sell-off Archives - The Automatic Earth

World leaders have been told they have moral obligation to ramp up their action on the climate crisis in the wake of a new UN report that shows even half a degree of extra warming will affect hundreds of millions of people, decimate corals and intensify heat extremes. But the muted response by Britain, Australia and other governments highlights the immense political challenges facing adoption of pathways to the relatively safe limit of 1.5C above pre-industrial temperatures outlined on Monday by the IPCC. With the report set to be presented at a major climate summit in Poland in December, known as COP24, there is little time for squabbles. The report noted that emissions need to be cut by 45% by 2030 in order to keep warming within 1.5C.

That means decisions have to be taken in the next two years to decommission coal power plants and replace them with renewables, because major investments usually have a lifecycle of at least a decade. Mary Robinson, a UN special envoy on climate, said Europe should set an example by adopting a target of zero-carbon emissions by 2050. “Before this, people talked vaguely about staying at or below 2C – we now know that 2C is dangerous,” she said. “So it is really important that governments take the responsibility, but we must all do what we can.” The UK, which has gone further than most nations by cutting its annual emissions by 40% since 1990, will need to step up if the more ambitious goal is to be reached.

Both think adapting to climate change is easy.

• US Economists Win Nobel Memorial For Work On Climate And Growth (G.)

Two American economists at the forefront of work on climate change and the role of governments in boosting growth have been jointly awarded the prestigious Nobel Memorial prize for economics. The Royal Swedish Academy of Sciences said William Nordhaus and Paul Romer were being honoured for their research into two of the most “basic and pressing” economic issues of the age. Nordhaus made his name by warning policymakers during the first stirrings of concern about climate change in the 1970s that their economic models were not properly taking account of the impact of global warming and he is seen as one of the pioneers of environmental economics.

The Yale economist was honoured a day after the latest UN warning on global warming said that urgent and unprecedented changes were needed to keep climate change to a maximum of 1.5C (2.7F). The co-winner – Romer – is seen as the prime mover behind the endogenous growth theory, the notion that countries can improve their underlying performance if they concentrate on supply-side measures such as research and development, innovation and skills. [..] Responding to news of his award, Romer said it was perfectly possible for global warming to be kept to a maximum of 1.5C, in line with the latest recommendation of the UN Intergovernmental Panel on Climate Change. “Once we start to try to reduce carbon emissions, we’ll be surprised that it wasn’t as hard as we anticipated. The danger with very alarming forecasts is that it will make people feel apathetic and hopeless.

“One problem today is that people think protecting the environment will be so costly and so hard that they want to ignore the problem and pretend it doesn’t exist. Humans are capable of amazing accomplishments if we set our minds to it.” [..] Nordhaus has been a prominent advocate of the use of a uniformly applied carbon tax as the best way to put a true cost on the use of burning fossil fuels and so reducing greenhouse gas emissions. The committee that awarded the prize said he was the first person to design “simple but dynamic and quantitative models of the global economic-climate system, now called integrated assessment models (IAMs). “His tools allow us to simulate how the economy and climate would co-evolve in the future under alternative assumptions about the workings of nature and the market economy, including relevant policies.”

This is useful h/t Yves. Peter Dorman on how Martin Weitzman, who has a far more aggressive take on economics and climate, was snubbed so Nordhaus’ light version would get the attention.

• Nobel Prizes in Economics, Awarded and Withheld (NC)

Nordhaus was widely expected to be a winner for his work on the economics of climate change. For decades he has assembled and tweaked a model called DICE (Dynamic Integrated Climate-Economy), that melds computable general equilibrium theory from economics and equations from the various strands of climate science. His goal has been to estimate the “optimal” amount of climate change, where the marginal cost of abating it equals the marginal cost of undergoing it. From this comes an optimal carbon price, the “social cost of carbon”, which should be implemented now and allowed to rise over time at the rate of interest. In his first published work using DICE, from the early 1990s, he recommended a carbon tax of $5 a tonne of CO2, inching slowly upward until peaking at $20 in 2085. His “optimal” policy was expected to result in an atmospheric concentration of CO2 of over 1400 ppm (parts per million) at the end of this planning horizon, yielding global warming in excess of 3º C. (Nordhaus, 1992)

Over time Nordhaus has become slightly more concerned with the potential economic costs of climate change but also more sanguine about the prospects for decarbonized economic growth, even in the absence of policy. In his latest work he advocates a carbon tax of $31 per tonne in 2015, increasing at 3% per year over the following century. This too would result in more than 3º warming. To give a sense of how modest his suggestion is, consider that, in the same paper, Nordhaus calculates that the most efficient carbon tax to limit warming to 2.5º is between $107-184 per tonne depending on assumptions. The target of the Paris Accord is 2º, and most scientists consider this an upper bound for the amount of warming we should permit.

What do these “optimal” tax numbers mean? Based on the carbon content of gas, each $1 carbon tax translates into a one cent tax on a gallon of gas at the pump. If we adopted Nordhaus’ suggestion for carbon pricing, the result would be minuscule compared to the year-to-year fluctuations in energy prices due to other causes. In other words, while his prize is being trumpeted as a statement from the Swedish bankers on the importance of climate change, in fact he is a key spokesman for the position, rejected by nearly all climate scientists, that the problem is modest and can be solved by easy-to-digest, nearly imperceptible adjustments to energy prices. If we go down his road we face a significant risk of a climate apocalypse.

The benefits of climate change.

• The End Of The World Will Save Theresa May From Brexit (Ind.)

Brexit has been in its “something will turn up phase” for some time now and possibly, at last, something has. This is meant to be Theresa May’s “Hell Week”, with important post-Brexit proposals to be published in both Brussels and the UK, both of which will of course necessitate demented rows within her own party (current “strategies” include threatening to vote down the Budget), but Hell Week could hardly have got off to a better start. The most sensible reading of Hell Week is that it looks likely to end with May agreeing to keep the UK in the EU’s customs union until 2022. In the circumstances, the prime minister will not have failed to notice that, according to this morning’s report from the UN’s IPCC, that is a mere eight years before all of the planet’s inbuilt life preserving systems are currently scheduled to turn against humanity in act of vengeance that will be swift and total.

To borrow briefly from the probability-based lexicon of the climate science community, let’s take a look at the likelihood of Brexit being concluded by then in any meaningful way. Even in the unlikely event of Britain voting to leave the European Union, right up until around 8am on 24 June 2016, the latest point at which it was all meant to have been sorted out was 24 June 2018. But when David Cameron decided not to trigger the two-year Article 50 process “straight away” as he had consistently claimed he would, but resigned instead, that date was eventually pushed back by May to 29 March 2019, expanding Brexit by 37.5 per cent.

Then, in March 2018, the Brexit “transition period” was agreed to last until until 31 December 2020, and now, just seven months later, that deadline has been extended until the next general election in 2022, a further eighteen months. At the most conservative estimate, that gives Brexit a rate of expansion of around two hundred per cent, or four years for every two. If the depth to which it can be kicked into the long grass can be maintained on this exponential gradient, May has every reason to be optimistic that tornadoes of sulphuric gas will be moving freely over the Irish border long before she has to deliver any acceptable proposals for how to avoid the reintroduction of customs infrastructure across it.

Not the only issue.

• Stock Markets Stage Sharp Sell-Off Amid Fear Of Italy-EU Budget Fight (G.)

Global stock markets staged a sharp sell-off on Monday amid growing concerns over a budget showdown between Italy and the EU and the prospect of weaker growth in the Chinese economy. Italian borrowing costs jumped and the euro dropped on foreign exchanges as the war of words between Rome and Brussels escalated, while shares on Wall Street and other major international markets declined amid growing concerns over the US-China trade war. Italian bond yields jumped by as much as 30 basis points to the highest levels since early 2014 after the Italian deputy prime minister, Matteo Salvini, attacked the European commission president, Jean-Claude Juncker, and the economics commissioner, Pierre Moscovici, as enemies of Europe.

Speaking at a news conference with the French far-right leader Marine Le Pen, he said the country would not cave to pressure from the financial markets or retreat from its plan for government spending. “We are against the enemies of Europe — Juncker and Moscovici — shut away in the Brussels bunker,” he said. Brussels has told Italy it is concerned over the plan because it would mean the nation running a larger budget deficit – the gap between income from taxes and government spending – than previously planned for the next three years. Rome is to submit its draft budget to the commission, the EU’s executive arm, which will check whether it is in line with EU rules by 15 October.

When the easy money goes, how do we keep the bubbles inflated?

• QE Party Is Drying Up, Even at the Bank of Japan (WS)

As of September 30, total assets on the Bank of Japan’s elephantine balance sheet dropped by ¥5.4 trillion ($33 billion) from a month earlier, to ¥537 trillion ($4.87 trillion). It was the fourth month-over-month decline in a series that started in December. This chart shows the month-to-month changes of the balance sheet. Despite all the volatility, the trend since mid-2016 is becoming clear: Abenomics became the economic religion of Japan in later 2012, and “QQE” (Qualitative and Quantitative Easing) was an integral part of it. So has the “QQE Unwind” commenced? Are central bankers, even at the Bank of Japan, getting cold feet about the consequences?

At BOJ policy meetings, concerns have been voiced over the “sustainability” of the stimulus program, according to the minutes of the July meeting, released on September 25. So the BOJ staff “proposed measures to enhance the sustainability of the current monetary easing while taking into consideration, for example, their effects on financial markets.” And “flexibility” has been proposed as solution to those concerns. The minutes reiterated that the BOJ would continue to buy Japanese Government Bonds (JGBs) in “a flexible manner” so that its holdings would increase by about ¥80 trillion a year. But this is precisely what has not been happening, in line with this “flexibility.”

Over the past 12 months, the BOJ’s holdings of JGBs rose by “only” ¥26.2 trillion – not ¥80 trillion. And they declined in September from the prior month (more in a moment). Shortly after the minutes had been released, BOJ Governor Haruhiko Kuroda, once the most reckless among the money printers, changed his tune and said in a speech that, “in continuing with powerful monetary easing, we now need to consider both its positive effects and side-effects in a balanced manner.” The Fed has already whittled down its balance sheet by $285 billion since it started its QE unwind last October. The ECB has tapered its QE from a peak of buying €85 billion a month to buying €15 billion currently and will end it altogether in December. The discussion has switched to raising rates and unwinding QE.

Like the graph.

• Higher Rates Will Hurt Stocks Far More Than You Think (SA)

Federal Reserve Chair Jerome Powell thinks the economy is awesome. And he has no problem telling us so. What Powell will never discuss, however, is the “way-too-low-for-way-too-long” stimulus that the central bank engaged in to get here. In particular, the Fed has kept the neutral rate of interest far beneath the rate of inflation (CPI) for an entire decade. Consumers, corporations and Uncle Sam predictably borrowed as if there’d never be consequences. What consequences? Asset bubbles. Stocks, bonds, real estate, collectibles, cryptos, alternatives, everything. Straight across the Ouija board.

Perhaps ironically, we have seen this streaming video before. “Too-low-for-to-long” rate policy in the previous economic expansion (11/01-12/07) created an environment whereby the quality and the quantity of household mortgage debt became toxic. Granted, mortgage debt is less of an issue in the current credit cycle. Nevertheless, total household debt levels may not be sustainable at higher average interest costs. Meanwhile, the federal government is making households look downright responsible.

Long after the Great Recession ended, the country averaged $1.07 trillion in deficits (2010-2017). We’ve now hit $21.5 trillion in our national debt. Uncle Sammy’s bar tab won’t be getting smaller anytime soon. The new tax law, which has provided a near-term kick start for economic growth (GDP), will keep the trillion-dollar deficit train running for years to come. None of this would be so ominous were it not for the rapid-fire advance of interest expense. Interest expense alone accounts for 11% of the federal budget. Just interest. No debt repayment. Tack on higher interest rates to new borrowing needs? Pretty soon interest expense will surpass the money that goes to the Department of Defense (13.6%).

Belt and Road. Silk Road.

• Pakistan Seeks Bailout From IMF (WSJ)

Pakistan, the flagship country for China’s global infrastructure building initiative, said Monday that it needed a bailout from the International Monetary Fund, amid growing concerns that Beijing’s program is pushing recipient countries into financial crisis. The fiscal constraints of an IMF program would also undercut the promises made by Prime Minister Imran Khan’s new government, which include millions of new jobs and the establishment of a welfare state.

But a ballooning trade deficit and fast-depleting foreign exchange reserves left the Pakistani government no other choice, officials said, after markets were spooked by the government’s recent suggestions that it might try to make do without the fund. “Uncertainty was growing and the stock market was falling,” said Chaudhry Fawad Hussain, the Information Minister. “We decided to end the uncertainty.” The Pakistani request for an IMF loan could further test already-strained U.S.-China relations. In July, U.S. Secretary of State Mike Pompeo warned that the U.S. didn’t want to see any IMF lending to Pakistan “go to bail out Chinese bondholders or—or China itself.”

Growing at 6.9%(?) and still in need of pretty extreme support. I’d be concerned.

• IMF Not Concerned About China’s Ability To Defend The Yuan (R.)

IMF Chief Economist Maurice Obstfeld said on Tuesday that he was not concerned about the Chinese government’s ability to defend its currency despite the recent depreciation of the yuan. “No, I don’t think it’s a problem,” Obstfeld said when asked about the issue on the sidelines of a news conference at the IMF and World Bank annual meetings in Bali. But Obstfeld also told the news conference that Beijing would face a “balancing act” between actions to shore up growth and ensure financial stability. China’s yuan currency has faced strong selling pressure this year, losing over 8% between March and August at the height of market worries, though it has since pared losses as authorities stepped up support.

On Tuesday, China’s central bank fixed the yuan’s official mid-point for trading at 6.9019 per dollar, edging close to the psychologically important 7.0 barrier and helping to send Asian stocks to a 17-month low. A U.S. Treasury official on Monday repeated that the Trump administration was concerned about the yuan’s recent weakening as the department prepares a semi-annual report on currency manipulation due out next week. Obstfeld said financial markets have overly emphasized short-term movements in China’s currency, adding that the yuan has often quickly recovered from periods of volatility in recent years.

Reading this, I kept thinking: what sharp slowdown? Where is it? Not in the numbers…

• Sharp Slowdown In Consumer Spending Cools UK Retail Sales (G.)

Britain’s retailers experienced a sharp slowdown in consumer spending last month, bringing to a close the World Cup-inspired summer spree on the high street. According to the British Retail Consortium (BRC) and the accountancy firm KPMG, growth in total sales dropped to the weakest level in almost a year. Total sales grew at an annual rate of 0.7% in September, compared with 2.3% growth during the same month a year ago. The BRC said this was the lowest growth rate since October 2017. Excluding new store openings, like-for-like sales dropped by 0.2% in the year to September, compared with a 19.9% increase for the same period a year ago.

The latest snapshot for the retail sector comes before the important autumn and winter shopping periods, vital for industry profits, when sales of gifts and electrical goods are lifted by the Black Friday sales event in November and shoppers buying Christmas presents. Retailers have been hit hard by a combination of problems that have led to job cuts and store closures across Britain. The ongoing shift to online shopping has increased competition, while sluggish wage growth and high levels of inflation have damaged the spending power of British households. Sales of stationery, footwear and clothing fell last month, while retailers sold more computers, jewellery, furniture, home accessories and food.

If this doesn’t scare you…

• Google Drops Out Of Bidding For $10 Billion Pentagon Data Deal (R.)

Alphabet Inc’s Google said on Monday it was no longer vying for a $10 billion cloud computing contract with the U.S. Defense Department, in part because the company’s new ethical guidelines do not align with the project, without elaborating. Google said in a statement “we couldn’t be assured that [the JEDI deal] would align with our AI Principles and second, we determined that there were portions of the contract that were out of scope with our current government certifications.” The principles bar use of Google’s artificial intelligence (AI) software in weapons as well as services that violate international norms for surveillance and human rights.

Google was provisionally certified in March to handle U.S. government data with “moderate” security, but Amazon.com Inc and Microsoft Corp have higher clearances. Amazon was widely viewed among Pentagon officials and technology vendors as the front-runner for the contract, known as the Joint Enterprise Defense Infrastructure cloud, or JEDI. Google had been angling for the deal, hoping that the $10 billion annual contract could provide a giant boost to its nascent cloud business and catch up with Amazon and fellow JEDI competitor Microsoft. That the Pentagon could trust housing its digital data with Google would have been helpful to its marketing efforts with large companies. But thousands of Google employees this year protested use of Google’s technology in warfare or in ways that could lead to human rights violations.

Debt Rattle May 21 2015

May 212015

May 21, 2015 Posted by Raúl Ilargi Meijer at 10:12 am Finance Tagged with: austerity, China, default, deflation, Greece, pensions, Portugal, Russia, sell-off, stores, womb 2 Responses »

Harris&Ewing F Street N.W., Washington, DC 1918

• Has The Fed Got A Grasp On Economic Reality? (Gambles)

• Global Inflation Mystery Risks Making Central Bankers Bystanders (Bloomberg)

• Investors Need To Face The Possibility Of A ‘Great Reset’ (MarketWatch)

• Guilty Pleas and Heavy Fines Seem to Be Cost of Business for Wall St. (NY Times)

• Cui Bono (Richard Breslow)

• Record Number of American Stores, Malls Closing: Davidowitz (Bloomberg)

• Defiant Greeks Force Europe To Negotiating Table As Time-Bomb Ticks (AEP)

• Greek Pensions Said To Be In Creditor Crosshairs (Bloomberg)

• Giving Greece a Chance (Bruegel)

• Investors And Policy Makers Eye Consequences Of Greek Default (FT)

• Europe Faces 2nd Revolt As Portugal’s Ascendant Socialists Spurn Austerity (AEP)

• Portuguese Politicians Turn a Deaf Ear to IMF (WSJ)

• A Finance Minister Fit for a Greek Tragedy? (NY Times Magazine)

• UK Enters Era Of Deflation With CPI At Minus 0.1% (EI)

• Osborne Plans For Biggest Sell-Off Of British Public Assets (ITV)

• China’s Factory Activity Contracts For Third Month (CNBC)

• China Province Completes Landmark Bond Sale (FT)

• Goldin Group Losses Wipe $25 Billion Off Market Cap In One Day (FT)

• Hanergy Shares Suspended After 47% Plunge Wipes $19 Billion Off Market Cap (FT)

• The Weight Of Chinese Money Adds To The Cost Of Australian Housing (SMH)

• Moscow Says It Will Retaliate If Ukraine Hosts US Anti-Missile Defenses (RT)

• Russia Will Take Ukraine to Court If June Coupon Payment Missed (Bloomberg)

• In America, Inequality Begins In The Womb (PBS)

“..selective mass blindness prevents the economics profession answering the question posed by Queen Elizabeth II to the London School of Economics “Why did nobody notice it (the GFC)?”

• Has The Fed Got A Grasp On Economic Reality? (Gambles)

History shows us that the U.S. Federal Reserve’s grasp on economic reality hasn’t been anywhere near as strong as you might hope or expect, so maybe it’s time it used a new economic model. Back in 2011, CNBC’s Karen Tso asked me how I could be so critical of Yellen’s predecessor, Ben Bernanke, an acknowledged academic expert on the Great Depression. My answer was that Bernanke, his predecessor, Alan Greenspan, and many others in the economic establishment are associated with a single strand of economic thinking, neo-classical (and more specifically, monetarist) economics. Although this approach is being increasingly discredited, in practice it remains despite its utter failure to anticipate the global financial crisis (GFC) — or indeed just about any other significant financial crisis- the dominant school of economic thinking.

Professor Steve Keen, my advisory board colleague of economics think tank IDEA Economics, has stridently criticized the group-think of Bernanke including Larry Summers, Ken Rogoff, Paul Krugman and the IMF’s Olivier Blanchard, who all studied the same courses taught by Stanley Fischer at the Massachusetts Institute of Technology. The group’s views aren’t entirely uniform; but are informed by a uniform economic framework. Differences in opinion tend to be about details rather than fundamentals. Hence selective mass blindness prevents the economics profession answering the question posed by Queen Elizabeth II to the London School of Economics “Why did nobody notice it (the GFC)?” The answer is that quotations by leading economists about the apparently rude health of the US and global economies in 2007-08 would fill volumes.

They tend to range from Bernanke waxing lyrical about “the Great Moderation” to Blanchard telling us, as late as August 2008, “The state of macro is good”. Tempting as it may be, I’m not poking fun at high-profile individuals’ shortcomings, so much as diagnosing widespread institutional failure. While the GFC has been put behind us, the lack of any better understanding of its causes among most influential mainstream economists and policymakers remains a cause for concern. They tend to believe debt is merely a liquidity preference; one wealthy retiree’s deposits fund, via bank intermediation, is another borrower’s home or business loan. This ignores the fact that in the USA or the U.K. over 95% of ‘money’ is simply created by bank lending.

Long as they’re not called ‘innocent bystanders’.

• Global Inflation Mystery Risks Making Central Bankers Bystanders (Bloomberg)

Janet Yellen’s Federal Reserve is “reasonably confident” it can drive up consumer prices. Mario Draghi says his ECB’s stimulus has already “proven so far to be potent.” The Bank of England reckons inflation is “likely to return” to its target within two years. While not quite declarations of victory, such statements show policy makers’ optimism that record-low interest rates and bond-buying will be enough to return inflation to the 2% range most of them eye. Yet, central banks have repeatedly overestimated inflation since the middle of 2011, according to Marvin Barth at Barclays in London. To him, a mounting concern is that about a third of the decade-long decline in worldwide inflation is potentially inexplicable.

If he’s right then what he calls “global missingflation” threatens the ability of Yellen and company to push up prices and raises questions over whether they will ever be able to declare mission accomplished and truly end their use of easy stimulus. “‘Global missingflation’ likely will keep central banks nervous and should give pause to those who think downside risks to inflation are no longer a risk,” Barth, a former U.S. Treasury official, said in a report to clients on Wednesday. “It also should instill greater caution in market participants who think that ‘lowflation’ or deflation are receding risks.” To make his case, Barth studied 27 economies to identify why consumer prices outside of food and energy dropped 0.46 percentage point in industrial nations in the decade up to December 2014 and 0.74 percentage point in emerging markets.

Once he allowed for traditional drivers of prices such as demand or productivity, he found 35% of the slide in global inflation hard to pin down. Among the possible reasons could be deleveraging, technological progress, globalization, aging populations or China’s deflationary impulse. Whatever the explanation, the inflation puzzle is a reason for central banks to worry about the power of policy and may leave them reliant on factors over which they have less control such as commodities, currencies or wages to propel prices. Worse still is the risk that financial markets and the public lose faith in policy makers to control inflation. The inflation expectations of both over the next five years may start to suggest such doubts.

You betcha. They won’t be investors anymore.

• Investors Need To Face The Possibility Of A ‘Great Reset’ (MarketWatch)

Watch out if corporate-profit margins narrow to their long-term average share of GDP. If so, the S&P 500 Index would trade at less than 1,700 in five years, a decline of more than 20%. I’m not necessarily forecasting such a dismal eventuality, though it’s in the realm of possibility. I merely point it out to illustrate how dependent the stock market is on wide profit margins. Few seem to be focusing on this vulnerability. Take the discussion about George Mason University professor Tyler Cowen’s Friday column in The New York Times. Cowen discusses the possibility of a “Great Reset” as it collectively dawns on us that what workers in the future will earn a lot less than they did in the past. Yet I’ve not seen any mention in these discussions about Wall Street, where corporate profitability has been soaring even as wages struggle.

Wall Street needs to squarely face the possibility of a Great Reset of its own. If corporate-profit margins shrink even halfway to their long-term average, investors would suffer significant losses in coming years. There is more than one way of calculating the average profit margin of corporate America, and each approach has defects. For the chart at the top of this column, I used a simple ratio of corporate-after-tax-profits to GDP, which shows the latest profit margin to be 8.7%. Though lower than 10.1% from a couple of years ago, the current level is still two standard deviations above the six-decade average of 6.3%. To calculate what would happen if corporate profitability falls back to that average, I made a number of assumptions. For example, I assumed that this return to average takes five years.

I also assumed that the S&P 500’s price-to-earnings ratio stays constant, which is a generous assumption since the market’s current P/E is 30% above its 130-year average. I also had to assume a sales growth rate. I chose 4.2% annualized, which is how fast per-share sales for S&P 500 companies have grown since the economy emerged from the 2008-2009 recession. Notice that this generously assumes there will be no recession between now and May 2020. Even with those assumptions, however, the S&P 500 in May 2020 would be trading at 1,683 if corporate-profit margins revert to their historical average.

What an incredible disgrace. When did we start accepting this as normal? When did we start accepting this, period?

• Guilty Pleas and Heavy Fines Seem to Be Cost of Business for Wall St. (NY Times)

Even as five big banks plead guilty to felonies and paying out billions of dollars, the question remains whether top executives will shrug off the penalties as just an average cost of doing business. The Justice Department hailed the guilty pleas by JPMorgan Chase, Citigroup, Barclays, UBS and the Royal Bank of Scotland to foreign exchange and Libor manipulation charges as a victory for discouraging corporate misconduct. Attorney General Loretta E. Lynch said that the penalty of more than $5 billion that the banks agreed to pay, including $2.5 billion in criminal fines, “should deter competitors in the future from chasing profits without regard to fairness, to the law, or to the public welfare.”

Whether traders will ever be dissuaded from seeking out ways to gain any edge possible in financial dealings is an open question. The watchword for prosecutors and regulators these days in dealing with multinational businesses is “cooperation.” Last week, officials at both the Justice Department and the Securities and Exchange Commission emphasized that corporations and individuals would receive consideration if they were forthcoming about known violations. The price will be much steeper if they choose not to tell everything they know as early as possible. Yet even as penalty after penalty is paid by big banks in various cases, it seems as though the same cast of corporate characters keeps reappearing. It makes you wonder whether the global banks are acting like teenagers who find it easier to beg forgiveness than actually change their behavior.

The guilty pleas are noticeably tougher than the enforcement actions of just a few years ago, when virtually every case involving violations in the financial sector resulted in only a deferred or nonprosecution agreement. To send a message that repeat offenders will now pay a price, the Justice Department took the additional step of tearing up the 2012 nonprosecution agreement with UBS, which had resolved the investigation of its manipulation of the London interbank offered rate, or Libor. Now, UBS is pleading guilty and paying an additional $203 million fine. The bank had no defense to the Libor charges because its admissions could be used against it once the government found that it breached a provision of the nonprosecution agreement that promised it would not commit any more crimes.

I smell collapse.

• Cui Bono (Richard Breslow)

The bad news is that we are investing in a world where Graham and Dodd’s “Security Analysis” has become a quaint relic of simpler times, when the nuts and bolts of a company’s fundamental were meant to motivate how analysts viewed its prospects. Now we have QE and buybacks. We live in a world where good Keynesians Tobin and Brainard’s work on valuation (which led to Tobin’s q test) was meant to remind investors that markets needed to be grounded in some form of reality. (Interestingly, as an aside, William Brainard was strongly in favor of Janet Yellen being appointed to the Fed Chair). Today we read that equities are at all-time highs because weak economic numbers may keep the Fed on hold longer. The good news is that investing is a lot easier if you have central banks on your side.

Central bankers admit they follow the markets, as they should. What has evolved in this world of activist central banks as proxy sovereign wealth funds are policy makers who watch, care and try to manage price levels in markets, rather than managing liquidity and continuous pricing. Front-running mutual funds used to be something of a skill and art. Front-running central banks merely requires not losing sight of the bigger picture and managing your positions. Oddly enough, skill at the latter is what old-fashioned traders, who are in the process of being killed off by boxes, were actually most prized for. In today’s world, negative rates are argued to be realistic. Markets that go up 100% in a year are prescient.

Markets that go down are described as killing wealth, not, perhaps, normalizing in the face of better numbers. Economists extol the value of the “wealth effect” on economic prospects. Translated that means central banks should be in the business of helping markets along. We are all meant to be on the same side here, right? European bonds have sold off in response to better numbers. Cruising speed. Cue the ECB’s Coeure to announce bigger buying of bonds now. He assured us this had nothing to do with the recent back-up in yield but rather prudent liquidity management. Europe does treasure the summer holidays after all.

And it ain’t only developed markets. After a nasty sell-off last week, Egypt’s EGX30 index is up over 9% this week as the government “postponed” the widely-praised capital gains tax on equities. For those gregarious enough to trade this market, watch the key 9000 level which held as resistance today This morning, everything German responded favorably to the QE-steroid announcement. Later in the session, the ZEW was released and was horrid on its face. Immediate reaction? Profit-taking. Gives you a good example of what is driving things.

Howard’s back!

• Record Number of American Stores, Malls Closing: Davidowitz (Bloomberg)

Davidowitz & Associates Chairman Howard Davidowitz discusses the U.S. retail industry and economy.

“Pensions have already been cut by 44pc, and 48pc for public sector workers, and these stipends are the final safety net for Greek society. The recipients are literally feeding their children and grandchildren and extended kin. ”

• Defiant Greeks Force Europe To Negotiating Table As Time-Bomb Ticks (AEP)

Europe’s creditor powers have started to wobble. Berlin, Paris and Brussels are coming to the grim conclusion that Greece may not capitulate as expected, and time is running out fast. Athens is now warning openly that the “moment of truth” will come on June 5, when the country faces default on a €300m payment to the IMF, unless the EU authorities hand over the next tranche of bail-out cash. It would be hazardous to bet the integrity of monetary union on the assumption that this is just a bluff. For the past four months the creditor bloc has been dictating terms, mechanically repeating the same demand that Alexis Tsipras and his Syriza rebels deliver on an austerity contract that they vowed to repudiate and which the previous conservative government was unable to implement.

EMU leaders have never at any moment acknowledged that the extra loans imposed on a bankrupt Greek state in 2010 were chiefly designed to save the euro and stem a European-wide banking crisis at a time when the eurozone had no defences against contagion. They have yielded slightly on Greece’s primary budget surplus but are still insisting on fiscal targets that can only trap Greece in a vicious circle of low growth and under-investment. Such a regime would leave the country just as bankrupt in the early 2020s as it was when the traumatic ordeal began, with nothing to show for so many cuts and a decade of depression. They are still pushing Greece to sell off state assets for a pittance to the same old oligarchy, further entrenching the deformities of the Greek economy, presumably – for there is no other urgent imperative – so that they can collect their debts.

Yet creditor bluster has reached its limits. It is by now clear that Syriza is so angry, and so driven by a sense of injustice, that it may be willing to bring the whole temple of monetary and political union crashing down on everybody’s heads, if pushed to the brink. Mr Tsipras spent five hours trying to calm the party leadership on Tuesday as a mutinous caucus on the hard-Left, but not only them, berated him furiously for raiding reserve funds to pay off creditors. Better to default and be done with it. The mood was already clear at a “war cabinet” 10 days ago when all wings of the party agreed that they would stand and fight – whatever the consequences – rather than submit to demands for a further cut in wages and pensions, or accept any deal that fails to offer debt relief and imposes a primary surplus above 1pc of GDP.

Pensions have already been cut by 44pc, and 48pc for public sector workers, and these stipends are the final safety net for Greek society. The recipients are literally feeding their children and grandchildren and extended kin. More than 900,000 registered unemployed – or 86pc of the total – receive no benefits. The Greek drama has, in any case, escalated to a higher level. Washington has brought to bear its immense diplomatic power, warning Germany ever more insistently that it would be a geo-strategic disaster of the first order if an embittered Greece were to spin out of control and into the orbit of Vladimir Putin’s revanchist Russia. Wiser heads in Berlin need no persuasion. Vice-Chancellor Sigmar Gabriel, the Social Democrat leader, clenches his teeth with exasperation when told that Europe can safely handle a €315bn default and a Greek ejection from the euro. “It is extremely dangerous politically. Nobody would have any more faith in Europe if we break apart in the first big crisis,” he said.

Yes, that’s the same pensions that have already been cut by 48% for public sector workers.

• Greek Pensions Said To Be In Creditor Crosshairs (Bloomberg)

Greece’s creditors are making pension reforms a top priority, leaving the door open to compromises on other issues like the country’s minimum wage proposals. Greek negotiators are meeting Wednesday with the so-called Brussels Group as efforts continue to reach a deal by month-end, according to two officials close to the talks. If Prime Minister Alexis Tsipras can offer sufficient pledges to overhaul Greece’s retirement program – one of the nation’s biggest hurdles to qualifying for IMF aid – creditors might offer leniency on their demands to restrict increases to the minimum wage. “The pension system looks unsustainable and needs reform,” said Guntram Wolff, director of the Brussels-based Bruegel group.

“If you don’t reform it and want debt relief, you’re essentially asking your partners to fund an unsustainable pension system.” The debate over pensions, wages and other contentious points delves into details as some European policy makers strike a more optimistic tone that a deal to unlock bailout aid can be reached. An agreement is possible in the coming weeks, EU Economic Commissioner Pierre Moscovici told the French Senate Wednesday, the day after German Chancellor Angela Merkel said Greece had until the end of the month to reach a resolution. Creditors won’t accept raising the Greek minimum wage back to its pre-2012 level, according to one of the officials.

At the same time, they might be open to a more gradual increase that takes into account the impact of higher wage requirements on unemployment and the overall economy, the official said. An acceptable deal with Greece may comprise as little as a third of the country’s previous commitments for economic policy changes, according to a German government official who asked not to be identified. A second German official said an agreement that rolls back minimum-wage pledges would wipe out about three quarters of what the Greeks had initially promised to deliver. Taken together, the comments suggest a minimum-wage compromise is not ruled out if there is no other alternative. The officials reiterated Germany’s view that Greece needs to live up to its bailout promises if it wants to get the rest of its money owed under the program.

Bit weak for a ‘think tank’.

• Giving Greece a Chance (Bruegel)

The Greek tragedy must not go on. Europe’s growing frustration with the new Greek government has triggered calls for stopping negotiations and even accepting “Grexit”, Greece’s exit from the euro. We believe that this would be a mistake. Grexit would be a collective political failure. Above all, it would cause a social and economic catastrophe for Greek citizens. However, keeping Greece in the euro area at the cost of citizens of other countries, without a serious and credible commitment by the Greek government to reform its economy and its institutions, would be a collective political failure as well. It would not only erode further the credibility of Europe’s institutions and its architecture, but as well the roots of European integration, which was based from the beginning on the respect of common rules.

The national sovereignty of each member state must be respected. But in a deeply integrated Europe, sovereignty is increasingly shared, rather than national. Time is running out quickly for the Greek government. It needs to decide now whether to get serious about reforming the country. It continues to have one major advantage, namely a clear mandate for a fresh start for Greece, not relying on the old elites who ruined the country. But it has also one serious challenge: the fact that it won its political mandate based on contradictory promises that it could not fulfil under any circumstances. The idea to call for a referendum in Greece should therefore not be regarded as a threat, but as an opportunity.

If Greek voters decide in a referendum to follow through with a serious programme of economic and institutional transformation, the new Greek government would obtain the necessary legitimacy to adjust its agenda. If Greek citizens decide otherwise, they will do so in the full knowledge of the implications, including the possibility of Greece’s exit from the euro. However, a Greek referendum will not exonerate Europe from its responsibilities. We need to acknowledge that the two support programmes for Greece were a colossal bail-out of private creditors, not least those based in France and Germany, at the expense of European taxpayers.

The optimism of the two programmes regarding Greece’s ability to reform and its debt sustainability was deeply flawed. Yet we should also honour our historic responsibility in stabilizing a continent in a peaceful common union. And we should accept that every European country in such a deep crisis, as Greece is in today, deserves solidarity and continued support.[..] In addition, European taxpayers would pay a high price, as loans to the Greek government could no longer be repaid. The combined official exposure of Germany and France to Greece amounts to close to €160 billion, or around €4350 for a German or French family of four.

Important: “Default but no Grexit cannot be a stable equilibrium..”

• Investors And Policy Makers Eye Consequences Of Greek Default (FT)

With Greece fast running out of cash, investors and policy makers have begun contemplating the possibility of a default and its consequences. The question they are asking is whether it is possible to keep Athens in the eurozone even if it failed to repay some of its creditors, thereby sparing the global economy renewed uncertainty. Our base-case scenario remains that Greece and its international partners will reach an agreement, wrote Reinhard Cluse, an economist at UBS, in a research note. Nevertheless .. the risk of failure and eventual Grexit [Greek exit from the currency bloc] should not be underestimate . The cash position of the Greek government is extremely murky, making it hard to assess when exactly Athens might be forced to renege on its obligations.

Silvia Merler, an economist at European think-tank Bruegel, has calculated that the government is running a better than expected primary surplus. However, this is largely the result of a severe squeeze on public spending, which is partly due to delayed supplier payments. Athens faces a challenging debt redemption schedule during the summer with about €2bn due to the INF and €6.5bn to the ECB and other eurozone central banks between June and August. The Greek government also has to pay its civil servants and pensioners, while the existing, stalled bailout programme with the eurozone terminates at the end of June. Athens is adamant that an agreement is in sight but the possibility of an accident remains.

While a default need not necessarily lead to a Grexit economists warn that it would substantially increase the risks of a departure. Default but no Grexit cannot be a stable equilibrium, Mr Cluse said. The short-term consequences of a default may depend on who exactly the Greek government fails to pay, as well as on the reaction by creditors — in particular depositors and the ECB. A default by Athens on domestic payment obligations, in the form of IOUs to pensioners and civil servants, would probably be the least risky. While such a move would almost certainly be challenged in court — as well as creating substantial political problems for the government — any ruling would be delayed.

A default on IMF loans would look politically ugly, as Greece would indirectly be refusing to repay some of the poorest countries in the world who contribute to the institution’s coffers. However, it is generally seen as less risky than a default to the ECB. The fund’s executive board would only be notified a month after Greece had not met its obligations and it would take several months before any concrete steps, which could go as far as excluding Greece from the IMF, were taken. Refusing to pay the IMF would be unlikely to trigger an automatic cross-default on other obligations. For example, the European Financial Stability Facility, the eurozone rescue fund, would need to decide if Greece was in default, leaving room for discretion among other European governments.

“Greece is the testing ground and everybody is watching very carefully…”

• Europe Faces 2nd Revolt As Portugal’s Ascendant Socialists Spurn Austerity (AEP)

Europe faces the risk of a second revolt by Left-wing forces in the South after Portugal’s Socialist Party vowed to defy austerity demands from the country’s creditors and block any further sackings of public officials. “We will carry out a reverse policy,” said Antonio Costa, the Socialist leader. Mr Costa said a clear majority of his party wants to halt the “obsession with austerity”. Speaking to journalists in Lisbon as his country prepares for elections – expected in October – he insisted that Portugal must start rebuilding key parts of the public sector following the drastic cuts under the previous EU-IMF Troika regime. The Socialists hold a narrow lead over the ruling conservative coalition in the opinion polls and may team up with far-Left parties, possibly even with the old Communist Party.

“There must be an alternative that allows us to turn the page on austerity, revive the economy, create jobs, and – while complying with euro area rules – restore hope to this county,” he said. While the Socialist Party insists that it is a different animal from the radical Syriza movement in Greece, there is a striking similarity in some of the pre-electoral language and proposals. Syriza also pledged to stick to EMU rules, while at the same time campaigning for policies that were bound to provoke a head-on collision with creditors. Mr Costa accused the Portuguese government of launching a blitz of privatisations in its dying days, signalling that the Socialists will either block or review the sale of the national airline TAP, as well as public transport hubs and water works.

His harshest language was reserved for the IMF but this reflects the cultural milieu of the Portuguese Left. In reality the IMF was the junior partner in the Troika missions. Mr Costa unveiled a package of 55 measures in March, led by a wave of spending on healthcare and education that amounts to a fiscal reflation package. The party would also roll back labour reforms and make it harder for companies to sack workers. The plan would appear entirely incompatible with the EU’s Fiscal Compact, which requires Portugal to run massive primary surpluses to cut its public debt from 130pc to 60pc of GDP over 20 years under pain of sanctions.

The increasingly fierce attacks on austerity in Lisbon are likely to heighten fears in Berlin that fiscal and reform discipline will break down altogether in southern Europe if Greece’s rebels win concessions. Worry about political “moral hazard” is vastly complicating the search for a solution in Greece. “Greece is the testing ground and everybody is watching very carefully. That is why the Spanish and Portuguese prime ministers have been so hawkish,” said Vincenzo Scarpetta, from Open Europe.

It’s not just the Socialist Party either.

• Portuguese Politicians Turn a Deaf Ear to IMF (WSJ)

Five months ahead of a general election, the Portuguese government and the main opposition Socialist Party can agree with one thing: the IMF no longer has a say here. Earlier this week, the IMF, which along with the European Union bailed out Portugal in 2011 with a €78 billion loan, issued a staff report. Portugal, it wrote, is still far from achieving significant growth levels, having failed to implement all the necessary reforms to make its economy more competitive. In addition, it warned that while the country’s current account has turned positive, a fall in imports—not a rise in exports–has played an important role in fixing external imbalances. And as imports pick up along with the economy, the current account could revert to a deficit.

On Wednesday, Finance Minister Maria Luis Albuquerque largely dismissed the IMF assessment, saying the report “has a very distorted view related to a series of issues.” “The big difference [between now and under the bailout] is that today we can disagree, because we gained that right,” Ms. Albuquerque, who oversaw Portugal’s exit from the bailout program a year ago, said. Portugal’s vocal opposition to the IMF represents a major U-turn. At least in public, the government spent its bailout years picturing itself as a poster child to the austerity drive in the eurozone.

For its part, the Socialist Party, which is currently slightly ahead in the polls, has called the bailout program, designed by the IMF and the EU and implemented by the government, a mistake. The party, which released its campaign program Wednesday, said it can keep fiscal targets in check by rebalancing spending and revenue. Ultimately, it believes that raising family incomes will lead to higher consumption and a needed pick-up in the economy. With that goal, the party has promised to cut taxes, which were sharply raised over the past three years, and reverse the salary cuts in the public sector.

Superficial long piece. Revelation: Yanis taped Riga meeting(s).

• A Finance Minister Fit for a Greek Tragedy? (NY Times Magazine)

Varoufakis is neither a politician nor a banker by training. He has been one of the most visible and vociferous critics of the Greek government, the European establishment and the Greek-European bailout. Imagine that President Obama had, instead of picking Timothy Geithner to be his Treasury secretary in the midst of the financial crisis, appointed a progressive academic economist like Paul Krugman or Joseph Stiglitz, only edgier and funnier, someone who had spoken out scathingly against bank bailouts, freely expressing himself however he wanted on television and in public debates because he wasn t running for office. His popularity was undeniable, though. When Syriza did put Varoufakis on the ballot for Parliament in January, despite the fact that he was living in Austin, Tex., at the time, he won more votes than any other candidate.

Four months into his political tenure, Varoufakis is at the center of a contest that could determine the entire Continent’s future. No deal between Greece and the domineering center of European authority has been reached. Varoufakis finds himself struggling to hold on to his principles, what he calls the red lines that prevent him, in his mind, from becoming like every other Greek politician before him. Those ideals risk bringing more hardship to Greece, but Varoufakis has staked his academic integrity on a particular economic and moral critique of the crisis. To what, to whom, does he presently owe his ultimate responsibility? For the people who are now 15, 16, 17 years old, to have a chance by the time they are 20 this is what matters, he told me this month.

There’s no doubt that this economy now is far worse off in the last two months as a result of our hard bargaining. He described that change as a trade-off, an investment in a better future. And an investment always involves a short-term cost, he said. I asked him about that short-term cost. Is he worried about the Greek economy today? Terrified, he said. Terrified and aghast.

“Remember: cash is King, Queen and Prince in a deflationary environment.”

• UK Enters Era Of Deflation With CPI At Minus 0.1% (EI)

According to the latest figures from the Office of National Statistics, the Consumer Price Index (CPI) fell by 0.1% in the year to April 2015, making it the first time in the past 55 years that the UK has experienced deflation on this measure. There has been a lot of talk about how falling prices are good for consumers. However, what is hardly reported is the effect deflation has on those with debts. If we enter a period of sustained deflation, as predicted by some economists such as Professor Steve Keen – the so-called Japan-like scenario – the burden of paying everything from your credit card bill to your mortgage will become a lot more onerous. On this basis, house prices will likely fall quite a long way.

The UK recovery seems to have been based on debt financing, everything from 30-year mortgages for first time buyers to people taking advantage of ostensibly cheap car finance. Inflation shrinks debts but deflation will mean it takes much, much longer to pay that debt off. This is because deflation increases the real value money and the real value of debt. The overall economy will also suffer. With shrinking prices will come shrinking sales, leading to falling corporate profits. They’re will inevitably be less investment and spending as a result. Most workers can forget about pay rises, indeed pay cuts may become the norm. After all, in an era of atomised, non-unionised workforces on short-term and zero hour contracts people will be in no position to argue.

Just as worrying will be the effect of deflation on government finances. With falling sales and more caution on the part of indebted consumers struggling to service their debts, national GDP will shrink. Thus the debt-to GDP figures will increase. Just ask any ordinary Greek what this scenario will feel like. For investors in such a scenario, it makes sense to steer clear of some of the behemoths exposed to the consumer side and instead invest more in high growth small caps – although this is an area where you need to take extreme care. Remember: cash is King, Queen and Prince in a deflationary environment. Its buying power will increase, other things being equal.

All of Britain will be owned by private investors. Sovereign country?

• Osborne Plans For Biggest Sell-Off Of British Public Assets (ITV)

George Osborne has set out his plans to help restore Britain’s economy by staging the biggest ever sell-off of government and public owned corporate and financial assets this year. The Chancellor will create a new government-owned company who will be in charge of the sales, which are expected to be worth £23 billion. UK Government Investments (UKGI) will sell shares in Lloyds Banking Group, UK Asset Resolution assets, Eurostar and the pre-2012 income contingent repayment student loan book. It is part of plans to cut spending by £13 billion by 2017/18.

Speaking at the Confederation of British Industry (CBI), Osborne said: “If we want a more productive economy, let’s get the government out of the business of owning great chunks of our banking system – and indeed other assets that should be in the private sector.” A “plan to make Britain work better” will be published over the next few weeks, setting out proposals to improve transport, broadband, planning, skills, ownership, childcare, red tape, science and innovation. Osborne also addressed the issue of the EU referendum saying he will be “fighting to be in Europe but not run by Europe”.

This is not less growth, this is contraction.

• China’s Factory Activity Contracts For Third Month (CNBC)

China’s manufacturing sector contracted for a third straight month in May as output shrank at the fastest rate in a year, a private survey showed on Thursday. The HSBC flash Purchasing Managers’ Index (PMI) came in at 49.1, weaker than the 49.3 print forecast by Reuters but better than the 48.9 final showing in March. A reading below 50 indicates contraction. “Softer client demand, both at home and abroad, along with further job cuts indicate that the sector may find it difficult to expand, at least in the near-term, as companies tempered production plans in line with weaker demand conditions,” said Annabel Fiddes, an economist at Markit. “On a positive note, deflationary pressures remained relatively strong, with both input and output prices continuing to decline, leaving plenty of scope for the authorities to implement further stimulus measures if required.”

The sub-index on new exports orders fell to a 23-month low of 46.8 in May, while overall new orders shrank for the third straight month, albeit at a slower pace. The output sub-index contracted for the first time this year, to a 13-month low of 48.4, while the employment sub-index showed manufacturers shed jobs for the 19th month in a row. The Shanghai Composite initially turned negative on the news, before recovering to trade about 0.5% higher. The Australian dollar trimmed gains by nearly 0.1% to $0.7877 against the U.S. dollar. “I think we’re still quite far away from where we should be in a recovery. Last month was a really poor… a one year low. So you would expect that the number would improve a little bit,” said Julia Wang, Greater China Economist at HSBC.

“But I think that this number coming in a little bit below than medium forecast shows that the strength of the economy is still not as good as people expected even though expectations have been scaled back continuously in 2015,” she added. The data is the latest in a string of downbeat indicators from China, and reinforces the view that policymakers will be unleashing further stimulus to reach its 7% growth target for 2015. The People’s Bank of China has cut interest rates three times since November, and lowered the reserve requirement ratios (RRR) – the cash banks must hold as reserves -twice. The moves aim to reduce companies’ borrowing costs and boost lending.

Local government liabilities could be $6-7 trillion.

• China Province Completes Landmark Bond Sale (FT)

The Chinese province of Jiangsu completed a landmark bond sale on Monday that marks the start of a massive local government debt bailout that some have described as quantitative easing with “Chinese characteristics”. After an initial failure in April that forced the province to postpone its bond sale, the central government issued administrative orders, guarantees and preferential policies to convince state-owned banks to buy the bonds, the first in a wider Rmb1tn ($161bn) local government debt swap. On Monday Jiangsu sold Rmb52.2bn with a coupon rate only slightly higher than equivalent sovereign Treasury rates, after the central bank capped the premium local governments could offer.

The plan is aimed at reducing the interest burden for debt-laden local governments, which have all borrowed heavily in recent years to pay for the enormous government construction boom unleashed to prop up the economy following the 2008 global financial crisis. The Jiangsu government estimated that Monday’s bond sale would reduce its interest burden by about half, since most of the proceeds would be used to repay expiring short-term bank loans with interest rates of 7-8%. The three, five, seven and 10-year bonds are sold at rates ranging from 2.94% to 3.41%, only slightly higher than China’s Treasury bond rates, which ranged from 2.77% to 3.39% for 10-year notes on Monday.

Not even Beijing seems to know the true scale of local government borrowing in recent years since much of the debt was taken on by off-balance sheet “local government financing vehicles” that allowed provincial authorities to skirt rules banning them from running deficits. In mid-2013 Beijing estimated that local governments had direct and indirect liabilities of nearly Rmb18tn, but they have continued to borrow heavily since then and some analysts believe the actual amount could be more than double that.

There go the Chinese markets.

• Goldin Group Losses Wipe $25 Billion Off Market Cap In One Day (FT)

A day after Hanergy Thin Film shares plunged 47% and were suspended, the two listed units of Goldin Group, the Hong Kong real estate, horse-breeding and electronics conglomerate, have suffered their biggest losses on record. A steep sell-off continued on Thursday afternoon in Hong Kong for Goldin’s two units, having collectively lost more than $25bn from their market capitalisations in fewer than two days. Since the Hong Kong market’s opening on Wednesday, Goldin Properties’ market capitalisation declined from $12.7bn to as low as $5.2bn, while Goldin Financial slid from $29.9bn to $11.3bn. Each stock fell as much as 60% on Thursday alone, and trading continues. As of 1pm in Hong Kong, Goldin Properties shares were down 45%, whilst Goldin Financial stock was 57 lower on the day.

The listed subsidiaries each issued “unusual price and trading volume” announcements to the Hong Kong stock exchange, but did not offer a reason for the losses. “The board confirms that it is not aware of any reasons for these movements or of any information that must be announced to avoid a false market in the company’s securities or of any inside information that needs to be disclosed,” both Goldin subsidiaries said. The Securities and Futures Commission warned in mid-March that Goldin Financial shares “could fluctuate substantially” given the high concentration of ownership. Just 20 shareholders owned almost 99% of the company’s shares, as of March 4, including Pan Sutong, chairman, who held a 70.3% stake.

The main shareholders lost billions in mere minutes.

• Hanergy Shares Suspended After 47% Plunge Wipes $19 Billion Off Market Cap (FT)

Almost $19bn was wiped off the value of Hanergy Thin Film Power on Wednesday when the Hong Kong-listed solar equipment supplier’s shares plunged 47%, on the same day as its chairman failed to turn up at its annual meeting. Li Hejun, chairman of HTF and its Chinese parent Hanergy group, has become one of China’s richest men as the Hong Kong-listed subsidiary’s shares surged about 600% over the past two years. In recent months, an investigation by the Financial Times has raised questions over HTF’s business model and trading patterns in its shares. HTF’s stock was suspended on Wednesday, about 30 minutes after the share price drop, pending an announcement by the company. No other information was given.

Hong Kong’s markets regulator has recently been probing trading in HTF shares, sending written requests for information and meeting investment groups and brokers who have bought and sold stock in the company, according to people familiar with the matter. The Securities and Futures Commission declined to comment. HTF’s public relations company confirmed that Mr Li, who is the controlling shareholder at both Hanergy group and its Hong Kong-listed subsidiary, did not attend Wednesday’s annual meeting. HTF managers, including Frank Dai Mingfang, chief executive, and Eddie Lam, finance director, were present.

China’s started bailing out real estate.

• The Weight Of Chinese Money Adds To The Cost Of Australian Housing (SMH)

The Evergrande Real Estate Group in China recently received a $20 billion bailout (US$16.2 billion) from a group of state-controlled banks which extended it a line of credit to protect the company from insolvency. That’s $20 billion, not million. The chairman of Evergrande is Xu Jiayin, also known as Hui Ka Yan, regarded as the biggest home-builder in China, has a troubled Australian connection. Last November, Xu paid $39 million for Point Piper mansion Villa del Mare, a transaction made via a series of shelf companies to avoid the foreign ownership laws. The federal government examined the high-profile purchase, found it contravened the law on foreigners buying residential property, and ordered the Sydney mansion sold within 90 days.

It only took 60 days to find another Chinese buyer willing to pay $40 million for the property. It sold last week to a Sydney resident with extensive business links in China. Meanwhile, back at Evergrande, big-spending Xu’s real estate empire is so stretched, in a nationally contracting housing market, that the government, via surrogates, is keeping it solvent. Beijing doesn’t want a contagion from the mayhem enveloping another nationally important property developer, Kaisa, which has achieved the negative trifecta of financial distress, a plunging share price and a corruption scandal. The Kaisa scandal coincides with a nationwide anti-corruption drive, instigated by President Xi Jinping, which has enmeshed hundreds of thousands of government officials. It has precipitated a recession in the gambling centre of Macao, a honeypot for laundering money in the grey economy.

The crackdown has caused capital flight, with many Chinese keen to place assets out of the sight and reach of the government. Australia has long been seen as a safe haven for Chinese investors, especially real estate in Sydney and Melbourne, and the local property industry has been a sieve for investments that would not pass the Foreign Investment Review Board guidelines if investigated. As the $20 billion bailout for Evergrande shows, the amount of money sluicing through the volatile Chinese real estate sector is enormous, at a time when the Australian government is looking for more investment from China.

Russia’s had enough.

• Moscow Says It Will Retaliate If Ukraine Hosts US Anti-Missile Defenses (RT)

Russia will take retaliatory measures to protect itself if Ukraine decides to station US anti-missile defense systems in its territory, a Kremlin spokesman told the media. “Concerning Ukraine’s plan to house anti-missile systems in its territory, we can only perceive it negatively,” Dmitry Peskov said Wednesday. “Because it will be a threat to the Russian Federation. In case there are missile defense systems stationed in Ukraine, Russia will have to take retaliatory measures to ensure its own safety.” He was commenting on a recent statement by the head of Ukraine’s Security Service, Aleksandr Turchinov, which claimed that Ukraine faces a “Russian nuclear threat.”

In an interview-structured statement published by the Ukrainian Security Council’s website, Turchinov claims Russia has stationed nuclear missiles on the Crimean peninsula. “Nuclear weapons in Crimea will be targeted, first and foremost, at European countries. There is also real danger for Turkey, which is, by the way, a NATO member,” Turchinov said. “To protect ourselves from the nuclear threat, we may have to hold consultations about stationing components of an anti-missile defense system in Ukraine,” Turchinov said in his statement.

The statement also calls for additional international sanctions against Russia, including blocking the Bosphorus strait from Russian navy vessels and shutting Russia off from the international SWIFT financial transfer system. When asked about Turchinov’s statements on hosting anti-missile defense, a NATO representative told the RIA Novosti news agency he could not comment, saying only that the alliance was “responsible for protecting its member states from missile threats.” Although NATO leaders have expressed support for Ukraine, it is not a member of the alliance. Russia has already rebuffed the idea, with Foreign Minister Sergey Lavrov saying that Turchinov’s statements are “hot air” and “have no prospects.”

Russia will not give in on this.

• Russia Will Take Ukraine to Court If June Coupon Payment Missed (Bloomberg)

Russia said it will take Ukraine to court if the government in Kiev fails to make its next coupon payment after passing a law allowing it to stop servicing its debt. “In June, a $75 million payment is due,” Finance Minister Anton Siluanov told reporters in Moscow on Wednesday. “We’ll see, if they miss the payment, we will use our right to go to court.” Ukraine has failed to bring Russia to the table as it begins negotiating with creditors to reduce its $23 billion of international debt. Russia says the $3 billion bond that comes due in December shouldn’t be included in the restructuring because it was bought from the regime of former Ukrainian President Viktor Yanukovych as part of a government aid agreement.

Ukraine raised the pressure on creditors to accept a writedown on their holdings on Tuesday when it passed a bill enabling the government to halt payments if it can’t reach agreement with bondholders by its June 15 target. Failure to cut a deal risks future tranches of a $17.5 billion IMF loan that Ukraine needs after a conflict with pro-Russian separatists pushed it into the worst recession since 2009. “If Russia takes Ukraine to court, that might be an incentive for other creditors to go down the same route,” Jakob Christensen at Exotix Partners in London, said by phone on Wednesday. “I would wait until after June 20 to go forward with” any moratorium, he said.

Ukraine’s sovereign bonds advanced on Wednesday after falling the most in two months yesterday. The nation’s debt levels are “unsustainable” and there is “no alternative” for creditors but to accept maturity extensions, coupon reductions and principal writedowns on their holdings, Finance Minister Natalie Jaresko said on Tuesday. “I wouldn’t assume that Ukraine is not willing to default on the Russia bond,” Anna Gelpern, a Georgetown University law professor and fellow at the Peterson Institute for International Economics, said by phone on Tuesday. “They’ve said that they want to restructure them on the same terms as everybody else.”

Scary numbers.

• In America, Inequality Begins In The Womb (PBS)

The womb is a miraculous tiny organ prior to pregnancy — not greater than a medium-size orange; its sole purpose is to nurture and protect the fetus until it is expelled into the world. Though small, its impact is gigantic: the nature of its environment during the short period between conception and birth has lifelong consequences on the fetus. For instance, babies born prior to the 37 weeks of gestation or weighing less than 5.5 pounds will be disadvantaged for the rest of their lives in just about everything including their lifetime earnings. Fetuses exposed to toxins or infections will be irreparably damaged. The elephant in the room that we’ve been ignoring for the most part is that inequality — the big social issue of our time — begins amazingly during those 37 weeks.

Sadly, zip codes of birth do matter in the U.S. and they matter more than we think. If the fetus happens to find itself in a womb at 10104 (sandwiched between 5th Avenue and the Avenue of the Americas between W. 51st and 52nd Streets) with an average annual income of an unbelievable $2.9 million, it’ll surely enjoy the best nutrition imaginable: no toxins, no infections, certainly no shortage of micronutrients, and a stupendous team of doctors will make sure that it sees the light of day with optimal weight under optimal circumstances. Those in zip-code 10112 (near Rockefeller Center), who have to make do with $700,000 less, would not be bad either.

However, should the fetus have somehow used an inaccurate GPS and landed in the Melrose-Morrisania neighborhood of the South Bronx — a small mix-up measured in miles — where in some housing projects half the households have less than $9,000 (no, not per month but per year) the fetus’ environment surely would be like on another continent. The kind of inhumane deprivation that exists in the dysfunctional low-income crime-ridden environment that is colloquially called a slum and which the federal government refers euphemistically as “targeted census tracts,” leads to stress, anxiety, abuse, poor nutrition, infrequent doctor visits or no visits at all until the time of delivery, because of lack of money and lack of health insurance.

Debt Rattle May 8 2015

May 082015

May 8, 2015 Posted by Raúl Ilargi Meijer at 11:11 am Finance Tagged with: bonds, climate denial, consumer credit, Greece, Merkel, sell-off, slavery, stocks, yields Comments Off

Gottscho-Schleisner New York City views. Looking down South Street 1933

• Why Are Stock Prices So High? Borrowed Money (MarketWatch)

• Break Up Big Banks (Senator Bernie Sanders)

• Violent Bond Moves Signal Tectonic Shifts In Global Markets (AEP)

• Bond Yields, Not Political Fallout, Should Be Worrying Us Now (Independent)

• Rising European Yields Are A Worry For US Stocks (CNBC)

• Stocks May Find It Tough To Wiggle Out Of The Bond-Market Mess (MarketWatch)

• The Great German Government Bond Sell-Off Mystery (Guardian)

• 98% Of Q1 US Consumer Credit Was Used For Student And Car Loans (Zero Hedge)

• China Exports, Imports Fall Sharply In April (CNBC)

• Varoufakis Says Greece Ready to Take EU Impasse Down to the Wire (Bloomberg)

• Greece To Rehire Cleaners, School Guards Laid Off Under Austerity (Kath.)

• Five Years On, Doctor and Patient Split on Greek Cure (WSJ)

• Greece’s Biggest Brain Drain Since The Death Of Socrates (MarketWatch)

• Greek Bank Bailout Fund CEO To Stand Trial, Asked To Resign (Kathimerini)

• Greece and Britain Test the Union (Kathimerini)

• Greece Sees Massive Increase In Refugees Arriving By Boat (Guardian)

• Hedge Funds Aren’t Casino Capitalists. They’re Parasite Capitalists (Ind.)

• The British Press Has Lost It (Politico)

• Angela Merkel Under Pressure To Reveal All About US Spying Agreement (Guardian)

• Chinese Warships To Join Russian Navy Drill In Black Sea, Mediterranean (RT)

• Modern Slavery In Australia: Labour Exploitation Rife In Agriculture (RT)

• Nepal Quake Victims’ Families Not Allowed To Leave Qatar For Funerals (Ind.)

• How Climate Science Denial Affects The Scientific Community (PhysOrg)

“Despite all the claims that U.S. companies are awash with cash and have “never had it so good,”[..] in reality Corporate America has “overspent” in recent years to the tune of hundreds of billions of dollars.”

• Why Are Stock Prices So High? Borrowed Money (MarketWatch)

Why are stock prices so high? Follow the borrowed money Maybe the bears and cynics and general party-poopers are all wrong. Maybe the stock market these days isn’t a giant Ponzi scheme. Maybe it’s a shell game. The cheerleaders on the Street of Shame won’t tell you this, but lurking behind the phenomenon of today’s skyrocketing stock prices is a surge in corporate borrowing. Companies have been borrowing money with both fists, and spend the money to buy back shares and in the process drive up their share prices. But what the stock market giveth, the bond market taketh away.

Despite all the claims that U.S. companies are awash with cash and have “never had it so good,” an analysis by investment bank SG Securities calculates that in reality Corporate America has “overspent” in recent years to the tune of hundreds of billions of dollars. Over the past five years, equity prices have almost doubled — but so has the net debt of nonfinancial companies. Both have outstripped a 60% rise in profits. Or, to put it another way, since March 2009, the cash pile of non-financial U.S. corporations has risen by $570 billion, but debt has risen by $1.6 trillion. Indeed over the past year net debt has risen about 20%,SG estimates — while gross cash flows have risen a more modest 4%. Indeed, “it is also those companies with the weakest sales growth that are buying back the most,” warns SG quantitative strategist Andrew Lapthorne in a new report for clients.

And that’s not all. The “net debt” figures for most of the stock market are even worse than many will tell you, for the simple reason that the overall figure is skewed by a handful of companies with big cash piles — such as Apple AAPL, +1.08% . When you remove those from the equation, the picture for the rest of the pack looks a lot worse. Many of those cash piles are sitting offshore, untaxed or lightly taxed. Net of tax, the levels are lower. And anyone who tries to give you comfort by pointing out that net debt levels aren’t too bad when compared to asset prices needs to offer a big caveat. Such ratios always look good during a boom, because asset prices get inflated. If or when the tide turns, the asset prices can tumble — but the value of the debt, alas, sticks around at its previous level.

“The function of banking should be to provide affordable loans to businesses to create jobs. The function of banking should be to provide affordable loans to Americans to purchase homes and cars. Wall Street cannot be an island unto itself..”

• Break Up Big Banks (Senator Bernie Sanders)

We don’t hear it discussed much in the media, but the reality is that the middle class of this country, once the envy of the world, is collapsing, 45 million Americans are living in poverty, and the gap between the rich and everyone else is growing wider and wider. Despite a huge increase in technology and productivity, median family income is almost $5,000 lower today than it was in 1999. There are 45 million people living in poverty and we have the highest rate of childhood poverty of any major country on earth. Half of the American people have less than $10,000 in savings and have no idea how they will retire with dignity. Real unemployment is not 5.5% – it’s close to 11%. Today, 99% of all new income goes to the top 1%.

During the last two years, the 14 wealthiest Americans saw their wealth increase by $157 billion, which is more wealth than is owned by the bottom 130 million Americans. In the midst of all this grotesque level of income and wealth inequality comes Wall Street.
As we all know, it was the greed, recklessness and illegal behavior on Wall Street six years ago that drove this country into the worst recession since the Great Depression. Millions of Americans lost their jobs, homes, life savings and ability to send their kids to college. The middle class is still suffering from the horrendous damage huge financial institutions and insurance companies did to this country in 2008. It seems like almost every day we read about one giant financial institution after another being fined or reaching settlements for their reckless, unfair, and deceptive activities.

In fact, since 2009, huge financial institutions have paid $176 billion in fines and settlement payments for fraudulent and unscrupulous activities. It should make every American very nervous that in this weak regulatory environment, the financial supervisors in this country and around the world are still able to uncover an enormous amount of fraud on Wall Street to this day. I fear very much that the financial system is even more fragile than many people may perceive. This huge issue cannot be swept under the rug. It has got to be addressed. Although I voted for Dodd-Frank, I did so knowing it was a modest piece of legislation. Dodd-Frank did not end much of the casino-style gambling on Wall Street. In fact, much of this reckless activity is still going on today. Yet, today, three out of the four financial institutions in this country (JP Morgan, BoA, and Wells Fargo) are 80% larger today than they were on September 30, 2007, a year before the taxpayers of this country bailed them out. 80%!

“It is absolute pandemonium in the fixed income markets..”

• Violent Bond Moves Signal Tectonic Shifts In Global Markets (AEP)

A wave of turmoil is sweeping through sovereign bond markets, setting off the most dramatic gyrations seen in recent years and threatening to spill over into over-heated equity markets. Yields on German 10-year Bunds spiked violently by almost 20 basis points to 0.78pc in early trading on Thursday as funds scrambled to unwind the so-called “QE trade” in Europe, with powerful ripple effects reaching Japan, Australia, Brazil and even US Treasuries. “It is absolute pandemonium in the fixed income markets,” said Andrew Roberts at RBS. “Everybody has been trying to get out of long-duration positions at the same time but the door is getting smaller.” German yields fell back just as fast to 0.58pc later, as bargain-hunters came back into the European debt markets, but are still unrecognisable from the historic lows of 0.07pc two weeks ago.

Ructions of this magnitude are extremely rare in government bond markets. Investors are nursing almost half a trillion dollars in paper losses in two weeks, a staggering sum in what is supposed to be a rock-solid repository for institutional investors. French, Italian, Spanish and Portuguese bonds have all been sold off sharply over the past two weeks, obliterating the gains in yield compression since the European Central Bank unveiled a bond purchase programme of €60bn a month in January. “Anything over-populated is being cleared out. People got too exuberant and they’re coming back to reality,” said David Bloom, currency chief at HSBC. Peter Schaffrik, at RBC Capital Markets, said rising yields can be a healthy development if the global economy is picking up speed. It is a different matter if they suddenly jump at a time of sluggish growth and disappointing figures in the US.

“It is potentially dangerous. What worries me is that we don’t have a good macro-economic back-drop driving yields higher. We don’t see a reflationary recovery,” he said. Investors already face a changed world from early April, when deflation was still on everybody’s lips and Mexico was able to sell €1.5bn of 100-year bonds at a rate of 4.2pc. The worm turned two weeks later when bond king Bill Gross declared that Bunds had become unhinged and were the “short of a lifetime”, quickly followed by warnings from Warren Buffett that bonds were “very overvalued”. The sharp moves have been exacerbated by a lack of liquidity as traditional dealers withdraw from the market to comply with stricter rules. The Institute of International Finance said this week that thin liquidity had become the top issue in talks with central banks and regulators.

It said the new rules amounted to a “dramatic revolution” that had re-engineered the global financial system and pushed risk out into the shadows, storing up outcomes that are likely to be “pretty painful and certainly unknowable”.

“..there is a timebomb ticking away in the bond markets, with the unwinding of QE, particularly in Europe, being more difficult and destructive than most people now appreciate.”

• Bond Yields, Not Political Fallout, Should Be Worrying Us Now (Independent)

I am worrying about something. No, not what will happen in the UK in the next few days, though maybe that should be a worry. It’s that there is a timebomb ticking away in the bond markets, with the unwinding of QE, particularly in Europe, being more difficult and destructive than most people now appreciate. There are, as is usual after any long bull equity run, quite a few warnings around of a forthcoming crash in share prices, and there is in any case a good chance of a correction during the summer. But what has been happening in the bond markets is rather different. Bond prices are not as interesting as share prices: a 10-basis point move in 10-year German bund yields makes a worse headline than a 3% rise in the share price of HSBC when it says it may move its headquarters out of London.

But bund yields have an impact on the cost of mortgages across the eurozone (and to some extent here), whereas the price of HSBC shares really has not that much effect on anything. The easiest way to get one’s mind round what is happening is to start with 10-year government bond yields. US treasuries yielded 2.2% and UK gilts just under 2%. Many of us think these are far too low; what is inflation going to be over the next 10 years? Say 2%. So an investor would get no real reward at all. But while these are far too low, they are not ridiculously low. For that you look at German bunds. Yesterday they yielded just over 0.5%. At that level you are bound to lose money and would be far better with just about anything else: equities obviously, or maybe buying a flat in Berlin or even Athens, the latter being rather cheap right now.

Actually bunds yielding 0.5% represent some return to sanity compared with yields in the middle of last month. As you can see from the red line in the top graph, yields dipped to 0.1% for a short period. If you were nutty enough to buy at that level you would have lost quite a lot of money by now. You could argue that German yields make sense if you think the country will dump the euro and return to the deutschmark, for investors would make a currency gain. But that is some way off and in any case the argument would not apply to French or Italian bonds, yielding 0.9% and 1.9% respectively. So ask yourself this: which country is more likely to be able to pay its debt back in 10 years’ time, Italy or the US? Not many people would say Italy. Yet Italian yields are lower than US ones. This cannot be right. So why is this happening?

“U.S. stocks will have to sing for their supper..”

• Rising European Yields Are A Worry For US Stocks (CNBC)

Over the past three weeks, the yield on the 10-year German bund has more than tripled, albeit from incredibly low levels. And that’s sending up warning signs for investors, particularly in U.S. equities. “Low interest rates have supported global equity prices during a period of very slow macro growth,” Convergex chief strategist Nicholas Colas wrote in a note Wednesday to clients. “To hold stock prices constant—or see them rise—during a period of rising rates, you need to see tangible signs of economic growth and rising corporate earnings.” The basic issue is that low bond yields support rich stock valuations, as they reduce the attractiveness of alternatives to risk assets. But U.S. yields have risen alongside European ones lately, in a move than investors have long been anticipating. If rates continues to surge, stocks will need to show some serious earnings growth.

“U.S. stocks will have to sing for their supper,” Colas wrote. “It can be a nice tune about lower interest rates, sung in the European language of your choice. Or, it can be a robust march with verses promising a vigorous domestic economy.” Others also have some concerns. Technical analyst Todd Gordon sees the recent yield move as giving the Federal Reserve license to hike rates—which could be an issue for stocks. “Why are commodities rallying? Why are bonds selling off? Why is the dollar selling off? Everything from an intermarket point of view points to inflation. … So I wonder if the Fed’s going to be move sooner rather than later,” Gordon said. “I think that may be trouble for equities if we are in fact going to get a rate hike.” Forecasting inflation is a major departure from the market’s recent milieu: The big modern concern has been disinflation or deflation, rather than inflation.

““The Fed are fully aware that ultra-low interest rates have been a huge factor behind U.S. equities hitting all-time highs..”

• Stocks May Find It Tough To Wiggle Out Of The Bond-Market Mess (MarketWatch)

Look at it this way — someday, you’ll have some great financial war stories to tell. “The latter part of 2014 and the dawn of 2015 will probably represent one of those episodes in financial history when the fixed-income markets were gripped by a confluence of factors that is unlikely to be repeated over the next hundred years,” said Jefferies’s chief equity strategist, Sean Darby. There’s fodder for your future tales of battles past this morning, as Fed Chairwoman Janet Yellen’s assets-are-bubbly comments continue to rattle global markets, which have already been duly freaked out by plummeting global bonds. She’s hit us at a tough time. While some shout, “Off with her head!”, over at IG, analyst David Madden says Yellen was probably just trying to ready investors for an eventual hike.

“The Fed are fully aware that ultra-low interest rates have been a huge factor behind U.S. equities hitting all-time highs this year, and the last thing the U.S. central bank wants is a crash when rates start to rise,” he says. Or maybe she and the rest of her Fed minions are as confused as the rest of us. That’s the theory from Ed Yardeni, chief investment strategist at Yardeni Research, who notes that Fed officials have been pretty silent since the last meeting. He says they’re probably struggling to work backups in bond yields and oil prices into their policy-making decisions. Hang on until summer, he says, when the Fed will get less confused and less confusing.

“..the market in German government debt is meant to be deep, liquid and populated by grown-ups.”

• The Great German Government Bond Sell-Off Mystery (Guardian)

It’s a head-scratcher. Why have investors suddenly decided to dump German government bonds? The sell-off, seemingly on no news, has been extraordinary, affecting the entire European bond market. Yields, which move inversely to the price of the bond, briefly hit 0.8% on 10-year German debt on Thursday. Then they fell to 0.57%, but even that represents a surge from 0.1% only a few weeks ago. A glib explanation is to say that the ultra-low yields were wrong in the first place. Deflation is a worry, not a probability, so isn’t lending to any government for a decade for a near-zero return a surefire way to destroy your capital? But that doesn’t explain the suddenness of the move: the market in German government debt is meant to be deep, liquid and populated by grown-ups.

Greece doesn’t offer a plausible answer. Grexit – if anything – seems more likely than it did a month ago, in which case you’d expect a rush into German debt. “Supply indigestion,” ran another idea – in other words, lots of European governments issuing bonds, trying to take advantage of the European Central Bank’s bond-buying programme. Possibly. But what will happen when bond yields start to rise for reasons that are easier to explain – for example, a return of modest inflation and higher interest rates. On the evidence of Thursday’s brief wobble in stock markets, it won’t be pretty for share prices.

A sign of bankruptcy.

• 98% Of Q1 Consumer Credit Was Used For Student And Car Loans (Zero Hedge)

By now everyone realizes that Q1 will be the second consecutive first quarter to see a negative GDP print. Wall Street’s weathermen formerly known as “economists” have been quick to scapegoat harsh weather once again for this unprecedented “non-recessionary” contraction in the US economy, however what the actual reason for the drop is irrelevant for this specific post; what is relevant is that even in a quarter in which US GDP is set to decline consumer credit, according to the latest update from the Federal Reserve, increased by just over $45 billion. But how is it possible that with such a massive expansion in household credit there was no actual benefit to the underlying economy? Simple: 98% of the credit lent out in the first quarter, or $44.3 billion, went to student and car loans!

The amount of credit that actually made it into the broader, consumer economy, i.e., credit card or revolving credit: a negative $600 million, despite a jump in revolving credit in March, when it rose by $4.4 billion to $889.4 billion. So $889.4 billion in credit card debt: as a reminder this is the key credit amount that has to keep growing for consumers to telegraph optimism about their wages, jobs, and generally, the economy. The problem is that as of Q1, this amount was lower than both car debt, at $972.4 billion, and certainly student debt, which in Q1 rose by another $30 billion to a record $1.355 trillion! In other words, virtually every dollar lent out in Q1 went to such dead-end uses as bailed out General Motors and student loans keeping an entire generation away from the harsh reality of the labor market.

But the most troubling discovery in Q1 is that as we reported last month, America’s consumer banks, i.e. depositor institutions, have shut down the lending spigot after seeing a jump in consumer bank lending in 2014. In fact, in the first three months of 2015, depository institutions saw a $32 billion decline in the total amount of credit lent out. So who did lend? Why the US government of course, which was the source of over $39 billion in consumer credit, or the vast bulk, lent out in the first quarter. In other words, the US government lends out cash, so US consumers can either buy cars from Government Motors in one truly epic circle jerk, or stay in the safe, ivory tower confines of college, and avoid the reality of what is really going on with the US economy.

Exports down 15% in March, another 6.4% in April. Where oh where is the 7% growth going to come from?

• China Exports, Imports Fall Sharply In April (CNBC)

China’s exports and imports tumbled in April, dashing hopes of a seasonal rebound and underscoring concerns over the soggy trade picture in the world’s second biggest economy. Exports fell 6.4% in April from the year-ago period, coming in worse than the 2.4% rise forecast in a Reuters poll and following a 15% plunge in March. Imports dived 16.2% on year, also missing the 12% expected drop and after falling 12.7% in March. This brought the trade surplus for the month to $34.13 billion, compared with the $39.45 billion forecast and March’s print of $30.8 billion. The news dampened prospects for Australia, one of the mainland’s major trading partners, and the Australian dollar fell to fresh session lows on the news, easing to $0.7859.

Markets had been hoping April’s trade numbers will rebound from the depressed levels in February and March blamed on the Lunar New Year holiday. “This [Lunar New Year] effect should have fully dissipated last month, so it is slightly surprising that export growth remained in negative territory,” said Julian Evans-Pritchard, China economist with Capital Economics, in a note. “The trade data suggest that both foreign and domestic demand has softened going into the second quarter.” Weak external and domestic demand has been a key factor behind the slowing Chinese economy, which Beijing expects will grow around 7% this year.

Every day this lasts hurts Brussels more.

• Varoufakis Says Greece Ready to Take EU Impasse Down to the Wire (Bloomberg)

Greek Finance Minister Yanis Varoufakis said his government is prepared to go “down to the wire” in talks with its creditors as policy makers signal they’re losing patience with the country after months of brinkmanship. Varoufakis, who denies he’s been sidelined by Greek Prime Minister Alexis Tsipras in the negotiations, said he expects an agreement in the next two weeks, though one is unlikely to be announced when euro-area finance chiefs meet on Monday. Greece has less than a week to prove to the European Central Bank that it’s serious about reaching an agreement with international lenders. Failure to make progress in bailout talks or repay about €745 million owed to the IMF on May 12 may prompt the imposition of tighter liquidity rules on its banks.

“Europe works in glacial ways and eventually does the right thing after trying all alternatives,” Varoufakis, 54, told BBC World on Thursday. “So we probably won’t have an agreement on Monday, but certainly we’re going to have an agreement in the next couple of weeks or so.” More than 100 days of talks between Europe’s most-indebted state and its creditors have failed to produce an agreement on the terms attached to the country’s €240 billion bailout. The standoff between Greece’s governing coalition and euro-area member states has led to an unprecedented flight of deposits from Greek banks and renewed concern over the country’s future in the single currency.

“To speak of Greek exit now is profoundly anti-European because it will begin a process of fragmentation in Europe that will actually be very detrimental to Britain, let alone Greece and Europe,” said Varoufakis. “The solution is to agree on a debt sustainability analysis and a fiscal consolidation plan that makes sense, unlike the ones in the past.” Varoufakis said that while there’s convergence between the two sides, the Greek government won’t bow to creditors’ demands for more austerity. “This cycle of debt deflation and insincerity has to end,” he said in the BBC interview. “We are prepared to go all the way down to the wire.”

Good on them.

• Greece To Rehire Cleaners, School Guards Laid Off Under Austerity (Kath.)

Greece’s parliament passed a law on Thursday paving the way for the government to rehire about 4,000 public sector workers who were laid off or earmarked for dismissal under austerity cuts imposed by international creditors. The move made good on a campaign promise by Prime Minister Alexis Tsipras, who rode a wave of public anger against austerity measures to win January elections, and does not explicitly violate the terms of the EU/IMF bailout which allows Greece to hire one public employee for every five who leave. But the plan to rehire school guards, cleaning ladies and civil servants appeared to go against the spirit of the layoff scheme in the bailout, which says the firings were aimed at rejuvenating the public administration by bringing in new, motivated workers and ending the legacy of patronage hiring.

“This is an unorganised, irresponsible settlement of your party’s pre-election pledges,» opposition lawmaker Kyriakos Mitsotakis, the former administrative reforms minister who sacked many of those being rehired, told parliament. The previous government had intended for hirings this year to be focused mainly on the health and education sectors. Tsipras received a jubilant group of about 50 cleaning ladies – who protested against their dismissal outside the finance ministry for months – at his office on Thursday. “Even the Chancellor, in a meeting that we had and without me bringing it up, referred to how unfair what the previous government did to you was,” Tsipras told the group, in an apparent reference to German Chancellor Angela Merkel. “Your fight was known abroad because it was a fair fight.”

An official at the administrative reforms ministry said the reinstatement of the workers would have an annual cost of €33.5 million that was already included in the country’s 2015 budget plan approved with last year. The 3,928 workers to be rehired include 2,100 who were fired outright and another 1,900 in a so-called labour reserve where workers received partial salaries while they waited to see if they would be moved into new jobs. The state was already paying salaries for about 1,000 school guards in the reserve, limiting costs involved in their hiring, the ministry official said. Greece has pledged not to make unilateral actions reversing bailout reforms it opposes while talks with its international lenders continue.

“Syriza ministers and lawmakers believe they have a duty to Greece and Europe to fight, even if the odds are against them.”

• Five Years On, Doctor and Patient Split on Greek Cure (WSJ)

Greece and its creditors, deadlocked over fresh financing, agree on at least one thing about the country’s mammoth bailout, launched five years ago this month: It hasn’t worked as hoped. But Athens and its lenders—the eurozone and the IMF—disagree diametrically on why the bailout program has flopped. This dispute about the past five years helps explain why the players so often seem to be talking past each other today, and why reaching agreement on further aid is proving so hard. Lenders, led by Germany, believe that the bailout’s blueprint was and remains correct, but that Greece failed to follow it. Rapid deficit-cutting was the only way to cure Greece’s debt problem. The rollback of stifling regulation and unaffordable social benefits and an injection of free-market competition were unavoidable if Greece was to grow sustainably.

German leaders such as Finance Minister Wolfgang Schäuble see Greece as the patient that didn’t take its pills, unlike others in the same hospital, such as Portugal and Ireland, who swallowed the same medicine and recovered. To many Greeks, however, the eurozone seems more like the psychiatric ward in the Ken Kesey novel “One Flew Over the Cuckoo’s Nest,” where a domineering “Big Nurse” controls the inmates through punishment and humiliation. In this view, Greece under Syriza is Europe’s Randle McMurphy, the rebel inmate who rattles Big Nurse Merkel’s regimen with constant provocations, encouraging others to stand up for themselves, too. Syriza ministers and lawmakers believe they have a duty to Greece and Europe to fight, even if the odds are against them.

There is little doubt that major economic overhauls were overdue in Greece, and that painful fiscal austerity was unavoidable. Athens had lost control of its budget and nobody was prepared to finance its deficits. But most economists, and some officials on the creditors’ side, say the bailout program always suffered from at least three design flaws. Firstly, the scale and speed of austerity were unique, and proved to be an overdose, many economists say. Greek spending cuts and tax-revenue measures totaled over 30% of gross domestic product in 2010-14, according to Greek and EU data. That 30%-of-GDP austerity effort improved Greece’s primary budget balance, excluding debt interest, but only by 11 percentage points of GDP.

Still, many, like Varoufakis, have returned recently.

• Greece’s Biggest Brain Drain Since The Death Of Socrates (MarketWatch)

Ancient Greece was once a magnet for the world’s intellectual elite. Scholarly work out of Athens contributed to everything from logic and philosophy to the politics that formed the basis of modern civilization. But as the Hellenic Republic struggles to strike an agreement to repay more than €300 billion it owes international creditors, it is also facing the depletion of its most important asset: human capital. A devastating brain drain is luring away the best and brightest of Greece’s workforce, several reports showed, with estimates varying between 180,000 and 200,000 well-educated citizens leaving the cash-strapped nation. At that rate, the exodus translates to about 10% of the country’s total university-educated workforce, said Lois Lambrinidis, a professor of economic geography at the University of Macedonia.

On a macro level, this movement is a clear brain drain, said Nicholas Alexiou, a sociology professor at CUNY’s Queens College who studies Greek immigration patterns. What differentiates a brain drain from other types of migrant waves is the high percentage of skilled and educated people who leave the country, Alexiou said. In other words, Greece is losing its “youngest, best and brightest,” as a European University Institute study dated March 2014 noted. According to the study, of those who have left 88% hold a university degree, and of those, over 60% have a master’s degree, while 11% hold a Ph.D. According to the EUI report, 79% of those who left Greece during the crisis were actually employed but felt that there was “no future” in the country (50%) or no professional opportunities (25%).

It takes time to fight a corruption so deeply entrenched.

• Greek Bank Bailout Fund CEO To Stand Trial, Asked To Resign (Kathimerini)

Greece’s government late Thursday asked the chief executive of its bank bailout fund to resign, after prosecutors ordered her to stand trial for her role in bad loans issued by defunct state lender Hellenic Postbank. Anastasia Sakellariou has been chief executive of the Hellenic Financial Stability Fund (HFSF) since February 2013. She was charged last year with breach of trust for restructuring loans issued by the state lender from 2008 to 2012 and was told to stand trial on Wednesday, according to court officials. Sakellariou’s resignation means the fund is now headless after its chairman, Christos Sclavounis, stepped down in March. The new leftist government of Alexis Tsipras has not yet replaced him.

“(The government) asked Mrs. Sakellariou today to hand in her resignation,” a government official told Reuters, speaking on condition of anonymity. The HFSF, funded from Greece’s €240 billion bailout by the European Union and International Monetary Fund, has recapitalised the country’s banking sector and also used its funds to wind down non-viable lenders. The HFSF has said that, in 2012, Sakellariou was a member of a Hellenic Postbank committee that handled the restructuring of two loans. HFSF has remaining funds of €10.9 billion in European Financial Stability Fund bonds, which were handed over to the European Stability Mechanism.

Brexit, Grexit, bring it on sooner rather than later.

• Greece and Britain Test the Union (Kathimerini)

Two very different countries are challenging the European Union’s cohesion and the outcome of this test will determine the future of the greatest experiment in democracy that the world has known. Britain, a former superpower, once said that the sun never set on its imperial domain, and it is still the EU’s second-largest economy; Greece, which has been plagued by bankruptcies since its independence, is the Union’s most troubled economy. Both present problems that demand a radical shift in the way that the EU has operated over the past decades, in order to protect all that it has achieved.

Whereas Greece’s need for its partners’ support stems from the country’s inability to reform its economy, public administration and political system so as to be a viable competitor in the global economy, Britain is putting similar pressure on the EU’s cohesion in the belief that it has to insulate itself from its partners, to safeguard what it considers its special advantages. The two countries’ political systems and economies are vastly different, as is their geopolitical stature. Greece has been an enthusiastic member of the EU since it joined in 1981 and is part of its inner sanctum, the eurozone. Britain has always been at pains to opt out from too much union, avoiding the euro and abstaining from Greece’s bailout.

During the crisis, Greece has benefited from the support (with painful strings attached) of its partners, while Britain has gained enormously – from money fleeing the European periphery for what is seen as the safe haven of Britain, and from the Bank of England’s independence from the austerity dogma imposed on the rest of the EU. Both Greece and Britain have contributed to the EU in their own unique way, and each one’s relationship with the rest of the Union also shows the great tension at the heart of every association: Even as every member needs the advantages provided by the group, each fears being absorbed by the others, to the extent that it loses its independence, its special characteristics and the freedom to exploit its differences to its own advantage. Greece cannot function without financial support, yet it also cannot accept the loss of independence that this entails.

Britain, which has gained much from being “in and out” of the Union, is in danger of getting too far from the center of gravity. But a total break will leave it on its own, unable to influence EU policy. In the EU the great question today is whether countries can place the common good above their national interest. The Greek elections in January intensified the push and pull between the country and its partners, with results that are still unpredictable. Whatever the outcome of Thursday’s election, Britain, too, will test the limits of membership and the Union’s cohesion. All players should remember two simple facts: Thanks to ever closer union, Europe has enjoyed 70 years of unprecedented peace and prosperity; pulling too hard can break any bond.

“In the first four months of the year, at least 21,745 migrants arrived in Greece by boat, compared with 33,951 in all of 2014..”

• Greece Sees Massive Increase In Refugees Arriving By Boat (Guardian)

The scale of mass migration across the Mediterranean has been revealed by new figures showing that record numbers of migrants are now arriving by boat in Greece as well as Italy. Just four months into the year, the number of arrivals in Greece is already two-thirds as high as last year’s total, highlighting the volume of migration in not just the central Mediterranean, between Libya and Italy, but also at its eastern fringes. Even as the UN security council mulls using military force against smugglers in Libya, the figures suggest migrants are increasingly using other routes to break into Fortress Europe. In the first four months of the year, at least 21,745 migrants arrived in Greece by boat, compared with 33,951 in all of 2014, according to figures from the International Organisation for Migration, and compiled by the Greek coastguard.

The numbers are even higher than estimates released earlier in the year, and show almost as many migrants are arriving in Greece as in Italy. At least 26,228 have reached Italy since the start of 2015, fractionally down on last year’s equivalent level. Aid workers in the Greek islands, where most migrants travelling by sea arrive from Turkey, say the rises are all the more surprising because the peak smuggling season has not yet started. Stathis Kyroussis, head of mission in Greece for Médecins sans Frontières, which provides support to migrants, said: “It’s not just an increase, it’s an explosive increase. It’s already five times up on last year. In one island – the biggest, Kos – last year we had 72 entries in all of April. This year we had 2,110. In Leros last April we had zero. This year we had 900.”

Kyroussis said the increase in arrivals in Greece seemed to have been caused in part by a rise in Syrians making the trip. “There is a higher percentage of Syrians travelling to the Greek islands: last year it was 60%, this year it is 80%,” said Kyroussis. “So part of the increase is a change in the route of the Syrians. Instead of Italy, they’re coming through Greece.” This analysis appears to be corroborated by further IOM statistics, which show that Syrians account for only 8% of arrivals in Italy this year, compared with 25% in 2014. Theories for the rise include the civil war in Libya, which may have put Syrians off travelling there; and the worsening situation in Syria, which has persuaded many Syrian refugees in Turkey that there is no longer point in waiting for Syria’s chaos to be resolved.

“It might not matter so much if what these funds did was socially useful. But it is not.”

• Hedge Funds Aren’t Casino Capitalists. They’re Parasite Capitalists (Ind.)

Adair Turner coined a neat phrase for many of the banking industry’s activities during the financial crisis. In a biting critique he opined that they were “socially useless”. He was right. But it’s not just banking at which his criticism could be aimed. Consider the bastard child of investment banking and asset management: the hedge fund industry. It is a place where a portion of the elite of both have found homes. Multiple homes, in fact, funded by salary packages which make even the dizzying rewards on offer at the height of the big investment banks’ insanity look modest. According to a list published by Institutional Investor’s Alpha magazine, the top 25 collectively gorged upon $11.62bn (£7.6bn) in 2014.

Their bumper paydays came in a year when the industry produced returns averaging in the low single digits, even though the S&P 500 stock market index – the most reliable US benchmark – would have produced nearly 14% in dollar terms had you tracked it. The New York Times reports that just half of the top 10 earners managed to beat it. These massive rewards for mediocre performance were in part due to the industry’s structure: typically managers skim 2% of their investors’ funds every year and 20% of their profits. So when they do well the rewards are staggering. When they do less well the rewards are staggering. Just a bit less staggering.

It might not matter so much if what these funds did was socially useful. But it is not. It is true that some provide a certain Darwinian screening process by attacking under-performing companies and their complacent boards. Elliott Advisors’ assault on Alliance Trust is an example that may ultimately prove to be of benefit to a legion of small investors. However, for every Alliance Trust there is an ABN Amro. Activist funds delivered the Dutch bank to a consortium made up of Royal Bank of Scotland, Fortis and Banco Santander in a transaction which left only the latter unscathed and the taxpayers of three countries to pick up the pieces.

Propaganda.

• The British Press Has Lost It (Politico)

Fasten your seatbelt: it’s going to be a bumpy ride. With the two major parties, Conservative and Labour, neck and neck in the polls; and two new insurrectionary forces, UKIP and the Scottish National Party, set to disrupt the two-and-a-half party system that’s dominated British politics for 40 years, Thursday’s election night is going to be fought constituency by constituency, sometimes recount by recount. There will be unexpected triumphs, unforeseen disasters (“Were you up for the moment when so-and-so lost their seat?”). Only one thing is for sure. This is the election during which Britain’s press ‘lost it.’ The press just haven’t reflected reality, let alone the views of their readers. For months polls have put Conservatives and Labour close with about third of the vote each, and smaller parties destined to hold some balance of power.

But there has been no balance in the papers. Tracked by Election Unspun, the coverage has been unremittingly hostile to Ed Miliband, the Labour challenger, with national newspapers backing the Conservative incumbent, David Cameron over Labour by a ratio of five to one. Veteran US campaign manager David Axelrod finds this politicization of the print media one of the most salient differences with the US. “I’ve worked in aggressive media environments before,” he told POLITICO, “but not this partisan.” Axelrod may have ax to grind as he advises the Labour Party, but even a conservative commentator and long-serving lieutenant of Rupert Murdoch has been shocked. “Tomorrow’s front pages show British press at partisan worst,” Andrew Neil, former editor of the Sunday Times rued. “All pretense of separation between news and opinion gone, even in ‘qualities.’”

And that’s the difference. The whole newspaper industry seems to be affected by the tabloid tendentiousness trade-marked by Murdoch’s best-selling the Sun when it roared, in 1992, “It’s the Sun Wot Won It.” The Daily Mail specializes in political character assassination and the ‘Red Ed’ tag was predictable. But when the paper went on from attacking Miliband’s dead father to a hit-job on his wife’s appearance, the politics of personal destruction sank from gutter to sewer. In this precipitous race to the bottom, perhaps the Daily Telegraph had the steepest fall. Known as a bastion of the Tory thinking, it had long been respected for separating fact from comment. During this election cycle is was caught sourcing its front pages direct from Conservative Campaign HQ, seeming to confirm the parting words of its senior political commentator, Peter Oborne, that it was intent on committing “a fraud on its readership.”

It would be quite something if she refuses to. End of credibility.

• Angela Merkel Under Pressure To Reveal All About US Spying Agreement (Guardian)

Angela Merkel’s reputation as an unassailable chancellor is under threat amid mounting pressure for her to reveal how much she knew about a German-supported US spying operation on European companies and officials. The onus on her government to deliver answers over the spying scandal has only increased with the Austrian government’s announcement that it has filed a legal complaint against an unnamed party over “covert intelligence to the detriment of Austria”. EADS, now Airbus, one of the companies known to have been spied on by the BND – Germany’s foreign intelligence agency – is also taking legal action, saying it will file a complaint with prosecutors in Germany. The BND stands accused of spying on behalf of America’s NSA on European companies such as EADS, as well as the French presidency and the EU commission.

There are also suspicions that German government workers and journalists were spied on. The Social Democrats (SPD), Merkel’s government partners, along with Germany’s federal public prosecutor, Harald Range, are demanding the release of a list of “selectors” – 40,000 search terms used in the spying operations – the results of which were passed on to the NSA. “The list must be published and only then is clarification possible,” said Christine Lambrecht, parliamentary head of the SPD faction. Merkel has so far refused to allow its release. Her spokesman, Steffen Seibert, said she would make a decision on whether or not to do so only “once consultations with the American partners are completed”.

Thomas de Maizière, the interior minister and a close Merkel confidante, is under even more pressure than the chancellor over allegations he lied about what he knew of BND/NSA cooperation. On Wednesday he answered questions on the affair to a parliamentary committee investigating the row, but only in camera and in a bug-proof room. Among other alleged shortcomings over the affair, he stands accused of failing to act when the BND informed him of the espionage activities in 2008 when he was Merkel’s chief of staff. He has repeatedly been portrayed in the tabloid media with a Pinocchio nose.

Responding to journalists during a break in the proceedings, he once again vehemently denied the allegations. “As chief of staff in 2008, I learned nothing about search terms used by the US for the purposes of economic espionage in Germany,” he said. But he acknowledged knowing about American efforts to intensify the intelligence swapping, calling it “problematic cooperation”, and said the requests had been turned down by the BND.

Balance.

• Chinese Warships To Join Russian Navy Drill In Black Sea, Mediterranean (RT)

Two Chinese missile frigates will enter the Russian Black Sea naval base of Novorossiysk for the first time in history. They will then conduct joint exercises with Russia in the Mediterranean. The Linyi and the Weifang will enter the port of Novorossiysk on May 8 to take part in Victory Day celebrations, according to the Russian Defense Ministry. Each is a 4,000-ton vessel of the relatively new Type 054A (also known as Jiangkai II), which first entered service in 2007. They are accompanied by a support ship. This is the first time Chinese warships will have entered the Russian base. The ships will then head to the Mediterranean for joint drills with Russian forces.

“It is planned that the People s Liberation Army Navy warships will leave Novorossiysk on May 12 and relocate to the designated area of the Mediterranean Sea for the Russian-Chinese exercise Sea Cooperation-2015,” the Russian Defense Ministry said in a statement. The exercise will take place from May 11-21. Nine ships are scheduled to take part in total in the first drill of its kind to happen in the Mediterranean. The drills’ goal has been stated as deepening friendly cooperation between China and Russia and strengthening their combat ability in repelling naval threats. The exercise comes at a time when NATO and its allies are holding a massive wave of military drills all across Europe.

Collectively codenamed Operation Atlantic Resolve, NATO commanders and European leaders have said the training sends a message to Russia over its alleged aggression and the crisis in Ukraine. Some states are also conducting their own training maneuvers parallel to Atlantic Resolve. Russia has been conducting a series of military exercises within its territory throughout winter and in early spring, including massive drills in the Baltic Sea, Black Sea, the Arctic and the Far East.

“Third-world bondage” down under.

• Modern Slavery In Australia: Labour Exploitation Rife In Agriculture (RT)

The Australian investigative journalism program “Four Corners” has discovered that Australia’s biggest supermarkets and fast food chains are supplied with food from farms exploiting workers in slave labour-like conditions. According to Four Corners reporters, who used hidden cameras and undercover surveillance to reveal the “third-world bondage,” supermarkets such as Woolworths, Coles, Aldi, IGA and Costco and such fast food outlets as KFC, Red Rooster and Subway are implicated in the exploitative practice. The workers who are being abused are frequently migrants from Asia and Europe. They are being routinely harassed, forced to work and underpaid. Moreover, women workers are often propositioned for sex or asked to perform sexual favours in exchange for visas.

Underpayment for migrant workers gives the farms a competitive advantage over their contestants. Supermarkets prefer cheaper suppliers without paying attention to the labour conditions on their farms. This leads to a paradox: suppliers who play by the rules lose market share to those who don’t, according to ABC TV. For instance, SA Potatoes, one of the largest potato suppliers in Australia, says it has lately lost some of its contracts. “It’s gutting,” said the company’s CEO, Steve Marafioti, “They’re cheating the system…It’s not the correct thing. It’s not the right thing. It’s actually changing the shape of our industry.” Migrants come to Australia on the 417 working holiday visa system which gives them an opportunity to stay in Australia for 12 months and to work up to six months with a single employer.

However, the system is very often used to supply cheap labour in such low-skilled jobs as fruit and vegetable picking. The Four Corners investigation has prompted outrage across Australian society. “We will be known as a country that exploits vulnerable people who are looking for a better chance at life,” labour law and migration expert Joanna Howe told ABC News. She says the 417 visa should replaced with a new low-skilled work visa. “Successive governments, Labor and Liberal, have turned a blind eye to the fact that both international students and working holiday makers are being used as a low-skilled source of labour for farmers and other people across the country,” Howe said. A low-skilled work visa “would allow the whole system to be better regulated,” she added.

More slavery.

• Nepal Quake Victims’ Families Not Allowed To Leave Qatar For Funerals (Ind.)

Tens of thousands of workers on the 2022 football World Cup in Qatar cannot get home to see their families and attend funerals in the wake of last month’s Nepal earthquake. Qatar’s strict worker rules, known as kafala, mean that many of the 400,000 Nepalese workers in the country have their passports taken by employers and find it difficult to get permission to go home. The international campaign group Avaaz has written to Qatari authorities demanding compassionate leave for workers with families affected by the earthquake; it has yet to receive a response.

Sam Barratt, Avaaz’s campaign director, said: “We’re calling for these workers to be granted amnesty to go home. They are working on World Cup related infrastructure projects. Qatar was built with Nepal’s cheap labour; the least they can do is allow them to go home and grieve.” A Nepalese worker in Doha, who asked not to be named, said that his wife and children were now homeless: “My family lives in a village outside Kathmandu. Since the quake I have not been able to contact them… Two of my relatives in Kathmandu have died in the quake. My wife and two little children are sleeping on the road. I am desperate to go back… but I can’t leave because my employer won’t let me go. I can’t leave the job because I have to pay back the loan I had taken to get to Qatar.”

“..the recent modest decrease in the rate of warming has elicited numerous articles and special issues of leading journals.”

• How Climate Science Denial Affects The Scientific Community (PhysOrg)

Climate change denial in public discourse may encourage climate scientists to over-emphasise scientific uncertainty and is also affecting how they themselves speak – and perhaps even think – about their own research, a new study from the University of Bristol, UK argues. Professor Stephan Lewandowsky, from Bristol’s School of Experimental Psychology and the Cabot Institute, and colleagues from Harvard University and three institutions in Australia show how the language used by people who oppose the scientific consensus on climate change has seeped into scientists’ discussion of the alleged recent ‘hiatus’ or ‘pause’ in global warming, and has thereby unwittingly reinforced a misleading message.

The idea that ‘global warming has stopped’ has been promoted in contrarian blogs and media articles for many years, and ultimately the idea of a ‘pause’ or ‘hiatus’ has become ensconced in the scientific literature, including in the latest assessment report of the Intergovernmental Panel on Climate Change (IPCC). Multiple lines of evidence indicate that global warming continues unabated, which implies that talk of a ‘pause’ or ‘hiatus’ is misleading. Recent warming has been slower than the long term trend, but this fluctuation differs little from past fluctuations in warming rate, including past periods of more rapid than average warming. Crucially, on previous occasions when decadal warming was particularly rapid, the scientific community did not give short-term climate variability the attention it has now received, when decadal warming was slower. During earlier rapid warming there was no additional research effort directed at explaining ‘catastrophic’ warming. By contrast, the recent modest decrease in the rate of warming has elicited numerous articles and special issues of leading journals.

This asymmetry in response to fluctuations in the decadal warming trend likely reflects what the study’s authors call the ‘seepage’ of contrarian claims into scientific work. Professor Lewandowsky said: “It seems reasonable to conclude that the pressure of climate contrarians has contributed, at least to some degree, to scientists re-examining their own theory, data and models, even though all of them permit – indeed, expect – changes in the rate of warming over any arbitrarily chosen period.” So why might scientists be affected by contrarian public discourse? The study argues that three recognised psychological mechanisms are at work: ‘stereotype threat’, ‘pluralistic ignorance’ and the ‘third-person effect’.