Apr 122019
 


Jean-Francois Millet Harvesters Resting1850-53

 

Chelsea and Julian are in Jail. History Trembles. (Craig Murray)
Julian Assange Branded ‘Narcissist’ By Judge As He Faces US Extradition (Ind.)
They Will Punish Assange For Their Sins (Turley)
Assange ‘Direct Participant In Russian Efforts To Undermine West’ (Hill)
Tulsi Gabbard: Assange Arrest Is A Threat To Journalists (Hill)
Grave Threats To Press Freedoms (Greenwald, Lee)
5 Years (G.)
‘Rude, Ungrateful And Meddling’: Why Ecuador Turned On Assange (G.)
‘Swedish Software Developer’ Linked To Wikileaks Arrested In Ecuador (RT)
Yet Another Conspiracy Theory Died Today (ZH)
Democrats Call AG Barr’s ‘Spying’ Claim Conspiracy Theory (RT)
Shadow Banking Is Now A $52 Trillion Industry (CNBC)
May Hopes For Final Shot At Forcing Withdrawal Deal Through Parliament (Ind.)
UK Government ‘Halts No-Deal Planning’ After Committing £4 Billion (Ind.)
IMF Says Brexit Delay Means Businesses Face More Uncertainty (G.)

 

 

Former UK diplomat Craig Murray is quite upbeat.

Chelsea and Julian are in Jail. History Trembles. (Craig Murray)

If a Russian opposition politician were dragged out by armed police, and within three hours had been convicted on a political charge by a patently biased judge with no jury, with a lengthy jail sentence to follow, can you imagine the Western media reaction to that kind of kangaroo court? Yet that is exactly what just happened in London. District Judge Michael Snow is a disgrace to the bench who deserves to be infamous well beyond his death. He displayed the most plain and open prejudice against Assange in the 15 minutes it took for him to hear the case and declare Assange guilty, in a fashion which makes the dictators’ courts I had witnessed, in Babangida’s Nigeria or Karimov’s Uzbekistan, look fair and reasonable, in comparison to the gross charade of justice conducted by Michael Snow.

One key fact gave away Snow’s enormous prejudice. Julian Assange said nothing during the whole brief proceedings, other than to say “Not guilty” twice, and to ask a one sentence question about why the charges were changed midway through this sham “trial”. Yet Judge Michael Snow condemned Assange as “narcissistic”. There was nothing that happened in Snow’s brief court hearing that could conceivably have given rise to that opinion. It was plainly something he brought with him into the courtroom, and had read or heard in the mainstream media or picked up in his club. It was in short the very definition of prejudice, and “Judge” Michael Snow and his summary judgement is a total disgrace.

We wrapped up the final Wikileaks and legal team meeting at 21.45 tonight and thereafter Kristian Hrafnsson and I had dinner together. The whole team, including Julian, is energised rather than downhearted. At last there is no more hiding for the pretend liberals behind ludicrous Swedish allegations or bail jumping allegations, and the true motive – revenge for the Chelsea Manning revelations – is now completely in the open.

Read more …

Deport this clown.

Julian Assange Branded ‘Narcissist’ By Judge As He Faces US Extradition (Ind.)

Julian Assange has been branded a “narcissist” by a judge as he faces both a UK prison sentence and being extradited to the US. The Metropolitan Police said the Australian hacker was initially detained at the Ecuadorian embassy for failing to surrender to court. He had been summoned in 2012 over an alleged rape in Sweden, where authorities are now considering reopening their investigation into those allegations.After arriving at a London police station on Thursday morning, the 47-year-old was additionally arrested on behalf of the US under an extradition warrant.


Mr Assange was taken to Westminster Magistrates’ Court and found guilty of breaching bail hours later. He faces a jail sentence of up to a year. He denied the offence, with lawyers arguing that he had a “reasonable excuse” could not expect a fair trial in the UK as its purpose was to “secure his delivery” to the US. District Judge Michael Snow described the defence as “laughable”, adding: “Mr Assange’s behaviour is that of a narcissist who cannot get beyond his own selfish interests. He hasn’t come close to establishing ‘reasonable excuse’.” He remanded Mr Assange in custody ahead of a future sentencing hearing at Southwark Crown Court.

Read more …

“Assange will be convicted of the felony of causing embarrassment in the first degree.”

They Will Punish Assange For Their Sins (Turley)

The key to prosecuting Assange has always been to punish him without again embarrassing the powerful figures made mockeries by his disclosures. That means to keep him from discussing how the U.S. government launched an unprecedented surveillance program that scooped up the emails and communications of citizens without a warrant or probable cause. He cannot discuss how Democratic and Republican members either were complicit or incompetent in their oversight. He cannot discuss how the public was lied to about the program. A glimpse of that artificial scope was seen within minutes of the arrest. CNN brought on its national security analyst, James Clapper, former director of national intelligence.

CNN never mentioned that Clapper was accused of perjury in denying the existence of the National Security Agency surveillance program and was personally implicated in the scandal that WikiLeaks triggered. Clapper was asked directly before Congress, “Does the NSA collect any type of data at all on millions or hundreds of millions of Americans?” Clapper responded, “No, sir. … Not wittingly.” Later, Clapper said his testimony was “the least untruthful” statement he could make. That would still make it a lie, of course, but this is Washington and people like Clapper are untouchable. In the view of the establishment, Assange is the problem. So on CNN, Clapper was allowed to explain (without any hint of self-awareness or contradiction) that Assange has “caused us all kinds of grief in the intelligence community.”

Indeed, few people seriously believe that the government is aggrieved about password protection. The grief was the disclosure of an abusive surveillance program and a long record of lies to the American people. Assange will be convicted of the felony of causing embarrassment in the first degree. Notably, no one went to jail or was fired for the surveillance programs. Those in charge of failed congressional oversight were reelected. Clapper was never charged with perjury. Even figures shown to have lied in the Clinton emails, like former CNN commentator Donna Brazile (who lied about giving Clinton’s campaign questions in advance of the presidential debates), are now back on television. Assange, however, could well do time.

Read more …

Mark Warner conspired with James Comey to keep Assange from talking to the DOJ, as John Solomon revealed last June in How Comey Intervened To Kill Wikileaks’ Immunity Deal. Assange offered to prove there was no link to Russia in the DNC emails case. Now he remains silenced, and Warner can continue to make these crazy claims.

Assange ‘Direct Participant In Russian Efforts To Undermine West’ (Hill)

Sen. Mark Warner (D-Va.) blasted Julian Assange on Thursday after the WikiLeaks founder was arrested in London, casting him as an ally in Russia’s efforts to influence politics in the U.S. and Europe. “Julian Assange has long professed high ideals and moral superiority. Unfortunately, whatever his intentions when he started WikiLeaks, what he’s really become is a direct participant in Russian efforts to undermine the West and a dedicated accomplice in efforts to undermine American security,” Warner, the top Democrat on the Senate Intelligence Committee, said in a statement. “It is my hope that the British courts will quickly transfer him to U.S. custody so he can finally get the justice he deserves,” Warner said, while praising the Ecuadorian government for withdrawing Assange’s asylum.


[..] Manning’s document dump contained approximately 90,000 Afghanistan War–related reports, 400,000 Iraq War–related reports, 800 Guantanamo Bay detainee assessment briefs and 250,000 State Department cables between January and May 2010, many of which were labeled classified, according to Assange’s indictment.

Read more …

Now, Mark Warner represents the same party as Tulsi Gabbard does. And Hillary. If I were Tulsi, that would make me very uncomfortable.

Gabbard: Assange Arrest Is A Threat To Journalists (Hill)

Democratic presidential hopeful Rep. Tulsi Gabbard (D-Hawaii) condemned the arrest of WikiLeaks founder Julian Assange on Thursday, calling the arrest a threat to journalists. “The arrest of #JulianAssange is meant to send a message to all Americans and journalists: be quiet, behave, toe the line. Or you will pay the price,” Gabbard tweeted. The Democrat’s remark came hours after police in London arrested Assange, citing charges he is facing in the U.S. Assange is accused of conspiring to hack into computers in connection with WikiLeaks’s release of classified documents from former Army private and intelligence analyst Chelsea Manning.


The indictment filed under seal last year in Virginia and released Thursday alleges that Assange helped Manning crack a password stored on a Defense Department computer, which was connected to a government system that stored classified information. U.S. intelligence officials and lawmakers have also voiced concerns about WikiLeaks’s actions during the 2016 election, when they published troves of hacked emails stolen from the Democratic National Committee and 2016 Democratic nominee Hillary Clinton’s campaign. The U.S. has said that Russian hackers were behind stealing the emails. However, Assange has dismissed criticisms surrounding his actions, arguing he acted like other journalists would have by seeking to leak classified documents viewed as in the public interest.

Read more …

It’s all old hack. Pun intended.

Grave Threats To Press Freedoms (Greenwald, Lee)

The first crucial fact about the indictment is that its key allegation – that Assange did not merely receive classified documents from Chelsea Manning but tried to help her crack a password in order to cover her tracks – is not new. It was long known by the Obama DOJ and was explicitly part of Manning’s trial, yet the Obama DOJ – not exactly renowned for being stalwart guardians of press freedoms – concluded it could not and should not prosecute Assange because indicting him would pose serious threats to press freedom. In sum, today’s indictment contains no new evidence or facts about Assange’s actions; all of it has been known for years.

The other key fact being widely misreported is that the indictment accuses Assange of trying to help Manning obtain access to document databases to which she had no valid access: i.e., hacking rather than journalism. But the indictment alleges no such thing. Rather, it simply accuses Assange of trying to help Manning log into the Defense Department’s computers using a different user name so that she could maintain her anonymity while downloading documents in the public interest and then furnish them to WikiLeaks to publish.

In other words, the indictment seeks to criminalize what journalists are not only permitted but ethically required to do: take steps to help their sources maintain their anonymity. As long-time Assange lawyer Barry Pollack put it: “the factual allegations…boil down to encouraging a source to provide him information and taking efforts to protect the identity of that source. Journalists around the world should be deeply troubled by these unprecedented criminal charges.” That’s why the indictment poses such a grave threat to press freedom. It characterizes as a felony many actions that journalists are not just permitted but required to take in order to conduct sensitive reporting in the digital age.

[..] The Obama DOJ tried for years to find evidence to justify a claim that Assange did more than act as a journalist – that he, for instance, illegally worked with Manning to steal the documents – but found nothing to justify that accusation and thus never indicted Assange (as noted, the Obama DOJ since at least 2011 was well aware of the core allegation of today’s indictment – that Assange tried to help Manning circumvent a password wall so she could use a different user name – because that was all part of Manning’s charges).

Read more …

The Guardian says Assange can get max 5 years. I don’t believe that for a moment.

5 Years (G.)

Can Assange appeal against an extradition decision?Yes, and there are many levels of appeal he can pass through before a final decision is made. In fact, this is exactly what happened to the request from Sweden. Assange challenged the decision to extradite him to Sweden all the way up to the supreme court, the highest court of appeal for civil cases in England, Wales and Northern Ireland. He can appeal against a judge’s decision to refer an approved extradition request back to the hme secretary and he can also appeal against a decision by the home secretary himself to execute that approved order. To give an idea of timescale, Assange presented himself to the Metropolitan police on the Swedish extradition request on 7 December 2010 and the supreme court hearing was held on 1 and 2 February 2012.

Can Julian Assange be charged with additional offences once he has been extradited to the United States? Normal practice is that anyone extradited can only be prosecuted in the country that sought them for the offences specified on the extradition indictment. That restriction is known as the rule of specialty. There are two possible but difficult-to-use exemptions. The first is that if it could be argued new information had come to light since his extradition, extra charges could conceivably be brought. “That almost never happens,” says Nick Vamos, the former head of extradition at the Crown Prosecution Service who is a partner at the London law firm Peters and Peters. “American prosecutors would also have to seek the consent of the UK to bring in further charges.”

The second exemption covers what happens after someone has been extradited, convicted and then chooses to remain in the country. Essentially the extraditing country has to allow the prisoner time to run away after they have served their sentence. “After a short period, however, usually two months,” Vamos explained, “anyone who remained in the same country would be deemed to be treated like a local citizen and could be charged for other offences”. Neither conditions are likely to be met in Assange’s case. “The US has only put one charge on the indictment and it carries the maximum term of five years in prison. Assange has the opportunity to assent to it. It’s relatively light sentence by US standards.”

Read more …

The Guardian must have a smear piece on Assange of course. This time they apparently could not locate Luke Harding, so they sent his stupid twin Dan Collyns. The two were responsible for the bombshell fake news piece on Manafort visiting Assange.

‘Rude, Ungrateful And Meddling’: Why Ecuador Turned On Assange (G.)

Ecuador’s decision to allow police to arrest Julian Assange inside its embassy on Thursday followed a fraught and acrimonious period in which relations between the government in Quito and the WikiLeaks founder became increasingly hostile. In a presentation before Ecuador’s parliament on Thursday, the foreign minister, José Valencia, set out nine reasons why Assange’s asylum had been withdrawn. The list ranged from meddling in Ecuador’s relations with other countries to having to “put up with his rudeness” for nearly seven years. Valencia said Ecuador had been left with little choice but to end Assange’s stay in its London embassy following his “innumerable acts of interference in the politics of other states” which put at risk the country’s relations with them.

His second point focused on Assange’s behaviour, which stretched from riding a skateboard and playing football inside the small embassy building to mistreating and threatening embassy staff and even coming to blows with security workers. Valencia said the whistleblower and his lawyers had made “insulting threats” against the country, accusing its officials of being pressured by other countries. He said Assange “permanently accused [embassy] staff of spying on and filming him” on behalf of the United States and instead of thanking Ecuador for nearly seven years of asylum he and his entourage launched “an avalanche of criticisms” against the Quito government. He referred also to the guest’s “hygienic” problems including one that was “very unpleasant” and “attributed to a digestive problem”.

But Assange’s deteriorating health was also major concern, the minister said, as he could not be properly treated in the embassy building. He added the fact the UK would not consider granting him safe conduct meant Ecuador faced the prospect of him staying “indefinitely in the diplomatic headquarters”. The minister went on to say Ecuador could not extend asylum to a person fleeing justice and there was no extradition request for Assange when Ecuador ended his asylum. The UK had offered sufficient guarantees of due process to Assange, Valencia added, and that he would not be extradited to a country where he could face torture or the death penalty.

Finally, there were “multiple inconsistencies” in how Assange had been granted Ecuadorean citizenship and his stay had proved very costly, the minister said. Ecuador had spent more $5.8m on its guest’s security between 2012 and 2018 and nearly $400,000 on his medical costs, food and laundry, he added. Ecuador’s president, Lenín Moreno, had made little secret of his desire to evict Assange from the embassy building in Knightsbridge, west London, where he had lived since June 2012. Moreno has variously described Assange as a “hacker”, an “inherited problem” and a “stone in the shoe”.

In a video address on Thursday, he accused Assange of breaching the “generous” asylum conditions offered by Ecuador and of meddling in the internal affairs of other states. Moreno claimed Assange had installed forbidden electronic equipment in the embassy, had mistreated guards and “accessed the security files of our embassy without permission”. The final straw came “two days ago”, Moreno suggested, when WikiLeaks directly “threatened the government of Ecuador”. On Tuesday Assange’s legal team gave a press conference in which they accused Quito of illegally spying on him.

Read more …

2 for the price of one.

‘Swedish Software Developer’ Linked To Wikileaks Arrested In Ecuador (RT)

Ecuador’s Interior Minister has confirmed that a person who is alleged to have links to WikiLeaks co-founder Julian Assange has been arrested as he attempted to take a flight to Japan. She also spoke of two ‘Russian hackers.’ Ecuador’s Interior Minister María Paula Romo said Thursday that a man was taken into custody in one of the airports as he was about to board a plane to Japan. There is little official information about his identity or the reasons for his arrest, with Romo telling a local radio station the individual was arrested on Thursday afternoon for the purposes of investigation. Shortly after Assange’s own arrest in London earlier that day, Romo hinted that the Ecuadorian government is about to unleash a crackdown on Assange’s supposed web of connections on the Ecuadorian soil.

She claimed that a “key” member of WikiLeaks, who is also “close to Julian Assange,” has been a resident of Ecuador for several years and has engaged in malicious activity to undermine the government. “We have sufficient evidence that he has been collaborating with destabilization attempts against the government, ” Romo said. The minister claimed that the individual used to accompany Minister of Foreign Affairs in the Rafael Correa government, Ricardo Patiño, on trips overseas. “Along with Ricardo Patiño he has traveled twice last year to Peru and also to Spain,” she said, adding that the two also took a trip to Venezuela in February this year one day apart.

While the Interior Ministry did not reveal the identity of Assange’s supposed helper, an anonymous official told AP that the arrested man was a Swedish software developer by the name of Ola Bini, a resident of Ecuador’s capital Quito. Bini appears to run a Twitter account under his own name, which is filled with reposts of news developments surrounding Assange around the time of the publisher’s arrest. Bini also retweeted the news about Romo announcing that a person who is “part of WikiLeaks” is living in Ecuador. He called “very worrisome” her remark that the information on the individual and the “two Russian hackers” might be soon handed over to prosecution. That was the accounts last tweet before going silent for 14 hours at the time of writing.

Read more …

Yeah, the story of Assange working for Trump is pretty much done. But they’ll just make him Putin’s puppet and keep smearing.

Yet Another Conspiracy Theory Died Today (ZH)

It bears repeating, given the nearly past three years of ‘Russiagate’ collusion hysteria which focused heavily and uncritically on the role of WikiLeaks in both Hillary’s defeat and the rise of Trump, and centrally the “Russian connection” supposedly tying it all together: there seems yet more daily and weekly evidence demonstrating how absurd the claims were and are. With Thursday’s dramatic UK arrest of WikiLeaks founder and leader Julian Assange, revealed to be based largely on a US extradition request, which we’ve all now learned has been pursued for the past two years by the Trump Department of Justice, another conspiracy theory bites the dust.


Journalist Aaron Maté points out “over the last 2 years, just as Maddow et al were feverishly speculating that Trump and Assange secretly conspired, Trump’s DOJ was secretly trying to extradite Assange.” So much of it continues to unravel. Maté continues: “The conspiracy theory never slowed even after Roger Stone’s indictment revealed that a) Trump camp had no advance knowledge of WL releases b) they tried to find out from Stone, who also had no advance knowledge. Maté adds that further “Stone had no such knowledge because he had no actual contact to WikiLeaks.”

Read more …

She doth protest too much?!

Democrats Call AG Barr’s ‘Spying’ Claim Conspiracy Theory (RT)

The very same congressional Democrats who maintain ‘Russiagate’ was real are denouncing Attorney General William Barr’s claim there was improper surveillance of the Trump campaign as a conspiracy theory. Senate Minority Leader Chuck Schumer (D-New York) demanded of Barr to retract his statement, made earlier on Wednesday, that “spying did occur” during the 2016 presidential campaign. Barr “must retract his statement immediately or produce specific evidence to back it up. Perpetuating conspiracy theories is beneath the office of the Attorney General,” Schumer tweeted. House Democrats were also pushing the “conspiracy theory” talking point on Wednesday, with Judiciary Committee chair Jerry Nadler (D-New York) contrasting it to what he said was fact of Russiagate, and Intelligence Committee chair Adam Schiff (D-California) calling it “another destructive blow to our democratic institutions.”


Though he was supposed to testify about the Department of Justice’s 2020 budget, Barr found himself answering questions about the report by Special Counsel Robert Mueller, which he said showed no evidence of collusion between the Trump campaign and Russia. Unwilling to give up the conspiracy theory they’ve pushed for almost three years, Democrats are demanding Barr release the full, unredacted Mueller report. “I don’t trust Barr, I trust Mueller,” Speaker of the House Nancy Pelosi (D-California) told AP. “He is acting as an employee of the president,” said House Majority Leader Steny Hoyer (D-Maryland). “I believe the Attorney General believes he needs to protect the president of the United States.”

Read more …

Haven’t heard from DBRS in a while.

Shadow Banking Is Now A $52 Trillion Industry (CNBC)

Nonbank lending, an industry that played a central role in the financial crisis, has been expanding rapidly and is still posing risks should credit conditions deteriorate. Often called “shadow banking” — a term the industry does not embrace — these institutions helped fuel the crisis by providing lending to underqualified borrowers and by financing some of the exotic investment instruments that collapsed when subprime mortgages fell apart. The companies face less regulation than traditional banks and thus have been associated with higher levels of risk. In the years since the crisis, global shadow banks have seen their assets grow to $52 trillion, a 75% jump from the level in 2010, the year after the crisis ended.


The asset level is through 2017, according to bond ratings agency DBRS, citing data from the Financial Stability Board. The U.S. still makes up the biggest part of the sector with 29% or $15 trillion in assets, though its share of the global pie has fallen. China has seen particularly strong growth, with its $8 trillion in assets good for 16% of the total share. Within shadow banking, the biggest growth area has been “collective investment vehicles,” a term that encompasses many bond funds, hedge funds, money markets and mixed funds. The group has seen its assets explode by 130% to $36.7 trillion. It poses particular danger because of its volatility and susceptibility to “runs” and is part of the “significant risks” DBRS sees from the industry.

Read more …

Groundhog.

May Hopes For Final Shot At Forcing Withdrawal Deal Through Parliament (Ind.)

Theresa May has paved the way for a final shot at pushing a Brexit deal through the House of Commons ahead of European elections in May. The prime minister and her aides repeatedly highlighted that the country could avoid the ignominy of electing British MEPs to the European parliament if the Commons passes a deal in the coming weeks.= It would also mean Britain would not need the full extension of the Article 50 negotiating period until 31 October offered by European leaders last night – a proposal that saw Tory Brexiteers demand Ms May resign on Thursday. No 10 said talks with Jeremy Corbyn’s Labour to find a compromise that might enjoy a Commons majority would not continue “for the sake of it”, in a sign they are not progressing.


Officials underlined the PM’s desire to bring a series of options before MPs for voting – including her original withdrawal deal – if talks with Mr Corbyn collapse. Having to take part in European elections on 23 May would be a humiliation for the prime minister, with her spokesman refusing to even say on Thursday that she would campaign. In a Commons statement following Wednesday’s EU summit, Ms May insisted it is still possible Britain could avoid voting in the elections if MPs pass a deal before then. She added: “The choices we face are stark and the timetable is clear. I believe we must now press on at pace with our efforts to reach a consensus on a deal that is in the national interest.”

Read more …

6,000 people were working on it.

UK Government ‘Halts No-Deal Planning’ After Committing £4 Billion (Ind.)

The government has halted all emergency planning for a no-deal Brexit despite committing £4bn to preparations, according to reports. A leaked email reportedly sent to all civil servants in an unnamed “front line Brexit department” said no-deal operational planning had been suspended with “immediate effect”. The decision was made by cabinet secretary Mark Sedwill, according to the email seen by Sky News. Downing Street said departments were taking “sensible decisions” about the timing of their no-deal preparations following the agreement by EU leaders to extend the Article 50 withdrawal process to 31 October. However the move is likely to infuriate Tory Brexiteers already angry at the latest delay to Britain’s departure from the EU.


The government has committed a staggering £4bn to no-deal preparations, but some MPs believe the six-month extension shows Theresa May was never prepared to countenance leaving without a deal. Former Brexit minister Steve Baker, who is now deputy chairman of the pro-Brexit European Research Group, accused the government of acting out of “sheer spite”. “Officials have worked exceptionally hard to deliver our preparedness and deserve better,” he tweeted. According to Sky, the email said: “In common with the rest of government, we have stood down our no-deal operational planning with immediate effect.

Read more …

“..some smaller businesses “won’t survive” the delay because they had ploughed resources into planning for a spring Brexit.”

IMF Says Brexit Delay Means Businesses Face More Uncertainty (G.)

The decision to extend the UK’s Brexit deadline will mean another six months of uncertainty for business, the head of the International Monetary Fund has warned. Christine Lagarde, the IMF’s managing director, said that while she welcomed the fact that Britain would not leave the EU without a deal on Friday, nothing had been resolved. The decision gave more time for discussions between the political parties and for companies to prepare for all options, Lagarde said. “On the other hand, it is obvious it is continued uncertainty. And it does not resolve, other than by postponing what would have been a terrible outcome.”


The IMF said earlier this week that leaving the EU without a deal risked pushing the UK into a two-year recession. UK business leaders have warned the government against wasting the Brexit extension, sounding the alarm that another deadlock in six months’ time would inflict renewed damage on the UK economy. Stephen Phipson, the chief executive of the manufacturing lobby group Make UK, said some smaller businesses “won’t survive” the delay because they had ploughed resources into planning for a spring Brexit. Businesses lower down the manufacturing supply chain have been forced to borrow money to pay for stockpiling. The extra burden of financing their lending for another six months could push some companies under, he said.

Read more …

Aug 082015
 
 August 8, 2015  Posted by at 9:37 am Finance Tagged with: , , , , , , ,  4 Responses »


NPC Auto races, Rockville Fair, Montgomery County, Maryland 1923

China Exports Fall 8.3% From A Year Earlier (Bloomberg)
The Commodity Slump Is Killing Hedge Funds (Bloomberg)
“The Top’s In”: David Stockman Warns Of “Epochal Deflation” (ZH)
Gross Sees September Rate Rise, Global Economy In Deflation (Bloomberg)
Shadow Banking Draws Canadians Where US Banks Are Warned Away (Bloomberg)
Europe Moves to Cut Risk in $505 Trillion Derivatives Market (Bloomberg)
Economic Reality Now Catching Up To Market Fantasy (Smith)
EU Told Greece On Track For Possible Bailout Deal Next Week (Reuters)
James Galbraith: ‘Not Even Schäuble Thinks It’s a Good Solution’ (Spiegel)
Acting On Varoufakis Claim, Greek Police Find No Hacking Signs (Kathimerini)
Europe’s Neo-Liberal Road Began At Mont Pélerin (Luciano Gallino)
The US Is Destroying Europe (Eric Zuesse)
Bank Shares Become Latest Thorn for Australia’s Market (WSJ)
Economists Think Brazil Will Get Downgraded to Junk in the Next Few Years (Bloomberg)
Dutch Pension Fund Demands Full Fee Disclosure From Private-Equity Firms (WSJ)
Merkel’s War on Germany’s Press and Parliament (Spiegel)
Tourists and Refugees Cross Paths in the Mediterranean (Spiegel)
UNHCR Warns Of Deepening Refugee Crisis In Greece, Calls For Action (UNHCR)
Greek PM Calls EU For Help On Migrants Crisis (Reuters)
‘If We Don’t Help, Then Who Will?’ (Kathimerini)

And the economy is supposed to grow at 7%?!

China Exports Fall 8.3% From A Year Earlier (Bloomberg)

China’s exports declined more than expected in July, hobbled by a strong yuan and lower demand in the European Union, and adding pressure on Premier Li Keqiang to stabilize growth. Overseas shipments fell 8.3% from a year earlier in dollar terms, the customs administration said. The reading was well below the estimate for a 1.5% decline in a Bloomberg survey and compared with an increase of 2.8% in June. Imports dropped 8.1%, widening from a 6.6% decrease in June, leaving a trade surplus of $43 billion. Along with weak domestic investment, subdued global demand is putting China’s 2015 growth target of about 7% at risk.

The government has rolled out fresh pro-expansion measures, including special bond sales to finance construction, but has held off weakening the yuan as China seeks reserve-currency status. “Exports are no longer an engine for China growth – no matter what the government does, it’s just impossible to see strong export growth as in the past,” said Bank of Communications economist Liu Xuezhi. “It means additional slowdown pressure, and it requires the government to be more aggressive in the domestic market.” Liu said China is likely to accelerate infrastructure spending as fixed-asset investment is the “the most immediate and effective” way to stimulate growth.

Read more …

All they can do is short everything in sight.

The Commodity Slump Is Killing Hedge Funds (Bloomberg)

When even Cargill, the world’s largest grain trader, decides to liquidate its own hedge fund, that’s a sign that commodity speculators are in trouble. Hedge funds focused on raw materials lost money on average in the first half, the Newedge Commodity Trading Index shows. Diminishing investor demand spurred Cargill’s Black River Asset Management unit to shut its commodities fund last month. Others enduring redemptions include Armajaro Asset Management, which closed one of its funds, Carlyle Group’s Vermillion Asset Management and Krom River Trading. While hedge funds are designed to make money in both bull and bear markets, managers have a bias toward wagering on rising prices and that’s left them vulnerable in this year’s slump, said Donald Steinbrugge of Agecroft Partners.

The Bloomberg Commodity Index tumbled 29% in the past year and 18 of its 22 components are in a bear market. “No one wants to catch a falling knife, and demand for commodity-oriented hedge funds is very low,” said Steinbrugge, whose company helps funds find investors. The amount of money under management by hedge funds specializing in commodities stands at $24 billion, 15% below the peak three years ago, according to data from Hedge Fund Research. The Newedge index, which tracks funds betting on natural resources, suggests managers have lost money for clients during much of the past four years. A dollar invested in the average commodity hedge fund in January 2011, when values reached a reached a record, had shrunk to 93 cents by the end of June. Investing in the S&P 500 index would have returned 80%, including dividends.

Read more …

Maybe people should have listened to the Automatic Earth all along? That’s not to say that Stockman isn’t worth listening to, but …

“The Top’s In”: David Stockman Warns Of “Epochal Deflation” (ZH)

The truth hurts… especially permabullish CNBC anchors. But when David Stockman explained why “the top is in,” and warned that the world is overdue for an “epochal deflation, like nothing it has ever seen,” one should listen. The “debt supernova” of the last decade or two has created massive over-capacity and this commodity deflation “is not temporary, it’s the end of the central bank bubble.” The catalyst has already happened -“It’s China,” Stockman exclaims, “China is the most lunatic pyramid of credit and speculation.. and capital is now fleeing the swaying towers of the China ponzi.” Well worth the price of admission…

Read more …

More deflation.

Gross Sees September Rate Rise, Global Economy In Deflation (Bloomberg)

Bill Gross, money manager at Janus Capital, said the global economy is “dangerously close to deflationary growth.” Once there is a “whiff of deflation, things tend to reverse and go badly,” Gross said Friday in a Bloomberg Radio interview with Tom Keene. Gross pointed to how the CRB Commodity Index isn’t just at a cyclical low, but lower than in 2008 when Lehman Brothers went bankrupt. The commodity markets tell a truer story of what is happening in the economy because they are subject to real-time supply and demand, Gross said. Oil, metals and crops have plunged as China’s economy has decelerated and gluts in multiple markets have further depressed prices.

Gross, who joined Janus in September after abruptly leaving PIMCO, manages the $1.5 billion Janus Global Unconstrained Bond Fund. He said the Federal Reserve will raise interest rates next month by 25 basis points. “September is the number for sure,” said Gross, who used to manage the world’s largest bond fund. The Fed is “mentally committed to moving before year end,” he said, despite the Bank of England’s Monetary Policy Committee this week voting 8-1 to keep its key rate at a record low and talking about changing policy next year. A move in September is “not unanimous” but is the “majority opinion” now, Gross said. Any increase will likely be 25 to 50 basis points. A 50 basis point move would “scare the market,” he added.

Read more …

More bad news for Canada.

Shadow Banking Draws Canadians Where US Banks Are Warned Away (Bloomberg)

Canada’s largest money managers are joining the ranks of America’s shadow banks. Public Sector Pension Investment Board, Canada’s fifth-largest pension plan, said last month it intends to open a loan-origination business in New York by year-end. That follows the Canada Pension Plan Investment Board’s $12 billion deal to acquire General Electric’s business that lends to smaller companies. The Canadians are part of a wave of institutions unencumbered by U.S. regulation searching for higher returns in the market for risky loans to American companies. Bank supervisors there are pressuring the biggest lenders to pull back from deals that load up companies with too much debt, seeking to avoid a credit bubble that could damage the U.S. economy.

“Whenever you have regulatory constraints and it closes down a market, it provides opportunities for those who fall outside the regulatory constraints,” said Alan White, professor of investment strategy at University of Toronto’s Rotman School of Management. The Canadian funds, which have pioneered the strategy of using alternative investments in pensions, are joining private-equity giants KKR and Apollo Global and other nonbank firms in seeking to profit from high-yield credit as central banks around the world suppress interest rates. Canada’s biggest private-equity firm, Onex Corp., has also moved deeper into the U.S. market, ramping up its business packaging the debt as securities with an eye to doubling that unit’s assets in two years.

Read more …

Take this with 800 pounds of salt.

Europe Moves to Cut Risk in $505 Trillion Derivatives Market (Bloomberg)

Banks and investors in the European Union will have to send trades of some interest-rate swaps to a third party under new rules intended to make financial markets safer. The banks and major investors that hold the derivatives will have to use a third party called a clearinghouse to process their trades, the European Commission, the EU’s executive arm, said in a statement on Thursday. “There’s been quite a long delay in getting the European Union to the end point in mandatory clearing,” said Emma Dwyer at law firm Allen & Overy in London. “People should be reasonably content with this. It hasn’t changed the scope of contracts that are covered and the compromises that were worked out along the way have been largely observed.”

The Group of 20 nations in 2009 mandated clearing for many swaps contracts in an attempt to reduce the damage that would be caused by a major financial institution defaulting on its payments. “Today we take a significant step to implement our G-20 commitments, strengthen financial stability and boost market confidence,” said Jonathan Hill, the EU commissioner for financial services. “This is also part of our move toward markets that are fair, open and transparent.” Banks have traditionally traded interest-rate swaps between themselves in over-the-counter, or off-exchange, transactions. By redirecting these transactions to a clearinghouse, the derivatives market should become safer. If a counterparty goes bust, the clearinghouse will spread the losses incurred between all its member firms.

Companies have to post collateral with clearinghouses to use them. Financial institutions held OTC swaps with a notional value of $505 trillion at the end of 2014, according to a survey from the Bank for International Settlements. The real value of the contracts is far smaller because firms often hold contracts which cancel each other out. The commission has made clearing compulsory for plain vanilla interest-rate derivatives, basis swaps, forward-rate agreements and overnight index swaps traded within the EU. It said that the mandate would be phased in over three years. The estimated daily turnover in the EU of OTC interest-rate derivative contracts denominated in so-called G4 currencies – dollar, euro, yen and pound – was more than €1.5 trillion as of April 2013, according to the commission.

Read more …

“China is a litmus test for the fiscal health of the rest of the world.”

Economic Reality Now Catching Up To Market Fantasy (Smith)

Asia is the biggest story right now, with Chinese markets in veritable free fall despite all attempts by the communist government to quell stock selling and shorting, to the point of threatening arrest and imprisonment for some net short sellers. China’s Shanghai Stock Exchange has experienced a 30% drop in market value in a month’s time. The mainstream argument meant to marginalize this fact is that less than 2% of China’s equities are owned by foreign investors; therefore, a crash there will not affect us here. This is, of course, pure idiocy. China is the largest importer/exporter in the world; and it’s set to become the world’s largest economy within the next two years, surpassing the United States. China’s economy is a production economy, and the nation is a primary supplier for all consumer goods everywhere.

Thus, China is a litmus test for the fiscal health of the rest of the world. When Chinese companies are struggling, when exporters are seeing steady overall declines and when manufacturing begins to crawl, this is not only a reflection of China’s economic instability, but also a reflection of the collapsing demand in every other nation that buys from China. Collapsing demand means collapsing sales and collapsing market value. For a global economic system so dependent on ever growing consumption, this is a death knell. In the U.S., markets have experienced a delayed reaction of sorts, due in great part to the Federal Reserve’s constant injections of fiat fantasy fuel since the credit crisis began.

This kind of artificial support for markets has become an expected and essential part of market psychology, resulting in utter dependency on easy money siphoned into big banks that then use it to bolster equities through massive stock buybacks (among other methods). Now, however, QE has been tapered and ZIRP is nearing the chopping block. The stock buyback scam is nearing an end. Already, U.S. stocks are beginning to feel the pain as reality slowly nibbles away once dependable gains. There is a good reason for this – Wages are in constant decline; manufacturing is in steady decline; retail sales are in decline, and government and personal debts continue to rise. We are not immune to the financial chaos of other nations exactly because we have been railroaded into a highly interdependent global economic system. In fact, much international fiscal uncertainty is tied directly to the fall of the American consumer as a reliable cash cow and economic engine.

Read more …

Germany could still kill it, and go for more emergency loans.

EU Told Greece On Track For Possible Bailout Deal Next Week (Reuters)

Greece is on track to complete a draft deal with international creditors on a third bailout by next Tuesday with a possible first disbursement by Aug. 20, a source familiar with a conference call of senior EU finance officials on Friday said. Talks are proceeding smoothly and may be completed over the weekend, the source said. If a draft memorandum of understanding and an updated debt sustainability analysis are ready as planned on Tuesday, the Greek government and parliament would be expected to approve them by Thursday. Euro zone finance ministers could then meet or hold a teleconference on Friday to endorse an up to €86 billion three-year loan programme for Athens, the source said.

Greece would be expected to enact another package of reform legislation before Aug. 20, in parallel with national ratification procedures so it could receive a first aid payment in time to meet a crucial bond payment to the ECB on Aug. 20, the source added. “Everyone is working on Plan A – a deal with disbursement by Aug. 20,” the source said. The negotiations began on July 20, a week after euro zone leaders agreed at an acrimonious all-night summit on stringent conditions for opening negotiations with Greece on a third bailout to save it from bankruptcy and keep it in the euro zone.

The source said no major differences had emerged among creditor nations on the one-hour call of the Economic and Financial Committee of deputy finance ministers, partly because there was nothing immediate to decide. Some countries, led by Germany, were keen to nail down more specific long-term reform commitments in addition to the immediate actions to be implemented, the source added.

Read more …

“..it is fair to say that the political imperatives and economic commitments of Mr. Schäuble are incompatible with the pressing needs of the Greek economy..”

James Galbraith: ‘Not Even Schäuble Thinks It’s a Good Solution’ (Spiegel)

American economist James Galbraith was one of ex-Greek Finance Minister Yanis Varoufakis’ advisors. He speaks with SPIEGEL about secret plans to return to the drachma and the role played by German Finance Minister Wolfgang Schäuble.

SPIEGEL: Was the mission Varoufakis embarked on ultimately impossible?

Galbraith: As finance minister, Yanis Varoufakis gave everything he had for five months to the cause of achieving a compromise that would permit some hope for economic stabilization in Greece and recovery from the extreme debacle of the past five years. It is very disappointing that there was, in fact, no flexibility in the position of the creditors.

SPIEGEL: Varoufakis’ primary adversary was German Finance Minister Wolfgang Schäuble. How would you assess the role he played?

Galbraith: Along with Yanis Varoufakis, I have a great deal of respect for the German finance minister. But it is fair to say that the political imperatives and economic commitments of Mr. Schäuble are incompatible with the pressing needs of the Greek economy. And it could prove a tragedy for Europe that no way has been found to bridge those differences.

SPIEGEL: Is the latest agreement between Greece and Europe a good one?

Galbraith: I don’t believe even Minister Schäuble thinks it is a good solution. And of course we know that there remain very strong differences between the IMF and the European creditors, especially the German government, over the question of debt relief. So the agreement is not yet in place -= and the question of whether it will come into place remains unsettled.

SPIEGEL: Do you believe that a Grexit would be better for Europe’s future?

Galbraith: This is a difficult question. The issue is the costs of making the transition, on the one side, against the advantages and risks of having an independent currency, eventually, on the other. Ultimately that judgment is better made by the political authorities in Greece and in Europe, who are the ones who will have to take the responsibility.

Read more …

That’s all the opposition parties and western media could wring out of the narrative?!

Acting On Varoufakis Claim, Greek Police Find No Hacking Signs (Kathimerini)

During the course of an investigation into claims by ex-Finance Minister Yanis Varoufakis, Kathimerini understands police computer experts have found no signs that anyone has hacked into a government database of tax registration numbers. Four members of the Cyber Crimes Unit were assigned the task of checking the General Secretariat for Public Revenues database to see if anyone had attempted to copy tax identification codes, known as AFMs in Greece. The probe was ordered after it emerged that Varoufakis claimed in a conversation with investors on July 16 that he talked to a ministry employee about hacking into the general secretariat’s online system during alleged attempts to create a scheme that would help the government overcome liquidity problems. Varoufakis did not clarify whether this breach took place. However, his claims prompted internal and judicial investigations.

Read more …

Highly interesting.

Europe’s Neo-Liberal Road Began At Mont Pélerin (Luciano Gallino)

When I open the windows in the morning these days, my gaze inevitably falls on Mont Pélerin, beyond the lake. It is a hill a few kilometres from Switzerland’s Montreux, known since the twenties for good hotels and a good climate. It is also the birthplace of the Mont Pélerin Society in 1947, when neoliberalism began the long march to a totalitarian hegemony over the economy and politics of Europe. Today we are experiencing the dramatic consequences. Gramsci would have been fascinated by the strategy adopted by the Mont Pélerin Society to win hegemony, which the father of Italian communism saw as a power exercised with the consent of those subject to it. Rather than being yet another foundation or a think tank specializing in promoting this or that branch of the economy, the Mont Pélerin Society chose to build a large-scale “collective intellectual”.

When Friedrich Hayek in 1947 called together a small group of economists and other intellectuals (including Maurice Allais, Walter Eucken, Ludwig von Mises, Milton Friedman and Karl Popper) to found the society, there were only 38 members, for the most part European. In the late 90s they had become a thousand, scattered throughout the world, although the majority continued to come from Europe. Rooted mostly in academia, this collective intellectual did not draft ambitious manifestos (the intent formulated in 47 at the time of its foundation amounted to just one page, you can also read it today on the website of Mont Pélerin Society ), or large projects of institutional reforms.

Instead it produced thousands of essays and books, many to a remarkable level, which all revolve around the issues that members of the society saw as the essence of neo-liberalism: the free movement of capital; the unquestioned superiority of the free market; the brutal reduction of the role of the state to the builder and guardian of the conditions that allow the widest possible dissemination of both. Thanks to this vast and detailed work, around 1980 economic doctrines and neo-liberal policies became embedded in universities and governments. It was not of course only the Mont Pelerin Society which was responsible for this, but its role has been overwhelming. The neo-liberal historian Dieter Plehwe was not exaggerating when, years ago, he called the society “one of the most powerful bodies of knowledge of our time”.

However, its members did not limit themselves to publishing articles and books. Many of them have come to occupy central positions in the apparatus of the governments of a number of countries. At the time of the Reagan presidency (1981-88), about more than a quarter of the eighty economic advisers of the President were members of the Mont Pélerin Society. The financial liberalization decided by the Thatcher government in the first half of the 1980s, which has changed the face of the British economy, were developed largely by the Institute of Economic Affairs, a subsidiary of the society founded and directed by two partners, Antony Fisher and Ralph Harris. The captains of industry in France and Germany have always been numerous among the ranks of the Mont PElerin Society, entertaining close relationships with members in the world of politics.

Read more …

It’s all about Russia.

The US Is Destroying Europe (Eric Zuesse)

Obama’s top goal in international relations, and throughout his military policies, has been to defeat Russia, to force a regime-change there that will make Russia part of the American empire, no longer the major nation that resists control from Washington. Prior to the U.S. bombings of Libya in 2011, Libya was at peace and thriving. Per-capita GDP (income) in 2010 according to the IMF was $12,357.80, but it plunged to only $5,839.70 in 2011 — the year we bombed and destroyed the country. (Hillary Clinton famously bragged, “We came, we saw, he [Gaddafi] died!”) (And, unlike in U.S. ally Saudi Arabia, that per-capita GDP was remarkably evenly distributed, and both education and health care were socialized and available to everyone, even to the poor.)

More recently, on 15 February 2015, reporter Leila Fadel of NPR bannered “With Oil Fields Under Attack, Libya’s Economic Future Looks Bleak.” She announced: “The man in charge looks at production and knows the future is bleak. ‘We cannot produce. We are losing 80% of our production,’ says Mustapha Sanallah, the chairman of Libya’s National Oil Corporation.” Under instructions from Washington, the IMF hasn’t been reliably reporting Libya’s GDP figures after 2011, but instead shows that things there were immediately restored to normal (even to better than normal: $13,580.55 per-capita GDP) in 2012, but everybody knows that it’s false; even NPR is, in effect, reporting that it’s not true.

The CIA estimates that Libya’s per-capita GDP was a ridiculous $23,900 in 2012 (they give no figures for the years before that), and says Libya’s per-capita GDP has declined only slightly thereafter. None of the official estimates are at all trustworthy, though the Atlantic Council at least made an effort to explain things honestly, headlining in their latest systematic report about Libya’s economy, on 23 January 2014, “Libya: Facing Economic Collapse in 2014.” Libya has become Europe’s big problem. Millions of Libyans are fleeing the chaos there. Some of them are fleeing across the Mediterranean and ending up in refugee camps in southern Italy; and some are escaping to elsewhere in Europe.

And Syria is now yet another nation that’s being destroyed in order to conquer Russia. Even the reliably propagandistic New York Times is acknowledging, in its ‘news’ reporting, that, “both the Turks and the Syrian insurgents see defeating President Bashar al-Assad of Syria as their first priority.” So: U.S. bombers will be enforcing a no-fly-zone over parts of Syria in order to bring down Russia’s ally Bashar al-Assad and replace his secular government by an Islamic government — and the ‘anti-ISIS’ thing is just for show; it’s PR, propaganda. The public cares far more about defeating ISIS than about defeating Russia; but that’s not the way America’s aristocracy views things. Their objective is extending America’s empire — extending their own empire.

Read more …

What did anyone expect?

Bank Shares Become Latest Thorn for Australia’s Market (WSJ)

In the span of a week, Australian stocks have wiped out all gains from July, making the index’s best month since February look like an anomaly. Australia’s S&P ASX 200 fell 2.4% Friday, its biggest one-day%age drop since May 18, 2012. The index closed the week with a loss of 3.9%, and has narrowed its gains for the year so far to 1.2%. The August moves mark a sharp reversal, after the benchmark last Friday briefly broke above 5700, rising 4.4% for the month. A deepening rout in commodities including oil, copper and iron ore, Australia’s biggest export, have dented resources stocks in recent months. But those firms aren’t the latest culprits. Bank shares, which account for a large chunk of the market, are leading losses this week.

In the last two days, shares in the country’s largest banks have fallen sharply after one of Australia’s biggest, Australia and New Zealand Banking Group, announced plans to raise 3 billion Australian dollars ($2.2 billion). The money would help meet the industry regulator’s call for big banks to increase the level of capital held against potential home-loan losses. It follows an announcement late last month of plans to sell a finance unit to help build a cash cushion. Thursday’s move stoked concerns that others among Australia’s “Big Four” banks— Westpac Banking Corp., National Australia Bank Ltd. and Commonwealth Bank of Australia—would also tap investors for cash, leading them to dump shares.

The ASX 200 basket of financial stocks fell 5.1% this week. Australia’s four largest banks are also four of the largest stocks by market capitalization, so losses have an outsize impact on the broader index. Declines in three of those banks on Thursday—with ANZ halted because of its announcement—accounted for slightly more than half of the stocks’ daily fall, Commonwealth Securities estimated. When ANZ resumed trading on Friday, its shares fell as much as 8.5%. Shares ended Friday down 7.5% at A$30.14.

Read more …

Try 2016.

Economists Think Brazil Will Get Downgraded to Junk in the Next Few Years (Bloomberg)

From another economic recession to a juicy corruption scandal embroiling President Dilma Rousseff, Brazil has had a tough 2015. It’s now looking down the barrel of another likely event: a junk rating of its government bonds. Latin America’s largest economy has a 70% chance of losing its investment grade rating in the next few years, according to the median estimate in a Bloomberg News survey of economists. Standard & Poor’s said last week it may downgrade the country’s rating and revised its outlook to negative from stable. Brazil’s bonds are currently rated BBB- which is one step away from junk. The company cited Brazil’s political and economic challenges amid an ongoing probe into kickbacks at the country’s state-owned oil company, Petrobras, which President Rousseff chaired at the time.

Inflation has ballooned to 9.25% in mid-July, more than double the central bank’s goal of 4.5%, according to the IBGE. Inflation won’t come back down to the target level until 2017, according to 70% of respondents in the survey. Policy makers have raised the key interest rate seven times since the end of 2014 to a nine-year high of 14.25% in an effort to taper prices by the end of 2016. All but one of 15 economists surveyed see the central bank cutting rates next year, with 60% saying the easing will start at the March or April meeting.

Read more …

Why does this take so long?

Dutch Pension Fund Demands Full Fee Disclosure From Private-Equity Firms (WSJ)

A Dutch pension fund running €186.6 billion ($204 billion) is to cease investing in outside money managers, including private-equity firms, that don’t fully disclose their fees, a move that echoes concerns raised by a host of U.S. investors. In a document seen by The Wall Street Journal, Dutch fund PGGM sets out for the first time what it deems to be acceptable compensation for money managers. It is worried that the pensions of its clients—social workers and nurses—are being undermined by high fees. “The interests of our beneficiaries and the interests of the asset management industry are not always aligned,” Ruulke Bagijn, PGGM’s CIO for private markets, said. “We are on the side of pension funds and we no longer want to turn a blind eye on difficult subjects like fees and compensation.”

Ms. Bagijn oversees investments including private equity, which accounts for a high proportion of the fees PGGM pays to managers, especially when compared with the amount invested in the asset class. Most of the money that PGGM manages is on behalf of the PFZW pension fund. More than half of PFZW’s €811 million fee bill in 2014 went to private equity. Yet private equity only accounts for 5.6% of PFZW’s €162 billion of assets. PGGM’s determination to reduce fees coincides with a Securities and Exchange Commission investigation into the private equity industry which has focused on expenses. The SEC has been helpful in highlighting the issue, Ms. Bagijn said. In addition to annual management fees and keeping a share of profits, private-equity firms sometimes charge less-visible administration and transaction fees. In July, a group of U.S. state and city officials wrote to urge the SEC to require private-equity firms to make better disclosure of expenses.

Read more …

“In reality, senior government officials and intelligence agency heads in Germany have long been pursuing a policy of intimidating and deterring journalists and their sources.”

Merkel’s War on Germany’s Press and Parliament (Spiegel)

When former German Federal Prosecutor Harald Range greeted SPIEGEL journalists for an interview at the end of July, he seemed combative. The 67-year-old recalled his oath of office as a young public prosecutor in the university town of Göttingen, to investigate “independent of a person’s standing.” He also said he refused to allow his position to be influenced by politics in any way, adding that he “had so far” not been given any orders by the government. “I am free in my decisions,” he said. But did he already suspect at that point that an investigation into two journalists would soon rock both his office and the government in Berlin?

Two weeks after the interview, Range stood in front of his admiring staff in Karlsruhe, where the federal prosecutor’s office is headquartered. It was the day after he had challenged the federal government, which he accused of an “intolerable intervention” into his work. And it was a few hours after he had been terminated. He said it was more important to him to be able to look in the mirror than in a newspaper. “I did it for myself and I did it for the agency,” he said. His staff showered him with applause. The mood in Berlin was quite a bit different. In an almost unprecedented show of unity, Chancellor Angela Merkel and her cabinet distanced themselves from Range. They acted as though they had nothing at all to do with the investigation that cost Range his job – an investigation that marked the first time the state had probed journalists for treason since the government of West Germany sought to prosecute DER SPIEGEL journalists 53 years ago.

Range is now gone, but what remains is a mess that could still lead to other politicians, ministers or agency chiefs getting pushed out. Within the course of just a few days, questions have arisen in Berlin that are fundamental to the meaning of democracy. And so far, the answers to those questions have been insufficient. How do prosecutors and members of Germany’s domestic intelligence agency, the Office for the Protection of the Constitution (BfV), perceive freedom of the press? How independent is Germany’s judiciary system? And are parliamentarians charged with oversight of the country’s intelligence agencies able to do their jobs?

In recent days, the chancellor, Justice Minister Heiko Maas and Interior Minister Thomas de Maizière have santimoniously thrown their support behind freedom of the press. But reality often looks different. In reality, senior government officials and intelligence agency heads in Germany have long been pursuing a policy of intimidating and deterring journalists and their sources. Leaks and whistleblowers are being hunted down and criminalized. Treason, a word that had hardly been heard for decades, is once again being used as part of the repertoire of politicians in Berlin – and all in the alleged name of protecting the common good.

Read more …

A strange world.

Tourists and Refugees Cross Paths in the Mediterranean (Spiegel)

It’s quiet on the beach. Vacationers are still sleeping in their hotels, and the only sound to be heard is of a few dogs barking. Dawn is breaking over Kos. Rasib Ali drags his body out of the water with the last of his strength. His arms and legs are shaking, his lips are blue and his wet jeans and shirt cling to his body. The Greek island of Kos is only a few nautical miles from the Turkish coast. Ali, an 18-year-old migrant from Pakistan, left Turkey in a rubber boat the night before. He traveled alone, unable to afford the cost of a spot on board a smugglers’ ship. Not far from Kos, his boat capsized. Though he can’t swim, Ali somehow he managed to make it to the beach.

Some Greek fishermen hurry over, pull Ali’s clothes off and wrap him in a jacket. “Don’t be afraid, boy, you’re safe now,” they say. Ali stares at the sea. “Thank you,” he stammers, “thank you.” Three hours later, at around 7 a.m., the first hotel guests shuffle out to the shore for an early-morning yoga class, and by noon the beach is full. Families spread out their towels, retirees play bocce and children build sand castles. Tourists snorkel in the exact same spot where Ali almost drowned a few hours earlier. It’s high season once again, and millions of people are flocking to Mediterranean beaches this summer, from Sicily to the Aegean Sea – vacationers from the north and refugees from the south. The sunny weather promises relaxation and fun to some.

To others, those seeking protection from bombs, hunger or poverty, it offers a less dangerous crossing than in fall or winter. Dazzling white yachts glide across the turquoise-blue water alongside jet-skiers, guests at beach bars sip chilled rosé and tanned Germans, Swedes and Britons model the latest beach fashion along the waterside promenades. But those same waters are also the scene of a gruesome drama with no end in sight. This year alone, more than 1,800 people have already drowned in the Mediterranean while trying to reach Europe. There are few places in Europe where rich and poor stand in such sharp contrast as in the vacation spots of the Mediterranean.

Read more …

The UN should call out Brussels on this, not Greece.

UNHCR Warns Of Deepening Refugee Crisis In Greece, Calls For Action (UNHCR)

The UNHCR Directors of the Bureau for Europe and of Emergency, Security and Supply, visited Greece last week to assess the refugee crisis in the country, where some 124,000 refugees and migrants have arrived by sea this year – as of 31 July – mainly to the islands of Lesvos, Chios, Kos, Samos and Leros. This represents a staggering increase of over 750% compared to the same period in 2014. In July alone, 50,000 new arrivals have been reported, 20,000 more than the previous month (an increase of almost 70%). This humanitarian emergency is happening in Europe, and requires an urgent Greek and European response. The vast majority of those coming to Greece are from countries experiencing conflict or human rights violations, mainly Syria, Afghanistan, and Iraq.

While Syrians made up 63% of all arrivals since the beginning of the year, in July alone Syrians reached 70% of arrivals. Many are in need of urgent medical assistance, water, food, shelter and information. All are exhausted. The reception infrastructure, services and registration procedures are falling far short of real needs. The Director of the Bureau for Europe, Vincent Cochetel, highlighted: “Such a level of suffering should and can be avoided. The Greek authorities need to urgently designate a single body to coordinate response and set up an adequate humanitarian assistance mechanism. As Greece faces financial challenges the country needs help, European countries should support Greece on these efforts.”

Read more …

“The EU is being tested on the issue of Greece. It has responded negatively on the economic front – that’s my view. I hope it will respond positively on the humanitarian front..”

Greek PM Calls EU For Help On Migrants Crisis (Reuters)

Greek Prime Minister Alexis Tsipras asked Europe to help in handling tens of thousands of refugees coming in from Syria, Afghanistan and other war zones, saying yesterday his cash-strapped country could not deal with them alone. The influx has piled pressure on Greece’s services at a time when its own citizens are struggling with harsh cuts and its government is negotiating with the EU and the IMF for fresh loans to stave off economic collapse. Boatloads of migrants arriving every day had triggered a “humanitarian crisis within the economic crisis,” Tsipras said after a meeting with ministers. “The EU is being tested on the issue of Greece. It has responded negatively on the economic front – that’s my view. I hope it will respond positively on the humanitarian front,” he said.

The comments came as the UN refugee agency (UNHCR) called on Greece to take control of the “total chaos” on Mediterranean islands, where thousands of migrants have landed. About 124,000 have arrived this year by sea, many via Turkey, according to Vincent Cochetel, UNHCR director for Europe. “The level of suffering we have seen on the islands is unbearable. People arrive thinking they are in the EU. What we have seen was not anything acceptable in terms of standards of treatment,” Cochetel said after visiting the Greek islands of Lesbos, Kos and Chios. “I have never seen a situation like that. This is the EU and this is totally shameful,” he added.

At a makeshift refugee centre at Kara Tepe, a hilltop about 5km north of Lesbos island’s main town of Mytilene, about 50 white tents provided by the local council struggled to accommodate the waves of people coming in daily. Rubbish littered the area and locals said 16 toilets were frequently blocked despite attempts by authorities to keep the area clean. Up to 10 people could be seen sharing one of the tents, while others lay on pieces of cardboard, jostling for space under the shade of olive trees in sweltering heat. “The government had battles on plenty of fronts and probably could not give as much attention to the problem,” the island’s mayor Spiros Galinos said. The UNHCR’s Cochetel said Greece had to step up its response.

Read more …

When I can go back, I’ll try and find them.

‘If We Don’t Help, Then Who Will?’ (Kathimerini)

The founding members of Melissa, a new network of migrants who live in Greece, did not hold a special council or vote on the issue. They simply asked themselves during a normal conversation one afternoon a couple of weeks ago: “If not us, then who? If we, who are women, mothers and immigrants, don’t give a helping hand to the children of Pedion to Areos, who will?” They got to work the very next day to provide some relief to the Afghan and Syrian children living among hundreds of refugees in a makeshift camp in the downtown Athens park.

Maria Ifechukude Ohilebo from Nigeria, Debbie Carlos Valencia from the Philippines, Click Ngwere from Zimbabwe and the other women from Asia, Africa and the Balkans, all active members of their respective communities who came together to establish Melissa with the aim of building networks of communication with their host communities, noticed the situation at the park long before the authorities did. Over a month ago, Victoria Square, where Melissa has its new office, was occupied by Syrian refugees. Pedion to Areos, which many of the network’s women walked through every day, started filling with newcomers too – entire families, mothers traveling alone with their children and unaccompanied minors among them.

Their numbers became too high for the Melissa ladies to do something for all of them, but they could do something for the children at least. Starting about 10 days ago, they began preparing 170 to 220 servings of nutritious breakfast, with a different menu every day: biscuits, carrot, banana or orange cake, fritters, sandwiches, muesli bars, etc. “It’s fascinating to watch them work,” an anthropologist who helps the network, Nadina Christopoulou, tells Kathimerini. “These are women who start their day at 5.30 a.m., work a 10-hour shift and then go home, where they prepare breakfasts for the Pedion tou Areos children. These are incredibly resourceful women who make something out of nothing.”

The food is prepared every evening at one of the network members’ houses, packaged along with a piece of fruit at the Victoria Square office and then distributed the following morning – and the entire cost is covered by Melissa’s members. It is a spontaneous initiative that has not been registered with any official authorities and is therefore not entitled to apply for any funding. As the women of Melissa say, they simply couldn’t stand by and do nothing for the children – who could just as easily have been their own. The symbolism is powerful: In the middle of a full-blown crisis, among the first to extend a helping hand to the refugees in the park, at a time when even the European Union is acting simply as an observer, themselves count among society’s most vulnerable.

Read more …

Aug 022015
 


DPC Heart of Chinatown, San Francisco, after earthquake and fire 1906

Nicole Foss: Our consistent theme here at the Automatic Earth since its inception has been that we are facing a very powerful deflationary depression, following on from the bursting of an epic financial bubble. What we have witnessed in our three decades of expansion and inflation is nothing short of a monetary supernova, and that period has been the just culmination of a much larger upward trend going back many decades at least. We have lived through a credit hyper-expansion for the record books, with an unprecedented generation of excess claims to underlying real wealth. In doing so we have created the largest financial departure from reality in human history. 

Bubbles are not new – humanity has experienced them periodically going all the way back to antiquity – but the novel aspect of this one, apart from its scale, is its occurrence at a point when we have reached or are reaching so many limits on a global scale. The retrenchment we are about to experience as this bubble bursts is also set to be unprecedented, given that the scale of a bust is predictably proportionate to the scale of the excesses during the boom that precedes it. We have built an incredibly complex economic system, but despite its robust appearance it is over-extended, brittle and fragile after decades of fuelling its continued expansion by feeding on its own substance.

The Automatic Earth, December 2011: The lessons of the past are sadly never learned. Each time the optimism is highly contagious. In the larger episodes, it crescendos into euphoria, leading societies into a period of collective madness where risk is embraced and caution is thrown to the wind. Sky-high valuations are readily rationalized – it’s different here, it’s different this time. 

We come to believe that just this once there might be a free lunch, that we can have something for nothing. We throw ourselves into ponzi finance, chasing the mirage of speculative gains, often through highly questionable and outright fraudulent practices. Enron, Lehman Brothers, and recently MF Global, are but a few egregious examples of what has become an endemic phenomenon.

The increasing focus on chasing speculative profits parasitizes the real economy to a greater and greater extent over time. After all, why work hard for small profits in the real world, when profits on money chasing its own tail are so much greater for so little effort?

Who even notices the hollowing out of the real economy, or the conversion of large amounts of capital into waste, or the often pointless depletion of non-renewable resources, or the growing structural dependency trap, when there is so much short term material prosperity to pursue? 

In such times, the expansionary impulse drives the development of multiple engines of credit expansion. The reserve requirements for fractional reserve banking (already a ponzi scheme) are whittled away to almost nothing. Since the reserve requirement effectively determines the money supply multiplier effect, that multiplier becomes almost infinite.

The extension of credit through the shadow banking system removes the semblance of central bank control over monetary expansion. Securitization and financial innovation also create putative wealth from thin air, using underlying collateral to derive layers of additional illusory value. In this way, excess claims to underlying real wealth are created. The connection between the rapidly expanding virtual worth of the derivative instruments and the real value of the underlying collateral becomes ever more tenuous.

Shadow Banking and Phantom Wealth

Since 2011, in our desperate attempt to avoid the consequences of an imploding bubble, we doubled down on the doomed strategy of ponzi credit expansion. In doing so, we have only succeeded in digging ourselves into a deeper hole, and have done so on a massive scale. While the aggregate balance sheet of the world’s central banks grew exponentially from $3 trillion to $22 trillion over the last 15 years, the expansion in the shadow banking sector has been even more dramatic, and its role in fostering the overall credit hyper-expansion has become increasingly clear:

Shadow banks are that exploding growth segment of global finance capital that share the following characteristics: they are largely unregulated, they invest primarily in financial asset securities of various kinds (i.e. stocks, government and corporate junk bonds, foreign exchange, derivatives, etc.) instead of real asset investment (plant, equipment, software, etc.), they target high risk-high return opportunities based on asset price appreciation and volatility to realize financial capital gains, their investments are highly leveraged and debt driven, their investment targets are highly liquid financial markets worldwide that enable a quick entry, price appreciation, and subsequent just as quick short term profit extraction.

Their client base is predominantly composed of the global finance capital elite – i.e. the roughly 200,000 worldwide ultra and very high net worth individuals with net annual additional income from investment flows of $20 million or more—for whom they invest individually as well as for themselves as shadow bank institutions.

Shadow bank ‘forms’ include private equity firms, hedge funds, asset and wealth management companies, mutual funds, money market funds, investment banks, insurance companies, boutique banks, trust companies, real estate investment trusts – to note just a short list – as well as dozens of other forms and newly emerging initiatives like peer to peer lending networks, online investment funds, and the like.

Shadow banks have been estimated to have investable assets (i.e. relatively short term and liquid) of about $75 trillion globally as of year end 2014, a total that does not include revenue from ‘portfolio’ shadow-shadow banking. That is projected to exceed $100 trillion well before 2020.

The exponential growth of both central banks and shadow banking during the long global boom constitutes a gargantuan increase in the supply of money plus credit relative to available goods and services, which is inflation by definition. This huge supply of virtual wealth has acted to push up asset prices, creating a plethora of asset price bubbles and a cascade of malinvestment based on those price distortions. The explosive growth of shadow banking in particular, following the 2009 bottom, was accompanied by a return to extreme risk complacency and rock bottom interest rates, leading to a frantic search for investment returns in riskier and riskier places. 

Inherently risky emerging markets became a major focus during this time, and the search for outsized returns not only sought out risk, but actively increased it. Volatility provides the momentum that generates trading profits, but it also creates considerable instability. Given that finance is virtual, and that changes in the financial world therefore unfold far more quickly than the real economy can realistically adapt to, large influxes and exoduses of hot money looking for quick profits are very destablizing to target sectors of the real economy, and to entire countries. The phantom wealth generated by the shadow banking bonanza has both created and subsequently fed upon real world destruction:

What China, Argentina, Greece, Venezuela, and Ukraine all share in common is an ongoing struggle with global shadow bankers, who continue to destabilize their financial systems and drive their real economies, at different rates, toward recession and worse….

….Shadow banks and their finance capital elite clients make money when financial asset prices are volatile, i.e. when such prices rapidly rise or fall or both. It is thus in their direct interest to cause asset price volatility and instability—whether in provoking a rapid rise in government bonds rates (Greece), in contributing to the collapse in currencies (Venezuela, Argentina), or in IMF-enforced ‘firesales’ of companies (Ukraine).  Their strategy is to exacerbate, or even create, financial price inflation in the targeted market and financial instruments, be they stocks, junk bonds, real estate, foreign exchange, derivatives, etc. That same financial price instability, however, is what causes havoc with the real economies of countries—like those in southern Europe in recent years, in Asia in the late 1990s, Japan in early 1990s, and which led to the global financial crash of 2008-09 itself….

….Shadow banks generate profits from excess lending and debt creation, from financial speculation, and from creating financial asset bubbles that primarily benefit their wealthy investors….Shadow banks add little to the real economy or real economic growth.  And in the process of generating excess financial profits for themselves and their finance capital elite, they destabilize economies and can often lead to major financial asset collapses, general credit crunches and at times even credit crashes, that in turn lead to deep recessions and prolonged, difficult recoveries….

….Shadow banks are the preferred institutions of the global finance capital elite. They always work to the benefit of that elite, often at the direct expense of the real economy, including non-financial businesses, and always at the expense of working classes who never share in the capital gains but pay the price in slower economic growth and repeated financial-economic crashes.

Recovery? No, Endgame

Since 2009 we have collectively told ourselves that recovery was underway, and this became the mainstream received wisdom. Optimism made a substantial return, even though it was, for insiders, tinged with desperation, and was grounded in the catabolic consumption of peripheral economies. Fears of deflation, which had been widespread during 2008/2009, receded again, and once again deflationist commentators were ridiculed. Commentators returned to speaking of inflationary risks, as they always do after a long enough period of upward momentum, given humanity’s proclivity for extrapolating current trends forward, and relative inability to anticipate trend changes, however obvious they may be if one is paying attention.

The supposed recovery is a temporary fantasy – a smoke and mirrors game grounded in ponzi finance on steroids. The excess claims to underlying real wealth, created during the both the initial boom and the false recovery, are set to evaporate once the extent of our crisis of under-collateralization become evident, and that moment is rapidly approaching. The deflation which was always the obvious endgame of credit expansion, is now underway and picking up momentum. A gigantic pile of IOUs is set to be defaulted upon, and the resulting monetary contraction will slash demand for almost everything, not for lack of desire to purchase or consume, but for lack of ability to pay for the privilege. This will undercut price support for almost everything many years. 

As we wrote in 2011:

In the process of credit expansion, we borrow from the future through the creation of debt. Our focus on virtual wealth has very significant real world effects, as it distorts our decision-making in ways that guarantee bust will follow boom. We bring forward tomorrow’s demand to over-consume today, frantically building out productive capacity in order to satisfy that seemingly insatiable demand.

As money supply increase leads the development of productive capacity during this manic phase, increasing purchasing power chases limited supply and consumer prices rise. Increasing virtual wealth also drives up asset prices across the board, strengthening speculative feedback loops that inevitably strain the fabric of our societies, all too easily to the breaking point….

….Decades of inflation lie behind us. It is deflation – the contraction of the supply of money plus credit relative to available goods and services – that lies ahead….When a credit expansion reaches the point where the debt created can no longer be serviced by a hollowed-out real economy, and the marginal productivity of debt becomes negative, continued growth is no longer possible….

….The process of monetary contraction following a ponzi expansion is implosive because it involves the destruction of virtual value – the fairly abrupt realization that the emperor has no clothes….It is an economic seizure, and its effect is devastating. Credit in its myriad forms represents the vast majority of the money supply, and it is about to lose its money equivalency. This will leave only cash, and that cash will be extremely scarce. Aggravating the effect of crashing the money supply will be a substantial fall in the velocity of money, meaning that money will largely cease to circulate in the economy as people hang on to every penny they can get their hands on….

….Nothing moves in an economic depression. This is the polar opposite of the frenetic activity of the inflationary boom years. Instead of the orgy of consumption to which we have become accustomed, we will experience austerity on a scale we cannot yet imagine.

This is exactly what we are currently seeing places like Greece and Cyprus – the canaries in the coal mine. As much trouble as such places are currently in, however, this is still the thin edge of the wedge even for them. And for places as yet unaffected, the storm is rapidly approaching. Departures from reality can persist only so long as the illusions they are based on retain credibility:

Self-evidently, we are now in the cliff-diving phase, but unlike the bounce after the September 2008 financial crisis, there will be no rebound this time around. That is owing to two reasons. First, most of the world is at “peak debt”. That is, the ratio of total credit market debt to current national income ranges between 350% and 500% in every major economy; and that is the limit of what can be serviced even at today’s aberrantly low interest rates. As Milton Friedman famously observed, markets are ultimately not fooled by the money illusion. In this case, the illusion is that today’s sub-economic interest rates will last forever and that debt carrying capacity has been elevated accordingly. Not true.

Short-term interest rates may be temporarily and artificially pegged at the zero bound by central bankers, but at the end of the day debt carrying capacity is tethered by real economics and normalized costs of money and debt. Accordingly, the central banks are now pushing on a string.  The credit channel of monetary transmission is over and done. The only remaining effect of the residual level of money printing still underway is that ZIRP enables carry trade gamblers to drive financial asset prices ever higher, thereby setting up another thundering collapse of the financial bubbles being generated for the third time this century by the world’s central banks.

We are already witnessing the next phase of financial crisis, and the fear-based contagion is already spreading. However, as John Stuart Mill said in 1867, “Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works.” A vast quantity of capital has been so betrayed during the era of monetary profligacy, mispricing and malinvestment that is now coming to an end, and the coming financial reckoning will reveal the extent of that destruction.

After the Commodity Blow-Off…

The monetary supernova sparked an orgy of consumption, fuelling an explosion of demand for commodities of all kinds and a frantic scramble to supply that demand. In the process, huge distortions were created from which considerable consequences will flow now that the blow-off phase is over:

The worldwide economic and industrial boom since the early 1990s was not indicative of sublime human progress or the break-out of a newly energetic market capitalism on a global basis. Instead, the approximate $50 trillion gain in the reported global GDP over the past two decades was an unhealthy and unsustainable economic deformation financed by a vast outpouring of fiat credit and false prices in the capital markets.

For that reason, the radical swings in commodity prices during the last two decades mark the path of a central bank generated macro-economic bubble, not merely the unique local supply and demand factors which pertain to crude oil, copper, iron ore, or the rest….What really happened is that the central bank instigated global macro-economic bubble ripped commodity pricing cycles out of their historical moorings, resulting in a one time eruption of price levels that had no relationship to sustainable supply and demand factors in the mines and petroleum patch. What materialized, instead, was an unprecedented one-time mismatch of commodity production and use that caused pricing abnormalities of gargantuan proportions.

The erstwhile prolonged frenzy of consumption has created the sense that demand for commodities would be eternally insatiable, but that perception is now being profoundly shaken. It has long been clear that commodity demand would fall enormously during the coming period of deflation and depression, but the illusion of perpetual expansion has been slow to release its grip.

In the summer of 2011 we wrote that commodities were peaking and offered a bearish prognosis in Et tu, Commodities?. At the time this was seen as being quite heretical, as contrarian forecasts at peaks always are. Fear of shortages was rampant, but fear causes market participants to bid up the price in advance of what the fundamentals would justify, opening the door to a major price readjustment, as we saw in 2008. At the time, we explained the nature of commodity tops and what inevitably follows:

As an expansion develops, one can generally expect increasing upward pressure on commodity prices, thanks to both demand stimulation and latterly the perception that prices can only continue to increase. The resulting crescendo of fear – of impending shortages –  is accompanied by the parabolic price rise typical of speculative bubbles, as momentum chasing creates a self-fulfilling prophecy. At the point where almost everyone with the capacity to do so has jumped on the bandwagon, and all agree that the upward trend is set in stone, a trend change is typically imminent. 

We find ourselves still near the peak of the largest credit bubble in history. As faith in many of the more spurious ‘asset’ classes devised by ‘financial innovation’ has been shaken, faith in the ever increasing value of commodities has strengthened. However, commodities are not immune to the effects of a shift from credit expansion to credit contraction, despite justifications for endless price rises, such as the apparently bottomly demand from China and the other BRIC countries. 

Every bubble is accompanied by the story that it is different this time, that this time prices are justified by fundamentals which can only propel prices ever upwards. It is never different this time, no matter what rationalizations exist for speculative fervour. BRIC demand only appears to be insatiable if we make our predictions solely by extrapolating past trends, but that approach leaves us blind to trend changes and therefore vulnerable to running off a cliff. Insatiable demand results from seemingly endless cheap credit, given that demand is not what one wants, but what one can pay for. When credit collapses, so will demand, and with it the justification for higher prices. 

While credit expansion (inflation) is a powerful driver of increasing prices, credit contraction (deflation) is a far more powerful driver of decreasing prices. Credit, having no substance, is subject to abrupt fear-driven disappearance. Confidence and liquidity are synonymous….As contraction picks up momentum, the loss of credit will rapidly lead to liquidity crunch, drastically undermining price support for almost everything. With purchasing power in sharp retreat, however, lower prices will not lead to greater affordability. Purchasing power typically falls faster than price under such circumstances, so that almost everything becomes less affordable even as prices fall.

At the time we called it a peak that would stand for a very long time.

There were commodity peaks across the board in 2011, and despite the supposed on-going recovery from that time, price declines have continued.















Charts: indexmundi.com/commodities

Notice that there was a virtually simultaneous price peak in every case. In some instances it was a secondary peak, following a top in 2008, and in others prices had gone beyond the 2008 levels. Only gold lagged in time, and not by much. This illustrates an important point that we have made before, the prices are not determined by the fundamentals of these industries, but by the ebb and flow of liquidity. Once a sector of the real economy has been thoroughly financialized, it is subject to the boom and bust dynamics of finance, and is no longer driven by it’s own fundamentals. Price swings of huge amplitude are possible in very short timeframes, as in 2008.

Tops in different asset classes can be remarkably co-incident. See for instance this graphic that we have shown before (thanks to Elliottwave.com), demonstrating the ‘All the Same Market” phenomenon with co-incident tops on the same day:


Of course the commodity narrative is also a story of movements in the US dollar. We have always maintained that the dollar was going to see a major rise in a deflationary environment, both as a result of demand for dollars to repay dollar denominated debt, and on a flight to safety into the reserve currency. This position was also contrarian and heretical. US dollar sentiment was extremely bearish in 2011, with the majority seeing only the previous trend and full expecting it to continue. Commentators were calling the dollar toilet paper. That is exactly what one would expect at a bottom. 

The dollar is now receiving additional upward propulsion from the Federal Reserve’s stated goal to raise interest rates, but this is almost certainly less of a factor than a flight to safety, which would occur even at lower rates if driven by sufficient fear. Since interest rates are a risk premium, low rates are a good indication that the asset in question is perceived to be a safe haven. As a flight to safety gets underway in earnest, we should see a flood of money into the USD in a climate of falling interest rates, perhaps even to the point of being marginally negative in nominal terms, at least temporarily. In a climate of extreme fear, investors will pay for the privilege of capital preservation, for so long as the illusion of it lasts. 

Emerging markets, which have collectively borrowed $4.5 trillion USD are going to experience a tremendous squeeze, aggravating the consequences of their bust phase.


Notice that the US dollar began its rise at the same time as commodities, denominated in dollars began to fall. The dollar is part of the all-the-same-markets phenomenon, in that is trend changes coincide with trend changes in other asset classes, but its movements occur in the opposite direction. There are many commentators who therefore regard falling commodity prices purely as a function of a rising dollar, but the situation is not so simple. Correlation is not causation. All values fluctuate relative to one another, and none is a fixed value against which all else can be measured. The dollar is trading on its relatively safe haven status and is therefore increasing, but the commodity decline is by no means simply a dollar story. It is a story of the realization that we have grossly over-built productive and extractive capacity, but that realization is only just beginning to dawn four years after the peak:

Had stockmarkets fallen more than 40% from their peak, the national news bulletins and the mainstream papers would be full of headlines about collapse and calamity….But this is one of the great bear markets. It may seem less important because few people are directly invested in commodities. But in terms of people’s daily lives, commodity prices are very important indeed. The Arab spring started as a response to soaring food prices in North Africa. Rising and falling prices act as a tax rise/cut for western consumers. For commodity producing nations, falling prices mean loss export earnings, lost jobs and currency crises.

Declining Fortunes

Emerging markets and commodity companies are caught in a global economic downdraft, following on from their years of extraordinary boom and consequent over-investment. That misallocation of capital, compounded by the leverage involved, has created an enormous overhang of productive capacity. The sunk costs create an incentive to continue producing and generate at least some revenue, even as a supply glut is already causing prices to collapse. This is a toxic dynamic for a highly leveraged sector, leading to downward spiral of excess inventory and a pancaking debt pyramid:

In the case of the global mining industries, CapEx by the top 40 miners amounted to $18 billion in 2001. During the original boom cycle it soared to $42 billion by 2008, and then after a temporary pause during the financial crisis, reaccelerated once again, reaching a peak of $130 billion in 2013. Owing to the collapse of commodity prices as shown above, new projects and greenfield investments have pretty much ground to a halt in iron ore, met coal, copper and the other principal industrial materials, but there is a catch.

Namely, that big projects which were in the pipeline when commodity prices and profit margins began to roll-over in 2012, are being carried to completion owing to the sunk cost syndrome. This means that available, on-line capacity continues to soar. The poster child for that is the world’s largest iron ore complex at Port Hedland, Australia. The latter set another shipment record in June owing to still rising output in the vast network of iron mines it services——-a record notwithstanding the plunge of iron ore prices from a peak of $190 per ton in 2011 to $47 per ton a present.

In such a climate, commodity company valuations are very vulnerable. They have already fallen substantially, but considering the negative circumstances they face are far closer to their beginning than to their end, it seems highly unlikely that the decline will end any time soon. Talk of capitulation is extremely premature:

Sprott Asset Management’s Rick Rule is one of the smartest guys in the resource investing world — and one of the most reasonable — which has made his interviews of the past few years a little disconcerting. Along with the obligatory positive thoughts on the long-term value of gold and silver and the resulting bright future for the best precious metals miners, he always points out that the sector hasn’t yet endured a capitulation, where everyone just gives up and sells at any price, tanking prices and setting the stage for the next bull market.

Knowing that this kind of existential crisis is still out there has taken the fun out of buying ever-cheaper mining stocks, which of course has been Rule’s point. Just because something is cheap doesn’t mean it can’t get a lot cheaper before its bear market is done….

….Both metals are now below the production cost of most miners, whose shares are cratering on the prospect of some truly horrendous operating results in the coming year. Which sounds a lot like what Rule is describing.

Commodities priced below the cost of production for most producers is exactly what one would expect in a deflation, as a combination of supply glut and lack of purchasing power drastically undercut price support. Our long term forecast at TAE is for an undershoot proportionate to the scale of the preceding overshoot, meaning a price collapse at least down to the cost of the lowest cost producer. Under such circumstances, there would be no investment in the sector for many years – a long period of under-investment proportionate to the previous over-investment. The attempt to avoid the day of reckoning is only adding to the eventual pain:

And that’s where central bank enabled zombie finance comes in. Production cuts and capacity liquidations in virtually every materials sector are being drastically delayed by the continuing availability of cheap finance. So what “extend and pretend” really means is that prices and margins will be driven even lower than would otherwise be the case in the face of excess capacity. Stated differently, the correlate of zombie finance is flattened profits for an unusually prolonged period of time.

Here’s the thing. During the central bank driven doubled-pumped boom, profits margins rose to historically unprecedented levels because scarcity rents were being captured by producers during most of the past 15 years. Now comes the era of gluts and unrents. The casino is most definitely priced as if scarcity rents were a permanent fixture of economic life——when they were actually a freakish consequence of the central bankers’ reign of bubble finance.

Vulnerable Commodity Exporters

Commodity exporting nations, which were insulated from the effects of the 2008 financial crisis by virtue of their ability to export into a huge commodity boom, are indeed feeling the impact of the trend change in commodity prices. All are uniquely vulnerable now. Not only are their export earnings falling and their currencies weakening substantially, but they and their industries had typically invested heavily in their own productive capacity, often with borrowed money. These leveraged investments now represent a substantial risk during this next phase of financial crisis. Canada, Australia, New Zealand, are all experiencing difficulties:

Known as the Kiwi, Aussie, and Loonie, respectively, all three have tumbled to six-year lows in recent sessions, with year-to-date losses of 10-15%. “Despite the fact that they have already fallen a long way, we expect them to weaken further,” said Capital Economists in a recent note. The three nations are large producers of commodities: energy is Canada’s top export, iron ore for Australia and dairy for New Zealand. Prices for all three commodities have declined significantly over the past year, worsening each country’s terms of trade and causing major currency adjustments.

South Africa and Brazil are similarly affected:

Brazil’s real plummeted to a 12-year low of 3.34 to the dollar, reflecting the country’s heavy reliance on exports of iron ore and other raw materials to China. The devaluation tightens the noose on Brazilian companies saddled with $188bn in dollar debt taken out during the glory days of the commodity boom.

Complacency has been rife in these ‘lucky countries’ which have tended to perceive natural limits as someone else’s problem and to regard themselves as impervious to systemic shocks:

This colossal collapse in wealth is symptomatic of the wider economic problem now facing Australia, which for years has been known as the lucky country due to its preponderance in natural resources such as iron ore, coal and gold. During the boom years of the so-called commodities “super cycle” when China couldn’t buy enough of everything that Australia dug out of the ground, the country’s economy resembled oil-rich Saudi Arabia….

….While the rest of the world suffered from the aftermath of the global financial crisis, Australia’s economy – closely tied to China – appeared impervious, with full employment and a healthy trade surplus. However, a collapse in iron ore and coal prices coupled with the impact of large international mining companies slashing investment has exposed Australia’s true vulnerability. Just like Saudi Arabia, which is now burning its foreign reserves to compensate for falling oil prices, Australia faces a collapse in export revenue.

The greater the extent to which an exporting economy has placed all its eggs in one basket, the greater the vulnerability of its economy:

Australia’s export base has narrowed to levels approaching that of a “banana republic,” a former government adviser says, raising the specter of the country’s economic nadir almost 30 years ago.The concentration of shipments abroad is at the highest level in more than 50 years, according to Andrew Charlton, who counselled former Prime Minister Kevin Rudd on economic policy. The nation’s budget is “hostage” to global iron ore prices, with a $10 drop taking up to A$10 billion from forecast revenue, he said. The global iron ore price has dropped more than $12 in the past month, further exposing Australia’s lack of export alternatives….

….”Even some low-income countries like Nepal, Kenya, and Tanzania have greater export diversity than Australia.” His analysis again raises the question of what Australia will fall back on as the resources tide recedes. Exports have gone backwards as a proportion of the economy over the last 15 years in almost every non-resources industry, and services are now too small to offset mining.

Australia’s national business model has for a long time been ‘dig it up and sell it to China as quickly as possible’, but the success of the mining sector in its heyday caused a large appreciation of the currency (the Dutch Disease), which in turn damaged the international competitiveness of the country’s manufacturing base. Manufacturing was increasingly off-shored, hence the inability to revive it now that the currency is falling. Add to that the fact the global trade takes a major hit in times of economic depression, and it is obvious that alternative exports will struggle to pick up pace. In addition, so much of the focus of the domestic economy has come to centre around real estate during the development of its gigantic property bubble, that interest in out-sized profits from property speculation have easily outweighed interest in the normal profits one could expect from re-establishing manufacturing:

“Australian governments have been operating on the assumption that, once the mining boom passed, low interest rates and a falling dollar would be enough to bring the non-resource sectors dancing out of their graves,” Charlton, now director of consultancy AlphaBeta, said in a research report. “Unfortunately, no such resurrection is occurring.” “Australia watched idly as the rust-belt manufacturing suburbs around Sydney and Melbourne were transformed from red-brick factories into red-hot real estate,” he said.

Even erstwhile ‘rock-star economies’ are feeling the pressure to cut interest rates, in the vain hope that beggar-thy-neighbour currency devaluations will be beneficial:

Yesterday, the Reserve Bank of New Zealand slashed borrowing costs for the second time in six weeks even as housing prices continue to skyrocket. A day earlier, its counterpart across the Tasman Sea (already wrestling with an even bigger property bubble of its own) said a third cut this year is “on the table.”

Just one year ago, it seemed unthinkable that officials in Wellington and Sydney, more typically known for their hawkishness and stubborn independence, would join the global race toward zero. But with commodity prices sliding, China slowing and governments reluctant to adopt bold reforms, jittery markets are demanding ever-bigger gestures from central banks. Even those presiding over stable growth feel the need to placate hedge funds, lest asset markets falter. When this dynamic overtakes countries such as New Zealand (growing 2.6%) and Australia (2.3%), it’s hard not to conclude that ultra-low rates will be the global norm for a long, long time.

Contagious instability is spreading from the periphery towards the centre, threatening to convulse the financial world again, with considerable knock-on consequences in the real world:

Less than a decade after a housing/derivatives bubble nearly wiped out the global financial system, a new and much bigger commodities/derivatives bubble is threatening to finish the job. Raw materials are tanking as capital pours out of the most heavily-impacted countries and into anything that looks like a reasonable hiding place. So the dollar is up, Swiss and German bond yields are negative, and fine art is through the roof.

Now emerging market turmoil is spreading to the developed world and the conventional wisdom is shifting from a future of gradual interest rate normalization amid a return to steady growth, to zero or negative rates as far as the eye can see….Indeed, the major monetary powers that are easing — Europe, Japan, Australia and New Zealand — have all suggested rates may stay low almost indefinitely. Those angling to return to normalcy, meanwhile — the Federal Reserve and Bank of England — are pledging to move very slowly. Even nations with rising inflation problems, like India, are hinting at more stimulus….

….So…the central banks will panic. Again. Countries that retain some control over their monetary systems will see their interest rates fall to zero and beyond, while those that don’t will be thrown into some kind of new age hyperinflationary depression. Not 2008 all over again; this is something much stranger.

Stranger indeed, and a far more powerful contractionary impulse than in 2008. While ultra-low rates are characteristic of the current stage, as we stand on the brink, they are not likely to persist into the coming strongly deflationary environment rife with risk. While perceived low risk states may be able to maintain low rates for a while, others will not be so lucky as credit spreads blow out to form self-fulfilling prophecies. In any case, rates may appear low only in nominal terms. In a contractionary environment, where the real rate is the nominal rate minus negative inflation, real interest rates will be high and rising. This will compound the burden imposed by decades of over-leverage, for both companies and countries, to an enormous extent. Indebted ‘lucky countries’ are not going to look so lucky in a few years time.

China – Not Just Another BRIC in the Wall

More than anything, the story of both the phantom recovery and the blow-off phase of the commodity boom, has been a story of China. The Chinese boom has quite simply been an unprecedented blow-out the like of which the world has never seen before: 

China has, for years now, become the engine of global growth. Its building sprees have kept afloat thousands of mines, its consumers have poured billions into the pockets of car manufacturers around the world, and its flush state-owned enterprises (SOEs) have become de facto bankers for energy, agricultural and other development in just about every country. China holds more U.S. Treasuries than any other nation outside the U.S. itself. It uses 46% of the world’s steel and 47% of the world’s copper. By 2010, its import- and export-oriented banks had surpassed the World Bank in lending to developed countries. In 2013, Chinese companies made $90-billion (U.S.) in non-financial overseas investments.

If China catches a cold, the rest of the world won’t be sneezing – it will be headed for the emergency room.

To put China’s construction bonanza in perspective, the country used more cement in 3 years than the USA used in the entire 20th century:


To get a feel for the pace of the development, look at Shanghai’s financial district in 1987 and again in 2013:

The setting is Shanghai’s financial district of Pudong, dominated by the Oriental Pearl Tower at left, and the new 125-story Shanghai Tower, China’s tallest building and the world’s second tallest skyscraper, at 632 meters (2,073 ft) high, scheduled to finish by the end of 2014. Shanghai, the largest city by population in the world, has been growing at a rate of about 10% a year the past 20 years, and now is home to 23.5 million people — nearly double what it was back in 1987.

Photos: Reuters/Stringer, Carlos Barria

Or look into China’s ghost cities, fully equipped with everything, except people:


China’s infrastructure build-out has to be seen to be believed. Fuelled by an exceptional level of corruption in the state-owned enterprise sector, a lack of feedback as to what is and is not a productive investment, perverse incentives for local government to push development and a huge expansion of credit and debt, the boom has created a society of extreme inequality and increasing social pressures:

The richest 70 members of China’s legislature added more to their wealth last year than the combined net worth of all 535 members of the U.S. Congress, the president and his Cabinet, and the nine Supreme Court justices. The net worth of the 70 richest delegates in China’s National People’s Congress, which opens its annual session on March 5, rose to 565.8 billion yuan ($89.8 billion) in 2011, a gain of $11.5 billion from 2010, according to figures from the Hurun Report, which tracks the country’s wealthy. That compares to the $7.5 billion net worth of all 660 top officials in the three branches of the U.S. government.

The income gain by NPC members reflects the imbalances in economic growth in China, where per capita annual income in 2010 was $2,425, less than in Belarus and a fraction of the $37,527 in the U.S. The disparity points to the challenges that China’s new generation of leaders, to be named this year, faces in countering a rise in social unrest fuelled by illegal land grabs and corruption. “It is extraordinary to see this degree of a marriage of wealth and politics,” said Kenneth Lieberthal, director of the John L. Thornton China Center at Washington’s Brookings Institution. “It certainly lends vivid texture to the widespread complaints in China about an extreme inequality of wealth in the country now.”….

….Rupert Hoogewerf, chairman and chief researcher for the Hurun Report, estimates that for every Chinese billionaire the company discovers for its list, there is another one it misses, meaning the gap between the wealth of China’s NPC and the U.S. Congress may be greater still. “The prevalence of billionaires in the NPC shows the cozy relationship between the wealthy and the Communist Party,” said Bruce Jacobs, a professor of Asian languages and studies at Monash University in Melbourne, Australia. “In all levels of the system there seem to be local officials in cahoots with entrepreneurs, enriching themselves, and this has led to a lot of the demonstrations.”

 

China built like there was no tomorrow, thereby guaranteeing that there will not be for the country in its current form. The raw materials demand was simply staggering:

The torrid demand for commodities during this second wave resulted in part from the need to feed cement, steel, copper, aluminum and hydrocarbons into the maw of China’s massive infrastructure, high rise apartment and commercial building projects and similar construction booms in other emerging market economies. And on top of that was another whole layer of demand for the raw materials needed to build the ships, earthmovers, mining machinery, refineries, power plants and steel furnaces and mills that were directly embodied in the capital spending spree.

Stated differently, the torrid demand for construction steel in China indirectly led to demand for more iron ore bulk carriers, which in turn required more plate steel to supply China’s shipyards which were given the contracts to build them. In short, a capital spending boom creates a self-feeding chain of materials demand——especially when its fuelled by cheap capital costs and the economically false rates of return embedded in long-lived capital assets funded by it.

While it is often referred to as an economic miracle, it will prove to be less of a dream and more of a nightmare as the credit hyper-expansion upon which it rests unravels. In July 2012, we described the situation in Meet China’s New Leader : Pon Zi. As the description implies, the boom was built on a massive expansion of credit and debt:

In the case of China, for example, public and private credit outstanding at the end of 2007 amounted to just $7 trillion or about 150% of its GDP. During the next seven years—-owing principally to Beijing’s maniacal stimulus of domestic infrastructure investment designed to replace waning exports——China’s now completely unhinged credit machine generated new debt equal to triple the 2007 amount, thereby bringing credit outstanding to $28 trillion or nearly 300% of GDP at present….

….Taken together, the combination of unprecedented financial repression in developed market capital markets and the prodigious expansion of domestic business credit in China and the emerging markets elicited a tidal wave of capital investment unlike the world has ever witnessed. This put a renewed round of pressure on commodities that caused a second surge of prices which peaked in 2011-2013….

….And therein lies the origins of the deflationary wave now rocking the global commodity markets. Neither the developed market consumer borrowing binge nor the China/emerging market infrastructure and industrial investment spree arose from sustainable real world economics.

They were artifacts of what history will show to be a hideous monetary expansion that left the developed market world stranded at peak household debt and the emerging market world drowning in excess capacity to produce commodities and industrial goods.

Shadow banking, outside of the formal banking system in the form of trusts, “wealth management products” and foreign-currency borrowings, lies at the heart of the Chinese ponzi scheme, as in the rest of the world, only in China it operates at a completely different scale and speed of expansion than elsewhere: 

A study by JP Morgan Bank in 2012 estimated that the shadow banking sector in China grew from only several hundred billions of dollars in total assets under management in 2008, to more than $6 trillion by the end of 2012. In percentage terms, shadow banks assets accelerated 125% in just the second half of 2009, followed by another 75% growth in 2010. Shadow bank assets grew additional 35% and 33% in each of the two years, 2012-13. By 2013 the total had risen to more than $8 trillion, according to the research arm of Japan’s Nomura Securities company.  Shadow bank total assets rose another 14% and $1 trillion in 2014—to more than $9 trillion….

….At the center of shadow bank instability has been the so-called ‘Investment Trusts’.  According to McKinsey Research, Investment Trusts today account for between $1.6-$2.0 trillion (of the roughly $9 trillion) of all shadow bank assets in China. Trusts’ assets grew five-fold between 2010 and 2013.  Approximately 26% of the Trusts provided credit (and therefore generate debt) to local governments for infrastructure spending, another 29% to industrial and commercial enterprises, another 20% to real estate and financial institutions, and other 11% to investors in stock and bond markets. Local government debt in particular has risen by more than 70% in China since 2010. In other words, shadow bank credit has gone mostly to those sectors of China’s economy where debt has accelerated fastest and produced financial bubbles….

Fictitious, self-feeding private debt growth has become a dominant feature of the Chinese economy for far too long, causing enormous distortions in supply and demand for the pure purpose of continued credit expansion. There is no way that such a huge artificial stimulation of demand could fail to depress demand for almost everything in the years to come:

Zoomlion customers sometimes buy ten concrete mixers when they planned to initially by one or two. They have a perverse incentive to buy more than they need because these concrete trucks are purchased via finance packages supplied by Zoomlion. Then the machines can be garaged and used as collateral to borrow further funds from other lenders. Zoomlion continues to grow while cement sales have plunged. In May, cement output increased 4.3% YoY, down from 19.2% recorded last year.  Zoomlion’s new debt of $22.5B buys roughly 900,000 trucks which could produce enough concrete (at six loads a day) to build over thirty Great Pyramids of Giza a day.

Every sector is infected with these kinds of perverse business practices, steel traders used loans meant for steel projects to speculate in property and stocks, it has been common (apparently) for steel traders to secure loans to buy steel then use this same steel as collateral to borrow funds to invest in property development and the stock market. In many ways this is the steel version of the Zoomlion model.

Lending through the formal banking system is restricted by government’s vain attempts to restrict credit expansion:

During the past two years, 2013-2014, a struggle has been underway between China and its shadow banks….In spring 2013, China tried to slow the asset price bubbles by making loans more expensive, by raising general economy-wide interest rates.  That had unintended, counterproductive effects, however.  It quickly resulted in a credit crunch that slowed the entire economy almost.  Unable to get loans from China’s traditional banks, local governments attempting to continue the infrastructure boom borrowed even more from the shadow banks. Bubbles in housing and infrastructure grew further.

The growth of shadow banking as a means to evade such limits has been greatly enhanced as a result, illustrating the lack of control central governments actually exert of financial expansion and contraction. Where official restrictions exist, credit expansions will find a way to happen anyway, as they have throughout history

Local government is an extremely important player in the infrastructure boom, and consequently in the accumulation of debt, despite persistent central government attempts to rein them in :

Local governments in China take almost exclusive responsibility for urban infrastructure investments and financing. In 2011 China invested the equivalent of 12.5% of GDP in fixed assets for public utilities, infrastructure and facilities. More than 80% of this was sponsored by local governments and their entities. China’s Budget Law imposes strict restrictions on the borrowing powers of local governments. To circumvent this law, local governments have set up around 10,000 Local Government Financing Vehicles (LGFVs) to issue debt and finance infrastructure investment. Local government borrowing rose sharply to finance stimulus packages in the wake of the 2008 financial crisis. By the end of June 2013 the explicit debt load of local governments amounted to RMB 10.9 trillion; local government guaranteed debts, RMB 2.67 trillion; and other contingent debts, RMB 4.3 trillion, with the total around 33% of GDP.

The side-stepping of central government credit control mechanisms has turned local government into a major engine of shadow banking expansion, complete with implicit guarantees that reduce apparent risk despite the dubious nature of many infrastructure projects:

Beijing has tried to contain local-debt growth since at least 2010. But according to IMF estimates, local-government debt reached 36% of GDP in 2013, double its share of GDP in 2008, and will increase to 52% of GDP in 2019. Since the mid-1990s, after some local governments went on borrowing binges to build hotels and golf courses, the central government has banned city halls from selling bonds or borrowing directly from banks. Instead, localities borrow indirectly through so-called local-government-financing vehicles. These entities raise money for local governments to fund roads, subways, airports, housing sites and other projects. Local governments implicitly guarantee the debt, helping the financing firms borrow no matter whether projects make sense.

The exponential growth in the shadow banking in China has been so rapid that in a very few years it has begun to strain the country’s ability to service that debt:

Booming shadow banking growth has pushed China to the outer limits of its ability to keep its economy functioning smoothly. With total leverage in the Chinese economy now topping 280% of gross domestic product, it was clear that credit quality was deteriorating, Primavera Capital Group founder and chairman Fred Hu told delegates at a Fung Global Institute forum….Debt sustainability, the ability to service debts, is a key measure of solvency. Analysis by the McKinsey Global Institute earlier this year showed debt in the Chinese economy had roughly quadrupled between 2007 and the middle of last year to US$28 trillion, leaving it with a debt-to-GDP ratio more than twice that of crisis-wracked Greece.

Authorities recognize the existence of the shadow banking, but, as is the case in the rest of the world, completely fail to understand its significance in terms of systemic risk:

Liu Mingkang, the former chairman of the China Banking Regulatory Commission, told the same forum that time was running out for the government to reform the financial system and liberalise credit markets sufficiently to obviate the need for shadow banking, though he was sanguine on the systemic risks posed….He added that shadow banking must be regarded by policymakers only as a short-term mechanism through which time can be bought to help finance small and medium-sized private enterprises until wholesale reform can be completed to liberalise access to capital markets and bank credit.

Shadow banking is no temporary measure without consequences. It represents a massive build up in unrepayable debt that is already beginning to act as a millstone round the neck of the Chinese economy and will continue to do so for many years, as the momentum towards debt default and economic contraction picks up further. This will be aggravated by the nature of the private debt created during the expansion:

A good deal of that private debt explosion has also taken the form of dangerous short term debt that requires frequent ‘roll over’ and refinancing. By 2014 a third of all new debt created in China was ‘roll over’ refinancing of prior debt. That means that should interest rates rise too far or too fast, many businesses heavily indebted to shadow banks will not be able to roll over that debt, and will have to default. In turn, defaults could result in panic sell offs of financial securities, followed by a general ‘credit crunch’ that will slow the real economy still faster than even at present.

In addition, the debt to GDP ratio is actually far worse than it appears, since GDP is substantially overstated:

During the course of its mad scramble to become the world’s export factory and then its greatest infrastructure construction site, China’s expansion of domestic credit broke every historical record and has ultimately landed in the zone of pure financial madness. To wit, during the 14 years since the turn of the century China’s total debt outstanding–including its vast, opaque, wild west shadow banking system—soared from $1 trillion to $25 trillion, and from 1X GDP to upwards of 3X.

But these “leverage ratios” are actually far more dangerous and unstable than the pure numbers suggest because the denominator – national income or GDP – has been erected on an unsustainable frenzy of fixed asset investment. Accordingly, China’s so-called GDP of $9 trillion contains a huge component of one-time spending that will disappear in the years ahead, but which will leave behind enormous economic waste and monumental over-investment that will result in sub-economic returns and write-offs for years to come. Stated differently, China’s true total debt ratio is much higher than 3X currently reported due to the unsustainable bloat in its reported national income.

Nearly every year since 2008, in fact, fixed asset investment in public infrastructure, housing and domestic industry has amounted to nearly 50% of GDP. But that’s not just a case of extreme of growth enthusiasm, as the Wall Street bulls would have you believe. It’s actually indicative of an economy of 1.3 billion people who have gone mad digging, building, borrowing and speculating.

The leverage that lifted China so high during the boom will crush it without mercy during the bust. Already, declining marginal productivity of debt is a major problem, meaning that it takes more and more debt to generate ever smaller additions to the over-stated GDP:

China has now become an “economy that is actually worth a lot less than they pretend it’s worth,” Ms. Stevenson Yang says. By her estimate, 60 to 70% of new lending is now going to service old debt. In 2006, $1.20 in new credit could stoke $1 in economic growth. Today, it takes over $3. At that rate, it takes a greater than 20% annual expansion in credit to sustain China’s target 7.5% economic growth. “That just means that the problem itself is getting bigger,” said Jonathan Cornish, managing director for Asian operations at Fitch Ratings.

The bust is already underway despite doomed government attempts to prevent it:

China’s stocks tumbled, with the benchmark index falling the most since February 2007, amid concern a three-week rally sparked by unprecedented government intervention is unsustainable. The Shanghai Composite Index plunged 8.5% to 3,725.56 at the close, with 75 stocks dropping for each one that rose. PetroChina Co., long considered a target of state-linked market support funds, tumbled by a record 9.6%. The rout dented investor confidence from Hong Kong to Taiwan and Indonesia, helping send the MSCI Emerging Markets Index to a two-year low.

Monday’s retreat shattered the sense of calm that had fallen over mainland markets last week and raised questions over the viability of government efforts to prop up prices as the economy slows….“Investors are afraid the Chinese government will withdraw supporting measures from the market,” said Sam Chi Yung, a strategist at Delta Asia Securities Ltd. in Hong Kong. “Once those disappear, the market cannot support itself.”

Government action cannot prevent over-valued markets from crashing. It did not work in the 1930s, and it will not work now. Temporary postponement was all that intervention could achieve, and as always, that postponement came at a price, guaranteeing that the inevitable crash will be worse when it does occur. Central banks are not omnipotent. They may appear to be during an expansion when everything is going in a direction people are happy with, so no one asks difficult questions, but during a contraction that they cannot prevent, their powerlessness will become blindly obvious.

The Chinese government is currently attempting to conceal the extent of the accelerating contraction, but official figures are meaningless. Looking behind the scenes makes it clearer why the contagion from China is spreading a wave of deflationary deleveraging across so many sectors globally:

Much of the economic weakness rippling through emerging markets is “made in China”. A slump in Chinese investment growth has hammered global demand for commodities and some manufactured products, triggering a chain reaction that is depressing emerging market exports, deepening deflationary pressures and even sapping consumer demand….

….The magnitude of China’s investment slump this year is likely to have been much greater than official figures show. Beijing’s official monthly data series tracks “fixed asset investment” (FAI), which grew by 11.4% year on year in June — not the sort of figure that might be expected to elicit alarm. But FAI readings are inflated by several elements — such as sales of land and other assets — that do not add to the country’s productive capital stock. A cleaner measure of how much companies are investing in boosting their productive capacities — and therefore in their futures — is gross fixed capital formation (GFCF), which strips out extraneous items to capture capital goods deployment. By this yardstick, investment is tanking….When viewed from this perspective, China’s slumping demand for iron ore, copper, alumina and other commodity imports from Latin America, Africa and elsewhere is easier to comprehend.

….Local government financing vehicles (LGFVs) — key agents of infrastructure investment at the grassroots level — are reaping an average return on assets on infrastructure projects of around 3%, compared with an average interest rate on loans of around 7%.

Warnings regarding Chinese banking instability and the inevitability of a crash are being made, but remain relatively rare and generally go unheeded even in the face of considerable evidence.

In a country where the banks, even the largest, are not known for openness, Charlene Chu has warned since 2009 about a rapid expansion in lending that has seen something close to $15 trillion (£9.1 trillion) of credit created, fuelling a property and infrastructure boom that has no equal in history.

To say her warnings have been unusual is to underestimate quite how important her contributions have been. Chu has explained the creation – from a standing start just five years ago – of a shadow banking industry in China that today is responsible for as many loans in terms of volume as the country’s entire mainstream financial system. Speaking for the first time since her departure from Fitch last year, Chu, who has taken a new job at Autonomous, the respected independent research firm, says she remains adamant that a Chinese banking collapse of some description remains not just an outside chance, but a certainty. “The banking sector has extended $14 trillion to $15 trillion in the span of five years. There’s no way that we are not going to have massive problems in China,” she says.

The inevitable systemic banking crisis will be compounded in its impact by the inevitable contraction of the real economy, with China taking the lead in both areas. It will be a world of knock-on consequences and of cascading system failure. See for instance the excellent example of the Chinese steel industry, which is set not only to collapse domestically, but to propagate economic contraction globally.

Nowhere is this more evident than in China’s vastly overbuilt steel industry, where capacity has soared from about 100 million tons in 1995 to upwards of 1.2 billion tons today. Again, this 12X growth in less than two decades is not just red capitalism getting rambunctious; its actually an economically cancerous deformation that will eventually dislocate the entire global economy.  Stated differently, the 1 billion ton growth of China’s steel industry since 1995 represents 2X the entire capacity of the global steel industry at the time; 7X the size of Japan’s then world champion steel industry; and 10X the then size of the US industry.

Already, the evidence of a thundering break-down of China’s steel industry is gathering momentum. Capacity utilization has fallen from 95% in 2001 to 75% last year, and will eventually plunge toward 60%, resulting in upwards of a half billion tons of excess capacity. Likewise, even the manipulated and massaged financial results from China big steel companies have begin to sharply deteriorate. Profits have dropped from $80-100 billion RMB annually to 20 billion in 2013, and are now in the red; and the reported aggregate leverage ratio of the industry has soared to in excess of 70%.

But these are just mild intimations of what is coming. The hidden truth of the matter is that China would be lucky to have even 500 million tons of annual “sell-through” demand for steel to be used in production of cars, appliances, industrial machinery and for normal replacement cycles of long-lived capital assets like office towers, ships, shopping malls, highways, airports and rails.  Stated differently, upwards of 50% of the 800 million tons of steel produced by China in 2013 likely went into one-time demand from the frenzy in infrastructure spending.

Indeed, the deformations are so extreme that on the margin China’s steel industry has been chasing its own tail like some stumbling, fevered dragon. Thus, demand for plate steel to build dry bulk carriers has soared, but the underlying demand for new bulk carrier capacity was, ironically, driven by bloated demand for the iron ore needed to make the steel to build China’s empty apartments and office towers and unused airports, highways and rails.

In short, when the credit and building frenzy stops, China will be drowning in excess steel capacity and will try to export its way out— flooding the world with cheap steel. A trade crisis will soon ensue, and we will shortly have the kind of globalized import quota system that was imposed on Japan in the early 1980s. Needless to say, the latter may stabilize steel prices at levels far below current quotes, but it will also mean a drastic cutback in global steel production and iron ore demand.

And that gets to the core component of the deformation arising from central bank fueled credit expansion and the drastic worldwide repression of interest rates and cost of capital. The 12X expansion of China’s steel industry was accompanied by an even more fantastic expansion of iron ore production, processing, transportation, port and ocean shipping capacity.

This is only one industrial sector, but the picture painted applies to many others. The flawed state development model in China, like the Japanese counterpart which preceded it in the 1980s, led to credit explosion and consequent mal-investment in over-production on a grand scale. As with Japan, painful consequences will follow, but this time the impact will be truly global.

Caofeidian lies a three-hour drive east of Beijing, a Chinese industrial dream jutting into the sea. A decade ago, it was a pretty coast whose shallow waters were dotted with fishing vessels. Today, it’s a manufacturer’s paradise in the making, its eight-lane roads connecting sprawling factories to a vast port. Named after a former imperial concubine, it was a place of feverish fantasy, where borrowed money fuelled a vast reclamation effort to create 200 square kilometres of land and build something new….

….But the loans that allowed all that spending have just 50% odds of being paid back, says an independent research group that has spent years studying Caofeidian. The stakes are enormous. Caofeidian was a project of national importance for China, a “flagship,” according to Jon Chan Kung, chief researcher at Anbound, a Beijing think tank. “If this project fails, it proves that the major model driving China’s development has also failed.”

A New World Disorder

Our long global boom stands on the brink of a major reversal, the consequences of which will ricochet around the world as the credit pyramid pancakes. The endgame of a monetary supernova is credit implosion, and it does not play out as a slow squeeze. We are going to see some dramatic movements in the financial world, followed by a cascade of similarly dramatic events in the real economy, in the not too distant future. The process begins with the deflation that is already underway, with monetary contraction that leads to falling prices across the board, crushing companies and countries along the way and leading straight into economic depression. 

Deflation and depression are mutually reinforcing, meaning the downward spiral will continue for many years. We have been warning about this dynamic since 2008, and have already seen the liquidity crunch start to play out in many parts of the world. Once it hits critical mass, and it can do so very quickly, momentum will increase greatly. China is the biggest domino about to fall, and from a great height as well, threatening to flatten everything in its path on the way down. This is the beginning of a New World Disorder…

Mar 172015
 
 March 17, 2015  Posted by at 12:11 pm Finance Tagged with: , , , , , , ,  1 Response »


DPC Shoppers on Sixth Avenue, New York City 1903

Bull Market Is ‘Closer To The End’ Than Investors Think (MarketWatch)
Europe’s Trapdoor Slams Shut (Vilches)
March 23 Tsipras, Merkel Talks Could Be Chance To Break Impasse (Kathimerini)
Greek PM Tsipras Says There Is No Going Back To Austerity (Reuters)
Austerity Policy Failed In Whole Of Europe, Not Just Greece – Tsipras (RT)
ECB Reports Only €9.8 Billion In Bond Purchases In First Full Week Of Q€ (ZH)
If Greece Exits, Don’t Expect Us To Follow: Italy (CNBC)
Italy’s Debt Burden Now At Record High 132% Of GDP (RT)
China Trust Firms Shift, Rather Than Reduce, Shadow Banking Risk (Reuters)
A US Shadow Banking Sector Has Gotten 65 Times Larger (CNBC)
Corporations Get $760 Back For Every $1 of US Political Donations (Zero Hedge)
The Volatility / Quantitative Easing Dance of Doom (Nomi Prins)
Public Banking: Ayn Rand’s Worst Nightmare (Phillip Doe)
American Amoeba (Jim Kunstler)
US Intel Stands Pat on MH-17 Shoot-Down (Robert Parry)
Petrobras Scandal Widening as Braskem Named in Morass (Bloomberg)
A $250,000 Tour With One Aim: Get Chinese to Buy a Home
Nationwide Protests In Canada To Denounce New Anti-Terror Law (RT)
Nuclear Expert Arnie Gundersen Warns Of ‘Chernobyl On Steroids’ In UK (Ind.)
Great Barrier Reef Wins Protection With Ban on Waste Dumping (Bloomberg)
Earth Has Exceeded Four Of The Nine Limits For Hospitable Life (Ind.)

“Rising interest rates can provide significant headwinds to a bull market..”

Bull Market Is ‘Closer To The End’ Than Investors Think (MarketWatch)

Spring training has begun, and with it the dreams of baseball fans everywhere that this year their team will win it all. On Wall Street, investors hope that one of the longest bull markets in memory can keep rolling. But one All-Star who called this bull from its outset now thinks we’re in the seventh-inning stretch, possibly the top of the ninth. Jim Stack is the president of Whitefish, Montana-based InvesTech Research, which is on the Hulbert Financial Digest’s Honor Roll of top newsletters over the past 15 years, and Stack Financial Management, which manages more than $1 billion of investors’ money. He’s been cautious for some time, as we wrote last January. Now, in a special alert, he suggests that subscribers cut their equity exposure to 76% of their holdings, from 80%, and put the rest in cash.

That may sound like a lot, but it’s actually the lowest equity and highest cash position he’s recommended since the bull market began in March 2009. “We’re most likely in the later third of the bull market and closer to the end than we think,” Stack said in an exclusive interview with MarketWatch. And maybe even the final year. “We could see this bull market peak this year, whether it’s already done so or could within the next six to nine months.” If the bull continues through May and the S&P 500 Index adds another 5% to its March 2 all-time closing high of 2017.48, this will be the third-longest and third-biggest bull market of the past 80 years, Stack said. But although bull markets don’t die of old age, there are signs “it’s getting ‘late in the bull game,’ ” he wrote.

Stack is troubled by what he sees as the media’s frothy coverage of the economy. The reaction to the latest jobs report — “Jobs Boom Continues” and “Party Like It’s 1999” were two headlines I found — prompted his latest “sell” signal. “The U.S. economy is hitting on all cylinders,” he said. “Bull markets characteristically peak when you have strong economic news and pressures on the Federal Reserve to take away the punch bowl.” He sees anecdotal evidence of mounting wage pressures, putting the Fed on course to raise rates later this year. We may get more clarity after the Fed’s March meeting ends Wednesday. “Rising interest rates,” he explained, “can provide significant headwinds to a bull market,” which he calls “one of the more interest-rate-sensitive bull markets in our lifetime.”

Read more …

“..the Greek ‘impossible triangle’ can be solved in great style as Alexander the Great had in solving the Gordian Knot.”

Europe’s Trapdoor Slams Shut (Vilches)

Nothing has changed with the ‘new’ agreement between Greece and its European ‘partners’ because the Greek so-called ‘impossible triangle’ stands in their way. The three mutually incompatible vertices of the Greek ‘impossible triangle’ are : (1) The Syriza ruling party staying in power. (2) Reversing the current Troika austerity programs. (3) Greece staying in the euro. The uncompliable list of promises made to the Greek people by Syriza has now been replaced by an equivalent uncompliable list of promises made to the Troika. The European soul-searching exercise is thus over, leaving no further room for self-correction. The Troika is back in Athens with yet heavier boots on the ground pushing for the very same things it always wanted –and needs– from exemplary Greece.

Meanwhile, government money is running out fast, as we speak. Near term payments of all sorts have been jeopardized with no solution in sight. Major events –including a referendum– are highly probable very soon in Greece, way before the June ‘agreed’ reset date which can’t solve anything anyway. Thus, the stage has been set for the Pan-European Grand Project to come apart at the seams. The 2010 – 2012 press rehearsal is over, now it’s for good. Adrift in European shallow waters, the Greek ship will now run aground into unchartered political rocks. Europe’s own trapdoor has slammed shut. [..]

So here comes the Alexander-the-Great moment for Greece whereby the Gordian knot has to be cut apart, high and dry. Because no matter the rationale or how the problem is sliced… or temporarily postponed… by having Vertex 1 and 2 firmly embodied into the Greek current power structure, the final outcome necessarily means the devaluation of the Greek currency, namely the euro (or rather the Deutsche Mark?) And that means Grexit. Additionally, repudiating the USD $0.5 trillion real, effective sovereign debt (***) would jump start the Greek economy with primary account surplus on the ‘get go’ similarly to what happened in Argentina. Russia and/or China would probably (and eagerly) take it from there for their own good reasons. So with Vertex 3 demolished, the “impossible triangle” is instantly solved and both Greece and Euclidian geometry would find themselves back in business… with a lot of hardship ahead.

There will be no shortage of costs, both inside and outside of Greece, both inside and outside of Europe. But such costs would be far lower for everybody than having Greece turn into an anomic state. Greeks know this already and Europeans are finally finding out. There will also be additional Grexit losses because of the euro area GDP reduction. That’d be another Eurozone problem, not Greece’s, something which Brussels, Paris and Berlin should have thought about long ago. So make no mistake: the Greek ‘impossible triangle’ can be solved in great style as Alexander the Great had in solving the Gordian Knot.

Read more …

Finally the long overdue invitation.

March 23 Tsipras, Merkel Talks Could Be Chance To Break Impasse (Kathimerini)

Prime Minister Alexis Tsipras is to meet German Chancellor Angela Merkel in Berlin on March 23 for talks expected to focus on Greece’s looming cash crunch even as bilateral tensions remain high. Tsipras is expected to use the meeting, proposed by Merkel on Monday, to seek a “political solution” to the current deadlock that would allow the release of much-needed funding. However, sources close to Merkel indicated that Athens should not foster high hopes for the meeting. “Our aim is the implementation of the February 20 agreement and to keep Greece in the eurozone,” a source said. In the meantime, technical experts from the Greek side and the creditors will continue talks in Brussels on Wednesday as diplomats prepare for an EU leaders’ summit on Thursday and Friday.

Tsipras had been planning to raise the matter of Greece’s funding needs and reform proposals with the German chancellor on the sidelines of the summit. Sources conceded that the meeting is likely to be “difficult,” adding that Tsipras may also seek a meeting with European Commission President Jean-Claude Juncker and European Central Bank President Mario Draghi. Sources close to Tsipras welcomed Merkel’s overture to the Greek premier, noting that she had so far rejected the prospect of a bilateral meeting. During a phone call with Tsipras on Monday, Merkel underlined the critical nature of the current situation and suggested that a face-to-face meeting would be a good idea, sources said.

The meeting could be the last chance for the two leaders to avert an impasse which some prominent Greek government officials blame on “circles in the EU” that want the current administration to fall and are pushing it to implement measures the previous conservative-led coalition had agreed to. In an interview with Ethnos newspaper published on Monday, Tsipras insisted that further tough measures were out of the question. “Whatever obstacles we may encounter in our negotiating effort, we will not return to the policies of austerity,” Tsipras told Ethnos. One reason that creditors appear to be holding a hard line is the Greek government’s delay in enforcing economic reforms. Another is a series of initiatives that have been interpreted as aggressive vis-a-vis Greece’s creditors, notably Tsipras’s decision to resurrect the country’s demands for war reparations from Germany.

Read more …

And he means it too.

Greek PM Tsipras Says There Is No Going Back To Austerity (Reuters)

Greece will not accept any return to austerity, leftist Prime Minister Alexis Tsipras said on Monday, adding that he was convinced he would strike a deal with international partners to keep finances afloat. “The key for an honorable compromise (with the EU/IMF creditors) is to recognize that the previous policy of extreme austerity has failed, not only in Greece, but in the whole of Europe,” Tsipras told daily Ethnos in an interview. Greece’s left-wing government won elections in January on a pledge to roll back budget rigor and renegotiate the terms of a €240 billion bailout. But it has faced resistance from euro zone partners who are unwilling to offer major compromises.

Although Athens has been granted a four-month extension to the bailout deal, the Feb. 20 accord did not give Greece access to aid pledged to it from the euro zone and the International Monetary Fund, which has led to a cash crunch. To obtain the remaining aid, Athens must agree on a revised package of reforms. With cash running low, the government has sought to issue more short-term debt, but the European Central Bank has so far refused to give its green light. Tsipras said the bailout policies of the last five years had led to an unprecedented recession, record unemployment and a humanitarian crisis. Athens could find common ground with its partners based on its proposed reforms, but talks remain tough.

“Whatever obstacles we may encounter in our negotiating effort, we will not return to the policies of austerity,” the prime minister said. Asked whether the government had an alternative plan if its partners continued to refuse it any leeway on its funding needs, Tsipras said he expected the issue would be resolved at this week’s EU summit, scheduled for March 19 and 20. “I don’t believe we will need to apply alternative plans because the issue will be solved at a political level by the end of the week in the run up to the EU summit, or, if necessary, at the EU summit (itself),” he told the paper.

Read more …

And here’s why.

Austerity Policy Failed In Whole Of Europe, Not Just Greece – Tsipras (RT)

The policy of extreme austerity has failed not only in Athens, but in the whole of Europe, Greek Prime Minister Alexis Tsipras has said. His comments come as the standoff with key creditor Germany mounts. “The key for an honorable compromise (with the EU/IMF creditors) is to recognize that the previous policy of extreme austerity has failed, not only in Greece, but in the whole of Europe,” Tsipras said in an interview to daily Ethnos, Reuters reports. The prime minister is convinced he’ll reach an agreement with international creditors to keep the country’s finances afloat. Tsipras’ pre-election promise to drop austerity helped him win support from Greeks, but the prime minister’s anti-austerity tone has slightly faded since then.

His reform plan worked out in late February to get a bailout extension caused protests against the Tsipras cabinet. People were angry as they felt the new government had failed to fulfill its anti-austerity election pledge. On Monday, the prime minister reaffirmed his government would not return to austerity whatever it takes. “Whatever obstacles we may encounter in our negotiating effort, we will not return to the policies of austerity,” Tsipras was cited as saying by Reuters. He also expressed hopes that the issue would be resolved at the EU summit, scheduled for March 19 and 20.

“I don’t believe we will need to apply alternative plans because the issue will be solved at a political level by the end of the week in the run up to the EU summit, or, if necessary, at the EU summit (itself),” he said. Greece’s bailout program extension was approved by the so-called troika of lenders in February; nevertheless, Greece hasn’t received the aid from the ECB. Athens must agree on a revised package of reforms in order to obtain the remaining aid from the eurozone and IMF. The prime minister also blames eurozone austerity for the country’s unprecedented recession. Since 2010, when Greece undertook the austerity measures, the economy has lost a quarter of its value, a third of Greeks live below the poverty line and the unemployment rate has reached 30%.

Read more …

They’re all looking for escape velocity…

ECB Reports Only €9.8 Billion In Bond Purchases In First Full Week Of Q€ (ZH)

Unlike the Fed, the ECB’s Q€ program is far more opaque, far more ad-hoc, and far more improvised (and at the rate it is soaking up already negligible collateral as JPM explained yesterday, soon to be far more abbreviated). In fact, without a daily POMO preview (such as what the Fed used to provide) nobody has any idea what is going or what the ECB will be buying until a week after the fact. Today, for the first time, the ECB provided the bare minimum data on its “Public sector purchase program” i.e., how much debt it had purchased in the first week of the ECB’s QE. The answer: only €9.8 billion.

This being the central bank which refused to respond to a Bloomberg FOIA seeking to uncover what the ECB knew when, about Goldman’s Greek FX swaps, don’t expect any additional data breakdown, such as which CUSIPs the ECB has purchased, or which nations benefitted the most from the ECB’s money printing generosity. All of that information may lead to the heads of ordinary European peasants exploding, and who can blame the ECB. After all this comes from a central bank servicing a current Commissioner who said “there can be no democratic choice against the European treaties” and whose former Commissioner said “democratic governments are often wrong. If you trust them too much they make bad decisions.”

In fact, it is best to not give any information to these “democratic governments” and their constituent peasantry at all. Because a few central-planning BIS bankers always know best. Snyde comments about Europe’s democratic union aside, the take home, and why we said “only”, is that a mere €9.8 billion in bond purchases was enough to break the European bond market, to expose the complete lack of collateral and in the process soak up all available liquidity. So less than €10 billion down, €1.1 trillion to go, and the ECB hopes to have something resembling a bond market left afterwards? Good luck.

Read more …

“Because the fundamentals in Italy have very much strengthened over the recent past..” Yeah, right. Wait till you see the artcile below this one.

If Greece Exits, Don’t Expect Us To Follow: Italy (CNBC)

No matter what the Greeks may say, Italy is not at risk of leaving the euro if Greece does, Italy’s Finance Minister told CNBC. “I think that any relationship between ‘Grexit’ and Italy is out of place,” said Pier Carlo Padoan, using the parlance for a Greek exit from the currency zone while speaking on the sidelines of the Ambrosetti conference on Lake Como. “Italy has significantly strengthened its position. Italy is gaining a lot of confidence in the markets.” Greece and its European partners are in the middle of tough negotiations over the conditions Greece must meet in order to secure billions more in bailout money.

Without those funds, Greece is at high risk of having to put capital controls in place, which would significantly raise the likelihood that the country would leave the 19-member currency union. New Greek Finance Minister Yanis Varoufakis has repeatedly told reporters, hedge fund managers, and anyone else who will listen that if Greece were to leave the Euro, the markets would start to price in the risk of Italy leaving the currency zone as well. When asked if Varoufakis is right, he responded: “I don’t know whether it is right. I think that any ‘Grexit’ option would be very bad, and I think it’s [in the] interest of everybody to be united within the euro and to move toward a stronger growth prospect for Greece.”

Padoan added that he does not believe that Italy would face substantially higher interest rates in the face of Greek exit. “I don’t think so, because to the extent that [interest rates] price risk, the Italian risk will not increase as a consequence of a Greece accident,” he said, then adding, “Because the fundamentals in Italy have very much strengthened over the recent past as for instance the assessment by the commission of our fiscal and growth position shows.”

Read more …

Nothing much has improved, has it?

Italy’s Debt Burden Now At Record High 132% Of GDP (RT)

Italy’s debt load is now €2.1659 trillion, the Bank of Italy said Friday. The country’s public debt increased by €31 billion in January, bringing the total close to the record-high of €2.1677 billion euro recorded in July 2014. Italy’s public debt is only second to Greece in the eurozone. The main reason debt spiked in January is because the Treasury increased its available liquidity, or money supply, by €36.3 billion euro, bringing the total to €82.6 billions, Italy’s ANSA news agency reported Friday. Gross domestic product to debt in Italy is near 132%, compared to 127.9% in 2013, or 102% two years ago.

Italy, the third largest economy in Europe, has had its economic woes overshadowed by the looming crisis in Greece. Rome hasn’t seen quarterly growth since mid-2011, and the economy is in need of economic resuscitation. Though the European Commission isn’t monitoring Italy as strictly as Greece, Rome’s budget is still under “special surveillance.”The European Commission mandated debt-to-GDP target is 60%. Italy’s growth forecast for 2015 is 0.5%, a much rosier picture after the economy’s less than stellar performance in 2014, when growth stagnated in the fourth quarter. In 2016, Italy’s central bank expects 1.5% expansion.

Read more …

The $8+ trillion elephant in the China shop.

China Trust Firms Shift, Rather Than Reduce, Shadow Banking Risk (Reuters)

China’s trust firms, with total assets of $2.2 trillion, are shifting more cash into frothy capital markets and over-the-counter (OTC) instruments instead of loans – blunting regulators’ efforts to reduce shadow banking risk. By redirecting money into capital markets and OTC products like asset-backed securities (ABS) and bankers’ acceptances, trusts are acting less like lenders and more like hedge funds or lightly regulated mutual funds. And the shift – a response to a clampdown last year on trust lending to risky real estate and industrial projects – means a significant chunk of shadow banking risk is migrating rather than shrinking. China trusts take in funds from retail and institutional investors and re-lend or reinvest that money, often in parts of the economy that struggle to obtain bank credit, like mid-sized private enterprises or municipal industrial projects.

As of end-2014, total trust assets were 14 trillion yuan, according to China Trust Association data. Previously, people who bought into opaque wealth management products, many of which were peddled by banks but actually backed by trust assets, found themselves heavily exposed to real estate loans. Trust firms’ changing asset mix means these investors may now instead find themselves exposed to high-yield corporate debt (junk bonds), volatile stock funds or risky short-term OTC debt instruments. While this could help keep the wealth management industry running, and by extension help the trust industry stay afloat, it could delay efforts to properly price risk. A Reuters analysis of China Trust Association data shows that while loans outstanding grew just 8% last year – far below the 62% growth in 2013 – growth in obscure asset categories including “tradable financial assets” and “saleable fixed-term investments” was 77% and 47%, respectively.

Read more …

Just what we needed. But CNBC says it’s all just fine: they have evolved…

A US Shadow Banking Sector Has Gotten 65 Times Larger (CNBC)

Shadow banking in general has come back to life after getting hammered during the financial crisis, but one segment has been especially rampant. Peer-to-peer (P2P) lending, in which loans are made privately through individuals who most often connect through a network of relatively new websites, has exploded over the past five years. It is now the fastest-growing sector of non-bank lending, according to an exhaustive Goldman Sachs report on the shadow banking industry. The P2P industry had just $26 million in loan issuance back in 2009, as the worst of the banking crisis passed; but that figure now stands at a robust $1.7 billion.

While that’s still a fraction of the total $12 trillion in loans across the U.S., and even pales in comparison to the $4 trillion in total shadow bank loans, it represents a growth of 65 times during the period. “Personal lending (installment and card) is likely to continue to see disruption as the benefits of a lesser regulatory burden, lower capital requirements and a slimmer cost structure [over time] drive pricing advantages for new players…leading to share moving away from traditional players,” Goldman said in its report. Broadly speaking, shadow banking refers to nonbank lending, with total liabilities in the industry put at $15 trillion. That’s a decline from the 2007 peak of $22 trillion.

The name originated from former Pimco executive Paul McCulley, who used it to describe the myriad institutions that helped provide the easy-money financing that led to the subprime mortgage market crash, which in turn triggered the financial crisis. While the term became a pejorative closely tied to the crisis, the industry has evolved. As banks find themselves under tighter regulatory scrutiny, customers are turning back to nonbank lenders for financing. The shadow firms don’t face the same regulatory burdens as banks, because they don’t take deposits and are thus less constrained when making loans.

Read more …

What a surprise, right?!

Corporations Get $760 Back For Every $1 of US Political Donations (Zero Hedge)

The first time we read the recent analysis by the Sunlight Foundation in which it combed through 14 million corporate records, including data on campaign contributions, lobbying expenditures, federal budget allocations and spending, in order to determine the “rate of return” on lobbying and spending to buy political goodwill, we were left speechless. To be sure, we had previously shown that when it comes to the rate of return on lobbying, the rates were simply staggering, and ranged anywhere between 5,900% for oil subsidies, to 22,000% for multinational tax breaks and even higher for America’s legal drug dealers.

But nothing could prepare us for this. According to the foundation’s analysis, between 2007 and 2012, 200 of America’s most politically active corporations spent a combined $5.8 billion (with a B) on federal lobbying and campaign contributions. What they gave pales compared to what those same corporations got: $4.4 trillion (with a T) in federal business and support. Putting that in context, the $4.4 trillion total represents two-thirds of the $6.5 trillion that individual taxpayers paid into the federal treasury. Said otherwise, by “spending: a paltry $6 billion to bribe the US government, or just a little more than what GM will spend on stock buybacks alone, US corporations are getting the direct benefit of two-thirds of US taxpayers’ labor!

Read more …

“Yellen had a seat at the Clinton administration banking deregulation table when Glass-Steagall was summarily dismantled..”

The Volatility / Quantitative Easing Dance of Doom (Nomi Prins)

What began with the US Federal Reserve became a global phenomenon of subsidizing the financial system and its largest players. Most real people – that don’t run hedge funds or big banks or leverage other peoples’ money in esoteric derivatives trades – have their own meager fortunes at risk. They don’t have the power of ECB head, Mario Draghi to issue the ‘buy’ order from atop the ECB mountain. Nor do they reap the benefits. Retail sales are down because people have no extra money and can’t take on excess debt through credit cards forever. They aren’t governments or central banks that can print when they want to, or big private banks that can summon such assistance at will. Federal Reserve Chair, Janet Yellen recently chastised these bankers. This, while the Fed has become their largest client and the world’s biggest hedge fund.

While she wags her finger, the Fed is paying JPM Chase to manage the $1.7 trillion portfolio of mortgage related assets that it purchased from the largest banks. In other words, somewhere along the line, the public is both paying to buy nefarious assets from the big banks at full value, thereby supporting an artificially higher price and demand for these and similar assets, and paying the nation’s largest bank for managing them on behalf of the Fed. Yellen says things like “poor values may undermine bank safety” and all of a sudden she’s on an anti-bank rampage? What about the fact that just six banks control 97% of all trading assets in the US banking system and 95% of derivatives? Or that 30 banks control 40% of lending and 52% of assets worldwide?

Think about the twilight zone squared logic of this. Yellen’s predecessors, Alan Greenspan and Ben Bernanke, enabled the path of the US banking system to become more concentrated in the hands the Big Six banks, which have legacy connections to the Big Six banks that drove the country to disaster during the 1929 Crash, and have been at the forefront of the nexus of political-financial power polices for more than a century. Yellen had a seat at the Clinton administration banking deregulation table when Glass-Steagall was summarily dismantled thereby enabling big banks to become bigger and more complex and risky. Those commercial banks that didn’t hook up with investment banks back then, got their chance in the wake of the financial crisis of 2008. They also concocted 75% of the toxic assets that were spread globally and the associated leverage behind them in the lead up to 2008.

Read more …

An alternative worth contemplating/

Public Banking: Ayn Rand’s Worst Nightmare (Phillip Doe)

A few weeks ago a Colorado grassroots group, Be the Change, of which I am a board member, sponsored an all -day conference on public banking. I know, it sounds like the equivalent of an all- day climate debate between aging Republican Senators, but the public banking concept may have some value, it might even surprise you. Indeed, it could provide a source of funding for desperately needed infrastructure, particularly at the local level. Over 20 states are looking into the public banking option. But only one, North Dakota has a public bank, and it dates from the populist era, early in the last century. In a recent WSJ article the North Dakota bank was lauded for having a return on investment of almost 20%, a 70% greater return than either Goldman-Sachs or J.P. Morgan, two of Wall Street’s best bullies.

From a short-term perspective, a public bank’s chief advantage is that revenues generated at the city, county, and state level from taxes and fees, stay in the state. They would no longer be sent to the grand casino that has become Wall Street where the prospects of another melt down grow. The recent actions of Congress make it likely that giant retirement funds such as Colorado’s public employee’s retirement plan, PERA, can be appropriated to cover Wall Street speculative losses should a melt down occur. Even FDIC insured personal accounts might be at risk. Moreover, the high management fees Wall Street charges for using our money to gamble with would be eliminated, thus greatly increasing the amount available for local and regional projects of wide public support and interest.

Critical to a public bank is its structure. If it looks like just another bank, public support and interest will be ho hum, at best. But if it is chartered so that management rests with a citizen advisory board, with a professional banking staff answering to them, interest will be sustained, with the public interest more likely to be served. And if the banking management is paid on a scale consistent with prevailing professional salaries within the state or region it serves, a sense of common or shared interest might be possible.

Adopting anything resembling Wall Street’s outrageous self-dealing in salary and bonus structures would be self-defeating. Salaries based on public sector pay for professionals should be the model. After all bankers are no better than engineers, teachers, and scientists, as the numerous bank failures throughout our history clearly demonstrate. Teachers have a much better success ratio and a much tougher work environment. In the long term, city and regional banks, the latter called mutual banks by public banking advocates, hold more promise. The closer to home the decision-making, the better the potential outcome is a truth self-evident. A dithering, science denying, money-corrupted, war-mongering Washington provides the mother of all counterpoints.

Read more …

“The transparent truthlessness of the Fed’s basic premises go far to explain the chasm between official policy and reality..”

American Amoeba (Jim Kunstler)

The money-moving world waits on tenterhooks for the Wednesday appearance of America’s oracle, Janet Yellen, to step out of her grotto and state whether or not she feels twinges of patience. Wikipedia notes that Pythia, the original priestess of Delphi “…delivered oracles in a frenzied state induced by vapors rising from a chasm in the rock, and that she spoke gibberish which priests interpreted as the enigmatic prophecies preserved in Greek literature.” Some things never change. Patience for what? Well, whether to raise the Federal Reserve’s benchmark short-term interest rate from near-zero to something microscopically above zero. This is what the world foolishly turns on. And, of course, also some oracular hint as to whether this momentous move might occur in April, June, September, or not at all.

Some canny observers of the vaudeville that US money policy has become — namely, Jim Rickards, David Stockman, Peter Schiff — maintain that Yellen and her Fed are boxed in and can really do nothing. Their policies and interventions regarding the flows of capital have done nothing so far but disable the normal operations of markets and distort the valuation of everything, especially the cost of renting money itself — for that is what happens when you take out a loan. The net result of all that is a financial picture that no longer reflects anything truthful about the actual economy, being a trade in goods and services.

The transparent truthlessness of the Fed’s basic premises go far to explain the chasm between official policy and reality — though it does not explain the appetite for plain lying of the supposedly informed minority cohort of the public, the deciders among us in business, politics, and media. For instance, the employment numbers that came out of the federal government ten days ago saying that the jobless rate is just over 5%. Everybody not in a special ed class in America knows that this is a barefaced lie. But nobody except a few mavericks on the web (see above) object to it. Lesser official oracles such as The New York Times and the Wall Street Journal report the lie without reservation and it gets absorbed into the body politic like any other morsel of protoplasm into the mindless amoeba that America has become.

Read more …

Comprehensive history of MH17 intel. US ‘intelligence’ hasn’t updated its data since July. Wonder why. Could it be that…?

US Intel Stands Pat on MH-17 Shoot-Down (Robert Parry)

Despite the high stakes involved in the confrontation between nuclear-armed Russia and the United States over Ukraine, the US intelligence community has not updated its assessment on a critical turning point of the crisis – the shooting down of Malaysia Airlines Flight 17 – since five days after the crash last July 17, according to the office of the Director of National Intelligence. On Thursday, when I inquired about arranging a possible briefing on where that US intelligence assessment stands, DNI spokesperson Kathleen Butler sent me the same report that was distributed by the DNI on July 22, 2014, which relied heavily on claims being made about the incident on social media. So, I sent a follow-up e-mail to Butler saying: “are you telling me that US intelligence has not refined its assessment of what happened to MH-17 since July 22, 2014?”

Her response: “Yes. The assessment is the same.” I then wrote back: “I don’t mean to be difficult but that’s just not credible. US intelligence has surely refined its assessment of this important event since July 22.” When she didn’t respond, I sent her some more detailed questions describing leaks that I had received about what some US intelligence analysts have since concluded, as well as what the German intelligence agency, the BND, reported to a parliamentary committee last October, according to Der Spiegel. While there are differences in those analyses about who fired the missile, there appears to be agreement that the Russian government did not supply the ethnic Russian rebels in eastern Ukraine with a sophisticated Buk anti-aircraft missile system that the original DNI report identified as the likely weapon used to destroy the commercial airliner killing all 298 people onboard.

Butler replied to my last e-mail late Friday, saying “As you can imagine, I can’t get into details, but can share that the assessment has IC [Intelligence Community] consensus” – apparently still referring to the July 22 report. Last July, the MH-17 tragedy quickly became a lightning rod in a storm of anti-Russian propaganda, blaming the deaths personally on Russian President Vladimir Putin and resulting in European and American sanctions against Russia which pushed the crisis in Ukraine to a dangerous new level. Yet, after getting propaganda mileage out of the tragedy – and after I reported on the growing doubts within the US intelligence community about whether the Russians and the rebels were indeed responsible – the Obama administration went silent.

In other words, after US intelligence analysts had time to review the data from spy satellites and various electronic surveillance, including phone intercepts, the Obama administration didn’t retract its initial rush to judgment – tossing blame on Russia and the rebels – but provided no further elaboration either. This strange behavior reinforces the suspicion that the US government possesses information that contradicts its initial rush to judgment, but senior officials don’t want to correct the record because to do so would embarrass them and weaken the value of the tragedy as a propaganda club to pound the Russians.

Read more …

Haven’t reached the bottom of this pit by a long shot.

Petrobras Scandal Widening as Braskem Named in Morass (Bloomberg)

The staggering reach of Petroleo Brasileiro SA’s corruption scandal is getting even bigger. Braskem, Latin America’s biggest petrochemicals maker by sales, became the latest company implicated in testimony alleging it paid bribes to the state-controlled oil producer in return for contracts. While Braskem denied the accusations, its $750 million of bonds due 2024 plummeted 7.9% last week, the most among high-grade emerging-market debt. The allegations against Braskem underscore how pervasive the alleged kickbacks were in Brazil. The federal investigation has already embroiled the nation’s biggest builders and rig makers while fueling losses in the bonds of banks, the government and even a state pension fund.

“The whole scandal is damaging more and more Brazilian companies from all segments, and Braskem can be seen as the latest example,” Leonardo Kestelman, a money manager at Dinosaur Securities, said by telephone from Sao Paulo. “People just prefer to hit the sell button instead of waiting.” Sao Paulo-based Braskem denied any irregularities in its dealings with Petrobras in e-mail to Bloomberg News on March 11. “All the payments and contracts between Braskem and Petrobras followed the legal requirements and were approved in a transparent manner in accordance with the governance rules of both companies,” Braskem said. Braskem’s 6 billion reais ($1.8 billion) in cash and revolving credit facilities are enough to cover debt payments for the next 47 months, the company said.

“Braskem understands that the oscillation of its securities doesn’t reflect its credit quality,” the company said. Braskem also said that most of its revenue is tied to the dollar, which has surged against the real. Braskem paid annual bribes, initially set at $5 million, to buy crude derivatives such as naphtha and propylene at low prices from 2006 to 2012, ex-Petrobras executive Paulo Roberto Costa and admitted money launderer Alberto Youssef said in testimony published on the Supreme Court’s website on March 6.

Read more …

China prints monopoly money and has its people buy up America with it. And Australia, New Zealand etc.

A $250,000 Tour With One Aim: Get Chinese to Buy a Home

Just how confident is Los Angeles property broker Erik Coffin that he can interest Chinese clients in high-end Las Vegas villas? He’s charging $4 million a month for a quick glimpse. It isn’t just any tour. The marketing push is set to start next month for these twice-monthly journeys that cost $250,000 a pop for a seven-day, private jet and Rolls Royce-chauffeured trip to the American heartland. Eight-person groups also will be offered consultations on plastic surgery, picking the sex of a child and wealth-management.
“It’s already a win for us,” said Coffin, 42, who employs 18 Mandarin speakers, almost a third of his staff, at Gotham Corporate, which recently opened an office in Beijing Wealthy Chinese have been stocking up on overseas real estate for at least the past five years, according to SouFun, China’s biggest real estate website.

Now, entrepreneurs such as Coffin are banking on that demand to create an entirely new industry to cater to their needs – everything from websites and brokers to developers, lawyers and international marketers. “Chinese consumers used to come to us and say, ‘Where can I buy with $500,000?,’’ said Andrew Taylor, 44, who helps run Juwai.com, a four-year-old Shanghai-based real estate platform catering to Chinese clients seeking homes overseas. ‘‘Now they are looking at three or four countries at the same time.’’ Juwai, which means ‘‘Live Abroad,’’ says it has more than 4.8 million property listings in 58 nations. There’s no shortage of clients: 60% of China’s wealthiest are contemplating a move, the site says.

In Beijing, a marketing campaign sponsored by SouFun touts a 12-day ‘‘Gold-Digging U.S. tour.” The Chinese capital was also host last weekend to a three-day foreign property and immigration exhibition, the second of its kind in four months. Among destinations on offer: Portugal (“get a residence permit for the whole family”); Japan (“pass on your ownership for generations”); and the U.S. (again, “invest by one person, get a green card for the whole family”). “We used to think these buyers are local tycoons,” said Ben Liu, Shanghai-based marketing director at the American Regional Center for Entrepreneurs, which helps Chinese buyers invest in U.S. properties through the EB-5 program. “They are now entrepreneurs or higher mid-class professionals, such as doctors and engineers.”

Read more …

Five eyes squared.

Nationwide Protests In Canada To Denounce New Anti-Terror Law (RT)

Thousands of demonstrators have united across Canada to take action against proposed anti-terrorism legislation known as Bill C-51, which would expand the powers of police and the nation’s spy agency, especially when it comes to detaining terror suspects. Organizers of the ‘Day of Action’ said that “over 70 communities” across Canada were planning to participate on Saturday, according to StopC51.ca. The biggest gatherings were reported in Montreal, Toronto, Vancouver, Ottawa and Halifax. “I’m really worried about democracy, this country is going in a really bad direction, [Prime Minister Stephen] Harper is taking it in a really bad direction,” protester Stuart Basden from Toronto, the Canadian city which saw hundreds of people come out, told The Star. “Freedom to speak out against the government is probably [in] jeopardy…even if you’re just posting stuff online you could be targeted, so it’s a really terrifying bill,” Basden added.

The ruling Conservative government tabled the legislation back in January, arguing that the new law would improve the safety of Canadians. Demonstrators across the nation held signs and chanted against the bill, which they believe violates Canadian civil liberties and online privacy rights. Protester Holley Kofluk told CBC News that the legislation “lacked specificity…it’s just so much ambiguity, it leaves people open [and] vulnerable.” One of the protest organizers in Collingwood, Jim Pinkerton, shared with QMI Agency that he would like to see the Canadian government “start over with Bill C-51 with proper safeguards and real oversight.” “We need CSIS to be accountable. It’s not OK for CSIS to act as the police, which is what’s indicated in Bill C-51. We need accountability and Canadians deserve that,” Pinkerton said.

Read more …

Yay! New nukes!

Nuclear Expert Arnie Gundersen Warns Of ‘Chernobyl On Steroids’ In UK (Ind.)

An American nuclear expert has warned that Westinghouse’s proposed reactor for Cumbria needs a $100m (£68m) filter to safeguard against a leak that would turn the region into “Chernobyl on steroids”. Arnie Gundersen lifted the lid on safety violations at a nuclear firm in 1990 – he claimed to have found radioactive material in a safe – and was CNN’s resident expert during the Fukushima nuclear disaster in Japan in 2011. Mr Gundersen told The Independent that he is concerned by designs for three reactors proposed for a new civil nuclear plant in Cumbria. A nuclear engineering graduate by background, Mr Gunderson believes that the AP1000, designed by the US-based giant Westinghouse, is susceptible to leaks.

The reactor has been selected for the proposed £10bn Moorside plant, a Toshiba-GDF Suez joint venture that will power six million homes. It is going through an approval process with the Office for Nuclear Regulation (ONR). Mr Gundersen, who visited the Sellafield nuclear facility in Cumbria last week, warned that any leak would be like “Chernobyl on steroids”, referring to the 1986 nuclear disaster that killed 28 workers within four months. He passed on some of these fears to MPs at an event in Parliament during his visit to the UK. He said: “Evacuation of Moorside would have to be up to 50 miles. You could put a filter on the top of the AP1000 to trap the gases – that would cost about $100m, which is small potatoes. “If this leaks it would be a leak worse than the one at Fukushima. Historically, there have been 66 containment leaks around the world.”

Read more …

Good.

Great Barrier Reef Wins Protection With Ban on Waste Dumping (Bloomberg)

Australia will ban companies from dumping waste in the Great Barrier Reef marine park, a victory for environmental groups that have long campaigned to protect the World Heritage-listed area. The entire 345,000 square kilometer (133,200 square mile) park will be protected under the plan to stop the disposal of dredging waste, Environment Minister Greg Hunt said Monday. “Improving the Great Barrier Reef’s health and resilience requires governments and the community to work together,” Hunt said in a statement. The move will ensure the reef “remains one of the most biologically diverse places on Earth,” he said.

Environmental groups have campaigned against dredge dumping near the reef and last year lodged a legal challenge after North Queensland Bulk Ports Corp. was given the right to dispose of spoil from a coal port expansion at sea. Ports Australia said in a statement Monday the ban would threaten the nation’s economy and the long-term viability of ports in the northeastern state of Queensland. The government has “allowed misguided activism aimed at closing down Australian coal exports” to influence policy, Ports Australia CEO David Anderson said.

Read more …

And counting.

Earth Has Exceeded Four Of The Nine Limits For Hospitable Life (Ind.)

Humanity has raced past four of the boundaries keeping it hospitable to life, and we’re inching close to the remaining five, an Earth resilience strategist has found. In a paper published in Science in January 2015, Johan Rockström argues that we’ve already screwed up with regards to climate change, extinction of species, addition of phosphorus and nitrogen to the world’s ecosystems and deforestation. We are well within the boundaries for ocean acidification and freshwater use meanwhile, but cutting it fine with regards to emission of poisonous aerosols and stratospheric ozone depletion. “The planet has been our best friend by buffering our actions and showing its resilience,” Rockström said. “But for the first time ever, we might shift the planet from friend to foe.”

Rockström came up with the boundaries in 2007, and since then the concentration of greenhouse gases in the atmosphere has risen to around 400 parts per million (the ‘safe’ boundary being 350 parts per million), risking high temperatures and sea levels, droughts and floods and other catastrophic climate problems. The research echoes a recent debate over whether the Earth has moved from the Holocene epoch to a new one scientists are calling the Anthropocene, named after the substantial effect mankind has had on the Earth’s crust. It’s not all doom and gloom though. “Ours is a positive, not a doomsday, message,” Rockström insisted. He is confident that we can step back within some of the boundaries, for example through slashing carbon emissions and boosting agricultural yields in Africa to soothe deforestation and biodiversity loss. “For the first time, we have a framework for growth, for eradicating poverty and hunger, and for improving health,” he said.

Read more …

Mar 012015
 
 March 1, 2015  Posted by at 12:58 pm Finance Tagged with: , , , , , , ,  4 Responses »


NPC K & W Tire Co. Rainier truck, Washington, DC 1919

Forget All Our Other Troubles – The Russians Are Coming! (Neil Clark)
What Is Money And How Is It Created? (Steve Keen)
Humiliated Greece Eyes Byzantine Pivot As Crisis Deepens (AEP)
Poll Surge For Alexis Tsipras’ Syriza As Greeks Learn To Smile Again (Guardian)
Greece’s Lenders Skeptical On New Bills But Focus On Funding Needs (Kathimerini)
Greece To Prioritize IMF Repayments But Wants Talks On ECB-held Bonds (AP)
Schäuble Softens Tone On Greece and Varoufakis (AFP)
Greek PM Accuses Spain, Portugal of Anti-Athens ‘Axis’ (Reuters)
Eurozone Negative-Yield Bond Universe Expands to $1.9 Trillion (Bloomberg)
US Cuts Off Student-Loan Collectors for Misleading Debtors (Bloomberg)
Shadow Banking Shrinks to Least Since 2000 as Liquidity Declines (Bloomberg)
Fed Independence Is A Joke, So Why Not Audit? (Freedomworks)
China Factory Sector Still Shrinking, Official PMI Shows (Reuters)
Crude Price Shock Sends Canadian Oil Service Companies Into Whirlwind (RT)
Ukraine Pays Gazprom $15 Million For 24 Hours Worth Of Gas (RT)
Mass Anti-Immigration Rally In Rome (BBC)
Uruguay Bids Farewell To Jose Mujica, Its Pauper President (BBC)
Why Iceland Banned Beer 100 Years Ago (BBC)

“..the BBC News website ran an article entitled “How to spot a Russian bomber.” I printed the guide out and thanks to it I was able to rule out the possibility that the plane flying over my local playing fields was a Tupolev Tu-22M3 and was able to sleep easily in my bed that night..”

Forget All Our Other Troubles – The Russians Are Coming! (Neil Clark)

The gap between the rich and the poor continues to grow. Train and bus fares continue to rise. Twice as many people are living in poverty than 30 years ago. And our National Health Service is being privatized before our very eyes. But hey – we Brits must forget about all those things – because there’s something far more important to worry about. The Russians are coming! That “sinister tyrant” Vladimir Putin, doesn’t’ just threaten the whole of Ukraine – and the Baltic States – but even poses a “threat” to Britain too! This simply must be true (says author, tongue firmly in cheek), because the claims are being made by prominent members of the British political and media establishment – you know the same bunch who in 2003 told us Iraq had WMDs, who in 2011 told us that toppling Gaddafi was a great idea, and who in 2013 wanted us to bomb Syria and topple a secular government that was fighting ISIS.

UK Defense Secretary Michael Fallon (who voted for the Iraq war in 2003), raised the specter last week of Putin targeting the Baltic States. “I’m worried about Putin. I’m worried about his pressure on the Baltics, the way he is testing NATO,” Fallon said. “It’s a very real and present danger,” the Minister went on, just in case we still didn’t appreciate the Russian ‘threat’. “He (Putin) flew two Russian bombers down the English Channel two weeks ago. We had to scramble jets very quickly to see them off. It’s the first time since the height of the Cold War; it’s the first time that’s happened.” Sir Adrian Bradshaw, the NATO Deputy Supreme Commander in Europe, went even further than Fallon, saying that “the threat from Russia” represented “an existential threat to our whole being.”

Meanwhile, the former Air Chief Marshall Lord Jock Stirrup raised the horrifying prospect that civilian planes containing holidaymakers could be brought down by Russian jets. In case these warnings weren’t enough to give us palpitations the so-called Russophobic hack pack – the group of mutually-adoring propagandists who obsess about Russia – weighed in to reinforce the message that we all ought to be jolly scared about Putin. [One] commenter provided useful advice on “How to stop Putin nuking us all” (which includes blocking RT). While ordinary people in Britain struggle to make ends meet, for theelite, the big burning question of the day is not “What can we do to reduce bus and train fares?” but “How can we can deal with the Russian ‘threat?’”.

“Can the UK handle the Bear threat from Russia? “asked the Independent. “With bad guys about, you can’t ignore defense” was the title of one comment piece in Rupert Murdoch’s Times. “Putin’s war on the West” was the cover story of the Economist. “As Ukraine suffers, it is time to recognize the gravity of the Russian threat – and to counter it.. The EU and NATO are Mr. Putin’s ultimate targets.” Very helpfully, amid all these concerns, the BBC News website ran an article entitled “How to spot a Russian bomber.” I printed the guide out and thanks to it I was able to rule out the possibility that the plane flying over my local playing fields was a Tupolev Tu-22M3 and was able to sleep easily in my bed that night.

Read more …

And now you know!

What Is Money And How Is It Created? (Steve Keen)

[..] Only one person ever really did work out what money really is.—and no, it wasn’t Ayn Rand. It was Augusto Graziani, an Italian Professor of Economics, who died early last year. He understood what money is because he posed and correctly answered a simple question: how does a monetary economy differ from one in which trade occurs by barter? This ruled out gold being money, since gold is a commodity that anyone can produce for themselves with a bit of mining (and a lot of luck). So even though gold is really special and incredibly rare, it is in the end, a commodity: an economy using gold for trade is really a barter economy, not a monetary one. As Graziani put it:

a true monetary economy is inconsistent with the presence of a commodity money. A commodity money is by definition a kind of money that any producer can produce for himself. But an economy using as money a commodity coming out of a regular process of production, cannot be distinguished from a barter economy. A true monetary economy must therefore be using a token money, which is nowadays a paper currency. [He wrote this in 1989, before our modern electronic money system had developed]

That doesn’t rule out a world in which gold is used as the basis for commerce of course: it just says that that’s not a monetary economy. Those who say we’d be better off “going back to gold” are really saying that they don’t like a monetary economy, and reckon we would be better off in a barter economy instead. Identifying money as a paper token wasn’t enough, however, since there are some paper tokens—such as a “bill of exchange”—which are used in transactions, but leave a debt obligation between the buyer and the seller. An economy using bills of exchange was not a monetary economy, Graziani argued, but a credit economy:

If in a credit economy at the end of the period some agents still owe money to other ones, a final payment is needed, which means that no money has been used.

So to be money, the token given in exchange for a good must be accepted as a final payment—but this carried the danger that whoever produced the token might be able to “get something for nothing”. In an ideal system, this had to be ruled out as well.

This gave Graziani three basic conditions that had to be met for something to be called “money”:

a) money has to be a token currency (otherwise it would give rise to barter and not to monetary exchanges);

b) money has to be accepted as a means of final settlement of the transaction (otherwise it would be credit and not money);

c) money must not grant privileges of seignorage to any agent making a payment.

Read more …

“The euro is more than just money. It is talismatic for the Greeks. It was only when we joined the euro that we felt truly European. There was always a nagging doubt before.. ”

Humiliated Greece Eyes Byzantine Pivot As Crisis Deepens (AEP)

Greece’s new currency designs are ready. The green 50 drachma note features Cornelius Castoriadis, the Marxisant philosopher and sworn enemy of privatisation. The Nobel poet Odysseus Elytis – voice of Eastward-looking Hellenism – honours the 200 note. The bills rise to 10,000 drachma, a wise precaution lest there is a hyperinflationary shock as Greece breaks out of its debt-deflation trap at high velocity. The amateur blueprints are a minor sensation in Greek artistic circles. They are only half in jest. Greece’s Syriza radicals have signed a fragile ceasefire with the eurozone’s creditor powers. Few think this can last as escalating deadlines reach their kairotic moment in June. Each side has agreed to a deception with equal cynicism, knowing that the interim deal evades the true nature of Greece’s crisis and cannot bridge the immense political divide.

They have bought time, but not much. “I am the finance minister of a bankrupt country,” says Yanis Varoufakis, the rap-artist Keynesian with a mission to correct all of Europe’s economic ills. First he has to deal with his own liquidity crisis. Tax arrears have reached €74bn, rising by €1.1bn a month. “This isn’t tax evasion. These are normal people who can’t pay because they are in distress,” he told the Telegraph. The Greek Orthodox Church is struggling to pick up the pieces. “The local councils can’t cope, so people come to us for food,” said Father Nicolaos of St Panourios parish in a working-class district of West Athens. “We’re feeding 270 people and it is getting worse every day. Today we discovered three young children going through rubbish bins for food. They are living in a derelict building and we have no idea who they are,” he said, sitting in a cramped office packed with bags of bread and supplies.

“We rely on donations from the local bakery. If we run out of beans or lentils, I put out a call, and everybody brings in what they can. There is this spirit of solidarity because nobody feels immune,” he said. His poor parish in Drapetsova was built by refugees from Smyrna and Pontus, victims of the “Catastrophe” in 1922, when ethnic cleansing extinguished the ancient Greek communities of Asia Minor. He lovingly showed me the historic icons and prayer books they hauled with them in wagons, now in the church basement. The utility companies have been cutting off the electricity as arrears rise – and sometimes the water too – leaving 300,000 Greeks in the dark. “They come and ask for candles. They can’t use their fridge. They can’t cook. Their children can’t do their homework,” he said. It is almost a description of a failed state.

Restoring electricity is the first order of business in Syriza’s “Thessaloniki programme”, along with food stamps, a halt to property foreclosures, and a month’s extra pension for the less affluent. Father Nicolaos urged Syriza to stand its ground. “Yes, we Greeks played our own part in our downfall, but Europe played its part too. We must not sell out at any cost, or sell our monuments to pay our debts. We must fight,” he said. Syriza has a peculiar mandate. The Greeks voted for defiance, and also to stay in the euro, two objectives that are hard to reconcile. Views are divided over which emotion runs deeper, therefore which way the inscrutable Alexis Tsipras will pivot. The boyish prime minister has yet to show his hand. “When it comes to the choice, I fear Tsipras will abandon our programme rather than give up the euro,” said one Syriza MP, glancing cautiously around in case anybody was listening as we drank coffee in the “conspiracy” canteen of the Greek parliament.

“The euro is more than just money. It is talismatic for the Greeks. It was only when we joined the euro that we felt truly European. There was always a nagging doubt before,” he said. “But you can’t fight austerity without confronting the eurozone directly. You have to be willing to leave. It is going to take a long time for the party to accept this bitter reality. I think the euro was a tremendous historic mistake, and the sooner they get rid of it, the better for all the peoples of Europe, but that is not the party view,” he said.

Read more …

“They’ve given us our voice back,” “For the first time there’s a feeling that we have a government that is defending our interests.”

Poll Surge For Alexis Tsipras’ Syriza As Greeks Learn To Smile Again (Guardian)

Alexis Tsipras’ left-led government may be the bane of Europe’s political establishment, but in Greece support is soaring as Athens’ new political class negotiates the country’s economic plight. One month and three days after the tough-talking firebrand assumed power, Greeks of all political persuasions appear to like what they see. A Metron Analysis poll published on Saturday showed popularity ratings for the prime minister’s radical left Syriza party at an all-time high: from the almost 36% it won in snap polls on 25 January, support for Syriza has jumped to 47.6%, a record for a movement that only three years ago was on margins of Greek politics. In a triumphant address Tsipras attributed the surge to restored pride after five rollercoaster years of being humbled and humiliated by the debt-stricken nation’s worst economic crisis in modern times.

“The Greek people feels it is regaining the dignity that it has been doubted and denied,” the leader told Syriza’s central committee at the weekend. “From the very first day of the new [coalition] government, Greece stopped being a pariah, executing orders and enforcing memorandums,” he said, referring to the EU- and IMF-sponsored bailout accords Athens signed to keep afloat. On the street, optimism has returned. People worn down by gruelling austerity, on the back of unprecedented recession, are smiling. Government officials have taken to walking through central Athens, instead of ducking into chauffeur-driven cars to avoid protesters. Last week, finance minister Yanis Varoufakis – a maverick to many of his counterparts – was mobbed by appreciative voters as he ambled across Syntagma square.

“They’ve given us our voice back,” said Dimitris Stathokostopoulos, a prominent entrepreneur. “For the first time there’s a feeling that we have a government that is defending our interests. Germany needs to calm down. Austerity hasn’t worked. Wherever it has been applied it has spawned poverty, unemployment, absolute catastrophe.” The approval is all the more extraordinary, given the policy U-turns the anti-austerity government has been forced to make – concessions that have sparked fierce opposition within the ranks of Syriza. Faced with the reality of governing, Tsipras has dropped demands for a reduction of the country’s monumental debt; agreed to continued supervision by auditors at the EU, ECB and IMF (now named “the institutions” rather than the maligned “troika”); and abandoned pre-election pledges by promising not to take “unilateral” steps that might throw the budget off-balance.

Read more …

“We have not discussed anything with the Greek side,” a European official told Sunday’s Kathimerini..”

Greece’s Lenders Skeptical On New Bills But Focus On Funding Needs (Kathimerini)

European officials have expressed concern that the Greek government has not consulted with its partners over its plans to bring new legislation to Parliament this week but the greatest focus appears to be on how Athens will cover its immediate funding needs. “We have not discussed anything with the Greek side,” a European official told Sunday’s Kathimerini after Prime Minister Alexis Tsipras announced on Friday night that four bills would be tabled in the House this week. In a televised address to his cabinet, Tsipras said that four draft laws would be unveiled this week in order to tackle the social impact of the crisis, to introduce a new payment scheme for overdue debts to the state, to protect primary residences from foreclosures and to reopen public broadcaster ERT.

At the Eurogroup on February 20, Greece and its lenders agreed that the government would not adopt any measures unilaterally that “would negatively impact fiscal targets, economic recovery or financial stability, as assessed by the institutions.” It is not clear if Greece’s creditors believe that the bills due to be submitted to Parliament this week fall into this category but sources suggested that there is concern about the lack of of communication between Athens and its partners. However, the immediate problem that must be overcome is ensuring that the government can meet its funding needs over the next few months, starting with a €1.6 billion payment to the IMF in March.

On Saturday, Finance Minister Yanis Varoufakis went as far saying that Athens would try to negotiate the summer payment of €6.7 billion worth of Greek bonds held by the ECB. “Shouldn’t we negotiate this? We will fight it,” he told Skai TV. “If we had the money we would pay… They know we don’t have it.” Greece’s lenders, however, believe that they may be able to use this inability to pay to their advantage and pressure the government to carry out reforms before the country’s funding needs become less significant. “Now is the time that we can exercise pressure on the Greek government,” a European official told Kathimerini.

Read more …

“.. the ECB repayments are in a different league and we shall have to determine this in association with our partners and the institutions.”

Greece To Prioritize IMF Repayments But Wants Talks On ECB-held Bonds (AP)

Greece will prioritize debt repayments to the International Monetary Fund, some of which come due in March, but repayments to the European Central Bank are «in a different league» and will need discussion with Greece’s creditors, the country’s finance minister said Saturday. In an interview with The Associated Press, Yanis Varoufakis also said Athens intends to start discussions with its creditors on debt rescheduling in order to make the country’s massive debt sustainable, at the same time as working on reform measures that need to be cemented by April, the finance minister said Saturday.

“The IMF repayments of course we are going to prioritize, we are not going to be the first country not to meet our obligations to the IMF,» the 53-year-old said, speaking in his office in the finance ministry overlooking Athens’ central square and the country’s parliament. “We shall squeeze blood out of stone if we need to do this on our own, and we shall do it.” However, “the ECB repayments are in a different league and we shall have to determine this in association with our partners and the institutions.” The ECB has always insisted on full repayment and it’s not clear they would accept a rescheduling.

Greece faces IMF repayments in March of about €1.5 billion, and about €6.7 billion to the ECB in the summer. But it is facing a cash crunch and will struggle with scheduled repayment of its debts. Athens wouldn’t ask for a delay in repayment in its ECB obligations, the minister noted, but rather something that would make the repayments easier to achieve. “I do not believe the ECB would accept a delay, but what we can do is we can package a deal that makes these repayments palatable and reasonably doable as part of our overall negotiation regarding the Greek debt, and the next … contract for growth for the Greek economy between us and the partners.”

Read more …

Almost kissed him.

Schäuble Softens Tone On Greece and Varoufakis (AFP)

German Finance Minister Wolfgang Schaeuble said Sunday Greece’s new government needs «a bit of time» but is committed to implementing necessary reforms to resolve its debt crisis. “The new Greek government has strong public support,» Schaeuble said in an interview with German newspaper Bild am Sonntag. “I am confident that it will put in place the necessary measures, set up a more efficient tax system and in the end honour its commitments. “You have to give a little bit of time to a newly elected government,» he told the Sunday paper. «To govern is to face reality.”

Schaeuble also insisted that his Greek counterpart Yanis Varoufakis, despite their policy differences, had «behaved most properly with me» and had «the right to as much respect as everyone else». mIt was a marked change in tone for the strait-laced Schaeuble, who has repeatedly exchanged barbs with Varoufakis, his virtual opposite in both style and politics, since January’s watershed Greek elections brought in an anti-austerity government. Schaeuble last week sternly warned that Greece would not receive «a single euro» until it meets the pledges of its existing €240 billion bailout programme.

But he put his weight behind a four-month extension, to the end of June, approved overwhelmingly by the German parliament on Friday after a complex compromise reached between eurozone finance ministers and Athens. In exchange, Greece has pledged to implement reforms and savings. Schaeuble reiterated the ground rules for the aid programme extension, stressing that «Greece must meet its commitments. Only then will it receive the promised aid payments.” Asked about repeated comments from the new Greek government against austerity measures and for a debt haircut, Schaeuble said that «contracts are more important than statements».

Read more …

Technocrats are sore losers.

Greek PM Accuses Spain, Portugal of Anti-Athens ‘Axis’ (Reuters)

Greece’s leftist Prime Minister Alexis Tsipras accused Spain and Portugal on Saturday of leading a conservative conspiracy to topple his anti-austerity government, saying they feared their own radical forces before elections this year. Tsipras also rejected criticism that Athens had staged a climbdown to secure an extension of its financial lifeline from the euro zone, saying anger among German conservatives showed that his government had won concessions. Greeks have directed much of their fury about years of austerity dictated by international creditors at Germany, the biggest contributor to their country’s €240 billion bailout.

But in a speech to his Syriza party, Tsipras turned on Madrid and Lisbon, accusing them of taking a hard line in negotiations which led to the euro zone extending the bailout program last week for four months. “We found opposing us an axis of powers … led by the governments of Spain and Portugal which for obvious political reasons attempted to lead the entire negotiations to the brink,” said Tsipras, who won an election on Jan. 25. “Their plan was and is to wear down, topple or bring our government to unconditional surrender before our work begins to bear fruit and before the Greek example affects other countries,” he said, adding: “And mainly before the elections in Spain.”

Spain’s new anti-establishment Podemos movement has topped some opinion polls, making it a serious threat to the conservative People’s Party of Prime Minister Mariano Rajoy in an election which must be held by the end of this year. Rajoy went to Athens less than a fortnight before the Greek election to warn voters against believing the “impossible” promises of Syriza. His appeal fell on deaf ears and voters swept the previous conservative premier from power. Portugal will also have elections after the summer but no anti-austerity force as potent as Syriza or Podemos has so far emerged there.

In an interview published before Tsipras made his speech, Prime Minister Pedro Passos Coelho denied that Portugal had taken a hard line in negotiations on the Greek deal at the Eurogroup of euro zone finance ministers. “There may have been a political intention to create this idea, but it is not true,” he told the Expresso weekly newspaper. Passos Coelho aligned himself with euro zone governments which have called for policies to promote economic growth but without trying to walk away from austerity as in Greece. “We were on the same side as the French government, with the Italian and Irish governments. I think it’s bad to stigmatize southern European countries,” he said.

Read more …

“It sounds very awkward in a sense, but if you look at it more, the central bank has a deposit rate in negative territory, and there’s a huge bond-buying program coming.”

Eurozone Negative-Yield Bond Universe Expands to $1.9 Trillion (Bloomberg)

The European Central Bank’s imminent bond-buying plan has left $1.9 trillion of the euro region’s government securities with negative yields. Germany sold five-year notes at an average yield of minus 0.08% on Wednesday, a euro-area record, meaning investors buying the securities will get less back than they paid when the debt matures in April 2020. By the next day, German notes with a maturity out to seven years had sub-zero yields, while rates on seven other euro-area nations’ debt were also negative. While some bonds had such yields as far back as 2012, the phenomenon has gathered pace since the ECB’s decision to cut its deposit rate to below zero last year. Even when investors extend maturities, and move away from the region’s core markets, returns are becoming increasingly meager.

Ireland’s 10-year yield slid below 1% for the first time this week, Portugal’s dropped below 2%, while Spanish and Italian rates also tumbled to records. “It is something that many would not have pictured a year ago,” said Jan von Gerich at Nordea Bank in Helsinki. “It sounds very awkward in a sense, but if you look at it more, the central bank has a deposit rate in negative territory, and there’s a huge bond-buying program coming. People are holding on to these bonds and so you don’t have many willing sellers.” 88 of the 346 securities in the Bloomberg Eurozone Sovereign Bond Index have negative yields, data compiled by Bloomberg show. Euro-area bonds make up about 80% of the $2.35 trillion of negative-yielding assets in the Bloomberg Global Developed Sovereign Bond Index, the data show.

Read more …

Huge disgrace. But since when would the US government take that as an insult?

US Cuts Off Student-Loan Collectors for Misleading Debtors (Bloomberg)

The U.S. Education Department, citing “inaccurate representations” to student-loan borrowers, will end debt-collection contracts with Navient and four other companies. Representatives of these companies, which pursue students who default on their loans, made misleading statements about programs that help borrowers get back on track, the agency said in a statement late Friday. The companies include Pioneer Credit Recovery, a unit of Navient, which was split off last year from SLM, commonly known as Sallie Mae, the largest U.S. education finance company. “Federal Student Aid borrowers are entitled to accurate information as they make critical choices to manage their debt,” Under Secretary Ted Mitchell said in a statement. “Every company that works for the Department must keep consumers’ best interests at the heart of their business practices by giving borrowers clear and accurate guidance.”

The government turns to 22 debt-collection companies to put the squeeze on borrowers who are defaulting on their loans. In 2012, Bloomberg News reported that the private contractors chasing these debts collected about $1 billion annually in commissions and faced growing complaints that they were insisting on stiff payments, even when borrowers’ incomes make them eligible for leniency. Pioneer said in a statement that the Education Department has conducted 17 exams since the beginning of 2014, listening to 600 phone calls, and had not raised concerns about the company’s rates of inaccurate or misleading information to borrowers. In April, it received written confirmation from the agency that its policies complied with regulation.

“We were blindsided by the Department of Education’s actions,” Pioneer said. Navient’s revenue from collecting for the Education Department totaled $65 million last year. The agency said it will “wind down” its contracts with the five companies and transfer their business to other agencies with contracts. The four other companies losing contracts are Coast Professional, Enterprise Recovery Systems, National Recoveries and West Asset Management, according to the statement. Those companies couldn’t be reached for comment after business hours. “This is a huge step forward for student loan borrowers who are too often the victims of dishonest debt-collection practices,” Maggie Thompson, campaign manager for Higher Ed, Not Debt, said in a statement. “We are happy the Department of Education protected borrowers by ending the contracts of some of the most abusive debt collectors in the business.”

Read more …

End of the Ponzi.

Shadow Banking Shrinks to Least Since 2000 as Liquidity Declines (Bloomberg)

The financing markets that grease the wheels of most debt trading have contracted to the smallest in 15 years as liquidity declines, adding to concern U.S. economic stability is at risk. The amount, known as shadow banking, was $4.13 trillion last month, down from a peak of $7.61 trillion in March 2008, according to data compiled by the Center for Financial Stability, a nonpartisan research group. The CFS measure, which includes money-market funds, repurchase agreements and commercial paper, all adjusted for the impact of inflation, is at the lowest since January 2000.

“Market finance is suffering, and it has been inextricably linked to growth in the economy and financial stability,” Lawrence Goodman, president of CFS and author of the report, said. “The fact that we are seeing bumps in varying asset classes suggests that cracks are evident in the financial system. In part, this is a direct function of limited liquidity.” Global regulators have focused on reducing the footprint of shadow banking, which was viewed as a catalyst for the collapse of Lehman Brothers Holdings Inc. in 2008 that shook markets worldwide, accelerating the financial crisis. In the process, market finance has contracted to an “excessively steep” degree that “starves financial markets from needed liquidity and is detrimental to future growth,” according to a Feb. 25 report from the CFS.

Repurchase agreements, or repos, are a source of short-term finance for banks, allowing them to use securities as collateral for short-term loans from investors such as other banks or money-market mutual funds. The amount of securities financed through a part of the market known as tri-party repo fell to an average $1.58 trillion as of Jan. 12, from $1.96 trillion in December 2012, according to data compiled by the Federal Reserve. Tighter market liquidity and a resulting surge in volatility were both on display Oct. 15, when Treasuries suddenly careened through the biggest yield fluctuations in a quarter-century without being spurred by any concrete news. While that extreme loss of liquidity in Treasuries has faded, the day-to-day dealings in 10-year Treasuries have worsened this year, according to analysis by Deutsche Bank.

Read more …

“The people – those plain people who think economics is about supply and demand rather than complicated math formulas – deserve some level of sway over the Fed’s operations..”

Fed Independence Is A Joke, So Why Not Audit? (Freedomworks)

If Janet Yellen didn’t resemble a bookwormish teetotaler, perhaps she’d join her colleagues in a toast to suppressing democratic accountability. For now, she’ll order a club soda while working vigorously to keep Congress, and thus the people, out of her business of running the country’s central bank. Yellen has only been Chair of the Federal Reserve for one year, but she’s already facing pressure to open the books from the new Congress. Leading the charge are two statesmen from Kentucky: Representative Thomas Massie and Senator Rand Paul. Both have introduced audit the Fed legislation in their respective chambers. Wall Street’s cadre of financial oligarchs are predictably up in arms over an audit of their free money machine.

Think tankers are antagonizing the campaign, with Jim Pethokoukis of the American Enterprise Institute asserting that Sen. Paul has “a poor understanding of what’s actually on the Fed balance sheet and how the bank operates.” It’s expected President Obama would veto an audit the Fed bill. Even local bankers are scaremongering over the prospect of the Fed losing autonomy. Yellen, for her part, isn’t about to let the nosy wolves in her henhouse. In a recent interview, she said she would stand “forcefully” against any audit measures. She justified her intransigence by citing the importance of “central bank independence” and being able to act without interference. Nothing says limited government and separation of powers like a bureaucracy unaccountable to the voice of the people! Then again, Yellen doesn’t care much for democratic oversight.

She’s a caricature of Randian libertarianism: someone who wants to do whatever, whenever, without rulers. The problem is Yellen isn’t operating a private railroad company. She’s the figurehead for a government institution created by Congress. If democracy means anything, it’s that voters have some measure of control over political bureaucracies. So apologies Janet, you don’t operate in a bubble (insert Fed pun here). The people – those plain people who think economics is about supply and demand rather than complicated math formulas – deserve some level of sway over the Fed’s operations. So why not an audit by the Government Accountability Office? Last I heard, President Obama was all about accountability. Yellen and company aren’t buying it. They don’t want anyone butting in on their micromanagement of the money supply. Outside observers would interfere with the Fed’s independence, which is a sacrament of the central bank.

Read more …

Bub. Ble.

China Factory Sector Still Shrinking, Official PMI Shows (Reuters)

Activity in China’s factory sector contracted for a second straight month in February on unsteady exports and slowing investment, an official survey showed on Sunday, reinforcing bets that more policy loosening is needed to lift the economy. The official Purchasing Managers’ Index (PMI) inched up to 49.9 in February from January’s 49.8, a whisker below the 50-point level that separates growth from contraction on a monthly basis. Analysts polled by Reuters had forecast a weaker reading of 49.7. A separate official services PMI, also released on Sunday, showed growth in the sector accelerated to 53.9, up from 53.7 in January. Accounting for 48% of China’s $10.2 trillion economy last year, the services sector has weathered the growth downturn better than factories, partly because it depends less on foreign demand.

The official PMIs were released shortly after China’s central bank cut interest rates late on Saturday, the latest effort to support the world’s second-largest economy as its momentum slows and deflation risks rise. The PMIs are the last official Chinese data to come out before the opening this week of the annual session of China’s legislature, where leaders will announce a growth target for 2015. The final February reading for the HSBC manufacturing PMI survey will be announced on Monday. The flash estimate showed factory growth edged up to a four-month high in February, but export orders shrank at their fastest rate in 20 months. To boost a sagging economy, China’s central bank lowered the reserve requirement – the ratio of cash that banks must set aside as reserves – in February for the first time in over two years.

That was after it had cut interest rates in November, also for the first time in more than two years. Despite the raft of stimulus moves, a newspaper owned by the central bank warned on Wednesday that China is dangerously close to slipping into deflation, highlighting the nervousness among policymakers about a sputtering economy that is not gaining speed. A housing slump, erratic growth in exports and a state-led slowdown in investment to help restructure China’s economy dragged growth to 7.4% last year – a level not seen since 1990. Reflecting China’s “new normal” of slower but better-quality growth, economists at state think-tanks with knowledge of policy discussions said the government is likely to lower its 2015 economic growth target to around 7%, from last year’s 7.5%.

Read more …

Ha. Ha.: “Customers are taking a cautious approach until there is more certainty as to when oil prices will recover..”

Crude Price Shock Sends Canadian Oil Service Companies Into Whirlwind (RT)

The crude oil price collapse has forced some Canadian oil service companies to cut their workforces, budgets, and salaries, as their energy-producing customers have been struggling with their own budget cuts and market uncertainty. Calfrac Well Services and Trican Well Service, both based out of Calgary, are two of the most recent examples of companies showing signs of a struggle amid a slowdown in drilling activity across North America. Oilfield services and hydraulic fracturing company Calfrac announced on Wednesday that it will cut over $25 million from its general and administrative costs, as it released its fourth quarter revenue report. The firm will be slashing executive salaries by around 10% and directors’ pay by 20% starting in April. Calfrac was also forced to shut down its operations in Colombia.

“As a result of the decline in crude oil prices, the company’s customers in Canada and the United States have lowered their 2015 capital budgets in the order of 20 to 40 per cent from 2014,” Calfrac’s president and chief executive, Fernando Aguilar, told analysts. The biggest concern is how cheaper crude will impact equipment utilization and pricing in 2015. “Customers are taking a cautious approach until there is more certainty as to when oil prices will recover,” Aguilar added. One of Calfrac’s biggest competitors, Trican, announced similar cuts – including slashing salaries and costs – after cutting 600 positions. All Canadian and US employees will receive a 10% cut in average compensation, according to the firm’s press release.

Oil prices have plummeted by at least 50% since the summer. The situation was made worse when OPEC opted not to cut its daily output levels in November. In reaction to new oil price projections, the Bank of Canada (BoC) unexpectedly cut its interest rate to 0.75% in January, with markets pricing in another rate cut in March. The central bank also lowered its economic growth and inflation forecasts, warning of widespread negative effects of lower oil prices on the Canadian economy. Just last week, BoC Deputy Governor Agathe Cote stressed the significance of the oil-price shock. “This shock will delay the economy’s return to full capacity by undermining both investment in the oil sector and gross domestic income,” she said, noting that personal wealth is likely to be reduced and interprovincial trade affected.

Read more …

And counting.

Ukraine Pays Gazprom $15 Million For 24 Hours Worth Of Gas (RT)

Ukraine’s Naftogaz has paid Gazprom $15 million for gas delivery. At current levels, the prepayment covers one day’s gas consumption and will be spent by Tuesday, Gazprom spokesperson Sergey Kupriyanov said. “Today at 9:20am MSK Gazprom received a payment from Ukraine’s Naftogaz in the amount of $15 million. At the current level of supply this sum will be enough roughly for one day,” he said. “If Naftogaz paid for another 24 hours, it means the resources would last through Monday till Tuesday,” he said. The relatively small prepayment suggests Kiev is buying time before trilateral talks in Brussels on march 2nd. Russian energy minister Alexander Novak had warned Kiev’s failure to pre-pay would mean a cut-off.

In a letter sent to Gazprom late Wednesday, Naftogaz said it had a total of 206 million cubic meters of Russian gas pre-paid. “The concerns and worries are caused first of all by the fact that not much prepaid gas is left. If there is no money the supplies will stop starting from Tuesday,” Russian Energy Minister Alexander Novak said. “The payment should be completed Friday so that the gas is supplied starting from Tuesday,” Novak said. “If there is no payment there will be a break in gas supplies to Ukraine. The European consumers will fully receive gas.” “We are worried about the situation with the problem of prepayment for the gas delivery. On Friday morning, the rest of the gas, prepaid by Ukraine, accounted for 123.8 mln cubic meters.

Taking into consideration the fact that on the average we supply [Ukraine] with 42 mln cubic meters, without DPR and LPR [Donetsk People’s Republic and Lugansk People’s Republic], in fact, the remains of the gas will be enough only for Friday, Saturday, and Sunday,” Novak said, according to RIA-Novosti. In a new gas standoff, deliveries to the conflict-plagued Donbass region have become a new bone of contention between Russian and Ukraine. Last week Kiev suspended deliveries to the area, citing damage to the pipeline. Russia then launched a separate gas supply to Donbass, with President Vladimir Putin saying that cutting the war zone off gas “smells like genocide.” Gazprom said Thursday it was ready to separate gas supplies to Ukraine and Donbass.

Read more …

Europe better watch out.

Mass Anti-Immigration Rally In Rome (BBC)

Thousands of supporters of Italy’s Northern League have poured into one of Rome’s biggest squares for a rally against immigration, the EU and Prime Minister Matteo Renzi’s government. League leader Matteo Salvini accused Mr Renzi of substituting the country’s interests to those of the EU. He also criticised the government’s record in dealing with Romanian truck drivers, tax, banks and big business. A large counter-demonstration against Mr Salvini was also held in Rome. Opinion polls suggest that Mr Salvini is rapidly gaining in popularity. They show him as being second only to Mr Renzi, prompting some to dub him as “the other Matteo”.

The Northern League was once a strong ally of former Prime Minister Silvio Berlusconi, but it has sought to find new allies as he struggles to shake off a tax fraud conviction that forced him out of parliament. Mr Salvini’s fiery rhetoric against the European Union, immigration and austerity politics had led to comparisons being drawn between him and French National Front leader Marine Le Pen. The counter-demonstration staged by an alliance of leftist parties, anti-racism campaigners and gay rights groups was held only a few hundred metres from the Northern League rally. Many protested under the banner “Never with Salvini”.

“The problem isn’t Renzi, Renzi is a pawn, Renzi is a dumb slave, at the disposal of some nameless person who wants to control all our lives from Brussels,” Mr Salvini told the rally at the Piazza del Popolo. He told his supporters that the prime minister was the “foolish servant” of Brussels. Mr Salvini spoke of a “different Europe, where banks count for less, and citizens and small businessmen count for more”. “I want to change Italy. I want the Italian economy to be able to move forward again, something that is obstructed by Brussels and mad European policies,” he said, describing the government’s immigration policies as “a disaster”.

Read more …

A fine man.

Uruguay Bids Farewell To Jose Mujica, Its Pauper President (BBC)

Whatever your own particular “shade” of politics, it’s impossible not to be impressed or beguiled by Jose “Pepe” Mujica. There are idealistic, hard-working and honest politicians the world over – although cynics might argue they’re a small minority – but none of them surely comes anywhere close to the outgoing Uruguayan president when it comes to living by one’s principles. It’s not just for show. Mujica’s beat-up old VW Beetle is probably one of the most famous cars in the world and his decision to forego the luxury of the Presidential Palace is not unique – his successor, Tabare Vasquez, will also probably elect to live at home. But when you visit “Pepe” at his tiny, one-storey home on the outskirts of Montevideo you realise that the man is as good as his word.

Wearing what could best be described as “casual” clothes – I don’t think he’s ever been seen wearing a tie – Mujica seats himself down on a simple wooden stool in front of a bookshelf that seems on the verge of collapsing under the weight of biographies and mementoes from his political adversaries and allies. Books are important to the former guerrilla fighter who spent a total of 13 years in jail, two of them lying at the bottom of an old horse trough. It was an experience that almost broke him mentally and which shaped his transformation from fighter to politician. “I was imprisoned in solitary [confinement] so the day they put me on a sofa I felt comfortable!” Mujica jokes. “I’ve no doubt that had I not lived through that I would not be who I am today. Prison, solitary confinement had a huge influence on me. I had to find an inner strength. I couldn’t even read a book for seven, eight years – imagine that!”

Given his past, it’s perhaps understandable why Mujica gives away about 90% of his salary to charity, simply because he “has no need for it”. A little bit grumpy to begin with, Mujcia warms to his task as he describes being perplexed by those who question his lifestyle. “This world is crazy, crazy! People are amazed by normal things and that obsession worries me!” Not afraid to take a swipe at his fellow leaders, he adds: “All I do is live like the majority of my people, not the minority. I’m living a normal life and Italian, Spanish leaders should also live as their people do. They shouldn’t be aspiring to or copying a rich minority.”

Read more …

If only Al Capone had known.

Why Iceland Banned Beer 100 Years Ago (BBC)

.. for much of the 20th Century it was unpatriotic – and illegal – to drink beer. When full prohibition became law 100 years ago, alcohol in general was frowned upon, and beer was especially out of favour – for political reasons. Iceland was engaged in a struggle for independence from Denmark at the time, and Icelanders strongly associated beer with Danish lifestyles. “The Danes were drinking eight times as much alcohol per person on a yearly basis at the time,” says historian Stefan Palsson, author of Beer: Around the World in 120 Pints. As a result, beer was “not the patriotic drink of choice”. The independence and temperance movements reinforced each other, and in 1908, four years after gaining home rule, Iceland held a referendum on a proposal to outlaw all alcohol from 1915. About 60% voted in favour. Women, who still didn’t have the vote, were vocal in their support.

“Prohibition was seen as progressive, like smoking [bans] today,” says Palsson. It didn’t take long for Prohibition to be undermined. Smuggling, home-brew and ambassadors lobbying for alcohol to oil the wheels of diplomacy all played a part. “Doctors started prescribed alcohol as medicine and they did so in huge quantities, for more or less everything. Wine if you had bad nerves, and for the heart, cognac,” says Palsson. But beer was never “what the doctor ordered”, despite the argument some put forward that it was a good treatment for malnourishment. “The head doctor put his foot down and said beer did not qualify as a medicine under any circumstances,” Palsson says.

There were other leaks in the Prohibition armour too. “Prohibition supporters complained that painters who never used to use spirits to clean their brushes were now getting litres and litres each year,” says Palsson. “So alcohol was flowing in from all directions.” Then the Spanish threatened to stop importing salted cod – Iceland’s most profitable export at the time – if Iceland did not buy its wine. Politicians bowed to the pressure and legalised red and rose wines from Spain and Portugal in 1921. Over time, support for prohibition dwindled. It had already been repealed by all the other European nations that had experimented with it (apart from the Faroe Islands) when in 1933 Icelanders voted to reverse course.

But even then the ban remained in force for beer containing more than 2.25% alcohol (about half the strength of an average-strength beer). As beer was cheaper than wines or spirits, the fear was that legalising it would lead to a big rise in alcohol abuse. The association of beer with Denmark also continued to tarnish its image in a country that only achieved full independence in 1944. However, beer remained accessible, just about, to those who really wanted it. “If you knew a fisherman, he may have had a few cases stashed in his garage – usually the cheapest and strongest beer available, often stored too long,” says Palsson Also popular, according to Ingvarsson, was tipping brennivin (burning wine), a potato-based vodka, into non-alcoholic beer – which tasted, as he puts it, “interesting and totally disgusting”.

Read more …

Feb 052015
 
 February 5, 2015  Posted by at 11:40 pm Finance Tagged with: , , , , , , , ,  13 Responses »


Harris&Ewing Washington snow scenes April 1924

With all the media focus aimed at Greece, we might be inclined to overlook – deliberately or not – that it is merely one case study, and a very small one at that, of what ails the entire world. The whole globe, and just about all of its 200+ nations, is drowning in debt, and more so every as single day passes. Not only is this process not being halted, it gets progressively, if not exponentially, worse. There are differences between countries in depth, in percentages and other details, but at this point these seem to serve mostly to draw attention away from the ghastly reality. ‘Look at so and so, he’s doing even worse than we are!’

Still, though there are plenty accounting tricks available, you’d be hard put to find even one single nation of any importance that could conceivably ever pay back the debt it’s drowning in. That’s why we’re seeing the global currency war slash race to the bottom of interest rates.

Greece is a prominent example, though, simply because it’s been set up as a test case for how far the world’s leading politicians, central bankers, bankers as well as the wizards behind the various curtains are prepared to go. And that does not bode well for you either, wherever you live. Greece is a test case: how far can we go?

And I’ve made the comparison before, this is what Naomi Klein describes happened in South America, as perpetrated by the Chicago School and the CIA, in her bestseller Shock Doctrine. We’re watching the experiment, we know the history, and we still sit our asses down on our couches? Doesn’t that simply mean that we get what we deserve?

Here’s McKinsey’s debt report today via Simon Kennedy at Bloomberg:

A World Overflowing With Debt

The world economy is still built on debt. That’s the warning today from McKinsey’s research division which estimates that since 2007, the IOUs of governments, companies, households and financial firms in 47 countries has grown by $57 trillion to $199 trillion, a rise equivalent to 17 percentage points of gross domestic product.

While not as big a gain as the 23 point surge in debt witnessed in the seven years before the financial crisis, the new data make a mockery of the hope that the turmoil and subsequent global recession would put the globe on a more sustainable path. Government debt alone has swelled by $25 trillion over the past seven years and developing economies are responsible for almost half of the overall gain. McKinsey sees little reason to think the trajectory of rising leverage will change any time soon. Here are three areas of particular concern:

1. Debt is too high for either austerity or growth to cure. Politicians will instead need to consider more unorthodox measures such as asset sales, one-off tax hikes and perhaps debt restructuring programs.

2. Households in some nations are still boosting debts. 80% of households have a higher debt than in 2007 including some in northern Europe as well as Canada and Australia.

3. China’s debt is rising rapidly. Thanks to real estate and shadow banking, debt in the world’s second-largest economy has quadrupled from $7 trillion in 2007 to $28 trillion in the middle of last year. At 282% of GDP, the debt burden is now larger than that of the U.S. or Germany. Especially worrisome to McKinsey is that half the loans are linked to the cooling property sector.

Note: Chinese total debt rose $20.8 trillion in 7 years, or 281%. And we’re talking about Greece as a problem?! You’d think – make that swear – that perhaps Merkel and her ilk have bigger fish to fry. But maybe they just don’t get it?!

Ambrose has this earlier today, just let the numbers sink in:

Devaluation By China Is The Next Great Risk For A Deflationary World

China is trapped. The Communist authorities have discovered, like the Japanese in the early 1990s and the US in the inter-war years, that they cannot deflate a credit bubble safely. A year of tight money from the People’s Bank and a $250bn crackdown on shadow banking have pushed the Chinese economy close to a debt-deflation crisis. Wednesday’s surprise cut in the Reserve Requirement Ratio (RRR) – the main policy tool – comes in the nick of time. Factory gate deflation has reached -3.3%.

The official gauge of manufacturing fell below the “boom-bust” line to 49.8 in January. Haibin Zhu, from JP Morgan, says the 50-point cut in the RRR from 20% to 19.5% injects roughly $100bn into the system. This will not, in itself, change anything. The average one-year borrowing cost for Chinese companies has risen from zero to 5% in real terms over the past three years as a result of falling inflation.

UBS said the debt-servicing burden for these firms has doubled from 7.5% to 15% of GDP. Yet the cut marks an inflection point. There will undoubtedly be a long series of cuts before China sweats out its hangover from a $26 trillion credit boom. Debt has risen from 100% to 250% of GDP in eight years. By comparison, Japan’s credit growth in the cycle preceding its Lost Decade was 50% of GDP.

Wednesday’s trigger was an amber warning sign in the jobs market. The employment component of the manufacturing survey contracted for the 15th month. Premier Li Keqiang targets jobs – not growth – and the labour market is looking faintly ominous for the first time. Unemployment is supposed to be 4.1%, a make-believe figure. A joint study by the IMF and the International Labour Federation said it is really 6.3% [..]

Whether or not you call it a hard-landing, China is struggling. Home prices fell 4.3% in December. New floor space started has slumped 30% on a three-month basis. This packs a macro-economic punch. A study by Jun Nie and Guangye Cao for the US Federal Reserve said that since 1998 property investment in China has risen from 4% to 15% of GDP, the same level as in Spain at the peak of the “burbuja”. The inventory overhang has risen to 18 months compared with 5.8 in the US.

The property slump is turning into a fiscal squeeze since land sales make up 25% of local government money. Zhiwei Zhang, from Deutsche Bank, says land revenues crashed 21% in the fourth quarter of last year. “The decline of fiscal revenue is the top risk in China and will lead to a sharp slowdown,” he said.

Asia is already in a currency cauldron, eerily like the onset of the 1998 crisis. The Japanese yen has fallen by half against the Chinese yuan since Abenomics burst upon the Pacific Rim. Japanese exporters pocketed the windfall gains of devaluation at first to boost margins. Now they are cutting prices to gain export share, exporting deflation.

This is eroding the wafer-thin profit margins of Chinese companies and tightening monetary conditions into the downturn. David Woo, from Bank of America, says Beijing may be forced to join the currency wars to defend itself, even though this variant of the “Prisoner’s Dilemma” leaves everybody worse off. “We view a meaningful yuan devaluation as a major tail-risk for the global economy,” he said.

If this were to happen, it would send a deflationary impulse worldwide. China spent $5 trillion on fixed investment last year, more than Europe and America combined, increasing its overcapacity in everything from shipping to steels, chemicals and solar panels , to even more unmanageable levels. A yuan devaluation would dump this on everybody else. Such a shock would be extremely hard to combat. Interest rates are already zero across the developed world. Five-year bond yields are negative in six European countries. The 10-year Bund has dropped to 0.31. These are no longer just 14th century lows. They are unprecedented.

[..] .. helicopter money, or “fiscal dominance”, may be dangerous, but not nearly as dangerous as the alternative. China faces a Morton’s Fork. Li Keqiang has been trying for two years to tame the state’s industrial behemoths, and trying to wean the economy off credit. Yet virtuous intent has run into cold reality. It cannot be done. China passed the point of no return five years ago.

That ain’t nothing to laugh at. But still, Malcolm Scott has more for Bloomberg:

Pushing on a String? Two Charts Showing China’s Dilemma

Is China’s latest monetary easing really going to help? While economists see it freeing up about 600 billion yuan ($96 billion), that assumes businesses and consumers want to borrow. This chart may put some champagne corks back in. It shows demand for credit is waning even as money supply continues its steady climb.

The reserve ratio requirement cut “helps to raise loan supply, but loan demand may remain weak,” said Zhang Zhiwei, chief China economist at Deutsche Bank. “We think the impact on the real economy is positive, but it is not enough to stabilize the economy.” This chart may also give pause. It shows the surge in debt since 2008, which has corresponded with a slowdown in economic growth.

Note: Social finance is, to an extent, just another word for shadow banking.

“Monetary stimulus of the real economy has not worked for several years,” said Derek Scissors, a scholar at the American Enterprises Institute in Washington who focuses on Asia economics. “The obsession with monetary policy is a problem around the world, but only China has a money supply of $20 trillion.”

China now carries $28 trillion in debt, or 282% of its GDP, $20 trillion of which was added in just the past 7 years. It’s also useful to note that it boosted its money supply to $20 trillion. What part of these numbers includes shadow banking, we don’t know – even if social finance can be assumed to include an X amount of shadow funding-. However, there can be no doubt that China’s real debt burden would be significantly higher if and when ‘shadow debt’ would be added.

Ergo: whether it’s tiny Greece, or behemoth China, or any given nation in between, they’re all in debt way over their heads. One might be tempted to ponder that debt restructuring would be worth considering. A first step towards that would be to look at who owes what to whom. And, of course, who profits. When it comes to Greece, that’s awfully clear, something you may want to consider next time you think about who’s squeezing who. From the Jubilee Debt Campaign through Telesur:

That doesn’t leave too many questions, does it? As in, who rules this blue planet?! That also tells you why there won’t be any debt restructuring, even though that is exactly what this conundrum calls for. Debt is a power tool. Debt is how the Roman Empire managed to stretch its existence for many years, as it increasingly squeezed the periphery. And then it died anyway. Joe Stiglitz gives it another try, and in the process takes us back to Greece:

A Greek Morality Tale: We Need A Global Debt Restructuring Framework

At the international level, we have not yet created an orderly process for giving countries a fresh start. Since even before the 2008 crisis, the UN, with the support of almost all of the developing and emerging countries, has been seeking to create such a framework. But the US is adamantly opposed; perhaps it wants to reinstitute debtor prisons for over indebted countries’ officials (if so, space may be opening up at Guantánamo Bay).

The idea of bringing back debtors’ prisons may seem far-fetched, but it resonates with current talk of moral hazard and accountability. There is a fear that if Greece is allowed to restructure its debt, it will simply get itself into trouble again, as will others. This is sheer nonsense. Does anyone in their right mind think that any country would willingly put itself through what Greece has gone through, just to get a free ride from its creditors?

If there is a moral hazard, it is on the part of the lenders – especially in the private sector – who have been bailed out repeatedly. If Europe has allowed these debts to move from the private sector to the public sector – a well-established pattern over the past half-century – it is Europe, not Greece, that should bear the consequences. Indeed, Greece’s current plight, including the massive run-up in the debt ratio, is largely the fault of the misguided troika programs foisted on it. So it is not debt restructuring, but its absence, that is “immoral”.

There is nothing particularly special about the dilemmas that Greece faces today; many countries have been in the same position. What makes Greece’s problems more difficult to address is the structure of the eurozone: monetary union implies that member states cannot devalue their way out of trouble, yet the modicum of European solidarity that must accompany this loss of policy flexibility simply is not there.

You can put it down to technical or structural issues, but down the line none of that will convince me. Who cares about talking about technical shit when people are suffering, without access to doctors, and/or dying, in a first world nation like Greece, just so Angela Merkel and Mario Draghi and Jeroen Dijsselbloem can get their way?

Oh, no, wait, that graph there says it’s not them, it’s Wall Street that gets their way. It’s the world’s TBTF banks (they gave themselves that label) that get to call the shots on who lives in Greece and who does not. And they will never ever allow for any meaningful debt restructuring to take place. Which means they also call the shots on who lives in Berlin and New York and Tokyo and who does not. Did I mention Beijing, Shanghai, LA, Paris and your town?

Greece’s problem can only be truly solved if large scale debt restructuring is accepted and executed. But that would initiate a chain of events that would bring down the bloated zombie that is Wall Street. And it just so happens that this zombie rules the planet.

We are all addicted to the zombie. It allows us to fool ourselves into thinking we are doing well – well, sort of -, but the longer term implications of that behavior will be devastating. We’re all going to be Greece, that’s inevitable. It’s not some maybe thing. The only thing that keeps us from realizing that is that the big media outlets have become part of the same industry that Wall Street, and the governments it controls, have full control over.

And that in turn says something about the importance of what Yanis Varoufakis and Syriza are trying to accomplish. They’re taking the battle to the finance empire. And it should not be a lonely fight. Because if the international Wall Street banks succeed in Greece, some theater eerily uncomfortably near you will be next. That is cast in stone.

As for the title, it’s obviously Marquez, and what better link is there than Wall Street and cholera?

Jan 162015
 
 January 16, 2015  Posted by at 11:36 am Finance Tagged with: , , , , , , , , ,  6 Responses »


Earl Theisen Walt Disney oiling scale model locomotive at home in LA Sep 1951

Swiss Mess Could Make Oil Plunge Seem Like Minor Hiccup (MarketWatch)
World Deflationary Forces Have Swept Away Switzerland’s Defences (AEP)
Switzerland Shows The Era Of Central Bank Omnipotence Is Over (Krasting)
Swiss Franc Move Cripples, Wipes Out Currency Brokers (WSJ)
Wall Street Is Bracing For Shock Waves From Swiss Franc Move (MarketWatch)
Franc’s Surge Ranks Among Largest Ever in Foreign Exchange (Bloomberg)
Swiss Bankers Are Accelerating the Euro’s Slide (Bloomberg)
In Praise Of Price Discovery – The Market Is Off Its Lithium (David Stockman)
Iran Lowers Oil Price for Budget to $40 After Collapse (Bloomberg)
BP Sees $50 Oil For Three Years (BBC)
$50 Oil Is The Ceiling For A Much Lower Trading Range (Anatole Kaletsky)
Big Oil Gets Serious With Cost Cuts on Worst Slump Since 1986 (Bloomberg)
Schlumberger Cuts 9,000 Jobs as Oil Slump Portends Uncertainty (Bloomberg)
Aberdeen, The Energy-Rich Town Counting The Cost Of The New Oil Shock (Guardian)
Greek Systemic Banks Request Emergency Liquidity Assistance (Kathimerini)
No Risk Of ‘Deflation Spiral’ In Europe: German Minister (CNBC)
UK Retailers ‘Throttled’ By Black Friday (Daily Mail)
Warning: China May Trigger Fresh Rout In Commodities (CNBC)
China Shadow Banking Surge Chills Stimulus Hopes (CNBC)
New Russian/Chinese Credit Rating Agencies To ‘Balance Big Three’ (RT)
Ukraine President Poroshenko Signs Decree To Mobilize Up To 100,000 (TASS)
‘Corporate Wolves’ Will Exploit TTIP Trade Deal, MPs Warned (Guardian)
Pope Francis Says Freedom Of Speech Has Limits (BBC)

Anything could blow now.

Swiss Mess Could Make Oil Plunge Seem Like Minor Hiccup (MarketWatch)

One day, it’s gold. The next, it’s equities. Most days, it’s crude. On Wednesday, it was copper. On Thursday it was the Swiss franc and Swiss stocks. And the move in those two makes those others look like minor-league hiccups. While you were sleeping, all hell broke loose in Switzerland, as the central bank ditched its currency cap against the euro after four years and slashed interest rates to negative 0.75%. The Swiss franc is rallying wildly, while the Swiss stock market is cratering and U.S. stock futures are mostly on the losing side as investors figure out this latest shock to the markets Meanwhile, collapsing oil is claiming its next batch of victims. Apache just became the first, and certainly not the last, big-name oil producer to cut a notable number of jobs. And Calgary is suffering through it’s worst decline in home prices in almost two years. Airlines stocks aren’t even benefiting anymore.

So where’s that cheap oil upside? Perhaps, it’s in the opportunity created in solar stocks. The best thing that can be said about oil at this point is that, hey, at least it’s not bitcoin. Or the ruble. More fallout to come if $50 does, indeed, turn out to be a ceiling and if, as Goldman Sachs says, prices fall below the bank’s $39 target.

Read more …

Ambrose gets it right: deflation.

World Deflationary Forces Have Swept Away Switzerland’s Defences (AEP)

The Swiss National Bank has lost control. It is the latest in a list of venerable central banks to be overwhelmed by deflationary forces and global economic disorder. The country is already in deflation. The Swiss franc ended Thursday 13% higher after the SNB abandoned its three-year efforts to defend a currency floor of 1.20 to the euro. “We have a free exchange rate once again,” said the SNB’s president, Thomas Jordan. Indeed, but nobody is fooled by the SNB’s attempt to spin this as benign. “This is a huge hit to their credibility,” said Deutsche Bank. The official statement claimed that the exchange floor is no longer needed and that “overvaluation has decreased as a whole since the introduction of the minimum exchange rate”. This is eyewash. “They have had to throw in the towel. They couldn’t hold the line anymore,” said David Owen, from Jefferies Fixed Income.

“This is going to cause extreme pain for parts of the Swiss economy but SNB are trapped.” The franc has been level over the past year on a trade-weighted basis. Even before Thursday morning’s events, the exchange rate was 25% above its decade-long average. It is now 40% higher. Just one month ago the SNB argued in its quarterly report that currency floor was imperative to stop Switzerland relapsing back into deflation. “In view of heightened deflation risks, the minimum exchange rate remains the key instrument for ensuring appropriate monetary conditions. A further appreciation of the Swiss franc would have a major impact on salary and price structures. Companies in Switzerland would be forced to cut costs drastically again to remain competitive.” The statement was true then. The threat is much greater now, made all too clear by the howls of protest this morning from the Swiss export sector.

Nick Hayek, head of Swatch Group, said the collapse of the floor would cause havoc. “Words fail me. Today’s SNB action is a tsunami; for the export industry and for tourism, and for the entire country,” he said. The Swiss economy has been muddling through over the past year but the output gap is still -1% of GDP, inflation is negative and the KOF index of business sentiment has been slipping lower for two years. On top of this, the country now has to grapple with the likely hangover from its own domestic credit bubble. The SNB’s Mr Jordan said the end of an exchange floor inevitably requires subterfuge. “You can only end a policy like this by surprise. It is not something you can debate for weeks,” he said. That may be true. Less justifiable is the failure to come clean after the event and explain exactly why the SNB now judges the damage of eternal currency intervention to be even more dangerous than the threat of a systemic deflationary shock. We are left guessing.

Read more …

It was always but an illusion, though.

Switzerland Shows The Era Of Central Bank Omnipotence Is Over (Krasting)

I wrote about the Swiss National Bank being forced to abandon its currency peg to the Euro on 12/3/14, 12/8/14 and 1/11/15. That said, I’m blown away that this has happened today. Thomas Jordan, the head of the SNB has repeatedly said that the Franc peg would last forever, and that he would be willing to intervene in “Unlimited Amounts” in support of the peg. Jordan has folded on his promise like a cheap suit in the rain. When push came to shove, Jordan failed to deliver. The Swiss economy will rapidly fall into recession as a result of the SNB move. The Swiss stock market has been blasted, the currency is now nearly 20% higher than it was a day before. Someone will have to fall on the sword, the arrows are pointing at Jordan.

The dust has not settled on this development as of this morning. I will stick my neck out and say that the failure to hold the minimum rate will result in a one time loss for the SNB of close to $100B. That’s a huge amount of money. It comes to 20% of the Swiss GDP! If this type of loss were incurred by the US Fed it would result in a loss in excess of $2 Trillion! In the coming days and weeks there will be more fallout from the SNB disaster. There will be reports of big losses and gains from today’s events. But that is a side show to the real story. We have just witnesses the collapse of a promise by a major central bank. The Fed, Bank of Japan, ECB, SNB and other Central Banks have repeatedly made the same promises over the past half decade:

Don’t worry! We are here. We will do anything it takes to achieve the stability we desire. We are stronger than the markets. We can overwhelm all forces. We will never let go – just trust us!

I never believed in these promises, but the vast majority of those who are active in financial markets did. The entire world has signed onto the notion that Central Banks are all powerful. We now have evidence that they are not. Anyone who continues to believes in the All Powerful CB after today is a fool. Those who believed in Jordan’s promises now have red ink on their hands – lots of it! The next central bank that will come into the market’s cross hairs is the ECB. Mario Draghi has made promises that he would “Do anything – in any amount”. Like I said, you would be a fool to continue to believe in that promise as of this morning. We’ve just taken a huge leap into chaos. The linchpin of the capital markets has been the trust in the CBs. The market’s anchors have now been tossed overboard.

Read more …

“Where a client cannot cover this loss, it is passed on to us. This has forced Alpari (UK) Limited to confirm…that it has entered into insolvency ..”

Swiss Franc Move Cripples, Wipes Out Currency Brokers (WSJ)

A major U.S. currency broker warned its equity was wiped out, a U.K. retail broker entered insolvency and a global foreign-exchange trading house failed after suffering big losses sparked by the Swiss central bank’s move to free up its currency. On Friday, regulators in Japan, Hong Kong, Singapore and New Zealand sought information from brokers about what happened. In Japan, the Finance Ministry was checking on trading firms after industry sources said the country’s army of mom-and-pop foreign exchange traders suffered big losses. The losses were caused when liquidity dried up and volatility spiked in the debt-driven foreign exchange market, making it impossible for brokers to execute trades as losses spiraled. Many of these brokers offer 100-to-1 leverage, meaning a 1% loss can wipe a client out.

The Swiss franc jumped 30% against the euro in minutes on Thursday, after the Swiss National Bank stopped capping the rise their nation’s currency against the euro. The surprise move sent the Swiss franc soaring and caused big losses for traders who had bet against the currency. FXCM, the biggest retail foreign-exchange broker in the U.S. and Asia, said in a statement that because of unprecedented volatility in the euro against the Swiss franc, its losses left it with a negative equity balance of about $225 million and that it was trying to shore up its capital. FXCM was operating normally in Hong Kong on Friday with employees trying to sort out trading positions and answer questions from clients about their trading losses. “As a result of these debit balances, the company may be in breach of some regulatory capital requirements.

We are actively discussing alternatives to return our capital to levels prior to today’s events and discussing the matter with our regulators,” the company, which has a market capitalization of about $701.3 million, said in a statement. Shares of the company fell 15% in U.S. trading and tumbled another 12% after hours. In the U.K., retail broker Alpari entered insolvency after racking up losses amid the currency turmoil following the SNB’s decision. Alpari said in a statement on its website that a majority of its clients sustained losses exceeding the equity in their accounts. “Where a client cannot cover this loss, it is passed on to us. This has forced Alpari (UK) Limited to confirm…that it has entered into insolvency,” the firm said.

Read more …

““We expect that few risk-management algorithms in G-20 currencies were prepared for greater than 20% moves in a currency pair ..”

Wall Street Is Bracing For Shock Waves From Swiss Franc Move (MarketWatch)

Don’t be too quick to look past the turmoil that swept global financial markets after Switzerland’s central bank unexpectedly scrapped a cap on the value of its currency versus the euro. While European and U.S. equities largely regained their footing after a panicky round of selling in the wake of the decision, dangers may still lurk in some corners of the market. Here are the potential shock waves to look out for:

Needless to say, the Swiss franc, which had long been held down by the Swiss National Bank’s controversial cap, exploded to the upside. The euro is down 15% and the U.S. dollar remains down nearly 14% versus the so-called Swissie after having plunged even further in the immediate aftermath of the move. See: Swiss stunner sends euro to 11-year low against buck. Since the Swiss National Bank had given no indication it was set to move — indeed, it had previously said it would defend the euro/Swiss franc currency floor with the “utmost determination” — investors were holding large dollar/Swiss franc and euro/Swiss franc long positions, noted George Saravelos, currency strategist at Deutsche Bank, in a note. As a result, the moves Thursday likely resulted in some big losses on investor portfolios holding those positions, he said.

“This effectively serves as a large VaR [value-at-risk] shock to the market, at a time when investors were already sensitive to poor [profit-and-loss] performance for the year,” Saravelos wrote. The Wall Street Journal reported that Goldman Sachs on Thursday closed what had previously been one of its top trade recommendations for 2015: shorting the Swiss franc versus the Swedish krona after the franc jumped as much as 14% on the day versus its Swedish counterpart. Douglas Borthwick, managing director at Chapdelaine Foreign Exchange, said forex participants are bracing for aftershocks. “We expect that few risk-management algorithms in G-20 currencies were prepared for greater than 20% moves in a currency pair, for this reason the chance of a binary outcome is significant,” he said, in a note. “Either participants gained or lost considerable amounts.”

Read more …

“It’s normal for ruble to do this kind of thing, but we’re talking about Swiss franc ..”

Franc’s Surge Ranks Among Largest Ever in Foreign Exchange (Bloomberg)

The Swiss franc’s 41% surge after the central bank unexpectedly lifted its cap against the euro is one of the biggest moves among major currencies since the collapse of the Bretton Woods system in 1971. Unlike previous foreign-exchange upheavals, today’s action occurred to one of the most-traded currencies that is considered a haven in tumultuous times, and few saw the move coming. “It’s normal for ruble to do this kind of thing, but we’re talking about Swiss franc,” Axel Merk, president and founder of Merk Investments, who has 20 years of experience in the currency market. “That’s quite extraordinary and unheard of.” A history of some of the biggest moves in the now $5.3 trillion a day market:

• Mexico Tequila Crisis, December 1994: U.S. interest-rate increases helped spark a peso devaluation and fueled capital flight across Latin America. The peso lost 53% in three months. The recession the following year, when the economy contracted 6.2%, was among the worst since the 1930s.

• Thai baht, July 1997: The currency fell 48% over the second half of the year after the central bank devalued its the baht in an attempt to revive its slumping economy, marking one of the biggest shifts in Asian currency policy since the country last devalued its currency in 1984.

• Japanese yen, October 1998: During the Asian Financial Crisis, the Japanese currency rallied as much as 7.2% in a day as hedge funds rushed to unwind carry trades by repaying the yen that they borrowed to invest in higher-yielding currencies such as the Thai baht and Russia’s ruble. The yen surged 16% that week.

• Turkish lira, 2001: A spat between then-President Ahmet Necdet Sezer and Prime Minister Bulent Ecevit led to an exodus of foreign capital, pushed up government debt and throwing more than 20 banks into bankruptcy. The currency lost 54% in value that year and inflation jumped to 69% by December.

• Argentine peso, June 2002: Argentina started struggling to finance its debt in 1999 as the one-to-one peg to a rising dollar squeezed exporters and Brazil, the country’s largest trading partner, devalued the real. Interim President Adolfo Rodriguez Saa announced to default on $95 billion debts in December 2001. Within weeks, the central bank abandoned the peg, allowing the peso to fall 74% by June 2002.

• Russian Ruble, December 2014: The currency plummeted 34% in three weeks through mid-December as plunging oil prices and international sanctions pushed Russia toward a recession. The central bank has spent $95 billion of foreign reserves over the past year to shore up the ruble and boosted interest rate five times. While the efforts helped quell volatility, the ruble remains within 5% of the record low set on Dec. 16.

Read more …

Not too crazy so far.

Swiss Bankers Are Accelerating the Euro’s Slide (Bloomberg)

The euro is shaping up as the biggest casualty of Switzerland’s decision to scrap its currency cap. Soon after the Swiss National Bank unexpectedly decided yesterday to end its three-year policy of keeping the franc from appreciating beyond 1.20 per euro, bearish bets on Europe’s common currency soared. While setting a record low versus the franc, the euro also plunged 3.5% against a basket of 10 developed-nation peers, the most since its 1999 debut. The SNB’s decision removes a key pillar of support for the euro, boosting the odds that its recent slide will accelerate. Companies from Goldman Sachs to Pimco have in recent days talked about the increasing chance the euro falls to parity with the dollar, which would represent a 14% decline from its current level.

“It adds fuel to the fire,” Atul Lele, the chief investment officer of Deltec International Group, who manages $1.9 billion, said by phone from Nassau, Bahamas. “This move out of Switzerland certainly exacerbates the trade-weighted euro weakness that we expect to see.” The difference in the cost of options to sell Europe’s common currency against the dollar, over those allowing for purchases, jumped by the most in almost two years yesterday. The euro dropped 1.3% to $1.1633 yesterday. In defending its cap on the franc, the SNB almost doubled its holdings of the 19-nation currency to 174.3 billion euros ($203 billion) since September 2011.

Speculation the European Central Bank is only days away from announcing a government-bond purchase program, or quantitative easing, at its Jan. 22 meeting had already weakened the euro against its major peers. The euro also sank below parity with the franc yesterday to an all-time low of 85.17 centimes, before recovering to 1.0096 per euro today. Deltec’s Lele said he sees it falling an additional 5% to 10%. “The euro can’t find a friend for love nor money,” said London-based Kit Juckes, a strategist at Societe Generale SA, which predicts a decline to $1.14 by year-end. When one of the biggest buyers of euros “leaves the building,” losses are inevitable, he said.

Read more …

Stockman addresses the same issue, the return of price discovery, that I did yesterday in The End Of Fed QE Didn’t Start Market Madness, It Ended It.

In Praise Of Price Discovery – The Market Is Off Its Lithium (David Stockman)

This morning’s market is more erratic than Claire Danes off her lithium. Gold is soaring, the euro’s plunging, US treasury yields are in free fall, junk bonds are faltering, copper is bouncing, oil has rolled over, the Russell 2000 momos are getting mauled, the swissie has shot the moon, the Dow is knee-jerking down, correlations are failing……and the robo traders are flat-out lost. All praise the god of price discovery! For six years financial markets have been drugged into zombiedom by maniacal central bankers who have violated every known rule of sound money and financial market honesty. In expanding their collective balance sheets from $5 trillion to $16 trillion over the past decade, for instance, they have midwifed a planet-wide fiscal fraud.

Politicians have been enabled to spend and borrow like never before because central banks have swapped trillions of public debt for electronic cash confected from nothing. Likewise, never have carry traders and gamblers been so egregiously pleasured by the state. After 73 straight months of ZIRP they are still pinching themselves, wondering if such stupendous largesse is real. They have bought anything with a yield and everything with prospect of gain, financed it for nothing and collected the arb – while being swaddled in the Fed’s guarantee that it would never surprise them or perturb their trades with unannounced money market rate changes. And so they wallowed in their windfalls, proclaiming their own genius.

Does a pompous dandy like Bill Ackman end up purchasing an absurdly priced $90 million Manhattan condo just “for fun” because markets operate on the level? Do his petulant brawls with other grand “activist” speculators like Carl Icahn mark investment genius or the machinery of honest capitalism at work? No they don’t. There is absolutely nothing honest, productive or fair about the central bank dominated casinos which have morphed out of what used to be legitimate money and capital markets. Indeed, all the requisites of stability, efficiency and honest price discovery have been destroyed by the monetary central planners. The short sellers have been eradicated. Downside insurance against a broad market swoon has become dirt cheap. Momo traders have thereby been enabled to earn unconscionable returns because their carry costs have been negligible and their hedging expenses nearly nothing.

Read more …

“Saudi Arabia, the biggest producer, is probably assuming $80 ..”

Iran Lowers Oil Price for Budget to $40 After Collapse (Bloomberg)

Iran, its oil exports curbed by sanctions, is lowering the crude price for this year’s budget to $40 a barrel as the energy slump affects governments and industry. The government is revising its draft budget to assume a base price of $40, from $72, the state-run Fars News Agency reported Finance and Economy Minister Ali Tayebnia as saying Jan. 15. The minister said some projects will have to be halted, according to Fars. Iran’s calendar year begins March 21. Prices of Brent, a benchmark for more than half the world’s oil, have dropped about 50% in the past year, forcing governments to reduce subsidies on diesel, natural gas and utilities and companies to cut billions from capital budgets. Qatar Petroleum and Shell called off plans to build a $6.5 billion petrochemical plant.

“Most Gulf countries are pricing $50 oil for 2015,” said Naeem Aslam, chief market analyst at Dublin-based Avatrade Ltd. in a phone interview from Dubai. “Creditors want to be sure they recoup their money so there could be hesitation to starting up new projects.” Iran President Hassan Rouhani presented a budget to lawmakers on Dec. 7 based on $72 oil. Since then, Brent crude has dropped about 30%. It budgeted $100 oil last year. [..] Iraq, the second-biggest member of OPEC, is using $60 in its budget. Saudi Arabia, the biggest producer, is probably assuming $80, according to John Sfakianakis, a former Saudi government economic adviser. Kuwait has propsed basing its 2015-16 budget on oil at $45.

Read more …

Makes you wonder how BP itself will survive.

BP Sees $50 Oil For Three Years (BBC)

BP’s job announcement later today, including a few hundred job losses in Aberdeen, is being made because it does not expect the oil price to bounce any time soon. The oil price has dropped around 60% since June, to $48 a barrel, and I understand that BP expects that it will stay in the range of $50 to $60 for two to three years. Although no oil company has a crystal ball, this matters – especially since it has a big impact on its investment and staffing ambitions. So plans that it had already initiated to reduce costs have taken on a new element, namely postponement of investments in new capacity that have not been started, and shelving of plans to extend the life of older fields where residual oil is more expensive to extract.

Aberdeen is an important centre for BP, and it employs around 4000 there. And it is in no sense withdrawing – it is continuing to invest in the Greater Clair and Quad 204 offshore properties. But the reduction of several hundred in the numbers it will henceforth employ in the Aberdeen area is symbolic of a city and industry that faces a severe recession. Hardest hit will be North Sea companies with stakes in older fields, where production costs are on a rising trend – and whose profitable life will be significantly shortened if the oil price does not recover soon. The reason BP expects the oil price to stay in the range of $50 to $60 for some years is for reasons you have read about here – it is persuaded that the Saudis, Emiratis and Kuwaitis are determined to recapture market share from US shale gas.

This means keeping the volume of oil production high enough such that the oil price remains low enough to wipe out the so-called froth from the shale industry – to bankrupt those high-cost frackers who have borrowed colossal sums to finance their investment. This does not simply require some US frackers to be bankrupted and put out of business, but also that enough banks and creditors are burned such that the supply of finance to the shale industry dries up. Only in that way could Saudi could be confident of reinvigorating its market power.

Read more …

The end of major parts of the industry.

$50 Oil Is The Ceiling For A Much Lower Trading Range (Anatole Kaletsky)

If one number determines the fate of the world economy, it is the price of a barrel of oil. Every global recession since 1970 has been preceded by at least a doubling of the oil price, and every time the oil price has fallen by half and stayed down for six months or so, a major acceleration of global growth has followed. Having fallen from $100 to $50, the oil price is now hovering at exactly this critical level. So should we expect $50 to be the floor or the ceiling of the new trading range for oil? Most analysts still see $50 as a floor – or even a springboard, because positioning in the futures market suggests expectations of a fairly quick rebound to $70 or $80. But economics and history suggest that today’s price should be viewed as a probable ceiling for a much lower trading range, which may stretch all the way down toward $20.

To see why, first consider the ideological irony at the heart of today’s energy economics. The oil market has always been marked by a struggle between monopoly and competition. But what most western commentators refuse to acknowledge is that the champion of competition nowadays is Saudi Arabia, while the freedom-loving oilmen of Texas are praying for OPEC to reassert its monopoly power. Now let’s turn to history – specifically, the history of inflation-adjusted oil prices since 1974, when OPEC first emerged. That history reveals two distinct pricing regimes. From 1974 to 1985, the US benchmark oil price fluctuated between $50 and $120 in today’s money. From 1986 to 2004, it ranged from $20 to $50 (apart from two brief aberrations after the 1990 invasion of Kuwait and the 1998 Russian devaluation).

Finally, from 2005 until 2014, oil again traded in the 1974-1985 range of roughly $50 to $120, apart from two very brief spikes during the 2008-09 financial crisis. In other words, the trading range of the past 10 years was similar to that of OPEC’s first decade, whereas the 19 years from 1986 to 2004 represented a totally different regime. It seems plausible that the difference between these two regimes can be explained by the breakdown of OPEC power in 1985, owing to North Sea and Alaskan oil development, causing a shift from monopolistic to competitive pricing. This period ended in 2005, when surging Chinese demand temporarily created a global oil shortage, allowing OPEC’s price “discipline” to be restored.

Read more …

Just the start.

Big Oil Gets Serious With Cost Cuts on Worst Slump Since 1986 (Bloomberg)

Major oil companies are awaking from their slumber and facing up to the magnitude of the crash in crude prices. From Shell canceling a $6.5 billion project in Qatar to Schlumberger firing about 9,000 people and Statoil giving up exploration in Greenland, the oil industry this week concluded that the slump is no blip. Top producers follow U.S. shale developers such as Continental in unraveling a boom that produced more oil and natural gas than the world is ready to buy. And there’s certainly more unwinding to come. For most of this month, crude oil has traded below $50 a barrel, a level few predicted even two months ago when OPEC signaled it wouldn’t cut production to defend prices.

If the market stays this depressed, global spending on exploration and production could fall more than 30%, the biggest drop since 1986, according to forecasts from Cowen. “Not too many people expected these levels of oil prices, not even the companies themselves,” said Dragan Trajkov, an analyst at Oriel in London. “Now they have to deal with this new situation and the first impact will be on new investments.” Shell, BP, Chevron and other top producers are preparing to present 2014 earnings to investors at the end of this month or early February and will signal plans for this year. Their chief executive officers are faced with the challenge of assuring shareholders they can see through the depression without cutting dividend payments. The direction of the oil market shows companies probably need to prepare for the worst.

Bank of America, noting the speed global oil inventories are building, forecast Thursday that Brent futures are set to fall to as low as $31 a barrel by the end of the first quarter from about $48 now. That’s even lower than the $36.30 seen during the depths of 2008’s financial crisis. Oil traded above $100 a barrel in July and analysts forecast prices would stay there for years to come. The scale and speed of the price drop has forced companies to start making significant decisions. Shell, Europe’s largest oil company, took the axe this week to a $6.5 billion petrochemicals plant it planned to build in Qatar in partnership with the state oil producer. The company, based in The Hague, said the project wasn’t economically feasible in the current price environment.

Read more …

“Energy companies are expected to cut spending in the U.S. by as much as 35% this year ..”

Schlumberger Cuts 9,000 Jobs as Oil Slump Portends Uncertainty (Bloomberg)

Schlumberger, the world’s biggest oilfield-services company, tackled the “uncertain environment” of plummeting crude prices head-on by cutting 9,000 jobs and lowering costs at a vessels unit. The 7.1% workforce cutback, along with the reduction and reassessment of its WesternGeco fleet, were among steps leading to a $1.77 billion fourth-quarter charge in anticipation of lower spending by customers in 2015, the Houston- and Paris-based company said in an earnings report Thursday. Energy companies, coping with oil worth less than half its price six months ago, are expected to cut spending in the U.S. by as much as 35% this year, according to Cowen. The number of onshore U.S. rigs could fall by as much as 750 this year, Wells Fargo said. That would be a 43% decline from the 1,744 in operation at the start of the year, according to Baker Hughes. The coming year “is looking like it’s gonna be pretty rough,” Rob Desai, an analyst at Edward Jones in St. Louis, said.

“With the potential for this to last some time, it’s in the best interest of the company to attack it aggressively.” Schlumberger, which had doubled its workforce in the past 10 years, said the one-time charges for the quarter also resulted from the devaluation of Venezuela’s currency and a lower value for production assets it owns in Texas. Net income dropped to $302 million, from $1.66 billion a year earlier. “In this uncertain environment, we continue to focus on what we can control,” Schlumberger Chief Executive Officer Paal Kibsgaard said in the earnings report. “We have already taken a number of actions to restructure and resize our organization.” Shares in oilfield-services companies, which help customers find and produce oil and natural gas, were the first to fall as crude prices declined. Service companies in the Standard & Poor’s Index dropped 20% in the quarter, more than the 18% decline for producers.

Read more …

Hit hard.

Aberdeen, The Energy-Rich Town Counting The Cost Of The New Oil Shock (Guardian)

Billy Campbell’s three-year-old is spinning around in a Peppa Pig plastic rocket in the middle of Aberdeen’s Union Square shopping mall. It is not hard to believe that the wider Aberdonian population is in a similar spin given the crisis that has struck the Granite City’s key industry: oil and gas. Ed Davey, the energy secretary, and Nicola Sturgeon, Scotland’s first minister, have both rushed to Britain’s oil capital in the last 48 hours to reassure the city that they are aware of looming problems – problems that, the Bank of England governor warned on Wednesday, will deliver a “negative shock” to Scotland’s economy. Some experts think the oil price fall will wipe £6bn off the country’s GDP and Sturgeon is setting up a task force to try to preserve energy jobs.

[..] This is a very affluent city where unemployment is only a little over 2% and incomes are well above the Scottish average. In Aberdeenshire some 38% of households have an income of more than £30,000, compared to 28% across Scotland and just 19% in Glasgow. The Union Square car park is crammed with upmarket models and four-wheel drives – a survey last year by accountants UHY Hacker Young showed that Aberdeenshire has the highest sales of 4x4s in the UK. The car park is just yards away from the massive offshore support vessels that are waiting to load in the harbour beyond. But, away from the downtown bustle of the city centre, not everyone is quite so laid back.

Certainly not those at the sprawling business park at Dyce, close to the airport, where oil firms and the industry’s service companies are congregated. It was here that BP staff were just told that 300 jobs are to be lost from the North Sea business. These are just the latest staff cuts at major oil employers in the region. Shell has taken similar steps, as has Chevron. Companies such as the Wood Group and Petrofac that provide drilling and other support services to the big oil companies have also been cutting costs. Last year Wood slashed 10% off the rates it pays to its contractors, saying operating costs in the North Sea were unsustainable. And that was before the price of oil crashed over the last six months by 60% to its lowest level in six years.

Read more …

Preparing for a bank run.

Greek Systemic Banks Request Emergency Liquidity Assistance (Kathimerini)

Two Greek systemic banks submitted the first requests to the Bank of Greece for cash via the emergency liquidity assistance (ELA) system on Thursday, sources told Kathimerini. It is thought that requests from the remaining Greek banks will follow in the next few days. The move came in response to the pressing liquidity conditions resulting from the growing outflow of deposits as well as the acquisition of treasury bills forced onto them by the state. Banks usually resort to ELA when they face a cash crunch and do not have adequate collateral to draw liquidity from the European Central Bank, their main funding tool. ELA is particularly costly as it carries an interest rate of 1.55%, against just 0.05% for ECB funding.

The requests by the two lenders will be discussed by the ECB next Wednesday. Bank officials commented that lenders are resorting to ELA earlier than expected, which reflects the deteriorating liquidity conditions in the credit sector. Besides the decline in deposits, banks were dealt another blow on Thursday with the scrapping of the euro cap on the Swiss franc. Bank estimates put the impact of the euro’s drop on the local system’s cash flow at between €1.5 and €2 billion. Deposits recorded a decline of €3 billion in December – a month when they traditionally expand – while in the first couple of weeks of January the outflow continued, although banks say it is under control.

A major blow to the system’s liquidity has come from the repeated issue of T-bills: In November the state drew €2.75 billion in this way, in December it secured €3.25 billion, and it has already tapped another €2.7 billion in January. Of the above amounts, a significant share – amounting to €3 billion according to bank estimates – was in the hands of foreign investors who are not renewing their stakes, so Greek banks have to step in to buy them. Local lenders had also resorted to ELA in 2011 to cope with the outflow of deposits and consecutive credit rating downgrades of the state (and the banks) that made Greek paper insufficient for the supply of liquidity by the Eurosystem. In June 2012, due to the uncertainty of the twin elections at the time, the ELA being drawn by local banks to handle the unprecedented outflow of deposits reached a high of €135 billion. By May 2014, Greek banks had reduced their ELA financing to zero.

Read more …

If politicians – like this guy – don’t understand what deflation is, and most have no clue, that can obviously cause trouble.

No Risk Of ‘Deflation Spiral’ In Europe: German Minister (CNBC)

Despite data showing that the euro zone has slid into deflation, Germany’s deputy finance minister brushed off concerns that the region could enter a downward spiral of falling prices and lack of demand. “This is not what economists and textbooks describe as a deflation spiral, this is a modest price development,” Steffen Kampeter told CNBC Thursday. Data released last week showed that the 19-country single currency region had entered deflation territory in December. Prices in the euro zone fell 0.2% year-on-year in December, marking the first time since 2009 that prices have dipped into negative territory. The decline in prices has been largely attributed in the cost of oil, which has slipped over 60% since June 2014. However, core inflation, which strips out volatile factors like fuel and unprocessed food prices, was stable at 0.7% in December.

“I see the facts,” Kampeter said. “And the fact is that the core inflation is rising and we have a very moderate and negative price development, especially in energy and raw material.” Deflation concerns analysts because a decline in the price of goods can cause consumers to delay purchases in the hope of further price falls, putting pressure on the broader economy. The figures prompted widespread market speculation that the European Central Bank (ECB) could announce a full-scale quantitative easing program when it meets on January 22. The deputy finance minister wouldn’t comment on any forthcoming ECB action, however. As a German policymaker, Kampeter said he was tasked with looking at structural reforms in Germany and Europe as a whole, and was aiming to ensure that investment in Europe continued in order to keep the region competitive. The Germany economy – which is the largest in the euro zone – has staged something of a turnaround of late, after veering dangerously close to recession in 2014.

Read more …

Today’s episode of The Dog Ate My Homework.

UK Retailers ‘Throttled’ By Black Friday (Daily Mail)

It’s the American import that has played havoc with Christmas retail sales. Black Friday, where US shops slash their prices on the day after Thanksgiving, has joined the school prom as a stars-and-stripes tradition that has invaded our islands. For UK retailers, it has proved an unwelcome arrival. Far from boosting net sales it has proved a festive nightmare, denting Christmas trading, causing websites to crash, and sparking delivery chaos. Shoppers spent an estimated £810m on Black Friday on November 28 – making it the biggest ever day for UK online sales. But consumers more than made up for their spree by tightening their belts later on, in the run-up to Christmas.

Retailers suffered their slowest December growth in six years as Black Friday disrupted the timing and rhythm of festive sales. Several chains have lined up to blame the event for their lacklustre performance, with Argos owner Home Retail Group claiming to be the latest victim. The company, which fell short of City forecasts, accused Black Friday of fostering ‘a discount mentality’ in the run-up to Christmas, a time of year when shoppers are usually prepared to pay full price for gifts. Marks & Spencer said that it had caused systems at its Castle Donington warehouse to collapse, and Game Digital blamed it for Monday’s profit warning. Home Retail Group’s new chief executive John Walden said: ‘This year’s adoption of ‘Black Friday’ promotional events generally by the UK market significantly impacted the shape of Argos sales over its peak trading period.’

Read more …

But China can make the numbers up as it goes along.

Warning: China May Trigger Fresh Rout In Commodities (CNBC)

Commodities just can’t catch a break – and China’s GDP release on January 20 could throw another punch at the beleaguered asset class should it underperform expectations, warn analysts. “We are days from the release of China’s Q4 GDP and copper is the best barometer of growth. The rout gives me reason to believe China’s growth is not only moderating but is slowing faster than estimated,” Evan Lucas, market strategist at IG wrote in a note. “If China disappoints next Tuesday, brace for a real rout in commodities,” he said. Copper, regarded as an important indicator of economic health, joined the selloff in commodities Wednesday after the World Bank downgraded its growth outlook for the global economy. The global economy is forecast to expand by 3% this year,the Washington-based lender said in its Global Economic Prospects report released on Tuesday, a notch lower than its previous forecast of 3.4% made in June, but up from an estimated 2.6% in 2014.

The red metal suffered its biggest one-day slide in more than three years on Wednesday, with three-month copper on the London Metal Exchange falling more than 8% at one point to $5,353 a tonne before settling around $5,655 on Thursday. The World Bank expects China’s gradual pace of deceleration to continue,forecasting growth in the world’s second largest economy to slow to 7.1% this year from an estimated 7.4% last year. China plays a dominant role in the commodities market because it’s the world’s largest consumer of energy and metals, including copper. “In our view, the significant pressure on copper price lately indicates either a noticeable slow-down in demand [out of China] or troubles in the shadow banking sector, or both,” said David Cui, strategist at Bank of America Merrill Lynch.

Read more …

“.. shadow bank credit exceeded new yuan-denominated loans for the first time in 2014.”

China Shadow Banking Surge Chills Stimulus Hopes (CNBC)

Two months ago calls for broad-based stimulus in China were all the rage, but a sudden spike in shadow banking has led analysts to revise their expectations for looser monetary policy. Aggregate social financing, a measure of credit that covers bank lending and shadow banking activity, hit one-year high of 1.69 trillion yuan ($273 billion) in December, up from 1.15 trillion yuan the previous month, official data showed on Thursday. “A surge in shadow bank credit – entrusted loans, trust loans, banker’s acceptances, corporate bonds and non-financial enterprises’ domestic equity – was responsible for December’s considerably larger than expected increase in aggregate financing,” said Tim Condon, head of Asia research at ING in a note on Friday, noting that shadow bank credit exceeded new yuan-denominated loans for the first time in 2014.

China’s central bank surprised markets by cutting interest rates for the first time in two years in November, sparking expectations for further policy easing via interest rate or reserve ratio requirements (RRR) cuts. Tight funding conditions also fuelled hopes for RRR cuts late last year. The seven-day repo rate, a closely-watched measure of interbank lending costs, spiked suddenly to an over one-year high in mid-December, prompting speculation for central bank action to boost liquidity. But Thursday’s data reduce the likelihood that the People’s Bank of China will cut the RRR for lenders, Condon said: “We are reviewing our forecast of 100 basis-points of RRR cuts in the first half of the year for downward revision.” Shadow banking was fairly stable last year after Beijing introduced regulatory measures to clampdown on the sector, such as stricter financing rules for trust companies.

During the July-September period, the shadow banking sector of China’s total social financing contracted for the first time on quarter since the global financial crisis. However, those tightening measures may be the very reason for December’s surge, according to Barclays. “We suspect that borrowers including local government financing vehicles (LGFVs) could have accelerated their financing activities through shadow banking channels, since they might experience difficulties in accessing bond market for new issuance as a result of tightening regulations/declining support from provincial government on new debt,” analysts said in a note on Friday. The sudden spike in shadow banking credit leaves the central bank in a catch-22 situation, Gavin Parry at Parry International Trading said. “Here is the issue for the PBoC; it is facing rampant speculation bubbling in the economy like the stock market, while also facing weaker loan demand, local government funding needs and deflationary forces,” he said.

Read more …

Logical step.

New Russian/Chinese Credit Rating Agencies To ‘Balance Big Three’ (RT)

The creation of a joint Russian-Chinese credit rating agency will balance the global outlook and give the world an alternative view on how credit ratings should be done, Chinese international relations expert Victor Gao told RT. “Traditionally credit rating is mostly done by Western credit rating agencies. They sometimes may not fully understand the dynamics of the economics of any particular company or the sovereign borrower,” he said, adding that the agency won’t pursue a goal of replacing traditional Western credit rating agencies like S&P and Moody’s. “It will give the whole world another perspective of how risks are analyzed and how credit rating should be done,” he said. Gao believes Western rating agencies claim to be independent and professional, but in fact they turn out to be biased when it comes to issues of geopolitical importance.

“During the global financial crisis the Western rating agencies did not react as quickly as possible,” he said. “In terms of the rating of the sovereign debt of the US for example, or even for Japan, they’ve actually displayed much more flexibility in rating these countries compared with many other countries.” The announcement of a rating could actually make a situation even worse rather than help stabilize it, he added. Credit rating agencies are very much at the top of the international financial system and they’re not only active domestically in one particular country but in many cases they are active across national boundaries.

Gao said that China has its own credit rating agency Dagong which is actively operating in the country and abroad, increasingly estimating other countries’ and companies’ credit rating. The analyst believes the global economy is changing and going through an important transformation as the emerging markets are growing and their portion in the global economy is increasing despite a significant turmoil in the international financial, economic and energy sectors. Creating a joint credit rating agency of Russia and China is significant but it’s high time the world’s most important developing economies united and came up with their own credit rating agency, as in case of establishing the BRICS Development Bank, he said.

Read more …

Up to 60 years old, women up to 50.

Ukraine President Poroshenko Signs Decree To Mobilize Up To 100,000 (TASS)

Ukrainian President Petro Poroshenko has signed a decree on another mobilization. He put his signature to the document at a meeting with the heads of regional authorities. “I have handed it over to parliament, because it requires approval by the national legislature,” Poroshenko said. Under a decision by the National Security and Defense Council of December 20, 2014, a fourth mobilization wave is beginning on January 20, and two more will be held in April and June.

Some categories of reservists will be exempt from mobilization: men with poor health, university and post-graduate students, clerics, parents having three or more children, and those resident in the territories uncontrolled by the Ukrainian authorities. On January 8, Defense Minister Stepan Poltorak said that in 2015 about 104,000 men may be mobilized, if need be. Ukrainian General Staff spokesman Volodymyr Talalai said that women aged 25 through 50 might be drafted into the army, if necessary.

Read more …

There needs to be far more protest against TTIP, or it’ll be pushed through.

‘Corporate Wolves’ Will Exploit TTIP Trade Deal, MPs Warned (Guardian)

The controversial TTIP trade deal between Europe and the US could depress workers’ wages by £3,000 a year and allow “corporate wolves” to sue the government for loss of profit, MPs have heard. The claims were made in a highly-charged House of Commons debate, with many Conservative MPs defending the proposed Transatlantic Trade and Investment Partnership free trade deal and opposition MPs warning that it risks giving too much power to big US corporations. Anti-TTIP campaigners claim one million people have signed a petition against the deal, mainly because of worries that it could open the door to US health companies running parts of the NHS. This has been firmly denied by the UK government and the European commission, who have said public services are explicitly excluded. However, Labour is still worried that the proposals not do enough to protect the public interest.

Many MPs have particular concerns about the investor-state dispute settlement clauses, which would give private companies the right to sue the government in international tribunals for loss of profit arising from policy decisions. Labour MP Geraint Davies, who called the debate, urged negotiators to drop controversial clauses, insisting the judicial system in each country was sufficient protection in mature democracies. His motion called for the UK parliament to play a role in scrutinising any eventual deal, instead of it being passed exclusively by Brussels. “The harsh reality is this deal is being stitched up behind closed doors by negotiators with the influence of big corporations and the dark arts of corporate lawyers – stitching up laws that will be quite outside contract law and common law, outside the shining light of democracy, to in fact give powers to multinationals to sue governments over laws designed to protect their citizens.”

“My view is we should pull the teeth of the corporate wolves scratching at the door of TTIP by scrapping the investor-state dispute settlement rules altogether and so we can get on with the trade agreement without this threat over our shoulder.” Caroline Lucas, the former Green party leader and MP for Brighton Pavilion, said she believed TTIP amounted to a corporate takeover and cited independent research from Tuft University suggesting workers’ wages could suffer by £3,000 a year. “Countries like the Czech Republic, Slovakia and Poland who are in trade agreements which include this kind of investor-state relationship have been sued 127 times and lost the equivalent money that could have employed 300,000 nurses for a year,” she said. “The idea this isn’t a problem is patently wrong; this is about a corporate takeover and that is why it is right to oppose this particular mechanism.”

Read more …

Good man.

Pope Francis Says Freedom Of Speech Has Limits (BBC)

Pope Francis has defended freedom of expression following last week’s attack on French satirical magazine Charlie Hebdo – but also stressed its limits. The pontiff said religions had to be treated with respect, so that people’s faiths were not insulted or ridiculed. To illustrate his point, he told journalists that his assistant could expect a punch if he cursed his mother. [..] Speaking to journalists flying with him to the Philippines, Pope Francis said last week’s attacks were an “aberration”, and such horrific violence in God’s name could not be justified. He staunchly defended freedom of expression, but then he said there were limits, especially when people mocked religion. “If my good friend Doctor Gasparri [who organises the Pope’s trips] speaks badly of my mother, he can expect to get punched,” he said, throwing a pretend punch at the doctor, who was standing beside him. “You cannot provoke. You cannot insult the faith of others. You cannot make fun of the faith of others. There is a limit.”

Read more …

Dec 022014
 
 December 2, 2014  Posted by at 11:39 pm Finance Tagged with: , , , , , , ,  19 Responses »


Lewis Wickes Hine Newsies Gus Hodges, 11, and brother Julius, 5, Norfolk VA Jun 1911

Oh man, I wanted to keep this short, what I wanted to say looked so straight-forward. But then, in this convoluted world of pretense, is anything ever anymore? Please allow me to start off with something I wrote yesterday in Oil, Gold And Now Stocks? concerning the nonsense spouted by New York Fed President Bill Dudley, who claimed that money not spent by Americans on gas would actually boost the economy if -and that’s still an if – they spent it on anything else. I said they’d still have the same amount of money to spend, so how can it be a boost? Sure, you can say that a lot of the oil is imported, which would transfer profits abroad, but then so are most of the trinkets people can may buy at WalMart with their gas savings. .

Today Zero Hedge’s Tyler Durden turns that theme into not one, but two different posts. First this morning, ‘Central Bankers’ Say The Darndest Things – Bill Dudley Edition, and then just now the second take on the topic, with a very good explanation of what it is Dudley, perhaps the second-most important man in the American financial world – if he’s not numero uno-, gets so wrong, intentionally or not.

Fed Fischer’s Complete & Bizarre Nonsense: Oil Price Collapse “Making Everybody Better Off”

“I’m not very worried,” explains Fed Vice Chairman Stan Fischer in a very Bernanke-“contained”-like nonchalance about the total collapse of oil prices (and US oil producer stocks). Sharply lower oil prices will boost spending and aid U.S. growth, Fischer stated in a mind-blowingly naive speech for the 2nd-most-important-monetary-policy-maker-in-the-world, adding that lower oil prices were “a phenomenon that’s making everybody better off.” We don’t understand his ignorance: as Raul Ilargi Meijer noted earlier, Fischer is talking about money that would otherwise also have been spent, only on gas. There is no additional money, so where’s the boost? This is just complete and bizarre nonsense. As Bloomberg reports:

Fed Vice Chairman Stanley Fischer and New York Fed President William C. Dudley, speaking at separate events yesterday in New York, both stressed the positive economic impact from the steepest decline in oil prices for five years. “I’m not very worried,” Fischer told an audience at the Council on Foreign Relations. “The lower inflation that we’ll get from the lower price of oil is going to be temporary.” He also said lower oil prices were “a phenomenon that’s making everybody better off.”

Perhaps Mr. Fischer should ask the owners of oil producer and servicer stocks, the workers in Texas and North Dakota, as well permits collapse..

Here’s some 1st grade math…
• Money people have to spend (the number that is US CONSUMPTION) = X
• Money people have to spend on Gas = GAS
• Money people have to spend on everything else = EVERYTHINGELSE
• Therefore: X = GAS + EVERYTHINGELSE

Now if Gas becomes cheaper by 30%… the savings are merely spent on more of everything else OR ‘saved’ – there is not boost in US consumption… How does it make X any bigger? How does that make anyone better off? Just don’t tell Fischer, Dudley, or anyone on CNBC this!!!

Will Dudley, or the press that covers him, learn anything from this? Does he really not understand why what he says in gibberish, or does he do it on purpose? Do the press too? Will we ever know? All we can do is point it out, and hope people understand it with us.

But I was thinking about another topic today, and it happened to come up in a comment on my article on both The Automatic Earth and Zero Hedge, by an old friend and commenter I hadn’t seen in a while. I started off yesterday saying:

“Is the Plunge Protection Team really buying oil now? That would be so funny. Out of the blue, up almost 5%? Or was it the Chinese doing some heavy lifting stockpiling for their fading industrial base?”

And got this comment:

The Chinese have a “fading” industrial base?! The most spectacular industrial development story of all time, over decades, and they are “fading”?! Are we living on the same planet?

To which I said:

Big things fade too. Or as the French say: Un éléphant se trompe énormement.

Un éléphant se trompe énormement. In English: the bigger you are, the bigger your mistakes. There’s also a wordplay in there with the sound elephants make and a trumpet (trompette in French). But yeah, China’s industry is fading, and I don’t want to get into semantics about the meaning of the term fading. Two days ago, I posted ths from Bloomberg:

China Factory Gauge Drops as Shutdowns Add to Slowdown

A Chinese manufacturing gauge fell as factory shutdowns aggravated a pullback in the economy [..] The government’s Purchasing Managers’ Index (PMI) fell to an eight-month low of 50.3 in November, compared with the 50.5 median estimate of analysts in a Bloomberg survey and October’s 50.8. Readings above 50 indicate expansion.

“Today’s official PMI reading points to continued downward pressure on manufacturing activity,” said Julian Evans-Pritchard, China analyst in Singapore at Capital Economics. “The recent cut in the benchmark rate will do little to boost economic activity unless followed by a loosening of quantitative controls on lending, which policymakers will remain cautious about given concerns over mounting credit risk.” The final reading of another manufacturing PMI for November from HSBC and Markit was 50.0. It was unchanged from a preliminary reading.

My comment then: ‘It’s close to contraction, and that’s a long way away from 7.5% growth.’

Between the lines, we’ve been able to see for a while that China is quite a ways away from that 7.5% growth target, and a near contraction PMI reading would certainly seem to confirm that suspicion. Of course, nearly everything we get from China are ‘official’ numbers, and having faith in those wouldn’t seem to make a lot of sense.

Which made it sort of amazing to see an official government report issued that Jamil Anderlini wrote about for the Financial times on Friday, but which Reuters had already covered 10 days before that. These are government researchers, and that makes you wonder what the message is, and how it’s sent: is Beijing exaggerating the waste for political purposes, or acknowledging just a part of it? My bet would always be on number 2, Xi and Li are not sitting pretty or relaxed these days, and making their own faults look even bigger than they are does not seem to be the way they would go. Here’s some excerpts from Anderlini’s piece:

China Has ‘Wasted’ $6.8 Trillion In Investment

“Ghost cities” lined with empty apartment blocks, abandoned highways and mothballed steel mills sprawl across China’s landscape – the outcome of government stimulus measures and hyperactive construction that have generated $6.8 trillion in wasted investment since 2009, according to a report by government researchers. In 2009 and 2013 alone, “ineffective investment” came to nearly half the total invested in the Chinese economy in those years, according to research by Xu Ce of the National Development and Reform Commission, the state planning agency, and Wang Yuan from the Academy of Macroeconomic Research, a former arm of the NDRC.

China is this year on track to grow at its slowest annual pace since 1990, and the report highlights growing concern in the Chinese leadership about the potential economic and social consequences if wasteful investment leaves projects abandoned and bad loans overloading the financial system. The bulk of wasted investment went directly into industries such as steel and automobile production that received the most support from the government.

To wit: iron ore stocks are down 50%. That’s all China not buying anymore, plus the industry that invested hoping they would. Overcapacity everywhere. US shale, you name it. What does not have overcapacity these days? Oh well, yeah, care for the poor and the elderly, you’re right. I sit corrected.

Mr Xu and Ms Wang said ultra-loose monetary policy, little or no oversight over government investment plans and distorted incentive structures for officials were largely to blame for the waste. “Investment efficiency has fallen dramatically [in recent years],” they say in the report. “It has become far more obvious in the wake of the global financial crisis and has caused a lot of over-investment and waste.” [..]

Much of the investment in recent years has been funnelled into real estate projects, but apartment sales and prices have fallen this year, leading to fears of an impending property crash. Most of the industries that feed the real estate sector, such as steel, glass and cement, are awash with overcapacity and have been hit hard by the property downturn.

Misallocation of capital and poor investment decisions are not the only explanation for the enormous waste in China’s economy. A significant portion of China’s post-crisis stimulus binge was simply stolen by Communist Party officials with direct responsibility for boosting growth through investment, according to separate estimates by Chinese and overseas economists. Jonathan Anderson, founder of Emerging Advisors Group, the consultancy, estimates that about $1tn has gone missing in China in the past half-decade as a result of weak oversight and the enormous opportunity provided by the investment boom. “That translates into maybe 5% of GDP per year worth of skimming off the top,” he says.

“Think about it: every local government wakes up one morning in 2009 and finds that the central authorities have lifted every single form of credit restriction in the economy,” he says. “With no one watching the till, it would be awfully hard to resist the temptation to sidetrack the funds, squirrelling them away in related official accounts or paying them out through padded contracts to other connected suppliers and friends.”

That last bit doesn’t cover he situation. Beijing has relied on the shadow banking system, not just tolerated it, to get China to grow at the numbers it has. And local governments have taken the bait, and taken the shadow loans, so they would look good to their superiors, building whatever they could build, useful or not, roads, bridges, apartment buildings.

I don’t know if we will ever know the size of the shadow banks in China, but there can be no doubt that it’s mind shattering. And if an official government report says $6.8 trillion was spent on nothing, do we even want to know how much shadow loans were spent that way?

In 2009 and 2013, the report says, ‘half the total invested in the Chinese economy’ was ‘ineffective investment’, i.e. money wasted on bridges to nowhere. A more or less accepted number for total official Beijing ‘invested’ is $15 trillion in 5 years, and we now know that the ‘waste’ got bigger as time went on, and totaled about half of the total investment. And that’s just what Beijing put in; it’s anybody’s guess what da shadows added, and how much of that never went anywhere.

Here’s an idea of how that compares to the US, itself not exactly a slacker when it comes to stimulus:

Reuters, 10 days earlier, said this about the report:

China Wasted $6.9 Trillion On Bad Investment Post 2009

China has acknowledged that it is overly-dependent on investment to power the world’s second-biggest economy, but re-ordering the growth model takes time. Investment contributed to 42% of China’s economic growth between January and September this year. Exhorting caution, Xu and Wang said China wasted between 4.7 trillion yuan and 13.2 trillion yuan each year between 2009 and 2013 on investment with zero efficiency. The money wasted on such projects peaked in 2013 at 13.2 trillion yuan, or 47% of China’s total fixed capital formation for that year, their calculations showed. Investment quality had fallen so much recently that nearly two-thirds of the 67 trillion yuan that China wasted from 1997 were spent after 2008.

I don’t know if you can still follow it, but this adds up to absolute insanity. The $6.8 trillion number for money spent on ‘zero efficiency’ is but a cautious estimate by people who both have no access to, and are not supposed to know about, the Chinese equivalent of Don Corleone and the five families. Here’s a bunch of GDP numbers in the west for comparison, PPP GDP data from Wikipedia, for perspective:

France Population 66 million, GDP $2.6 trillion
Britain Population 64 million, GDP $2.45 trillion
Germany Population 87 million, GDP $3.6 trillion
Japan Population 126 million, GDP $4.8 trillion
USA Population 319 million, GDP $16.8 trillion
China Population 1,357 million, GDP $16.1 trillion

When you see those numbers, the $6.8 trillion spent on absolutely nothing productive in China should make you cringe and shudder. China took a big lighter and burned off half of Britain or France’s GDP each and every year just to look better. And not because it was so independently rich and could easily afford it, but because it wanted to look richer than it was, if only for a day, or a year. We all have had that wish at times.

And that’s without adding in the shadow banks, who were pivotal in making the local officials look even twice as grandiose than Beijing’s loose policies were already allowing them to be. China has been running on free debt for years, and who cares about paying it back? It’s no different from the US, is it? Or Europe, or Tokyo. It’s all just a big collection of big debt bubbles. And China looks like it might well be the biggest of them all.

If that PMI number, shaky as it may be both because it comes from the Communist Party and because of its own inherent flaws, dives below 50, and China starts contracting and moving even further away from it 7.5% growth target, I’d literally say there’s no telling what will happen. But it won’t be pretty, that I can tell. It won’t even be funny. Look at all the steel, copper, aluminum, producers in the west who have heavily invested in and on China growth. And don’t get me started on oil producers. Yeah, China’s going to stockpile and save the industry. Sure.

China, like the entire world, is doing much worse then anyone’s willing to tell you. But the entire world still is. And so is China. Enter Elephant stage left.

Nov 242014
 
 November 24, 2014  Posted by at 12:02 pm Finance Tagged with: , , , , , , , , , ,  Comments Off on Debt Rattle November 24 2014


William Henry Jackson Hospital Street, St. Augustine, Florida 1897

Global Business Confidence Plunges To Post-Crisis Low (CNBC)
Pope Francis Warns Greed Of Man Will ‘Destroy The World’ (Daily Mail)
Record Numbers Of UK Working Families In Poverty Due To Low-Paid Jobs (Guardian)
New Abnormal Means Relying on Central Banks for Growth (Bloomberg)
Why We Can’t Afford Another Financial Crisis (Guardian)
PBOC Bounce Seen Short Lived as History Defies Bulls (Bloomberg)
China Rate-Cut Likely To Hurt Banks, Curb New Loans To Small Borrowers (Reuters)
Bad News Mounts for Chinese Banks, Funds Grow More Bullish (Bloomberg)
Property, Manufacturing Woes Help Trim China’s Shadow Banking (Reuters)
The Consequences of Imposing Negative Interest Rates (Tenebrarum)
Why Countries Wage Currency Wars (A. Gary Shilling)
How the EU Plans to Turn $26 Billion Into $390 Billion (Bloomberg)
Draghi’s About to Find Out How Urgent His Call for Action Has Become (Bloomberg)
UK Supermarket War Turns Smaller Food Suppliers Into ‘Cannon Fodder’ (Guardian)
‘OPEC’s Easy Days Setting Oil Production Are Over’ (Bloomberg)
Russia Losing ‘Up To $140 Billion’ From Sanctions, Oil Drop (Reuters)
Demand Set to Outstrip the $100 Trillion Bond Market Again in 2015 (Bloomberg)
Swedish Banks Face Deposit Drain as Interest Rates Slump (Bloomberg)
World Locked Into ‘Alarming’ Global Warming: World Bank (CNBC)

How much money was thrown into the system in those five years?

Global Business Confidence Plunges To Post-Crisis Low (CNBC)

Worldwide business confidence slumped to a five-year low, with company hiring and investment intentions at or near their weakest levels in the post-global financial crisis era, according to a new survey. “Clouds are gathering over the global economic outlook, presenting the darkest picture seen since the global financial crisis,” said Chris Williamson, chief economist at Markit. The number of companies expecting their business activity to be higher in a years’ time exceeded those expecting a decline by just 28%. This was below the net balance of 39% recorded in the summer, the Markit Global Business Outlook Survey showed. The tri-annual survey, published on Monday, looked at expectations for the year ahead across 6,100 manufacturing and services companies worldwide. Optimism in manufacturing fell to its lowest since mid-2013 but remained ahead of that seen in services, where confidence about the outlook slumped to the lowest in the survey’s five-year history.

Global hiring intentions slid to within a whisker of the all-time low seen in June of last year, deteriorating in the U.S., Japan, the U.K., euro zone, Russia and Brazil. [..] Investment intentions also collapsed to a new post-crisis low across major economies. China and India bucked the trend, however, with capital expenditure plans in the two countries improving. The survey highlighted a growing list of concerns among companies about the outlook for the year ahead including a worsening global economic climate, the prospect of higher interest rates in countries such as the U.K. and U.S. and geopolitical risk emanating from crises in Ukraine and the Middle East. “Of greatest concern is the slide in business optimism and expansion plans in the U.S. to the weakest seen over the past five years. U.S. growth therefore looks likely to have peaked over the summer months, with a slowing trend signaled for coming months,” Williamson said.

Read more …

‘It is also painful to see the struggle against hunger and malnutrition hindered by ‘market priorities’, the ‘primacy of profit’, which reduce foodstuffs to a commodity like any other, subject to speculation and financial speculation in particular ..’

Pope Francis Warns Greed Of Man Will ‘Destroy The World’ (Daily Mail)

Pope Francis has warned that planet earth could face a doomsday scenario if the world does not stop abusing its resources for profit The pontiff warned that nature would exact revenge, and urged the world’s leaders to rein in their greed and help the hungry. He told the Second International Conference on Nutrition (CIN2) in Rome: ‘God always forgives, but the earth does not. ‘Take care of the earth so it does not respond with destruction.’ The three-day meeting aimed at tackling malnutrition, and included representatives from 190 countries.

It was organised by the UN food agency (FAO) and World Health Organization (WHO) in the Italian capital. The 77-year old said the world had ‘paid too little heed to those who are hungry.’ While the number of undernourished people dropped by over half in the past two decades, 805 million people were still affected in 2014. ‘It is also painful to see the struggle against hunger and malnutrition hindered by ‘market priorities’, the ‘primacy of profit’, which reduce foodstuffs to a commodity like any other, subject to speculation and financial speculation in particular,’ Francis said.

Read more …

Britain’s new normal: ” .. the report showed a real change in UK society over a relatively short period of time.”

Record Numbers Of UK Working Families In Poverty Due To Low-Paid Jobs (Guardian)

Insecure, low-paid jobs are leaving record numbers of working families in poverty, with two-thirds of people who found work in the past year taking jobs for less than the living wage, according to the latest annual report from the Joseph Rowntree Foundation. The research shows that over the last decade, increasing numbers of pensioners have become comfortable, but at the same time incomes among the worst-off have dropped almost 10% in real terms. Painting a picture of huge numbers trapped on low wages, the foundation said during the decade only a fifth of low-paid workers managed to move to better paid jobs. The living wage is calculated at £7.85 an hour nationally, or £9.15 in London – much higher than the legally enforceable £6.50 minimum wage.

As many people from working families are now in poverty as from workless ones, partly due to a vast increase in insecure work on zero-hours contracts, or in part-time or low-paid self-employment. Nearly 1.4 million people are on the controversial contracts that do not guarantee minimum hours, most of them in catering, accommodation, retail and administrative jobs. Meanwhile, the self-employed earn on average 13% less than they did five years ago, the foundation said. Average wages for men working full time have dropped from £13.90 to £12.90 an hour in real terms between 2008 and 2013 and for women from £10.80 to £10.30.

Poverty wages have been exacerbated by the number of people reliant on private rented accommodation and unable to get social housing, the report said. Evictions of tenants by private landlords outstrip mortgage repossessions and are the most common cause of homelessness. The report noted that price rises for food, energy and transport have far outstripped the accepted CPI inflation of 30% in the last decade. Julia Unwin, chief executive of the foundation, said the report showed a real change in UK society over a relatively short period of time. “We are concerned that the economic recovery we face will still have so many people living in poverty. It is a risk, waste and cost we cannot afford: we will never reach our full economic potential with so many people struggling to make ends meet.

Read more …

Central banks can’t create growth.

New Abnormal Means Relying on Central Banks for Growth (Bloomberg)

The “new normal” may be new. It’s hardly normal. The “new abnormal” would be more apt, according to reports published this month by Ed Yardeni and ING’s Mark Cliffe in London. “Dictionaries define ‘normal’ as regular, usual, healthy, natural, orderly, ordinary, rational,” Cliffe said Nov. 7. “It is hard to use those words to describe the current performance of the world economy and financial markets.” Among signs of irregularity since Pimco popularized the expression “new normal” in 2009 to describe an environment of below-average economic growth: Central banks are still deploying near-zero interest rates or quantitative easing six years after the financial crisis, yet output, inflation, business investment and wages remain mostly subpar. In financial markets, equities are hitting new highs as bond yields probe new lows. Even as the U.S. shows signs of strength, commodities are slumping.

The lesson for Yardeni is that by running to the rescue every time asset prices swooned in the past two decades, central bankers’ prescriptions distorted economies. “If a central bank moderates recessions, then speculative excesses are likely to build up much more during the booms and never get fully cleaned out,” Yardeni, a former chief economist at Deutsche Bank, said in a Nov. 19 report. “So each financial crisis gets progressively worse than the previous one, forcing the central bank to provide even more easy money to avert a financial meltdown.” Cliffe at ING is less willing than Yardeni to lambaste central banks, noting it’s hard to say how bad a recession may have occurred without their aid. Still, he agrees that policy makers now find themselves having to keep an eye on markets as much as the economies when setting policy.

Read more …

“For now, the Federal Reserve, the European Central Bank and the Bank of England prefer not to contemplate this dire possibility.”

Why We Can’t Afford Another Financial Crisis (Guardian)

A look into the future: David Cameron’s nightmare has come true; the slowdown in the global economy has turned into a second major recession within a decade. In those circumstances, there would be two massive policy challenges. The first would be how to prevent the recession turning into a global slump. The second would be how to prevent the financial system from imploding. These are the same challenges as in 2008, but this time they would be magnified. Zero interest rates and quantitative easing have already been used extensively to support activity, which would leave policymakers with a dilemma. Should they double down on QE or come up with more radical proposals – drops of helicopter money or using QE for specified purposes, such as investment in green energy?

For now, the Federal Reserve, the European Central Bank and the Bank of England prefer not to contemplate this dire possibility. They will deal with it if it happens, but are assuming it won’t. More explicit plans have been drawn up for the big banks. The concern here is obvious. The bailouts last time played havoc with the public finances and the still incomplete repair job has required unpopular austerity. Governments are not flush enough to contemplate a second wave of bailouts. Even if they had the money, they know just how voters would react if there was talk of bailing out the bankers a second time.

Read more …

They’ll just cut again. Or maybe even just devalue the yuan overnight.

PBOC Bounce Seen Short Lived as History Defies Bulls (Bloomberg)

China’s benchmark stock index rose to a three-year high after the central bank’s surprise interest rate cut late last week. Recent history suggests the gains won’t last long. While the Shanghai Composite Index climbed 1.9% today, six of the past seven cuts to interest rates and reserve requirements have been followed by declines in stock prices over the next two months. The last time the PBOC lowered lending and deposit rates, in July 2012, the benchmark index fell 7.4%, according to data compiled by Bloomberg. The rate cut, announced after the close of regular trading in China on Nov. 21, underlines concern that a slowdown in the world’s second-largest economy is deepening. Factory production rose 7.7% in October from a year earlier, the second-weakest pace since 2009, while retail sales missed economists’ forecasts.

China’s economy expanded 7.3% in the three months ended September and it’s projected to grow this year at the slowest pace since 1990 amid weakness in the property market and manufacturing. “In the short term, it’s positive, but in the long term, the economic slowdown is probably the main driver of the market,” Lucy Qiu, an emerging markets analyst at UBS Wealth Management, which has $1 trillion in invested assets, said by phone from New York on Nov. 21. “This announcement came after a slew of underperforming economic releases. It kind of shows the government is determined to support growth, but going forward we really have to look at the data.” The PBOC has cut reserve requirements for the nation’s largest lenders three times and lowered benchmark rates three times since late 2011.

Policy makers said in a Nov. 21 statement that the move in interest rates was “a neutral operation and doesn’t mean any change in monetary policy direction.” As China is still able to keep medium to high growth rates, it “has no need to take strong stimulus measures, and the direction of prudent monetary policy won’t change,” the central bank said. China’s retail inflation held at the slowest pace since January 2010 last month. Consumer prices increased 1.6%, matching September’s rate, while producer prices fell for a record 32nd month, slumping 2.2%.

Read more …

Unintended consequences?!

China Rate-Cut Likely To Hurt Banks, Curb New Loans To Small Borrowers (Reuters)

China’s latest interest rate cut is set to dent the profitability of domestic lenders, especially mid-sized banks, which are already suffering from higher bad loans and a slowdown in profit growth. The central bank unexpectedly cut rates late on Friday, stepping up efforts to support small and medium-sized enterprises (SMEs) which are struggling to repay loans and access credit, as the economy slides to its slowest growth in nearly a quarter of a century. It slashed the one-year benchmark lending rate by 40 basis points to 5.6% while lowering the one-year benchmark deposit rate by 25 basis points to 2.75%. The narrowing of interest rate margins will eat into lenders’ profitability, with Cinda Securities’ chief strategist, Jiahe Chen, predicting it will cut profits by up to 5%. Interest margins generated from lending have already been shrinking for second-tier lenders, which have been squeezed by competition from online financiers and a rise in funding costs stemming from an industry tussle for deposits.

Fitch Ratings downgraded its credit rating of China Guangfa Bank, a medium-sized lender, two days before the rate-cut announcement, and said the level of off-balance-sheet lending among second-tier banks was a concern. The squeeze on profits will make it tougher for lenders to raise capital to meet new international rules designed to protect depositors from banking collapses. Retained profits are one way in which banks can build up regulatory capital. “In the past when Chinese banks disbursed loans, they mainly relied on profits from their own capital to replenish their capital,” Jiang Jianqing, chairman of China’s biggest commercial bank, the Industrial and Commercial Bank of China, told a conference in Beijing on Saturday. The PBoC said in announcing the rate cut that it wanted to help smaller firms gain access to credit. While the measures may ease the financing costs of these firms’ existing loans, it is unlikely to encourage banks to write new loans to lower-rung borrowers, bankers said.

Read more …

Bad debt is China’s biggest conundrum. How can they ever get out other than through defaults?

Bad News Mounts for Chinese Banks, Funds Grow More Bullish (Bloomberg)

China’s banks, already saddled with mounting bad debt, face the risk of sagging profit growth after an interest-rate cut slashed their margins on loans. The twist: some investors are getting more optimistic, not less, about the outlook for the industry’s shares. Victoria Mio, chief investment officer for China at Robeco Hong Kong, whose parent company oversees about €237 billion ($294 billion), said Nov. 21 that bank stocks were very attractive because they were priced at levels that assumed an economic “hard landing.” Hours later, the central bank cut the one-year lending rate by 0.4 percentage point and the one-year deposit rate by 0.25 percentage point. Afterward, Mio said sustained monetary easing may drive an economic rebound and a jump in banks’ share prices. She was “more positive” on the stocks.

Chinese banks are trading at an average 4.8 times estimated earnings for this year, the lowest globally for lenders with a market value of more than $10 billion, according to data compiled by Bloomberg. Another fund manager, Baring Asset Management Ltd.’s Khiem Do, said he was “still bullish” on banks after the rate move and that dividends of more than 6% would become even more attractive as interest rates fall. “You tell me which banks in the world are paying out this yield, and making money, and working in an environment where the economy is growing at about 7% per annum,” he said earlier by phone. Do helps oversee about $60 billion as Hong Kong-based head of Asian multi-asset strategy. Ma Kunpeng, a Shanghai-based analyst at Sinolink Securities Co., has a buy rating on the industry. He said banks’ share prices have fallen even when earnings have exceeded expectations because investors have focused more on “perceived risks” than profits.

Read more …

China’s economy doesn’t function without shadow banks. There might be a hard lesson for Beijing in the offing here.

Property, Manufacturing Woes Help Trim China’s Shadow Banking (Reuters)

A bid by China to rein in its “shadow banking” activity is producing results, thanks to slowing economic growth and tighter regulation. But some success for a policy drive to curb risky lending is not all good news for Beijing, as smaller companies may face even bigger struggles to find funding. A cut in interest rates, announced by Beijing on Friday, is unlikely to help them much. Shadow banking includes off-balance-sheet forms of bank finance plus lending by non-traditional institutions, all of which is less regulated than formal lending and thus considered riskier. At the end of 2013, China had the world’s third-largest shadow banking sector, according to the Financial Stability Board, a task force set up by the G-20 economies. It estimated that Chinese assets of “other financial intermediaries” than traditional ones were then just under $3 trillion.

In the three months ended Sept. 30, the shadow banking portion of what China calls total social financing – a broad measure of liquidity in the economy – contracted for the first time on a quarterly basis since the 2008/09 financial crisis. Loans extended by trust companies fell by roughly 100 billion yuan ($16.33 billion). Bankers’ acceptances, a short-term method of financing regularly used by manufacturers, dropped 668.3 billion yuan, according to Reuters calculations based on central bank data. October lending data, released last week, showed further contractions in these types of shadow banking. Bankers’ acceptances and trust loans “fall into categories that have been squeezed by tightening regulations in the last few months, so it’s an ongoing trend,” said Donna Kwok, an economist at UBS in Hong Kong.

Read more …

“What can be abolished by laws and decrees is merely the right of the capitalists to receive interest. But such laws would bring about capital consumption and would very soon throw mankind back into the original state of natural poverty.”

The Consequences of Imposing Negative Interest Rates (Tenebrarum)

Ever since the ECB has introduced negative interest rates on its deposit facility, people have been waiting for commercial banks to react. After all, they are effectively losing money as a result of this bizarre directive, on excess reserves the accumulation of which they can do very little about. At first, only a small regional bank, Deutsche Skatbank, imposed a penalty rate on large depositors – slightly in excess of the 20 basis points banks must currently pay for ECB deposits. It turns out this was a Trojan horse. Other banks were presumably watching to see if depositors would flee Skatbank, and when that didn’t happen, Commerzbank decided to go down the same road. However, there is an obvious flaw in taking such measures – at least is seems obvious to us. The Keynesian overlords at the central bank who came up with this idea have failed to consider a warning Ludwig von Mises once uttered about the attempt to abolish interest by decree.

Obviously, the natural interest rate can never become negative, as time preferences cannot possibly become negative: ceteris paribus, consumption in the present will always be preferred to consumption in the future. Mises notes that if the natural interest rate were to decline to zero, all consumption would stop – we would die of hunger while investing all of our resources in capital goods, i.e., while directing all of our efforts and funds toward production for future consumption. This is obviously a situation that would make no sense whatsoever – it is simply not possible for this to happen in the real world of human action. Mises warns however that if interest payments are abolished by decree, or even a negative interest rate is imposed by decree, owners of capital will indeed begin to consume their capital – precisely because want satisfaction in the present will continue to be preferred to want satisfaction in the future regardless of the decree. This threatens to eventually impoverish society and reduce it to a state of penury:

If there were no originary interest, capital goods would not be devoted to immediate consumption and capital would not be consumed. On the contrary, under such an unthinkable and unimaginable state of affairs there would be no consumption at all, but only saving, accumulation of capital, and investment. Not the impossible disappearance of originary interest, but the abolition of payment of interest to the owners of capital, would result in capital consumption.

The capitalists would consume their capital goods and their capital precisely because there is originary interest and present want-satisfaction is preferred to later satisfaction. Therefore there cannot be any question of abolishing interest by any institutions, laws, and devices of bank manipulation. He who wants to “abolish” interest will have to induce people to value an apple available in a hundred years no less than a present apple. What can be abolished by laws and decrees is merely the right of the capitalists to receive interest. But such laws would bring about capital consumption and would very soon throw mankind back into the original state of natural poverty.”

Read more …

Because they’re desperate.

Why Countries Wage Currency Wars (A. Gary Shilling)

The U.S. dollar has been on a tear this year, rising against the currencies of virtually all major developed economies. What we’re seeing around the world is intense – and in some cases, deliberate – devaluations. What’s going on and what are the investment implications? One reason for the devaluations is that, when economic growth is weak – as it has been globally for five years – governments feel tremendous pressure to increase exports and reduce imports to restore growth. Often that means lowering the value of the currency so that products sent abroad are relatively less expensive and those coming into the country more so. The European Central Bank, for example, wants to depress the euro to keep deflation at bay. The euro’s earlier strength drove down import prices, forcing domestic producers who compete with imports to slash their prices. As a result, consumer price inflation moved steadily toward zero. It was a mere 0.4% in October versus a year earlier.

The euro-zone economy remains stagnant, with a third recession since 2007 a possibility. Unemployment is high. Youth unemployment tops 25% in many countries; it exceeds 50% in Spain and Greece. Meanwhile, consumer sentiment, which never recovered from the last recession, is again dropping. In early June, the ECB responded by cutting its benchmark interest rate from 0.25% to 0.15% and introducing a penalty charge of 0.1% on reserves it holds for member banks. While these measures were more symbolic than substantive, the euro slid in reaction. In September, the ECB started to make up to €1 trillion in cheap, four-year loans available to member banks, provided they made more credit available to the private sector. Still, these actions didn’t seriously depress the euro, so ECB President Mario Draghi in September announced a further cut in the overnight interest rate to 0.05% and an increase in the penalty rate for member-bank deposits to 0.2%.

In October, the ECB purchased a broad array of securities, including bonds backed by auto loans, home mortgages and credit-card debt, to encourage lenders to offer more credit to companies. Again, these actions have proved more symbolic than substantive, but the euro has weakened a bit further. While the ECB will probably end up with outright quantitative easing in one form or another, keep in mind that QE is less effective in the euro area. Financing is concentrated in the banks, which account for 70% of corporate financing, not in bond markets as in the U.S., where QE works its way into the economy rapidly. Also, weak euro-zone banks are weighed down by bad loans, anemic profits and the need to raise capital to meet new regulatory requirements. In addition, there are 18 euro-area countries and, therefore, 18 separate bond markets for the ECB to consider.

Read more …

Magic?!

How the EU Plans to Turn $26 Billion Into $390 Billion (Bloomberg)

The European Union is planning a €21 billion ($26 billion) fund to share the risks of new projects with private investors, two EU officials said. The new entity is designed to have an impact of about 15 times its size, making it the anchor of the EU’s €300 billion investment program, said the officials, who asked not to be named because the plans aren’t final. European Commission President Jean-Claude Juncker is due to announce the three-year initiative this week. The commission will pledge as much as €16 billion in guarantees for the vehicle, which will also include €5 billion from the European Investment Bank, the officials said. Loans, lending guarantees and stakes in equity and debt will be part of its toolbox, with the goal to jumpstart private risk-taking so that stalled projects can get off the ground.

Juncker’s investment plan aims to combine EU resources and regulatory changes “to crowd in more private investment in order to make real investments a reality,” EU Vice President Jyrki Katainen said Nov. 14 in Bratislava. The plan is one element of the EU’s economic strategy and “not a magic wand with which we will be able to miraculously invest ourselves out of a difficult economic climate,” he said. Europe is struggling to spur economic growth as it emerges only slowly from waves of crisis. The 18-nation euro area is forecast to see growth of just 0.8% this year, according to EU forecasts, while the region’s unemployment rate of 11.5% masks rates of about 25% in Greece and in Spain. While the Juncker proposal involves seeding investment in infrastructure and other fields, the €21 billion sum with a proposed leverage rate of 15 times risks disappointing markets.

Read more …

EU consumer data coming this week.

Draghi’s About to Find Out How Urgent His Call for Action Has Become (Bloomberg)

Mario Draghi is about to find out just how urgent his call for action has become. One week after the European Central Bank president vowed to revive inflation “as fast as possible,” policy makers will receive a glimpse on just how feeble cost pressures are now in the euro region. Economists forecast data on Nov. 28 will show consumer-price growth matching the weakest since 2009. That would add to the drumroll for a stimulus debate at the Dec. 4 meeting as panels of officials study possible new measures and prepare to cut their economic outlook. While Draghi has stoked pressure toward sovereign-bond buying, colleagues from Germany to the Netherlands are unconvinced quantitative easing is warranted, and his vice president suggested at the weekend that the ECB might hold off until next year. Spanish government bond yields fell today on speculation the ECB will start buy sovereign debt.

“The stakes are high and the risks are asymmetric,” said Frederik Ducrozet, an economist at Credit Agricole in Paris. “A drop in inflation, even a small one, could push the ECB to do something more in December. On the other hand if there is an upside surprise, that buys them time.” Inflation data for November are forecast to show a dip to 0.3% from 0.4%, while economic confidence is seen declining and October unemployment staying at 11.5%, according to economists surveyed by Bloomberg News before those reports this week.

Read more …

Deflation at work.

UK Supermarket War Turns Smaller Food Suppliers Into ‘Cannon Fodder’ (Guardian)

Food producers have become cannon fodder in the bitter supermarket price war, according to accountancy firm Moore Stephens, which found 28% more specialist manufacturers have gone into insolvency this year than last. In the year to September, 146 food producers went into insolvency, including wholesale bakeries, pasta makers, fish processors and ready meal manufacturers. In one of the larger cases, 170 jobs were lost when Sussex-based fresh pasta maker Pasta Reale went into administration in August after it lost three major supermarket contracts in a year. Duncan Swift, head of the food advisory group at Moore Stephens, said: “The supermarkets are going through the bloodiest price war in nearly two decades and are using food producers as the cannon fodder. UK supermarkets are trying to compete on price with Aldi and Lidl but with profit margins that are far higher than these discount chains.

“To try and make the maths work, the big supermarkets are putting food producers under so much pressure that we have seen a sharp increase in the number of producers failing.” The rise in insolvencies among food suppliers is in stark contrast to the 8% fall in liquidations in the economy as a whole over the same period. Swift said that because supermarket buyers’ bonuses were based on securing cash contributions from suppliers, they were being hit with “spurious deductions”, cancellations at short notice and threats to take them off the supplier list.

Highlighting contracts where suppliers contribute to supermarkets’ costs, he said: “Supplier contributions cause major cashflow problems for food producers and can tip them into insolvency. It’s a raw deal for food producers, who need the supermarkets to reach the public, but who can’t afford the terms of business that the supermarkets foist on them.” The extent of these contributions has come into the spotlight this year after Tesco admitted it had found a £263m black hole in its accounts relating to the way it booked payments from suppliers.

Read more …

This is OPEC’s biggest problem, followed closely by infighting within the cartel. Agreements won’t be worth the paper they’re written on. Who’s going to check production?

‘OPEC’s Easy Days Setting Oil Production Are Over’ (Bloomberg)

The days when OPEC members could all but guarantee consensus when deciding production levels for oil are long gone, according to a veteran of almost two decades of the group’s meetings. The global glut of crude, which has contributed to a 30% decline in prices since June 19, has left the organization disunited and dependent on non-members to shore up the market, said former Qatari Oil Minister Abdullah Bin Hamad Al Attiyah. The 12-member Organization of Petroleum Exporting Countries is scheduled to meet in Vienna on Nov. 27. “OPEC can’t balance the market alone,” Al Attiyah, who participated in the group’s policy meetings from 1992 to 2011, said in a Nov. 19 phone interview. “This time, Russia, Norway and Mexico must all come to the table. OPEC can make a cut, but what will happen is that non-OPEC supply will continue to grow. Then what will the market do?”

Read more …

Sounds very bearable.

Russia Losing ‘Up To $140 Billion’ From Sanctions, Oil Drop (Reuters)

Russia is suffering losses at a rate of about $40 billion per year because of Western sanctions and $90-100 billion from the drop in the oil price, Finance Minister Anton Siluanov said on Monday. The admission came on the same morning that a central bank official said that banking profits could be 10% lower in 2014, compared to the previous year. External markets are largely closed for Russian banks and companies, some of which – including top banks Sberbank and VTB – are under Western sanctions over Moscow’s role in the Ukraine crisis. Banks’ profits and margins are also under pressure because they have to serve increased domestic demand for loans, while their sources of capital and liquidity are limited.

Read more …

That’s what you get in a world run on zombie money.

Demand Set to Outstrip the $100 Trillion Bond Market Again in 2015 (Bloomberg)

Even in the $100 trillion market for bonds worldwide, one of the most persistent dilemmas facing potential buyers is a dearth of supply. Demand for debt securities has surpassed issuance five times in the past seven years, according to data compiled by JPMorgan. The shortfall is set to continue into 2015, with the New York-based firm predicting demand globally will outstrip supply by $400 billion as central banks in Japan and Europe step up their own debt purchases. The mismatch helps to explain why bond yields worldwide have fallen by more than half since the financial crisis in 2008 to a record-low 1.51% in October, even as borrowing by governments, businesses and consumers added $30 trillion to the market for debt securities. Now, with a global economic slowdown threatening to hold back the U.S. recovery and few signs of inflation anywhere in the developed world, the shortage of bonds may temper the rise in yields forecasters project next year.

“It will keep global yields lower than they would be otherwise,” Chris Low, the New York-based chief economist at FTN Financial, said in a telephone interview on Nov. 19. The demand for bonds “reflects disappointing global growth and that’s been a consistent theme.” Potential bond buyers are poised to spend $2.4 trillion next year on a net basis, while borrowers will issue an estimated $2 trillion of debt, according to JPMorgan, the top-ranked firm for fixed-income research in the U.S. and Europe by Institutional Investor magazine. Since the end of 2007, JPMorgan estimates the potential bond demand has exceeded supply by more than $2.5 trillion, including a gap almost a half-trillion dollars this year. The Bank for International Settlements estimates the amount of bonds outstanding has surged more than 40% since 2007 as countries such as the U.S. increased deficits to pull their economies out of recession and companies locked in low-cost financing as central banks dropped interest rates. Even so, a shortfall emerged.

Read more …

How to shoot yourself in the foot: tell banks they need more deposits, but enact low interest policies that drain them away. All part of the same brilliant plan. They had a visit from Krugman, didn’t they?

Swedish Banks Face Deposit Drain as Interest Rates Slump (Bloomberg)

Sweden’s biggest banks could see deposits plunge as record-low interest rates prod households to start seeking higher returns elsewhere. Net deposit inflows declined to 4.4 billion kronor ($589 million) in the third quarter from 44.3 billion kronor the prior quarter, according to Statistics Sweden. While the period typically sees a seasonal decline, deposits were less than half the 10.2 billion kronor recorded a year earlier. While the financial crisis initially saw an influx of deposits into Nordea Bank and other Swedish lenders amid a flight to safety, record-low interest rates are now driving savers into riskier assets. Swedish bank depositors earn on average about 0.4%, while the country’s benchmark stock index has returned more than 8% this year. “We’ve never had such big savings in rates but they have now hit the floor and will return very little in the coming five to seven years,” Claes Hemberg, an economist at Avanza Bank, which offers online trading accounts as well as deposit accounts, said by phone Nov. 20.

“That knowledge hit home when the Riksbank cut rates to zero and it’s now obvious that there is nothing there to fetch. It’s a real U-turn.” The trend threatens to erode a cheap and stable funding source for banks just as regulators demand more. Swedes have about 60% to 65% of their savings in bank accounts or bonds and the rest in stocks, down from about 70% in 2000, according to Avanza. The shift comes amid a campaign by policy makers, including former Finance Minister Anders Borg, to urge banks to reduce their reliance on market funding and increase deposits. The Financial Stability Council, comprised of the Riksbank, the government, the debt office and the regulator, earlier this year said risks that need to be kept under surveillance include bank reliance on market funding in foreign currency.

Read more …

1.5°C is lowballing it. There is no doubt we’re looking at 2ºC minimum.

World Locked Into ‘Alarming’ Global Warming: World Bank (CNBC)

The world is locked into 1.5°C global warming, posing severe risks to lives and livelihoods around the world, according to a new climate report commissioned by the World Bank. The report, which called on a large body of scientific evidence, found that global warming of close to 1.5°C above pre-industrial times – up from 0.8°C today – is already locked into Earth’s atmospheric system by past and predicted greenhouse gas emissions. Such an increase could have potentially catastrophic consequences for mankind, causing the global sea level to rise more than 30 centimeters by 2100, droughts to become more severe and placing almost 90% of coral reefs at risk of extinction. The World Bank called on scientists at the Potsdam Institute for Climate Impact Research and Climate Analytics and asked them to look at the likely impacts of present day (0.8°C), 2°C and 4°C warming on agricultural production, water resources, cities and ecosystems across the world.

Their findings, collated in the Bank’s third report on climate change published on Monday, specifically looked at the risks climate change poses to lives and livelihoods across Latin America and the Caribbean, Eastern Europe and Central Asia, and the Middle East and North Africa. In the report entitled “Turndown the heat – Confronting the new climate normal,” scientists warned that even a seemingly slight rise in global warming could have dramatic effects on us all. “A world even 1.5°C [warmer] will mean more severe droughts and global sea level rise, increasing the risk of damage from storm surges and crop loss and raising the cost of adaptation for millions of people,” the report with multiple authors said. “These changes are already underway, with global temperatures 0.8 degrees Celsius above pre-industrial times, and the impact on food security, water supplies and livelihoods is just beginning.”

Read more …

Nov 232014
 
 November 23, 2014  Posted by at 8:42 pm Finance Tagged with: , , , , , , ,  5 Responses »


Arthur Siegel Bethlehem-Fairfield shipyards, Baltimore, MD May 1943

A lot of people these days vent their opinions on what’s happening with the Chinese economy, and the opinions are so all over the place they could hardly be more different. Which is interesting, to say the least. Apparently it’s still very hard to understand what does happen ‘over there’.

And I don’t at all mean to suggest that I would know better than Morgan Stanley’s former Asia go-to-man Stephen Roach, or hedge funder Hugh Hendry, or Bob Davis, who just spent 4 years in the country for the Wall Street Journal, or Gwynn Guilford at Quartz, or local Reuters correspondents. It’s just that between them, they disagree so vastly you’d think they’re playing a game with your mind.

Me, personally, I think China’s official economic data should be trusted even less – if possible – than those of most other nations, including Japan, EU+ and the US. And therefore the rate cut last week, and the ones that look to be in the offing soon, constitute neither an act of confidence nor an confident act. China may well already be doing a lot worse than we think.

So where are we right now with all this, what DO we know? The best approach seems to be, as always, to follow the money. Let’s start with Reuters today:

China Ready To Cut Rates Again On Fears Of Deflation

China’s leadership and central bank are ready to cut interest rates again and also loosen lending restrictions, concerned that falling prices could trigger a surge in debt defaults, business failures and job losses, said sources involved in policy-making. Friday’s surprise cut in rates, the first in more than two years, reflects a change of course by Beijing and the central bank, which had persisted with modest stimulus measures before finally deciding last week that a bold monetary policy step was required to stabilize the world’s second-largest economy.

Economic growth has slowed to 7.3% in the third quarter and policymakers feared it was on the verge of dipping below 7% – a rate not seen since the global financial crisis. Producer prices, charged at the factory gate, have been falling for almost three years, piling pressure on manufacturers, and consumer inflation is also weak. “Top leaders have changed their views,” said a senior economist at a government think-tank involved in internal policy discussions.

The economist, who declined to be named, said the People’s Bank of China had shifted its focus toward broad-based stimulus and were open to more rate cuts as well as a cut to the banking industry’s reserve requirement ratio (RRR), which effectively restricts the amount of capital available to fund loans. China cut the RRR for some banks this year but has not announced a banking-wide reduction in the ratio since May 2012. “Further interest rate cuts should be in the pipeline as we have entered into a rate-cut cycle and RRR cuts are also likely,” the think-tank’s economist said.

Friday’s move, which cut one-year benchmark lending rates by 40 basis points to 5.6%, also arose from concerns that local governments are struggling to manage high debt burdens amidst reforms to their funding arrangements, the sources said. Top leaders had been resisting a rate cut, fearing it could fuel debt and property bubbles and dent their reformist credentials, but were eventually swayed by signs of deteriorating growth as the property sector cooled.

This suggests a certain level of control on the part of China, but certainly not a full swagger. And yes, they’re at 5.6%, and so there seems to be a lot of leeway left if you look at the near zero rates we see all over the world.. But then again, China wants, or should we by now say pretends to want, a 7% growth level. The fact that they’re ready to cut more doesn’t bode well for that growth number, even as they pretend to boost growth with those exact same cuts.

We saw China’s largest corporate bankruptcy last week, of the Haixin Iron & Steel Group, and that is not a good sign. China has been borrowing beyond the pale, a process in which the shadow banking system has played a major role, to ‘invest’ in commodities with an eye to much more growth even than the 7% Beijing claims to aim for. The problem with that is that this overbuying has been a substantial part of that same growth number.

And we know the story, certainly after the Qingdao warehouse tale this spring, where nobody could figure out anymore who actually owned what piles of aluminum, copper and iron because they were all used as collateral for multiple loans. In that bleak light, that one of the principal iron and steel companies goes belly up can hardly be seen as a positive message. China may be buying a whole lot less metal. And a whole lot less oil too. Which may drive down global market prices a lot, because everybody’s last hope was China.

Stephen Roach of Morgan Stanley fame, however, think Beijing has it all down. Full control. If they say 7%, 7% it is. Now, I know Roach spent a lot of time over there, but perhaps that was in the days when 10% GDP growth was still a realistic number. And that may not have had much to do with Beijing control.

Now that growth is gone everywhere, other than in stock markets and private banks’ reserves at central banks, where would China get even a 7% number from? And to what extent would Beijing have any control over that at all? Roach has little doubt that whatever number Xi and Li Call will be the correct one:

China Cut Pegs Growth Floor At 7%,: Stephen Roach

After unexpectedly cutting interest rates for the first time in two years, Chinese leaders have revealed their floor for economic growth is around 7%, said Stephen Roach[..] In a surprise announcement Friday, the People’s Bank of China said it was cutting one-year benchmark lending rates by 40 basis points to 5.6%. It also lowered one-year benchmark deposit rates by 25 basis points. [..] The hyperbole about China being an ever-ticking debt bomb stacked with excesses and nonperforming loans is based on emotion rather than empirical data, he said.

Hugh Hendry arrives at a similar conclusion through different means, namely the central bank omnipotence theory. And sure enough, central banks can do a lot, spend a lot, and fake a lot. But if there’s one thing the present global deflation threat tells us they can’t do, it’s to make people spend money. Not in Japan, not in Europe, not stateside, and not in China. It would seem advisable to keep that in mind.

Hugh Hendry: “A Bet Against China Is A Bet Against Central Bank Omnipotence”

Merryn Somerset Webb: But you’re assuming that the correct policy will be followed [in China].

Hugh Hendry: Well, it has been to date. That they haven’t panicked and gone into that crazy splurge in 2009-2011, they haven’t done that. Then the other point with China it’s a bit like the US. It’s had its excess. The problem in the US was it was felt intently with the private banking system which went bankrupt. But, and this is not counter-factual, what if you owned, what if the state is the banking sector? Does it have a Minsky moment? I’d say it doesn’t. So the whole game with Fed QE was to underwrite the collateral values, to keep the credit system moving. So it aimed its fire at mortgage obligations more than Treasuries.

The whole deal with LTROs in Europe has been again when investors at volume banks at 40%-60% discounts to asset volume, the central bank’s coming in and saying, “Actually we’ll buy it from you at full value or something higher. So we are going to endorse the collateral of your assets.” In China it’s the same deal. They’re fiat currency and they can get away with this. So to bet against China or Chinese equities, or the Chinese currency is to bet against the omnipotence of central banks. One day that will be the right trade, just not ready or sure that that is the right trade today.

Gwynn Guilford at Quartz suspects that Beijing if not so much in control as it is freaking out, and that that’s why they’ve cut rates and are publicly suggesting they’ll do it again.

China’s Surprise Rate Cut Shows How Freaked Out The Government Is By The Slowdown

Earlier [this week], the People’s Bank of China slashed the benchmark lending rate by 40 basis points, to 5.6%, and pushed down the 12-month deposit rate 25 basis points, to 2.75%. Few analysts expected this. The PBoC – which, unlike many central banks, is very much controlled by the central government – generally cuts rates only as a last resort to boost growth.

The government has been rigorously using less broad-based ways of lowering borrowing costs (e.g. cutting reserve requirement ratios at small banks, and re-lending to certain sectors). The fact that the government finally cut rates suggests that these more “targeted” measures haven’t succeeded in easing funding costs for Chinese firms. The push that came to shove might have been the grim October data, which showed industrial output, investment, exports, and retail sales all slowing fast.

Those data suggest it will be much harder to get anywhere close to the government’s 2014 target of 7.5% GDP growth, given that the economy grew only 7.3% in the third quarter, its slowest pace in more than five years. But wait. Isn’t the Chinese economy supposed to be losing steam? Yes. The Chinese government has acknowledged many times that in order to introduce the market-based reforms needed to sustain long-term growth and stop piling on more corporate debt, it has to start ceding its control over China’s financial sector.

[..] But clearly, the economy’s not supposed to be decelerating as fast as it is. Tellingly, it’s been more than two years since the central bank last cut rates, when the economic picture darkened abruptly in mid-2012, the critical year that the Hu Jintao administration was to hand over power to Xi Jinping. The all-out push to boost growth that followed made the 2013 boom, but also freighted corporate balance sheets with dangerous levels of debt. But this could only last so long; things started looking ugly again in 2014.[..]

What hasn’t been mentioned yet, and that’s undoubtedly a huge oversight, whether you’re talking about the theoretical Beijing political control over growth numbers, or the nitty gritty of actual numbers in the real economy, is the power, both political and financial, of the Chinese shadow banking industry.

The guys who’ve been making a killing off loans to local officials who couldn’t get state bank loans but were still rewarded for achievements in their constituencies that would have been impossible without loans. Where would China be without shadow banking? What is it today, a third of the economy, half?

And the Xi-Li gang seeks to break its power, for a multitude of reasons. The shadow set-up only works as long as things are great, and the sky’s the limit. When that diminishes, not so much. You can borrow all the way to nowhere when you’re doing great, but when you go broke, all you’re left with is the debt.

That’s the reality a lot of Chinese officials and entrepreneurs find themselves in today. Which is why the next article below says ” .. city officials reminded residents that it is illegal to jump off the tops of buildings ..” They don’t just own money, they own it to the wrong people too. Not that I presume there’s right people to be indebted to in China, but those who volunteer to re-arrange your physical appearance must be last on the list.

Bob Davis spent a few recent years in China for the Wall Street Journal, and he has this to say:

The End of China’s Economic Miracle?

When I arrived, China’s GDP was growing at nearly 10% a year, as it had been for almost 30 years – a feat unmatched in modern economic history. But growth is now decelerating toward 7%. Western business people and international economists in China warn that the government’s GDP statistics are accurate only as an indication of direction, and the direction of the Chinese economy is plainly downward. The big questions are how far and how fast. My own reporting suggests that we are witnessing the end of the Chinese economic miracle.

We are seeing just how much of China’s success depended on a debt-powered housing bubble and corruption-laced spending. The construction crane isn’t necessarily a symbol of economic vitality; it can also be a symbol of an economy run amok. Most of the Chinese cities I visited are ringed by vast, empty apartment complexes whose outlines are visible at night only by the blinking lights on their top floors.

I was particularly aware of this on trips to the so-called third- and fourth-tier cities—the 200 or so cities with populations ranging from 500,000 to several million, which Westerners rarely visit but which account for 70% of China’s residential property sales. From my hotel window in the northeastern Chinese city of Yingkou, for example, I could see empty apartment buildings stretching for miles, with just a handful of cars driving by. It made me think of the aftermath of a neutron-bomb detonation—the structures left standing but no people in sight.

The situation has become so bad in Handan, a steel center about 300 miles south of Beijing, that a middle-aged investor, fearing that a local developer wouldn’t be able to make his promised interest payments, threatened to commit suicide in dramatic fashion last summer. After hearing similar stories of desperation, city officials reminded residents that it is illegal to jump off the tops of buildings, local investors said.

[..] In the late 1990s, the party finally allowed urban Chinese to own their own homes, and the economy soared. People poured their life savings into real estate. Related industries like steel, glass and home electronics grew until real estate accounted for one-fourth of China’s GDP, maybe more.

Debt paid for the boom, including borrowing by governments, developers and all manner of industries. This summer, the IMF noted that over the past 50 years, only four countries have experienced as rapid a buildup of debt as China during the past five years. All four – Brazil, Ireland, Spain and Sweden – faced banking crises within three years of their supercharged credit growth.

[..] China’s immense scale has now become a limitation. As the world’s largest exporter, how much more growth can it count on from trade with the U.S. and especially Europe? [..] Will Mr. Xi’s campaign reverse China’s slowdown or at least limit it? Perhaps. It follows the standard recipe of Chinese reformers: remake the financial system so that it encourages risk-taking, break up monopolies to create a bigger role for private enterprise, rely more on domestic consumption.

But even powerful Chinese leaders have trouble enforcing their will. I reported earlier this year on the government’s plan to handle one straightforward problem: reducing excess steel production in Hebei, the province that surrounds Beijing. Hebei alone produces twice as much crude steel as the U.S., but China no longer needs so much steel, to say nothing of the emissions that darken the skies over Beijing.

It’s hard to say anything definitive about the Chinese economy and the official government numbers, for anyone but the rulers, because those numbers are clad in a murky veil. But what we do know from our experience here in the west is that the murkiness of numbers is invariably used by our ‘leaders’ to make things look better than they are. If anything, it seems reasonable to presume Beijing exaggerates its ‘achievements’ even more than our own clowns.

And in that light, I don’t see how or why the $30 oil I talked about yesterday would be all that far-fetched, given that China has driven most of the world’s growth expectations over the past decade or so, and that it seems to have very little chance of living up to those expectations. Even if for no other reason than because the rest of the world stopped growing.

And that seems to me to be where China’s growth fairy tale has stopped, and must have: ‘consumer spending’ (ugly term) across the world is falling. After all, that’s were all the lowflation and deflation comes from. And central banks can’t force their people to spend. Not in China and not in the west. They only need to look at Japan to see why that is true and how it plays out.

Growth in Japan is gone, and no QE can revive it. In Europe, it’s beyond life support. In the US, things look a little different on the surface, but the US can’t withdraw and do well in the present economic system if Japan and Europe don’t.

And that’s China’s story too. No growth anywhere to be seen, and they’re supposed to have 7%? It’s simply not possible. At least that we know.