underwater homeowners did after the housing crash: by damaged credit, an inability to spend and save for the future, and a lack of resources to move to better jobs.

Read more …

“..the 34 listed banks in the latest stress tests results have lost on average 33% of their book value since the last stress tests were done less than two years ago..”

The State Of Europe’s Banks Is Far From Steady (CNBC)

Bank investors rejoice! The European Banking Authority declares stress tests should no longer be about pushing fresh capital into the system, as they were five years ago, or drilling down in to asset quality, as in 2014. Nope. The good news is that we are now in a world where “steady-state monitoring” is what’s needed. So will this “steady state’ policy pronouncement provide the confidence and assurance investors need? I hate to say it but I’m not convinced. Even if the stock prices overall bounce a bit this week, the banking sector did not get off to a good start Monday. I fear the market will continue to apply their own version of stress tests and find both the banks – and the regulators for that matter -lacking.

I asked European Central Bank President Mario Draghi at the last policy meeting if investors were over-exaggerating the risks. His response was cautious but positive. ”I don’t want to underplay the situation, to say it’s not a solvency problem, it’s a profitability problem doesn’t mean that one underplays but figure wise, we see from a solvency viewpoint, our banks are better off than years ago but our banks do have profitability issues, especially those with a high share of NPLs (non-performing loans), but not only those with high share of NPLs, some of it has to do with weak growth performance of the past few years. Draghi added that he was pretty confident that “strong supervision, robust regulation and better communication by supervisory authorities will still improve the situation and the perception in the rest of the world’s eyes.”

Call me cynical but I’m not sure the EBA’s “steady state” monitoring communication is quite what investors are looking for. Especially when you have a panel of respected academics including ZEW’s Sascha Steffen suggesting this month that European banks need €900 billion ($1 trillion) of fresh capital to convince investors they are robust. Who knows? But just compare that to the €280 billion the EBA says has been pumped in since 2011. Plus the report’s authors also point out that the 34 listed banks in the latest stress tests results have lost on average 33% of their book value since the last stress tests were done less than two years ago. A clear sign in my mind that the market still had significant concerns about the health of bank balance sheets and their ability to make profits.

Read more …

Can Renzi bail out his biggest banks too, like he trying to do with Monte Passchi?

UniCredit Shares Fall Sharply After European Bank Stress Tests (G.)

Italy’s biggest bank, UniCredit, has borne the brunt of lingering anxiety about the country’s banking sector, seeing its shares fall sharply following the EU-wide banking health checks. The 9.4% drop in UniCredit shares, which were being closely monitored by the Italian Borse on Monday amid heavy trading, followed Friday’s publication of stress tests on 51 banks across the EU. In the European Banking Authority tests, UniCredit recorded a capital ratio of more than 7% after the stress test applied a hypothetical shock to global growth, interest rates and currencies. Although well above the legal minimumof 4.5%, it left Unicredit as one of the five weakest out of the 51 banks tested.

The deterioration in its capital ratio was not on the scale of Banca Monte dei Paschi di Siena (MPS) – Italy’s third largest bank – which announced a rescue package on Friday aimed at funding at least €5bn worth of capital, after the stress test showed that its entire capital base would be wiped out under the adverse scenario. MPS was the worst-performing bank of any bank tested. Shares in MPS, regarded as the world’s oldest bank, were among the few to rally after the stress test results as its rescue operation appeared to alleviate pressure on the Italian government to intervene. Even so, questions remained about how easily MPS could find investors willing to stump up €5bn when its existing stock market value was less than €1bn.

Read more …

In itself, not a bad idea. Just don’t push it all towards exports. Make your own stuff. It’s the way of the future.

UK PM May Revives Industrial Policy Killed Off By Thatcher 30 Years Ago (R.)

Prime Minister Theresa May will on Tuesday outline her bid to reshape the British economy for a post-Brexit world, reviving the once unfashionable concept of industrial policy 30 years after Margaret Thatcher killed it off. May will chair the first meeting of the “Cabinet Committee on Economy and Industrial Strategy” in her Downing Street Offices, bringing together the heads of 11 other ministries to set out her vision for a state-boosted industrial renaissance. “If we are to take advantages of the opportunities presented by Brexit, we need to have our whole economy firing,” May said ahead of the meeting in a statement released by her office. “We also need a plan to drive growth up and down the country – from rural areas to our great cities.”

After a referendum campaign that revealed dissatisfaction in many of Britain’s struggling post-industrial regions, May is pitching a plan to reunite the country by raising the prospects of those who she casts as “hard-working people”. The June 23 vote to leave the EU has raised serious questions about the future of the world’s fifth largest economy, with some surveys indicating a recession, a hit to consumer confidence and a possible fall in investment. “We need a proper industrial strategy that focuses on improving productivity, rewarding hard-working people with higher wages and creating more opportunities for young people so that, whatever their background, they go as far as their talents will take them,” May said ahead of the meeting.

Read more …

This is the kind of pain that takes a long time to heal. But how predictable would you like it? “According to Nationwide, the UK average had risen to £196,930 in February – a 60% increase in 13 years.”

Home Ownership In England At Lowest Level In 30 Years (G.)

Home ownership in England has fallen to its lowest level in 30 years as the growing gap between earnings and property prices has created a housing crisis that extends beyond London to cities including Manchester. The struggle to get on the housing ladder is not just a feature of the London property market, according to a new report by the Resolution Foundation thinktank, with Greater Manchester seeing as big a slump in ownership since its peak in the early 2000s as parts of the capital, and cities in Yorkshire and the West Midlands also seeing sharp drops. Home ownership across England reached a peak in April 2003, when 71% of households owned their home, either outright or with a mortgage, but by February this year the figure had fallen to 64%, the Resolution Foundation said.

The figure is the lowest since 1986, when home ownership levels were on the way up, with a housing market boom fuelled by the deregulation of the mortgage industry and the introduction of the right-to-buy policy for council homes by Margaret Thatcher’s Conservative government. The Resolution Foundation’s analysis highlights the scale of the job faced by the prime minister, Theresa May, who has pledged to tackle the housing deficit. May warned last month that unless the issue was dealt with “young people will find it even harder to afford their own home. The divide between those who inherit wealth and those who don’t will become more pronounced. And more and more of the country’s money will go into expensive housing.”

The report, based on analysis of the latest Labour Force Survey, showed that in early 2016 only 58% of households in Greater Manchester were homeowners, compared with a peak of 72% in 2003. In outer London, the peak in ownership came earlier, in 2000, but the fall was also from 72% then to 58% in February. The West Midlands and Yorkshire have also seen double-digit drops, driven by declines in Sheffield and Leeds.

Read more …

VW had already suspended sales July 25. BTW: 80 different models?!

South Korea Halts Sale of 80 Volkswagen Models Over Emissions Scandal (AFP)

South Korea is suspending sales of 80 Volkswagen models as part of a widening investigation into the German carmaker’s emissions cheating scandal. The environment ministry said most of the models had been showcased for sale until recently, and added that the problem vehicles had fabricated documents for emissions and noise-level tests. “As of August 2 we have revoked the certification of 83,000 vehicles of 80 models,” said a ministry statement. In July South Korean prosecutors arrested an executive of Volkswagen’s South Korean unit as part of their investigations.

The world’s second-largest automaker faces legal action in several countries after it admitted to faking US emissions tests on some of its diesel-engined vehicles. In November 2015 Seoul ordered Volkswagen Korea to recall more than 125,000 diesel-powered cars sold in South Korea and fined the firm 14.1bn won ($12.3m). Foreign carmakers, especially German brands like Volkswagen, have steadily expanded their presence in South Korea’s auto market, long dominated by the local giant Hyundai and its affiliate Kia. Sales of foreign cars account for about 15% of total auto sales, compared with 10% in 2012. Around 70% of foreign auto sales in South Korea are diesel-engined vehicles.

Read more …

One of many things that are going wrong in Greece vis a vis refugees.

Aid Workers Try To Convert Muslim Refugees At Greek Camp (G.)

Christians working in Greece’s most notorious asylum detention centre have tried to convert some of the Muslim detainees, who have been held under the terms of the EU-Turkey migration deal. On at least two occasions in recent months, aid workers have distributed conversion forms inside copies of Arabic versions of the St John’s gospel to people held at the Moria detention camp on Lesbos. The forms, seen by the Guardian, invite asylum seekers to sign a statement declaring the following: “I know I’m a sinner … I ask Jesus to forgive my sins and grant me eternal life. My desire is to love and obey his word.” Muslim asylum seekers who received the booklet said they found the aid workers’ intervention insensitive.

“It’s a big problem because a lot of the people are Muslim and they have a problem with changing their religion,” said Mohamed, a detainee from Damascus. “They were trying this during Ramadan, the holiest Muslim month.” A second Syrian, Ahmed, said: “We like all religions, but if you are a Christian, and I give you a Qur’an, how would you feel?” Detainees alleged that the forms were distributed by at least two representatives of Euro Relief, a Greek charity that became the largest aid group active in Moria after other aid organisations pulled out in protest against the EU-Turkey deal. The camp is overseen by the Greek migration ministry, but aid groups perform most of the day-to-day management.

Read more …

As I wrote yesterday in Why Should The IMF Care About Its Credibility?, the IMF has a credibility problem. Multiple, in fact.

New Greek Bailout Finds IMF In A Political Bind (AFP)

The IMF can scarcely ignore Europe. Its members together hold the largest voting bloc on the Executive Board, the body which approves bailouts. The United States is still the single-largest member. The result is a complex equation for the Fund, which has pledged to make a decision before the end of the year. If it bails Greece out again, some will surely see Europes hand pulling the strings. But if it abstains, the Fund may appear to suggest the bailout is doomed to fail. “That’s the conundrum they face,” Peter Doyle, a former official in the IMF’s European Department, told AFP. ”If they go along they look like they’re caving in; if they reject, it means that they could potentially be raising new big alarms.” With its nerves already frayed by Brexit, Europe can still hardly afford a new, large-scale Greek crisis.

This latest dilemma could still offer the IMF a means of proclaiming its independence from the member countries. “Theres a need for them to rebuild their credibility,” Desmond Lachman, a former European Department official, told AFP. “By staying out of Greece, they could tell the rest of the world ‘weve realized that we were politically used.’” Doyle does not believe the IMF can be truly independent, saying the United States and Europe will still call the shots. ”That’s only what matters and that has always been the case,” said Doyle, who left the Fund in 2012. At the center of the drama and after six years of recession, Greece has seized on the latest controversy to make its views known. “The IMF has been neither useful nor needed in Europe,” said Olga Gerovassili, a government spokeswoman.

Read more …

“And so the great disaster movie of 2016 commences: Godzilla Versus Rodan the Flying Reptile.”

Let the Games Begin! (Jim Kunstler)

The distraction du jour is whether Trump has become an agent of Russia. Notice that this line of intel comes direct from the neo-con central agitprop desk. This unofficial US War Party representing the amalgamated war industries has been busy demonizing Russia throughout the current presidential term. Not all Americans are so easily gulled, though. Those who know history understand, for instance, that the Crimea has been a province of Russia almost continually for hundreds of years — except the brief interval when the ur-Ukrainian Soviet leader, Nikita Khrushchev one drunken evening gave it away to the then-Soviet region of Ukraine in a fit of sentimentality, assuming it would remain a virtual property of Greater Russia forever.

Notice, too, that since Russia annexed it in 2014 (being the site of its only warm water port and major naval stations) not even the US neo-con war party has been able to make a credible case for fighting over it. Instead, they’ve resorted to name-calling: Putin the “thug,” Putin the “worst political gangster in the world.” This is exactly the brand of foreign policy that Hillary will bring to the Oval Office. Not that Donald Trump offers a coherent alternative. The reasonable suspicion persists that he doesn’t know his ass from a hole in the ground vis-à-vis how the affairs of the world actually work. For him it’s all same as tough-talking the sheet-rocker’s union. Then, of course, Trump had to immediately step in dog-shit by bad-mouthing the mother of an American army hero who-just-happened-to-be of the Mohammedan persuasion.

Trump for practical purposes is a child and a reasonable case is not hard to make for denying him presidential power. And so the great disaster movie of 2016 commences: Godzilla Versus Rodan the Flying Reptile. Which one will survive to completely destroy the sclerotic remains of our nation? The good news is that voters are moving to the Third and Fourth party nominees, Gary Johnson (Libertarian) and Jill Stein (Green) in droves, herds, flocks, porpoise pods, and stampedes. Perhaps both of these relatively sane candidates will show enough polling strength to make it into the Great Debates. Won’t that be fun?

Read more …

Aug 012016
 
 August 1, 2016  Posted by at 5:38 pm Finance Tagged with: , , , , , , , , ,  3 Responses »


Dorothea Lange Migratory agricultural worker family fixing tire along California highway US 99 1937

The IMF’s Independent Evaluation Office (IEO) issued a report a few days ago entitled ‘The IMF and the Crises in Greece, Ireland, and Portugal’. It is so damning for managing director Christine Lagarde and her closest associates, that it’s hard to see, certainly at first blush, how they could all keep their jobs. But don’t be surprised if that is exactly what will happen.

Because organizations like the IMF don’t care much, if at all, about accountability. Their leaders think they are close to untouchable, at least as long as they have the ‘blessing’ of those whose interests they serve. Which in case of the IMF means the world’s major banks and the governments of the richest nations (who also serve the same banks’ interests). And if these don’t like the course set out, a scandal with a chambermaid is easily staged.

But the IEO doesn’t answer to Lagarde, it answers to the IMF’s board of executive directors. Still, despite multiple reports over the past few years out of the ‘inner layers’ of the Fund that were critical of, and showed far more comprehension of events than, Lagarde et al, the board never criticizes the former France finance minister in public. And maybe that should change; if the IMF is to hold on to the last shreds of its credibility, that is. But that brings us back to “Organizations like the IMF don’t care much, if at all, about accountability.”

What the IEO report makes very clear is that the IMF should never have agreed, as part of the Troika, to assist the EU in forcing austerity upon Greece without insisting on significant debt relief, in the shape of a haircut, or (a) debt writedown(s). The IMF’s long established policy is that both MUST happen together. But its Troika companion, the EU, is bound by the Lisbon Treaty, which stipulates: “The Union shall not be liable for or assume the commitments of central governments”. Also, the ECB can not “finance member states”.

If Lagarde and her minions had stayed true to their own ‘principles’, they should have refused to impose austerity on Greece if and when the EU refused debt relief (note: this has been playing out since at least 2010). They did not, however.

 

 

The IMF caved in (how willingly is hard to gauge), and the entire Troika agreed to waterboard Greece. The official excuse for bending the IMF’s own rules was the risk of ‘contagion’. But in a surefire sign that Lagarde et al were not acting with, let’s say, a “clear conscience”, they hid this decision from their own executive board.

Moreover, the IEO now says it was unable to obtain key records or assess the activities of secretive “ad-hoc task forces”. “Many documents were prepared outside the regular established channels; written documentation on some sensitive matters could not be located; [the IEO] has not been able to determine who made certain decisions or what information was available, nor has it been able to assess the relative roles of management and staff..”

One must wonder why the IMF has an executive board at all. Is it only to provide a facade of credibility and international coherence? When it becomes so clear, and -no less- through a report issued by one of its own offices, that its ‘boots on the ground’ care neither for its established policies nor for its board, isn’t it time for the board to interfere lest the Fund loses even more credibility?

The IMF’s main problem, which many insiders may ironically see as its main asset, is the lack of transparency, combined with the overwhelming power exerted by the US and Europe. And Europe’s grip on the IMF is exactly what the report is about, in that it accuses Lagarde et al of bowing to EU pressure, to the extent that it abandons its own guiding ‘laws’. It acted like it was the European Monetary Fund, not the international one.

So there’s no transparency, no accountability, and in the end that will lead to no credibility and no relevance. Well, that’s exactly how the EU lost Britain. And that shows where accountability and credibility are important even for non-democratic supra-national institutions, something these institutions are prone to neglect.

No, there will not be a vote put to the people, no referendum on the IMF. Though that would sure be interesting. What can happen, though, is that countries, even large ones like China and Russia, threaten to leave, perhaps start their own alternative fund. These things have already been widely discussed.

What is sure is that the US/Europe-centered character of the Fund will have to change. If Washington and Brussels try to appoint another European as managing director (an unwritten law thus far) they will face a rebellion.

 

 

That next appointment may come sooner than we think. Because Christine Lagarde is in trouble. It’s even a bit strange, and that’s putting it gently, that she’s still in her job. What’s hanging over her head is a 2008 case, in which she approved a payment of €403 million to businessman Bernard Tapie, for ‘losses’ he was to have suffered in 1993 when French bank Crédit Lyonnais supposedly undervalued his stake in Adidas.

Lagarde is accused of negligence in the case, in particular because she ignored advice from her own ministry (yeah, that does smack like the IMF thing) and let the Tapie case go to a special arbitration committee instead of the courts. That Tapie was a supporter of the Sarkozy government Lagarde served as finance minister at the time makes it juicier.

So does this: In 1993 Crédit Lyonnais was a private bank. But in 2008, it had been wound up and was run by a state-operated consortium. Therefore, the €403 million ‘awarded’ to Tapie out-of-court was all taxpayers money. Even juicier: in December 2015, a French appeal court overruled the compensation and ordered Tapie to repay the money, with interest.

What’s peculiar about Lagarde staying on at the IMF is that she is not merely under investigation or even ‘only’ accused of committing a crime. Instead, she has been ordered to stand trial, something she’s spent 8 years trying to avoid. Still, apparently nobody sees any problem in her continuing to act as Managing Director of the IMF.

That is quite something. And it directly affects the Fund’s credibility. If a president or prime minister of a country, any country, had been ordered to stand trial, the likely procedure would be to temporarily stand down and let someone else take care of government business pending the trial.

As it stands, however, Lagarde is allowed to sit pretty. And then? Borrowing from the Guardian: “A charge of negligence in the use of public money carries a one-year jail sentence and a €15,000 fine. The CJR is made up of six members of the French Assemblée Nationale, six members of the upper house, the Senate and three magistrates. No date has been set for the hearing.”

Ironically, negligence turns out to be a very light charge. Someone in Lagarde’s position could have given away or squandered trillions of euros and then be fined €15,000. But then, class justice is alive and well in France. What are the odds that she will be convicted? She’d have to be found with a chambermaid in Manhattan for that to happen…

 

 

That’s perhaps what the IMF board are thinking too. Whether that’s wise remains to be seen. Hubris rules all these institutions, sheltered as they are from the real world. But the real world is changing.

Ironically, many people think these changes will reinforce the IMF. Since the Fund can issue a sort of ‘super money’ in the shape/guise of Special Drawing Rights (SDRs), and especially China would seem to like SDRs becoming the world’s reserve currency instead of the US dollar, the IMF in some people’s eyes holds a trump card.

There may well be an effort to hide private and public debt throughout the planet even more than it is hidden now, through SDRs. We’ll likely see governments and perhaps large corporations issue bonds denominated in SDRs. China seems to think that this could potentially halt much of its capital flight.

My trouble with this is that it’s either too unclear or too clear who would profit most from such schemes. Even if the next managing director of the IMF is not European, but Asian or African, the puppet masters of the Fund will still be the same western financial ‘cabal’. And I don’t see China or Russia signing up to that kind of control, and willingly expand it by making SDRs far more important.

Then again, there’s a sh*tload of debt that needs to be hidden, and the whole world is running out of carpet to sweep it under. Then again, Russia is not that indebted. It’ll be hard to get a consensus.

 

 

But all that won’t help Greece. Let’s get back to that. We left off where Lagarde conspired with the EU, under the guise of preventing contagion, to abandon the IMF’s own rules in order to waterboard the country. Of course, we know, though nobody writing on the IEO report mentions it, that the contagion they were trying to prevent was not so much between nations but between banks.

The bailout-related policies and actions that Lagarde hid from her own board (!) were designed to make French and German banks ‘whole’ at the cost of the Greek people. It became austerity, so severe as to make no sense whatsoever -certainly inside an alleged ‘Union’-, even if the IMF -not the world most charitable institution- has always banned this without being accompanied by strong debt relief.

Schäuble and Dijsselbloem saved Germany and Holland at the expense of Greece. This will end up being the undoing of the EU, even if nobody’s willing to acknowledge it despite the glaring evidence of the Brexit.

It will probably be the undoing of the IMF as well. And there I get back to what I’ve said 1000 times: centralization can only work in times of growth. There is no conceivable reason, other than dictatorship, why people would want to be part of a centralizing movement unless they get richer from it.

In today’s shrinking global economy, we have passed a point of no return in this regard. Everyone will want out of these institutions, and get back to making their own decisions about their own lives, instead of having these decisions being taken by some far away board with no accountability.

Let’s end with a few quotes about the IEO report. Ambrose Evans-Pritchard was in fine form:

IMF Admits Disastrous Love Affair With The Euro and Apologises For The Immolation Of Greece

The International Monetary Fund’s top staff misled their own board, made a series of calamitous misjudgments in Greece, became euphoric cheerleaders for the euro project, ignored warning signs of impending crisis, and collectively failed to grasp an elemental concept of currency theory.

[..] In Greece, the IMF violated its own cardinal rule by signing off on a bailout in 2010 even though it could offer no assurance that the package would bring the country’s debts under control or clear the way for recovery, and many suspected from the start that it was doomed. The organisation got around this by slipping through a radical change in IMF rescue policy, allowing an exemption (since abolished) if there was a risk of systemic contagion. “The board was not consulted or informed,” it said. The directors discovered the bombshell “tucked into the text” of the Greek package, but by then it was a fait accompli.

[..] The injustice is that the cost of the bailouts was switched to ordinary Greek citizens – the least able to support the burden – and it was never acknowledged that the true motive of EU-IMF Troika policy was to protect monetary union. Indeed, the Greeks were repeatedly blamed for failures that stemmed from the policy itself. This unfairness – the root of so much bitterness in Greece – is finally recognised in the report. “If preventing international contagion was an essential concern, the cost of its prevention should have been borne – at least in part – by the international community as the prime beneficiary,” it said.

 

 

That would seem to leave the IMF just one option: to apologize profoundly to Greece, to demand from the EU that all unjust measures be reversed and annulled, and to set up a very large fund (how about €1 trillion) specifically to support the Greek people, including retribution of lost funds, repair of the health care system, reinstatement of a pension system that can actually keep people alive and so on and so forth.

And to top it off of course: debt writedowns as far as the eye can see. You f**k up, you pay the price. This makes me think of a remark by Angela Merkel a few weeks ago, she said ‘we have found the right mix when it comes to Greece’. Well, Angela, that is so completely bonkers it’s insulting, and the IMF’s own evaluation office says so.

I like this one from Bill Black as well:

It was only after forcing the Greek people into a pointless purgatory of a decade of disaster that the troika would consider providing debt relief…The only ‘debt relief’ they offer to discuss is a ‘long rescheduling of debt payments at low interest rates.’ This, under their own dogmas, will lock Greece into a long-term debt trap that will materially lower Greece’s growth rate for decades and leave it constantly vulnerable to recurrent financial crises. That is a recipe for disaster for Greece, Italy, and Spain (collectively, 100 million citizens) and for the EU. It is financial madness – and that ignores the political instability it will cause to force an EU member nation to twist slowly in the wind for 50 years.”

Got that one off of Yanis Varoufakis’ site, and he must be feeling very vindicated, even if not nearly enough people express it, by the IMF report. Because he’s said all along what they themselves are now admitting. But it ain’t much good if nothing changes, is it? Or, as Varoufakis put it:

[..] to complete this week’s drubbing of the troika, the report by the IMF’s Independent Evaluation Office (IEO) saw the light of day. It is a brutal assessment, leaving no room for doubt about the vulgar economics and the gunboat diplomacy employed by the troika. It puts the IMF, the ECB and the Commission in a tight spot: Either restore a modicum of legitimacy by owning up and firing the officials most responsible or do nothing, thus turbocharging the discontent that European citizens feel toward the EU, accelerating the EU’s deconstruction.

[..] The question now is: What next? What good is it to receive a mea culpa if the policies imposed on the Greek government are the same ones that the mea culpa was issued for? What good is it to have a mea culpa if those officials who imposed such disastrous, inhuman policies remain on board and are, in fact, promoted for their gross incompetence?

In sum, an urgent apology is due to the Greek people, not just by the IMF but also by the ECB and the Commission whose officials were egging the IMF on with the fiscal waterboarding of Greece. But an apology and a collective mea culpa from the troika is woefully inadequate. It needs to be followed up by the immediate dismissal of at least three functionaries.

First on the list is Mr Poul Thomsen – the original IMF Greek Mission Chief whose great failure (according to the IMF’s own reports never before had a mission chief presided over a greater macroeconomic disaster) led to his promotion to the IMF’s European Chief status. A close second spot in this list is Mr Thomas Wieser, the chair of the EuroWorkingGroup who has been part of every policy and every coup that resulted in Greece’s immolation and Europe’s ignominy, hopefully to be joined into retirement by Mr Declan Costello, whose fingerprints are all over the instruments of fiscal waterboarding. And, lastly, a gentleman that my Irish friends know only too well, Mr Klaus Masuch of the ECB.

You probably guessed by now that I would certainly and urgently add Christine Lagarde to that list of people to be fired. And not appoint another French citizen as managing director. Too risky. They do crazy things. The IMF must be reorganized, and thoroughly, or it no longer has a ‘raison d’être’.

I see no reason to doubt that those who call the shots are too blinded by hubris to execute such measures, so I’ll list these things one more time: transparency, accountability, credibility and if you don’t have those you will lose your relevance.

But it’s probably a bad idea to begin with to let an economy, if not a world, in decline, be governed by the same people who owe their positions to its rise. It would seem to take another kind of mindframe.

Nov 302015
 
 November 30, 2015  Posted by at 10:26 am Finance Tagged with: , , , , , , , , , , , ,  4 Responses »


John Vachon Trucks loaded with mattresses at San Angelo, Texas Nov 1939

COP-21 Climate Deal In Paris Spells End Of The Fossil Era (AEP)
Oil’s Big Players Line Up for $30 Billion of Projects in Iran (Bloomberg)
India Opposes Deal To Phase Out Fossil Fuels By 2100 (Reuters)
Beijing Smog Levels So High They Move ‘Beyond Index’ (Bloomberg)
World’s Biggest Pension Fund Loses $64 Billion Amid Equity Rout (Bloomberg)
Iron Ore Falls Below $40 A Metric Ton For The First Time (Bloomberg)
Fed To Take Up ‘Too Big To Fail’ Emergency Lending Curb (Reuters)
Did the Yuan Really Pass the IMF Currency Test? You’ll Know Soon (Bloomberg)
IMF Move Would Pressure China on Management of Yuan (WSJ)
IMF’s Yuan Inclusion Signals Less Risk Taking In China (Reuters)
VW Top Execs Knew Fuel Usage In Some Cars Was Too High A Year Ago (Reuters)
BlackRock Spreads its Tentacles in Brussels (Don Quijones)
The Silk Road Affair: Power, Pop and a Bunch of Billionaires (Bloomberg)
The Strange Case Of Julian Assange (Crikey)
Saudi Arabia’s 2015 Beheadings The Most In 20 Years (Al Jazeera)
EU Split Over Refugee Deal As Germany Leads Breakaway Coalition (Guardian)
European Union Reaches Deal With Turkey on Migration (WSJ)
Tsipras Takes On Turkey’s Davutoglu On Twitter (AP)
As the World Turns Away, Refugees are Still Drowning in the Mediterranean (HRW)

Ambroses say the darndest things. This Ambrose looks through rosy glasses. Probably drinks from them too. “..both countries have come to the realisation that it is possible to decarbonise without hurting economic growth..” Oh, for Christ sake.

COP-21 Climate Deal In Paris Spells End Of The Fossil Era (AEP)

A far-reaching deal on climate change in Paris over coming days promises to unleash a $30 trillion blitz of investment on new technology and renewable energy by 2040, creating vast riches for those in the vanguard and potentially lifting the global economy out of its slow-growth trap. Economists at Barclays estimate that greenhouse gas pledges made by the US, the EU, China, India, and others for the COP-21 climate summit amount to an epic change in the allocation of capital and resources, with financial winners and losers to match. They said the fossil fuel industry of coal, gas, andoil could forfeit $34 trillion in revenues over the next quarter century – a quarter of their income – if the Paris accord is followed by a series of tougher reviews every five years to force down the trajectory of CO2 emissions, as proposed by the United Nations and French officials hosting the talks.

By then crude consumption would fall to 72m barrels a day – half OPEC projections – and demand would be in precipitous decline. Most fossil companies would face run-off unless they could reinvent themselves as 21st Century post-carbon leaders, as Shell, Total, and Statoil are already doing. The agreed UN goal is to cap the rise in global temperatures to 2 degrees centigrade above pre-industrial levels by 2100, deemed the safe limit if we are to pass on a world that is more or less recognisable. Climate negotiators say there will have to be drastic “decarbonisation” to bring this in sight, with negative net emissions by 2070 or soon after. This means that CO2 will have to be plucked from the air and buried, or absorbed by reforestation.

Such a scenario would imply the near extinction of the coal industry unless there is a big push for carbon capture and storage. It also implies a near total switch to electric cars, rendering the internal combustion engine obsolete. The Bank of England and the G20’s Financial Stability Board aim to bring about a “soft landing” that protects investors and gives the fossil industry time to adapt by forcing it to confront the issue head on. Barclays said ,$21.5 trillion of investment in energy efficiency will be needed by 2040 under the current pledges, which cover 155 countries and 94pc of the global economy. It expects a further $8.5 trillion of spending on solar, wind, hydro, energy storage, and nuclear power. Those best-placed to profit in Europe are: Denmark’s wind group Vestas; Schneider and ABB for motors and transmission; Legrand for low voltage equipment; Alstom and Siemens for rail efficiency; Philips, and Osram for LEDs and lighting.

But this is a minimalist scenario. While the Paris commitments suggest a watershed moment, they do not go far enough to meet the targets set by the Intergovernmental Panel on Climate Change (IPPC). The planet has already used up two-thirds of the allowable “carbon budget” of 2,900 gigatonnes (GT), and will have used up three quarters of the remaining 1,000 GT by 2030. Barclays advised clients to prepare for a more radical outcome, entailing almost $45 trillion of spending on different forms of decarbonisation. “The fact that COP-21 in itself is clearly not going to put the world on a 2 degree track does not mean that fossil-fuel companies can simply carry on with business-as-usual. We think they should be stress-testing their business models against a significant tightening of global climate policy over the next two decades,” it said.

[..] Mr Jacobs said a deal in Paris is highly likely. “You can never rule out a break-down. These meetings always go to the wire. But we have gone past the turning point in the US and China, and both countries have come to the realisation that it is possible to decarbonise without hurting economic growth,” he said. It will not be a legally-binding treaty, but it is expected to have the same effect as each country transposes the targets into its own law. In the US it will be enforced through the legal mechanism of the Clean Air Act, anchored on earlier accords, without need for Senate ratification. The sums of money are colossal. Macro-economists say this is just what is needed to soak up the global savings glut and rescue the world from its 1930s liquidity trap. There might even be a boom.

Read more …

End of the fossil era, Ambrose? Not everyone agrees.

Oil’s Big Players Line Up for $30 Billion of Projects in Iran (Bloomberg)

Total, Royal Dutch Shell and Lukoil are among international companies that have selected oil and natural gas deposits to develop in Iran as the holder of the world’s fourth-largest crude reserves presents $30 billion worth of projects to investors. Total is one of the companies that have been in the forefront of discussions and Eni is also looking to invest, Oil Minister Bijan Namdar Zanganeh said. Shell, Total and Lukoil all specified fields they would be interested in developing in Iran, Ali Kardor, deputy director of investment and financing at National Iranian Oil Co. said in an interview in Tehran. “Many companies are interested. Europeans are interested, Asian companies are interested,” Zanganeh told reporters at a conference in Tehran on Saturday. “Total is interested, Eni is interested.”

Iran is pitching 70 oil and natural gas projects valued at $30 billion to foreign investors at a two-day conference in Tehran as the Persian Gulf country prepares for the end of sanctions that have stifled its energy production. All banking and economic sanctions will be lifted by the first week of January,” Amir Hossein Zamaninia, deputy oil minister for international and commerce affairs, said at the event. “We are interested to come back to Iran when the sanctions are lifted and if the contracts are interesting,” Stephane Michel, Total’s head of exploration and production in the Middle East said at the conference. “We have worked in this country for a long time, so we know specific fields on which we’ve worked.”

Read more …

Eh, Ambrose? “The entire prosperity of the world has been built on cheap energy. And suddenly we are being forced into higher cost energy. That’s grossly unfair..”

India Opposes Deal To Phase Out Fossil Fuels By 2100 (Reuters)

India would reject a deal to combat climate change that includes a pledge for the world to wean itself off fossil fuels this century, a senior official said, underlying the difficulties countries face in agreeing how to slow global warming. Almost 200 nations will meet in the French capital on Nov. 30 to try and seal a deal to prevent the planet from warming more than the 2 degrees Celsius that scientists say is vital if the world is to avoid the most devastating effects of climate change. To keep warming in check, some countries want the Paris agreement to include a commitment to decarbonize – to reduce and ultimately phase out the burning of fossil fuels like coal, oil and gas that is blamed for climate change – this century.

India, the world’s third largest carbon emitter, is dependent on coal for most of its energy needs, and despite a pledge to expand solar and wind power has said its economy is too small and its people too poor to end use of the fossil fuel anytime soon. “It’s problematic for us to make that commitment at this point in time. It’s certainly a stumbling block (to a deal),” Ajay Mathur, a senior member of India’s negotiating team for Paris, told Reuters in an interview this week. “The entire prosperity of the world has been built on cheap energy. And suddenly we are being forced into higher cost energy. That’s grossly unfair,” he said. Mathur said India, whose position at climate talks is seen by some in the West as intransigent, was committed to the 2 degrees ceiling as a long-term goal and was confident a deal would be reached.

Read more …

If PM2.5 is the threat, what good is staying indoors? You’d have to live in a bunker.

Beijing Smog Levels So High They Move ‘Beyond Index’ (Bloomberg)

Smog levels spiked in Beijing on Monday, highlighting the environmental challenges facing China as President Xi Jinping arrives in Paris for global climate talks. The concentration of PM2.5, fine particulates that pose the greatest risk to human health, went “beyond index” in the afternoon, according to a U.S. Embassy monitor. The PM2.5 level was 678 micrograms per cubic meter near Tiananmen Square, the Beijing government said. The World Health Organization recommends average 24-hour exposure to PMI of 25 or below. Public outrage over air pollution has been a catalyst for China’s transformation into a driving force for a breakthrough deal in Paris. Leaders including U.S. President Barack Obama and Chinese President Xi Jinping are scheduled to being discussions in the French capital Monday.

Beijing on Sunday raised its air pollution alert to orange, the second-highest level in its four-tier system, for the first time in 13 months. The heavy pollution in Beijing won’t clear up until Dec. 2, according to the environment bureau. The city will ask some factories to suspend or limit production and construction sites to stop transporting materials and waste while the orange alert is active, it said. Under the orange alert, people are advised to cut down on outdoor activity, while the elderly and people with heart and lung ailments should stay inside. Severe pollution was also reported in at least 17 other cities around Beijing, Tianjin, Hebei and Shandong, according to the Ministry of Environmental Protection. Shanghai’s air was also heavily polluted, the second worst level on a six-grade scale, with the PM2.5 reading at 170.4 micrograms per cubic meter as of 12 p.m..

Read more …

I warned this would happen the moment Abe pushed pension funds to prop up stock markets: they lose big. Japanese who read this will save even more, further crippling Abenomics.

World’s Biggest Pension Fund Loses $64 Billion Amid Equity Rout (Bloomberg)

The world’s biggest pension fund posted its worst quarterly loss since at least 2008 after a global stock rout in August and September wiped $64 billion off the Japanese asset manager’s investments. The 135.1 trillion yen ($1.1 trillion) Government Pension Investment Fund lost 5.6% last quarter as the value of its holdings declined by 7.9 trillion yen, according to documents released Monday in Tokyo. That’s the biggest percentage drop in comparable data starting from April 2008. The fund lost 8 trillion yen on its domestic and foreign equities and 241 billion yen on overseas debt, while Japanese bonds handed GPIF a 302 billion yen gain.

The loss was GPIF’s first since doubling its allocation to stocks and reducing debt last October, and highlights the risk of sharp short-term losses that come with the fund’s more aggressive investment style. Fund executives have argued that holding more shares and foreign assets is a better approach as Prime Minister Shinzo Abe seeks to spur inflation that would erode the purchasing power of bonds. [..] GPIF had 39% of its assets in Japanese debt at Sept. 30, and 21% in the nation’s equities, according to the statement. That compares with 38% and 23% three months earlier, respectively. The fund had 22% of its investments in foreign stocks at the end of September, and 14% in overseas bonds.

Read more …

Overleveraged overcapacity will disappear no matter how powerful the interests.

Iron Ore Falls Below $40 A Metric Ton For The First Time (Bloomberg)

Most-active iron ore futures in Singapore sank below $40 a metric ton for the first time on concern that the economic slowdown in China will cut demand as supplies from the largest miners climb. [..] The raw material has been pummeled since the start of 2014 as surging supplies from low-cost producers including BHP Billiton Ltd. and Rio Tinto in Australia and Brazil’s Vale combine with faltering demand in China to spur a glut. Losses in Singapore and Dalian could presage a drop in the benchmark price for spot ore in Qingdao, which will be updated later in the day. The latest sign of new supply came from Australia, with a vessel waiting offshore on Monday to load the first cargo from Gina Rinehart’s Roy Hill mine.

“Supply continues to rise while port inventories are starting to climb, weighing on iron ore prices,” analysts at Maike Futures Co. said in a note on Monday. “The overseas producers are still profitable and are greatly reducing costs.” The top miners are betting that higher output will enable them to cut unit costs and defend market share while smaller rivals shut. Mills in China, contending with overcapacity and depressed margins, will cut steel production by almost 3% next year, according to the China Iron & Steel Association.

Read more …

The Fed can elect to ignore the law, and Congress?

Fed To Take Up ‘Too Big To Fail’ Emergency Lending Curb (Reuters)

The Federal Reserve Board will consider on Monday a proposal to curb its emergency lending powers, a change demanded by Congress after the central bank’s controversial decision to aid AIG, Citigroup and others in 2008. A proposed rule, to be considered by the Fed’s Washington-based board in an open meeting, would require that any future emergency lending be only “broad-based” to address larger financial market problems, and not tailored to specific firms. The 2010 Dodd-Frank financial reform law instructed the Fed to curtail emergency loans to individual banks and prohibited it from lending to companies considered insolvent.

While some at the Fed worry the new rules will hamper the central bank’s response in future crises, some politicians have said the proposed regulations are too imprecise, for example in defining insolvency, to prevent the types of deals done in 2008. As the financial crisis intensified in 2008, the Fed invoked its little-used emergency lending power to stave off the failure of AIG and Bear Stearns, and help other “too big to fail” companies including Citigroup and Bank of America. The Fed also enacted a series of more general emergency programs, in all providing $710 billion in loans and guarantees. Those programs were separate from the much larger Fed asset and bond purchases known as quantitative easing.

The loans have been repaid and the guarantees ended, ultimately earning the Fed a net profit of $30 billion, according to a September Congressional Research Service review. However the effort was criticized as overreach, arguably important in limiting the crisis but also not clearly in line with the intended use of the Fed’s emergency authority. The Fed routinely lends money to banks on a short-term basis to smooth the operations of the financial system. That is part of why it exists. But since the 1930s it has had the power to lend more broadly in a crisis.

Read more …

Can’t see Lagarde crushing the expectations she herself built up. Unless there’s a dirty game going on behind the curtain.

Did the Yuan Really Pass the IMF Currency Test? You’ll Know Soon (Bloomberg)

IMF Managing Director Christine Lagarde and some two dozen officials on the fund’s executive board will gather Monday at headquarters in Washington for one of the most-anticipated decisions outside of actually approving loans for nations in crisis. The question inside the 12th-floor, oval boardroom: whether to grant China’s yuan status as a reserve currency by adding it to the fund’s Special Drawing Rights basket. The SDR, created in 1969, gives IMF member countries who hold it the right to obtain any of the currencies in the basket – currently the dollar, euro, yen and pound – to meet balance-of-payments needs. While there’s little suspense in the main thrust of the expected approval – Lagarde already announced that fund staff had recommended the yuan be included and that she supported the finding – the IMF is likely to give more details on how it arrived at the decision.

The IMF’s highest decision-making body is its board of governors, a group of mostly finance ministers and central bankers from its 188 member countries. The board of governors has delegated most of its powers to the executive board, made up of 24 executive directors who represent the membership. The meeting Monday has been classified as “restricted,” meaning no support staff will be allowed to attend. The executive board, which meets more than 200 times a year, usually makes decisions based on consensus, rather than formal votes. Mark Sobel, the U.S. executive director who answers to the Obama administration, wields the most power, with a 17% voting stake. Together, the Group of Seven countries control 43% of the vote, making them a formidable bloc. China, which holds a 3.8% voting share, is represented by former People’s Bank of China official Jin Zhongxia.

Read more …

Beijing’s hands will be tied.

IMF Move Would Pressure China on Management of Yuan (WSJ)

The IMF is on the verge of labeling China’s yuan a reserve currency. Now Chinese officials will have to prove they can treat it like one. The IMF on Monday is widely expected to say that next year, it will add the yuan to the elite basket of currencies that comprise its lending reserves, a status enjoyed only by the U.S. dollar, the euro, the British pound and the Japanese yen. The inclusion would represent recognition that the yuan’s status is rising along with China’s place in global finance. Now comes the hard part. The inclusion puts new pressure on Beijing to change everything from how it manages the yuan, also known as renminbi, to how it communicates with investors and the world. China’s pledges to loosen its tight grip on the currency’s value and open its financial system will come under new scrutiny.

“We will have to build up confidence in renminbi assets from investors both at home and abroad and at the same time, prevent the financial risks associated with a more global currency,” said Sheng Songcheng, head of the survey and statistics department at the People’s Bank of China, the country’s central bank. “That calls for carrying out various financial reforms in a coordinated way.” Inclusion would also put pressure on the central bank to offer the same degree of clarity and transparency that the U.S. Federal Reserve, the European Central Bank and other vital institutions strive for. That could be difficult: In the past six months alone, the PBOC shocked markets with a surprise currency devaluation, stood mostly silent during a Chinese stock-market rout and confused investors by issuing a new proclamation that turned out to be months old.

Read more …

Is the SDR Xi’s Trojan Horse?

IMF’s Yuan Inclusion Signals Less Risk Taking In China (Reuters)

When the IMF agrees on Monday to add the Chinese yuan to its reserves basket in the biggest shake-up in more than three decades, the IMF can afford itself a congratulatory nod. By acknowledging the yuan as a major global currency alongside the dollar, euro, yen, and pound, as is widely expected, IMF members will endorse the efforts of China’s economic reformers and by doing so hope that will spur fresh change in China. But Chinese policy insiders and international policymakers say reforms may not continue at the breakneck pace of recent months. In addition, Chinese sources suggest adding the yuan to the IMF basket leaves economic conservatives better positioned to resist further significant reform in a reminder of the period following China’s entry to the World Trade Organization (WTO).

A slowing in the pace has implications for those who bet that making the yuan a global reserve currency will give it a boost. The yuan has fallen almost 3% against the dollar this year, on course for its biggest annual fall since its landmark 2005 revaluation. The IMF decision will remove a key incentive – bolstering national pride – that reformers used to push otherwise reluctant conservatives to support reforms. More importantly, however, are worries in Beijing that the rickety economy can’t handle more aggressive reform that allows a freer flow of currency across China’s borders. Beijing is already rapidly losing a taste for more experimentation with capital flows, say the sources – economists involved in policy discussions who declined to be identified because of the sensitivity of the subject.

After the stock market buckled more than 40% in the summer – which many blamed on nefarious foreign capital – regulators have made it harder for money to leave China to counter yuan selling pressure and have intervened heavily in onshore and offshore currency markets. Not just conservatives, but more liberal economists are calling for a pause. “Our ability to control financial risk has yet to be improved,” said a senior economist at the China Centre for International Economic Exchanges (CCIEE), an influential Beijing think-tank. “Any rush to open up the capital account completely could be unfavorable for controlling financial risks … we will definitely be very cautious.”

Read more …

Which is why former CEO Winterkorn left in a hurry as soon as the scandal first broke.

VW Top Execs Knew Fuel Usage In Some Cars Was Too High A Year Ago (Reuters)

Volkswagen’s top executives knew a year ago that some of the company’s cars were markedly less fuel efficient than had been officially stated, Sunday paper Bild am Sonntag reported, without specifying its sources. VW in early November revealed that it had understated the level of carbon dioxide emissions and fuel usage in around 800,000 cars sold mainly in Europe. The scandal, which will likely cost VW billions, initially centered on software on up to 11 million diesel vehicles worldwide that VW admitted was designed to artificially suppress nitrogen oxide emissions in a test setting. The Bild am Sonntag report contradicts VW’s assertion, however, that it only uncovered the false CO2 emissions labeling as part of efforts to clear up the diesel emissions scandal, which became public in September.

Months after becoming aware of excessive fuel consumption, former Chief Executive Martin Winterkorn decided this spring to pull one model off the market where the discrepancy was particularly pronounced, the Polo TDI BlueMotion, the paper cited sources close to Winterkorn as saying. The paper did not separately cite its sources for saying that top executives knew about the fuel usage problem a year ago, however. VW at the time cited low sales figures as the reason for the withdrawal. The paper said that VW did not inform Polo TDI BlueMotion owners of the high fuel consumption, which was 18% above the nameplate value.

Read more …

Goldman, BlackRock, they are the de facto executive rulers of the world. And it makes them filthy rich.

BlackRock Spreads its Tentacles in Brussels (Don Quijones)

Much like Goldman Sachs, Blackrock is spreading tentacles across Europe at a startling rate. In a sign of its growing influence, the firm met EU officials to discuss financial market matters more times than any other company in the seven months to July, Financial Times reported this week. During that period the firm met Jonathan Hill, European Commissioner for financial services (and former City of London lobbyist), and his team five times — one more time than HSBC and two more times than Deutsche Bank. In fact, the only institutions that met the Commissioner as many times were London Stock Exchange Group, the British Bankers’ Association and Insurance Europe.

BlackRock’s lobbying efforts have worried some investors amidst concerns that the fund house, which offers traditional active mutual funds, passive funds and alternative products such as hedge funds, could have too much influence on European policy. By pure happenstance, the growth in BlackRock’s influence coincided with a 10-fold increase in the company’s self-reported lobbying spending in Brussels: in 2012 the firm spent €150,000; by 2014 that number had catapulted to €1.5m. That kind of money gets you a heck of a lot of access and influence in Brussels, the world’s second most important lobbying hub, especially when you’re already the world’s biggest asset manager.

According to EU Integrity Watch, BlackRock held meetings with Brussels officials over issues as far-reaching as the regulatory agenda in financial services by the EU and the US – a vital issue given the looming TTIP and TiSA trade treaties – capital markets union, Mr. Hill’s plan to boost business funding and investment financing, and money market funds. BlackRock’s most audacious coup to date took place in August, 2014, when the ECB announced its decision to hire BlackRock Solutions to provide advice on the design and implementation of the central bank’s upcoming purchase of asset-backed securities. In other words, just before the ECB embarked on one of the biggest QE programs in world history, it sought the advice of the world’s largest asset manager – i.e. the company most invested in the assets it intended to buy.

To ensure that there were/are no conflicts of interest, BlackRock’s contract stipulates that there must be an effective separation between the project team working for the ECB and its staff involved in any other ABS-related activities, which, as you can imagine, is an immense relief. So too is the fact that “all external audits related to the management of conflicts of interest would be made available to the ECB,” an institution famed worldwide for its blinding institutional transparency and accountability. To put all lingering fears to bed, a spokesperson for BlackRock told FT, “BlackRock advocates for public policies that we believe are in our investors’ long-term best interests.”

Read more …

Juicy story. Let’s do a movie.

The Silk Road Affair: Power, Pop and a Bunch of Billionaires (Bloomberg)

Even in post-Soviet Uzbekistan, an ancient crossroads where torture and bribery allegations are endemic, Gulnara Karimova, the president’s Harvard-educated daughter, stood out for her ruthlessness. As the U.S. embassy noted in a secret dispatch from 2005 that was later published by Wikileaks, Karimova was viewed by most Uzbeks “as a greedy, power-hungry individual who uses her father to crush business people or anyone else who stands in her way.” These days the 43-year-old former globetrotting socialite who once publicly praised God for “my face” is confined to her homeland along the legendary Silk Road, watched over by the security services of her aging father, Islam Karimov, who has ruled for a quarter century.

Even in isolation, though, Googoosha, as she’s called herself in music videos, remains in the eye of a storm, the protagonist in a multibillion-dollar tale of alleged greed and graft unfolding across three continents. This story stretches back more than a decade, from the fringes of the czarist empire to the tidy streets of Oslo, via Gibraltar, Geneva and beyond. It touches companies owned by six of Europe’s richest men – five Russians and a native Norwegian – and thrusts the staid Scandinavian business world into a strange new light. It also offers a glimpse into a mercurial U.S. ally, a nation of 30 million that is ranked among the most repressive and corrupt in the world by Freedom House and Transparency International, even while providing occasional logistical support for American troops in neighboring Afghanistan.

[..] In Switzerland, where Karimova once lived in a Geneva mansion, prosecutors have widened their own probe into suspected money-laundering and fraud offenses related to her role in awarding telecommunications contracts in Uzbekistan. In August, they said they’d confiscated more than 800 million Swiss francs ($781 million) of assets linked to her, without elaborating, bringing the total amount seized to about $1.1 billion. Add the $900 million VimpelCom has set aside for potential liabilities and the amount tied up in the investigations is pushing $2 billion. And that’s not even counting the impact on the market values of VimpelCom, MTS and TeliaSonera or the future costs of litigation. VimpelCom’s market value has plunged 59% to $6.3 billion since March 12, 2014, when it disclosed the U.S. and Dutch probes…

Read more …

Good overview. No charges have ever been filed. No prosecutor wants to interview Assange.

The Strange Case Of Julian Assange (Crikey)

Julian Assange faces very serious allegations, politicians like to say. That was the description from UK Prime Minister David Cameron’s office three years ago, defending the UK s determination to extradite him to Sweden. And that was the description early this year from then-UK deputy PM Nick Clegg, too – he should go to Sweden to face very serious allegations and charges of rape, said Clegg, not long before leading his party to annihilation in this year’s general election. Clegg, of course, was peddling the oft-repeated lie that there are charges against Assange. But for very serious allegations -sexual molestation, unlawful coercion, sexual assault- the UK and Swedish governments have displayed zero interest in investigating them. In fact, the history of the case against Assange is a history of increasingly bizarre efforts by authorities to avoid questioning him.

When Swedish prosecutors first examined complaints about Assange by two women in 2010, the Chief Prosecutor of Stockholm dismissed all but one of the allegations, including the accusation of sexual assault, saying there is no suspicion of any crime whatsoever. After speaking to prosecutors, Assange remained in Sweden for another week to be interviewed about the one remaining allegation (of molestation). However, after an appeal by former Swedish politician Claes Borgstrom, another prosecutor, Marianne Ny, reopened the whole case. Assange remained in Sweden and offered to be interviewed again, but, in the first of what would turn out to be a long litany of excuses, was told Ny was ill and unable to speak to him. Ny’s office then told Assange’s lawyer he was free to leave Sweden, but once Assange did so, an arrest warrant was issued for him.

Assange then offered to return to Sweden to speak to Ny and gave her a full week of dates in which he would do so. These were all rejected. This was all despite Swedish police having access to the texts of one of the alleged victims of Assange saying she did not want to put any charges on JA but that the police were keen on getting a grip on him , that she was shocked when he was arrested given she only wanted him to take an STD test, and that it was the police who made up the charges . Ny’s unwillingnness to interview Assange would become the pattern for the next five years: Assange repeatedly offered to speak to Swedish authorities by phone, by videolink, or in person at the Australian embassy. The Swedes refused all opportunities to do so and demanded Assange return to Sweden, issuing a European arrest warrant for him.

Eventually the EAW would be upheld by British courts under UK laws, which since then have been amended. Under current British law, a similar case to Assange’s would now be successfully appealed and the EAW rejected. Once he had sought refuge in the Ecaudorean embassy in 2012, Assange continued to offer Swedish authorities the opportunity to speak with him, and they continued to reject them. But while they regularly rejected Assange s offer to be interviewed, other suspects were treated very differently: during the last five years, the Swedes have on 44 occasions asked to travel to the UK to interview, or asked British police to interview, other people in Britain in relation to allegations including violent crime, fraud and even murder. Assange, however, couldn’t be treated the same way – he had to go to Sweden.

Read more …

Nice company to keep: “Saudi Arabia, Iran, China, the United States, and Iraq are the top five countries with the most executions.”

Saudi Arabia’s 2015 Beheadings The Most In 20 Years (Al Jazeera)

Saudi Arabia has executed at least 151 people so far this year – the most put to death in a single year since 1995. The stark rise in the number of executions has seen, on average, one person killed every two days, according to the human rights group, Amnesty International. “The Saudi Arabian authorities appear intent on continuing a bloody execution spree,” Amnesty’s report released on Monday said, quoting James Lynch, deputy director at the Middle East and North Africa programme. It is the most people put to death in the kingdom in one year since 1995, when 192 executions were reportedly carried out. Most recent years have had between 79 and 90 people killed by beheadings annually for crimes including “nonlethal offences, such as drug-related ones,” according to the London-based rights group.

The large number of executions shed further light on what Amnesty referred to as unfair judicial proceedings, with a disproportionate imposition of capital punishment on foreign nationals. “Of the 63 people executed this year for drug-related charges, the vast majority, 45 people, were foreign nationals,” the report said. Khalid al-Dakhil, a Saudi political commentator based in Riyadh, challenged “the integrity” of Amnesty’s report, saying it failed to mention Iran’s execution record. “Iran executes far more people a year than Saudi Arabia, but it does not get the negative publicity Saudi Arabia has. This is something that must be addressed,” Dakhil told Al Jazeera. Saudi Arabia, Iran, China, the United States, and Iraq are the top five countries with the most executions. In total, 71 people executed so far in 2015 have been foreigners. The majority were migrant workers from poorer countries who are often sentenced to die without any knowledge of the court’s proceedings because they don’t speak Arabic and do not receive translations.

Read more …

These people are busy creating absolute mayhem in Europe.

EU Split Over Refugee Deal As Germany Leads Breakaway Coalition (Guardian)

Months of European efforts to come up with common policies on mass immigration unravelled when Germany led a “coalition of the willing” of nine EU countries taking in most refugees from the Middle East, splitting the EU on the issues of mandatory refugee-sharing and funding. An unprecedented full EU summit with Turkey agreed a fragile pact aimed at stemming the flow of migrants to Europe via Turkey. But the German chancellor, Angela Merkel, frustrated by the resistance in Europe to her policies, also convened a separate mini-summit with seven other leaders on Sunday to push a fast-track deal with the Turks and to press ahead with a new policy of taking in and sharing hundreds of thousands of refugees a year directly from Turkey.

The surprise mini-summit suggested that Merkel has given up trying to persuade her opponents, mostly in eastern Europe, to join a mandatory refugee-sharing scheme across the EU, although she is also expected to use the pro-quotas coalition to pressure the naysayers into joining later. Merkel’s ally on the new policy, Jean-Claude Juncker, president of the European commission, said of the mini-summit: “This is a meeting of those states which are prepared to take in large numbers of refugees from Turkey legally.” But the frictions triggered by the split were instantly apparent. Donald Tusk, the president of the European council who chaired the full summit with Turkey, contradicted the mainly west European emphasis on seeing Ankara as the best hope of slowing the mass migration to Europe.

“Let us not be naïve. Turkey is not the only key to solving the migration crisis. The most important one is our responsibility and duty to protect our external borders. We cannot outsource this obligation to any third country. I will repeat this again: without control on our external borders, Schengen will become history.” He was referring to the 26-country free-travel zone in Europe, which is also in danger of unravelling under the strains of the migratory pressures and jihadi terrorism. Merkel’s mini-summit brought together the leaders of Germany, Austria and Sweden – the countries taking the most refugees – Finland, Belgium, Luxembourg, the Netherlands, and Greece. President François Hollande of France did not attend the mini-summit because of scheduling problems, but it is understood that France is part of the pro-quotas vanguard.

The nine countries include the EU’s wealthiest. The EU-Turkey summit agreed to pay Turkey €3bn (£1.4bn) in return for a deal that would see Ankara patrolling the Aegean borders with Greece – the main point of entry to the EU for hundreds of thousands this year. Ankara is also to resume its long-stalled EU membership negotiations by the end of the year and, according to the schedule agreed, is to have visas waived by next year for Turks travelling to the EU. In response, the EU will be able to start deporting “illegal migrants” to Turkey by next summer under a fast-tracked “readmissions agreement”.

Read more …

No there there, just hot air. “..EU leaders made it clear there would be no shortcut in Turkey’s long-stalled bid to join the bloc. [..] And the Turks couldn’t say how effective the agreement would be in reducing the number of the migrants and refugees entering the EU..”

European Union Reaches Deal With Turkey on Migration (WSJ)

The EU on Sunday agreed with Turkey’s government for Ankara to take steps to cut the flow of migrants into Europe in exchange for EU cash and help with its bid to join the 28-nation bloc. EU leaders hailed the agreement as a key step toward substantially reducing the number of asylum seekers entering the bloc, while Turkey’s Prime Minister Ahmet Davutoglu said Sunday’s summit marked a historic new beginning in the often fraught relations between Brussels and Ankara. Yet the continued lack of trust on both sides remained evident, as EU leaders made it clear there would be no shortcut in Turkey’s long-stalled bid to join the bloc.

“The issue hasn’t changed,” French President François Hollande said after leaving the summit to return to Paris for global climate talks. “There is no reason either to accelerate or to slow it down.” And the Turks couldn’t say how effective the agreement would be in reducing the number of the migrants and refugees entering the EU via Turkey. EU officials have said cooperation with Turkey is the best way to reduce migrant flows, arguing that Ankara was very effective in previous years in preventing the outflow of refugees from the country. Alongside fresh efforts to tighten their external borders, EU officials hope the Turkey agreement can help turn the tide in the bloc’s migration crisis, the biggest since the aftermath of World War II.

[..] it appeared that substantial efforts would be required to turn Sunday’s agreement into reality. European Council President Donald Tusk said the EU will closely watch Turkey’s implementation of the deal and will review Ankara’s actions on a monthly basis. EU governments are also still at loggerheads over who would pay the €3 billion Turkey is to receive for its cooperation. Moreover, Turkey must complete dozens of EU requirements to win a recommendation for visa-free access to the bloc by autumn of 2016. Even then, a final decision will need backing of all 28 member states. Meanwhile, Mr. Davutoglu acknowledged he couldn’t promise the number of migrants heading into Europe via Turkey would fall. “Nobody can guarantee a drop,” he said of the refugees heading west from war-torn Syria.

Read more …

He’s simply right.

Tsipras Takes On Turkey’s Davutoglu On Twitter (AP)

A highly unusual online exchange took place on Twitter between the prime ministers of Greece and Turkey late Sunday before the former deleted his tweets – but only from the English version of his account. The official English-speaking account of Greek prime minister Alexis Tsipras (@Tsipras_eu) posted four tweets addressed to his Turkish counterpart Ahmet Davutoglu, needling him about Turkey’s downing of a Russian jet and Turkey’s violations of Greek airspace. “To Prime Minister Davutoglu: Fortunately our pilots are not mercurial as yours against the Russians #EuTurkey” Tsipras tweeted. Both prime ministers attended an EU-Turkey summit on refugees in Brussels Sunday. Tsipras did not explain whether his tweets reproduced a conversation between the two or were written especially for Twitter.

“What is happening in the Aegean is outrageous and unbelievable #EUTurkey” Tsipras continued. “We’re spending billions on weapons. You -to violate our airspace, we -to intercept you #EUTurkey” Tsipras said in a third tweet, referring to intrusions of Turkish planes into Greek airspace, which Turkey contests, and Greek and Turkish pilots frequently buzzing each other. Tsipras said the two countries should focus on saving refugees, not on weapons. “We have the most modern aerial weapons systems–and yet, on the ground, we can’t catch traffickers who drown innocent people #EUTurkey,” the Greek premier said in a fourth tweet. Davutoglu chose to respond to only the first tweet and not engage in a detailed dialogue.

“Comments on pilots by @atsipras seem hardly in tune with the spirit of the day. Alexis: let us focus on our positive agenda,” @Ahmet_Davutoglu responded. Then, the @Tsipras_EU account deleted the four tweets, which have remained posted, however, in Tsipras’ Greek language account, @atsipras. The deletion sparked further furious tweeting, with comments such as “who is handling your account?” being the most common. Then, the English account posted further tweets, but less controversial this time. “Important Summit today for the EU, Turkey and our broader region #EUTurkey” A last Tsipras tweet obliquely referred to the deleted ones: “We are in the same neighborhood and we have to talk honestly so we can reach solutions #EUTurkey.”

Read more …

But the disgrace goes on. And it’s ours, you, me, everyone. Want to protest something?

As the World Turns Away, Refugees are Still Drowning in the Mediterranean (HRW)

Her name was Sena. She was four years old. She was wearing blue trousers and a red shirt. She drowned in a shipwreck on November 18 in the Aegean Sea off Bodrum, Turkey. His name was Aylan. He was three years old. He drowned on September 2nd, along with his mother and his five-year-old brother. Like Sena, he was Syrian, dressed in blue and red, and travelling with his family on a desperate journey to reach safety and a future in Europe. The picture of his tiny lifeless body washed up on shore appeared to shake Europe’s—indeed, the world’s—conscience. Yet at least 100 more children, including Sena, have drowned in the Aegean in the weeks since. This year has seen an unprecedented number of asylum seekers and migrants—over 712,000 as of this week—crossing from Turkey to the Greek islands, most of them in overcrowded flimsy rubber dinghies.

One-quarter of those risking their lives are children. We have witnessed an unbearable death toll this year, with at least 585 people missing or lost in the Aegean, most of them since Aylan’s death. War, persecution, geopolitics, dangerous smuggler tactics, the weather – all of these factors contribute to the surge in arrivals as well as the number of lives lost. The UN refugee agency, UNHCR, estimates that 60% of those coming to Greece by sea are Syrians, while 24% are from Afghanistan. The response of the European Union has to be multifaceted. It should include measures to reduce the need for dangerous journeys and tackle the root causes of refugee and migration flows in a way that respects human rights.

But the immediate imperative has to be to save lives. Turkish and Greek coast guard boats are out there every day patrolling the waters. And various EU countries have sent boats, personnel and other equipment to participate in Operation Poseidon in the Aegean, a mission of the EU’s external border agency Frontex. Combined, these actions have saved tens of thousands of lives. I’ve seen a burly Portuguese coast guard officer gently take a baby from her mother’s arms after a rescue. I’ve observed the professionalism of Norwegian police officers on patrol for Frontex. A colleague of mine was impressed by the way Greek coast guard officers handled two difficult rescues. But more needs to be done.

Read more …

Nov 192015
 
 November 19, 2015  Posted by at 11:28 am Finance Tagged with: , , , , , , , , ,  6 Responses »


Robert Capa Anti-fascist militia women at Barcelona street barricade 1936

Looking through a bunch of numbers and graphs dealing with China recently, it occurred to us that perhaps we, and most others with us, may need to recalibrate our focus on what to emphasize amongst everything we read and hear, if we’re looking to interpret what’s happening in and with the country’s economy.

It was only fair -perhaps even inevitable- that oil would be the first major commodity to dive off a cliff, because oil drives the entire global economy, both as a source of fuel -energy- and as raw material. Oil makes the world go round.

But still, the price of oil was merely a lagging indicator of underlying trends and events. Oil prices didn‘t start their plunge until sometime in 2014. On June 19, 2014, Brent was $115. Less than seven months later, on January 9, it was $50.

Severe as that was, China’s troubles started much earlier. Which lends credence to the idea that it was those troubles that brought down the price of oil in the first place, and people were slow to catch up. And it’s only now other commodities are plummeting that they, albeit very reluctantly, start to see a shimmer of ‘the light’.

Here are Brent oil prices (WTI follows the trend closely):

They happen to coincide quite strongly with the fall in Chinese imports, which perhaps makes it tempting to correlate the two one-on-one:

But this correlation doesn’t hold up. And that we can see when we look at a number everyone seems to largely overlook, at their own peril, producer prices:

About which Bloomberg had this to say:

China Deflation Pressures Persist As Producer Prices Fall 44th Month

China’s consumer inflation waned in October while factory-gate deflation extended a record streak of negative readings [..] The producer-price index fell 5.9%, its 44th straight monthly decline. [..] Overseas shipments dropped 6.9% in October in dollar terms while weaker demand for coal, iron and other commodities from declining heavy industries helped push imports down 18.8%, leaving a record trade surplus of $61.6 billion.

44 months is a long time. And March 2012 is a long time ago. Oil was about at its highest since right before the 2008 crisis took the bottom out. And if you look closer, you can see that producer prices started ‘losing it’ even earlier, around July 2011.

Something was happening there that should have warranted more scrutiny. That it didn’t might have a lot to do with this:

China’s debt-to-GDP ratio has risen by nearly 50% in the past four years.

The producer price index seems to indicate that trouble started over 4 years ago. China dug itself way deeper into debt since then. It already did that before as well (especially since 2008), but the additional debt apparently couldn’t be made productive anymore. And that’s an understatement.

Now, if you want to talk correlation, compare the producer price graph above with Bloomberg’s global commodities index:

World commodities markets, like the entire global economy, were propped up by China overinvestment ever since 2008. Commodities have been falling since early 2011, after rising some 60% in the wake of the crisis. And after the 2011 peak, they’ve dropped all the way down to levels not seen since 1999. And they keep on falling: steel, zinc, copper, aluminum, you name it, they’re all setting new lows almost at a daily basis.

Moreover, if we look at how fast China imports are falling, and we realize how much of those imports involve (raw material) commodities, we can’t escape the conclusion that here we’re looking at not a lagging, but a predictive indicator. What China doesn’t purchase in raw materials today, it can’t churn out as finished products tomorrow.

Not as exports, and not as products to be used domestically. Neither spell good news for the Chinese economy; indeed, the rot seems to come from both sides, inside and out. And no matter how much Beijing points to the ‘service’ economy it claims to be switching towards, with all the debt that is now deflating, and the plummeting marginal productivity of new debt, most of it looks like wishful thinking.

And that is not the whole story either. Closely linked to the sinking marginal productivity, there is overleveraged overcapacity and oversupply. It’s like the proverbial huge ocean liner that’s hard to turn around.

There are for instance lots of new coal plants in the pipeline:

China Coal Bubble: 155 Coal-Fired Power Plants To Be Added To Overcapacity

China has given the green light to more than 150 coal power plants so far this year despite falling coal consumption, flatlining production and existing overcapacity. [..] in the first nine months of 2015 China’s central and provincial governments issued environmental approvals to 155 coal-fired power plants — that’s 4 per week. The numbers associated with this prospective new fleet of plants are suitably astronomical. Should they all go ahead they would have a capacity of 123GW, more than twice Germany’s entire coal fleet; their carbon emissions would be around 560 million tonnes a year, roughly equal to the annual energy emissions of Brazil; they would produce more particle pollution than all the cars in Beijing, Shanghai, Tianjin and Chongqing put together [..]

And new car plants too:

China’s Demand For Cars Has Slowed. Overcapacity Is The New Normal.

For much of the past decade, China’s auto industry seemed to be a perpetual growth machine. Annual vehicle sales on the mainland surged to 23 million units in 2014 from about 5 million in 2004. [..] No more. Automakers in China have gone from adding extra factory shifts six years ago to running some plants at half-pace today—even as they continue to spend billions of dollars to bring online even more plants that were started during the good times.

The construction spree has added about 17 million units of annual production capacity since 2009, compared with an increase of 10.6 million units in annual sales [..] New Chinese factories are forecast to add a further 10% in capacity in 2016—despite projections that sales will continue to be challenged. [..] “The players tend to build more capacity in hopes of maintaining, or hopefully, gain market share. Overcapacity is here to stay.”

These are mere examples. Similar developments are undoubtedly taking place in many other sectors of the Chinese economy (how about construction?!). China has for example started dumping its overproduction of steel and aluminum on world markets, which makes the rest of the world, let’s say, skittish. The US is levying a 236% import tax on -some- China steel. The UK sees its remaining steel industry vanish. All US aluminum smelters are at risk of closure in 2016.

The flipside, the inevitable hangover, that China will wake up to sooner rather than later, is the debt that its real growth, and then it’s fantasy growth, has been based on. We already dealt extensively with the difference between ‘official’ and real growth numbers, let’s leave that topic alone this time around.

Though we can throw this in. Goldman Sachs recently said that even if the official Beijing growth numbers were right -which nobody believes anymore- ”Chinese credit growth is still running at roughly double the rate of GDP growth”. And even if credit growth may appear to be slowing a little, though we’d have to know the shadow banking numbers to gauge that (and we don’t), that hangover is still looming large:

China Bad Loans Estimated At 20% Or Higher vs Official 1.5%

[..] While the analysts interviewed for this story differ in their approaches to calculating likely levels of soured credit, their conclusion is the same: The official 1.5% bad-loan estimate is way too low.

Charlene Chu [..] and her colleagues at Autonomous Research in Hong Kong take a top-down approach. They estimate how much money is being wasted after the nation began getting smaller and smaller economic returns on its credit from 2008. Their assessment is informed by data from economies such as Japan that have gone though similar debt explosions. While traditional bank loans are not Chu’s prime focus – she looks at the wider picture, including shadow banking – she says her work suggests that nonperforming loans may be at 20% to 21%, or even higher.

The Bank for International Settlements cautioned in September that China’s credit to gross domestic product ratio indicates an increasing risk of a banking crisis in coming years. “A financial crisis is by no means preordained, but if losses don’t manifest in financial sector losses, they will do so via slowing growth and deflation, as they did in Japan,” said Chu. “China is confronting a massive debt problem, the scale of which the world has never seen.”

Looking at the producer price graph, we see that the downfall started at least 44 months ago, and that 52 months is just as good an assumption. And we know that debt rose 50% or more since the downfall started. That does put things in a different perspective, doesn’t it? (Probably) the majority of pundits and experts will still insist on a soft landing at worst.

But for those who don’t, please consider the overwhelming amount of deflationary forces that is being unleashed on the world as all that debt goes sour. As the part of that debt that was leveraged vanishes into thin air.

It’s ironic to see that it’s at this very point in time that the IMF (Christine Lagarde seems eager to take responsibility) seeks to include the yuan in its SDR basket. Xi Jinping’s power over the exchange rate can only be diminished by such a move, and we’re not at all sure he realizes to what extent that is true. Chinese politics are built on hubris, and that goes only so far when you free float but don’t deliver.

To summarize, do you remember what you were doing -and thinking- in mid-2011 and/or early 2012? Because that’s when this whole process started. Not this year, and not last year.

China’s producers couldn’t get the prices they wanted anymore, as early as 4 years ago, and that’s where deflationary forces came in. No matter how much extra credit/debt was injected into the money supply, the spending side started to stutter. It never recovered.