selloff Archives - Page 2 of 2 - The Automatic Earth

Mary Callahan Erdoes, one of JPMorgan Chase’s most senior executives, summed up her industry’s mood like this: “There is no excitement,” she told throngs of bankers gathered in Washington. “There is a lot of handwringing.” Again and again, speakers at the Institute of International Finance’s three-day meeting in Washington, which wrapped up Saturday, bemoaned the inability of central banks to rev up economic growth, as well as the drag of tougher regulations and the looming impact of Brexit. Concerns over Deutsche Bank’s mounting legal costs deepened the gloom. Slow growth is leaving companies little reason to expand, fueling the public’s frustration and giving rise to extreme political views and nationalism, said Erdoes, 49, who runs JPMorgan’s asset-management operations.

Low interest rates – instead of better fiscal stimulus – are taking a toll on the entire system, she said. “We had a very smart economist at JPMorgan ask me the following question: How do you have capitalism without any cost of capital? And therein lies the problem.” [..] Goldman Sachs President Gary Cohn called the world’s central banks an “ineffective cartel,” as actions in Europe and Japan lead to negative rates and hamstring other policy makers. The outlook for low growth is long-term, he said. “I don’t see this changing,” Cohn said Friday. “We keep saying we’re getting closer to the end, but I don’t think we’re getting closer to the end.”

I’m not sure how one writes an article like this and completely fails to mention that for millions of Americans, it’s not a matter of bad saving habits, but of spending everything on the basics.

• 7 in 10 Americans Have Less Than $1,000 In Savings (MF)

The U.S. is often referred to as the land of economic opportunity. Apparently, it’s also the land of consumption and “spend everything you’ve got.” We don’t have to look far for confirmation that Americans are generally poor savers. Every month the St. Louis Federal Reserve releases data on personal household savings rates. In July 2016, the personal savings rate was just 5.7%. Comparatively, personal savings rates in the U.S. 50 years ago were double where they are today, and nearly all developed countries have a higher personal savings rate than the United States. In other words, Americans are saving less of their income than they should be — the recommendation is to save between 10% and 15% of your annual income — and they’re being forced to do more with less in terms of investing.

However, new data emerged this week from personal-finance news website GoBankingRates that shows just how dire Americans’ savings habits really are. Last year, GoBankingRates surveyed more than 5,000 Americans only to uncover that 62% of them had less than $1,000 in savings. Last month GoBankingRates again posed the question to Americans of how much they had in their savings account, only this time it asked 7,052 people. The result? Nearly seven in 10 Americans (69%) had less than $1,000 in their savings account. Breaking the survey data down a bit further, we find that 34% of Americans don’t have a dime in their savings account, while another 35% have less than $1,000. Of the remaining survey-takers, 11% have between $1,000 and $4,999, 4% have between $5,000 and $9,999, and 15% have more than $10,000.

Furthermore, even though lower-income adults struggle with saving money more than middle- and upper-income folks, no income group did particularly well. Some 29% of adults earning more than $150,000 a year, and 44% making between $100,000 and $149,999, had less than $1,000 in savings. Comparatively, 73% of the lowest income adults (those earnings $24,999 or less annually) had less than $1,000 in their savings account. There was even minimal difference between multiple generations of Americans. From seniors aged 65 and up to young millennials aged 18 to 24, between 62% and 72% of Americans had less than $1,000 in a savings account.

Great little piece by Wolf Richter.

• After Becoming Debt Slaves, Millennials Get Blamed for Lousy Economy (WS)

Over the past few days, the Diamond Producers Association launched its first new ad campaign in five years after watching retail sales of diamond jewelry slow down, as Millennials built on the habit pioneered by prior generations of delaying or not even thinking about marriage, and thus not being sufficiently enthusiastic about buying diamond engagement rings. The campaign, according to Adweek, is designed to motivate Millennials “to commemorate their ‘real,’ honest relationships with diamonds, even if marriage isn’t part of the equation.” Mother New York, the agency behind the campaign, spent months interviewing millennials, according to Quartz, and learned that they associated diamonds with a “fairytale love story that wasn’t relevant to them.”

So the premium jewelry industry, seeing future profits at risk, needs to do something about that. A year ago, it was Wall Street – specifically Goldman Sachs – that did a lot of hand-wringing about millennials. “They don’t trust the stock market,” Goldman Sachs determined in a survey. Only 18% thought that the stock market was “the best way to save for the future.” It’s a big deal for Wall Street because millennials are now the largest US generation. There are 75 million of them. They’re supposed to be the future source of big bonuses. Wall Street needs to figure out how to get to their money. The older ones have seen the market soar, collapse, re-soar, re-collapse, re-soar…. They’ve seen the Fed’s gyrations to re-inflate stocks. They grew up with scandals and manipulations, high-frequency trading, dark pools, and spoofing.

They’ve seen hard-working people get wiped out and wealthy people get bailed out. Maybe they’d rather not mess with that infernal machine. And today, the Los Angeles Times added more fuel. “They’re known for bouncing around jobs, delaying marriage, and holing up in their parents’ basements,” it mused. Everyone wants to know why millennials don’t follow the script. Brick-and-mortar retailers have been complaining about them for years, with increasing intensity, and a slew of specialty chains have gone bankrupt, a true fiasco for the industry, even as online retailers are laughing all the way to the bank. “For starters, millennials are not big spenders, at least not in the traditional sense,” the Times said. Yet most of them spend every dime they earn, those that have decent jobs. But much of that spending goes toward their student-loan burden and housing.

Trying to fit human behavior into triangles.

• S&P 500 Triangle Chart Pattern ‘Warns Of A Big Selloff’ (MW)

The S&P 500 is moving fast toward an impending breakout that could be bad news for investors. “And it’s gonna be big, by all accounts,” said Carter Braxton Worth, a technical analyst at research firm Cornerstone Macro. The S&P 500 has been trading within a “symmetrical triangle” on a number of time scales, as the index traced out a pattern of rising lows and falling highs. Since the upper and lower boundary lines are narrowing to a point, it’s just a matter of time before the S&P 500 breaks above or below one of them. “It is a circumstance where buyers and sellers are matched off so evenly that purchases being made by those who like a particular security are in the same order of magnitude as the selling being done by those who dislike the security,” Worth wrote in a note to clients.

His research suggests that the resolution of these standoffs is usually “aggressive,” with the index moving past the declining or rising trendlines “in a meaningful way.” Many technicians believe triangles represent continuation patterns, or periods of pause in a bigger trend, which means they should eventually be resolved in the direction of the preceding trend. In the S&P 500’s case, that would mean a big rally is coming. But Worth said that based on his interpretation of the charts, the S&P 500’s triangle looks more like a reversal pattern. “We believe the current formation is a setup for a move lower,” Worth said.

Hoping that just this once it’s different.

• The Bank of Mom and Dad is Australia’s Fastest-Growing Housing Lender (BBG)

Beset by lending curbs and bubble-esque prices, first-time home buyers in Australia are turning to a rapidly growing source of finance: The Bank of Mom and Dad. More parents are taking advantage of record-low interest rates to refinance their properties and help their grown-up kids onto the housing ladder amid sky-rocketing house values. Digital Finance Analytics estimates the number of Aussies getting help from their parents has soared to more than half of first-home buyers from just 3% six years ago. Australia’s housing rally has favored baby-boomers and locked out youth, compounding an inter-generational shift of wealth.

As the number of bank loans to first-time buyers dwindles, the average slice of cash handed to them by parents has almost quadrupled in the past six years, DFA says. The downside: a market that the Reserve Bank of Australia is already wary of may get further inflated. First-time buyers are “being infected by the notion that property is about wealth building, rather than somewhere to live,” said Martin North, Principal at DFA. That “may be tested if interest rates rise later, or property prices fall from their current illogical stratospheric levels.” [..] The boom is turning some homes into cash dispensers. More than two thirds of owners that refinanced houses worth more than A$750,000 did so to extract capital for reasons including helping their kids. Near the start of 2010, the average helping hand from parents was about A$23,000; today, it’s more than A$80,000.

“..they don’t have a strong willingness to hold the yuan due to depreciation expectations..” Does that rhyme with the SDR basket thing?

• Goldman Warns China’s Outflows May Be Worse Than They Look (BBG)

China’s currency outflows may be bigger than they look, with Goldman Sachs warning that a rising amount of capital is exiting the country in yuan rather than in dollars. While the nation’s foreign-exchange reserves have stabilized and lenders’ net foreign-exchange purchases for clients have fallen close to a one-year low, official data show that $27.7 billion in yuan payments left China in August. That’s compared with a monthly average of $4.4 billion in the five years through 2014. Such large cross-border moves can’t be explained by market-driven factors and need to be taken into account when measuring currency outflows, according to MK Tang, Hong Kong-based senior China economist at Goldman Sachs.

Any sign of increased capital outflows could disturb a recent calm in China’s foreign-exchange market, adding to pressure from a potential Federal Reserve interest-rate increase and denting the yuan’s image as the world’s newest global reserve currency. The yuan fell to a six-year low on Monday, adding to outflow pressures. “There is some window guidance from the central bank that limits companies’ dollar conversion onshore, so they need to move the money overseas in yuan,” said Harrison Hu, chief Greater China economist at RBS in Singapore. “But they don’t have a strong willingness to hold the yuan due to depreciation expectations, so they sell it to offshore banks. This pressures the offshore yuan’s exchange rate.”

[..] Goldman Sachs started including yuan funds in its analysis of outflows in July, after noting that cross-border movement of the currency masked actual pressures. The bank estimates that 56% and 87% of outflows took place through the offshore yuan market in July and August, respectively.

Do read the whole thing for a good history lesson.

• ‘Why Do They Hate Us So?’-A Western Scholar’s Reply to a Russian Student (SC)

In 2000 when Putin was elected president, he publically promoted security and economic cooperation with Europe and the United States. After 9/11, he offered real assistance to Washington. The United States accepted the Russian help, but continued its anti-Russian policies. Putin extended his hand to the west, but on the basis of five kopeks for five kopeks. This was a Soviet policy of the interwar years. It did not work then and it does not work now. In 2007 Putin spoke frankly at the Munich conference on Security Policy about overbearing US behaviour. The “colour revolutions” in Georgia and the Ukraine, for example, and the Anglo-American war of aggression against Iraq raised Russian concerns. US government officials did not appreciate Putin’s truth-telling which went against their standard narrative about «exceptionalist» America and altruistic foreign policies to promote «democracy».

Then in 2008 came the Georgian attack on South Ossetia and the successful Russian riposte which crushed the Georgian army. It’s been all down-hill since then. Libya, Syria, Ukraine, Yemen are all victims of US aggression or that of its vassals. The United States engineered and bankrolled a fascist coup d’état in Kiev and has attempted to do the same in Syria reverting to their “Afghan policy” of bankrolling, supplying and supporting a Wahhabi proxy war of aggression against Syria. Backing fascists on the one hand and Islamist terrorists on the other, the United States has plumbed the depths of malevolence. President Putin and Russian foreign minister Sergei Lavrov have made important concessions, to persuade the US government to avert catastrophe in the Middle East and Europe.

To no avail, five kopeks for five kopeks is not an offer the United States understands. Assymetrical advantages is what Washington expects. One cannot reproach the Russian government for trying to negotiate with the United States, but this policy has not worked in the Ukraine or Syria. Russian support of the legitimate government in Damascus has exposed the US-led war of aggression and exposed its strategy of supporting Al-Qaeda, Daesh, and their various Wahhabi iterations against the Syrian government. US Russophobia is redoubled by Putin’s exposure of American support for Islamist fundamentalists and by Russia’s successful, up to now, thwarting of US aggression. Who does Putin think he is? From my observations, I would reply that President Putin is a plain-spoken Russian statesman, with the support of the Russian people behind him.

For five kopeks against five kopeks, he will work with the United States and its vassals, no matter how malevolent they have been, if they adopt less destructive policies. Unfortunately, recent events suggest that the United States has no intention of doing so. After one hundred years of almost uninterrupted western hostility, no one should be under any illusions. So then, the question is “Why do they hate us so?” Because President Putin wants to build a strong, prosperous, independent Russian state in a multi-polar world. Because the Russian people cannot be bullied and will defend their country tenaciously. “Go tell all in foreign lands that Russia lives!» Prince Aleksandr Nevskii declared in the 13th century: «Those who come to us in peace will be welcome as a guest. But those who come to us sword in hand will die by the sword! On that Russia stands and forever will we stand!”

Yeah, Daniel Hannan has lots of stuff wrong with him. But Britain must have this conversation regardless of that. I picked this piece up on Twitter, with this accompanying comment: “No aspect of Brexit is Remain voters’ fault in any way, or to any extent at all.” I don’t know if that was meant sarcastically, but I would certainly hope so. Without that conversation things can only get worse. Remainers must try harder to understand why Brexit happened. If nothing else, I would think they’re at least ‘guilty’ of not seeing it coming. And perhaps also of seeing Brexit as the problem, not a mere symptom.

• Remainers, Brexit, Racism and a Self-Fulfilling Prophecy (Hannan)

Shortly after the EU referendum, several thousand young people marched through London demanding a rerun. I happened to be sitting next to three of them on a train as I travelled into the capital that morning. They evidently recognised me right away as an Evil Tory Leaver, but we were past Clapham Junction before one of them plucked up the courage to talk to me. “Are you Daniel Hannan? I just wanted to say that what you’ve done is terrible. We’re not a racist country. You’ve taken away our future.” “Is that so? Out of interest, can you tell me who the President of the European Commission is?” “No. What’s that got to do with it?” “Can you name a single European Commissioner, come to that? Do you know what our budget contribution will be this year? Or what the difference is between a Directive and a Regulation?”

She was affronted by the questions. So were her two friends with their “I [heart] EU” placards. They weren’t interested in details. For them, it was about values. Are you a decent, internationalist, compassionate person? Or are you a selfish bigot? Let’s leave aside the fact that no one would ever vote on any ballot paper for a “selfish bigot” option. Their determination to approach the issue in terms of character, rather than cost-benefit, explains why they were so upset – and why, even now, some Remain voters struggle to accept the outcome. In my experience, the 48% who voted Remain fall into two categories. There are those who were making a judgement as to where Britain’s best options lay. They could see that the is EU flawed.

They were well aware of the corruption, the lack of democracy, the slow growth. But they took the view that, on balance, the disruption of leaving would outweigh the gains. These people, by and large, now want to make a success of things, and are keen to maximise our opportunities. Then there were those like my companions on South West Trains, for whom the issue was not financial but somehow moral. For them, the EU wasn’t the grubby and self-interested body that exists in reality; rather, it was a symbol of something better and purer, an embodiment of the dream of peace among nations. They never heard, because they never wanted to hear, the democratic or economic arguments against membership. As far as they were concerned, the only possible reason for voting Leave was chauvinism.

“Euro Area Looks to Help on Debt” sounds like the epitomy of cynicism. The Eurogroup withheld €1.7 billion, to Greece’s surprise, because it wanted to assess A) whether a June payment was fully used to pay off third parties, and B) whether the government had squeezed its people enough (reforms). The delay is convenient for Brussels because it also delays debt restructuring talks once again, for the umpteenth time. And without those talks, the IMF won’t commit. Rinse and repeat.

• Greece Gets Fresh Loan Payout as Euro Area Looks to Help on Debt (BBG)

The euro area authorized a €1.1 billion payment to Greece and signaled a further €1.7 billion would follow this month, saying the region’s most indebted nation has made progress in overhauling its economy. The green light, given by euro-area finance ministers on Monday in Luxembourg, removes a hurdle on Greece’s path to debt relief on which Prime Minister Alexis Tsipras has staked part of his political future. The country had to fulfill 15 conditions on matters such as selling state assets and improving bank governance to get the first payout.

It “was unanimously decided that Greece had completed the 15 milestones, so we can proceed to the €1.1 billion disbursement,” Greek Finance Minister Euclid Tsakalotos told reporters after the meeting, saying the talks produced a “very good” outcome for his country. The delay in getting an endorsement for the remaining sum, which is tied to the clearing of arrears, is merely “technical,” he said. Greece, in its third bailout since 2010, is struggling to right an economy that is poised to undergo its eighth annual contraction in the past nine years. A second review of the country’s rescue program will pave the way for a possible restructuring of Greece’s debt, which the IMF says is a necessary condition for its future involvement.

This feels like a military coup, a chapter straight out of the Shock Doctrine. Stocks go up because people’s lives go down.

Glenn Greenwald on Twitter: “Brazil’s lower House- in the face of negative growth- just voted to amend the Constitution to ban spending increases for 20 years..” “This extreme austerity in Brazil – enabled by impeachment- is being imposed in world’s 7th largest economy, 5th most populous country (200m). ”

Nomi Prins on Twitter: “Brazil’s coup was about advancing western speculative market access & squashing domestic population needs – for decades…bastards.”

• Brazil Votes To Amend Constitution, Ban Spending Increases For 20 Years (BBG)

The Ibovespa rose to a two-year high and the real gained as commodities advanced and as expectations mounted that lawmakers will approve a bill to cap spending, a key measure in President Michel Temer’s plan to trim a budget deficit and rebuild confidence in Brazil. The benchmark equity index rose 0.9% and the currency climbed 0.5% Monday in Sao Paulo. [..] Brazilian stocks have gained 75% in dollar terms this year and the real has strengthened 24%, the best performances in the world, on bets that a new government would be able to pull the country out of its worst recession in a century.

Temer, who formally replaced impeached former President Dilma Rousseff in August, said the administration should have enough votes to drive through a budget bill Monday that’s seen as a vital first step toward his economic reforms. The proposal to amend the Constitution to set limits on government spending for as long as 20 years must be approved by at least three-fifths of both chambers of Congress. “The market is very optimistic over this legislation,” said Paulo Figueiredo, an economist at FN Capital in Petropolis, Brazil. “New bets on local assets depend a lot on the signals that will come from this vote.”

Bubble?!

• Global Clean Energy Investment Dropped 43% in Worst Quarter Since 2013 (BBG)

Global investment in clean energy fell to the lowest in more than three years as demand for new renewable energy sources slumped in China, Japan and Europe. Third-quarter spending was $42.4 billion, down 43% from the same period last year and the lowest since the $41.8 billion reported in the first quarter of 2013, Bloomberg New Energy Finance said in a report Monday. Financing for large solar and wind energy plants sank as governments cut incentives for clean energy and costs declined, said Michael Liebreich at the London-based research company. Total investment for this year is on track to be “well below” last year’s record of $348.5 billion, according to New Energy Finance.

The third-quarter numbers “are worryingly low even compared to the subdued trend we saw” in the first two quarters, Liebreich said in a statement. “Key markets such as China and Japan are pausing for a deep breath.” Part of the reason for the steep decline in the quarter was a slowdown following strong spending in the first half of the year on offshore wind. Investors poured $20.1 billion into European offshore wind farms in the first and second quarters, “a runaway record,” according to Abraham Louw, an analyst for energy economics with New Energy Finance. That was followed by a “summer lull,” with $2.4 billion in spending in the third quarter.

So much for that.

• Russia’s Rosneft Boss Sechin Says No To OPEC Oil Cut/Freeze (R.)

Igor Sechin, Russia’s most influential oil executive and the head of Kremlin energy champion Rosneft, said his company will not cut or freeze oil production as part of a possible agreement with OPEC. His comments underline how difficult it is for Russia to get its oil companies to freeze or cut output as part of a potential deal with OPEC designed to support oil prices. President Vladimir Putin told an energy congress on Monday that Russia was ready to join the proposed OPEC cap, but did not provide any details. “Why should we do it?” Sechin, known for his anti-OPEC position, told Reuters in Istanbul on Monday evening, when asked if Rosneft, which accounts for 40% of Russia’s total crude oil output, might cap its own output.

Sechin said he doubted that some OPEC countries, such as Iran, Saudi Arabia and Venezuela would cut their output either, saying that an increase in oil prices above $50 per barrel would make shale oil projects in the United States profitable. There have been several attempts in the past for Russia and OPEC to join forces to stabilize oil markets. Those efforts have never come to pass however. Oil prices surged on Monday after Putin’s comments amid hopes that a two-year price slide could be halted.

Uglee!!!

• Britain’s Nuclear Cover-Up (NYT)

Last month, the British government signed off on what might be the most controversial and least promising plan for a nuclear power station in a generation. Why did it do this? Because the project isn’t just about energy: It’s also a stealth initiative to bolster Britain’s nuclear deterrent. For years, the British government has been promoting a plan to build two so-called European Pressurized Reactors (EPR) at Hinkley Point C, in southwest England. It estimates that the facility will produce about 7% of the nation’s total electricity from 2025, the year it is expected to be completed. The EPR’s designer, Areva, claims that the reactor is reliable, efficient and so safe that it could withstand a collision with an airliner.

But the project is staggeringly expensive: It will cost more than $22 billion to build and bring online. And it isn’t clear that the EPR technology is viable. No working version of the reactor exists. The two EPR projects that are furthest along — one in Finland, the other in France — are many years behind schedule, have hemorrhaged billions of dollars and are beset by major safety issues. The first casting of certain components for the Hinkley Point C reactors left serious metallurgical flaws in the pressure vessel that holds the reactor core. In 2014, the Cambridge University nuclear engineer Tony Roulstone declared the EPR design “unconstructable.”

The lead builder of the EPR, the French utility company Electricité de France, faced a mutiny this year: Its unions fought the Hinkley Point project, fearing it might bring down the company. E.D.F.’s chief financial officer has resigned, arguing that it would put too much strain on the company’s balance sheet. But the British government continues to act as though it wants the Hinkley project to proceed at almost any price. In return for covering about one-third of the costs, the Chinese state-run company China General Nuclear Power Corporation will take about one-third ownership in the project. (A subsidiary of E.D.F. owns the rest.) The British government has also provisionally agreed to let China build a yet-untested Chinese-designed reactor in Bradwell-on-Sea, northeast of London, later.

[..] The British government has [..] guaranteed that investors in the Hinkley project will get $115 per megawatt-hour over 35 years. This is approximately twice the price of electricity today [..]. If the market price of electricity falls below that rate, a government company is contractually bound to cover the difference — with the extra cost passed on to consumers. Price forecasts have dropped since the deal was struck: This summer the government, revising estimates, said differential payments owed under the contract could reach nearly $37 billion. If the Hinkley plan seems outrageous, that’s because it only makes sense if one considers its connection to Britain’s military projects — especially Trident, a roving fleet of armed nuclear submarines, which is outdated and needs upgrading.

Debt Rattle April 18 2016

Apr 182016

April 18, 2016 Posted by Raúl Ilargi Meijer at 9:40 am Finance Tagged with: Brazil, Brexit, China, debt, default, Doha, earthquake, EM, freeze, oil, OPEC, selloff 2 Responses »

DPC Coaches at Holland House Hotel on Fifth Avenue, NY 1905

• Oil Prices Plunge After Doha Output Talks Fail (AFP)

• Oil Producers Get Worst Possible Outcome, Destroy Remaining Credibility (R.)

• Failure To Reach Oil Output Deal Sparks Selloff Across Emerging Markets (BBG)

• Loonie, Aussie Drop After Doha Failure; Yen Near 1 1/2-Year High (BBG)

• The Bad Smell Hovering Over The Global Economy (G.)

• Untried, Untested, Ready: Remedies for the Global Economy (BBG Ed.)

• China’s QoQ and YoY GDP Data Don’t Add Up (BBG)

• Is China Ready To Let More State-Owned Enterprises Default? (BBG)

• China Makes Plans for 1.8 Million Workers Facing Unemployment (WSJ)

• The Trucker’s Nightmare That Could Flatten Europe’s Economy (BBG)

• George Osborne: Brexit Would Leave UK ‘Permanently Poorer’ (G.)

• Brazilian Congress Votes To Impeach President Dilma Rousseff (G.)

• Australia’s Debt Dilemma Raises Downgrade Fears (BBG)

• Peter Schiff: ‘Trump’s Right, America Is Broke’ (ZH)

• Make America Solvent Again (Jim Grant)

• Is Capitalism Entering A New Era? (Kaletsky)

• Fears Of ‘The Big One’ As 7 Major Earthquakes Strike Pacific In 96 Hours (E.)

A curious piece of two-bit theater. It failed before it started. Why do it then? The west trying to pit Saudi vs Iran/Russia?

• Oil Prices Plunge After Doha Output Talks Fail (AFP)

Oil prices plunged on Monday after the world’s top producers failed to reach an agreement on capping output aimed at easing a global supply glut during a meeting in Doha. Hopes the world’s main producer cartel, OPEC, and other major exporters like Russia would agree to freeze output has helped scrape oil prices off the 13-year lows they touched in February. But crude tanked after top producer Saudi Arabia walked away from the talks, which many hoped would ease a huge surplus in world supplies, because of a boycott by its rival Iran. Oil tumbled in early Asian trade after the collapse of Sunday’s talks, with prices dropping as much as seven% in opening deals.

At around 0100 GMT, US benchmark West Texas Intermediate for May delivery was down $2.11, or 5.23%, from Friday’s close at $38.25 a barrel. Global benchmark Brent crude for June lost 4.71%, or $2.03, to $41.07. “Despite many of the 18 oil producers believing the meeting in Doha was merely a rubber stamp affair for an oil production freeze, Saudi Arabia managed to throw a spanner in the works,” said Angus Nicholson at IG Markets. “With Saudi Arabia fighting proxy wars with Iran in Yemen and Syria/Iraq, it is understandable that they had little inclination to freeze their own production and make way for newly sanctions-free Iran to increase their market share.”

It’s impossible for a reporter to see that no output freeze was ever in the works, simply because no producer can afford a freeze.

• Oil Producers Get Worst Possible Outcome, Destroy Remaining Credibility (R.)

It was the worst possible outcome for oil producers at their weekend meeting in Doha, with their failure to reach even a weak agreement showing very publicly their divisions and inability to act in their own interests. Expectations for the meeting had been modest at best, with sources in the producer group predicting an agreement to freeze output. But even this meagre hope was dashed by Saudi Arabia’s insistence Iran join any deal, something the newly sanctions-free Islamic republic wouldn’t countenance. From a producer point of view, an agreement including Iran that shifted market perceptions on the amount of oil supply available would have been the best outcome.

The acceptable result would have been an agreement that froze production at already near record levels, with an accord that Iran would join in once it had reached its pre-sanctions level of exports. What was delivered instead was confirmation that the Saudis are prepared to take more pain in order not to deliver their regional rivals Iran any windfall gains from higher prices and exports. The meeting in Qatar on Sunday effectively pushed a reset button on the crude markets, putting the situation back to where the market was before hopes of producer discipline were first raised. What happens now is that the market will have to continue along its previous path of re-balancing, without any assistance from the OPEC or erstwhile ally Russia. Brent crude fell nearly 7% in early trade in Asia on Monday, before partly recovering to be down around 4%.

The potential is for crude to fall further in coming sessions as long positions built up in the expectation of some sort of producer agreement are liquidated in the face of the reality of no deal. It’s likely that recriminations will follow for some time among the oil producers, with the Russians and Venezuelans said to be annoyed at what they see as the Saudi scuppering of a deal that had almost been locked in. This will make it harder for any future agreement, with the OPEC meeting on June 2 the next chance for the grouping to reach some sort of agreement. For the time being, OPEC’s credibility is shot, and won’t be restored by even a future agreement as it will take actual, verifiable action to convince a now sceptical market. However, as the events in Doha showed, the Saudis are unlikely to agree to anything in the absence of Iranian participation, and that is also equally unlikely.

Naturally. Sell-off is waning already, by the way. But the trend is clear.

• Failure To Reach Oil Output Deal Sparks Selloff Across Emerging Markets (BBG)

The failure by the world’s biggest oil producers to agree on an output freeze spurred a selloff across emerging markets, with stocks halting a seven-day rally as Brent crude plunged as much as 7%. The ringgit led declines in developing-nation currencies as the disappointment stemming from the weekend meeting in Doha disrupted a recovery in commodity prices, putting pressure on Malaysian finances as a net oil exporter. Hopes an agreement would be reached had pushed Brent above $44 a barrel for the first time since December and spurred gains across asset classes in recent days. It’s now headed back toward $41 as the discussions to address a global oil glut stalled after Saudi Arabia and other Gulf nations wouldn’t commit to any deal unless all OPEC members joined, including Iran.

“We have seen a high correlation between oil, commodity prices and emerging assets this year and we have seen a strong run up, so the latest development on the failure to agree on an oil output freeze should spark profit-taking among investors,” said Miles Remington, head of equities at BNP Paribas Securities Indonesia. Energy-related companies fell the most among the 10 industry groups of the MSCI Emerging Markets Index, which dropped 0.7% and retreated from last week’s highest level since November. While that was the biggest decline since April 5, the energy component slid 1.4% and industrial stocks 1%.

Japan can’t keep this up much longer.

• Loonie, Aussie Drop After Doha Failure; Yen Near 1 1/2-Year High (BBG)

The Canadian and Australian dollars dropped as crude tumbled after oil-producing nations failed to reach an accord to freeze output. The yen, used by investors as a haven, rose toward a 17-month high. The currencies of Australia, Canada, Malaysia and Norway all retreated at least 0.7% after negotiations in Doha ended without an agreement from OPEC and other oil producers to freeze supplies. Foreign-exchange traders sought the safety of Japan’s currency as the diplomatic failure threatens to send crude back toward the more than 13-year lows reached in February. World leaders at the end of last week signaled opposition to any efforts from Japan to directly halt the yen’s 11% climb this year.

“Lack of agreement from Doha has hit commodity currencies lower,” said Robert Rennie at Westpac Banking in Sydney. “The prospects of another near-term round of talks appear limited ahead of the June OPEC meeting.” The Aussie dropped 0.8% to 76.65 U.S. cents as of 7:01 a.m. London time, set for the largest decline since April 7. Canada’s loonie tumbled 1.1% to C$1.2962 against the greenback. Crude is the nation’s second-largest export. Malaysia’s ringgit slid 0.8% to 3.9348 per dollar. Oil futures fell as much as 6.8%, the biggest intraday drop since Feb. 1. “The oil price will reset lower and could even retest $30 over the next three months,”said James Purcell at UBS’s wealth-management business in Hong Kong.

“Short term, that will dampen enthusiasm for risk assets. However, markets are being slightly myopic. Economic data have improved in both China and the U.S. of late.” The lack of agreement at Doha highlights the deep divisions between OPEC members, and importantly, within Saudi Arabia, Westpac’s Rennie said. The Aussie should hold support from about 75.75 cents to 76 cents at least through the next day or so, he said. The yen jumped 0.7% to 107.96 per dollar, and touched 107.77. It reached 107.63 on April 11, the strongest since October 2014. Hedge funds and other large speculators pushed wagers on yen strength to a record last week as Japanese authorities appeared reluctant to intervene to reverse the strengthening currency.

Price discovery is the economy’s biggest enemy.

• The Bad Smell Hovering Over The Global Economy (G.)

All is calm. All is still. Share prices are going up. Oil prices are rising. China has stabilised. The eurozone is over the worst. After a panicky start to 2016, investors have decided that things aren’t so bad after all. Put your ear to the ground though, and it is possible to hear the blades whirring. Far away, preparations are being made for helicopter drops of money onto the global economy. With due honour to one of Humphrey Bogart’s many great lines from Casablanca: “Maybe not today, maybe not tomorrow but soon.” But isn’t it true that action by Beijing has boosted activity in China, helping to push oil prices back above $40 a barrel? Has Mario Draghi not announced a fresh stimulus package from the European Central Bank designed to remove the threat of deflation? Are hundreds of thousands of jobs not being created in the US each month?

In each case, the answer is yes. China’s economy appears to have bottomed out. Fears of a $20 oil price have receded. Prices have stopped falling in the eurozone. Employment growth has continued in the US. The International Monetary Fund is forecasting growth in the global economy of just over 3% this year – nothing spectacular, but not a disaster either. Don’t be fooled. China’s growth is the result of a surge in investment and the strongest credit growth in almost two years. There has been a return to a model that burdened the country with excess manufacturing capacity, a property bubble and a rising number of non-performing loans. The economy has been stabilised, but at a cost. The upward trend in oil prices also looks brittle. The fundamentals of the market – supply continues to exceed demand – have not changed.

Then there’s the US. Here there are two problems – one glaringly apparent, the other lurking in the shadows. The overt weakness is that real incomes continue to be squeezed, despite the fall in unemployment. Americans are finding that wages are barely keeping pace with prices, and that the amount left over for discretionary spending is being eaten into by higher rents and medical bills. For a while, consumer spending was kept going because rock-bottom interest rates allowed auto dealers to offer tempting terms to those of limited means wanting to buy a new car or truck. In an echo of the subprime real estate crisis, vehicle sales are now falling. The hidden problem has been highlighted by Andrew Lapthorne of the French bank Société Générale. Companies have exploited the Federal Reserve’s low interest-rate regime to load up on debt they don’t actually need.

“The proceeds of this debt raising are then largely reinvested back into the equity market via M&A or share buybacks in an attempt to boost share prices in the absence of actual demand,” Lapthorne says. “The effect on US non-financial balance sheets is now starting to look devastating.” He adds that the trigger for a US corporate debt crisis would be falling share prices, something that might easily be caused by the Fed increasing interest rates.

BBG senior editor David Shipley displays the general fallacy: all that’s there are desperate attempts to go back to something that once was, only in a more centralized fashion. But there’s no going back.

• Untried, Untested, Ready: Remedies for the Global Economy (BBG Ed.)

The deeper the slump, economists used to say, the stronger the recovery. They don’t say that anymore. The effects of the crash of 2008 still reverberate, with the latest forecasts for global growth even more dismal than the last. The persistently stagnant world economy is more than just a rebuke to economic theory, of course; it exacts a human toll. And while politicians and central bankers – or economists, for that matter – can’t be faulted for their creativity, their remedies might have more impact if they were bolder and better-coordinated. By ordinary standards, to be sure, governments haven’t been timid. Without fiscal stimulus and aggressive monetary easing in the U.S. and other countries, things would look even worse. And yet, worldwide output is predicted to rise only 3.2% this year, falling still further below the pre-crash trend.

Simply doubling down on current strategies is unlikely to work. Large-scale bond-buying, or so-called quantitative easing, has run into diminishing returns. Negative interest rates, where they’ve been tried, haven’t revived lending, and central banks are unable or unwilling to cut further. What about new fiscal stimulus? Where possible, that would be good – but it’s hardest to do in the very countries that need it most, because that’s where public debt is already dangerously high. True, as the IMF’s new fiscal report says, almost all countries could become more growth-friendly by combining measures to curb public spending in the longer term (for instance, raising the retirement age) with steps to increase demand in the short term (cutting payroll taxes, raising employment subsidies and building infrastructure).

Getting fiscal policy right country by country would surely help – yet probably wouldn’t be enough: No single country can adequately deal with a global shortfall of demand. A finance ministry for the world isn’t happening any time soon. Still, it’s a pity that governments aren’t trying harder to coordinate their fiscal policies more intelligently, or indeed at all. The global slump persists partly because of international spillovers. Better coordination would take these into account: Countries that could safely deploy fiscal stimulus would give some weight to global as well as national conditions, and fiscal policy would be formed interactively. Even within the EU, where you’d expect economic coordination to be the norm, and where the single currency makes it essential, there’s no sign of it.

At the global level, in forums such as the IMF, you might expect the U.S. to take the lead in any such effort. So it should – but it will need to mend its shattered policy-making machinery first. If Washington can’t come to a decision on its own on taxes or spending, the question of coordination doesn’t arise. The last resort, if the slump goes on and governments can’t coordinate better, might be to combine monetary and fiscal policy in a hybrid known (unfortunately) as helicopter money. Governments would cut taxes and/or spend more, but meet the cost by printing money rather than by borrowing. In one variant, central banks might simply send out checks to taxpayers. That’s a startling idea, no doubt – but so was quantitative easing not long ago.

Quarter-on-quarter annualized growth rate is 4.5%..

• China’s QoQ and YoY GDP Data Don’t Add Up (BBG)

China’s growth rates for quarter-on-quarter and year-on-year GDP for the past year don’t match. That, combined with confirmation that 1Q output was underpinned by an unsustainable resurgence in real estate, tarnishes the newly acquired shine on the country’s economic prospects. The initial reaction to the 1Q GDP data, published Friday, was a sigh of relief. Growth at 6.7% year on year was in line with expectations and comfortably inside the government’s 6.5-7% target range. If anyone noticed that the normal quarter-on- quarter data was missing from the National Bureau of Statistics release, few thought anything of it. Then, on Saturday, the quarter-on-quarter data was published, and some of the relief turned to consternation.

Quarter-on-quarter growth in 1Q was just 1.1% – an annualized growth rate of 4.5%, and the lowest print since the data series became available in 2011. Worse, based on the accumulated quarter-on-quarter data over the last year, annual growth in 1Q was just 6.3% – substantially below the NBS’s 6.7% reading for year-on-year growth. Explaining the inconsistency between the two data points is tough to do. Accumulated quarter-on-quarter growth over four quarters should add up to year-on-year growth. In the past, it has. The divergence in the 1Q readings might reflect something as simple as difficulties with seasonal adjustment. Even so, against a backdrop of concerns about data reliability, it can only add to skepticism about China’s true growth rate.

Xi’s dilemma.

• Is China Ready To Let More State-Owned Enterprises Default? (BBG)

China’s state-owned enterprises are likely to suffer more defaults over the next year as the government shows its readiness to shut companies in industries struggling with overcapacity, according to Standard & Poor’s. “In a major policy shift, the central government appears willing to close and liquidate struggling enterprises in the steel, mining, building materials, and shipbuilding industries,” S&P analyst Christopher Lee wrote in a report Monday. “We believe this stance will exacerbate the problems of companies in these cyclical and capital-intensive sectors, which are facing sluggish demand amid slowing investment growth.”

The warning follows S&P’s decision earlier this month to cut China’s sovereign rating outlook to negative from stable because economic rebalancing is likely to proceed more slowly than it had expected. Moody’s Investors Service also downgraded the outlook to negative in March, highlighting surging debt and the government’s ability to enact reforms. The revisions were biased, Finance Minister Lou Jiwei said in Washington on Friday. Premier Li Keqiang has pledged to withdraw support from so-called zombie firms that have wasted financial resources and dragged on economic growth, which is at the slowest in a quarter century. China’s central bank has lowered benchmark interest rates six times since 2014, underpinning a jump in debt to 247% of GDP.

China Railway Materials, a state-backed commodities trader, is seeking to reorganize debt and halted trading on 16.8 billion yuan ($2.6 billion) of bonds this month. Baoding Tianwei last year became the first government-backed company to renege on onshore bonds. Sinosteel defaulted on onshore debt in October. Leverage among the largest state-owned enterprises has reached a “critical” level, according to Lee. It is likely to worsen in 2016 as a weak top line is not fully offset by cost cuts and capital expenditure reductions, he wrote in the report.

1.8 million is a rounding error in China.

• China Makes Plans for 1.8 Million Workers Facing Unemployment (WSJ)

China etched in details of plans to help workers laid off from the bloated coal and steel industries, saying assistance would include career counseling, early retirement and help in starting businesses, among other measures. New guidelines released by seven Chinese ministries over the weekend build on previously announced commitments to restructure the coal and steel industries, whose excess production is dragging on the economy, and to take care of an estimated 1.8 million workers who will be displaced. The new measures place priority on finding jobs and cushioning the transition to reduce the unemployment that the authoritarian government sees as a threat to social stability.

“Proper placement of workers is the key to working to resolve excess capacity,” said the document issued by the labor ministry, the top economic planning agency and others. It urged local governments to “take timely measures to resolve conflicts” and to “avoid ignoring the issue.” Unlike a far-reaching restructuring of state industries two decades ago, Beijing is taking a cautious approach this time around, prompting some economists to caution that the protracted pace may make the situation worse. Government data released Friday showed economic growth slowing slightly in the first quarter, buoyed by new loans, debt and investment in real estate and factories—methods that are likely to lengthen the transition to a more consumer-driven society from one driven by investment and manufacturing.

Western-style “restructuring is not on the horizon here,” said ING economist Tim Condon. “Rebalancing, forget that. That’s for another day.” Government plans call for reducing some 10% to 15% of the excess capacity in the steel and coal sectors over the next several years. That is less than half the portion analysts say is needed to bring supply closer in line with demand. And steel and coal are only two of numerous other industries plagued by overcapacity that haven’t been addressed. The large number of ministries that have signed off on the plan dated April 7 but released more than a week later underscore the sensitivity, importance and breadth of resources China is devoting to the unemployment problem.

Europe goes blindly into the night.

• The Trucker’s Nightmare That Could Flatten Europe’s Economy (BBG)

[..] Germany, Austria, France and Sweden, among others, have reintroduced border checkpoints in some places. They are pressured by Europe’s biggest refugee crisis since World War II – about 1 million migrants arrived in Greece and Italy in 2015 – terrorist attacks, and the growth of anti-immigration movements. But the economic cost of dumping Schengen, at a time when growth across the continent is still weak, would be massive. A permanent return to border controls could lop €470 billion of GDP growth from the European economy over the next 10 years, based on a relatively conservative assumption of costs, according to research published by Germany’s Bertelsmann Foundation. That’s like losing a company almost the size of BMW AG every year for a decade.

The open borders power an economy of more than 400 million people, with 24 million business trips and 57 million cross-border freight transfers happening every year, the European Parliament says. Firms in Germany’s industrial heartland rely on elaborate, just-in-time supply chains that take advantage of lower costs in Hungary and Poland. French supermarket chains are supplied with fresh produce that speeds north from Spain and Portugal. And trans-national commutes have become commonplace since Europeans can easily choose to, say, live in Belgium and work in France. For many Europeans, passport-free travel is part of being, simply, European. For the company hiring driver Unczorg, the security checks increase costs in terms of delays, storage and inventory.

Permanent controls would destroy the business model of German industry, says Rainer Hundsdoerfer, chairman of EBM-Papst. “You get the products you need for assembly here in Germany just in time,” he said by phone. “That’s why the trucks go nonstop. They come here, they unload, they load, and off they go. The cost isn’t the only prime issue” in reinstating border checks. “It’s that we couldn’t even do it.” Nor could anyone else, he adds: “Nothing in German industry, regardless of whether it’s automotives or appliances or ventilators, could exist without the extended workbenches in eastern Europe.”

This sort of over the top comment could be the biggest gift to the Leave side. Then again, they have Boris Johnson and Nigel Farage as their figureheads. Not going to work.

• George Osborne: Brexit Would Leave UK ‘Permanently Poorer’ (G.)

Britain would be “permanently poorer” if voters choose to leave the EU, George Osborne has warned, as a Treasury study claimed the economy would shrink by 6% by 2030, costing every household the equivalent of £4,300 a year. In the starkest warning so far by the government in the referendum campaign, the chancellor describes Brexit as the “most extraordinary self-inflicted wound”. Osborne will embark on one of the government’s most significant moves in the referendum campaign on Monday when he publishes a 200-page Treasury report which sets out the costs and benefits of EU membership. In a Times article the chancellor wrote: “The conclusion is clear for Britain’s economy and for families – leaving the EU would be the most extraordinary self-inflicted wound.”

Osborne warned that the option favoured by Boris Johnson – a deal along the lines of the EU-Canada arrangement – would lead to an economic contraction of 6% by 2030. Supporters of Britain’s EU membership say the EU-Canadian deal would be a disaster for the UK because it excludes financial services, a crucial part of the British economy. The chancellor asked whether this was a “price worth paying” as he said there was no other model for the UK that gave it access to the single market without quotas and tariffs while retaining a say over the rules. Osborne continued: “Put simply : over many years, are you better off or worse off if we leave the EU? The answer is: Britain would be worse off, permanently so, and to the tune of £4,300 a year for every household.”

“It is a well-established doctrine of economic thought that greater openness and interconnectedness boosts the productive potential of our economy. That’s because being an open economy increases competition between our companies, making them more efficient in the face of consumer choice, and creates incentives for business to innovate and to adopt new technologies.”

One corrupt clan fights the other. Rousseff may well be the cleanest of the bunch.

• Brazilian Congress Votes To Impeach President Dilma Rousseff (G.)

Brazilian president Dilma Rousseff suffered a crushing defeat on Sunday as a hostile and corruption-tainted congress voted to impeach her. In a rowdy session of the lower house presided over by the president’s nemesis, house speaker Eduardo Cunha, voting ended late on Sunday evening with 367 of the 513 deputies backing impeachment – comfortably beyond the two-thirds majority of 342 needed to advance the case to the upper house. As the outcome became clear, Jose Guimarães, the leader of the Workers party in the lower house, conceded defeat with more than 80 votes still to be counted. “The fight is now in the courts, the street and the senate,” he said. As the crucial 342nd vote was cast for impeachment, the chamber erupted into cheers and Eu sou Brasileiro, the football chant that has become the anthem of the anti-government protest.

Opposition cries of “coup, coup,coup” were drowned out. In the midst of the raucous scenes the most impassive figure in the chamber was the architect of the political demolition, Cunha. Watched by tens of millions at home and in the streets, the vote – which was announced deputy by deputy – saw the conservative opposition comfortably secure its motion to remove the elected head of state less than halfway through her mandate. There were seven abstentions and two absences, and 137 deputies voted against the move. Once the senate agrees to consider the motion, which is likely within weeks, Rousseff will have to step aside for 180 days and the Workers party government, which has ruled Brazil since 2002, will be at least temporarily replaced by a centre-right administration led by vice-president Michel Temer.

On a dark night, arguably the lowest point was when Jair Bolsonaro, the far-right deputy from Rio de Janeiro, dedicated his yes vote to Carlos Brilhante Ustra, the colonel who headed the Doi-Codi torture unit during the dictatorship era. Rousseff, a former guerrilla, was among those tortured. Bolsonaro’s move prompted left-wing deputy Jean Wyllys to spit towards him. Eduardo Bolsonaro, his son and also a deputy, used his time at the microphone to honour the general responsible for the military coup in 1964. Deputies were called one by one to the microphone by the instigator of the impeachment process, Cunha – an evangelical conservative who is himself accused of perjury and corruption – and one by one they condemned the president. Yes, voted Paulo Maluf, who is on Interpol’s red list for conspiracy. Yes, voted Nilton Capixiba, who is accused of money laundering. “For the love of God, yes!” declared Silas Camara, who is under investigation for forging documents and misappropriating public funds.

Australia played all on red. Which can you take to mean either China, for exports, or debt, for housing. Realizing that in the ned the house always wins, it’s a suicide strategy.

• Australia’s Debt Dilemma Raises Downgrade Fears (BBG)

1986 may seem like a long time ago, but for Australian Treasurer Scott Morrison some of the parallels with his current budget balancing act are getting too close for comfort. Back then, Moody’s and Standard & Poor’s pulled their AAA ratings as weak commodity prices wrecked government income and external finances. With resources again in a funk and a widening funding gap, National Australia Bank and JPMorgan said last week Morrison needs to undertake repairs in his May 3 budget to safeguard the country’s top rankings. Moody’s warned Thursday that debt will grow without revenue-boosting measures. “Moody’s are understandably getting impatient,” said Shane Oliver at Sydney-based AMP Capital Investors.

“We’ve seen each successive budget update push out the return to surplus. This time around – like back in the middle of the ’80s when we did suffer downgrades – we again have a twin deficit problem.” Thirty years ago, then-Treasurer Paul Keating warned the country risked becoming a “banana republic” because of its reliance on resources and it took nearly 17 years to regain the two top credit scores. While Morrison’s language hasn’t been as strident, he has said Australia must live within its means and indicated a focus on reduced spending. The government expects Australia’s budget position to improve in coming years despite the environment for commodity prices as it controls expenditure growth, Finance Minister Mathias Cormann said Thursday in an e-mailed response to questions.

“The Government is committed to responsible budget management which protects our AAA credit rating,” he said. “Our public debt remains low internationally and consistent with our plan, the government is committed to stabilizing and reducing our debt over time.” Australia’s general government net debt is projected to peak at 19.9% in 2017, lower than any Group of Seven economy, according to the IMF’s fiscal monitor. That number has climbed from minus 0.6% in 2009. “One differentiating feature between Australia and other Aaa rated sovereigns is that, while government debt has increased markedly in Australia, it has been more stable for other Aaa sovereigns,” Marie Diron at Moody’s in Singapore wrote. “We expect a further increase in debt and will look at policy measures and the economic environment to review our analysis on this.”

Japan and Europe are in a much better position than the US? Really?

• Peter Schiff: ‘Trump’s Right, America Is Broke’ (ZH)

Euro Pacific Capital’s Peter Schiff sat down with Alex Jones last week to discuss the state of the economy, and where he sees everything going from here. Here are some notable moments from the interview. Regarding how bad things are, and what’s really going on in the economy, Schiff lays out all of the horrible economic data that has come out recently, as well as making sure to take away the crutch everyone uses to explain any and all data misses, which is weather.

“It’s no way to know exactly the timetable, but obviously this economy is already back in recession, and if it’s not in a recession it’s certainly on the cusp of one” “We could be in a negative GDP quarter right now, and I think that if the first quarter is bad the second quarter is going to be worse” “The last couple years we had a rebound in the second quarter because we’ve had very cold winters. Well this winter was the warmest in 120 years so there is nothing to rebound from.”

On the Fed, and current policies, he very bluntly points out that nothing is working, nor has it worked, but of course the central planners will try it all anyway. He also takes a moment to agree with Donald Trump regarding the fact that the U.S. is flat out, undeniably broke.

“The problem for the Fed is how do they launch a new round of stimulus and still pretend the economy is in good shape.” “Negative interest rates are a disaster. It’s not working in Japan, it’s not working in Europe, it’s not going to work here. Just because it doesn’t work doesn’t mean we’re not going to do it, because everything we do doesn’t work and we do it anyway. It shows desperation, that you’ve had all these central bankers lowering interest rates and expecting it to revive the economy. And then when they get down to zero, rather than admit that it didn’t work, because clearly if you go to zero and you still haven’t achieved your objective, maybe it doesn’t work. Instead of admitting that they were wrong, they’re now going negative.”

“The United States, no matter how high inflation gets, we’ll do our best to pretend it doesn’t exist or rationalize it away because we have a lot more debt. America is broke, if you look at Europe and Japan even though there is some debt there, overall those are still creditor nations. The world still owes Europe money, the world still owes Japan money, but America owes more money than all of the other debtor nations combined. Trump is right about that, we are broke, we’re flat broke, and we’re living off this credit bubble and we can’t prick it. Other central banks may be able to raise their rates, but the Fed can’t.”

On how he sees everything unfolding from this point, Peter again points out that the economy is weak and it’s only a matter of time before this entire centrally planned manipulation is exposed for what it is, and becomes a disaster for the Federal Reserve. He likens how investors are behaving today to the dot-com bubble, and the beginning of the global financial crisis.

“Let each wage-earning citizen hold the whole of his or her untaxed earnings–actually touch them. Then let the government pluck its taxes.” “..in six months we would have either a tax revolution or a startling contraction of the budget!”

• Make America Solvent Again (Jim Grant)

[..] The public debt will fall due someday. It will have to be repaid or refinanced. If repaid, where would the money come from? It would come from you, naturally. The debt is ultimately a deferred tax. You can calculate your pro rata obligation on your smartphone. Just visit the Treasury website, which posts the debt to the penny, then the Census Bureau’s website, which reports the up-to-the-minute size of the population. Divide the latter by the former and you have the scary truth: $42,998.12 for every man, woman and child, as I write this. In the short term, the debt would no doubt be refinanced, but at which interest rate? At 4.8%, the rate prevailing as recently as 2007, the government would pay more in interest expense –$654 billion– than it does for national defense.

At a blended rate of 6.7%, the average prevailing in the 1990s, the net federal-interest bill would reach $913 billion, which very nearly equals this year’s projected outlay on Social Security. We always need protection against cockeyed economic experimentation. Once a national consensus on money and debt furnished this protective armor. Money was gold and debt was bad, Americans assumed. Most credentialed economists today will smile at these ancient prejudices. Allow me to suggest that our forebears knew something. Keynes himself would recoil at 0% bank-deposit rates, chronically low economic growth and the towering trillions that we have so generously pledged to one another. (All we have to do now is earn the money to pay them.) How do we escape from our self-constructed fiscal jail? According to the Government Accountability Office, unpaid taxes add up to more than $450 billion a year.

Even so, according to the Tax Foundation, Americans spend 6.1 billion hours and $233.8 billion each tax season complying with a federal tax code that runs to 10 million words. Are we quite sure we want no part of the flat-tax idea? An identical low rate on most incomes. No deductions, no H&R Block. Impractical? So is the debt. So is the spending (and the promises to spend more down the road). We need to stop the squandermania. How? By resuming the principled fight that Vivien Kellems waged against the IRS during the Truman Administration. It enraged Kellems, a doughty Connecticut entrepreneur, that she was forced to withhold federal taxes from her employees’ wages. She called it involuntary servitude, and she itched to make her constitutional argument in court. She never got that chance, but she published her plan for a peaceful revolution.

She asked her readers –I ask mine– to really examine the stub of their paycheck. Observe how much your employer pays you and how much less you take home. Notice the dollars withheld for Medicare, Social Security and so forth. If you are like most of us, you stopped looking long ago. You don’t miss the income that you never get to touch. Picking up where Kellems left off, I propose a slight alteration in payday policy. Let each wage-earning citizen hold the whole of his or her untaxed earnings–actually touch them. Then let the government pluck its taxes. “Such a payroll policy,” wrote Kellems in her memoir, Taxes, Toil and Trouble, “is entirely legal and if it were universally adopted, in six months we would have either a tax revolution or a startling contraction of the budget!” Black ink, sound money and the spirit of Vivien Kellems are the way forward. “Make America solvent again” is my credo and battle cry. You can fit it on a cap.

“The message of today’s populist revolts is that politicians must tear up their pre-crisis rulebooks and encourage a revolution in economic thinking.” No, it’s that today’s politicians must go.

• Is Capitalism Entering A New Era? (Kaletsky)

The defining feature of each successive stage of global capitalism has been a shift in the boundary between economics and politics. In classical nineteenth-century capitalism, politics and economics were idealized as distinct spheres, with interactions between government and business confined to the (necessary) raising of taxes for military adventures and the (harmful) protection of powerful vested interests. In the second, Keynesian version of capitalism, markets were viewed with suspicion, while government intervention was assumed to be correct. In the third phase, dominated by Thatcher and Reagan, these assumptions were reversed: government was usually wrong and the market always right. The fourth phase may come to be defined by the recognition that governments and markets can both be catastrophically wrong.

Acknowledging such thoroughgoing fallibility may seem paralyzing – and the current political mood certainly seems to reflect this. But recognizing fallibility can actually be empowering, because it implies the possibility of improvement in both economics and politics. If the world is too complex and unpredictable for either markets or governments to achieve social objectives, then new systems of checks and balances must be designed so that political decision-making can constrain economic incentives and vice versa. If the world is characterized by ambiguity and unpredictability, then the economic theories of the pre-crisis period – rational expectations, efficient markets, and the neutrality of money – must be revised. Moreover, politicians must reconsider much of the ideological super-structure erected on market fundamentalist assumptions.

This includes not only financial deregulation, but also central bank independence, the separation of monetary and fiscal policies, and the assumption that competitive markets require no government intervention to produce an acceptable income distribution, drive innovation, provide necessary infrastructure, and deliver public goods. It is obvious that new technology and the integration of billions of additional workers into global markets have created opportunities that should mean greater prosperity in the decades ahead than before the crisis. Yet “responsible” politicians everywhere warn citizens about a “new normal” of stagnant growth. No wonder voters are up in arms. People sense that their leaders have powerful economic tools that could boost living standards.

Money could be printed and distributed directly to citizens. Minimum wages could be raised to reduce inequality. Governments could invest much more in infrastructure and innovation at zero cost. Bank regulation could encourage lending, instead of restricting it. But deploying such radical policies would mean rejecting the theories that have dominated economics since the 1980s, together with the institutional arrangements based upon them, such as Europe’s Maastricht Treaty. Few “responsible” people are yet willing to challenge pre-crisis economic orthodoxy. The message of today’s populist revolts is that politicians must tear up their pre-crisis rulebooks and encourage a revolution in economic thinking. If responsible politicians refuse, “some rough beast, its hour come at last” will do it for them.

Japan, Philippines, Tonga, Vanuatu, Ecuador and more

• Fears Of ‘The Big One’ As 7 Major Earthquakes Strike Pacific In 96 Hours (E.)

Japan has been worst hit by the tremors. The latest quake to hit the country yesterday, measuring 7.3 on the Richter scale, injured more than 1,000 and trapped people in collapsed buildings, only a day after a quake killed nine people in the same region. Rescue crews searched for survivors of a magnitude 7.3 earthquake that struck Japan’s Kyushu Island, the same region rattled by a 6.2 quake two days earlier. Around 20,000 troops have had to be deployed following the latest 7.3 earthquake at 1.25am local time on Saturday. Roads have also been damaged and big landslides have been reported, there are also 200,000 households without power. The death toll in the latest Kyushu earthquake is 16 people and a previous earthquake that struck the area on Thursday had killed nine people.

There have been other large earthquakes recorded in recent days, including a major one in southern Japan which destroyed buildings and left at least 45 people injured, after Myanmar was rocked on Wednesday. Japan’s Fire and Disaster Management Agency said 7,262 people have sought shelter at 375 centers since Friday in Kumamoto Prefecture. Prime Minister Shinzo Abe vowed to do everything he could to save lives following the disaster. He said: “Nothing is more important than human life and it’s a race against time.” On Thursday, The Japanese Red Cross Kumamoto Hospital confirmed 45 were injured, including five with serious injuries after a quake of magnitude 6.2 to 6.5 and a series of strong aftershocks ripped through Kumamoto city.

Several buildings were damaged or destroyed and at least six people are believed to be trapped under homes in Mashiki. Local reports said one woman was rescued in a critical condition Scientists say there has been an above average number of significant earthquakes across south Asia and the Pacific since the start of the year. The increased frequency has sparked fears of a repeat of the Nepal quake of 2015, where 8,000 people died, or even worse. Roger Bilham, seismologist of University of Colorado, said: “The current conditions might trigger at least four earthquakes greater than 8.0 in magnitude. “And if they delay, the strain accumulated during the centuries provokes more catastrophic mega earthquakes.”

Debt Rattle February 10 2016

Feb 102016

February 10, 2016 Posted by Raúl Ilargi Meijer at 10:20 am Finance Tagged with: Banks, bounce, credit, Deutsche, losses, NATO, oil, Ponzi, refugees, risk, selloff 14 Responses »

Arthur Rothstein Scene along Bathgate Avenue in the Bronx 1936

• Europe’s Dead Cats Bounce, Deutsche Up 10% (BBG)

• Surging Credit Risk for Banks a Major Issue in European Markets (WSJ)

• Banks Eye More Cost Cuts Amid Global Growth Concerns (Reuters)

• Europe Banks May Face $27 Billion Energy-Loan Losses (BBG)

• European Banks: Oil, Commodity Exposure As High As 160% Of Tangible Book (ZH)

• Europe’s ‘Doom-Loop’ Returns As Credit Markets Seize Up (AEP)

• Options Bears Circle Nasdaq (BBG)

• Deutsche Bank’s Big Unknowns (BBG)

• The Market Isn’t Buying That Deutsche Bank Is ‘Rock Solid’ (Coppola)

• Deutsche Considers Multibillion Bond Buyback (FT)

• Distillates Demand Signals US Recession Is Imminent (BI)

• US Oil Drillers Must Slash Another $24 Billion This Year (BBG)

• Five Reasons Behind US Bank Stocks Selloff (FT)

• 10-Year Japanese Government Bond Yield Falls Below Zero (FT)

• EU Probes Suspected Rigging Of $1.5 Trillion Debt Market (FT)

• Italy, A Ponzi Scheme Of Gargantuan Proportions (Tenebrarum)

• Maersk Profit Plunges as Oil, Container Units Both Suffer (BBG)

• Australia Admits Recent Stellar Job Numbers Were Cooked (ZH)

• Pentagon Fires First Shot In New Arms Race (Guardian)

• NATO Weighs Mission to Monitor Mediterranean Refugee Flow (BBG)

• Border Fences Will Not Stop Refugees, Migrants Heading To Europe (Reuters)

Brimming with confidence. Deutsche buying back its debt at this point in the game screams EXIT.

• Europe’s Dead Cats Bounce, Deutsche Up 10% (BBG)

European stocks rebounded from their lowest level since October 2013 as investors assessed valuations following seven days of declines. A measure of lenders posted the best performance of the 19 industry groups on the Stoxx Europe 600 Index, with Deutsche Bank rising 10% as a person familiar with the matter said the German bank is considering buying back some of its debt. Commerzbank climbed 6%. Greece’s Eurobank Ergasias recovered 11% after falling to its lowest since at least 1999 on Tuesday, and Italy’s UniCredit SpA gained 10%. The Stoxx 600 advanced 1.6% to 314.39 at 9:27 a.m. in London, moving out of so-called “oversold” territory.

Global equities have been battered in 2016 in volatile trading amid investor concern over oil prices, earnings, the strength of the U.S. and Chinese economies, as well as the creditworthiness of European banks. The Stoxx 600 now trades at 13.9 times estimated earnings, about 20% below its April 2015 peak. A gauge tracking stock swings has jumped 47% this year. “When it feels this bad, it’s usually a good buying opportunity,” said Kevin Lilley at Old Mutual Global Investors in London. “But we’ve just been through a huge crisis of confidence and I think a long-term rebound is still very dependent on central-bank policy and global macro data. You’re fighting negative newsflow with very low valuations at the moment, and that’s the trade off.”

Not just in Europe either.

• Surging Credit Risk for Banks a Major Issue in European Markets (WSJ)

If there’s one thing on the mind of analysts and investors in Europe right now, it’s credit risk. The recent selloff in equities has sparked questions over whether a similar bearishness on credit is justified, particularly among European banks that have been slammed in stock markets over the last month. The iTraxx Senior Financials index tracks the cost of credit default swaps, which protect the investors buying them against a company’s default, for major financial institutions in Europe. More credit risk means pricier CDS, and the cost of European bank CDS has taken off. The index is still far from the extremely elevated levels reached in 2012, during the dismal days of the euro crisis.

Some of the latest analysts to weigh in on the subject come from Bank of America Merrill Lynch. In a research note out on Monday titled “the tide has turned,” analysts Ioannis Angelakis, Barnaby Martin and Souheir Asba argue that risk is becoming more systematic. The authors go on: “Risks are not contained any more within the EM/oil related names. Global growth outlook fears and risks of quantitative failure have led to weakness into cyclical names. Add also the recent sell-off in financials and you have the perfect recipe for a market sell-off that looks and feels systemic.” Within the last week we’ve spoken to analysts and investors that disagreed, suggesting that European bank credit was quite secure. Either way, it’s clear that the worries about credit risks have become heightened. How far the threat to balance sheets now goes is one of the biggest questions in European markets right now.

The more you try to look confident, the less you do.

• Banks Eye More Cost Cuts Amid Global Growth Concerns (Reuters)

Goldman Sachs and other U.S. banks are looking at ways to slash expenses further this year as market turmoil, declining oil prices and concerns about Germany’s Deutsche Bank have sent the sector’s shares down sharply. “We can absolutely do a lot more on the cost side if we have to, especially now, when you have to deliver a return,” Goldman Chief Executive Officer Lloyd Blankfein said on Tuesday at the Credit Suisse financial services forum in Miami. “We take a particular and energetic look at continued cost cuts when revenues are stalled,” he said. ” … Necessity is the mother of invention.” U.S. Bancorp CFO Kathy Rogers echoed Blankfein’s comments at a separate panel, saying her bank would continue cutting costs this year. She cited a smaller chance that interest rates would rise, which would have indicated a stronger economy and more revenue for the bank.

As executives were speaking at the conference, Deutsche Bank shares hit a record low, following their 9.5% plunge on Monday. Although the bank has said it has sufficient reserves, investors have worried that it will not be able to repay some bonds that are coming due. The bonds, called AT1 securities, convert into equity in times of market stress. Deutsche Bank’s woes reflect broader concerns about the health and profitability of euro zone banks. Last week, for instance, Sanford Bernstein analyst Chirantan Barua said Barclays should spin off its investment bank in an effort to revive its core UK retail and commercial business. Major Wall Street banks have also had a brutal start to 2016, with the KBW Nasdaq Bank index down nearly 20% on concerns about profitability.

Since demand for U.S. bank shares began to weaken in late November, the sector’s top five stocks have lost 20% of their market capitalization, or around $120 billion. Almost 70% of the banks deemed globally significant are trading below their tangible book values, or what they would be worth if liquidated. Analysts say if this continues, banks may have to restructure more drastically to cut costs. Investors said bank executives would need to look at other ways to boost profitability now that hopes for further interest rates hikes have faded. “They’re going to have to come up with other levers to pull, whether it is investing in technology or reducing headcount,” said John Fox at Feinmore Asset Management, which invests in financials. “There will be more pressure on expenses because of the interest rate environment.”

Bloomberg lowballing.

• Europe Banks May Face $27 Billion Energy-Loan Losses (BBG)

European banks face potential loan losses from energy firms of $27 billion, or about 6% of their pretax profit over three years, according to analysts at Bank of America. “We believe European banks with large exposures to energy and commodities lending will be increasingly challenged over these positions by shareholders,” analysts Alastair Ryan and Michael Helsby wrote in a note to clients on Tuesday. “While long-term oil- and metal-price forecasts are well above current levels, we expect the equity market to continue to stress exposures to current market prices and deduct potential losses from the earnings multiple of the banks.”

The $27 billion estimate is “potentially a smaller figure than is implied in the share prices of a number of banks,” and lenders’ potential losses aren’t a threat to the capitalization of the banking system or its ability to provide credit to the economy, they wrote. European banks are getting walloped by the global market rout and plunge in global oil prices while struggling to bolster their capital buffers amid record low interest rates in the euro zone. The 46-member Stoxx Europe 600 Banks Index has lost about 27% this year, outpacing the 15% drop by the wider Stoxx 600.

Tyler Durden doesn’t lowball.

• European Banks: Oil, Commodity Exposure As High As 160% Of Tangible Book (ZH)

[..] Morgan Stanley writes, “Europeans have not typically disclosed reserve levels against energy exposure, making comparison to US banks challenging. Moreover, quality of books can vary meaningfully. For example, we note that Wells Fargo has raised reserves against its US$17 billion substantially non-investment grade book, while BNP and Cred Ag have indicated a significant skew (75% and 90%, respectively) to IG within energy books. Equally we note that US mid-cap banks typically have a greater skew to higher-risk support services (~20-25%) compared to Europeans (~5-10%) and to E&P/upstream (~65% versus Europeans ~10-20%).” Morgan Stanley then proceeds to make some assumptions about how rising reserves would impact European bank income statements as reserve builds flow through the P&L: in some cases the hit to EPS would be .

A ~2% reserve build in 2016 would impact EPS by 6-27%, we estimate:We believe noticeable differences exist between US and EU banks’ portfolios in terms of seniority and type of exposure. As such, applying the assumption of a ~2% further build in energy reserves in 2016, versus ~4% assumed for large US banks, we estimate that EPS would decline by 6-27% for European-exposed names (ex-UBS), with Standard Chartered, Barclays, Credit Agricole, Natixis and DNB most exposed. [..] But the biggest apparent threat for European banks, at least according to MS calulcations, is the following: while in the US even a modest 2% reserve on loans equates to just 10% of Tangible Book value…

… in Europe a long overdue reserve build of 3-10% for the most exposed banks, would immediately soak up anywhere between 60 and a whopping 160% of tangible book!

Which means just one thing: as oil stays “lower for longer”, and as many more European banks are forced to first reserve and then charge off their existing oil and gas exposure, expect much more diluation. Which, incidentlaly also explains why European bank stocks have been plunging since the beginning of the year as existing equity investors dump ahead of inevitable capital raises. And while that answers some of the “gross exposure to oil and commodities” question, another outstanding question is what is the net exposure to China. As a reminder, this is what Deutsche Bank’s credit analyst Dominic Konstam said in his explicit defense of what needs to be done to stop the European bloodletting:

The exposure issue has been downplayed but make no mistake banks are heavily exposed to Asia/MidEast and while 10% writedown might be worst case for China but too high for the whole, it is what investors shd and do worry about — whole wd include the contagion to banking hubs in Sing/HKong

Ironically, it is Deutsche Bank that has been hit the hardest as the full exposure answer, either at the German bank or elsewhere, remains elusive; it is also what has cost European banks billions (and counting) in market cap in just the past 6 weeks.

“..Liquidity is totally drained and it is very difficult to exit trades. You can’t find a buyer..”

• Europe’s ‘Doom-Loop’ Returns As Credit Markets Seize Up (AEP)

Credit stress in the European banking system has suddenly turned virulent and begun spreading to Italian, Spanish and Portuguese government debt, reviving fears of the sovereign “doom-loop” that ravaged the region four years ago. “People are scared. This is very close to a potentially self-fulfilling credit crisis,” said Antonio Guglielmi, head of European banking research at Italy’s Mediobanca. “We have a major dislocation in the credit markets. Liquidity is totally drained and it is very difficult to exit trades. You can’t find a buyer,” he said. The perverse result is that investors are “shorting” the equity of bank stocks in order to hedge their positions, making matters worse. Marc Ostwald, a credit expert at ADM, said the ominous new development is that bank stress has suddenly begun to drive up yields in the former crisis states of southern Europe.

“The doom-loop is rearing its ugly head again,” he said, referring to the vicious cycle in 2011 and 2012 when eurozone banks and states engulfed in each other in a destructive vortex. It comes just as sovereign wealth funds from the commodity bloc and emerging markets are forced to liquidate foreign assets on a grand scale, either to defend their currencies or to cover spending crises at home. Mr Ostwald said the Bank of Japan’s failure to gain any traction by cutting interest rates below zero last month was the trigger for the latest crisis, undermining faith in the magic of global central banks. “That was unquestionably the straw that broke the camel’s back. It has created havoc,” he said. Yield spreads on Italian and Spanish 10-year bonds have jumped to almost 150 basis points over German Bunds, up from 90 last year.

Portuguese spreads have surged to 235 as the country’s Left-wing government clashes with Brussels on austerity policies. While these levels are low by crisis standards, they are rising even though the ECB is buying the debt of these countries in large volumes under quantitative easing. The yield spike is a foretaste of what could happen if and when the ECB ever steps back. Mr Guglielmi said a key cause of the latest credit seizure is the imposition of a tough new “bail-in” regime for eurozone bank bonds without the crucial elements of an EMU banking union needed make it viable. “The markets are taking their revenge. They have been over-regulated and now are demanding a sacrificial lamb from the politicians,” he said.

Mr Guglielmi said there is a gnawing fear among global investors that these draconian “bail-ins” may be crystallised as European banks grapple with €1 trillion of non-performing loans. Declared bad debts make up 6.4pc of total loans, compared with 3pc in the US and 2.8pc in the UK.

Pop some more.

• Options Bears Circle Nasdaq (BBG)

Options traders are betting the pain is far from over in the Nasdaq 100 Index. Unconvinced a two-day decline of 5% found the bottom, they’re loading up on protection in the technology-heavy index, pushing the cost of options on a Nasdaq 100 exchange-traded fund to the highest in almost two years versus the Standard & Poor’s 500 Index, data compiled by Bloomberg show. It’s the latest exodus from risk in the U.S. equity market, with selling that started in energy shares spreading to everything from health-care to banks. Technology companies, which until recently had been spared because of their low debt burden and rising earnings, joined the rout as investors focus on elevated valuations among the industry’s biggest stocks.

“Exuberance has turned to panic pretty quickly,” said Stephen Solaka at Belmont Capital. “Technology stocks have had quite a run, and now they’re seeing momentum the other way.” The S&P 500 slipped less than 0.1% to 1,852.21 at 4 p.m. in New York, extending its three-day decline to 3.3%. The Nasdaq 100 lost 0.3%. Options are signaling more trouble ahead just as professional speculators dump bullish wagers on the group. Hedge funds and large speculators have pared back their long positions on the Nasdaq 100 for a fourth week out of five, data from the Commodity Futures Trading Commission show. Investors were dealt a blow on Friday when disappointing results from LinkedIn and Tableau sent both companies down more than 40%.

The selloff has been heaviest in a handful of momentum stocks that boosted returns in the Nasdaq 100 last year, sending the gauge’s valuation to a one-year high versus the S&P 500’s in December. Since then, the Nasdaq multiple has tumbled faster than the S&P 500’s, dropping 20% versus 13%, as stocks from Amazon to Netflix faced scrutiny from investors amid broader economic concerns. Even after a 16% plunge from a record in November, Nasdaq 100 companies still trade at 16.3 times projected profits, higher than the S&P 500’s 15.4 ratio. Scott Minerd at Guggenheim Partners said in an interview that technology stocks will tumble even further this year as investors flee to safety and buyers stay on the sidelines.

Tick. Tock.

• Deutsche Bank’s Big Unknowns (BBG)

Regulation is forcing banks to retrench from some previously lucrative businesses. Lacklustre economic growth and low interest rates are stymieing profit growth in other areas. Concerns about China’s economy and the energy industry are rippling through markets, reducing activity among bank clients.There are specific concerns about Deutsche Bank. Cryan is trying to reshape the business while facing these ominous economic and market headwinds. There’s still a slew of litigation costs to be settled. And he’s trying to offload parts of the bank that don’t fit any more, including Postbank, the domestic German retail unit. The announced full-year net loss of €6.8 billion darkened the mood.

The bank’s shares now trade at about 35% of the tangible book value of the bank’s assets, partly because equity investors can’t get a clear handle on what lies ahead. In the credit market, concerns were fueled Monday by a note from CreditSights analyst Simon Adamson that spelled out “a base case” for Deutsche Bank to pay AT1 coupons this year and next year. But there is a caveat – a bigger than expected loss this financial year, because of a major fine or other litigation cost, could wipe out the bank’s capacity to pay. In other words, what happens if a big unknown strikes? Deutsche Bank, for its part, made the case that it has more than enough capacity for the 2016 payment due in April – 1 billion euros of capacity compared with coupons of about €350 million.

The bank says it estimates it has €4.3 billion of capacity for the April 2017 payment, partly driven by the proceeds from selling its stake in a Chinese lender. That sale is still pending regulatory approval but should go through in coming months. So, Deutsche Bank ought to have enough to make its payments and will be desperate to do so. Can pay, will pay. Unless, the bank is hit with a big shock, like a major, unforeseen litigation cost. Nervous investors await further communication.

“I have said before that Deutsche Bank should be broken up. Now is the time to do it.”

• The Market Isn’t Buying That Deutsche Bank Is ‘Rock Solid’ (Coppola)

This has been a terrible day for Deutsche Bank. The stock price has collapsed, and shares are now trading lower than they were in the dark days of 2008 after the fall of Lehman. Yields on CoCos and CDS are spiking too. Despite a reassuring statement from the German Finance Minister that he had “no concerns” about Deutsche Bank, markets are clearly worried that Deutsche Bank may be in serious trouble. And when “serious trouble” means that shareholders, subordinated debt holders and even senior unsecured bondholders could lose part or all of their investment, because of the bail-in rules under the EU’s Bank Recovery and Resolution Directive (BRRD), it is hardly surprising that investors are running for the hills. Even if Deutsche Bank were not in trouble before, it is now.

Unsurprisingly, the CEO, John Cryan, is upbeat about it. Today he issued a statement to staff advising them how to address the concerns of clients:

Volatility in the fourth quarter impacted the earnings of most major banks, especially those in Europe, and clients may ask you about how the market-wide volatility is impacting Deutsche Bank. You can tell them that Deutsche Bank remains absolutely rock-solid, given our strong capital and risk position. On Monday, we took advantage of this strength to reassure the market of our capacity and commitment to pay coupons to investors who hold our Additional Tier 1 capital. This type of instrument has been the subject of recent market concern. The market also expressed some concern about the adequacy of our legal provisions but I don’t share that concern. We will almost certainly have to add to our legal provisions this year but this is already accounted for in our financial plan.

I reviewed Deutsche Bank’s financial position as stated in their interim results last week. My findings do not support John Cryan’s statement that the bank is “rock solid”. Its capital and leverage ratios were not particularly strong by current standards, and have deteriorated since the full-year results. More worryingly, I found evidence that profits in two of the four divisions were only achieved by risking-up: the other two divisions were loss-making. Risking-up to generate profits would, if sustained over the medium-term, require substantially more capital than Deutsche Bank currently has. For two divisions of a bank that is currently delivering NEGATIVE return on equity to adopt strategies which would in due course require more capital does not appear remotely sensible.

Though I suppose actually admitting that the bank cannot generate anything like a reasonable return for shareholders without taking significantly more risk would be even worse. I also share the market’s concern about lack of legal provisions. A large part of the write-off of 5.2bn Euros due to litigation costs and fines in the interim results arose from cases already settled, particularly the record multi-jurisdictional fine for benchmark rate rigging in April 2015, though it also includes the 1.3bn Euros increase in provisions announced in October 2015 to cover charges potentially arising from the investigation of Deutsche Bank’s Russian operation for money laundering. But since these provisions seem light for what is a serious offense, and Deutsche Bank faces other potentially very expensive regulatory investigations and legal cases, I do not consider this write-off adequate.

They’re so f**ked. Biggest bank, biggest derivatives portfolio. Run for the hills. When you even need your finance minister to do a reassurance call, you know you’re cooked.

• Deutsche Considers Multibillion Bond Buyback (FT)

Deutsche Bank is considering buying back several billion euros of its debt, as Germany’s biggest bank steps up efforts to shore up the tumbling value of its securities against the backdrop of a broader rout of financial stocks. After European banks suffered a second consecutive day of sharp falls, Deutsche Bank is expected to focus its emergency buyback plan on senior bonds, of which it has about €50bn in issue, according to the bank. The move was unlikely to involve so-called contingent convertible bonds which, along with the bank’s shares, have been the butt of a brutal investor sell-off in recent days, people briefed on the plan said. The news came as Germany’s finance minister Wolfgang Schäuble and Deutsche CEO John Cryan both sought to assuage market fears.

Mr Schäuble said he had “no concerns” about the bank, while Mr Cryan insisted Deutsche’s position was “absolutely rock-solid”. The bank’s shares still fell 4%, taking the decline since the start of the year to 40%. Other European banks fared even worse on Tuesday, with Credit Suisse falling 8% and UniCredit 7%, as investor nervousness intensified over the relative weakness of European bank capital and earnings amid broader market turmoil. US banks, which have been hit hard in recent weeks, too, were only marginally weaker at lunchtime on Tuesday. Investors have also been rattled by the prospect of negative interest rates spreading across the developed world.

On Tuesday Japan became the first major economy with a sub-zero borrowing rate for 10-year debt as the total of government bonds trading with negative yields climbed to a new peak of $6tn. Concern about the solidity of bank debt — principally European bank cocos, which can suspend coupons and may convert into equity in a crisis — has prompted an investor dash to buy protection. A popular credit derivatives index that tracks the likelihood of default of investment-grade debt of European companies and banks was trading at 119 basis points on Tuesday, near its highest level since June 2013. Broader investor concerns about the health of the financial sector have coincided with more specific questions about Deutsche’s nascent restructuring programme.

Ouch. Peddling fiction, sir?

• Distillates Demand Signals US Recession Is Imminent (BI)

The US economy is flashing warning signs, particularly the industrial and manufacturing sectors. Demand for oil, and particularly so-called distillates – which are refined oil products such as jet fuels and heating oils – is crashing. Here’s the Barclays commodities team on the indicator:

January US demand for the four main refined products came in at -568k b/d (-3.9% y/y), compared with January 2015. Distillates were the weakest sector, down 18% y/y. Whether or not the data itself point to much weaker underlying growth in the US economy is still open to question, but not much. As illustrated in Figure 4, the scale of the decline in distillates demand in January has only ever been seen before during full-blown US recessions.

And here’s that chart:

Barclays does cite some mitigating factors, such as unusually warm winter weather and the fact this is based on preliminary data that may get revised upward later on. But it doesn’t look great.

And counting.

• US Oil Drillers Must Slash Another $24 Billion This Year (BBG)

North American oil and natural gas drillers will need to cut an additional 30% from their capital budgets to balance their spending with the cash coming in their doors even if crude rises to $40 a barrel, according to an analysis by IHS Inc. A group of 44 North American exploration and production companies are planning to spend $78 billion on capital projects this year, down from $101 billion last year. Those companies need to cut another $24 billion this year to get their spending in line with a historical 130% ratio of spending to cash flow, IHS said Monday.

“These spending cuts will be particularly troublesome for the highly leveraged companies,” said Paul O’Donnell at IHS Energy. “These E&Ps are torn between slashing spending further to avoid additional weakening of their balance sheets, and the need to maintain sufficient production and cash flow to meet financial obligations.” The analysis is based on IHS’s low-case price scenario of $40-a-barrel oil and $2.50-per-million-cubic-feet natural gas prices. IHS cited Concho Resources, Whiting Petroleum, WPX Energy, and PDC Energy. as examples of companies displaying the best spending discipline.

“..“There is not any kind of imaginary line where you can say, ‘OK this has gone down enough,’ and it’s now a recovery play or a turnround play. They just go down more, until they are done going down..”

• Five Reasons Behind US Bank Stocks Selloff (FT)

US bank stocks have suffered a brutal start to 2016. Out of the 90 stocks on the S&P financials index, just eight were in positive territory for the year at mid-morning on Tuesday. Two of the biggest losers, Bank of America and Morgan Stanley, are down 27% and 28% respectively. Citigroup, also down 27%, is now trading at just 6.5 times earnings, not far off its post-crisis trough of 5.9 times, reached during the depths of the European debt crisis five years ago.

• Collapsing expectations of US interest rate rises Analysts offer a lot of different reasons for the big sell-off, but on this they agree. “Lift-off” in December was supposed to usher in an era of higher interest rates — which are always good news for the banks. In previous rate-raising cycles, assets have always re-priced faster than liabilities, earning banks a bigger spread between the yields on their loans and the cost of their funds. But worsening data since then from big economies, notably China, has investors worried that the world economy is a lot sicker than they had assumed. Expectations of another three rate rises from the Fed this year have collapsed in a matter of weeks. Talk of a rate cut, or even a move to negative rates, is entering the picture.

• Worsening credit quality In itself, a lower oil price will not do much direct damage to the big banks’ balance sheets, say analysts. Total energy exposures amount to less than 3% of gross loans at the big banks, which have mostly investment-grade assets, and which have already pumped up reserves. Perhaps more worrying are the second-round effects: if weakness in oil-dependent communities begins to spill into commercial real estate loan books, say, or if consumers find they cannot afford repayments on loans for their new gas-guzzling cars. In an environment of precious little growth — the big six US banks produced exactly the same amount of revenue last year as they did in 2014 — rising credit costs are likely to lead to lower profits.

• Deutsche Bank Every sell-off needs a point of focus and in recent days it has been Deutsche Bank. The contortions of the Frankfurt-based lender weighed on the entire banking sector on Monday, as it fought to dispel fears that it could not pay a coupon on a bond. “I think maybe counterparty risk is emerging,” says Shannon Stemm at Edward Jones in St Louis. “At the root, are some of these [European] banks as well capitalised as the US banks? Probably not. Can they continue to build capital in an environment where there is not a lot of revenue growth, and a lot of expenses have already been taken out of the business?”

• Banks are banks These are confidence stocks. When markets are doing well, banks tend to do well, as companies feel better about doing deals and raising money, investors put on a lot of trades, and asset management arms benefit from big inflows. But when confidence disappears, banks tend to bear the brunt of the sell-off. Matt O’Connor at Deutsche Bank notes that in 15 corrections going back to 1983, the US banks sector has been hit roughly twice as hard as the rest of the market — regional banks about 1.8 times worse, and capital markets-focused banks about 2.3 times worse. “At the end of the day when markets get scared, banks go down more, that is just what happens,” he says. “There is not any kind of imaginary line where you can say, ‘OK this has gone down enough,’ and it’s now a recovery play or a turnround play. They just go down more, until they are done going down or markets feel better about macro conditions.”

• Bank stocks were not cheap before the slide At the peak last July, the S&P 500 was trading about 20% above historical levels, and bank stocks were up to 25% higher than their historical averages, based on multiples of estimated earnings.* But none of these reasons is providing much comfort to investors at the moment. At Edward Jones, Ms Stemm is recommending clients ride out the turmoil by switching big global universal banks for steadier, US-focused lenders such as Wells Fargo and US Bancorp. “If there are global macro concerns, if recession concerns really are on the table, investors would rather get out than wait to see what happens,” she says.

Japan is getting cooked. Fried. Roasted. Torched.

• 10-Year Japanese Government Bond Yield Falls Below Zero (FT)

The universe of government bonds trading with negative yields climbed to a new peak of $6tn on Tuesday as Japan became the first major economy with a sub-zero borrowing rate for 10-year debt. Benchmark bonds issued by the world’s third-largest economy dropped to a yield of minus 0.05%, as investors sought shelter from market convulsions triggered by sliding oil prices, concern for the health of the global economy and mounting fears over parts of the financial system. Japan’s recent decision to introduce a charge on new reserves parked with the central bank has rippled out across global government bond markets as investors expect central banks in Europe to push their overnight borrowing rates further into negative territory. That has spurred strong buying of positive yielding government debt across the eurozone, US and UK markets, while also bolstering other havens such as gold and the yen.

“The bear market in risk assets is evolving very quickly,” said Andrew Milligan at Standard Life. “A month ago the focus was China, then oil, then the prospect of US recession, now it is European financial companies.” The move comes just 11 days after the Bank of Japan’s surprise decision to follow in the footsteps of Switzerland, Denmark, Sweden and the eurozone by adopting negative interest rates, raising fresh concern about the side-effects of ultra-loose monetary policy by central banks. The growing trend of negative yields within the $23tn universe of developed world government debt tracked by JP Morgan has also sapped sentiment for financial shares and bonds, intensifying the demand for havens, as investors reassess their holdings of equities and corporate bonds. David Tan at JPMorgan said negative interest rates were being viewed as negative for bank earnings.

“The principal driver of negative JGB yields was the Bank of Japan’s deposit rate cut to -10bp, and the market now expects additional cuts during this year starting from as soon as the next Bank of Japan meeting,” he said. “This has contributed to a sell-off in banking stocks and a renewed flight to safety into government bonds.” Leading the slide among financials has been Deutsche Bank, with investors worried that it may have trouble repaying its debts. David Ader, CRT Investment Banking bond strategist, said market skittishness was understandable, if not expected. “The European banking system clearly remains a meaningful concern and memories of the credit crisis in the sector are still fresh,” he said.

For Japan’s government, the appreciating yen looms as an uncomfortable development. A weak currency is one of the major hallmarks of Prime Minister Shinzo Abe’s economic revival plan, dubbed Abenomics. Investors now suspect Japan Inc’s assumptions of an average rate of Y117.5 against the dollar during 2016 could leave companies missing profit forecasts and force the BoJ and government into fresh action — if more is possible. “If a 20 basis points cut won’t stop the yen rising, what can the Japanese authorities do? That is the question the market is asking,” said Shusuke Yamada at Bank of America. Investors, especially foreign funds that poured into the Japanese stock market during 2013, are increasingly taking the view that the magic of the “Abenomics” growth programme has worn off. Foreigners sold a net Y1.66tn of Japanese equities in January, according to official figures.

Why not have another one of these scams?

• EU Probes Suspected Rigging Of $1.5 Trillion Debt Market (FT)

European regulators have opened a preliminary cartel investigation into possible manipulation of the $1.5tn government-sponsored bond market, in the latest efforts to root out rigging involving financial traders. The European Commission’s early-stage inquiry comes amid revelations that the US Department of Justice and the UK’s Financial Conduct Authority are also investigating the market. The investigations are part of a campaign by antitrust regulators to root out collusion in financial markets following revelations that groups of traders worked together to manipulate Libor, a key rate that underpins the price of loans around the world. Further allegations followed that traders colluded to rig foreign exchange markets.

The commission’s powerful competition department has sent questionnaires to a number of market participants as part of an early-stage probe into possible manipulation of the price of supranational, subsovereign and agency debt, known as the SSA market. This market covers a diverse range of debt issuers including organisations such as the European Bank for Reconstruction and Development and regional borrowers like Germany’s Länder. A common feature is that the bonds often have a form of implicit or explicit state guarantee. Banks and interdealer brokers have so far been fined around $20bn by authorities around the world in response to the Libor and foreign exchange rate scandals which saw over a dozen leading financial institutions investigated by antitrust authorities.

The findings also led to criminal prosecutions of individual traders, and spurred investigations into other markets such as derivatives trading. The Financial Times reported last month that Crédit Agricole, Nomura and Credit Suisse are among a number of banks being investigated by the DOJ as part of its investigation into possible manipulation of SSA markets. London-based traders at these three banks, in addition to another trader at Bank of America, have been put on leave in response to the DOJ investigations, according to people familiar with the matter. It is understood that the commission’s inquiry started around the same time as the DoJ probe.

The commission’s enquiries concern a possible cartel or “concerted practice” according to the person familiar with the investigation, who did not provide further details. The questionnaires will help Margrethe Vestager, the commission’s competition chief, decide whether there are the grounds to launch a formal probe. Complex cartel cases typically take a minimum of four years to complete and are usually based on evidence from tip-offs provided by whistleblowers. The commission can fine a company involved in a cartel up to 10% of its global turnover.

I picked one detail from the longer article on eurozone banks.

• Italy, A Ponzi Scheme Of Gargantuan Proportions (Tenebrarum)

Ever since the ECB has begun to implement its assorted money printing programs in recent years – lately culminating in an outright QE program involving government bonds, agency bonds, ABS and covered bonds – bank reserves and the euro area money supply have soared. Bank reserves deposited with the central bank can be seen as equivalent to the cash assets of banks. The greater the proportion of such reserves (plus vault cash) relative to their outstanding deposit liabilities, the more of the outstanding deposit money is in fact represented by “covered” money substitutes as opposed to fiduciary media.

Euro area true money supply (excl. deposits held by non-residents) – the action since 2007-2008 largely reflects the ECB’s money printing efforts, as private banks have barely expanded credit on a euro area-wide basis since then.

Many funny tricks have been employed to keep euro area banks and governments afloat during the sovereign debt crisis. Essentially these consisted of a version of Worldcom propping up Enron, with the central bank’s printing press as a go-between. As an example here is how Italian banks and the Italian government are helping each other in pretending that they are more solvent than they really are: the banks buy government properties (everything from office buildings to military barracks) from the government, and pay for them with government bonds. The government then leases the buildings back from the banks, and the banks turn the properties into asset backed securities. The Italian government then slaps a “guarantee” on these securities, which makes them eligible for repo with the ECB. The banks then repo these ABS with the ECB and take the proceeds to buy more Italian government bonds – and back to step one.

Simply put, this is a Ponzi scheme of gargantuan proportions. Still, in view of these concerted efforts to reliquefy the banking system, one would expect that European banks should be at least temporarily solvent, more or less. Since they have barely expanded credit to the private sector, preferring instead to invest in government bonds, the markets should in theory have little to worry about.

Overinvested.

• Maersk Profit Plunges as Oil, Container Units Both Suffer (BBG)

A.P. Moeller-Maersk A/S reported an 84% plunge in 2015 profit after its oil unit was hit by lower energy prices and its container division got squeezed between sluggish trade growth and overcapacity. Maersk said net income was $791 million last year compared with $5.02 billion in 2014. The result includes a writedown in the value of Maersk’s oil assets by $2.6 billion, the Copenhagen-based company said. “Given our expectation that the oil price will remain at a low level for a longer period, we have impaired the value of a number of Maersk Oil’s assets,” CEO Nils Smedegaard Andersen said in the statement. “We will continue to strengthen the Group’s position through strong operational performance and growth investments.”

In October, Maersk started cost cut programs for both of its two biggest units to address what analysts have described as a perfect storm for the conglomerate, which historically has found support from positive market conditions for at least one the two divisions. Maersk said Wednesday that 2016’s underlying profit will be “significantly below” last year’s $3.1 billion. The Maersk Line unit’s profit will also be “significantly below” 2015’s level, which was $1.3 billion. Maersk Oil will report a loss this year, it said. The unit currently breaks even when oil prices are in a range of $45 to $55 a barrel, the company said.

“..with the Australian economy suddenly desperate for lower rates from the RBA, one can ignore the propaganda lies, and focus once again on the far uglier truth…”

• Australia Admits Recent Stellar Job Numbers Were Cooked (ZH)

Two months ago the Australian media, which unlike its US counterpart refuses to be spoon fed ebullient economic propaganda, called bullshit on the spectacular October job numbers, when instead of adding 15,000 jobs as consensus expected, Australia’s Bureau of Statistics reported that a whopping 58,600 jobs had been added. [.] One month later, the situation got even more ridiculous, when instead of the expected 10,000 drop in November, the “statistical” bureau announced that 71,400 jobs had been added, the most in 15 years, and the equivalent of 1 million jobs added in the US. Once again the local media cried foul.

Two months later we find that the media, and all those mocking the government propaganda apparatus, were spot on, because moments ago today, Australia Treasury Secretary John Fraser, during testimony to parliamentary committee, admitted that jobs growth for the two months in question “may be overstated.” What’s the reason? The same one the propaganda bureau always uses when its lies are exposed: “technical issues”, the same explanation the Atlanta Fed used in its explanation for a strangely belated release of its GDP Now estimate one month ago. Here’s Bloomberg with more:

Australia has had some technical issues with its labor data, which “look a little bit better” than would otherwise have been the case, the secretary to the Treasury said, commenting on record employment growth in the final quarter of 2015. John Fraser, the nation’s top economic bureaucrat, told a parliamentary panel in Canberra Wednesday that he held discussions on the employment figures with the chief statistician this week. He didn’t elaborate on the meeting but said the recent strength in the jobs market is encouraging.

There were some “technical issues” in October and November that may have made the employment figures “look a little bit better than otherwise would be the case,” he said. The technical issues relate to “rolling off” of participants in the labor survey. Australia’s economy added 55,000 jobs in October and a further 74,900 in November, before shedding 1,000 in December to produce the record quarterly gain. Questions regarding the accuracy of the data have been raised following acknowledgment by the statistics agency in 2014 of measurement challenges.

Why the sudden admission it was all a lie? Simple: weakness in commodity prices “is far greater than people had been expecting,” Fraser said in earlier remarks to the panel. Australia is now “swimming against the tide” because of uncertainties in the global economy, he added. Translation: “we need more easing, and to do that, the economy has to go from strong to crap.” And with the Australian economy suddenly desperate for lower rates from the RBA, one can ignore the propaganda lies, and focus once again on the far uglier truth.

Which makes us wonder: with the Yellen Fed in desperate need of political cover for relenting on its terrible rate hike strategy, and once again lowering rates to zero or negative, a recession – something JPM hinted at yesterday – will be critical. And what better way to admit the US has been in one for nearly a year than to drastically revise all the exorbitant labor numbers over the past 12 months. You know, for “technical reasons”…

The crazies are in charge: “Ash Carter said he would ask for spending on US military forces in Europe to be quadrupled in the light of “Russian aggression”. The allocation for combating Islamic State, in contrast, is to be increased by 50%.”

• Pentagon Fires First Shot In New Arms Race (Guardian)

As the voters of New Hampshire braved the snow to play their part in the great pageant of American democracy on Tuesday, the US secretary of defence was setting out his spending requirements for 2017. And while the television cameras may have preferred the miniature dramas at the likes of Dixville Notch, the reorientation of US defence priorities under the outgoing president may turn out to exert the greater influence – and not in a good way, at least for the future of Europe. In a speech in Washington last week, previewing his announcement, Ash Carter said he would ask for spending on US military forces in Europe to be quadrupled in the light of “Russian aggression”. The allocation for combating Islamic State, in contrast, is to be increased by 50%. The message is unambiguous: as viewed from the Pentagon, the threat from Russia has become more alarming, suddenly, even than the menace that is Isis.

If this is Pentagon thinking, then it reverses a trend that has remained remarkably consistent throughout Barack Obama’s presidency. Even before he was elected there was trepidation in some European quarters that he would be the first genuinely post-cold war president – too young to remember the second world war, and more global than Atlanticist in outlook. And so it proved. From his first day in the White House, Obama seemed more interested in almost anywhere than Europe. He began his presidency with an appeal in Cairo addressed to the Muslim world, in an initiative that was frustrated by the Arab spring and its aftermath, but partly rescued by last year’s nuclear agreement with Iran. He had no choice but to address the growing competition from China, and he ended half a century of estrangement from Cuba.

But Europe, he left largely to its own devices. When France and the UK intervened in Libya, the US “led from behind”. Most of the US troops remaining in Europe, it was disclosed last year, were to be withdrawn. Nor was such an approach illogical. Europe was at peace – comparatively, at least. The European Union was chugging along, diverted only briefly (so it might have seemed from the US) by the internal crises of Greece and the euro. Even the unrest in Ukraine, at least in its early stages, was treated by Washington more as a local difficulty than a cold war-style standoff. Day to day policy was handled (fiercely, but to no great effect) by Victoria Nuland at the state department; Sanctions against Russia were agreed and coordinated with the EU. All the while – despite the urging of the Kiev government – Obama kept the conflict at arm’s length.

Congress agitated for weapons to be sent, but Obama wisely resisted. This was not, he thereby implied, America’s fight. In the last months of his presidency, this detachment is ending. The additional funds for Europe’s defence are earmarked for new bases and weapons stores in Poland and the Baltic states. There will be more training for local Nato troops, more state-of-the-art hardware and more manoeuvres. Now it is just possible that the extra spending and the capability it will buy are no more than sops to the “frontline” EU countries in the runup to the Nato summit in Warsaw in July, to be quietly forgotten afterwards. More probably, though, they are for real – and if so the timing could hardly be worse. Ditto the implications for Europe’s future.

By planning to increase spending in this way, the US is sending hostile signals to Russia at the very time when there is less reason to do so than for a long time. It is nearly two years since Russia annexed Crimea and 18 months since the downing of MH17. The fighting in eastern Ukraine has died down; there is no evidence of recent Russian material support for the anti-Kiev rebels, and there is a prospect, at least, that the Minsk-2 agreement could be honoured, with Ukraine (minus Crimea) remaining – albeit uneasily – whole.

These people are inventing a entire parallel universe, and nobody says a thing. NATO to patrol the Med on refugee streams? NATO is an aggression force, an army way past its expiration date. It has zero links to refugees. There is no military threat there. Oh, but then we bring in Russia.. “Stoltenberg said naval patrols would fit into “reassurance measures” to shield Turkey from the war in neighboring Syria..” ‘We’ have lost our marbles. ‘We’ are on the war path.

• NATO Weighs Mission to Monitor Mediterranean Refugee Flow (BBG)

NATO will weigh calls for a naval mission in the eastern Mediterranean Sea to police refugee streams as a fresh exodus from Syria adds to European leaders’ desperation. Such a mission, proposed by Germany and Turkey, would thrust the 28-nation alliance into the humanitarian trauma aggravated by the Russian-backed offensive by Syrian troops that drove thousands out of Aleppo and toward Turkey. “We will take very seriously a request from Turkey and other allies to look into what NATO can do to help them cope with and deal with the crisis,” NATO Secretary General Jens Stoltenberg told reporters in Brussels on Tuesday. NATO is confronted with Russian intervention in the Middle East – including airspace violations over Turkey, an alliance member – after reinforcing its eastern European defenses in response to the Kremlin’s annexation of Crimea and fomenting rebellion in Ukraine in 2014.

Allied warships now on a counter-terrorism mission in the Mediterranean and anti-piracy patrols off the coast of Somalia could be reassigned to monitor and potentially go after human traffickers in the Aegean Sea between Greece and Turkey. A naval mission, to be discussed Wednesday and Thursday at a meeting of defense ministers in Brussels, is controversial. It could produce unpleasant images of NATO sailors and soldiers herding refugee children behind barbed wire, handing a propaganda victory to Islamic radicals and the alliance’s detractors in the Kremlin. With her political standing in jeopardy as German public opinion turns against her open-arms approach, German Chancellor Angela Merkel went to Ankara on Monday with limited European leverage to persuade Turkey to house more refugees on its soil instead of pointing them toward western Europe.

Stoltenberg said naval patrols would fit into “reassurance measures” to shield Turkey from the war in neighboring Syria that already include Patriot air-defense missiles and air surveillance over Turkish territory and the coast. U.S. Ambassador to NATO Douglas Lute called on European Union governments to take the lead on civilian emergency management, with the alliance confined to offering backup. He said military planners will draw up options. “This is fundamentally an issue that should be addressed a couple miles from here at EU headquarters, but it doesn’t mean NATO can’t assist,” Lute told reporters.

I could have spared them the research.

• Border Fences Will Not Stop Refugees, Migrants Heading To Europe (Reuters)

Efforts by European countries to deter migrants with border fences, teargas and asset seizures will not stem the flow of people into the continent, and European leaders should make their journeys safer, a think-tank said on Wednesday. The Overseas Development Insitute (ODI) said Europe must act now to reduce migrant deaths in the Mediterranean, where nearly 4,000 people died last year trying to reach Greece and Italy, and more than 400 have died so far this year. European governments could open consular outposts in countries like Turkey and Libya which could grant humanitarian visas to people with a plausible asylum claim, the think-tank said. Allowing people to fly directly to Europe would be safer and cheaper than for them to pay people smugglers, and would help cripple the smuggling networks that feed off the migrant crisis, the London-based ODI said.

More than 1.1 million people fleeing poverty, war and repression in the Middle East, Asia and Africa reached Europe’s shores last year, prompting many European leaders to take steps to put people off traveling. But the ODI said new research showed such attempts either fail to alter people’s thinking or merely divert flows to neighboring states. Researchers interviewed 52 migrants from Syria, Eritrea and Senegal who had recently arrived in Germany, Britain and Spain. Their journeys had cost an average 2,680 pounds ($3,880) each. More than one third had been victims of extortion, and almost half the Eritreans had been kidnapped for ransom during their journey. Researchers said that, contrary to popular perception, many migrants left home without a clear destination in mind. Their experiences along the way and the people they met informed where they would go next.

Information from European governments was unlikely drastically to alter migrants’ behavior, the ODI said. “Our research suggests that while individual EU member states may be able to shift the flow of migration on to their neighbors through deterrent measures such as putting up fences, using teargas and seizing assets, it does little to change the overall number … coming to Europe,” said report co-author Jessica Hagen-Zanker. “As one of the people we interviewed put it ‘When one door shuts, another opens’.”

Debt Rattle February 8 2016

Feb 082016

February 8, 2016 Posted by Raúl Ilargi Meijer at 9:41 am Finance Tagged with: Australia, Deutsche, Dotcom2.0, EM, oil, selloff, shorts, tech bubble, VW 3 Responses »

DPC City Hall subway station, New York 1904

• Deutsche Bank Is Shaking To Its Foundations (SI)

• Why A Selloff In European Banks Is So Ominous (MW)

• Lending To Emerging Markets Comes To A Halt (FT)

• What the Heck is Going On in the Stock Market? (WS)

• Dot Com 2.0 – The Sequel Unfolds (St.Cyr)

• CEOs, Venture Backers Lose Big As Linkedin, Tableau Shares Tumble (Reuters)

• Record Numbers Of Longs And Shorts Are Piling Into Oil (BBG)

• Prolonged Slump Sparks 2nd Wave Of Cuts To 2016 Oil Company Budgets (Reuters)

• World’s Largest Energy Trader Sees a Decade of Low Oil Prices (BBG)

• 150 North Sea Oil Rigs Could Be Scrapped In 10 Years (Scotsman)

• Iran Wants Euro Payment For New And Outstanding Oil Sales (Reuters)

• Fining Bankers, Not Shareholders, for Banks’ Misconduct (Morgenson)

• Volkswagen’s Emissions Lies Are Coming Back To Haunt It (BBG)

• Moody’s Cuts Rating On Western Australia Iron Ore (WSJ)

• British Expat Workers Flood Home As Australia Mining Boom Turns To Dust (Tel.)

• Ukraine: A USA-Installed Nazi-Infested Failed State (Lendman)

• Through The Past, Darkly, For Europe’s Central Bankers (Münchau)

• German, French Central Bankers Call For Eurozone Finance Ministry (Reuters)

Arguably world’s biggest bank. “Deutsche Bank is now trading at less than 50% of the share price it was trading at in July last year. And no, the market isn’t wrong about this one. ..” The market will be going after Deutsche. Which is too vulnerable to save.

• Deutsche Bank Is Shaking To Its Foundations (SI)

The earnings season has started, and several major banks in the Eurozone have already reported on how they performed in the fourth quarter of 2015, and the entire financial year. Most results were quite boring, but unfortunately Deutsche Bank once again had some bad news. Just one week before it wanted to release its financial results, it already issued a profit warning to the markets, and the company’s market capitalization has lost in excess of 5B EUR since the profit warning, on top of seeing an additional 18B EUR evaporate since last summer. Deutsche Bank is now trading at less than 50% of the share price it was trading at in July last year. And no, the market isn’t wrong about this one.

The shit is now really hitting the fan at Deutsche Bank after having to confess another multi-billion euro loss in 2015 on the back of some hefty litigation charges (which are expected to persist in the future). And to add to all the gloom and doom, even Deutsche Bank’s CEO said he didn’t really want to be there . Talk about being pessimistic! Right after Germany’s largest bank (and one of the banks that are deemed too big to fail in the Eurozone system) surprised the market with these huge write-downs and high losses, the CDS spread started to increase quite sharply. Back in July of last year, when Deutsche Bank’s share price reached quite a high level, the cost to insure yourself reached a level of approximately 100, but the CDS spread started to increase sharply since the beginning of this year.

It reached a level of approximately 200 in just the past three weeks, indicating the market is becoming increasingly nervous about Deutsche’s chances to weather the current storm. Let’s now take a step back and explain why the problems at Deutsche Bank could have a huge negative impact on the world economy. Deutsche has a huge exposure to the derivatives market, and it’s impossible, and then we mean LITERALLY impossible for any government to bail out Deutsche Bank should things go terribly wrong. Keep in mind the exposure of Deutsche Bank to its derivatives portfolio is a stunning 55T EUR, which is almost 20 times (yes, twenty times) the GDP of Germany and roughly 5 times the GDP of the entire Eurozone! And to put things in perspective, the TOTAL government debt of the US government is less than 1/3rd of Deutsche Bank’s exposure.

Because it will pop the European finance bubble.

• Why A Selloff In European Banks Is So Ominous (MW)

European banks have been caught in a perfect storm of market turmoil, lately. Lackluster profits and negative interest rates, have prompted investors to dump shares in the sector that was touted as one of the best investment ideas just a few months ago. The region’s banking gauge, the Stoxx Europe 600, has logged six straight weeks of declines, its longest weekly losing stretch since 2008, when banks booked 10 weeks of losses, beginning in May, according to FactSet data. “The current environment for European banks is very, very bad. Over a full business cycle, I think it’s very questionable whether banks on average are able to cover their cost of equity. And as a result that makes it an unattractive investment for long-term investors,” warned Peter Garnry at Saxo Bank. The doom-and-gloom outlook for banks comes as the stock market has had an ominous start to the year.

East or west, investors ran for the exit in a market marred by panic over tumbling oil prices and signs of sluggishness in China. But for Europe’s banking sector, the new year has started even worse, sending the bank index down 20% year-to-date, compared with 11% for the broader Stoxx Europe 600 index. So what happened? At the end of last year, banks were singled out as one of the most popular sectors for 2016 because of expected benefits from higher bond yields, rising inflation expectations and improved economic growth. That outlook, however, was before the one-two punch of plunging oil and a slowdown in China sapped investor confidence world-wide. Garnry said the slump in bank shares is “a little bit odd” given the recent growth in the European economy and aggressive easing from the ECB.

Normally, banks benefit from measures such as quantitative easing, but it’s just not doing the trick in Europe. “And its worrisome, because banks are much more important for the credit mechanism in the economy here in Europe than it is in the U.S. There, you have a capital market where it’s easier to issue corporate bonds and get funding outside the commercial banking system. We don’t have that to the same extent in Europe, and therefore [the current weakness] is a little bit scary,” he said. Some of the sector’s collective underperformance comes down to exceptionally bad performances for a number of the bigger banks. Deutsche Bank, for example, has tumbled 32% year to date, amid a painful restructuring. And Credit Suisse is down 31% for the year as it posted a massive fourth-quarter loss.

Has long since reversed.

• Lending To Emerging Markets Comes To A Halt (FT)

The surge in lending to emerging markets that helped fuel their own — and much of the world’s — growth over the past 15 years has come to a halt, and may now give way to a “vicious circle” of deleveraging, financial market turmoil and a global economic downturn, the Bank for International Settlements has warned. “In the risk-on phase [of the global economic cycle], lending sets off a virtuous circle in financial conditions in which things can look better than they really are,” said Hyun Song Shin, head of research at the BIS, known as the central bank of central banks. “But flows can quickly go into reverse and then it becomes a vicious circle, especially if there is leverage,” he told the FT. That reversal has already taken place, according to BIS data released on Friday.

The total stock of dollar-denominated credit in bonds and bank loans to emerging markets — including that to governments, companies and households but excluding that to banks — was $3.33tn at the end of September 2015, down from $3.36tn at the end of June. It marks the first decline in such lending since the first quarter of 2009, during the global financial crisis, according to the BIS. The BIS data add to a growing pile of evidence pointing to tightening credit conditions in emerging markets and a sharp reversal of international capital flows. On Thursday, The IMF’s Christine Lagarde warned of the threat to global growth of an impending crisis in emerging markets. The Institute of International Finance, an industry body, said last month that emerging markets had seen net capital outflows of an estimated $735bn during 2015, the first year of net outflows since 1988.

In November, the IIF warned of an approaching credit crunch in EMs as bank lending conditions deteriorated sharply. This month, it said a contraction over the past year in the liquidity made available to the world’s financial system by central banks, primarily those in developed markets, now presented more of a threat to global growth than the slowdown in China and falling oil prices. Jaime Caruana, general manager of the BIS, said that recent turmoil on equity markets, disappointing economic growth, large movements in exchange rates and falling commodity prices were not unconnected, exogenous shocks but indicative of maturing financial cycles, particularly in emerging economies, and of shifts in global financial conditions. He noted that, while some advanced economies had reduced leverage after the crisis, debt had continued to build up in many emerging economies.

“Recent events are manifestations of maturing financial cycles in some emerging economies,” he said. The problem was aggravated, Mr Shin added, by the deteriorating quality of the assets financed by the lending boom. He noted that the indebtedness of companies in emerging markets as a%age of GDP had overtaken that of those in developed markets in 2013, just as the profitability of EM companies had fallen below that of DM ones for the first time. Since then, leverage in emerging economies had increased further as profitability had decreased, with exchange rates playing an important role. “Stronger EM currencies fed into more debt and more risk taking. Now that the dollar is strengthening, we have turned into a deleveraging cycle in EMs. So there is a sudden surge in measurable risk; all the weaknesses are suddenly being uncovered.”

Wolf has another nice list of plunging stocks. Tech bubble.

• What the Heck is Going On in the Stock Market? (WS)

Even Moody’s which is always late to the party with its warnings – but when it does warn, it’s a good idea to pay attention – finally warned: “Don’t fall into the trap of believing all is well outside of oil & gas.” What happened on Friday was the culmination of another dreary week in the stock markets, with the Dow down 1.3% for the day and 1.6% for the week, the S&P 500 down 1.8% and 3.1% respectively, and the Nasdaq down 3.2% and 5.4%. The S&P 500 is now nearly 12% off its record close in May, 2015; the Nasdaq nearly 17%. So on the surface, given that the Nasdaq likes to plunge over 70% before crying uncle, not much has happened yet. But beneath the surface, there have been some spectacular fireworks.

Not too long ago, during the bull market many folks still fondly remember and some think is still with us, a company could announce an earnings or revenue debacle but throw in a big share-buyback announcement, and its shares might not drop that much as dip buyers would jump in along with the company that was buying back its own shares, and they’d pump up the price again. Those were the good times, the times of “consensual hallucination,” as we’ve come to call it, because all players tried so hard to be deluded. It was the big strategy that worked. But not anymore. And that’s the sea change. Reality is returning, often suddenly, and in the most painful manner.

“Don’t wait too long on that “right price.” For if the current value of Alibaba™ is any indication – “right” is becoming more inline with “any” much faster than anyone dared think just a year prior..”

• Dot Com 2.0 – The Sequel Unfolds (St.Cyr)

Once high flyers such as the aforementioned Twitter and others are crashing to Earth like the proverbial canary. Companies like Square™, Box™, GoPro™, Pandora™, and now far too many others have watched their stock prices hammered ever lower. Yes, hammered, as in representing one selling round after another with almost no respite. Some have lost 90% of their once lofty high share prices. What’s further disheartening to those still clinging (or praying) to the “meme-dream” is the ever-increasing reputation of the old “Great companies on sale!” chortles from many a next in rotation fund manager on TV, radio, or print. For it seems every round of selling is being met with ever more selling – no buying. And the lower they go with an ever intensifying pressure, so too does the value of the debutantes in waiting: The yet to be IPO’d unicorns.

Valuation after unicorn valuation are getting marked down in one fell swoops such as that from Fidelity™ and others. However, there probably wasn’t a better representation on how little was left to the unicorn myth (and yes I believed/believe all these valuation metrics were myth and fairy-tales) than the very public meme shattering experienced in both the IPO, as well as the subsequent price action of Square. Here it was touted the IPO price was less than the unicorn implied valuation. This was supposedly done as to show “value” for those coming in to be next in line to pin their tails on the newest unicorn of riches. The problem? It sold, and sold, and is still selling – and not in a good way. It seems much like the other company Mr. Dorsey is CEO of (and how anyone with any business acumen argued that was a good idea is still beyond me. But I digress.) this unicorn also can’t fly. And; is in a perilous downward spiral of meeting the ground of reality.

It seems the only interest in buying these once high flyers can garner is wrapped up into any rumor (usually via a Tweet!) that they are to be sold – as in acquired by someone else who might be able to make money with them. Well, at least that would free up the ole CEO dilemma, no? And speaking of CEO dilemma and acquiring – how’s Yahoo!™ doing? Remember when the strategy for success for Yahoo as posited by the very public adoration styled magazine cover girl articles of its current CEO Marisa Mayer was an acquisition spree? This was all but unquestionable (and much digital ink spilled) in its brilliance and vision inspired forward thinking. Well, it seems all that “brilliance” has been eviscerated much like how the workforce still employed there is yet to be.

Let me be blunt: All you needed to know things were amiss both at Yahoo as well as “the Valley” itself was to look at the most recent decision of Ms. Mayer to throw a lavish multi-million dollar costumed theme party mere months ago. As unquestionably foolish as this was – the rationale given by many a Silicon Valley aficionado that it was nothing, after all, “it’s common in the Valley” was ever the more stupefying! Now it seems Yahoo is “cutting its workforce by double-digit%ages.” And: open to the possibility of selling off core assets of its business. Of course – at the right price. However, I’d just offer this advice: Don’t wait too long on that “right price.” For if the current value of Alibaba™ is any indication – “right” is becoming more inline with “any” much faster than anyone dared think just a year prior.

DotCom 2.0 revisited.

• CEOs, Venture Backers Lose Big As Linkedin, Tableau Shares Tumble (Reuters)

LinkedIn Executive Chairman Reid Hoffman lost almost half his $2.8 billion fortune on paper Friday as shares of his social media company suffered their largest drop on record. He was not alone in taking heavy losses. Other executives at LinkedIn, some at business analytics company Tableau Software, and a number of the companies’ venture capital backers also took losses running into tens of millions of dollars as both stocks tumbled on dismal financial outlooks. It was a humbling moment highlighting the personal exposure many technology leaders and venture capitalists face as Wall Street reassesses their value at an uncertain time for the sector. Silicon Valley-based LinkedIn’s shares closed down 43.6% at $108.38 on Friday, after hitting a three-year low, following a sales forecast well short of analysts’ expectations. Shares of Seattle-based Tableau Software, a business analytics tools company, fell 49.4% to $41.33 after cutting its full-year profit outlook.

As a result, LinkedIn’s Hoffman lost $1.2 billion from his value on paper on Friday, slashing his stake to $1.6 billion, based on his holdings detailed in a filing with securities regulators from March, which the company said was the most up-to-date. LinkedIn’s Chief Executive Jeff Weiner saw the value of his stake fall by $70.9 million to $91.5 million. At Tableau, the value of CEO Christian Chabot’s stake was slashed nearly in half to $268 million, based on his holdings in a filing with securities regulators in March. Besides Hoffman and Weiner, several venture capitalists who sit on LinkedIn’s board and own stakes in the company suffered substantial losses. Michael Moritz, the chairman of Sequoia Capital who owns more shares than any individual investor besides Hoffman and Weiner, lost $56 million as his stake’s value shrank to $72.8 million. David Sze at Greylock Partners saw the value of his stake slide to $5 million after losing $3.9 million on Friday.

“Any commodity market where inventories are at the highest level in more than 85 years is going to be bearish.”

• Record Numbers Of Longs And Shorts Are Piling Into Oil (BBG)

Money managers may not agree where oil prices are headed, but they are increasingly eager to place their bets. Total wagers on the price of crude climbed to the highest since the U.S. Commodity Futures Trading Commission began tracking the data in 2006. Speculators’ combined short and long positions in West Texas Intermediate crude, the U.S. benchmark, rose to 497,280 futures and options contracts in the week ended Feb. 2. WTI moved more than 1% each day in the past three weeks. U.S. crude stockpiles climbed to the highest level in more than 85 years and Venezuela called for cooperation between OPEC and other oil-exporting countries to stem the drop in prices. The slump has slashed earnings from Royal Dutch Shell to Chevron, while Exxon Mobil reduced its drilling budget to a 10-year low.

“This is a reflection of a lot of conviction on both sides,” said John Kilduff at Again Capital, a hedge fund that focuses on energy. “We’re seeing a battle royal between those who think a bottom has been put in and those who think we have lower to go.” WTI slumped 5% to $29.88 a barrel in the report week on the New York Mercantile Exchange. The March contract added 10 cents, or 0.3%, to $30.99 at 12:18 p.m. Singapore time on Monday. [..] “There’s a difference of opinion about the direction of the market,” said Tim Evans at Citi Futures Perspective in New York. “It looks like some of the high price levels offered an opening for shorts to get back into the market. The shorts were the winners on a net basis.”

In other markets, net bearish wagers on U.S. ultra low sulfur diesel increased 11% to 23,765 contracts. Diesel futures advanced 4.5% in the period. Net bullish bets on Nymex gasoline slipped 18% to 14,328 contracts as futures dropped 4.4%. The risks are weighted to the downside because of the global glut, Citi’s Evans said. U.S. crude stockpiles climbed 7.79 million barrels to 502.7 million in the week ended Jan. 29, the highest since 1930, according to Energy Information Administration. Gasoline supplies climbed 5.94 million barrels to 254.4 million, the highest in weekly records going back to 1990. “The rise in U.S. inventories is confirmation of a larger physical supply surplus,” Evans said. “Any commodity market where inventories are at the highest level in more than 85 years is going to be bearish.”

Time for the big margin calls?!

• Prolonged Slump Sparks 2nd Wave Of Cuts To 2016 Oil Company Budgets (Reuters)

Less than two months into the year, the top U.S. shale oil companies have already cut their budget for 2016 a second time as the relentless drop in oil prices continues to erode their cash flow. With oil prices firmly wedged in the low $30-per-barrel range, oil producers are deferring spending on new wells and projects. “Companies’ language has shifted towards preserving balance sheets and cash, and keeping expenditure within cash-flows, which means that budgets are going to fall further,” said Topeka Capital Markets analyst Gabriele Sorbara. 18 of the top 30 U.S. oil companies by output have so far outlined their spending plans for 2016. They have reduced their budget by 40% on average, steeper than most analysts’ expectations, according to a Reuters analysis. These 30 companies had, on average, lowered their spending plans for 2016 by more than 70% last year.

Some such as Hess Corp and ConocoPhillips, who had already planned to spend less this year than in 2015, have now further cut their capital expenditure targets. Others are expected to follow suit. But, is there room for further cuts? While reduced prices for oilfield services and increased efficiencies have helped companies scale back spending, many industry experts say there may not be room for further cuts. “It’s almost like a 80/20 rule – 80% of the cost reduction has already occurred, another 20% remains,” said Rob Thummel at Tortoise Capital Advisors. Although the reduced spending has not yet impacted shale output, production is expected to start falling by the end of the year. “The capital cuts that the industry is making should result in … a supply shock to the downside,” ConocoPhillips’ chief executive, Ryan Lance, said on Thursday.

Looking 10 years ahead? Sure.

• World’s Largest Energy Trader Sees a Decade of Low Oil Prices (BBG)

Oil prices will stay low for as long as 10 years as Chinese economic growth slows and the U.S. shale industry acts as a cap on any rally, according to the world’s largest independent oil-trading house. “It’s hard to see a dramatic price increase,” Vitol CEO Ian Taylor told Bloomberg in an interview, saying prices were likely to bounce around a band with a mid-point of $50 a barrel for the next decade. “We really do imagine a band, and that band would probably naturally see a $40 to $60 type of band,” he said. “I can see that band lasting for five to ten years. I think it’s fundamentally different.” The lower boundary would imply little price recovery from where Brent crude, the global price benchmark, trades at about $35 a barrel.

The upper limit would put prices back to the level of July 2015, when the oil industry was already taking measures to weather the crisis. The forecast, made as the oil trading community’s annual IP Week gathering starts in London on Monday, would mean oil-rich countries and the energy industry would face the longest stretch of low prices since the the 1986-1999 period, when crude mostly traded between $10 and $20 a barrel. Vitol trades more than five million barrels a day of crude and refined products – enough to cover the needs of Germany, France and Spain together – and its views are closely followed in the oil industry.

Taylor, a 59-year-old trader-cum-executive who started his career at Royal Dutch Shell in the late 1970s, said he was unsure whether prices have already bottomed out, as supply continued to out-pace demand, leading to ever higher global stockpiles. However, he said that prices were likely to recover somewhat in the second half of the year, toward $45 to $50 a barrel. For the foreseeable future, Taylor doubts the oil market would ever see the triple-digit prices that fattened the sovereign wealth funds of Middle East countries and propelled the valuations of companies such as Exxon Mobil and BP. “You have to believe that there is a possibility that you will not necessarily go back above $100, you know, ever,” he said.

How many will be capped in for good?

• 150 North Sea Oil Rigs Could Be Scrapped In 10 Years (Scotsman)

Almost 150 oil rigs in UK waters could be scrapped within the next 10 years, according to industry analysts Douglas Westwood, which carries out market research and consultancy work for the energy industry worldwide, said it anticipated that “146 platforms will be removed from the UK during 2019-2026”. The North Sea has been hit hard by plummeting oil prices, with the industry body Oil and Gas UK estimating 65,000 jobs have been lost in the sector since 2014. But Douglas Westwood said that decommissioning could provide an opportunity for the specialist firms involved in the work. Later this month it will publish its decommissioning market forecast for the North Sea – covering Denmark, Germany, Norway and the UK – over the period 2016 to 2040.

Ahead of that a paper on its website predicted that the “UK will dominate decommissioning expenditure”. This is down to the “high number of ageing platforms in the UK, which have an average age of over 20 years and are uneconomic at current commodity prices, as a result of high maintenance costs and the expensive production techniques required for mature fields”. Douglas Westwood said: “The oil price collapse has been bad news for nearly every company involved in the industry, but one group that could actually benefit from it are specialist decommissioning companies. “For these companies there is an opportunity to be part of removing the huge tonnage of infrastructure that exists in the North Sea. With oil prices forecast to remain low, life extension work that has kept many North Sea platforms producing long past their design life no longer makes commercial sense.”

Some people will try and make a big deal out of this.

• Iran Wants Euro Payment For New And Outstanding Oil Sales (Reuters)

Iran wants to recover tens of billions of dollars it is owed by India and other buyers of its oil in euros and is billing new crude sales in euros, too, looking to reduce its dependence on the U.S. dollar following last month’s sanctions relief. A source at state-owned National Iranian Oil told Reuters that Iran will charge in euros for its recently signed oil contracts with firms including French oil and gas major Total, Spanish refiner Cepsa and Litasco, the trading arm of Russia’s Lukoil. “In our invoices we mention a clause that buyers of our oil will have to pay in euros, considering the exchange rate versus the dollar around the time of delivery,” the NIOC source said. Iran has also told its trading partners who owe it billions of dollars that it wants to be paid in euros rather than U.S. dollars.

Iran was allowed to recover some of the funds frozen under U.S.-led sanctions in currencies other than dollars, such as the Omani rial and UAE dhiram. Switching oil sales to euros makes sense as Europe is now one of Iran’s biggest trading partners. “Many European companies are rushing to Iran for business opportunities, so it makes sense to have revenue in euros,” said Robin Mills, CEO of Dubai-based Qamar Energy. Iran has pushed for years to have the euro replace the dollar as the currency for international oil trade. In 2007, Tehran failed to persuade OPEC members to switch away from the dollar, which its then President Mahmoud Ahmadinejad called a “worthless piece of paper”.

What are the odds? If not done retroactively, how would it work out?

• Fining Bankers, Not Shareholders, for Banks’ Misconduct (Morgenson)

Ho-hum, another week, another multimillion-dollar settlement between regulators and a behemoth bank acting badly. The most recent version involves two such financial institutions, Barclays and Credit Suisse. They agreed last Sunday to pay $154.3 million after regulators contended that their stock trading platforms, advertised as places where investors would not be preyed on by high-frequency traders, were actually precisely the opposite. On both banks’ systems, investors trying to execute their transactions fairly were harmed. As has become all too common in these cases, not one individual was identified as being responsible for the activities. Once again, shareholders are shouldering the costs of unethical behavior they had nothing to do with.

It could not be clearer: Years of tighter rules from legislators and bank regulators have done nothing to fix the toxic, me-first cultures that afflict big financial firms. Regulators are at last awakening to this reality. On Jan. 5, for example, the Financial Industry Regulatory Authority, a top Wall Street cop, announced its regulatory priorities for 2016. Among the main issues in its sights, the regulator said, was the culture at these companies. “Nearly a decade after the financial crisis, some firms continue to experience systemic breakdowns manifested through significant violations due to poor cultures of compliance,” said Richard Ketchum, Finra’s chairman.

“Firms with a strong ethical culture and senior leaders who set the right tone, lead by example and impose consequences on anyone who violates the firm’s cultural norms are essential to restoring investor confidence and trust in the securities industry.” But changing behavior — as opposed, say, to imposing higher capital requirements — is a complex task. And regulators must do more than talk about what banks have to do to address their deficiencies. Andreas Dombret is a member of the executive board of the Deutsche Bundesbank, Germany’s central bank, and head of its department of banking and financial supervision. In an interview late last year, he said he was determined to tackle the problem of ethically challenged bankers.

“If behavior doesn’t change, banks will not be trusted and they won’t be efficient in their financing of the real economy,” he said. “A functioning banking system must be based on trust.” Mr. Dombret is a regulator who knows banking from the inside, having held executive positions at J.P. Morgan and Bank of America. Most companies have codes of ethics, Mr. Dombret said, but they often exist only on paper. Regulators could help encourage a more ethical approach by routinely monitoring how a bank cooperates with its overseers, Mr. Dombret said. “How often is the bank the whistle-blower?” he asked. “Not only to get a lesser penalty but also to show that it won’t accept that kind of behavior. We are seeing more of that.”

What VW didn’t get: the key player is the California Air Resources Board. You don’t want to piss them off. “Use of defeat devices is a civil violation” of the Clean Air Act, Uhlmann said. “Lying about CAA compliance is a criminal violation.”

• Volkswagen’s Emissions Lies Are Coming Back To Haunt It (BBG)

No one has died from the emissions-cheating software Volkswagen has admitted it installed in some of its cars, yet the U.S. Justice Department may treat it more harshly than two automakers whose vehicles have killed people. General Motors vehicles were fitted with faulty ignition switches linked to at least 124 deaths. Toyota cars were involved in unintended acceleration responsible for at least four deaths. Neither had to plead guilty in settling criminal allegations, but Volkswagen may be forced to if it’s charged with criminal conduct and also wants to settle, according to attorneys who specialize in environmental law. The German automaker lied to the Environmental Protection Agency and California regulators for almost a year before admitting it created a device to fool emissions tests, Mary D. Nichols, chair of the California Air Resources Board, said in September.

Now the company faces a Justice Department that’s become more willing to push businesses across industries into guilty pleas tied to multibillion-dollar penalties. The U.S. attorney general also made it a priority last year to pursue criminal convictions against corporate executives. “We’ve had difficulty in controlling the automobile industry,” said Daniel Riesel at Sive, Paget & Riesel, a law firm that isn’t involved in the case. “Clearly the government regards this as a very serious environmental dereliction and is making a big deal of it.” [..] The U.S. civil complaint against Volkswagen alleges four violations of the Clean Air Act and cites potential civil fines that could be in the billions of dollars, according to Justice Department officials. If the BP case is a guide, criminal penalties could be less costly.

A criminal claim probably would be based on allegations that Volkswagen lied to government officials, said David Uhlmann, a law professor at the University of Michigan in Ann Arbor and former head of the environmental-crimes section of the Justice Department’s Environment and Natural Resources Division. When confronted about excess emissions by EPA and California regulators in meetings over several months, Volkswagen engineers cited technical issues rather than admitting the engines contained the defeat devices, according to the Justice Department. The company also initially denied in November that it installed software in larger engines to alter emissions, the department said. “Use of defeat devices is a civil violation” of the Clean Air Act, Uhlmann said. “Lying about CAA compliance is a criminal violation.”

Just getting started.

• Moody’s Cuts Rating On Western Australia Iron Ore (WSJ)

Moody’s Investors Service cut its rating on Western Australia, one of the world’s major iron-ore hubs, as a sharp downturn in prices for the steelmaking commodity puts increasing strain on the state’s finances. The ratings agency said on Monday it had downgraded the long-term issuer and senior unsecured debt ratings of the Western Australian Treasury, which issues debt on behalf of the state of Western Australia and state-owned corporations, to Aa2 from Aa1, citing “the ongoing deterioration in Western Australia’s financial and debt metrics and an increasing risk that the state’s debt burden will be higher than indicated.”

Ratings agencies have put many resources-focused companies and countries on watch amid a deep fall in world commodity prices. Last week, Standard & Poor’s Ratings Services said it has lowered BHP Billiton credit rating and cautioned it could cut again as early as this month. It also downgraded Glencore’s rating to just one notch above junk status. Moody’s said Western Australia’s reliance on royalty income from miners meant sharp falls in commodity prices, particularly iron-ore prices, was creating considerable pressure on its budget.

Gives ‘down under’ a new meaning. Watch Perth housing market.

• British Expat Workers Flood Home As Australia Mining Boom Turns To Dust (Tel.)

Mining has been the driving force of Australia’s economic growth for longer than anyone cares to remember – helping GDP growth average 3.6pc a year for most of this century – but the global collapse in commodity prices has led to a painful readjustment Australians have heard the warnings before – but this time, it seems, the boom is truly over. The country is repointing its economy for a new reality, and renegotiating its trading partnership with China and the wider Asia-Pacific. Australia’s mining titans – the likes of BHP Billiton and Rio Tinto, whose shares have led the FTSE 100 lower in the recent market turmoil – have a huge fight on their hands. Meanwhile the migrants who answered their call for workers are considering their options. Will the mining downturn see Britons packing their bags for home?

“There is no doubt that current operating conditions in the mining sector are tough and companies are taking steps to ensure their long-term survival,” says Dr Gavin Lind, of the Minerals Council of Australia. Slowing demand in China – the world’s largest consumer of raw materials, and the buyer of 54pc of Australia’s resources exports in 2015 – has led to dizzying price falls in coal, iron ore, zinc, nickel, copper and bauxite, all minerals mined Down Under. Instead of cutting production and shoring up the price of their product, miners are taking a counter-intuitive tack, and boosting their output. Closing down mines is an expensive business and companies would rather cling on to their market share than cede ground to their rivals. Yet “the increase in volumes is unlikely to be sufficient to offset the effect of lower commodity prices”, Mark Cully, chief economist at the Department of Industry, Innovation and Science, warned in December.

He calculates that Australia’s earnings from mining and energy exports will fall by 4pc to A$166bn (£81bn) this year as lower prices bite. Giant miners such as Rio and BHP believe their low-cost models will enable them to survive while higher-cost competitors go to the wall. However, in common with their peers in the FTSE 100, they have been punished by investors, with their shares tumbling 44pc and 52pc respectively in the last year. While Rio’s balance sheet is regarded as the stronger of the two, both are under pressure to cut their dividends. Analysts expect Rio to unveil a 37pc slump in operating profits when it reports its full-year results this week. BHP, which announces its half-year results on February 23, is facing a 56pc tumble in profits for the year.

Call a spade a spade.

• Ukraine: A USA-Installed Nazi-Infested Failed State (Lendman)

In February 2014, Washington replaced Ukrainian democracy with fascism in Europe’s heartland – illegitimately installed officials waging war on their own people. Fundamental human and civil rights were abolished. Police state viciousness replaced them. Regime critics risk prosecution, sentencing, imprisonment or assassination. Two years after fascists seized power, conditions for ordinary Ukrainians are deplorable. According to Germany’s daily broadsheet Junge Welt, they’re “staggering.” “Since the end of the Yanukovych era, the average income has decreased by 50%,” it reported – on top of 2015’s 44% inflation, nearly reducing purchasing power by half, making it impossible for most Ukrainians to get by. They’re suffering hugely, deeply impoverished, denied fundamental social services, abolished or greatly reduced en route to eliminating them altogether.

Ukraine’s economy is bankrupt, teetering on collapse, sustained by US-controlled IMF loans, violating its longstanding rules, a special dispensation for Ukraine. It loaned billions of dollars to a deadbeat borrower unable to repay them, an unprecedented act, funding its war machine, turning a blind eye to a hugely corrupt regime persecuting its own people. Ukraine’s GDP is in near free-fall, contracting by 12% last year, projected to continue declining sharply this year and beyond. The average pension was cut to €80 monthly, an impossible amount to live on, forcing pensioners to try getting by any way they can, including growing some of their own food in season. US anointed illegitimate oligarch president Petro Poroshenko is widely despised. So are other key regime officials.

They blame dismal economic conditions mainly on ongoing civil war – US-orchestrated and backed naked aggression against Donbass freedom fighters, rejecting fascist rule, wanting fundamental democratic rights, deserving universal praise and support. According to Junge Welt, regime critics call Kiev claims lame excuses. “What matters is (it’s) done little or nothing to prevent corruption and insider trading,” elite interests benefitting at the expense of everyone else, stealing the country blind, grabbing all they can. Complicit regime-connected oligarchs profit hugely in Ukraine, benefitting from grand theft, super-rich Dmitry Firtash apparently not one of them, calling Kiev “politically bankrupt.”

Days earlier, Ukrainian Economy Minister Aivaras Abromavicius resigned, followed the next day by his first deputy, Yulia Kovaliv, his remaining team, two deputy ministers and Kiev’s trade representative. Parliament speaker Volodymyr Groysman warned of Ukraine “entering a serious political crisis.” Resignations followed nothing done to address vital reforms needed. In his resignation letter, Abromavicius said corrupt officials blocked them, wanting control over state enterprises for their own self-interest, including natural gas company NAK Naftogaz. “Neither I nor my team have any desire to serve as a cover-up for the covert corruption, or become puppets for” regime officials “trying to exercise control over the flow of public funds,” he explained.

Not a bad thought experiment. But having ‘populist’ Beppe Grillo as an example shows how clueless Münchau is about reality. That sort of talk itself is populist. David Cameron in a much more valid example, for one.

• Through The Past, Darkly, For Europe’s Central Bankers (Münchau)

Re-reading John Weitz’s biography of Hjalmar Schacht, Hitler’s Banker , I noted some interesting parallels between the 1930s and now that I had not considered before. It is well known that Hitler relied on Schacht, his central banker, to help fund his rearmament plans. But Weitz also pointed out — and this is potentially relevant to the situation in the eurozone today – that Schacht was only able to pursue his unorthodox policies at the Reichsbank because he had the backing of a dictator. If an extremist leader came to power in a large eurozone country – France or Italy, say – what would happen if they were to appoint a central banker with the acumen of Schacht? And what would be the chances that such a team could succeed in increasing economic growth in the short term? Let me say straightaway that I am not comparing anyone to Hitler – or indeed to Schacht.

My point concerns what an unorthodox central banker can do if he or she has the political support to break with the prevailing orthodoxy. Schacht had two stints as president of the Reichsbank — in the 1920s, when he brought an end to the hyperinflation then crippling Germany, and again from 1933 to 1939. It is hard to identify him with a single economic outlook: in the 1920s he was in favour of the gold standard but then, in the early 1930s, he opposed the consensus that promoted the policies of austerity and deflation. Schacht argued, rightly, that Germany was unable to meet the reparation payments specified in the Young Plan, which was adopted in 1929. On returning to the Reichsbank, Schacht organised a unilateral restructuring of private debt owed by German companies to foreigners.

The German economy had already benefited from withdrawal from the gold standard in 1931, and Schacht piled stimulus upon stimulus. One reason for Hitler’s initial popularity in Germany was the speedy recovery from the depression, which was no doubt helped by a loose fiscal and monetary policy mix. The current policy orthodoxy in Brussels and Frankfurt, which is shared across northern Europe, has some parallels to the deflationary mindset that prevailed in the 1930s. Today’s politicians and central bankers are fixated with fiscal targets and debt reduction. As in the early 1930s, policy orthodoxy has pathological qualities. Whenever they run out of things to say, today’s central bankers refer to “structural reforms”, although they never say what precisely such reforms would achieve.

In principle, the eurozone’s economic problems are not hard to solve: the ECB could hand each citizen a cheque for €10,000. The inflation problem would be solved within days. Or the ECB could issue its own IOUs — which is what Schacht did. Or else the EU could issue debt and the ECB would buy it up. There are lots of ways to print money. They are all magnificent — and illegal.

“..communal solidarity..” That says it all. More Europe! Not. Going. To. Happen.

• German, French Central Bankers Call For Eurozone Finance Ministry (Reuters)

The euro zone needs to press ahead with structural reforms and closer integration, including an euro zone finance ministry, to deliver sustainable growth, the heads of the French and German central banks wrote in a German newspaper on Monday. In a guest article for the Sueddeutsche Zeitung entitled “Europe at a crossroads”, they said the European Central Bank (ECB) was not in a position to create sustainable long-term growth for the 19-country single currency bloc. The ECB has undershot its 2% inflation target for three straight years and is unlikely to return to it to for years to come given low oil prices, lackluster economic growth, weak lending and only modest wage rises in the euro zone.

“Although monetary policy has done a lot for the euro zone economy, it can’t create sustainable economic growth,” Bundesbank President Jens Weidmann and Bank of France Chief Francois Villeroy de Galhau wrote. Instead the euro zone needs a decisive program for structural reforms, an ambitious financing and investment union as well as better economic policy framework, Weidmann and Villeroy de Galhau said. The idea of such a ministry was floated in 2011 to tighten coordination of national policy after the economic crisis had forced the European Union to fund bailouts worth hundreds of billions of euros for Greece, Ireland and Portugal. “The current asymmetry between national sovereignty and communal solidarity is posing a danger for the stability of our currency union,” they wrote.

“Stronger integration appears to be the obvious way to restore trust in the euro zone, for this would favor the development of joint strategies for state finances and reforms so as to promote growth,” they said. Specifically, they called for the creation of a common finance ministry in connection with an independent fiscal council as well as the formation of a stronger political body that can take decisions.

Debt Rattle December 16 2015

Dec 162015

December 16, 2015 Posted by Raúl Ilargi Meijer at 8:58 am Finance Tagged with: arctic, butterfly, Fed, junk, oil, rate hike, refugees, selloff, Treasuries 2 Responses »

DPC Elephants in Luna Park promenade, Coney Island 1905

• Fed Weighs Merits Of Jumbo Portfolio In Post-Crisis Era (Reuters)

• This Is a Test of the Shadow Banking System (BBG ed.)

• Why High-Yield Debt Selloff Isn’t 2007 All Over Again. Or Is It? (BBG)

• Foreigners Sell A Record $55.2 Billion In US Treasuries In October (ZH)

• The Guy Who Warned About Libor Sees Fast-Money Financing as New Risk (Alloway)

• The Current Credit Crisis Might Be 35 Times Worse Than You Thought (Yahoo)

• Inside Oil’s Deep Dive (BBG)

• The Oil Market Just Keeps Tearing Up Draghi’s Inflation Forecasts (BBG)

• Emergency OPEC Meeting Aired As Russia Braces For Sub-$30 Oil (AEP)

• Italy Says Financial System Solid As Bank Rescue Furor Grows (Reuters)

• Thousands Of Jobs To Disapper At Greek Banks (Kath.)

• Hillary Clinton’s Chronic Caution On The Big Banks (Nomi Prins)

• When The World Turns Dark (Coppola)

• Vegetarian And ‘Healthy’ Diets May Actually Be Worse For The Environment (SA)

• Decline In Over 75% Of UK Butterfly Species Is ‘Final Warning’ (Guardian)

• Record High 2015 Arctic Temperatures Have ‘Profound Effects’ (Guardian)

• Far Fewer People Entering Germany With Fake Syrian Passports Than Claimed (AFP)

• EU Says Only 64 -Of 66,000- Refugees Have Been ‘Relocated’ From Greece (AP)

One conclusion only from things like this: they make it up as they go along. And then you can cite ‘experts’ all you want, but experts in what? Uncharted territory? That doesn’t make any sense.

• Fed Weighs Merits Of Jumbo Portfolio In Post-Crisis Era (Reuters)

Once the Federal Reserve lifts interest rates from near zero, likely this week, the focus will turn to the other legacy of the crisis-era policies: the Fed’s swollen balance sheet. The prevailing view is that the U.S. central bank’s $4.5 trillion portfolio, vastly expanded by bond purchases aimed at stimulating the economy, will have to shrink once rates are on their way up, and the Fed will just need to decide how quickly. Now, however, there is a new twist to the debate, with some policymakers and outside experts saying that there are reasons to keep the balance sheet big. Arguments in favor of a leaner pre-crisis era Fed portfolio have been well laid out. A smaller balance sheet would mark a return to “normal” policy, minimize the Fed’s impact on the allocation of credit across the economy, and help defuse political pressure from critics accusing the Fed of overextending its influence beyond its core monetary mandate.

As recently as September 2014, the Fed pledged to eventually “hold no more securities than necessary,” in its “normalization” plan, a level widely interpreted as close to its pre-crisis $900 billion size. Today as the long-anticipated rate lift-off draws close, the central bank appears to be warming to the idea of a sizeable balance sheet. A “permanently higher balance sheet … is something that we haven’t studied that much but I think needs a lot more thought,” John Williams, president of the San Francisco Fed, said last month. A big Fed portfolio could help stabilize financial markets by inducing banks to keep greater amounts of money in reserve, advocates say. It could also give the Fed a permanent policy tool with which to target sectors of the economy and certain parts of the bond market.

For example, the Fed could buy and sell certain assets to stimulate or cool the mortgage market or to affect longer-term borrowing costs, says Benjamin Friedman, former chairman of Harvard University’s economics department. Experts addressing a conference hosted by the Fed last month, said the central bank Fed could use the assets as a new “macro prudential” tool to deal with financial market bubbles – by cooling particular sectors with targeted asset trades – and ward off investor runs by letting ample bank reserves act as a buffer. And while the Fed is now replenishing its portfolio as bonds mature and plans to continue doing so for another year or so, policymakers have directed staff to examine alternatives and to consult outside experts, according to minutes of the Fed’s July meeting.

Apologists for shadow banking.

• This Is a Test of the Shadow Banking System (BBG ed.)

It’s hard to know how bad the latest turmoil in the market for risky corporate debt will become. Already, though, it offers some insight into what’s good – and what could be better – about the so-called shadow banking system. Over several years following the 2008 recession, in an effort to reap better returns amid extremely low interest rates, investors piled into higher-yielding debt issued by companies with relatively shaky finances. This is a classic example of shadow banking: People put their savings into various types of funds, which in turn provided hundreds of billions of dollars in financing to companies, largely bypassing traditional banks. Now, inevitably, the cycle is turning. Investors are fleeing from funds that focus on high-yield bonds, precipitating sharp price declines and presenting portfolio managers with the difficult task of finding buyers for securities that rarely trade.

As a result, some mutual funds, including one run by Third Avenue Management, have frozen withdrawals as they raise the necessary cash. Others may follow. So what does this tell us? For one, it suggests that shadow banking can play an important role in making the financial system more resilient. Unpleasant as Third Avenue’s troubles may be for its investors, the broader repercussions are limited. That’s in part because mutual funds can’t use nearly as much borrowed money, or leverage, as banks typically do. As a result, the funds are very unlikely to end up owing more than their assets are worth – a disastrous outcome that, if it happened at a large institution or at many smaller ones, could destabilize the entire financial system and necessitate taxpayer bailouts. That said, mutual funds aren’t alone in holding risky corporate debt.

Large quantities of loans and bonds, as well as derivative contracts linked to them, reside in various other nonbank institutions – such as hedge funds – that can be highly leveraged and also active in other markets, making them potential conduits for contagion. Regulators have a hard time knowing where the risks are concentrated in this truly shadowy realm, in large part because their areas of responsibility are fragmented and they lack incentives to share information. One obvious solution, in which Congress has unfortunately taken no interest, would be to give the Financial Stability Oversight Council more power to shed light on dark corners and more authority to mitigate emerging risks. Beyond that, regulators should make use of tools – such as limits on the amount of money that can be borrowed against securities – that reduce the likelihood of distress among all financial-market participants, no matter what form they take.

Keep rates low, and you get this.

• Why High-Yield Debt Selloff Isn’t 2007 All Over Again. Or Is It? (BBG)

Wall Street is having a 2007 flashback as a high-yield debt rout triggers nightmares of hard-to-trade assets plunging in value and funds halting redemptions. Jim Reid, a strategist at Deutsche Bank, wrote Monday that this month’s turmoil, including Third Avenue Management’s suspension of cash redemptions from a mutual fund that invested in high-yield debt, may be a harbinger of things to come. Berwyn Income Fund’s George Cipolloni said the similarities between markets now and those before the financial crisis are too big to ignore. Get a grip, traders and analysts say: This isn’t the making of another financial crisis – at least not yet. “I don’t see any systemic risks out of this,” said Fred Cannon, a KBW Inc. bank analyst, likening the current situation more to the popping of the Internet bubble than to the credit crunch that crippled the financial system.

“If this is a signal of a recession, then you have to believe any kind of downturn in the economy, as it relates to the large banks, will look a lot more like 2001 than 2008.” Funds run by Third Avenue and Stone Lion Capital Partners have stopped returning cash to investors after clients sought to pull too much money as falling energy prices contributed to poor performance this year. In 2007, funds at Bear Stearns and BNP Paribas halted redemptions after the value of their subprime-mortgage investments plummeted. That served as a precursor to bigger losses and liquidity issues at major banks that hobbled the global economy over the next two years. [..]

The number of junk-debt funds that promise investors quick access to their money has exploded since September 2008 as zero interest rates spurred demand for higher returns. There are now 35 U.S.-based high-yield exchange-traded funds with $43 billion under management, compared with three funds with $1.3 billion in 2008, according to data compiled by Bloomberg. The number of mutual funds has grown to 252 from 100 in 2008 and assets increased to $326 billion from $126 billion.

Oh, those Belgians.

• Foreigners Sell A Record $55.2 Billion In US Treasuries In October (ZH)

After several months of significant reserves liquidations by China (specifically by its Euroclear proxy “Belgium”) which tracked the drop in China’s reserves practically tick for tick, in October Chinese+Belgian holdings were virtually unchanged according to the latest TIC data, as China moderated its defense of its sliding currency. Of course, putting this in context still shows a China which has sold $600 billion of US paper since 2014, as this website was first to note over half a year ago.

And while we expect a prompt resumption of Treasury selling in the coming months following China’s recent aggressive devaluation of its currency, what was more notable in today’s TIC data was the consolidated total change of all foreign US Treasury holdings. As shown in the chart below, following an increase of $17.4 billion in September, foreign net sales of Treasuries hit an all time high of $55.2 billion, surpassing the previous record of $55.0 billion set in January. In absolute terms, October’s total foreign holdings by major holders declined to $6,046.3 trillion the lowest since the summer of 2014.

What is the reason? There are two possible explanations, the first being that foreigners are unloading US paper (ostensibly to domestic accounts) ahead of what they perceive an imminent Fed rate hike which would pressure prices lower, or more likely, the ongoing surge in the dollar and collapse in commodity prices continues to pressures foreign reserve managers to liquidate US Treasury holdings as they scramble to satisfy surging dollar demand domestically and unable to obtain this much needed USD-denominated funding, are selling what US assets they have. Should this selling continue or accelerate in the coming months and if it has an adverse impact on TSY yields, it may also force the Fed’s tightening hand if, as some expect, the liquidation of foreign reserves becomes a self-fulfilling prophecy and leads to a material drop in Treasury prices.

Fast money, shadow banking, call it what you want.

• The Guy Who Warned About Libor Sees Fast-Money Financing as New Risk (Alloway)

The cash that finances the U.S. economy is now coming from a spigot that is more prone to rapidly turning off in times of stress than the traditional banking system has been, according to the strategist who first brought attention to banks misstating key benchmark lending rates during the financial crisis in 2008. The warning from Scott Peng, head of global portfolio solutions at Secor Asset Management in New York, comes as investors, analysts, and regulators fret about the recent selloff in the corporate bond market, which the strategist includes in his definition of the so-called “shadow banking system” of nonbank financial intermediaries. Such shadow banking includes all private-sector funding that isn’t provided by deposit-taking banks, so it encompasses bond funds as well as hedge funds, insurance companies, and pension funds, according to Peng.

While rules imposed in the wake of the financial crisis have shored up the banking system, he argues that regulators have swapped one set of systemic risks for another. World Bank data show that the percentage of U.S. private-sector funding provided by banks has fallen to almost the lowest point since 1960, illustrating the growing importance of nonbank financing. “Since 2008, we’ve reformed the banking system by ring-fencing our banks with more regulatory and capital requirements,” Peng told us. “But our economy is now much more dependent on the fast-money shadow-bank financing—which is more fickle in terms of extending credit and can expand or contract much quicker.” Peng was among the first during the financial crisis to suggest that the London interbank offered rate, known as Libor, was understating borrowing costs.

As the then-head of U.S. interest rate strategy at Citigroup Global Markets in New York, Peng co-authored a note titled “Is Libor Broken?” in April 2008. The report, which led to a global focus on the risk that the benchmark was mispricing bank lending rates, said European banks were probably submitting lower-than-actual transacted rates to avoid “being perceived as a weak hand in a fragile market.” Peng predicts that the share of private financing coming from banks at the end of this year will hold close to the 20.6% level of December 2014, given that flows into bond funds have remained positive and bank lending hasn’t risen materially.

Gross issuance of investment-grade U.S. dollar-denominated corporate bonds reached $1.23 trillion through Nov. 20, up from $1.15 trillion in all of 2014, marking a fourth successive year of record sales. In the second quarter of this year, assets in hedge funds reached a record $2.97 trillion before slipping to $2.9 trillion, according to HFR.

All birds of the one same feather. Credit Suisse is the main protagonist.

• The Current Credit Crisis Might Be 35 Times Worse Than You Thought (Yahoo)

Last week, Third Avenue Focused Credit Fund suspended investor redemptions, and credit markets reacted violently. This was the first time mutual fund investors were similarly gated since the financial crisis of 2008. However, the $788.5 million Third Avenue fund might be the tip of the iceberg. According to data obtained by Yahoo Finance*, there are currently $27.2 billion in mutual fund assets that have suffered peak-to-valley losses over the last year greater than 10%. This amount is 35 times greater than the size of the Third Avenue fund, which suffered the third worse loss in the list of -34.5%. The two greatest losses bear a common name, which dominates the list: Credit Suisse. Total assets of $15.9 billion are represented by Credit Suisse named funds, or 59% of the $27.2 billion total.

The largest fund in the list is Credit Suisse Institutional International, which has total assets of $9.9 billion. According to Morningstar, it is currently managed by American Funds. When the time period of the analysis is extended to the peak of June 19, 2014, fund performance for the Credit Suisse named fund reflects a loss of -24.6%, which is roughly half of the -47.4% loss of the Third Avenue fund. Today, the Federal Open Market Committee commences a two day meeting and is widely expected to announce on Wednesday an interest rate increase of 25 basis points for its benchmark Federal Funds rate. Further rate hikes may exacerbate problems in the credit markets, as companies that rely on high yield financing would face difficulty obtaining new loans and rolling over existing loans.

Contagion in risk markets might be contained, according to Goldman Sachs. In a report dated December 11, Goldman said credit markets are simply sending a “false recession signal” similar to the events that unfolded in 2011. Nevertheless, the trend of withdrawals in the mutual fund sector continues. According to the latest data from Lipper, U.S. based stock funds suffered $8.6 billion in net outflows over the week ending December 9, which is the worst reading in four months. As assets are shifted around into year end, the trend is likely to continue.

History.

• Inside Oil’s Deep Dive (BBG)

All oil crashes aren’t equal. This week West Texas Intermediate prices dipped below $35 a barrel, the lowest they’ve been since the 2008 financial crisis – from which oil prices have yet to fully recover. Previous oil crashes resulted from economic crises that temporarily blunted demand. This time, robust energy reserves created by the shale gas and oil revolution in the U.S. have put OPEC on the defensive. Shale reserves appear plentiful and are cheap to produce, forcing OPEC’s de-facto leader, Saudi Arabia, to focus on maximizing its own oil output. With Congress open to lifting the export ban, the oil market could also be awash in unfettered U.S. crude exports. Commercial crude stockpiles were at 485.9 million barrels through Dec. 4, more than 120 million barrels above the five-year seasonal average.

Excess oil inventories may be with us through 2016, according to my Gadfly colleague Liam Denning – and may not truly normalize until 2017. As you can see from the chart, the current crash in oil prices isn’t quite as deep as in 1985 or 2008 (the ’08 plunge was saw prices tank 77% in just over 100 trading days). The current crash is also not yet as lengthy as the less severe 1997 plunge, which took nearly 500 trading days to reach bottom and only about 200 trading days to return to its previous peak (following the Asian financial crisis). What is distinct about the current price plunge is that it’s unclear whether a robust price recovery will even arrive again – and if it does how it might align with previous rebounds.

Central bank inflation targets are magic tricks meant to deceive.

• The Oil Market Just Keeps Tearing Up Draghi’s Inflation Forecasts (BBG)

The oil market doesn’t seem to care about Mario Draghi’s inflation target. Less than two weeks after the European Central Bank president unveiled a beefed-up stimulus program to push inflation back toward its 2% target, fresh falls in the price of crude may have already undermined his efforts. Analysts at Nomura and JPMorgan say Draghi’s December forecast of 1% average inflation in 2016 may be too ambitious. Charles St-Arnaud and Sam Bonney at Nomura have found that the 25% slump in the WTI oil benchmark since the end of October may already be casting its shadow over inflation next year. They’ve calculated the so-called base effects – the contribution of outsized price swings in one year to the following year’s annual inflation rate – that they see as likely to have an impact in 2016.

The oil-price drop we’ve just seen may halve the base effect in some months next year, they write. And that could keep a tight lid on gains in the headline inflation rate, now just at 0.1%. “A weaker base effect early next year means that headline inflation should remain lower than we estimated only a couple of weeks ago,” the analysts say in a note to clients. “Whereas before we saw eurozone inflation reaching 1% in early 2016, the weaker oil prices could mean that headline inflation only reaches 0.5% to 0.6%.” In its December round of staff forecasts, the ECB staff based their prediction of 1% inflation in 2016 and 1.6% in 2017 on an average price for Brent of $52.2 and $57.5, respectively. However, Brent is now below $40 a barrel. If that’s maintained, euro-area inflation won’t meet the 1% average forecast, writes JPMorgan’s Raphael Brun-Aguerre. And if it falls to $20, the euro-area would be in outright deflation, his projections show.

Ambrose is trying to convince us that demand is rising fast.

• Emergency OPEC Meeting Aired As Russia Braces For Sub-$30 Oil (AEP)

OPEC will be forced to call an emergency meeting within weeks to stabilize the market if crude prices fail to rebound after crashing to seven-year lows of $35 a barrel, two of the oil cartel’s member states have warned. Emmanuel Kachikwu, Nigeria’s oil minister and OPEC president until last week, said the group is still hoping that the market will recover by February as low prices squeeze out excess production from US shale, Russia and the North Sea, but nerves are beginning to fray. “If it [the oil price] doesn’t [recover], then obviously we’re in for a very urgent meeting,” he said. Indonesia has issued similar warnings over recent days, suggesting that the OPEC majority may try to force a meeting if Saudi Arabia’s strategy of flooding the market pushes everybody into deeper crisis.

The comments came as Brent crude plunged to $36.76 as the fall-out from OPEC’s deeply-divided meeting earlier this month continued. Prices are now within a whisker of their Lehman-crisis lows in 2008. West Texas crude dropped to $34.54 before rebounding in late trading. Lower quality oil is already selling below $30 on global markets. Basra heavy crude from Iraq is quoted at $26 in Asia, and poor grades from Western Canada fetch as little as $22. Iran’s high-sulphur Foroozan is selling at $31. The oil market is now in the grip of speculative forces as hedge funds take out record short positions and exchange-traded funds (ETFs) liquidate paper holdings, making it extremely hard to read the underlying conditions. Russian finance minister Anton Siluanov said his country is bracing for the worst. “There is no defined policy by the OPEC countries: it is everyone for himself, all trying to recapture markets, and it leads to the dumping that is going on,” he said.

“Everything points to low oil prices next year, and it’s possible that it could be $30 a barrel, and maybe less. If someone had told us a year ago that oil was going to be under $40, everyone would’ve laughed. You have to prepare for difficult times.” The rouble fell to 71 against the dollar, helping to cushion the blow for the Kremlin’s budget but also further eroding Russian living standards. Elvira Nabiulina, the head of Russia’s central bank, said the authorities are now preparing for an average price of $35 next year, a drastic cut even from the earlier emergency planning. Bank of America says OPEC is effectively suspended as Saudi Arabia wages a price war within the cartel against Iran, its bitter rival for geo-strategic dominance in the Middle East. This duel is complicated yet further by a parallel fight with Russia outside the bloc.

Mike Wittner, from Societe Generale, said the Saudis’ motive for floating a proposal at the OPEC summit for a 1m barrel per day (b/d) output cut if Russia, Iraq and others agreed to join in was tactical, chiefly in order to demonstrate to critics at home that no such deal could be forged. He said the strategy to flood the market was not taken lightly and has support from the “highest possible level”. Part of the goal is to discourage energy efficiency and deter investment in renewables. OPEC is not due to meet again until June 2016 but by then a string of its own members could be facing serious fiscal crises. Even Saudi Arabia is freezing public procurement and drawing up austerity plans to rein in a budget deficit near 20pc of GDP.

The kind of thing you shouldn’t have to say. Like when an owner of sports team goes public saying he ‘supports’ the coach. Never a good sign.

• Italy Says Financial System Solid As Bank Rescue Furor Grows (Reuters)

Economy Minister Pier Carlo Padoan said on Tuesday that Italy’s financial system remained solid as the government faced a mounting furor over the rescue of four banks that wiped out the savings of thousands of retail investors. Italy saved Banca Marche, Banca Etruria, CariChieti and CariFe at the end of November, drawing €3.6 billion from a crisis fund financed by the country’s healthy lenders. Tougher European Union rules on bank rescues aimed at shielding taxpayers meant shareholders and holders of junior debt were hit, unleashing protests against the government. “The government is doing everything in its powers to put the banks on the right path and to reinforce the banking system,” Padoan said in a radio interview, adding that “the institutions and the system remain solid.”

The government has “full confidence” in the Bank of Italy and market regulator Consob, he said. Italian authorities came under fire after it emerged that many ordinary Italians had been sold risky subordinated bonds that, in case of bankruptcy, only get repaid after ordinary creditors have been reimbursed in full. Around 10,000 clients of the four banks held some €329 million in such junior bonds, the Treasury said on Monday. Padoan said he did not know if the government would be weakened by the affair which has hit bank bonds and shares. Retail investors have rushed to sell junior bank bonds after one pensioner who lost his savings committed suicide.

Padoan gave his support to the Minister for Reforms Maria Elena Boschi, one of Italian Prime Minister Matteo Renzi’s closest allies, who faces a no-confidence motion in parliament tabled by the anti-establishment 5-Star Movement, over an alleged conflict of interests. Boschi’s father was vice-president of Banca Etruria (PEL.MI) until the bank was put under special administration by the Bank of Italy this year and Boschi herself was a shareholder. “I am sure that Boschi will come out of this extremely well,” Padoan said. The political backlash for Renzi is particularly damaging because the four rescued banks mainly operate in central Italian regions that are traditional strongholds of his center-left Democratic Party.

Thumbscrews. Why not just get Germans to run it openly?

• Thousands Of Jobs To Disapper At Greek Banks (Kath.)

Greece’s four main banks will have to reduce their employees by a total of 4,350 and shut down about 180 branches between them up to the end of 2017. These new reduction demands result from the derailing of the Greek economy generated by the prolonged uncertainty during 2015 which brought the country to the brink of exiting the eurozone. The job cut and the branch shutdown will have been included in the revised restructuring plans that National, Alpha, Piraeus and Eurobank have submitted to the European Commission’s competition authorities which were required after the four lenders underwent their latest recapitalization process.

The new wave of cuts comes on the back of the Greek banking sector’s major contraction over the last few years. According to data compiled by the Hellenic Bank Association, in 2009 Greece boasted 19 domestic banks, 36 foreign ones (mainly branches of major international lenders) and 16 cooperative banks. Nowadays there are just seven banks remaining (the four systemic ones plus Attica Bank, HSBC and Panellinia) and only five foreign banks with branches in Greece, and it seems like only three cooperative banks will survive, if they manage to collect the funds required for their recapitalization.

Stunning numbers: “..the Big Six banks collectively control 42% more deposits, 84% more assets and are hoarding 400% more cash then they were prior to the financial crisis..”

• Hillary Clinton’s Chronic Caution On The Big Banks (Nomi Prins)

Hillary Clinton has a knack for saying what she believes she needs to. But when it comes to fortitude and detail, actions speak louder than rhetoric — including the rhetoric she espoused Monday at the New School to describe her self-defined pro-growth, pro-fairness economic blueprint. Over many years, via her actions and omissions in positions of high public responsibility, Clinton has failed to demonstrate an interest in reforming the power structures that fortify themselves at the expense of America’s middle class. In pursuit of the presidency, Hillary is crafting her message to capture the attention of the center as well as the progressives. Yet by doing so, it all feels scripted and safe, straining the boundaries of credulity.

[..] Hillary Clinton came to New York City to make her case on fighting inequality and spurring growth. Yet when she speaks about inequality, she’s either ignoring or unaware of the bigger picture. The very power structure of Wall Street has become more concentrated and thus presents a greater risk to stability than ever before due to a series of deregulatory moves and bailouts under Presidents from both sides of the aisle.

Yes, several of Hillary’s checklist items are useful to “ordinary Americans.” Raising the minimum wage, trying to gain salary parity for both genders and “putting families first” with paid sick leave and widely available free pre-kindergarten are all noteworthy policy agendas. They become less meaningful when dropped with such little detail by someone who has been in politics for so long. By how much should we raise minimum wages? How do we get parity? What does it mean to put families first if corporate boards vote their chairs massive compensation packages, regardless of whether the firm invests in R&D or employees? Will we put CEOs in jail for presiding over felonious firms or tacitly support their eight-figure bonuses and incarcerate bankers that aren’t her friends down the totem pole as she suggests?

Further, what does it mean to reduce Wall Street risk when the Big Six banks collectively control 42% more deposits, 84% more assets and are hoarding 400% more cash then they were prior to the financial crisis, and when just 10 big banks control 97% of bank trading assets? Bold, fresh ideas that shake up the core of the American power concentration structure did not come from Hillary Clinton. Nor will they come from Jeb Bush or other Republican frontrunners. The only way to articulate policies that can work for America as a whole is to re-imagine America as a country of equal opportunity for all — and that means limiting the concentration of power of the few that, by virtue of donations, lobbying forces and elite alliances, dictates policies that reinforce their dominance.

Really nice from Frances.

• When The World Turns Dark (Coppola)

The Poor Law reformers of the 1830s believed that hard work is a virtue in and of itself, regardless of usefulness to society or financial benefit to those doing it: the workless are “moral defectives” who must be forced to work in order to correct the defects in their personalities. Thomas Malthus believed that public spending that supports the poor encourages them to breed: the poor must be condemned to a life of poverty and deprivation to discourage them from choosing to have children at state expense. The children of workless parents must be protected from their malign influence. The Mother’s lament resonates with all too many of today’s mothers: How shall I feed my children on so small a wage? How can I comfort them when I am dead? This is the creed of meanness and selfishness, lampooned by Dickens in “A Christmas Carol”.

It is the creed of the false gods of Hard Work and Saving. But we, cocooned by the belief that we are better than our ancestors, invoke these false gods and publish the creed anew. The morality of the workhouse has become the morality of the Daily Mail. In bringing back the “old religion”, we have set the poor and vulnerable against each other. Solidarity disintegrates; the poor fight each other for a share of a pot of money that is deliberately kept too small to meet all needs, and demand that others who might need a share too are kept out. “Close the borders”. “Stop immigration NOW”. “We can’t afford refugees”. These are the cries of those who fear that the arrival of others will mean that they lose even more. In Europe, the same harshness is evident, but on an even larger scale.

Here, it is not just the poor within countries who are fighting over scraps: the countries themselves are at each other’s throats, as harshness is imposed by stronger countries on weaker in support of the same twisted morality. Countries that struggle to compete for export markets are morally defective: they must be forced to compete through harsh treatment. Countries that attempt to give citizens a decent life instead of paying creditors must be forced into poverty and deprivation to discourage others from the same path. Governments must be supervised by technocrats to make sure they obey fiscal rules even at the cost of recession and high unemployment. The Oppressed cry out: “When shall the usurer’s city cease? And famine depart from the fruitful land?”

Worshipping the false gods of hard work and saving comes at a terrible price. The sacrifices those gods demand are the lives of those who do not – or cannot – live as they dictate. But as yet, there is no widespread challenge to their authority. People still believe the lie they tell: “There is no more money”. People used to believe the promise of the gods of borrowing and spending, “The money will never run out”. But their belief was shattered in the crash of 2008, when the debt edifice abruptly collapsed, causing widespread financial destruction. People not only stopped believing that promise, they also stopped believing in themselves. The terrible recession and ensuing long slump created an enormous confidence gap. Into this gaping hole stepped the old gods and their new lie.

Here goes controversy. Keep in mind: don’t shoot the messenger!

• Vegetarian And ‘Healthy’ Diets May Actually Be Worse For The Environment (SA)

Advocates of vegetarianism – including everybody’s favourite Governator – regularly point out how how harmful human consumption of meat is to the environment, but is opting for a fully vegetable-based, meat-free diet a viable way to cut down on energy use and greenhouse gas emissions? Nope – according to a new study by scientists in the US – or, at least, it’s not that simple. Researchers at Carnegie Mellon University (CMU) say that adopting the US Department of Agriculture’s (USDA) current recommendations that people incorporate more fruits, vegetables, dairy and seafood in their diet would actually be worse for the environment than what Americans currently eat. “Eating lettuce is over three times worse in greenhouse gas emissions than eating bacon,” said Paul Fischbeck, one of the researchers.

“Lots of common vegetables require more resources per calorie than you would think. Eggplant, celery and cucumbers look particularly bad when compared to pork or chicken.” If these findings seem surprising in light of what we know about the impact of meat on the environment, you’re probably not alone. You’re also not wrong – meat production does take a high toll on the environment. But what we need to bear in mind is that the energy content of meat is also high, especially when compared to the energy content of many vegetables, which is why going on a salad diet is great for your waistline. Consuming less energy content means less you in the long run. But what if you don’t want to lose weight? What if you just want to replace the same amount of energy you get from meat with energy from vegetables?

Well, then, to put it very simply, you need to eat a lot of vegetables. And when you contrast meat and vegetables on their impact per calorie as opposed to by weight, veggies suddenly don’t look quite so environmentally friendly. [..] The researchers acknowledge that their findings may be somewhat surprising in light of the zeitgeist over meat’s impact. “These perhaps counterintuitive results are primarily due to USDA recommendations for greater caloric intake of fruits, vegetables, dairy, and fish/seafood, which have relatively high resource use and emissions per calorie,” they write in Environment Systems & Decisions. But controversial as the findings may sound, comparing the respective impact of different foods based on their calorie content isn’t new or radical.

No-one’s listening. Flapping butterfly wings and all that.

• Decline In Over 75% Of UK Butterfly Species Is ‘Final Warning’ (Guardian)

More than three-quarters of Britain’s 59 butterfly species have declined over the last 40 years, with particularly dramatic declines for once common farmland species such as the Essex Skipper and small heath, according to the most authoritative annual survey of population trends. But although common species continue to vanish from our countryside, the decline of some rarer species appears to have been arrested by last ditch conservation efforts. “This is the final warning bell,” said Chris Packham, Butterfly Conservation vice-president, calling for urgent research to identify the causes for the disappearance of butterflies from ordinary farmland. “If butterflies are going down like this, what’s happening to our grasshoppers, our beetles, our solitary bees? If butterflies are in trouble, rest assured everything else is.”

While 76% of species are declining, prospects for a handful of the most endangered butterflies in Britain have at least brightened over the past decade, according to the study by Butterfly Conservation and the Centre for Ecology & Hydrology, with rare species responding to intensive conservation efforts. During the last 10 years, the population of the threatened Duke of Burgundy has increased by 67% and the pearl-bordered fritillary has experienced a 45% rise in abundance as meadows and woodlands are specifically managed to help these species. Numbers of the UK’s most endangered butterfly, the high brown fritillary, are finally increasing at some of its remaining sites in Exmoor and south Wales, showing the success of targeted conservation efforts there.

But The State of the UK’s Butterflies 2015 report cautions that such revivals still leave these vulnerable species far scarcer than they once were – the high brown fritillary has suffered a 96% decline in occurrence (meaning the sites at which it is present) since 1976, reflecting its disappearance from most of Britain. Other endangered butterflies, including the wood white (down 88% in abundance), white admiral (down 59% in abundance) and marsh fritillary have continued a relentless long-term decline.

Endangering walruses.

• Record High 2015 Arctic Temperatures Have ‘Profound Effects’ (Guardian)

The Arctic experienced record air temperatures and a new low in peak ice extent during 2015, with scientists warning that climate change is having “profound effects” on the entire marine ecosystem and the indigenous communities that rely upon it. The latest National Oceanic and Atmospheric Administration (Noaa) report card on the state of the Arctic revealed the annual average air temperature was 1.3C (2.3F) above the long-term average – the highest since modern records began in 1900. In some parts of the icy region, the temperature exceeded 3C (5.4F) above the average, taken from 1981 to 2010. This record heat has been accompanied by diminishing ice. The Arctic Ocean reached its peak ice cover on 25 February – a full 15 days earlier than the long-term average and the lowest extent recorded since records began in 1979.

The minimum ice cover, which occurred on 11 September, was the fourth smallest in area on record. More than 50% of Greenland’s huge ice sheet experienced melting in 2015, with 22 of the 45 widest and fastest-flowing glaciers shrinking in comparison to their 2014 extent. Not only is the ice winnowing away, it is becoming younger – Noaa’s analysis of satellite data shows that 70% of the ice pack in March was composed of first-year ice, with just 3% of the ice older than four years. This means the amount of new, thinner ice has doubled since the 1980s and is more vulnerable to melting. The report card – compiled by 72 scientists from 11 countries – noted sharp variations in conditions in the northern part of the Arctic compared to its southern portion.

The melting season was 30-40 days longer than the long-term average in the north but slightly below average in the south, suggesting that changes to the jet stream, causing colder air to whip across the southern part of the Arctic, are having an impact. Noaa said warming in the Arctic is occurring at twice the rate of anywhere else in the world – a 2.9C (5.2F) average increase over the past century – and that it is certain climate change, driven by the release of greenhouse gases, is the cause. “There is a close association between air temperature and the amount of sea ice we see, so if we reduce the temperature globally it looks like it will stabilize the Arctic,” said Dr James Overland, oceanographer at Noaa. “The next generation may see an ice-free summer but hopefully their decedents will see more ice layering later on in the century.”

German interior minister just completely made that up. And he’s still in his job?

• Far Fewer People Entering Germany With Fake Syrian Passports Than Claimed (AFP)

The proportion of people entering Germany with fake Syrian passports is far less than the 30% announced by the interior minister in September, the government has said. Germany has to date maintained an open-door policy for Syrians escaping their country’s bloodshed, giving them “primary protection” – the highest status for refugees. Among other benefits, this status includes a three-year residence permit and family reunification. The policy has sparked controversy, heightened after the interior minister, Thomas de Maizière, said in September that up to 30% of people were found coming into Germany with false Syrian passports and actually came from other nations.

He said the figures were based on estimates from people working on the ground. But in response to a question from the leftwing Die Linke party, the government said in a written note obtained by AFP late on Monday that only 8% of the 6,822 Syrian passports examined by authorities between January and October were actually found to be fake. Die Linke lawmaker Ulla Jelpke criticised the minister, saying: “Instead of looking into a crystal ball… the minister should lean towards facts and reality.” Germany is Europe’s top destination for refugees, most of whom travel through Turkey and the Balkans, and expects more than 1 million arrivals this year.

Epic.

• EU Says Only 64 -Of 66,000- Refugees Have Been ‘Relocated’ From Greece (AP)

Only 64 of the tens of thousands of refugees that Greece’s European Union partners should be taking to help lighten the country’s migrant burden have actually gone to other EU states. The EUs executive Commission also said on Tuesday that just one of the five “hotspot areas” on the Greek islands meant to register and fingerprint arriving migrants is operational. The hotspots are a key component of the EUs relocation plan to share 66,400 refugees in Greece with other EU nations over the next two years. The Commission noted that only nine of the 23 participating EU states have offered relocation places to Greece, almost three months after the scheme was launched.

Debt Rattle October 18 2015

Oct 182015

October 18, 2015 Posted by Raúl Ilargi Meijer at 9:35 am Finance Tagged with: China, currency, debt, deflation, EM, manipulation, refugees, Saudi, selloff, UK, VW 3 Responses »

DPC Launch of battleship Georgia, Bath, Maine, Oct 1904

• At Least 10 More Children And 6 Adult Refugees Drown Off Greek Islands (Kath.)

• Germany Shows Signs of Strain from Mass of Refugees (Spiegel)

• Why The Euro Divides Europe (Wolfgang Streeck)

• The Truth Behind China’s Manipulated Economic Numbers (Telegraph)

• China’s Premier Li Says Achieving Growth Of Around 7% ‘Not Easy’ (Reuters)

• China ‘Officially’ Sold A Quarter Trillion Treasurys In The Past Year (ZH)

• The Only Thing In China’s Trade Data That’s Growing -But Shouldn’t Be (Quartz)

• Emerging Nations Trimming $5 Trillion Debt Stokes Currency Risk (Bloomberg)

• Federal Reserve Inaction Could Start Currency War (The Street)

• How Global Debt Has Changed Since The Financial Crisis (WEF)

• Volkswagen Faces €40 Billion Lawsuit From Investors (Telegraph)

• VW Made Several Defeat Devices To Cheat Emissions Tests (Reuters)

• ETFs’ Rapid Growth Sparks Concern at SEC (WSJ)

• JPMorgan Says Bad Corporate Loans Pose Main Risk For Brazil Banks (Reuters)

• Revealed: How UK Targets Saudis For Top Contracts (Observer)

• Britain Has Made ‘Visionary’ Choice To Become China’s Best Friend, Says Xi (Guardian)

No conscience. No humanity. No God.

• At Least 10 More Children And 6 Adult Refugees Drown Off Greek Islands (Kath.)

As EU leaders seek to boost cooperation in tackling a major refugee crisis, there has been more tragedy in the Aegean with at least 16 migrants drowning in their attempt to get to Greece from Turkey. In one incident late on Friday, the bodies of four children – three girls, aged 5, 9 and 16, and a 2-year-old boy – were discovered by the Greek coast guard off Kalymnos. According to the accounts of 11 adult survivors, another boy was missing. On Saturday, the Turkish coast guard recovered the bodies of another 12 migrants whose boat sank off Turkey’s coast. According to sources, they were heading to the Greek island of Lesvos. Lesvos has borne the brunt of an influx of migrants. Last week alone, at least 10 people, including six children, drowned in an attempt to get the island. On a visit to Lesvos on Friday, European Migration Commissioner Dimitris Avramopoulos inaugurated Greece’s first refugee screening center, or “hotspot.”

“The German states have reported some 409,000 new arrivals between Sept. 5 and Oct. 15..”

• Germany Shows Signs of Strain from Mass of Refugees (Spiegel)

The road to the reception camp in Hesepe has become something of a refugees’ avenue. Small groups of young men wander along the sidewalk. A family from Syria schleps a clutch of shopping bags towards the gate. A Sudanese man snakes along the road on his bicycle. Most people don’t speak a word of German, just a little fragmentary English, but when they see locals, they offer a friendly wave and call out, “Hello!” The main road “is like a pedestrian shopping zone,” says one resident, “except without the stores.” Red-brick houses with pretty gardens line both sides of the street, and Kathrin and Ralf Meyer are standing outside theirs. “It’s gotten a bit too much for us,” says the 31-year-old mother of three. “Too much noise, too many refugees, too much garbage.” Now the Meyers are planning to move out in November.

They’re sick of seeing asylum-seekers sit on their garden wall or rummage through their garbage cans for anything they can use. Though “you do feel sorry for them,” says Ralf, who’s handed out some clothes that his children have grown out of. “But there are just too many of them here now.” Hesepe, a village of 2,500 that comprises one district of the small town of Bramsche in the state of Lower Saxony, is now hosting some 4,000 asylum-seekers, making it a symbol of Germany’s refugee crisis. Locals are still showing a great willingness to help, but the sheer number of refugees is testing them. The German states have reported some 409,000 new arrivals between Sept. 5 and Oct. 15 – more than ever before in a comparable time period – though it remains unclear how many of those include people who have been registered twice.

Six weeks after Chancellor Angela Merkel’s historic decision to open Germany’s borders, there is a shortage of basic supplies in many places in this prosperous nation. Cots, portable housing containers and chemical toilets are largely sold out. There is a shortage of German teachers, social workers and administrative judges. Authorities in many towns are worried about the approaching winter, because thousands of asylum-seekers are still sleeping in tents. But what Germany lacks more than anything is a plan to make Merkel’s two most-pronounced statements on the crisis – “We can do it” and “We cannot close our borders” – fit together. In the second month of what has been dubbed the country’s brand new “Welcoming Culture,” it has become clear to many that Germany will only be able to cope if the number of refugees drops.

But that is unlikely to happen anytime soon. Tens of thousands of people are making their way to Germany along the so-called Balkan route; at the same time, Merkel’s efforts to reduce the influx through diplomacy and tougher regulations remain just that.

Impressive take-down of the many failures of Brussels.

• Why The Euro Divides Europe (Wolfgang Streeck)

The ‘European idea’—or better: ideology—notwithstanding, the euro has split Europe in two. As the engine of an ever-closer union the currency’s balance sheet has been disastrous. Norway and Switzerland will not be joining the EU any time soon; Britain is actively considering leaving it altogether. Sweden and Denmark were supposed to adopt the euro at some point; that is now off the table. The Eurozone itself is split between surplus and deficit countries, North and South, Germany and the rest. At no point since the end of World War Two have its nation-states confronted each other with so much hostility; the historic achievements of European unification have never been so threatened.

No ruler today would dare to call a referendum in France, the Netherlands or Denmark on even the smallest steps towards further integration. Thanks to the single currency, hopes for a European Germany—for integration as a solution to the problems of both German identity and European hegemony—have been superseded by fears of a German Europe, not least in the FRG itself. In consequence, election campaigns in Southern Europe are being fought and won against Germany and its Chancellor; pictures of Merkel and Schäuble wearing swastikas have begun appearing, not just in Greece and Italy but even in France. That Germany finds itself increasingly faced by demands for reparations—not only from Greece but also Italy—shows how far its post-war policy of Europeanizing itself has foundered since its transition to the single currency.

Anyone wishing to understand how an institution such as the single currency can wreak such havoc needs a concept of money that goes beyond that of the liberal economic tradition and the sociological theory informed by it. The conflicts in the Eurozone can only be decoded with the aid of an economic theory that can conceive of money not merely as a system of signs that symbolize claims and contractual obligations, but also, in tune with Weber’s view, as the product of a ruling organization, and hence as a contentious and contested institution with distributive consequences full of potential for conflict.

3% growth?! Or worse? “..His work finds that growth collapsed to a mere 0.2pc during the Asian Financial Crisis, rather than the official figure of 7.8pc.”

• The Truth Behind China’s Manipulated Economic Numbers (Telegraph)

\Beijing’s massaged growth statistics have long over-estimated growth. So what do we really know about what’s going on in the world’s second largest economy? The true state of China’s economic fortunes remain a mystery to the world. Monday will see the latest round of official quarterly GDP statistics from Beijing’s National Statistics Bureau. Economists expect they will reveal another moderate slowdown in growth to around 6.8pc – the lowest rate of expansion since the depths of the financial crisis six years ago. Yet the government’s estimates have long been dismissed as an accurate barometer of what’s really going on in the Chinese economy. [..] Questions over China’s “actual” rate of growth have been thrown into sharp relief after a summer of turmoil in financial markets. Sudden anxiety over a Chinese “hard-landing” left investors dumbstruck.

Billions were wiped off global stock indices and authorities were forced to suspend trading to prop up equity prices. China data-watching has now become the main driver for global economic sentiment. In July, Chinese market ructions were sparked by weak industrial profits numbers. By August, a six-year slump in monthly manufacturing triggered the ugliest day of global trading since the depths of the financial crisis eight years ago. “China’s new export this year is fear” says Paul Gruenwald, chief Asia economist at Standard & Poor’s rating agency. “The joke with Asian analysts on China is that we don’t need to forecast the actual rate of Chinese growth, we have to forecast what the Chinese authorities will say the rate will be.” But China’s GDP figure remains totemic. This stems in large part from the Politburo’s own fixation on annualised growth.

Authorities now say they are targeting yearly expansion of “around 7pc”. Harry Wu, an economics professor at Hitotsubashi University in Tokyo, has calculated the states’ GDP numbers have long played down the effects of external shocks to the economy. His work finds that growth collapsed to a mere 0.2pc during the Asian Financial Crisis, rather than the official figure of 7.8pc. For the period from 2008-14, his readings show an average expansion of 6.1pc, rather than 8.7pc. “Would I bet the actual growth rate is 7pc? No”, says Gruenwald. “Do we have enough indicators to work out what’s going on in the economy? Yes.” “The statistics are still catching up – that’s part of the fun of being an Asia [analyst]…we get to put on our detective hats and do a little investigative economics.” This investigative turn has led to a proliferation in “proxy” indicators for Chinese growth.

The calculations range from anything from 3pc-7pc real GDP growth in 2015. This diversity means there is plenty to support the case for China bulls and China bears. One gauge that has grown in popularity in recent years is the “Li Keqiang index”, named after China’s current premier, and revealed as his preferred measure of economic activity while serving as a senior Communist party secretary in the province of Liaoning a decade ago. GDP numbers were merely a “man-made” and “unreliable” construct, Mr Li was quoted as saying in diplomatic cables published by Wikileaks in 2010. Instead, he chose to focus on a trio of real economic indicators – bank lending, rail freight volumes and electricity production. Taking their cue from the premier, economics consultancy Fathom compile the Li Index as the “true” reflection of what the Communist party’s senior officials are most worried about. It suggests the economy has come to a standstill. Growth will reach just 3pc this year, according to Fathom.

Look: “A Reuters poll of 50 economists put expected growth at 6.8% year on year..” vs “Industrial profits fell 8.8% year on year in August..” That means that A) Reuters polls idiot economists because B) that 6.8% growth is utter nonsense.

• China’s Premier Li Says Achieving Growth Of Around 7% ‘Not Easy’ (Reuters)

China’s Premier Li Keqiang said that with the global economic recovery losing steam, achieving domestic growth of around 7% is “not easy”, according to a transcript of his remarks posted on the website of the State Council, China’s cabinet. Nonetheless in his comments, made at a recent meeting with senior provincial officials, the premier said that continued strength in the labour market and services were reasons for optimism, despite the headwinds facing the manufacturing sector. “As long as employment remains adequate, the people’s income grows, and the environment continuously improves, GDP a little higher or lower than 7% is acceptable,” the premier said in the comments posted on Saturday. China is due to release its third-quarter GDP growth figures on Monday.

A Reuters poll of 50 economists put expected growth at 6.8% year on year, which would be the slowest since the financial crisis in 2009. China’s growth in the first half of 2015, at 7%, was already the slowest since that time. Policymakers had previously forecast growth of “around 7%” for 2015. Most official and private estimates show that the Chinese labour market as a whole is outperforming the steep slowdown in industry, largely due to continuing strength in the service sector. But some analysts have expressed concern that the sharp drop in industrial profits over the past year indicates deeper weakness in income growth and wages next year, which could weaken overall growth further.

Industrial profits fell 8.8% year on year in August, the steepest drop since China’s statistics agency began publishing such data in 2011. The premier cited the emergence of new industries including the Internet sector, the continued need for high infrastructure investment in western regions, and ongoing urbanization as additional reasons for optimism on China’s future growth trajectory. Nonetheless, Li also highlighted the need for further market-oriented reforms and a reduced government role in the economy in order to fully grasp new economic opportunities and maintain growth.

And unofficially much more.

• China Officially Sold A Quarter Trillion Treasurys In The Past Year (ZH)

Back in May, this website was the first to explain the “mystery” behind Belgium’s ravenous Treasury buying which in early 2015 had turned into sudden selling, and which we demonstrated was merely China transacting using offshore Euroclear-based accounts to preserve anonymity. Since then theme of Belgium as a Chinese proxy has become so popular, even CNBC gets it. Consequently, we were also the first to correctly warn that China had begun liquidating its Treasury holdings (a finding which left none other than Goldman “speechless”), which also helped us predict that China is about to announce its currency devaluation three days before it happened as the conversion of Chinese reserves from inert paper to active dollars hinted at a massive effort to stabilize the currency, and thus unprecedented capital outflows.

As a result, the only data point which mattered in yesterday’s Treasury International Capital data release was not China’s holdings, which actually “rose” $1.7 billion in the month when China actively devalued its currency and then spent hundreds of billions to prevent the devaluation from becoming an all out FX rout, but the ongoing decline in Belgium holdings. As the chart below shows, Belgium, pardon Euroclear – which is a clearing house not only for China but many other EM nations who park their reserves in Belgium – sold another $45 billion in Treasurys last month, bringing the total to a dangerously low $111 billion, down from $355 billion at the start of the year.

Lumping Belgium and China holdings into one, as we have done since May, shows that as expected, Chinese selling continued in August, and the result was another drop of $43 billion in TSY holdings in the month of August, which incidentally mirrors perfectly the previously announced decline in September Chinese FX reserves, which according to official data declined from $3.557 trillion to $3.514 trillion.

According to the chart above, while to many Quantitative Tightening is a novel concept, the reality is that China (+ Euroclear) have been dumping Treasurys and liquidating reserves since January when total holdings peaked at $1.6 trillion last summer, and have since declined to $1.38 trillion. It means that China has sold a quarter trillion dollars worth of Treasurys in the past year, in the process offsetting what would have been about 25% of the Fed’s QE3. However, the real number is likely far greater.

China’s killing the world steel industry by dumping its surplus stock. Britain knows all about it.

• The Only Thing In China’s Trade Data That’s Growing -But Shouldn’t Be (Quartz)

China’s trade data have been a reliable monthly horror show over the last year, and September was no exception. Exports fell nearly 4% from year-earlier levels, while imports dove an astonishing 20%. One thing, however, is growing quite quickly. The trade gap shown here—illustrating the value of goods China exports minus the value of goods that it imports—leapt more than 90% versus September 2014. In fact, if you discount distortions during Chinese New Year, China’s trade gap was the highest it’s ever been. Some of that gap might be due to slumping commodity prices weighing more heavily on China’s import values. Still, the boom in extra exports reflects the fact that China continues to benefit from the global economy much more than the global economy benefits from China.

This is because the People’s Republic hogs more than its due share of global demand. To get why, let’s first look at how China has engineered its yawning trade surplus. As economist Michael Pettis explained in his book The Great Rebalancing, when one country rigs its economy to produce more than it consumes, it amasses extra savings that it then foists onto its trade partners. For more than a decade, this is exactly what the Chinese government has done. By keeping interest rates and the yuan artificially cheap, it suppressed its people’s purchasing power and moved money out of the hands of Chinese consumers, shifting it instead to Chinese manufacturers at artificially low rates. Thanks to these subsidies, Chinese manufacturers cut export prices, driving global competitors out of business.

That’s not the only risk it stokes.

• Emerging Nations Trimming $5 Trillion Debt Stokes Currency Risk (Bloomberg)

Borrowers in emerging markets have started to address a $5 trillion mountain of dollar-denominated bonds and loans, reducing their obligations for the first time in seven years in a move that threatens to cut short a budding rally in currencies from Brazil to Malaysia. Companies in developing nations paid back $38 billion of dollar debt last quarter, $3 billion more than they borrowed in the period and marking the first reduction in net issuance since 2008, according to data compiled by Bloomberg. Demand for greenbacks among borrowers needing the currency to repay debt is contributing to the largest capital outflows in almost three decades.

The borrowing binge, which took off in the wake of the global financial crisis as interest rates tumbled, may now be reversing as economic growth slows, commodity prices fall and lenders demand higher yields. While developing-nation currencies are rebounding from their record lows, analysts surveyed by Bloomberg expect the depreciation trend to resume as dollar debt repayments accelerate. “This is a massive event,” said Stephen Jen, the co-founder of London-based hedge fund SLJ Macro Partners LLP and a former economist at the IMF whose bearish call on emerging markets since 2012 has proven prescient. “They want to pay down their dollar loans. We are early in the game, there’s pretty intense pressure on emerging markets.”

[..] In the $1.4 trillion corporate debt market, new bond sales dropped to a four-year low of $35 billion last quarter, from a peak of $121 billion in June 2014, data compiled by Bloomberg show. “When growth deteriorates, investment opportunities are naturally lower, therefore money leaves, either to repay debt or buy alternative investments elsewhere,” said Koon Chow, a strategist at Union Bancaire Privee in London and former head of emerging-market strategy at Barclays Capital. “There’s a good chance that the deleveraging does continue because on the commodity side, the reduction in capex is going to be long term.”

The Institute of International Finance forecast on Oct. 1 that about $540 billion will leave emerging markets this year, the first net capital outflow since 1988. The unwinding of dollar borrowings is more than a fleeting phenomenon, which will contribute to the weakening of emerging-market currencies against the U.S. currency, according to Pierre Lapointe at Pavilion Global Markets. The Fed’s broad measure of the dollar against major U.S. trading partners has rallied 16% since the middle of 2014 and reached a 12-year high last month. “We expect the theme of EM external deleveraging to remain with us for a long time,” Lapointe said in a note on Oct. 9. “Historically, this process tends to last many years. In this context, we are probably halfway throughout the current structural dollar uptrend.”

It’s the loss of Fed credibility more than anything.

• Federal Reserve Inaction Could Start Currency War (The Street)

Sometimes doing nothing is the same as doing something – at least, that’s how it is when it comes to the Federal Reserve not raising interest rates. The stock market stays high because the Fed is not going to raise short-term interest rates. The Fed is not going to raise short-term interest rates because the U.S. inflation rate remains low. The inflation rate remains low because the value of the U.S. dollar is high. The dollar is strong because world commodity prices have fallen and have “driven up the dollar and held down U.S. import prices.” According to the Financial Times, the last three items mentioned are interrelated. Furthermore, it now seems as if momentum is picking up within the Federal Reserve to postpone any increases in it policy rate for an extended period of time. That inaction may not be the best decision in terms of the relative strength of currencies.

At least the doves – those reluctant to raise interest rates – are making their voices heard on the issues. Yesterday, Daniel Tarullo, one of the Fed’s Governors, joined another Fed Governor, Lael Brainard, who argued on Monday that the Fed should not raise its target short-term interest rate any time soon. The value of the dollar fell. By early afternoon Wednesday, it cost around $1.145 to buy a Euro, the same rate as on Sept. 17, the day the Federal Open Market Committee decided that the Fed would keep its target short-term interest rate unchanged. The Governors believe that inflation is not going to return that quickly and that without data supporting the return of inflation toward a level closer to the Fed’s target rate of 2%, there should be no upward movement in the policy rate.

Certainly, the predictions of Fed officials don’t indicate any quick return of the economy to the Fed’s target. In these forecasts the expectation is for the inflation rate to pick up in 2016 and 2017, but a 2% inflation rate is not expected until 2018. That’s a long time. According to the Financial Times article, if the Fed doesn’t move interest rates for a long time, the value of the dollar will continue to fall. This should connect to a faster rise in inflation than is forecast by the Fed. With interest rates constant, the stock market should continue to rise. But if inflation begins to rise, the Fed will have a justification for raising short-term interest rates, which will cause the value of the dollar to increase. This will result in slowing down the inflation rate once again. According to this argument, the stock market should begin to fall because the Fed is raising interest rates.

Since 2007/8: “The total stock of global debt, even excluding debts held by the financial sector, is up by more than $50 trillion. That’s an increase of more than 50%.”

• How Global Debt Has Changed Since The Financial Crisis (WEF)

Debt levels have been a subject of constant news in the years since the financial crisis — from the sub-prime housing crisis in the United States, to the eurozone sovereign debt crisis, to the dramatic increases in debt evident in emerging markets now. Graphs produced by analysts at Bank of America Merrill Lynch show an astonishing acceleration in global debt levels, and demonstrate just how little de-leveraging there’s been since the 2008 financial crisis (none). They say its evidence that “the world is still in love with debt.” After 30 years of relative stability from the early 1950s to the early 1980s, something changed, and debt started ramping up:

Debt then took a rapid step up in the mid-1980s, and another in the late 1990s. Over the last 30 years or so, global debt has risen by around 100% of GDP — so it hasn’t just grown in total terms, but has massively outstripped the economic expansion over that period. In some developed economies, like the United States, the United Kingdom and Ireland, there’s been some deleveraging since the financial crisis, particularly by households. But that’s been more than offset by increases in emerging markets. The total stock of global debt, even excluding debts held by the financial sector, is up by more than $50 trillion. That’s an increase of more than 50%.

Household debt has ticked up a little, and government debt has expanded as states attempted to stimulate their economies in the aftermath of the financial crisis. But the main increase has been down to non-financial corporate debt, which has risen by 63% over the period, largely in emerging markets.

One of many.

• Volkswagen Faces €40 Billion Lawsuit From Investors (Telegraph)

Volkswagen is set to be pushed deeper into crisis after it emerged that the carmaker is facing a record-breaking €40bn (£30bn) legal attack spearheaded by one of the world’s top law firms. Quinn Emanuel, which has won almost $50bn (£32bn) for clients and represented Google, Sony and Fifa, has been retained by claim funding group Bentham to prepare a case for VW shareholders over the diesel emissions scandal, The Sunday Telegraph can reveal. Bentham has recently backed an action by Tesco shareholders over the retailer’s overstating of profits. The pair are attempting to assemble a huge class action following what they call “fundamental dishonesty” at the German auto giant, which plunged the carmaker into crisis after it admitted using “defeat devices” to cheat pollution tests.

The admission has been hugely costly for shareholders after it wiped more than €25bn off VW’s stock market value. Recalls and fines worth tens of billions of euros more are also expected. Now Quinn Emanuel and Bentham are contacting VW’s biggest investors – which include sovereign wealth funds of Qatar and Norway – to ask them to join the claim. VW has admitted that it fitted “defeat devices” to 11m cars that allowed them to fraudulently pass pollution controls, though the company’s senior management has insisted it was unaware of the practices. Richard East, co-managing partner of Quinn Emanuel in London, said: “We estimate shareholders’ losses could be €40bn as a result of VW’s failure to provide relevant disclosure [about defeat devices] to the market and gives rise to questions about fundamental dishonesty.”

Legal action would be pursued in Germany under its Securities Trading Act, according to Quinn Emanuel, which hopes to file the first wave of actions by February. The law firm will argue that VW’s failure to reveal its use of defeat devices to shareholders constituted gross negligence by management. Mr East added that damages could be calculated from 2009 – when VW started fitting the devices to its engines – and that if investors had known about them they would not have held or traded in VW shares. “We don’t think it will be very hard to find shareholders who have suffered because of it,” he said.

Deeply embedded. There needs to be an independent investigation.

• VW Made Several Defeat Devices To Cheat Emissions Tests (Reuters)

Volkswagen made several versions of its “defeat device” software to rig diesel emissions tests, three people familiar with the matter told Reuters, potentially suggesting a complex deception by the German carmaker. During seven years of self-confessed cheating, Volkswagen altered its illegal software for four engine types, said the sources, who include a VW manager with knowledge of the matter and a U.S. official close to an investigation into the company. Spokespersons for VW in Europe and the United States declined to comment on whether it developed multiple defeat devices, citing ongoing investigations by the company and authorities in both regions. Asked about the number of people who might have known about the cheating, a spokesman at company headquarters in Wolfsburg, Germany, said: “We are working intensely to investigate who knew what and when, but it’s far too early to tell.”

Some industry experts and analysts said several versions of the defeat device raised the possibility that a range of employees were involved. Software technicians would have needed regular funding and knowledge of engine programs, they said. The number of people involved is a key issue for investors because it could affect the size of potential fines and the extent of management change at the company, said Arndt Ellinghorst, an analyst at banking advisory firm Evercore ISI. Brandon Garrett, a corporate crime expert at the University of Virginia School of Law, said federal prosecution guidelines would call for the U.S. Justice Department to seek tougher penalties if numerous senior executives were found to have been involved in the cheating. “The more higher-ups that are involved, the more the company is considered blameworthy and deserving of more serious punishment,” said Garrett.

Paper fake wealth.

• ETFs’ Rapid Growth Sparks Concern at SEC (WSJ)

The proliferation of exchange-traded funds is causing concern at the U.S. Securities and Exchange Commission, the latest sign of increased scrutiny of the popular products. Investors have piled into the funds over the past decade, attracted to the products’ low fees and issuers’ pitch that they provide exposure to a variety of asset classes while offering the chance to get in and out of positions easily. But they have been drawing scrutiny from the SEC, even before wild trading on Aug. 24 exposed problems with how the funds are set up to trade. “It seems fairly certain that the explosive growth of ETFs in recent years poses a challenge that isn’t going away—and may well become even more acute as new ETFs enter the market,” said SEC Commissioner Luis Aguilar.

The number of exchange-traded products in the U.S. has swelled by more than 60% over the past five years to 1,787 as of the end of September, according to ETFGI, a London consulting firm. And a record number of new providers launched products this year, the firm has said. Competition to list new products is ramping up. Last month, BATS Global Markets Inc. said it would start a new plan to pay ETF providers as much as $400,000 a year to list on its exchange. On Aug. 24, some funds, including ones run by the largest ETF providers, priced at steep discounts to their underlying holdings during that session. Circuit breakers halted trading more than 1,000 times of stocks and ETFs, interfering with pricing of some the funds.

“Why ETFs proved so fragile that morning raises many questions, and suggests that it may be time to re-examine the entire ETF ecosystem,” Mr. Aguilar said in his remarks. Some large ETF providers have said the tumultuous trading on Aug. 24 was partly because of market-structure issues, not the products themselves. “The events of Aug. 24 were a result of the convergence of various market structure issues, including market volatility, price uncertainty, and the use of market and stop orders,” said Vanguard Group in a statement on Friday. (Market orders are instructions to buy or sell a stock at the market price, as opposed to a specific price.) “These issues exacerbated trading difficulties with respect to some ETFs.”

“..if 10% of the loan balances of the top 100 borrowers were lowered from non-risk to risky categories, annual bank earnings would fall between 11% and 25%.”

• JPMorgan Says Bad Corporate Loans Pose Main Risk For Brazil Banks (Reuters)

A deterioration in the quality of corporate loan books poses the most obvious risk to Brazil’s largest listed banks, which are wrestling with the nation’s steepest recession in a quarter century, JPMorgan Securities said on Friday. In a report, analysts led by Saúl Martínez said the nation’s top banks are working actively with debt-laden borrowers to ease terms of their credit in order to improve loan affordability, while simultaneously asking for more guarantees. Their assessment was based on talks with industry players. Such a move comes as banks seek to mitigate the earnings impact of worsening corporate balance sheets, with the country sinking into a recession, a corruption probe at state firms and plunging confidence magnifying the current crisis. At this point, Martínez said, “a small number of loans can have a big impact” on loan-related losses at banks.

“Unexpected losses can be greater for corporate loans given that average exposures to specific borrowers are much larger,” the report said. “This is relevant as signs of financial strain in the Brazilian corporate sector are appearing.” His remarks underscore the uncertain outlook facing Brazilian banks. Brazil’s economy shrank in recent quarters and is slated to contract this year and next, the first back-to-back annual declines since the 1930s. Industrial output, retail sales and capital spending indicators have all tumbled over the past two years, with no sign of relief in the near term. According to the analysts’ estimates, if 10% of the loan balances of the top 100 borrowers were lowered from non-risk to risky categories, annual bank earnings would fall between 11% and 25%.

Human right? Who needs them?

• Revealed: How UK Targets Saudis For Top Contracts (Observer)

Government departments are intensifying efforts to win lucrative public contracts in Saudi Arabia, despite a growing human rights row that led the ministry of justice to pull out of a £6m prison contract in the kingdom last week. Documents seen by the Observer show the government identifying Saudi Arabia as a “priority market” and encouraging UK businesses to bid for contracts in health, security, defence and justice. “It’s becoming increasingly clear that ministers are bent on ever-closer ties with the world’s most notorious human rights abusers,” said Maya Foa, director of Reprieve’s death penalty team. “Ministers must urgently come clean about the true extent of our agreements with Saudi Arabia and other repressive regimes.”

The UK’s increasingly close relationship with Saudi Arabia – which observes sharia law, under which capital and corporal punishment are common – is under scrutiny because of the imminent beheading of two young Saudis. Ali al-Nimr and Dawoud al-Marhoon were both 17 when they were arrested at protests in 2012 and tortured into confessions, their lawyers say. France, Germany, the US and the UK have raised concerns about the sentences but this has not stopped Whitehall officials from quietly promoting UK interests in the kingdom – while refusing to make public the human rights concerns they have to consider before approving more controversial business deals there.

Several of the most important Saudi contracts were concluded under the obscurely named Overseas Security and Justice Assistance (OSJA) policy, which is meant to ensure that the UK’s security and justice activities are “consistent with a foreign policy based on British values, including human rights”. Foreign Office lawyers have gone to court to prevent the policy being made public. The Labour leader, Jeremy Corbyn, has written to David Cameron asking him to commit to an independent review of the use of the OSJA process. “By operating under a veil of secrecy, we risk making the OSJA process appear to be little more than a rubber-stamping exercise, enabling the UK to be complicit in gross human rights abuses,” Corbyn writes.

The UK has licensed £4bn of arms sales to the Saudis since the Conservatives came to power in 2010, according to research by Campaign Against Arms Trade. Around 240 ministry of defence civil servants and military personnel work in the UK and Saudi Arabia to support the contracts, which will next year include delivery of 22 Hawk jets in a deal worth £1.6bn. And research by the Stockholm International Peace Research Institute shows that the UK is now the kingdom’s largest arms supplier, responsible for 36% of all Saudi arms imports.

“They will be looking for horses and people in funny hats and meeting the Queen..”

• Britain Has Made ‘Visionary’ Choice To Become China’s Best Friend, Says Xi (Guardian)

Chinese president Xi Jinping praised Britain’s “visionary and strategic choice” to become Beijing’s best friend in the west as he prepared to jet off on his first state visit to the UK, taking with him billions of pounds of planned investment. The trip, Xi’s first to Britain in more than two decades, has been hailed by British and Chinese officials as the start of a “golden era” of relations which the Treasury hopes will make China Britain’s second biggest trade partner within 10 years. “The UK has stated that it will be the western country that is most open to China,” Xi told Reuters in a rare written interview published on the eve of his departure. “This is a visionary and strategic choice that fully meets Britain’s own long-term interest.”

During the four-day trip, which officially begins on Tuesday, Xi will be feted by sports and film stars, Nobel-winning scientists, members of the royal family and politicians. David Cameron and George Osborne will both accompany Xi, who Beijing describes as a football fan, to Manchester where he will visit Manchester City football club and dine at Town Hall. The Communist party leader will also address parliament. Chinese state media has predicted Britain will afford an “ultra-royal welcome” to Xi, who last set foot in the UK in 1994 when he was an official in the south-eastern city of Fuzhou. A frontpage story in the China Daily boasted that Xi’s arrival would be celebrated with a 103-gun salute – 41 in Green Park and 62 at the Tower of London.

Fraser Howie, the co-author of Red Capitalism, said Beijing would revel in the pomp and circumstance. “They will be looking for horses and people in funny hats and meeting the Queen. That plays fantastically well back in China and they make big use of that to show how important the Chinese leadership is,” he said. “It also plays to the pitch that China is now being recognised on the world stage as a great power. This is especially true in Britain’s case because it was those nasty Brits who beat them in the opium war. Now the table has turned and it is China in the ascendancy and it is Britain who is pandering to the Chinese.”

Debt Rattle October 15 2015

Oct 152015

October 15, 2015 Posted by Raúl Ilargi Meijer at 9:04 am Finance Tagged with: carry trade, debt, deflation, exports, Glencore, inequality, refugees, selloff, VW, Walmart 1 Response »

DPC League Island Navy Yard, Philadelphia. USS Brooklyn spar deck 1898

• The Biggest American Debt Selloff In 15 Years (CNN)

• Inequality To Drive ‘Massive Policy Shift’: Bank of America (CNBC)

• At US Ports, Exports Are Coming Up Empty (WSJ)

• Consumers Shutting Down As US Economy Deflates (CNBC)

• The US Is Closer To Deflation Than You Think (CNBC)

• Walmart Share Plunge Wipes Out $21 Billion In Market Cap In One Day (USA Today)

• Wal-Mart Just Made Things Worse For Everybody Else (CNBC)

• The Chilling Thing Walmart Said About Financial Engineering (WolfStreet)

• Glencore Collapse Could Be Even Worse Than Feared (MM)

• Unwinding Of Carry Trade May Unmask China’s True Metal Demand (Bloomberg)

• VW: Secret Emissions Tool In 2016 Cars Is Separate From ‘Defeat’ Cheat (AP)

• VW Customers Demand Answers And Compensation Over Emissions Scandal (Guardian)

• Lavrov: Unclear What Exactly US Is Doing In Syria (RT)

• Two-Thirds Of British Hospitals Offer Substandard Care (Guardian)

• Assange ‘In Constant Pain’ As UK Denies Safe Passage To Hospital For MRI (RT)

• Will Trudeaumania Sweep Canada’s Liberals Into Power – Again? (Guardian)

• EU Need for Turkey to Halt Refugee Flow Collides With History (Bloomberg)

• Refugee Rhetoric Echoes 1938 Summit Before Holocaust: UN Official (Guardian)

• ‘Lesbos Is Carrying The Sins Of The Great Powers’ (ES)

This is not reversible.

• The Biggest American Debt Selloff In 15 Years (CNN)

China has been selling U.S. debt but it’s not alone. Lots of emerging markets like Brazil, India and Mexico are also selling U.S. Treasuries. Not that long ago all these countries were all huge buyers of U.S. debt, which is viewed as one of the safest places to park money. “Five or six years ago, the big concern was that China was going to own the United States,” says Gus Faucher, senior economist at PNC Bank. “Now the concern is that China is selling them.” Foreign governments have sold more U.S. Treasury bonds than they’ve bought in the 10 consecutive months through July 2015, the most recent month of available data from the Treasury Department. Just in the first seven months of the year, foreign governments sold off $103 billion of U.S. debt, according to CNNMoney’s analysis of Treasury Department data.

Last year there was an overall increase of nearly $45 billion. It’s a reality of the global economic slowdown. When commodity prices boomed a decade ago, emerging market countries took their profits and invested them in U.S. Treasury bonds and other types of assets that are similar to cash. Now that commodity prices are falling, countries that rely on commodities – Brazil, Mexico, Indonesia – just don’t have the cash they once did to invest in safe assets like U.S. Treasury bonds. “Slow growth means that they just don’t have the same appetite for dollars because they don’t have cash to put to work,” says Lori Heinel, chief portfolio strategist at State Street Global Advisors. “The bigger issue is ‘do they have the dollars flowing into the economies to keep investing in Treasuries?'”

Interesting thought on PQE. Too little too late though.

• Inequality To Drive ‘Massive Policy Shift’: Bank of America (CNBC)

Rising income inequality and a deflationary global economic picture are going to lead to big changes in 2016, according to one Wall Street forecast. Quantitative easing and zero interest rates are on their way out in the U.S., and Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, believes they will be replaced with massive infrastructure spending. The result would benefit Main Street more than Wall Street, which has had a banner seven-year run helped by historically easy Federal Reserve monetary policy. “If the secular reality of deflation and inequality is intensified by recession and rising unemployment, investors should expect a massive policy shift in 2016,” Hartnett said in a note to clients. “Seven years after the West went ‘all-in’ on QE and ZIRP, the U.S./Japan/Europe would shift toward fiscal stimulus via government spending on infrastructure or more aggressive income redistribution.”

A reversal in trend would have a substantial impact on investing. Investors should move to assets that benefit in reflationary times, like Treasury Inflation Protected Securities, gold (which Hartnett thinks will bottom in 2016), commodities and small-cap Chinese stocks, Hartnett said. TIPs have been around flat for the year, while gold has dropped nearly 2% and commodities overall are off nearly 13%. Easy-money measures have helped boost Wall Street, with the S&P 500 up about 200% since the March 2009 lows as companies have spent some $2 trillion on stock repurchases. Dividend payments also have soared during the period, with the second quarter’s $105 billion increase the biggest in 10 years, according to FactSet.

Asset returns have jumped while global economic growth has been anemic in what Hartnett called “the most deflationary expansion of all time.” GDP gains in the U.S. have averaged barely 2% during the post-Great Recession recovery, while some economists believe a global recession could hit in 2016. The clamor for some of that asset wealth to find its way into the larger economy is growing and giving rise, according to Hartnett, to populist presidential candidates like Donald Trump and Bernie Sanders in the U.S. and similar movements around the world. “Deflation exacerbates ‘inequality’ of income, wealth, profits, asset valuations,” Hartnett wrote. “The gap between winners and losers is being driven wider and wider by excess liquidity and technological disruption (trends synonymous with the 1920s, another period infamous for ‘inequality’).”

China exports fell 20%. US exports are pluning. See the trend.

• At US Ports, Exports Are Coming Up Empty (WSJ)

One of the fastest-growing U.S. exports right now is air. Shipments of empty containers out of the U.S. are surging this year, highlighting the impact the economic slowdown in China is having on U.S. exporters. The U.S. imports more from China than it sends back, but certain American industries—including those that supply scrap metal and wastepaper—feed China’s industrial production. Those exporters have suffered this year as China’s economy has cooled. In September, the Port of Long Beach, Calif., part of the country’s busiest ocean-shipping gateway, handled 197,076 outbound empty boxes. They accounted for nearly a third of all containers that moved through the port last month. September was the eighth straight month in which empty containers leaving Long Beach outnumbered those loaded with exports.

The empties are shipping out at a faster rate at many U.S. ports, particularly those closely tied to trade with China, while shipments of containers loaded with goods are declining as exporters find it tougher to make foreign sales. That’s at least partly because the strong dollar makes American goods more expensive. Normally, after containers filled with consumer goods are delivered to the U.S. and unloaded, they return to export hubs. There, they typically are stuffed with American agricultural products, certain high-end consumer goods and large volumes of the heavy, bulk refuse that is recycled through China’s factories into products or packaging. Last month, however, Long Beach and the Port of Oakland both reported double-digit gains in exports of empty containers.

So far this year, empties at the two ports are up more than 20% from a year earlier. Long Beach’s containerized exports were down 8.2% this year through September, while Oakland’s volume of outbound loaded containers fell 12.7% from a year earlier in the January-September period. “This is a thermometer,” said Jock O’Connell at Beacon Economics. “The thing to worry about is if the trade imbalance starts to widen.” Trade figures released Tuesday in Beijing underscored China’s faltering demand. China’s imports fell 20.4% year-over-year in September following a 13.8% decline in August. As of June, U.S. exports of scrap materials were down 36% from their peak of $32.6 billion in 2011.

This is what deflation truly is: “The math is pretty simple: A lack of purchasing power for consumers has led to a lack of pricing power for companies.”

• Consumers Shutting Down As US Economy Deflates (CNBC)

The math is pretty simple: A lack of purchasing power for consumers has led to a lack of pricing power for companies. When it comes to the U.S. economy big-picture outlook, the ramifications are more complicated, and not particularly pleasant. Wednesday’s producer price index reading, showing a monthly decline of 0.5%, demonstrates a larger problem: At a time when policymakers are hoping to generate the kind of inflation that would indicate strong growth, the reality is that deflation is looming as the larger threat. Declining prices often would be treated as a net positive by consumers, but income weakness is offsetting the effects. Even Wall Street is feeling the heat. Prices for brokerage-related services and financial advice dropped 4.3% in September, accounting for about a quarter of the entire slide for final demand services.

The prospects heading into year’s end are daunting. In addition to the punk PPI number, retail sales gained by just 0.1% in September. Excluding autos, gasoline and building materials, sales actually declined 0.1%. On top of that, the August retail numbers were revised lower, with the headline rate now flat from the originally reported 0.2% gain. On the same day as the two disappointing data releases, Wal-Mart warned that the weakness is likely to extend through its fiscal year, with sales expected to be flat. The warning sent its shares tumbling 9% in morning trade, the worst performance in 15 years. All in all, then, not a great environment in which to raise rates, which the Federal Reserve hopes to do before the end of the year.

“Consumers are growing increasingly uncertain regarding their future income streams and are less willing to finance today’s spending with the prospect of tomorrow’s improved, future earnings,” Lindsey Piegza, chief economist at Stifel Fixed Income, said in a note to clients. “With gasoline prices at multiyear lows, consumers should be spending gangbusters but they aren’t.” Wage growth remains elusive for most workers, with the average hourly earnings rising just 2.2% annually. Job growth has slowed as well, with average monthly nonfarm payroll additions in the third quarter down nearly 28% from the previous quarter. The data on the ground shoot holes in a number of theories that were expected to drive the economy, market behavior and Fed policymaking.

Prices rise only in the West.

• The US Is Closer To Deflation Than You Think (CNBC)

Deflation talk these days is mostly centered on the euro zone and parts of emerging markets, but the U.S. is dancing on the brink itself. In fact, if not for a comparatively high inflation rate in the Western quadrant, the U.S. itself actually would have had a negative consumer price index rating in August, driving its economy into the same deflationary malaise found in other slow-growth regions. Of the four Census regions, only the West had a positive CPI for August, according to the most recent figures from the Bureau of Labor Statistics. And it hasn’t just been a recent occurrence. “All price growth in the U.S. in the past eight months came from the West,” the St. Louis Federal Reserve said in a report on geographic inflation influences. Inflation in the West has been a full percentage point above the other three regions, all of which experienced deflation.

Excluding the West, the national rate of inflation as measured by the CPI would have been -0.19% in August, as compared to the already anemic national rate of 0.2%, according to the St. Louis Fed. (The September reading will be released Thursday morning.) Annualized inflation in the West was 1.3% in August. In the Northeast it was -0.1%, -0.2% in the South and -0.3% in the Midwest. Much of the deflationary pressure came through falling energy prices – down 9.5% annualized in the West, 14.5% in the Midwest, 18.3% in the East and 17.1% in the South. Low inflation, and the possibility of deflation, presents a daunting conundrum for Fed officials, who have dismissed falling energy prices as transitory despite the fundamental factor of slowing global demand.

Wall Street has been waiting all year for signs the U.S. central bank would start down the path to normalizing monetary policy by raising rates for the first time in more than nine years. However, liftoff has been delayed as the FOMC has fussed over when conditions will be ideal for the move. More hawkish members want to raise because they worry the Fed will be too late once inflation accelerates, while also citing the need simply to have wiggle room for policy accommodation that the Fed does not have as long as it keeps its key rate near zero. Futures traders do not believe the Fed will hike until March 2016.

The direct result of falling consumer spending.

• Walmart Share Plunge Wipes Out $21 Billion In Market Cap In One Day (USA Today)

The Waltons had a bad – and expensive – day. Retailing giant Walmart stunned investors Wednesday when it gave disappointing guidance for growth and profit, sending its stock down 10% to $60.03. The stock drop, which was the biggest in decades, instantly wiped out more than $21 billion in shareholder wealth. That drop was bad for anyone who owns shares of Walmart. But it was especially painful for the company’s top 10 shareholders, who collectively own two-thirds of Walmart’s outstanding stock and saw $14.7 billion in wealth vanish Wednesday. The dive in Walmart shares hurt some of the wealthiest people in America including Walton family members Alice, Jim, John and S. Robson. Famed investor Warren Buffett’s Berkshire Hathaway also is a huge owner of Walmart stock.

Each was on the front line for one of the biggest implosions of a blue-chip stock in recent years. Walton Enterprises, an investment vehicle controlled by several members of the Walmart family, suffered the biggest hit. This investment vehicle owns 1.4 billion shares of Walmart, or 44% of the total shares outstanding, S&P Capital IQ says. Its holdings took a $9.5 billion hit. When you Include the holdings of other Walton family-controlled entities, such as the 197 million shares owned by S. Robson Walton and another 194 million held in the Walton Family name, the day’s loss jumps to more than $12 billion. Buffett’s Berkshire Hathaway owns 60.4 million shares of Walmart and lost nearly $405 million.

Don’t think it’s just a “rich person’s problem,” either. Walmart’s drop hit many individual investors closer to home. Index fund behemoth Vanguard is the fourth largest owner of Walmart stock because Walmart’s huge market value makes it a key holding in many index funds, which are widely held by individual investors. Vanguard’s 98.6 million shares brought home a $660 million daily loss directly to Vanguard investors. The pain of owning a big chunk of a single stock became painfully clear again Wednesday – especially if your last name is Walton.

As the no. 1 drops, so must the smaller fish.

• Wal-Mart Just Made Things Worse For Everybody Else (CNBC)

Wal-Mart shares had their worst day in 15 years Wednesday, after the world’s largest retailer said sales will be flat in fiscal 2016, while its earnings will slide to between $4.40 and $4.70 a share — down from $4.84 last year. Shares of competitors including Target, Macy’s, Kohl’s and J.C. Penney fell in sympathy, as Wal-Mart said it would invest billions into price over the next two years. With Wal-Mart already undercutting much of its peers, the move will put added pressure on its competitive set, which is already struggling to grow sales against a backdrop of steep price cuts and rock-bottom starting prices. Deflation in the retail sector was one reason why the National Retail Federation said that holiday sales will increase 3.7% this year, representing a deceleration from 2014.

Analysts and brands alike have said the holiday shopping season is already shaping up to be cutthroat, as retailers will do almost anything to get consumers to spend in their stores. “It’s a never-ending battle to capture their share of the overall spend,” Steve Barr, U.S. retail and consumer leader at PricewaterhouseCoopers, said Tuesday. It’s easy to understand why Wal-Mart, once the undisputed leader in pricing, is putting such an emphasis on delivering the best value to shoppers. According to PwC’s holiday forecast, 87% of shoppers said price is the primary driver behind their holiday spending choices. This is even more pronounced among what the consulting firm has dubbed “survivalists,” those who earn an annual income of less than $50,000.

According to PwC, 90% of survivalists said price is the No. 1 factor behind their holiday purchase decisions. Separately, a study released by coupon website RetailMeNot found consumers said a discount has to offer more than 34% off to be deemed a good deal. “I think we’ll see individuals taking advantage of the fact that prices haven’t moved against them this year,” the NRF’s chief economist, Jack Kleinhenz, said on a call after the trade group’s sales forecast.

“The most chilling words in the news release? “These are exciting times in retail given the pace and magnitude of change.”

• The Chilling Thing Wal-Mart Said About Financial Engineering (WolfStreet)

Wal-Mart had a bad-hair day. Its shares plunged $6.71, the largest single-day cliff-dive in its illustrious history. They ended the day down 10%, at $60.02, a number first kissed in 2001. Shares are 34% off their peak in January. So it wasn’t just today. But Wal-Mart didn’t do anything that special at its annual investor meeting today. It announced big “capital investments,” (we’ll get to the quotation marks in a moment), a crummy outlook, and a huge share buyback program. All of which it has done many times before. Only this time, the outlook is even worse, but the promised share buybacks are even larger. Wal-Mart proffered its strategies on how it would try to boost revenue growth in an environment where its primary customers – the 80% that got trampled by the Fed’s policies – are struggling to make ends meet.

A problem Wal-Mart has had for years. The news release hints at these new initiatives, spells out costs, and forecasts the resulting earnings debacle. Wal-Mart will goose “capital investments” by $11 billion in Fiscal 2017, on top of the $16.4 billion it’s spending on “capital investments” in fiscal 2016. This will maul earnings per share. In 2017, they’re expected to drop 6% to 12%, when the analyst community had forecast an increase of 4%. But 2019 is back in the rosy scenario of earnings growth. These capital investments aren’t computers, buildings, or new shelves. They’re largely “investments in wages and training,” which isn’t a capital investment at all, but an ordinary expense. “75% of next year’s investment will be related to people,” CEO Doug McMillon clarified.

That’s why they’ll hit earnings right away. A true capital investment would be an asset that is depreciated over time, with little earnings impact upfront. So sales in fiscal 2016 would be flat, which Wal-Mart blamed on “currency exchange fluctuations.” Would that be the strong dollar? But sales were also flat for the prior three fiscal years when the dollar was weak. Don’t lose hope, however. In the future, starting in fiscal 2017, sales would edge up 3% to 4%. To accomplish this, management is now desperately praying for inflation. The most chilling words in the news release? “These are exciting times in retail given the pace and magnitude of change.”

Then there was the announcement of a $20-billion share buyback program. $8.6 billion remaining from the $15 billion buyback program authorized in 2013 would be retired. That $15-billion program was on top of $36 billion in buyback programs over the preceding four years. Buybacks is what Wal-Mart does best.

Derivatives.

• Glencore Collapse Could Be Even Worse Than Feared (MM)

“Editor’s Note: We’re sharing this update on Glencore’s collapse with you because it’s shaping up to be even worse than Michael originally thought. Glencore still poses a “Lehman Brothers”-level risk to the global economy – but it’s now clear the world’s biggest commodities trader is on the hook for hundreds of billions in “shadow debt” that it simply refuses to address. This crisis is one small step away from upending our financial system, so here’s what you need to know…”

A lot of powerful voices have joined me in warning about the potential threat that Glencore poses to global financial markets. Bank of America, for instance, has published a report on the true size of the fallout. As you’ll see in a moment, it’s staggering. But since we talked about Glencore late last month, something insane has happened: The stock has gone up. But not for any good reason. The company has not righted the ship. The surge is only due to short-sellers covering their positions. The ugly truth is, the company is still a “shining” example of exactly what’s wrong with these markets. And I fear individual investors will get caught in the mess and wiped out on a stock like this or some of the others around it. That’s why I want to call out the misapprehensions and lies that are causing this “fauxcovery” and show you what’s next.

Because it could end up even worse than I thought…Since hitting a low of £0.69 ($1.05) per share on Sept. 28, Glencore stock has doubled to £1.29 ($1.97) per share. Even its credit default swap spreads have recovered to 650 basis points from a panic peak of 900 basis points. To place the last point in context, however, markets are pricing the company like a weak single B credit instead of a CCC credit. So while the major credit rating agencies still consider Glencore an investment-grade company, the actual credit markets have a much dimmer view of its prospects. Naturally, the company is doing everything possible to calm markets. First, last week it took the unusual step of publishing a six-page “funding factsheet” designed to dispel market concerns about its liquidity and solvency.

This factsheet shed very little light on what is really going on at the company, however. It said virtually nothing about Glencore’s derivatives contracts, other than stating that its derivatives contracts were undertaken within “industry standard frameworks.” Here’s the thing – “industry standard frameworks” normally require companies to post additional cash collateral upon the loss of an investment-grade rating, so the company’s statement should not have made anybody feel better. That suggests to me that the rise in the company’s stock price was largely a matter of short covering, not investors suddenly deciding that everything is hunky-dory in the House of Glencore.

Remember the metals bought with stored and unpaid metals as collateral?

• Unwinding Of Carry Trade May Unmask China’s True Metal Demand (Bloomberg)

The great mystery of metals is the amount used to finance the Chinese carry trade, or collateral used to borrow cheap dollars to buy yuan-backed high-interest-carrying notes. The Bank for International Settlements says this trade may be $1 trillion to $2 trillion, tying up tens of millions of metric tons of iron ore, aluminum and other metals. About a year of global copper consumption (22 million mt) equals just 5% to 10% of the estimate. The true figure will determine real China metal demand and future inventory. The impact of the Chinese metal carry trade is in the distortion of the true underlying copper demand, and a buildup in the metal’s inventory, strictly for collateral in financing. China accounts for 46% of global copper demand, according to the Word Bureau of Metals Statistics.

One question analysts must ask: What if it’s just 35%? The potential stopping of this trade, and normalization of the distorted demand, will provide understanding of China’s true copper needs and their potential growth. Nickel prices have fallen by half since year-end 2013, when they surged after No. 1 global exporter Indonesia banned exports of nonprocessed ore. Inventories are near record levels. The likely culprits for the higher inventory and price crash are the large amounts of the metal held off exchanges because they were used as collateral in a carry trade that took advantage of China’s high interest rates. A warehouse scandal at the Qingdao complex prompted banks to call in these trades, pummeling nickel prices.

The lucrative practice of using commodities as collateral to make money from interest-rate differentials inside and outside of China, a practice known as the carry trade, could cause significant pressure on commodity markets, were the trade to unravel. The Bank for International Settlements says this trade exceeds $1.2 trillion worth of commodities and could reach $2 trillion. Any major change in the direction of this trade could flood the market with more supply.

Actually, it’s a second defeat device. And that means it’s company policy, not a freak incident involving only technicians.

• VW: Secret Emissions Tool In 2016 Cars Is Separate From ‘Defeat’ Cheat (AP)

US regulators say they have a lot more questions for Volkswagen, triggered by the company’s recent disclosure of additional suspect engineering of 2016 diesel models that potentially would help exhaust systems run cleaner during government tests. That’s more bad news for VW dealers looking for new cars to replace the ones they can no longer sell because of the worldwide cheating scandal already engulfing the world’s largest automaker. Depending on what the Environmental Protection Agency eventually finds, it raises the possibility of even more severe punishment. Volkswagen confirmed to AP on Tuesday that the “auxiliary emissions control device” at issue operates differently from the “defeat” software included in the company’s 2009 to 2015 models and revealed last month.

The new software was first revealed to EPA and California regulators on 29 September, prompting the company last week to withdraw applications for approval to sell the 2016 model cars in the US. “We have a long list of questions for VW about this,” said Janet McCabe at EPA. “We’re getting some answers from them, but we do not have all the answers yet.” The delay means that thousands of 2016 Beetles, Golfs and Jettas will remain quarantined in US ports until a fix can be developed, approved and implemented. Diesel versions of the Passat sedan manufactured at the company’s plant in Chattanooga, Tennessee, also are on hold. Volkswagen already faces a criminal investigation and billions of dollars in fines for violating the Clean Air Act for its earlier emissions cheat, as well as a raft of state investigations and class-action lawsuits filed on behalf of customers.

If EPA rules the new software is a second defeat device specifically aimed at gaming government emissions tests, it would call into question repeated assertions by top VW executives that responsibility for the cheating scheme lay with a handful of rogue software developers who wrote the illegal code installed in prior generations of its four-cylinder diesel engines. That a separate device was included in the redesigned 2016 cars could suggest a multi-year effort by the company to influence US emissions tests that continued even after regulators began pressing the company last year about irregularities with the emissions produced by the older cars.

VW has provided precious little info for its clients. That’ll backfire.

• VW Customers Demand Answers And Compensation Over Emissions Scandal (Guardian)

Nine out of 10 Volkswagen drivers in Britain affected by the diesel emissions scandal believe they should receive compensation, increasing the pressure on the carmaker as it attempts to recover from the crisis. Almost 1.2m diesel vehicles in Britain are involved in the scandal, out of 11m worldwide, and VW faces a hefty bill if it is forced to make payouts to motorists. The company has put aside €6.5bn (£4.8bn) to deal with the cost of recalling and repairing the affected vehicles, but it also faces the threat of fines and legal action from customers and shareholders. There is a growing frustration among VW drivers in the UK over the lack of information about how their vehicle will be repaired, according to the consumer watchdog Which?. VW has sent letters to affected customers, arriving this week.

However, the letters state that the company is still working on its plans and another letter will be sent when these are confirmed. Paul Willis, the managing director of VW UK, told MPs on Monday that the recall of vehicles may not be completed by the end of 2016 and that it was premature to discuss compensation. However a survey by Which? has found that nine out of 10 affected motorists want compensation. Richard Lloyd, the executive director of Which?, said: “Many VW owners tell us they decided to buy their car based on its efficiency and low environmental impact, so it’s outrageous that VW aren’t being clear with their customers about how and when they will be compensated.

“Volkswagen UK must set out an urgent timetable for redress to the owners of the affected vehicles. We also need assurances from the government that it is putting in place changes to prevent anything like this happening again.” In the wake of the scandal, 86% of VW drivers are concerned about the environmental impact of their car, while 83% questioned the impact on its resale value and 73% feared the performance of their vehicle would be affected. More than half of the VW customers said they had been put off from buying a VW diesel car in the future. A total of 96% stated that fuel efficiency was an important factor in buying the diesel vehicle, while 90% said it was the seemingly limited environmental impact. Both these issues are affected by the scandal.

“..it’s unclear “why the results of so many combat sorties are so insignificant.”

• Lavrov: Unclear What Exactly US Is Doing In Syria (RT)

The Russian Foreign Ministry has questioned the effectiveness of the US-led year-long air campaign in Syria, saying it’s unclear “why the results of so many combat sorties are so insignificant.” Failing to curb ISIS, the US has now “adjusted” its program. “We have very few specifics which could explain what the US is exactly doing in Syria and why the results of so many combat sorties are so insignificant,” Russian Foreign Minister Sergey Lavrov told Russian channel NTV. “With, as far as I know, 25,000 sorties they [US-led air campaign] could have smashed the entire [country of] Syria into smithereens,” the minister noted.

Lavrov questioned the Western coalition’s objectives in their air campaign, stressing that Washington must decide whether its aim is to eliminate the jihadists or to use extremist forces to pursue its own political agenda. “Maybe their stated goal is not entirely sincere? Maybe it is regime change?” Lavrov said, as he expressed doubts that weapons and munitions supplied by the US to the so-called “moderate Syrian opposition” will end up in terrorists’ hands. “I want to be honest, we barely have any doubt that at least a considerable part of these weapons will fall into the terrorists’ hands,” Lavrov said. American airlifters have reportedly dropped 50 tons of small arms ammunition and grenades to Arab groups fighting Islamic State (IS, formerly ISIS/ISIL) in northern Syria.

US officials assure concerned parties that the fighters have been screened and are really confronting IS. “We do not want the events, when [some countries] not only cooperated with terrorists but plainly relied on them, to happen again,” Lavrov said, recalling that the French, for instance supplied weapons to anti-government forces in Libya in violation of a UN Security Council resolution. Lavrov has called on the US to “transcend themselves” and decide what is more important, either “misguided self-esteem realization” or getting rid of the “greatest threat” that is challenging humanity.

Scary.

• Two-Thirds Of British Hospitals Offer Substandard Care (Guardian)

Two-thirds of hospitals are offering substandard care, according to the NHS regulator, which also warns that pressure to cut costs could lead to a further worsening of the health service in the coming years. The Care Quality Commission also said that levels of safety are not good enough in almost three-quarters of hospitals, with one in eight being rated as inadequate. In its annual report, the watchdog detailed examples including one hospital where A&E patients were kept on trolleys overnight in a portable unit and not properly assessed by a nurse; while in another, medicine was given despite the patient’s identity not being properly confirmed. In some care homes, residents either received their medication too late or were given too much of it, leading to overdoses.

Understaffing and money problems are already contributing to a situation where 65% of hospitals, mental health and ambulance services either require improvement or are providing inadequate care.Too many patients are already receiving care that is unacceptably poor, unsafe or highly variable in its quality, from staff who range from the exceptional to those who lack basic compassion, it adds. In the report, England’s health and social care regulator raises concerns that patients could suffer as the service seeks to make the £22bn of efficiency savings by 2020 that NHS England has offered and health secretary Jeremy Hunt is pressing it hard to start delivering. “The environment for health and social care will become even more challenging over the next few years,” it states. “Tensions will arise for providers about how to balance the pressures to increase efficiency with their need to improve or maintain the quality of their care”.

As much humanity as refugees receive. “They can guard the car with 10,000 police officers if they wish..”

• Assange ‘In Constant Pain’ As UK Denies Safe Passage To Hospital For MRI (RT)

The UK has refused to grant Julian Assange safe passage to a hospital for an MRI scan and diagnosis, WikiLeaks has said, adding that he has been in “severe pain” since June. Assange’s lawyer has accused the UK of violating his client’s basic rights. WikiLeaks said that the UK government refused to satisfy Assange’s request to visit a hospital unhindered after the Ecuadorian Embassy filed one on his behalf on September 30. An MRI was recommended by a doctor, Laura Wood, back in August, according to the statement read aloud at a press conference given by Ecuadorian Foreign Minister Ricardo Patino on Wednesday.

“He [Julian Assange] has been suffering with a constant pain to the right shoulder region…[since June 2015]. There is no history of acute injury to the area. I examined him and all movements of his shoulder (abduction, internal rotation and external rotation) are limited due to pain. I am unable to elicit the exact cause of his symptoms without the benefit of further diagnostic tests, [including] MRI,” Patino read, citing a letter from the doctor. The UK’s Foreign and Commonwealth Office (FCO) issued a reply stating that Assange could not be guaranteed unhindered passage for a more thorough medical diagnosis on October 12.

Patino has criticized the decision saying that “even in times of war, safe passage are given for humanitarian reasons.” The Ecuadorian Embassy asked the UK authorities to offer a safe passage for a few hours for Assange into a London Hospital “under conditions agreed upon by UK and Ecuador,” Patino said, according to the WikiLeaks press release. “They can guard the car with 10,000 police officers if they wish,” the FM stressed, according to the press-release.

If Canada elects Harper again, forget about the country.

• Will Trudeaumania Sweep Canada’s Liberals Into Power – Again? (Guardian)

In the longest official federal election period in the nation’s history, it now appears Liberal leader Justin Trudeau may well be the nation’s next prime minister, with polls showing him establishing a commanding lead over his rivals, and the trend continuing to grow. It’s a stunning development in an election that could be described as an epic cliffhanger. Many, if not most, Canadians are eager for a change from prime minister Stephen Harper and his Conservative government, but with two worthy and eager rivals – the New Democratic party’s Thomas Mulcair and the Liberal party’s Justin Trudeau – where those change-hungry voters will place their bet has been difficult to decipher. When Harper announced the campaign in early August, it was met with immediate cynicism.

The extended campaign time (79 days as opposed to what had been the standard 37 days) gave the Conservatives an immediate advantage, given that their financial war chest is considerably larger than that of the Liberals or NDP. The Conservative strategy seemed a sound one: let the two opposition parties battle it out while the ruling party would float as much advertising as possible, handily winning over another majority. But the ruling party has faced considerable obstacles, including an astonishingly embarrassing ongoing scandal involving appointees to the unelected Senate (the Canadian version of the House of Lords) and a flagging economy. Polls have indicated many Canadians want change.

Ironically enough, one of the main reasons Canadians may have shifted their allegiances to the Liberal party leader is precisely because of the most famous negative ad campaign of the election, paid for and put into heavy rotation by the Conservatives. The ad, first rolled out in May by the Conservatives, has a group of people looking over an application by Justin Trudeau for the PM’s job. Perhaps most striking for its laughably bad acting, the ad has people concluding Trudeau is a lightweight who is “just not ready” for the job, with one concluding “nice hair, though”.

The ad attempts to suggest that not only is Trudeau simply not ready but voting for him is tantamount to a risky foray into untested waters, given the turbulent global economy and nagging threats of terror (the Cons have been playing both up at every turn). But a funny thing happened on the way through this fear-mongering: by just about any standards, Trudeau has run an excellent campaign. In late August he unveiled a campaign promise to invest billions of dollars in Canada’s roads, bridges, public transit and other public facilities. He suggested these were all necessary investments, which would help to stimulate the moribund economy, and went one step further, suggesting if he formed government, he would be open to deficit spending – moderate deficits, he cautioned, which would be over by 2019.

Europe has it coming.

• EU Need for Turkey to Halt Refugee Flow Collides With History (Bloomberg)

The EU needs Turkey more than ever to halt the flow of refugees from the Middle East – and has little to offer in return. With its decade-old bid to join the 28-nation union stalled, Turkey will be the topic without being at the table at a summit of EU leaders Thursday in Brussels. On the same mission, Angela Merkel plans to travel to Istanbul on Sunday to meet Turkish leaders. Relations have been all downhill since EU membership talks with Turkey began in 2005, years before civil war in neighboring Syria sent refugees streaming toward Europe. Turkey is stymied in part by Cyprus, its Mediterranean rival, and an anti-expansion mood in northern Europe. Meantime, a blossoming Turkish economy fed the sense that the country of 77 million could get along fine on its own.

“Many people in the EU are regretting the unproductive approach they had to the accession negotiations with Turkey, blocking the process and creating a deep sense of resentment in Ankara,” said Amanda Paul, an analyst at the European Policy Centre in Brussels. “If it were going along normally, it would be easier to reach this sort of agreement with Turkey.” Contacts are so strained that after President Recep Tayyip Erdogan went to Brussels on Oct. 5 to consider an “action plan” on migration, Turkish officials said the plan wasn’t discussed. EU Commission President Jean-Claude Juncker’s spokesman downgraded it to “an accord in principle to undertake a process.”

After Syria descended into war in 2011, European governments were content to let neighboring states such as Turkey, Lebanon and Jordan cope with the refugee influx. Only once Turkey amassed 2.2 million and they started heading northwest did European leaders wake up, finding themselves in the biggest refugee crisis since World War II. Germany, with a population of 81 million, is being roiled by this year’s expected arrival of at least 800,000 refugees, which is causing strains in Merkel’s governing coalition. “Turkey fears that even more refugees will come because the fighting in Syria isn’t letting up,” Merkel said Wednesday in a speech in eastern Germany. “I will fly to Turkey on Sunday to see how we can help on the ground so Turkey’s burden is shouldered more widely.”

“It’s just a political issue that is being ramped up by those who can use the excuse of even the smallest community as a threat to the sort of national purity of the state..”

• Refugee Rhetoric Echoes 1938 Summit Before Holocaust: UN Official (Guardian)

The dehumanising language used by UK and other European politicians to debate the refugee crisis has echoes of the pre-second world war rhetoric with which the world effectively turned its back on German and Austrian Jews and helped pave the way for the Holocaust, the UN’s most senior human rights official has warned. Zeid Ra’ad Al Hussein, the UN high commissioner for human rights, described Europe’s response to the crisis as amnesiac and “bewildering”. Although he did not mention any British politicians by name, he said the use of terms such as “swarms of refugees” were deeply regrettable. In July, the UK prime minister, David Cameron, referred to migrants in Calais as a “swarm of people”.

At this month’s Conservative party conference, the home secretary, Theresa May, was widely criticised for suggesting that mass migration made it “impossible to build a cohesive society”. In an interview, the high commissioner said the language surrounding the issue reminded him of the 1938 Evian conference, when countries including the US, the UK and Australia refused to take in substantial numbers of Jewish refugees fleeing Hitler’s annexation of Austria on the grounds that they would destabilise their societies and strain their economies. Their reluctance, Zeid added, helped Hitler to conclude that extermination could be an alternative to deportation.

Three-quarters of a century later, he said, the same rhetoric was being deployed by those seeking to make political capital out of the refugee crisis. “It’s just a political issue that is being ramped up by those who can use the excuse of even the smallest community as a threat to the sort of national purity of the state,” he said. “If you just look back to the Evian conference and read through the intergovernmental discussion, you will see that there were things that were said that were very similar.”

“..there are cases of Afghan children drowning off Greece that would touch the public deeply if publicised..”

• ‘Lesbos Is Carrying The Sins Of The Great Powers’ (ES)

Four rubber boats arrive in an hour, 40 to 50 people in each. One man nudges his two-year-old daughter towards me while he fetches his son. I try to soothe her tears. While two French doctors attend the injured, most of the new arrivals seem in good health and high spirits. Many of them, with their fashionable sportswear and smart backpacks, could be day-trippers. But it feels very different as night falls and the coach bearing me and my fellow Startup Boat activists — young volunteers trying to find tech and strategic solutions to the problems posed by the refugee crisis — takes us past a crowd of 150. None of the promised buses have arrived to take them to refugee camps at Moria and Karatape, 20 miles away.

Welcome to Lesbos, where in recent weeks 1,500-3,000 people — predominantly Syrians, then Iraqis and Afghans — have arrived daily, paying traffickers €1,200 for the short passage from Turkey. The former military camp at Moria has an official capacity of 410 but at times has housed 1,000, with hundreds camped outside. Karatape, set up specifically for Syrians, can take 1,000. While we were on Lesbos, a 24-hour period when police were off duty left Karatape at twice capacity, and food stores exhausted. The situation, says Lesbos mayor Spyros Galinos, is like “a bomb in my hands”. “I believe Lesbos is carrying the sins of great powers,” he says. “If this dot on the map could manage to accommodate such high numbers, all member states can help us.”

The problems extend beyond Syrian refugees. In Athens, young Afghan Mohammad Mirzay tells me why EU nations have made a “big mistake”, allowing Syrians the right to remain, however many countries they have travelled through, but not extending this to others. The Taliban are persecuting the Hazaras, he says, while there are cases of Afghan children drowning off Greece that would touch the public deeply if publicised. He takes me to Galatsi Olympic Hall, a venue at the 2004 Games, now designated a safe house. Families are camped in the fetid space. “Why should we be divided?” says Mirzay. “We should push in altogether. We should support ‘human’.”

Debt Rattle August 27 2015

Aug 272015

August 27, 2015 Posted by Raúl Ilargi Meijer at 11:44 am Finance Tagged with: China, crisis, Greece, Lehman, meltdown, Minsky, oil, refugees, selloff, stocks 3 Responses »

Arthur Siegel Zoot suit, business district, Detroit, Michigan Feb 1942

• US Stocks Surge, Snapping 6-Day Losing Streak (AP)

• Worst Decline In World Trade In 6 Years (RT)

• China Meltdown So Large That Losses Eclipsed BRICS Peers, Twice (Bloomberg)

• The Stock Market Hasn’t Had a Selloff Like This One in Over 75 Years (BBG)

• China’s Workers Abandon The City As Beijing Faces An Economic Storm (Guardian)

• China’s Central Bank Won’t Do Beijing’s Dirty Work (Pesek)

• China Is In A Serious Bind But This Is Not Yet A ‘Lehman’ Moment (AEP)

• Capitalism Is Always And Fundamentally Unstable (Steve Keen)

• The US Is Short on Options to Confront Next Crisis (Benchmark)

• Stock Market Tumult Exposes Flaws in Modern Markets (WSJ)

• China Remains a Key Commodities Player, Despite Waning Appetites (WSJ)

• Oil Industry Needs to Find Half a Trillion Dollars to Survive (Bloomberg)

• For Oil Producers Cash Is King; That’s Why They Just Can’t Stop Drilling (BBG)

• Alberta’s Economy Heading Toward Contraction (Globe and Mail)

• Yanis Varoufakis Pushes For Pan-European Network To Fight Austerity (ABC.au)

• Tsipras Rules Out Coalition Partners, Says Varoufakis ‘Lost His Credibility’ (AP)

• Greek Minister Says €5 Billion ATE Bank Scandal Is Biggest Of Its Type (Kath.)

• Hedge Funds Set To Bank Millions Short Selling In London Share Slump (Guardian)

• Mass Migration: What Is Driving the Balkan Exodus? (Spiegel)

• Hungary Scrambles To Confront Migrant Influx, Merkel Heckled (Reuters)

Debt rattle.

• US Stocks Surge, Snapping 6-Day Losing Streak (AP)

The Dow Jones industrial average rocketed more than 600 points Wednesday, its biggest gain in seven years, snapping a six-day losing streak that had Americans nervously checking their investment balances. While the surge came as a relief to many, Wall Street professionals warned that more rough days lie ahead, in part because of weakness in China, where signs of an economic slowdown triggered the sell-off that has shaken global markets over the past week. Heading into Wednesday, the three major U.S. stock indexes had dropped six days in a row, the longest slide in more than three years. The Dow lost about 1,900 points over that period, and more than $2 trillion in corporate value was wiped out. On Tuesday, a daylong rally collapsed in the final minutes of trading.

On Wednesday, the market opened strong again, and the question all day was whether the rally would hold. It did, and picked up speed just before the closing bell. The Dow vaulted 619.07 points, or 4%, to 16,285.51. It was the Dow’s third-biggest point gain of all time and its largest since Oct. 28, 2008, when it soared 889 points. The Standard & Poor’s 500 index, a much broader measure of the stock market, gained 72.90 points, or 3.9%, to 1,940.51. In %age terms, it was the best day for the S&P 500 in nearly four years. The Nasdaq composite rose 191.05 points, or 4.2%, to 4,697.54. Analysts said investors apparently saw the big sell-off as an opportunity to go bargain-hunting and buy low. “That always leads to a bounce or spike in the market,” said Quincy Krosby, market strategist for Prudential Financial.

“Meanwhile, the IMF predicted the world economy would grow 3.5% this year…”

• Worst Decline In World Trade In 6 Years (RT)

The first half of 2015 has seen the worst decline in world trade since the 2009 crisis, according to World Trade Monitor. The data could imply that globalization has reached its peak. In the first quarter of 2015, the volume of world trade declined by 1.5%, while the second quarter saw a 0.5% contraction (1.1% growth in annual terms), which makes the first six months of the year the worst since the 2009 collapse. Global trade won back 2% in June, but the authors of the research, the Netherlands Bureau for Economic Policy Analysis, warned that the monthly numbers were volatile and suggested looking at the long-term figures.

“We have had a miserable first six months of 2015,” chief economist of the WTO Robert Koopman told the FT. The organization had predicted trade would grow 3.3% this year, but is likely to downgrade the estimate in the coming weeks. According to Koopman, the downturn in world trade reflects the delay in the recovery of the European economy and the economic slowdown in China. “There’s an adjustment going on in the global economy and trade is a place where that adjustment becomes pretty visible,” added the economist. However, despite the fact that globalization has indeed reached its peak, there are no signs that it will decline, said Koopman. Meanwhile, the IMF predicted the world economy would grow 3.5% this year.

$5 trillion.

• China Meltdown So Large That Losses Eclipsed BRICS Peers, Twice (Bloomberg)

Take the combined size of all stocks traded in Brazil, Russia, India and South Africa, multiply by two, and you’ll get a sense of how much China’s market value has slumped since the meltdown started. Shanghai-listed equities erased $5 trillion since reaching a seven-year high in June, half their value, as margin traders closed out bullish bets and concern deepened that valuations were unjustified by the weak economic outlook. The four other countries in the BRICS universe have a combined market capitalization of $2.8 trillion, according to data compiled by Bloomberg. China has accounted for 41% of equity declines worldwide since mid-June, with the scale of the drop also exceeding the entire size of the Japanese stock market.

Losses accelerated following the shock yuan devaluation on Aug. 11 as investors took the step as a sign the government is more worried about the pace of the economic slowdown than previously thought. That, in turn, sent convulsions through global markets, particularly hurting countries that rely heavily on China as a destination for their exports of vegetables, minerals and fuel, including Brazil, Russia and South Africa. The Shanghai Composite Index remains 33% higher in the past 12 months. “China has been the single most important source of growth in the world for several years, hence such a sharp slowdown has a profound impact on trade,” Nathan Griffiths at NN Investment Partners in The Hague said by e-mail. Stock-market volatility on the “downside is much more important than the move on the upside for broader markets,” he said.

By one metric…

• The Stock Market Hasn’t Had a Selloff Like This One in Over 75 Years (BBG)

By one metric, investors would have to go back 75 years to find the last time the S&P 500’s losses were this abrupt. Bespoke Investment Group observed that the S&P 500 has closed more than four standard deviations below its 50-day moving average for the third consecutive session. That’s only the second time this has happened in the history of the index. May 15, 1940, marked the end of the last three-session period in which this occurred. This string of sizable deviations from the 50-day moving average is a testament to just how severe recent losses have been compared to the index’s recent range. “Not even the crash of 1987 got this oversold relative to trend,” writes Bespoke.

The money management and research firm produced a pair of analogue charts showing what’s in store if the S&P 500 mimics the price action seen in mid-1940. Overlaying the axes gives the impression that the worst of the pain is behind us, and a market bottom isn’t too far off. However, indexing the S&P 500 to five sessions prior to the tumult shows that a replication of the mid-1940 plunge could see equities run much further to the downside and into a bear market. If it tracked the 1940 trajectory, the S&P 500 would hit a low of 1,556 in relatively short order. But Bespoke doesn’t think stocks are fated to repeat that selloff.

“There is nothing, nothing, we have seen – Chinese fears, positioning, valuation, or any other factor – suggests to us that we are headed to 1556,” the analysts write. “More likely, in our view, is something along the lines of the top analogue; we doubt the bottom is in, but see it unlikely we enter a bear market and a true stock market crash.”

Back to the country.

• China’s Workers Abandon The City As Beijing Faces An Economic Storm (Guardian)

Liu Weiqin swapped rural poverty for life on the dusty fringes of China’s capital eight years ago hoping – like millions of other migrants – for a better future. On Thursday she will board a bus with her two young children and abandon her adopted home. “There’s no business,” complained the 36-year-old, who built a thriving junkyard in this dilapidated recycling village only to watch it crumble this year as plummeting scrap prices bankrupted her family. “My husband will stick around a bit longer to see if there is any more work to be found. I’m taking the kids.” Weeks of stock market turmoil have focused the world’s attention on the health of the Chinese economy and raised doubts over Beijing’s ability to avert a potentially disastrous economic crisis, both at home and aboard.

The financial upheaval has been so severe it has even put a question mark over the future of premier Li Keqiang, who took office less than three years ago. Following a stock market rout dubbed China’s “Black Monday”, government-controlled media have rejected the increasingly desolate readings of its economy this week. “The long-term prediction for China’s economy still remains rosy and Beijing has the will and means to avert a financial crisis,” Xinhua, the official news agency, claimed in an editorial. Meanwhile Li told the state TV channel CCTVthat “the overall stability of the Chinese economy has not changed”. The evidence in places such as Nanqijia – a hardscrabble migrant community of recyclers around 45 minutes’ drive from Tiananmen Square – points in the opposite direction.

“It’s the worst we’ve seen it. It’s even worse than 2008,” said Liu Weiqin, who like most of the village’s residents hails from Xinyang in south-eastern Henan province, one of China’s most deprived corners. “When things were good we could earn 10,000 yuan [£1,000] a month. But I’ve lost around 200,000 yuan since last year,” added Liu, who was preparing to leave her cramped redbrick shack for a 10-hour coach journey back to her family home with her eight-year-old son, Hao Hao, and five-year-old daughter, Han Han.

Trouble in Utopia?

• China’s Central Bank Won’t Do Beijing’s Dirty Work (Pesek)

China’s Zhou Xiaochuan is either the smartest or most reckless central banker in the world. Even after its fifth rate cut in nine months on Tuesday, the People’s Bank of China is running a monetary policy that’s too tight for an economy on the brink. The PBOC is grappling with weakening growth, excessive debt and a plunging equity market that’s wreaking havoc on household wealth, corporate profits and business confidence. So why is Zhou still only offering monetary-baby steps over the shock-and-awe recently favored by Bank of Japan Governor Haruhiko Kuroda? It’s partly because he wants to prevent China’s central bank autonomy from being reduced to a hollow cliché.

Zhou’s team – well aware that he has a control-obsessed Communist Party looking over his shoulder – wants to make sure President Xi Jinping does his part to restore China’s economy. We’ll know soon enough whether Zhou is being reckless. Many commentators have argued the PBOC should initiate quantitative easing. After all, China’s overcapacity and debt levels – the country’s local governments alone owe more than Germany’s annual gross domestic product – caution against a new round of fiscal stimulus. If the data on China’s economic fundamentals and Shanghai stocks cascade lower in the months ahead, Zhou might have some explaining to do. But, for now, his show of independence is a silver lining amid the ongoing turmoil.

Zhou is an economic modernizer without peer in today’s Beijing, a disciple of former premier Zhu Rongji, China’s most-important reformer since the pioneering Communist Party chairman Deng Xiaoping. Zhou’s top goal has been to get the yuan added to the International Monetary Fund’s special drawing rights program. But unlike other Chinese policy makers, who want to leverage that status to increase the country’s global clout, he wants to use it to spur further economic reforms. He knows that once the yuan is recognized as a reserve currency, Beijing will have no choice but to adhere to global economic norms.

Ambrose can’t seem to be able to make up his mind these days. Make it a Minsky moment then.

• China Is In A Serious Bind But This Is Not Yet A ‘Lehman’ Moment (AEP)

The European and American economies are at this point like 747 jumbo jets flying smoothly into stiff headwinds at 37,000 ft. Such craft do not normally fall out of the sky just like that. The great unknown is China. Some of us never believed in the first place that the Communist Party can perform miracles, or that China is necessarily destined for economic hegemony this century. We have long argued that the post-2009 credit blitz has been unprecedented in any major country in history. Loans have increased from $9 trillion to $27 trillion in six years. The extra debt alone is greater than the combined banking systems of the US and Japan, and its potency is dying as the output gained from each yuan of fresh credit drops from 80pc to nearer 25pc.

We argued – like premier Li Keqiang, our lonely hero in the Politburo – that the country is hurtling straight into the middle income trap unless it ditches Deng Xiaoping’s obsolete catch-up model in time, both by weaning itself off investment-led growth and by relinquinshing the Party grip on Chinese society. We expected trouble. Yet the crumbling credibility of China’s leaders this year is disturbing to watch. They have made serial errors. They sat on their hands as real one-year borrowing costs rocketed to 5pc. They botched the local government reform plan over the winter, precipitating a four-month fiscal crunch (spending fell 19.9pc in January) that would bring any country to its knees. They deliberately stoked a stock mania in Shanghai and Shenzhen, thinking it would reflate the economy by means of equity rather than debt.

They then mobilized the state’s coercive powers to stop it collapsing, only to fail. Finally, they abandoned China’s dollar peg and switched to a managed float before the economy had pulled out of recession (my term, not theirs), causing much of the world and many of its own citizens to conclude that Beijing is deliberately trying to drive down the yuan. It is this that precipitated the August storm. It is has the potential to turn dangerous. Nomura says capital flight reached almost $200bn in early July. Reports are circulating that it may be much higher. The central bank (PBOC) is burning through foreign reserves to defend the currency. This is causing a liquidity squeeze and lowering the monetary multiplier, yet the PBOC cannot easily slash rates to support the economy without inviting further outflows. Hence the timid 50 point cut in the reserve requirement ratio on Tuesday.

We are already seeing signs of disguised capital controls. Beijing has invoked anti-terror laws to investigate anybody suspected of smuggling money out of the country. Police raids are under way in Macau, the casino centre used to launder capital flight. Beijing has lifted the interest rate cap on long-term deposit accounts to try to entice savings to stay within China. These steps may at least slow the exodus of money. My own view – with low conviction, as they say in the hedge fund world – is that China will weather this immediate storm, though with difficulty.

That is Minsky.

• Capitalism Is Always And Fundamentally Unstable (Steve Keen)

Minsky’s view that capitalism is fundamentally unstable can be derived from a simple, dynamic view of capitalism: without bankruptcy or government intervention, a pure free market capitalist economy will collapse into a private debt black hole. The political implications of this are (a) that capitalism needs debt write-offs to survive, and (b) that government money creation is needed to avoid economic collapse. This is a huge political shift from today’s politics where the rights of creditors are enforced to the detriment of debtors, and where Neoliberalism has attempted to reduce the size of the public sector.

Used all the tricks in the book.

• The US Is Short on Options to Confront Next Crisis (Benchmark)

Stock market and commodity price declines are sweeping the globe, raising a question: If the U.S. economy lands in another hole, what tools does it have to dig itself out? Perhaps not many, or at least not as many as before the 2008 meltdown. U.S. debt stands at 74% of gross domestic product, compared with 35% in 2007, based on a Congressional Budget Office report released Tuesday. That burden is expected to grow further in coming years, limiting government options for additional fiscal stimulus in the form of spending or lower taxes. While the U.S. could follow in the footsteps of Japan, Ireland, Italy or Greece, which have racked up even higher debt-to-GDP levels, heftier deficits would be a hard political sell.

After all, Congress has been loathe to borrow, curbing spending through “sequester” limits and pushing the nation to the brink of default in 2011 amid disputes over a debt-limit extension. In recent years, the Federal Reserve has provided the stimulus that austerity-minded fiscal policy makers didn’t. The central bank has held interest rates near zero since 2008 and carried out three massive asset purchase programs to boost the economy. Now, cutting interest rates wouldn’t be an option in the face of a big downturn. That means the Fed would need to once again turn to unconventional steps such as further asset purchases or increased forward guidance. They’ve done it before, so it’s hard to make the case that they wouldn’t do it again, but it does mean that a crucial option — interest rates — is missing from their toolbox.

Partly for that reason, the Bank for International Settlements has warned that still-low rates around the world pose a looming economic risk. “Restoring more normal conditions will also be essential for facing the next recession, which will no doubt materialise at some point,” according to an annual report from the organization of central banks. “Of what use is a gun with no bullets left?”

“..Monday’s issues are likely to lead to changes in how markets operate at times of uncertainty..” Ha ha, want to bet?

• Stock Market Tumult Exposes Flaws in Modern Markets (WSJ)

Monday’s mayhem exposed significant flaws in the new architecture of Wall Street, where stock-linked funds—as much as shares themselves—now trade en masse on U.S. markets. Many traders reported difficulty buying and selling exchange-traded funds, a popular investment in which baskets of stocks and other assets are packaged to facilitate easy trading. Dozens of ETFs traded at sharp discounts to their net asset value—or their components’ worth—leading to outsize losses for investors who entered sell orders at the depth of the panic. Products built to provide insurance for investors came up short. As a result of trading halts in futures tied to the S&P 500 index, it was difficult for investors to get consistent prices on contracts linked to them that offer insurance against S&P 500 declines.

Elsewhere, the value of the most widely tracked Wall Street gauge of investor anxiety, the CBOE Volatility Index, or VIX, wasn’t published until almost 10 a.m. Monday, half an hour after stock trading began and after the Dow Jones Industrial Average had already posted its largest-ever intraday point decline. That made it difficult for investors to easily gauge the fear in the market. “ETFs have democratized investing,” said David Mazza, head of ETF research at State Street Global Advisors, a major ETF provider. But he and others added that ETFs don’t prevent investors from suffering losses if they buy or sell when the market is under stress. Analysts said that, while losses were inevitable for some investors amid the turmoil, and unruly trading is hardly unheard of on late-summer days, Monday’s issues are likely to lead to changes in how markets operate at times of uncertainty.

The WSJ tries for a positive spin here, but what this really means is commodities are in for foul weather.

• China Remains a Key Commodities Player, Despite Waning Appetites (WSJ)

The fear that China’s appetite for commodities, from copper to coal, is falling after a decade of breakneck growth has sent prices tumbling, but the country’s sheer scale in these markets means that China will continue to shape them in the long term, even if at a slower speed. China now buys about an eighth of the world’s oil, a quarter of its gold, almost a third of its cotton and up to half of all the major base metals. Its buying power has made the country integral to global commodities trading, influencing everything from prices to the hours traders work. While analysts predict a slowdown in the growth of Chinese commodity demand, they believe the country’s clout in the market isn’t likely to wane.

Commodities have fallen sharply in recent days, extending a summer of declines, amid concerns that a slowdown in China’s economic growth will sap the demand that drove markets through more than a decade of gains. China’s voracious consumption amid double-digit annual economic growth also encouraged a glut of new supply, from fertilizers to gold. Earlier this week, oil fell to its lowest levels in over six years. Industrial metals, such as copper and aluminum, have lost about 20% of their value this year, as has iron ore.

ha ha ha

• Oil Industry Needs to Find Half a Trillion Dollars to Survive (Bloomberg)

At a time when the oil price is languishing at its lowest level in six years, producers need to find half a trillion dollars to repay debt. Some might not make it. The number of oil and gas company bonds with yields of 10% or more, a sign of distress, tripled in the past year, leaving 168 firms in North America, Europe and Asia holding this debt, data compiled by Bloomberg show. The ratio of net debt to earnings is the highest in two decades. If oil stays at about $40 a barrel, the shakeout could be profound, according to Kimberley Wood at Norton Rose Fulbright in London. “The look and shape of the oil industry would likely change over the next five to 10 years as companies emerge from this,” Wood said.

“If oil prices stay at these levels, the number of bankruptcies and distress deals will undoubtedly increase.” Debt repayments will increase for the rest of the decade, with $72 billion maturing this year, about $85 billion in 2016 and $129 billion in 2017, according to BMI Research. A total of about $550 billion in bonds and loans are due for repayment over the next five years. U.S. drillers account for 20% of the debt due in 2015, Chinese companies rank second with 12% and U.K. producers represent 9%. In the U.S., the number of bonds yielding greater than 10% has increased more than fourfold to 80 over the past year, according to data compiled by Bloomberg. 26 European oil companies have bonds in that category..

Hamster and treadmill.

• For Oil Producers Cash Is King; That’s Why They Just Can’t Stop Drilling (BBG)

Investors sent a surprising message to U.S. shale producers as crude fell almost 20% in August: keep calm and drill on. While most oil stocks have fallen sharply this month, the least affected by the slump share one thing in common: they don’t plan to slow down, even though a glut of supply is forcing prices down. Cimarex Energy jumped more than 8% in two days after executives said Aug. 5 that their rig count would more than double next year. Pioneer Natural Resources Co. rallied for three days when it disclosed a similar increase. Shareholders continue to favor growth over returns, helping explain why companies that form the engine of U.S. oil – the frackers behind the boom – aren’t slowing down enough to rebalance the market.

U.S. production has remained high, frustrating OPEC’s strategy of maintaining market share and enlarging a glut that has pushed oil below $40 a barrel. “These companies have always been rewarded for growth,” according to Manuj Nikhanj, head of energy research for ITG Investment Research in Calgary. Now though, “the balance sheets of this sector are so challenged that investors are going to have to look at other factors,” he said. Output from 58 shale producers rose 19% in the past year, according to data compiled by Bloomberg. Despite cutting spending by $21.7 billion, the group pumped 4% more in the second quarter than in the last three months of 2014.

That’s buoyed overall U.S. output, which has only drifted lower after peaking at a four-decade high in June. The government estimates production will slide 8% from the second quarter of this year to the third quarter of 2016. OPEC has been pumping above its target for more than a year. The oversupply may worsen if Iran is allowed to boost exports should it strike a deal with the U.S. and five other world powers to curb the Islamic Republic’s nuclear program.

“The province’s Wildrose opposition has noted that a barrel of Alberta’s oil is now cheaper than a case of beer.”

• Alberta’s Economy Heading Toward Contraction (Globe and Mail)

Faced with a collapse in energy prices, widespread drought, forest fires and the uncertainty of an untested government, the engine that drove much of Canada’s growth over the past decade has seized. Alberta’s economy is expected to contract this year. “I think it’s inevitable that Alberta will be in a contraction this year,” said Todd Hirsch, the chief economist for ATB Financial. “In 2016, I’m still optimistic we can squeeze out a very modest recovery. But this province won’t feel like it normally does until 2017 at the earliest.” Apart from a devastated energy sector, the provincial government has declared a provincewide agricultural disaster. After weeks of near-record drought, fields of parched grain can be found across much of Alberta.

The Agriculture Financial Services Corp. now expects to pay out as much as $1-billion to struggling farmers. Although most of Alberta’s farmers have crop insurance, the provincial agency will use the money to ensure the speedy compensation of farmers for lost crops and revenue. At the same time, dry weather gave rise to an early fire season in Alberta that has burnt 493,000 hectares across central and northern areas of the province – a burn area nearly twice the five-year average. A final price tag for the 1,646 fires seen across Alberta so far has yet to be determined. The struggling economy will have a huge effect on the government’s finances.

The provincial budget deficit could be the largest in nearly two decades, topping $8-billion if oil prices remain low, according to John Rose, the City of Edmonton’s chief economist. That would complicate Premier Rachel Notley’s campaign promise to increase spending on health and education while balancing the books by 2018. “It’s turning out worse than I expected,” said Mr. Rose, who warned of a significant slowdown in the provincial economy last December. “My forecast for 2015 was predicated on oil holding around $60 a barrel through the year. Things have gone awry.”

Can’t reform EU, Yanis.

• Yanis Varoufakis Pushes For Pan-European Network To Fight Austerity (ABC.au)

As far as Yanis Varoufakis is concerned, the Greek election campaign will be ‘sad and fruitless’. He tells Late Night Live why he won’t be running and why he is instead putting his energy into political action on a European level. When Greek prime minister Alexis Tsipras suddenly resigned last week, calling for fresh elections, his former finance minister Yanis Varoufakis was about to set off for France. His destination was the Fête de la Rose—a political event organised by the French Socialist Party, held annually in the tiny town of Frangy-en-Bresse, not far from the Swiss border. As rain poured down on the gathering, Varoufakis opened his speech with words familiar to any student of Marxist politics: ‘A spectre is haunting Europe.’

In Varoufakis’s adaptation, the spectre is that of democracy, and the powers of old Europe are as opposed to democracy in 2015 as they were to communism in 1848. For Varoufakis, the events of this year are an ‘Athens spring’ that was crushed by the banks after the Greek public’s vote against austerity in July. But as he explained to Late Night Live, he won’t be running for Greek parliament in the September elections, as he no longer believes in what Syriza and its leader, Tsipras, are doing. ‘The party that I served and the leader that I served has decided to change course completely and to espouse an economic policy that makes absolutely no sense, which was imposed upon us,’ he says.

‘I don’t believe that we should have signed up to it, simply because within a few months the ship is going to hit the rocks again. And we don’t have the right to stand in front of our courageous people who voted no against this program, and propose to them that we implement it, given that we know that it cannot be implemented.’ He has sympathy for a grouping of rebel MPs known as Popular Unity, but fundamentally disagrees with their ‘isolationist’ stance of desiring a return to the drachma. Instead, he says, his focus has turned to politics at the European level. ‘I don’t believe this parliament that will emerge from the coming election can ever hope to establish a majority in favour of a rational economic program and a progressive one,’ he says.

‘Instead of becoming engaged in an election campaign which in my mind is quite sad and fruitless, I’m going to be remain politically active—maybe more active than I have been so far—at the European level, trying to establish a European network. ‘National parties forming flimsy alliances within a Europe that operates like a bloc, like a macroeconomy, in its own interests—that model doesn’t work anymore. I think we should try to aim for a European network that at some point evolves into a pan-European party.’

“(Varoufakis) was talking and they paid no attention to him. They had switched off..”

• Tsipras Rules Out Coalition Partners, Says Varoufakis ‘Lost His Credibility’ (AP)

Greece’s prime minister on Wednesday raised the political stakes ahead of next month’s early national election, saying he will not enter a coalition with the main center-right and centrist opposition parties even if he needs their backing to govern. Alexis Tsipras resigned last week, barely seven months into his four-year mandate, when his bailout-dependent country received a new rescue loan that saved it from a looming bankruptcy and exit from the euro currency. He is seeking a stronger mandate, after his radical left-led coalition effectively lost its parliamentary majority when dozens of his own hardline left lawmakers refused to back new austerity measures demanded for the loan — which parliament approved with the backing of pro-European opposition parties.

Tsipras is widely expected to win the snap election, which will most likely be held Sept. 20, but it is unclear whether he will secure enough seats in parliament to govern alone. In an interview with private Alpha TV Wednesday, Tsipras ruled out a coalition with the center-right main opposition New Democracy party, or the smaller centrist Potami and PASOK parties. “I will not become prime minister in a coalition government with (New Democracy, PASOK or Potami),” he said. “I think that all three parties essentially express the old political system.” Before the election date is set, main opposition parties must complete the formal process of trying to form a national unity government. That procedure — doomed due to the parties’ disagreements — is expected to end Thursday.

Tsipras’ disaffected former comrades are angry at his policy U-turn to secure the international loans, as he was elected Jan. 25 on pledges to scrap creditor-demanded income cuts and tax hikes. They have formed the rebel group Popular Unity, now Greece’s third-largest party. Deepening the rift in Syriza, 53 members of the 201-strong central committee — the main party organ — announced their resignations from the party Wednesday, as they are switching to Popular Unity. Tsipras has argued that he was forced to accept creditors’ terms to keep Greece in the euro, and said that if he secures a slender majority in the election he will seek a coalition with his current partner, the small right wing populist Independent Greeks.

[..] In his interview, Tsipras said he accepted the bailout deal to avoid having to deal with a Greek bank collapse “and, possibly, civil strife” if the country was forced out of the euro. Tsipras also explained why, shortly before the agreement, he sacked his flamboyant finance minister, Yanis Varoufakis, who alienated Greece’s creditors with his aggressive talk and delaying tactics. Tsipras said that in a top-level June 25 meeting he and Varoufakis attended with the IMF, ECB and EC heads, “(Varoufakis) was talking and they paid no attention to him. They had switched off,” Tsipras said. “He had lost his credibility with his interlocutors.”

Until the next one.

• Greek Minister Says €5 Billion ATE Bank Scandal Is Biggest Of Its Type (Kath.)

Minister of State for Combating Corruption Panayiotis Nikoloudis on Wednesday described the illegal loans provided by the now-defunct Agricultural Bank of Greece (or ATEbank) between 2000 and 2012, which he is responsible for investigating, as the “biggest scandal since the modern Greek state was founded.” “We are talking about €5 billion at least… which dwarfs the infamous [Giorgos] Koskotas scandal involving the Bank of Crete [in the late 1980s], which ran to the equivalent of €60 million.”

The results of a preliminary investigation, which were made public in July, indicated that ATEbank was used to siphon some €5 billion to supporters of previous governments as part of a patron-client relationship. Prosecutors are investigating more than 1,300 loans that were issued without the necessary guarantees being demanded by the bank. ATEbank was absorbed by Piraeus Bank in 2013. Nikoloudis said that the loans were not given randomly, but to specific people, including “media owners, select businessmen and agricultural cooperatives.”

Shorting Sainsbury.

• Hedge Funds Set To Bank Millions Short Selling In London Share Slump (Guardian)

Hedge funds are set to bank tens of millions of pounds from the slump in share prices in London, having bet almost £18bn that the FTSE 100 would fall. The funds making the bets include Lansdowne Partners, which is run by George Osborne’s best man, Peter Davies, and Odey Asset Management, which is led by Crispin Odey – who made millions by predicting the credit crisis and earlier this year said the world was heading for a downturn “likely to be remembered in 100 years”. Short selling, effectively betting that share prices will fall, involves borrowing shares in a company and selling them with a view to buying them back at a lower price. The hedge fund makes a profit by banking the difference , as long as the shares do in fact fall.

As concerns over the slowing Chinese economy have grown, traders have increasingly bet that the fallout would be felt in blue-chip shares in London. The average%age of FTSE 100 company shares out on loan to short sellers has risen from 1.2% a year ago to 1.75%. The value of the short positions hedge funds have taken in FTSE 100 companies is £17.8bn, according to research by Markit. By the close of trading on Monday the FTSE 100 had fallen for 10 days in a row, sending it 17% down from its record high in April, before bouncing back by 3% on Tuesday. The biggest short positions are in Wm Morrison and J Sainsbury, with 16.4% of Morrisons shares out on loan, and 16.2% of Sainsbury’s shares. Traders have bet on the two supermarkets struggling further in the face of fierce competition from the discounters Aldi and Lidl.

Hopelessness is.

• Mass Migration: What Is Driving the Balkan Exodus? (Spiegel)

When Visar Krasniqi reached Berlin and saw the famous image on Bernauer Strasse – the one of the soldier jumping over barbed wire into the West — he knew he had arrived. He had entered a different world, one that he wanted to become a part of. What he didn’t yet know was that his dream would come to an end 11 months later, on Oct. 5, 2015. By then, he has to leave, as stipulated in the temporary residence permit he received. Krasniqi is not a war refugee, nor was he persecuted back home. In fact, he has nothing to fear in his native Kosovo. He says that he ran away from something he considers to be even worse than rockets and Kalashnikovs: hopelessness. Before he left, he promised his sick mother in Pristina that he would become an architect, and he promised his fiancée that they would have a good life together.

“I’m a nobody where I come from, but I want to be somebody.” But it is difficult to be somebody in Kosovo, unless you have influence or are part of the mafia, which is often the same thing. Taken together, the wealth of all parliamentarians in Kosovo is such that each of them could be a millionaire. But Krasniqi works seven days a week as a bartender, and earns just €200 ($220) a month. But a lack of prospects is not a recognized reason for asylum, which is why Krasniqi’s application was initially denied. The 30,000 Kosovars who have applied for asylum in Germany since the beginning of the year are in similar positions. And the Kosovars are not the only ones. This year, the country has seen the arrival of 5,514 Macedonians, 11,642 Serbians, 29,353 Albanians and 2,425 Montenegrins. Of the 196,000 people who had filed an initial application for asylum in Germany by the end of July, 42% are from the former Yugoslavia, a region now known as the Western Balkans.

The exodus shows the wounds of the Balkan wars have not yet healed. Slovenia and Croatia are now members of the European Union, but Kosovo, which split from Serbia and became prematurely independent in 2008, carves out a pariah existence. Serbia is heavily burdened with the unresolved Kosovo question. The political system in Bosnia-Hercegovina is on the brink of collapse, 20 years after the end of the war there. And Macedonia, long the post-Yugoslavia model nation, has spent two decades in the waiting rooms of the EU and NATO, thanks to Greek pressure in response to a dispute over the country’s name. The consequences are many: a lack of investment, failing social welfare systems, corruption, organized crime, high unemployment, poverty, frustration and rage.

“..helicopters, mounted police and dogs..”

• Hungary Scrambles To Confront Migrant Influx, Merkel Heckled (Reuters)

Hungary made plans on Wednesday to reinforce its southern border with helicopters, mounted police and dogs, and was also considering using the army as record numbers of migrants, many of them Syrian refugees, passed through coils of razor-wire into Europe. In Germany, which expects to receive 800,000 of them this year, Chancellor Angela Merkel was heckled by dozens of protesters as she visited an eastern town where violent anti-refugee protests erupted at the weekend. The surge in migrants seeking refuge from conflict or poverty in the Middle East, Africa and Asia has confronted Europe with its worst refugee crisis since World War Two, stirring social tensions and testing the resources and solidarity of the 28-nation European Union.

A record 2,533 mainly Syrians, Afghans and Pakistanis crossed from Serbia into EU member Hungary on Tuesday, climbing over or squirreling under a razor-wire barrier into the hands of an over-stretched police force that struggled to fingerprint and process them. Authorities said over 140,000 had been caught entering so far this year. Unrest flared briefly at a crowded reception center in the border region of Roszke, with tear gas fired by police. Another 1,300 were detained on Wednesday morning. More will have passed unnoticed, walking through gaps in a border fence being built by Hungary in what critics say is a futile attempt to keep them out. They packed a train station in the capital, Budapest, hundreds of men, women and children sleeping or sitting on the floor in a designated “transit zone” for migrants.

Almost all hope to reach the more affluent countries of northern and western Europe such as Germany and Sweden. Visiting the eastern German town of Heidenau, where violence broke out during weekend protests by far-right militants against the arrival of around 250 refugees, Merkel said xenophobia would not be tolerated. About 50 protesters booed, whistled and waved signs that read “Volksverraeter” (traitor), a slogan adopted by the anti-Islam PEGIDA movement earlier this year. “There is no tolerance for those people who question the dignity of others, no tolerance for those who are not willing to help where legal and human help is required,” Merkel told reporters and local people. “The more people who make that clear … the stronger we will be.”

Debt Rattle November 2 2014

Nov 022014

November 2, 2014 Posted by Raúl Ilargi Meijer at 1:40 pm Finance Tagged with: 1999, bubble, child poverty, China, Gazprom, Islamic finance, Japan, QE, selloff, UK, Ukraine 1 Response »

Russell Lee Dillon, Montana, trading center for a prosperous cattle and sheep country Aug 1942

• Financial ‘Experts’ No Better At Finance Than Normal Humans (HuffPo)

• Child Poverty Up In More Than Half Of Developed World Since 2008 (Guardian)

• Did QE Work? (Zero Hedge)

• History Will Surely See QE As A Major Mistake (Telegraph)

• Beware The QE Bubble, This Feels A Lot Like 1999 (Zero Hedge)

• ‘Another, Bigger Market Selloff Coming’ (CNBC)

• European Growth As Elusive As Quicksilver (Reuters)

• The World Economy Is Flying With Only One Engine (Roubini)

• Warning: Avoid This Corrupt, Third-World Country At All Costs (Simon Black)

• UK Courts Islamic Finance Market (Reuters)

• China’s Economy Goes From Bad To Worse (Zero Hedge)

• Ukraine Rebels Hold Russia-Backed Polls Condemned by UN (Bloomberg)

• Gazprom To Resume Gas Supply Once Ukraine Pays $2.2 Billion (Reuters)

• Ukraine Fighting Flares After Gas Deal as Winter Nears (Bloomberg)

We already knew.

• Financial ‘Experts’ No Better At Finance Than Normal Humans (HuffPo)

Knowing more about finance does not lead to better financial decisions. In fact, some of the most supposedly financially knowledgeable people – mutual-fund managers – don’t make better financial decisions than other people, according to a new study by Michigan State and Notre Dame researchers, as reported in The Atlantic. It’s the latest evidence that a years-long campaign to help normal Americans achieve “financial literacy” is ineffective at best and misguided at worst. As The Atlantic notes, expert stock-pickers in finance and forecasters in other fields have been derided for decades as no better than dart-throwing monkeys. When it comes to getting ordinary people to know more about finance, however, the consensus has been that this time it’s different. On the surface, it’s a well-intentioned and uncontroversial mission: Helping people help themselves by making better decisions. And there’s plenty of evidence that people have a scary lack of financial knowledge: One study found that just a third of Americans would correctly answer three simple financial questions.

And those questions are models of transparency compared with the opaque language consumers often face when making even the simplest financial decisions. The goal of making people financially literate seems to imply that it’s the individual’s responsibility to safely navigate what is often intentionally inscrutable financial language. The same companies who create the problem of financial products Americans can’t understand push financial literacy as the solution. For instance, Bank of America thinks the key is an online course. The financial industry’s self-regulatory organization has an entire foundation devoted to investor education. But financial literacy in this gauzy, generalized form simply doesn’t work. The Cleveland Fed found no “conclusive support that any benefit at all exists” from financial education as it is currently taught. Shocking no one who has been to high school, one study showed that taking a financial literacy class in high school does nothing to improve financial literacy.

And a study by researchers at the Brookings Institution could not find “strong evidence that financial literacy efforts have had positive and substantial impacts.” In a 2011 presentation titled “The Financial Education Fallacy,” Lauren Willis, a professor at Loyola Law School, shot down the idea that “ordinary consumers would have made better mortgage choices and would have accumulated sufficient precautionary savings to weather the recession” if they’d just been financially educated. Straightforward consumer protections, like putting limits on how many single stocks people can own in retirement accounts, are most effective. Financial education is no substitute for financial regulation, she argues.

This is QE for you. 40.5% child poverty in Greece, 32% in the US.

• Child Poverty Up In More Than Half Of Developed World Since 2008 (Guardian)

Child poverty has increased in 23 countries in the developed world since the start of the global recession in 2008, potentially trapping a generation in a life of material deprivation and reduced prospects. A report by Unicef says the number of children entering poverty during the recession is 2.6 million greater than the number who have been lifted out of it. “The longer these children remain trapped in the cycle of poverty, the harder it will be for them to escape,” it says in Children of Recession: the Impact of the Economic Crisis on Child Wellbeing in Rich Countries. Greece and Iceland have seen the biggest percentage increases in child poverty since 2008, followed by Latvia, Croatia and Ireland. The proportion of children living in poverty in the UK has increased from 24% to 25.6%. Eighteen of the 41 countries in the study have seen falls in child poverty, topped by Chile which has seen a reduction from 31.4% to 22.8%.

Norway has the lowest child poverty rate, at 5.3% (down from 9.6% in 2008), and Greece has the highest, at 40.5% (up from 23% in 2008). Latvia and Spain also have child poverty rates above 36%. In the US, the rate is 32%. “In the past five years, rising numbers of children and their families have experienced difficulty in satisfying their most basic material and educational needs,” says the report. “Unemployment rates not seen since the Great Depression of the 1930s have left many families unable to provide the care, protection and opportunities to which children are entitled. Most importantly, the Great Recession is about to trap a generation of educated and capable youth in a limbo of unmet expectations and lasting vulnerability.” It adds: “The impact of the recession on children, in particular, will be felt long after the recession itself is declared to be over.”

The study’s authors asked people about their experiences and perceptions of deprivation, based on four indicators: not having enough money to buy food for themselves or their family; stress levels; overall life satisfaction; and whether children have the opportunity to learn and grow. In 18 of the 41 countries, scores showed a worsening situation between 2007 and 2013, revealing “rising feelings of insecurity and stress”. The percentage of households with children unable to afford a meal with meat, chicken, fish or a vegetable equivalent every second day more than doubled in four European countries – Estonia (to 10%), Greece (18%), Iceland (6%) and Italy (16%).

It did for broke banks.

• Did QE Work? (Zero Hedge)

This week saw not only the end of QE but an unending parade of told-you-so talking-head willing to proclaim not only QE’s success (unemployment ~6%, stocks at record highs, corporate profits at record highs) but to scoff at the naysayers warnings that post-QE stocks will slide since ‘the whole rally has been driven by central bank liquidity’ because “see, stocks are ripping higher post-FOMC.” Obviously they fail to see the link between extraordinarily low rates (enabling cheap-funded financial engineering), printed money (repressing investors into buying stocks), and the fact that stocks are surged after another central bank – the BoJ – unleashed another round of even bigger insanity.To those that suggest QE was a victory, we have words and pictures… If it was so successful, why did they stop? And does this look like the chart of a successful monetary policy action?

“As UK state spending has surged over recent years, with our national debt doubling to £1,400bn since 2008, we’ve kept our public finances afloat only by effectively selling government debt back to the state …” You mean, the BoE is not ‘inedependent’?

• History Will Surely See QE As A Major Mistake (Telegraph)

“The final word on quantitative easing will have to wait for historians,” wrote Ambrose Evans-Pritchard this week. Now the US Federal Reserve has apparently ended QE, I’d like to take a cue from my esteemed Telegraph colleague by suggesting what future historians might say. On Wednesday, the Fed terminated QE3 – the latest incarnation of its money-creation programme. The American version of this highly unorthodox policy began in late 2008, with the Fed creating virtual balances ex nihilo and purchasing assets such as government debt and mortgage-backed securities, often from bombed-out banks. The US authorities originally billed QE as a $600bn exercise. By unlocking frozen interbank markets, it was supposed to spur growth, breaking the credit crunch. As meaningful recovery remained elusive, though, QE2 was launched in 2010, with its successor two years later. In sum, the world’s most important central bank has fired $3,700bn from its monetary bazooka. America’s QE has been six times bigger than envisaged.

The Fed’s balance sheet has grown more than three-fold in just over half a decade – an unprecedented monetary expansion. And it’s not just America, of course. Launched in March 2009, British QE was presented as a £50bn program. It has since ballooned to £375bn, some 7.5 times the official prediction. The Bank of England’s balance sheet has quadrupled, with our QE focusing on gilt purchases. The Bank now holds over a third of all outstanding sovereign bonds. Ordinarily, governments borrow from pension funds, insurance companies and other long-term investors. As UK state spending has surged over recent years, with our national debt doubling to £1,400bn since 2008, we’ve kept our public finances afloat only by effectively selling government debt back to the state, using newly-created money. If that sounds like dubious circular financing, that’s what it is. Future historians will no doubt discuss this uncomfortable reality more than we do.

“ … we are in the midst of a big bubble that will – down the line – be referred to as ‘The QE Bubble.”

• Beware The QE Bubble, This Feels A Lot Like 1999 (Zero Hedge)

It appears few remember the epic failure of Japan’s first experiment with quantitative easing from 2001 to 2006 (that even the NY Fed can’t find a silver lining to crow about) and yet, not only is QE heralded as a success (or not) but additional QE seems to be something to celebrate (even when it’s shown to fail to achieve anything economically). How’s QE working out for Japan? [..] As Michael Chadwick notes in an oddly bearish interview on CNBC, where has Japan gone in the last 14 years (since its QE started), “absolutely nowhere,” and yet, he exclaims, “sadly, across the globe all central banks are following the same failed path.” Chadwick reflects on the explosion of central bank balance sheets and asks, rhetorically, “do we really need QE every time the market gets nervous?”

Chadwick, rightly proclaims: “At this point not much matters apart from central banker comments, QE, and political promises… I wanna know about valuations, I worry about the consumer; this feels a lot like 1999 to me.” “We have to wonder, are the central banks working together; our QE ends one day; Japan QE ramps up the next – you gotta wonder?” “Right now the world is a very vulnerable place… we are in the midst of a big bubble that will – down the line – be referred to as ‘The QE Bubble'”

I don’t think -10% is a major sell-off, that’s just a correction.

• ‘Another, Bigger Market Selloff Coming’ (CNBC)

U.S. stocks rallied on Friday, with the Dow industrial average and S&P 500 closing at record highs. While the recent selloff may be in the rearview mirror, there’s a bigger one coming within the next three months, Empire Execution president Peter Costa told CNBC Friday. “The market has been on a tear for over five years. We had a small pullback of 8% I don’t think that’s enough. I think that the market needs to come back a little bit more than that for a longer duration,” Costa said in an interview with “Closing Bell.” In fact, he’s predicting a selloff of “probably” more than 10%.

It’s not elusive, it’s simple gone and it’s not coming back.

• European Growth As Elusive As Quicksilver (Reuters)

Data from both sides of the Atlantic will give clues in the coming week on just how bad the euro zone economy is and just how sustainable is its U.S. counterpart. Europe offers a rate meeting from the European Central Bank and a new slate of economic forecasts; the United States will release its influential monthly jobs data. Purchasing manager indexes for the past month will also show how businesses see things shaping up in the United States and Europe. One for China’s has already come in lower than expected. For many, the ECB meeting on Thursday will be the main money event – despite the fact that it is not likely to be one of action or suspense. As usual, the attention will be on ECB President Mario Draghi’s nuances at the news conference that follows the likely non-move on rates. When it comes to the ECB, the news is often all about the journey rather than the destination. This week’s inflation data let the ECB off the hook on taking any immediate additional action to combat the threat of deflation.

At 0.4% in October, inflation is worryingly slight, but it is higher than it was a month earlier. ECB policymakers are also in no rush to move on to something new when they have not yet seen how their targeted loans and purchases of asset-backed securities are doing. Many in financial markets would like to see the ECB move to a full quantitative easing (QE) asset-buying program like the one the U.S. Federal Reserve has just closed. But as these words from ECB Governing Council member Ewald Nowotny suggest, it is not likely. “I don’t think we should be pushed by the markets to produce a new program at every meeting we have.” The bank will also be looking at the U.S. Federal Reserve’s ending of QE and relatively hawkish tone for some spillover succour. The euro is down more than 1.5% against the dollar since the Fed meeting on Wednesday, and down more than 10% since May. A weaker euro not only boosts euro zone exports, it imports inflation, both of which the ECB wants to see.

‘Germany continues to resist a much-needed stimulus to boost eurozone demand.’ Roubini’s just another geezer proclaiming: ‘if only they picked the right policies, we’d return to growth … ‘ Yawn. It’s boring, it’s stupid, it’s costly, it’s destructive and it’s utterlyuseless. Why can’t anyone think beyond that narrow notion? Where is the power of the human brain? Where did it go? We’re stuck in a broken record rut.

• The World Economy Is Flying With Only One Engine (Roubini)

The global economy is like a jetliner that needs all of its engines operational to take off and steer clear of clouds and storms. Unfortunately, only one of its four engines is functioning properly: the Anglosphere (the United States and its close cousin, the United Kingdom). The second engine – the eurozone – has now stalled after an anaemic post-2008 restart. Indeed, Europe is one shock away from outright deflation and another bout of recession. Likewise, the third engine, Japan, is running out of fuel after a year of fiscal and monetary stimulus. And emerging markets (the fourth engine) are slowing sharply as decade-long global tailwinds – rapid Chinese growth, zero policy rates and quantitative easing by the US Federal Reserve, and a commodity super-cycle – become headwinds. So the question is whether and for how long the global economy can remain aloft on a single engine. Weakness in the rest of the world implies a stronger dollar, which will invariably weaken US growth.

The deeper the slowdown in other countries and the higher the dollar rises, the less the US will be able to decouple from the funk everywhere else, even if domestic demand seems robust. Falling oil prices may provide cheaper energy for manufacturers and households, but they hurt energy exporters and their spending. And, while increased supply – particularly from North American shale resources – has put downward pressure on prices, so has weaker demand in the eurozone, Japan, China, and many emerging markets. Moreover, persistently low oil prices induce a fall in investment in new capacity, further undermining global demand. Meanwhile, market volatility has grown, and a correction is still underway. Bad macro news can be good for markets, because a prompt policy response alone can boost asset prices.

But recent bad macro news has been bad for markets, owing to the perception of policy inertia. Indeed, the European Central Bank is dithering about how much to expand its balance sheet with purchases of sovereign bonds, while the Bank of Japan only now decided to increase its rate of quantitative easing, given evidence that this year’s consumption-tax increase is impeding growth and that next year’s planned tax increase will weaken it further. As for fiscal policy, Germany continues to resist a much-needed stimulus to boost eurozone demand. And Japan seems to be intent on inflicting on itself a second, growth-retarding consumption-tax increase. Furthermore, the Fed has now exited quantitative easing and is showing a willingness to start raising policy rates sooner than markets expected. If the Fed does not postpone rate increases until the global economic weather clears, it risks an aborted takeoff – the fate of many economies in the last few years.

The land of the free and the home of the depraved.

• Warning: Avoid This Corrupt, Third-World Country At All Costs (Simon Black)

John Anderson, an American tourist from San Clemente, California, was driving down a poorly-maintained highway when he saw flashing lights in his rearview mirror. After a brief exchange with the local police officer, Anderson was shocked when the cop started searching his vehicle. Anderson had $25,180 in US dollar cash in the car, which by the way was not a crime according to the local laws. When the cop saw it, he told Anderson that we would take it and threatened him with arrest if he protested. Anderson couldn’t believe it. This is the sort of stuff you always hear about in these third world countries—corrupt cops and state robbery. Ultimately Anderson gave in; the cop let him go and did not charge him with a crime, but took every last penny in the vehicle. And for the last two years, Anderson has been trying to unsuccessfully fight it in the country’s Kangaroo court system.

Clearly we should all avoid going to such dangerously corrupt third world countries. Except in this case, Anderson was in the United States of America. And he is far from being the only victim of this highway robbery known as Civil Asset Forfeiture. Since 9/11, police forces in the Land of the Free made over 62,000 seizures without charging anyone with any crime, stealing $2.5 billion in cash alone. The cost of taking legal action against the government is so high, that only about 17% of the victims actually challenged the seizures. And even then, only 41% of those that challenged have been able to get their money back. This means that the government has a better than 93% success rate in outright theft. This is worse than mafia—it’s blatant theft with impunity from the people that are sworn to protect and serve. It’s the kind of thing that is thought to only occur in heinously corrupt countries.

Here’s the good news: many people are waking up to the reality that they’re not living in a free country. They are starting to understand what I call ‘the criminalization of existence.’ Every last detail of our lives is regulated—what we can/cannot put in our bodies, whether we can collect rainwater or unplug from the grid, how we are allowed to educate our own children, etc. Driving this point home, a Tennessee woman was actually thrown in jail earlier this month for ignoring a city citation to trim some overgrown bushes in her yard. This isn’t freedom. The irony is that, even though many people are starting to realize this, they’re looking to the very institution that has enslaved them to solve the problem.

Try that in Texas.

• UK Courts Islamic Finance Market (Reuters)

The scope of Britain’s Islamic finance market is widening with several initiatives from the government and private sector, although the country is about to lose one of its six full-fledged Islamic banks. In June, Britain became the first Western country to sell sovereign sukuk (Islamic bonds), helping boost its industry credentials as competition intensifies among global financial centres for a slice of Islamic business. Britain has 22 firms that offer sharia-compliant financial products and they held an estimated $19 billion in assets last year, according to a report by lobby group TheCityUK. These include six full-fledged Islamic banks such as Bank of London and the Middle East, European Islamic Investment Bank, Gatehouse Bank and the Islamic Bank of Britain (IBB).

Last week a government official said the central bank would look into developing a liquidity management tool for use by Islamic banks, while Britain’s export credit agency expects to guarantee sukuk for the first time next year, an issue by a customer of European plane maker Airbus. In May, the Bank of England widened the types of sharia-compliant debt instruments that Islamic banks can use in their liquidity buffers, under a policy statement known as PS4/14.

We know.

• China’s Economy Goes From Bad To Worse (Zero Hedge)

Prepare to once again hear the word “decoupling” a whole lot more. The reason is that while the US economy is supposedly on an upward tear after the 3.5% Q3 GDP print (thanks to the war against ISIS sending defense spending soaring and a very contradictory plunge in imports which suggest US tollers are seeing far less end-demand) and despite the immediate cut to Goldman’s Q4 GDP estimate from 3.0% to 2.2% after US consumer spending tumbled in September it is, for now at least – because GDP-crushing snow is just around the corner – doing better than Europe (where Germany just joined the ranks of Spain, Italy and Portgual in the deflation column), Japan, where the BOJ just crashed recovery hopes and unleashed more QE for the official reason that the economy is tanking once more due to the inability to keep inflation steady above 1%, and certainly China, whose economy – driven by the housing market slide now in its 5th month and which has sent Y/Y prices negative for the first time since 2012 – keeps contracting, as confirmed overnight by the latest official PMI data from the National Bureau of Statistics. The Chinese data in a nutshell: overnight the official NBS PMI report indicted the October manufacturing PMI printed at a disappointing 50.8, below the 51.1 in September, and well below the consensus hopes for a rebound and uptick at 51.2.

Elections are not free.

• Ukraine Rebels Hold Russia-Backed Polls Condemned by UN (Bloomberg)

Russian-backed militias in eastern Ukraine are holding elections today in their self-proclaimed people’s republics in defiance of the United Nations and governments from Kiev to Washington. Voters in rebel-held territory in Donetsk and Luhansk will each select a head of government as well as a People’s Council, according to their websites. Voting was underway and was expected to end at 8 p.m. Both regions switched to Moscow time, one hour later than the rest of Ukraine, on Oct. 26. About 5.2 million people live in the conflict zones, according to the United Nations. Some 4.3 million and 2.2 million people, mainly Russian speakers, lived in Donetsk and Luhansk, respectively, before the uprising began. Seven months of fighting has displaced about 1 million people and claimed more than 4,000 lives, the UN says. Secretary-General Ban Ki-moon “deplores” the elections as a “breach of the constitution and national law,” according to the UN’s website. “These ‘elections’ will seriously undermine the Minsk protocol and memorandum, which need to be urgently implemented in full.”

Neither is gas.

• Gazprom To Resume Gas Supply Once Ukraine Pays $2.2 Billion (Reuters)

Russia could resume natural gas deliveries to Ukraine as soon as next week if Kiev pays $2.2 billion in debt and pre-payments, gas exporter Gazprom said on Friday, under a deal that also safeguards winter deliveries to Europe. Moscow, Kiev and the European Union reached an agreement on Thursday over the gas supplies despite tensions over a pro-Russian separatist rebellion in east Ukraine. Gazprom cut off Ukraine in June amid a bitter dispute over unpaid bills and pricing for the former Soviet republic, which is seeking closer ties with the West. Gazprom CEO Alexei Miller said Gazprom would restart the flow of gas within two days of Kiev covering part of its debt and pre-paying for deliveries in November. “Everything depends on when Ukraine makes this payment. We understand this can happen by the end of next week,” Miller told Russian state TV broadcaster Rossiya 24.

The Kremlin on Friday welcomed the deal as “an important step in the context of ensuring further uninterrupted gas transit to Europe”. The EU receives about a third of its gas from Russia and about half of that is piped across Ukraine. Speaking in Kiev, Ukraine Prime Minister Arseny Yatseniuk said he was determined to ensure safe transit to the EU, a crucial partner for Kiev in dealing with Russia over the rebellion in the east and a creditor of Ukraine’s bankrupt economy. “Ukraine will safeguard the transit and … won’t give Russia a chance to blackmail Ukraine and Europe,” Yatseniuk said. Thursday’s agreement covers November through next March and calls for Ukraine to pay $1.45 billion. Miller put the pre-payment portion of that at $760 million. Kiev must also pay off $3.1 billion for past deliveries by the end of the year, or supplies will cease from 2015, according to the protocol from Thursday’s talks in Brussels published by the Ukrainian government on Friday.

It’s the Ukraine that keeps shelling. At least until there’s so much snow and ice no-one can figure out what happened to MH-17. A bitter winter awaits Donetsk and Luhansk.

• Ukraine Fighting Flares After Gas Deal as Winter Nears (Bloomberg)

Fighting flared in Ukraine’s easternmost regions hours after the conclusion of a natural gas deal with Russia, highlighting the challenges in reaching peace as the Red Cross warned about winter’s onset. Ukrainian President Petro Poroshenko called on his parliamentary party yesterday to support Arseniy Yatsenyuk as prime minister, saying the country needs to be united “as never before” following Oct. 26 elections. “Despite the cease-fire in eastern Ukraine, acts of indiscriminate shelling and security incidents continue to put civilians at risk,” the International Committee of the Red Cross said in a statement. “The approaching winter makes the situation of both residents and displaced people even more difficult.” While the pact brokered by the European Union on Oct. 30 is designed to keep homes warm through the winter, rebels still hold large chunks of Ukraine’s east and are planning a controversial election tomorrow. Crimea remains under Russian control and the Kremlin, bristling at an EU accord Ukraine signed, is testing NATO with daily airspace violations.

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