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Where Is China On The Map Exactly?

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.

Debt Rattle November 17 2014

Nov 172014
 
 November 17, 2014  Posted by at 12:34 pm Finance Tagged with: , , , , , , , , , , ,  12 Responses »


NPC US Naval Research Lab, Bellevue, DC 1925

• Japan Falls Into Recession As Consumers ‘Stop Spending’ (BBC)
• China Bad Loans Jump Most Since 2005 (Bloomberg)
• China’s Shadow Banking Grinds To A Halt As Bad Debt Surges (Zero Hedge)
• UK PM Cameron Warns On Second Global Crash (CNBC)
• Global Markets ‘Living On Borrowed Time’: Wilbur Ross (CNBC)
• G20 Final Communique Lists 800 Measures For Economic Growth (Guardian)
• The G20 Small Print: Summits Promise More Than They Deliver (Guardian)
• Cracks Widen At OPEC As Oil Prices Tumble (CNBC)
• Companies Scouring Europe for Best Tax Deals Are Turning to France (Bloomberg)
• The Explosive Ascent Of The Podemos Party In Spain (Guardian)
• Ukraine Finances In Jeopardy: IMF (CNBC)
• Russia Claims Satellite Image Shows Moment MH17 Shot Down By Fighter Jet (Mirror)
• Putin Rebukes Ukraine for Cutting Links With East Regions (Bloomberg)
• How Almonds Are Sucking California Dry (BBC)
• Are We Really Interested In Saving Time? (John Gray)
• The Trouble With the Genetically Modified Future (Bloomberg)
• World Is Crossing Malnutrition Red Line (BBC)

And Abe will use his self wrought crisis to grab more power through an election in which he has no real competition.

• Japan Falls Into Recession As Consumers ‘Stop Spending’ (BBC)

Japan’s economy unexpectedly shrank for the second consecutive quarter, marking a technical recession in the world’s third largest economy. GDP fell at annualised 1.6% from July to September, compared with forecasts of a 2.1% rise. That followed a revised 7.3% contraction in the second quarter, which was the biggest fall since the March 2011 earthquake and tsunami. Tokyo Correspondent Rupert Wingfield-Hayes says, “ordinary people in Japan have stopped spending money”. Economists said the weak economic data could delay a sales tax rise. Prime Minister Shinzo Abe is widely expected to call a snap election to seek a mandate to delay an increase in the sales tax to 10%, scheduled for 2015.

The tax increase was legislated by the previous government in 2012 to curb Japan’s huge public debt, which is the highest among developed nations. April saw the first phase of the sales tax increase, from 5% to 8%, which hit growth in the second quarter and still appears to be having an impact on the economy. The economy shrank 0.4% in the third quarter from the quarter previous. The data also showed that growth in private consumption, which accounts for about 60% of the economy, was much weaker than expected. The next tax rise had already been put in question by already weak economic indicators.

Read more …

I think these numbers are grossly lowballing the problems.

• China Bad Loans Jump Most Since 2005 (Bloomberg)

China’s bad loans jumped by the most since 2005 in the third quarter, fueling concern that a cooling economy will be further weakened as banks limit lending to avoid credit risks. Nonperforming loans rose by 72.5 billion yuan ($11.8 billion) from the previous quarter to 766.9 billion yuan, the China Banking Regulatory Commission said in a statement on Nov. 15. Soured credit accounted for 1.16% of lending, up from 1.08% three months earlier. As China heads for the weakest economic expansion since 1990, Communist Party leaders have discussed lowering the nation’s growth target for 2015, according to a person with knowledge of their talks. Bankers’ low appetite for risk and their rising concerns about asset quality are leading to a “sluggish” expansion in credit, according to UBS AG.

“We are still suffering from the aftermath of the credit binge and massive stimulus measures put in place in 2008,” said Rainy Yuan, a Shanghai-based analyst at Masterlink Securities Corp. “Banks have accelerated recognition of their bad loans in the last two quarters so that they could start the clean-up process.” Still, the pace of debt souring may have reached its peak, Jim Antos, a Hong Kong-based analyst at Mizuho Securities Asia, said in a note today. He estimated that nonperforming loans at Hong Kong-listed banks will probably increase by 18% in 2015, slowing from an estimated 31% gain in 2014.

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The potential fall-out from the demise of shadow banking in China is like that of a nuclear bomb.

• China’s Shadow Banking Grinds To A Halt As Bad Debt Surges (Zero Hedge)

[..] as China finally reveals little by little the true extent of its gargantuan bad debt problem (which is far worse than ever in history, although Beijing is taking its time in making the necessary revelations: and after all Chinese banks are all SOEs – if needed they can all just get a few trillions renminbi in in liquidity injections a la the “developed west”), it is also slamming the breaks on the shadow banking system that for years what the sector where marginal credit creation, and thus growth as well as bad debt formation, was rampant. And as Japan showed so clearly just 48 hours after the end of America’s own QE3, reserves, like credit and money, are infinitely fungible in the global interconnected market. And infinitely, no pun intended, in demand, because if one central bank ends the goosing of risky assets, another has to immediately step in its place.

So while it has been widely documented that Japan is doing all in its power to crush the Japanese economy and in the process to send the Nikkei to all time highs, little has been said about a far greater slowdown in domestic (and indirectly global) credit creation using the “China” channel, where shadow banking has just slammed shut. Finally recall: it was the epic collapse in America’s own shadow banking liabilities in the aftermath of the Fannie and Freddie, and shortly thereafter, Lehman bankruptcy, which wiped out $8 trillion from the US shadow banking peak, that was the main reason for the Fed’s relentless intervention and attempts to reflate systemic funding since then. If the shadow banking collapse virus has finally jumped to China, there is no saying just how far Chinese GDP can drop if it is now constrained on the top side by surge in bad debt. One thing is certain: Japan’s paltry, in the grand scheme of things, expansion in its own QE will barely be felt if the record Chinese credit creation dynamo is indeed slamming shut.

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Cameron’s set-up for more policies that enrich the rich.

• UK PM Cameron Warns On Second Global Crash (CNBC)

The global economy is again showing worrying signs of an imminent financial crisis, according to David Cameron, the prime minister of the United Kingdom, who has warned of a dangerous backdrop of instability and uncertainty. Writing in the U.K.’s Guardian newspaper, he said that this weekend’s G-20 summit in Brisbane had further underlined the problems facing the global economy. “Six years on from the financial crash that brought the world to its knees, red warning lights are once again flashing on the dashboard of the global economy,” he said in the article, published late Sunday. Global trade talks have stalled, the eurozone is teetering on the brink of recession and emerging markets are now slowing down, he said.

The spread of Ebola, the conflict in the Middle East and Russia’s “illegal” actions in Ukraine are all adding to the global insecurity, according to Cameron. His words echo those of the Bank of England last week, which said that there were downside risks for the U.K. from weaker euro area activity which could also weigh on exports and be associated with rising market volatility. The U.K. is heavily indebted compared to most of its peers but has been praised by organizations like the IMF for being the fastest growing G-7 economy since the financial crash of 2008. The government – majority-led by the right-of-center Conservative Party – has followed a path of austerity and fiscal restraint since coming to power in 2010, although it has still missed deficit targets during that period.

Criticized at first, the austerity policies have come at the same time as a significant drop in unemployment in the U.K., with the Bank of England now looking to raise interest rates next year. Opposition policymakers argue the country has become unbalanced, with poorer citizens bearing the brunt of the cuts in spending. This thesis gained some backing on Monday with a new report that showed that the poorest groups in U.K. society lost the biggest share of their incomes on average following the benefit and direct tax changes since 2010. The research, by the London School of Economics and the University of Essex, also showed that the changes have not contributed to cutting the deficit and have instead been spent on tax breaks.

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No kidding.

• Global Markets ‘Living On Borrowed Time’: Wilbur Ross (CNBC)

Global financial markets are living on borrowed time with geopolitical crises and deflationary risks still a concern, private-equity billionaire Wilbur Ross told CNBC. “I think [markets] are living on borrowed time because investors have no alternatives,” the chairman and chief executive of private equity firm WL Ross & Co told CNBC Europe’s “Squawk Box” on Monday. “Everyone’s scared to death of long-term fixed income because we know rates will be going up, short-term fixed income doesn’t give you any yield, commodities are going no place except down [so] where else can you put money unless you want to buy a $100 million [Alberto] Giacometti sculpture,” he said.

So far, it has been a calm November for global stock markets when compared to the sharp selloff and volatility seen in October on the back of global growth worries. In the last thirty days, for instance, the FTSE100 has gained 7.4% and the S&P 500 and Dow Jones almost 10% – and the Nasdaq over 11% – from the market plunge seen in mid-October. Ross told CNBC earlier in the year that his company had been selling six times as much as it had been buying on the back of attractive stock valuations in the U.S. “We have been a seller on balance, not because we think a terrible crash is coming but we need to sell opportunistically because we tend to have relatively large stakes in relatively thin securities so we have to sell when the markets are very strong.”

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” … the IMF and the OECD had calculated the commitments “if fully implemented” would deliver an additional 2.1% to the GDP of G20 economies.” How crazy does that sound to you?

• G20 Final Communique Lists 800 Measures For Economic Growth (Guardian)

G20 leaders have approved a package of 800 measures estimated to increase their economic output by 2.1% by 2018 if fully implemented. At the end of the two-day summit in Brisbane, Australia, leaders representing 85% of the world’s economy also called for “strong and effective action” on climate change, with countries urged to reveal new emissions reduction targets in the first few months of next year. Australia, the host nation, had wanted to keep the summit focused on economic growth rather than climate change, but new commitments by China, the US and Japan helped build momentum for stronger global action to curb greenhouse gases. The host prime minister, Tony Abbott, said the summit had “very substantially delivered” on the goals of Australia’s presidency: boosting growth and employment, enhancing global economic resilience and strengthening global institutions. “We have signed off on a peer-reviewed growth package that, if implemented, will achieve a 2.1% increase in global growth over the next five years, on top of business as usual,” he said.

“This year the G20 has delivered real and practical outcomes. Because of the efforts the G20 has made this year, culminating in the last 48 hours, people right around the world are going to be better off … through the achievement of inclusive growth and jobs.” G20 finance ministers and central bank governors who gathered in Sydney in February agreed to develop policies “to lift our collective GDP [gross domestic product] by more than 2% above the trajectory implied by current policies over the coming five years”. The communique, issued after the leaders’ summit in Brisbane on Sunday said the IMF and the OECD had calculated the commitments “if fully implemented” would deliver an additional 2.1% to the GDP of G20 economies compared with baseline forecasts issued last year. “This will add more than US$2tn to the global economy and create millions of jobs,” the communique said. It said countries would hold one another to account for implementing the commitments spelled out in the Brisbane action plan and comprehensive growth strategies. But the IMF and OECD analysis sounded a note of caution, pointing to “the high degree of uncertainty entailed in quantifying the impact of members’ policies”. G20 members had set out “close to 1,000 individual structural policy commitments, of which more than 800 are new”.

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“What’s not clear is whether the long drama that has been the global financial crisis will end happily or with bodies littering the stage.” Excuse me, but that is painfully clear.

• The G20 Small Print: Summits Promise More Than They Deliver (Guardian)

The G20 is going to boost living standards and create better jobs. It has an 800-point action plan that will increase the size of the global economy by more than 2% over the next four years. It is going to step up the fight against climate change, make banks safer, modernise infrastructure, crack down on tax evasion and win the battle against Ebola. Not bad for a weekend in Brisbane. A word of advice: read the small print. Summits invariably promise more than they deliver; commitments made in communiqués are forgotten as soon as leaders have jetted out of the country. A quick look at the document pieced together in Brisbane suggests it is the familiar wishlist of pledges, most of which will not be met. Did the G20 sign up to numerical targets for cutting carbon emissions? No it did not. Did it put extra money on the table for tackling Ebola? No.

Is it expecting the private sector to produce most of the money for infrastructure projects? Yes. Is the action against tax evasion weakened by the failure to make registers of beneficial ownership open to public scrutiny? Most definitely. Is the G20 complacent in thinking that it has fixed the banks? Almost certainly. The G20 is right when it says the global recovery is “slow, uneven and not delivering the jobs needed”. The assessment that the global economy is being held back by a lack of demand is bang also on the money. Few would dispute the conclusion that there are both financial and geopolitical risks out there. It was something of a triumph for Barack Obama to get climate change in the communiqué at all given the opposition of Tony Abbott, the summit’s host. What’s clear is that the world is at a critical juncture. What’s not clear is whether the long drama that has been the global financial crisis will end happily or with bodies littering the stage.

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They’re meeting in 10 days. And no-one is going to volunteer to produce less. At current prices, they need to pump full blast.

• Cracks Widen At OPEC As Oil Prices Tumble (CNBC)

Oil prices firmly below $80 a barrel are rattling nerves within OPEC and calls are mounting for concrete action at the group’s crucial next meeting this month. Over the weekend oil-producing countries Kuwait and Iran raised concerns about oil’s worrying lows and what OPEC should be doing to help protect its members’ economies. Kuwait’s cabinet and the country’s Supreme Petroleum Council held an “extraordinary” joint meeting Sunday to consider measures to stop the slide in prices. According the official KUNA news agency, the meeting “discussed the steps that have to be taken on all levels…including having consultations with fellow OPEC member states for maintaining interests of all parties”.

This comes as a surprise considering the country’s earlier statements of confidence in a rebound of prices and that there was no reason to panic Only last week Kuwait’s oil minister stressed that he did not believe there would be a reduction in output by OPEC when its 12 members gather in November 27 in Vienna. Also Sunday Iran’s oil minister criticized countries of trying to justify keeping oil production at the current level – which were set before countries such as Iran were allowed to return to selling oil in the global marketplace. Iran is already tapping its sovereign wealth fund to mitigate the impact of the oil price slump.

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Holland, Luxembourg, Ireland, now France. We add one per day.

• Companies Scouring Europe for Best Tax Deals Are Turning to France (Bloomberg)

Move over, Ireland. Companies from Microsoft to China’s Huawei scouring Europe for fiscally attractive shores are turning to an unlikely country: France. As a base for research and development teams, that is. Tax breaks for R&D, €5.6 billion ($7 billion) this year alone, combined with world-class scientists are making France a honey pot for technology companies. As the French parliament debates how to shrink the country’s budget deficit this month some lawmakers are demanding reining in the R&D credits, saying some companies are abusing them. President Francois Hollande has pledged it’s a budget line he won’t touch. “The research tax breaks are decisive — they make France economically more attractive,” said Olivier Piou, who heads Gemalto, an Amsterdam-based developer of security products for bank cards, mobile phones and passports.

The fiscal breaks offset a significant part of Gemalto’s R&D budget, making it more compelling to keep 30% of its 2,000 researchers worldwide in France, Piou said. Ireland’s corporate tax of 12.5%, less than half France’s 33.3%, ensures companies from Google to Apple keep their European headquarters in the Celtic nation. Still, for R&D, global companies are increasingly beefing up their teams in France, transforming the country into a European technology hub, mirroring the U.K.’s dominance in the financial industry and Germany’s manufacturing prowess. Hollande boasted about the “edge” the measure gives France during his nationally televised interview on Nov. 6. “Often we have our handicaps, but here we have an advantage,” he said.

The jobs being created and the technological ecosystem the tax breaks are spawning is just what Hollande needs as he struggles to rekindle growth and reverse record-high joblessness. The measure, introduced in the 1980s, was expanded by former President Nicolas Sarkozy. It is among the few of his predecessor’s policies retained by Hollande. More than 17,000 companies, ranging from biotechnology and energy to software and gaming, are cashing in on the tax advantages and subsidies for innovation this year in France, with an average break of about €323,500. The R&D tax break is France’s second-biggest behind a payroll credit, a measure to spur competitiveness, according to the Budget Ministry. The move, meant to keep the brightest minds and high-value jobs at home, is also prompting foreign companies to set-up laboratories or hire French algorithm whizzes.

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This is what Europe needs: fresh blood in politics, new parties, different visions. And truly sovereign countries.

• The Explosive Ascent Of The Podemos Party In Spain (Guardian)

Spain is in a mess, with unemployment at almost 25%, and over half its young people without work, a plight that can damage an individual for life. And in comparison with Britain it has been transformed by immigration at lightning speed: in the early 90s fewer than one in every hundred Spaniards were immigrants; in the noughties, the number surged sixfold, from 924,000 immigrants officially registered in 2000 to 5.6 million in 2009. Yet, despite rampant joblessness, poverty and insecurity, parties that have prioritised clampdowns on immigrants have failed to thrive. Instead, disaffection has found a different expression: a party whose premise is that ordinary Spaniards should not have to pay for a crisis they had nothing to do with.

Podemos is founded on the politics of hope: its English translation is “we can”. It was founded only this year but won 1.2m votes and five seats in May’s European elections. And now it has topped opinion polls, eclipsing the governing rightwing People’s party and the ostensibly centre-left PSOE – the Spanish Socialist Workers’ party. There are few precedents for such an explosive political ascent in modern western Europe; in Spain, a discredited political elite appears to be tottering. Not that Podemos simply materialised out of nowhere. In the buildup to Spain’s 2011 general election, hundreds of thousands of indignados took to the streets in protest at the political elite. Yet without political leadership and direction, such movements – although they can mobilise the disengaged – invariably fizzle out.

As Iñigo Errejón, the Podemos election supremo, has written, before May’s European elections, “social mobilisation had been in retreat. Among large sections of the left the most pessimistic assumptions prevailed.” But Podemos was the child of the indignados movement, a party that emphasises bottom-up democratic participation: where the indignados had neighbourhood assemblies, Podemos has “circles” that take similar forms. There are even circles among Britain’s Spanish diaspora in London and Manchester. The funding for its European campaign was largely crowdsourced, and its policies and priorities are decided partly through online voting.

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That winter may yet be awfully hard.

• Ukraine Finances In Jeopardy: IMF (CNBC)

A $17 billion loan may not be enough for Ukraine to manage its finances if the conflict with Russia continues, the International Monetary Fund warned over the weekend. All parties involved in the Crimean crisis must work together, “because it’s very hard to imagine how the finances of Ukraine can be kept under control [otherwise],” the group’s deputy managing director David Lipton told CNBC at the G-20 summit in Brisbane. In April, the group agreed to a $17 billion two-year rescue package for Kiev with the aim of restoring macroeconomic stability. Yet that goal remains far off with the country in the midst of a currency crisis and facing an 8% contraction in GDP this year. The hryvnia plunged to record lows against the U.S. dollar in recent days, slumping nearly 90% in value year-to-date. Meanwhile, the World Bank estimates that economic growth may only return in 2016.

“We are working with Ukraine to try and stabilize their economy, which has become destabilized by what’s happened, including this conflict. This program stabilization really is now under threat from the flaring up of conflict,” said Lipton. “We’ve been presuming that Ukraine and the separatists would make some progress after the ceasefire, [and] that Russia would co-operate with that.” However, signs of co-operation remain to be seen. A ceasefire deal between pro-Russian rebels and government forces in September has been repeatedly violated as both groups accuse each other of launching fresh offensives in eastern Ukraine. At the G-20 summit, Russian president Vladimir Putin said “there was a good chance of resolution” in the eight-month old conflict even as Reuters reported fresh rounds of artillery file in Donetsk over the weekend.

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Report immediately ridiculed.

• Russia Claims Satellite Image Shows Moment MH17 Shot Down By Fighter Jet (Mirror)

These sensational new pictures allegedly show Malaysia Airlines flight MH17 being shot down by a fighter jet. The photographs were broadcast tonight by Russian state media as evidence the passenger plane was shot down in July by a Ukrainian warplane and not a ground to air missile as previously believed. It was claimed that the images were produced by a British or US satellite. The “leaked” pictures show a missile streaking towards the MH17 flight which was downed, killing all 298 people on board, it was claimed.  TV presenter Mikhail Leontiev claimed the mysterious source who provided the images concluded they showed “how a Mig-29 fighter plane destroys the Boeing passenger plane”.

The West has repeatedly suggested the plane was shot down by pro-Moscow rebels using a Russian-made BUK missile system. Russia has argued an unidentified plane was in vicinity at the time of the crash, and that Ukraine and the West have hushed up this fact.  The Kremlin-owned channel’s presenter said: “Today we have all grounds to suppose that a State crime was committed by those who deliberately destroyed the plane. And by those who are cynically hiding it, having the full information.” The extraordinary broadcast came ahead of Western leaders including David Cameron confronting Vladimir Putin over the crash at a summit in Australia. Channel One claimed: “We have at our disposal a sensational shot, supposedly made by foreign satellite spy during the final seconds of MH17 above Ukraine.” The reported disputed a BUK missile as the cause of the tragedy. “To cut it short, it looks like there was no BUK and no launch from the ground. There were dozens professional and thousands of amateur witnesses, and no-one registered it,” claimed Leontiev.

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They even threw out a human rights treaty.

• Putin Rebukes Ukraine for Cutting Links With East Regions (Bloomberg)

Russian President Vladimir Putin responded to his isolation at a global summit over his role in fomenting fighting in Ukraine by chastising authorities in Kiev. Putin said his counterpart in Ukraine, Petro Poroshenko, made a “big mistake” by moving to sever banking services and pull out state companies from two breakaway regions. He spoke after Group of 20 leaders berated Russia over the conflict at a summit in Brisbane, Australia. “Why are the authorities in Kiev now cutting off these regions with their own hands?” Putin told reporters. “I do not understand this. Or rather, I understand that they want to save money, but this is not the right occasion and the right time to do this.” Putin, who was told by fellow leaders to stop arming pro-Russian rebels, said he was leaving the G-20 gathering early to get some sleep on the flight home before tomorrow’s meetings. Russia has rejected accusations that it’s supplying manpower and weapons to support the insurgents who have carved out separatist republics in eastern Ukraine.

The government in Kiev is moving to revoke the special status and cut off links with rebel-held areas of the regions of Luhansk and Donetsk after they held elections two weeks ago that Ukraine considers illegitimate. Under a presidential decree issued yesterday, state companies and institutions were ordered to suspend work and evacuate employees with their consent. The central bank must stop Ukrainian lenders from servicing accounts used by individuals and companies in the breakaway areas, according to the document on Poroshenko’s website. “This is a big mistake because in this way they are cutting off these regions with their own hands,” Putin said, adding that he wants to discuss the decision with Poroshenko. “I do not think this a fatal blow though. I hope that life and practice in reality will yet make their adjustments to these plans.”

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” .. what this place is witnessing is a dust bowl of truly Steinbeckian proportions .. comedians joke that it’s so dry in California these days that the longest lines at Disneyland are for the water fountains – or ponder replacing the bear on the California state flag with a camel.”

• How Almonds Are Sucking California Dry (BBC)

California’s worst drought for more than a century is causing huge problems for farmers, who need a trillion gallons of water per year for their almond orchards alone. But it also leaves homeowners facing difficult choices about what to do with their lawn I have a neighbour, Deborah, and ever since I’ve lived here, her front lawn has been luxuriant and green. But wandering by the other day I did a double take. Mounds of earth were piled up where the grass had once been, and an army of workmen had set about installing succulent plants and ground cover, and the kind of prickly cactus you normally see in children’s cartoons. By the time Deborah had finished explaining why she was doing it, I could hardly believe I hadn’t done the same thing myself. Aside from the satisfaction of knowing you are planting something that is actually meant to grow in these desert-like conditions – as opposed to grass, which sucks up water with the zeal of an inebriate who has stumbled upon the keys to the drinks cabinet – she also stands to save a fortune on her water bill.

She even avoids having to confront a sorry, burned-out apology-for-a-front-lawn every time she leaves the house. Added to which, the city of Los Angeles actually paid her to do it – generously too, by all accounts. And if paying people to rip up their lawns and replace them with drought-tolerant plants strikes you as an odd use of government resources, then all I can say to you is that desperate times call for desperate measures – and these are desperate times. California is now in its third year of drought. The reservoirs are running dry and so too are the ground water supplies. While comedians joke that it’s so dry in California these days that the longest lines at Disneyland are for the water fountains – or ponder replacing the bear on the California state flag with a camel – what this place is witnessing is a dust bowl of truly Steinbeckian proportions. It’s so dry, in fact, that officials were reportedly thinking of adding a fifth level to the current four-tiered drought scale, which currently rates 99% of the state as “abnormally dry”.

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Intriguing piece by brilliant philosopher John Gray.

• Are We Really Interested In Saving Time? (John Gray)

A new food substitute has been advertised as time-saving. But when we say we want to save time, is this a lie we tell ourselves to mask other desires, asks John Gray. It might seem an extreme step to give up eating meals in order to save time, but this is how a new food substitute is being promoted. Soylent is a drink made by adding oil and water to a specially prepared powder that the manufacturers claim contains all the nutrients the human body needs. It’s described as creamy and faintly sweet-tasting, and enthusiasts who have given up regular meals to live on the fluid say it’s quite satisfying. With a month’s supply costing around £40, it’s cheaper than ordinary food and if it becomes widely popular will be even cheaper in future. The suggestion is that you can give your body the nourishment it needs without thought or bother, just by knocking back a drink of the fluid two or three times a day. Invented by a 24-year old American software engineer, Soylent is being promoted as a solution to what many people like to think is the bane of their lives – a perpetual shortage of time.

The name of the new food has a curious history. In Soylent Green, an unsettling film that appeared in 1973, the Soylent in question was a green wafer supposedly made from plankton algae. Taking its theme from a novel Make Room! Make Room!, published by the American science fiction writer Harry Harrison in 1966, the film is set in a heavily overpopulated world in which much of humankind lives by consuming the wafer. The action takes place in New York City, by then an overcrowded megalopolis containing 40 million people. The film’s story line tells how a New York City Police Department detective investigating a suspicious death eventually discovers that the wafer on which the world’s population lives is in fact made from human remains. The film ends with the detective, by now a broken-down figure, exclaiming, “Soylent Green is people!”

Human numbers have greatly increased over the past 40 years – from just under four billion when the film was made to well over seven billion now. At the same time concern about overpopulation, which was widespread when the film was made, has become distinctly unfashionable. Nowadays many would view as heresy the idea that there could be too many human beings on the planet, and I’ve not come across any mention of overpopulation in the publicity surrounding the Soylent that’s being marketed today. The new meal replacement isn’t being presented as a remedy for world hunger or an overcrowded planet. It’s an affliction of the well-fed that the liquid food is meant to cure.

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Losing the precautionary principle is never a good idea. But we definitely lost it. And it’s very hard to get it back, that probably requires a disaster to happen.

• The Trouble With the Genetically Modified Future (Bloomberg)

Like many people, I’ve long wondered about the safety of genetically modified organisms. They’ve become so ubiquitous that they account for about 80% of the corn grown in the U.S., yet we know almost nothing about what damage might ensue if the transplanted genes spread through global ecosystems. How can so many smart people, including many scientists, be so sure that there’s nothing to worry about? Judging from a new paper by several researchers from New York University, including “The Black Swan” author Nassim Taleb, they can’t and shouldn’t. The researchers focus on the risk of extremely unlikely but potentially devastating events. They argue that there’s no easy way to decide whether such risks are worth taking – it all depends on the nature of the worst-case scenario.

Their approach helps explain why some technologies, such as nuclear energy, should give no cause for alarm, while innovations such as GMOs merit extreme caution. The researchers fully recognize that fear of bad outcomes can lead to paralysis. Any human action, including inaction, entails risk. That said, the downside risks of some actions may be so hard to predict – and so potentially bad – that it is better to be safe than sorry. The benefits, no matter how great, do not merit even a tiny chance of an irreversible, catastrophic outcome. For most actions, there are identifiable limits on what can go wrong. Planning can reduce such risks to acceptable levels. When introducing a new medicine, for example, we can monitor the unintended effects and react if too many people fall ill or die.

Taleb and his colleagues argue that nuclear power is a similar case: Awful as the sudden meltdown of a large reactor might be, physics strongly suggests that it is exceedingly unlikely to have global and catastrophic consequences. Not all risks are so easily defined. In some cases, as Taleb explained in “The Black Swan,” experience and ordinary risk analysis are inadequate to understand the probability or scale of a devastating outcome. GMOs are an excellent example. Despite all precautions, genes from modified organisms inevitably invade natural populations, and from there have the potential to spread uncontrollably through the genetic ecosystem. There is no obvious mechanism to localize the damage.

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Overeating is malnutrition too.

• World Is Crossing Malnutrition Red Line (BBC)

Most countries in the world are facing a serious public health problem as a result of malnutrition, a report warns.The Global Nutrition Report said every nation except China had crossed a “malnutrition red line”, suffering from too much or too little nutrition. Globally, malnutrition led to “11% of GDP being squandered as a result of lives lost, less learning, less earning and days lost to illness,” it added. The findings follow on from last year’s Nutrition from Growth summit in London. At the 2013 gathering, 96 signatories made “significant and public commitments to nutrition-related actions” and this report was an assessment of the work that still needed to be done and the progress made. “Malnutrition is an invisible thing, unless it is very extreme,” explained Lawrence Haddad, co-chairman of the independent expert group that compiled the report. “This invisibility stops action happening but it does not stop bad things happening to the children, ” he told BBC News. “It does not stop preventing the children’s brains from developing; it does not stop their immune systems from not developing. “It is a silent crisis and we are trying to raise the awareness of the extent of malnutrition and the damage it does.”

The UN World Food Programme estimates that poor nutrition causes nearly half of deaths in children aged under five – 3.1 million children each year. Dr Haddad, a senior research fellow for the International Food Policy Research Institute, highlighted three areas that the report focused on. “The first thing we did was to say that we were not just going to focus on undernutrition, which is closely related to hunger, but also overnutrition and obesity,” he explained. “Malnutrition just means bad nutrition.” The second thing we did was focus on not just the outcomes, we also focused on the drivers. We looked at underlying factors, such as sanitation, water quality, food security, spending on nutrition and women’s status etc. “The third thing we did was to look at a very specific set of commitments that were made in the 2013 summit that David Cameron hosted in London.”

The expert group’s assessment on global nutrition drew a number of conclusions. “First of all, it is really interesting when you put all the data together you find out that nearly every country in the world has crossed a red line on nutrition in terms of it being a serious public health issue,” Dr Haddad observed. “In fact, the only country that has not is China… [but] they are very close to crossing a red line and that data is four to five years old. He added: “Often you read that it is just a problem that happens in Asia and Africa but, actually, every country in the world is grappling with malnutrition.” “The second big headline is almost half of the countries are grappling with more than one type of malnutrition. About half of the countries in the world are not just grappling with the undernutrition problem but also the overnutrition problem as well. “Countries like the UK dealt with the undernutrition problem, then there was a bit of a respite but then had to start dealing with overnutrition.

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Debt Rattle Halloween 2014

Oct 312014
 
 October 31, 2014  Posted by at 12:03 pm Finance Tagged with: , , , , , , , , , , , ,  3 Responses »


Russell Lee Saloon, Craigville, Minnesota Aug 1937

• Kuroda Jolts Markets With Assault on Deflation Mindset (Bloomberg)
• Kuroda Surprises Again With Stimulus Boost as Japan Struggles (Bloomberg)
• Japan Stocks Soar To 7-Year High On BOJ, Pension Fund Boost (Bloomberg)
• US And China Tighten In Unison, And Damn The Torpedoes (AEP)
• Shadow Banking Grows to $75 Trillion Industry (Bloomberg)
• The $75 Trillion Shadow Hanging Over The World (Telegraph)
• QE Central Bankers Deserve A Medal For Saving Society (AEP)
• Falling Bank Deposits Add to China Economy Warning Sign (Bloomberg)
• China Snares 180 Fugitives Abroad in Global Anti-Graft Sweep (Bloomberg)
• Time To Take A Zero-Tolerance Approach To The Banks (Guardian)
• New Junk Bond Risk: It Matters Who Owns What (CNBC)
• Putin To Western Elites: Play-Time Is Over (Dmitry Orlov)
• Russia Agrees to Terms With Ukraine Over Gas Supply (Bloomberg)
• Oil Rout Seen Diluting Price Appeal of US LNG Exports (Bloomberg)
• Oil Price Declines Have Small-Cap Shale Investors Scrambling (Reuters)
• Iran A ‘Time Bomb’ For Oil Prices (CNBC)
• Drones Spotted Over Seven French Nuclear Sites (AFP)
• US Fracking Advocates Urged to Win Ugly by Discrediting Foes (Bloomberg)

PM Abe and the BOJ are panicking big time. Japan debt is already well over 400% of GDP, and nothing they have done has had any positive effect other than those they’ve made up. It’s a matter of when, not if. Expect ugly.

• Kuroda Jolts Markets With Assault on Deflation Mindset (Bloomberg)

Today’s decision to expand Japan’s monetary stimulus may be regarded as shock treatment in the central bank’s effort to affect confidence levels. Bank of Japan Governor Haruhiko Kuroda’s remedy to reflate the world’s third-largest economy through influencing expectations saw the yen sliding and stocks climbing. Kuroda led a divided board in Tokyo in a surprise decision to expand unprecedented monetary stimulus. Bank officials hadn’t provided any hints in recent weeks that additional easing was on the cards to help reach the BOJ’s inflation goal. Kuroda, 70, repeatedly indicated confidence this month that Japan was on a path to reaching his 2% target in the coming fiscal year. Just three of 32 economists surveyed by Bloomberg News predicted extra easing. “We have to admit that this is sort of a second shock – after we had the first shock in April last year,” said Masaaki Kanno, chief Japan economist at JPMorgan Chase, referring to the first round of stimulus rolled out by Kuroda in 2013.

Kanno, who used to work at the BOJ, said “this is very effective,” especially because it comes the same day as the government pension fund said it will buy more of the nation’s stocks. The BOJ chief, a former Finance Ministry bureaucrat who at one time was in charge of currency affairs, had repeatedly said that the central bank wouldn’t hesitate to expand asset buying if necessary. At the same time, his public confidence in Japan being on a path to reach the inflation target left the idea that no stimulus was coming today, Kanno said. “Kuroda loves a surprise – Kuroda doesn’t care about common sense, all he cares about is meeting the price target,” said Naomi Muguruma, a Tokyo-based economist at Mitsubishi UFJ Morgan Stanley Securities Co., who correctly forecast more stimulus today. “Kuroda knows that when he moves it must be big and surprising.” The BOJ is aiming to pre-empt any risk of a delay in ending Japan’s “deflationary mindset,” it said in today’s policy statement. Kuroda later told reporters that surprising the markets wasn’t his intention.

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And the Japanese are still not spending, so inflation can’t and won’t rise. The Nikkei may have gained 5%, but the people in the street only got even more scared and prudent.

• Kuroda Surprises Again With Stimulus Boost as Japan Struggles (Bloomberg)

Bank of Japan Governor Haruhiko Kuroda led a divided board to expand what was already an unprecedentedly large monetary-stimulus program, boosting stocks and sending the yen tumbling. Kuroda, 70, and four of his eight fellow board members voted to raise the BOJ’s annual target for enlarging the monetary base to 80 trillion yen ($724 billion), up from 60 to 70 trillion yen, the central bank said in Tokyo. An increase was foreseen by just three of 32 analysts surveyed by Bloomberg News. The BOJ also cut its forecasts for consumer prices. Facing projections for failure to reach the BOJ’s 2% inflation target in about two years, and with the economy under pressure from a higher sales tax, enlarging the stimulus at some point had been anticipated by analysts for months. Kuroda opted not to telegraph his intentions in recent weeks, leaving today’s move a surprise – sending the Nikkei 225 Stock Average to the highest level since 2007.

“It was great timing for Kuroda,” said Takeshi Minami, Tokyo-based chief economist at Norinchukin Research Institute, one of two who correctly forecast today’s easing. Minami noted that it follows the Federal Reserve’s ending of quantitative easing, helping highlight the differing paths for the U.S. and Japan. Today’s decision comes almost 19 months after Kuroda unleashed his initial asset-purchase plan, with the intention of doubling the monetary base. That move similarly drove up stocks and undercut the yen. Since then, a more competitive exchange rate has triggered higher corporate earnings, and asset-price gains have expanded Japanese households’ net worth. The bank will purchase exchange-traded funds so their amounts outstanding increase by about 3 trillion yen a year, it said. Japanese real estate investment trusts will be purchased with a view to raising their amounts outstanding by about 90 billion yen annually, according to the bank.

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Down 5% again on Monday?

• Japan Stocks Soar To 7-Year High On BOJ, Pension Fund Boost (Bloomberg)

Japanese stocks soared, with the Nikkei 225 Stock Average closing at a seven-year high, as the Bank of Japan unexpectedly boosted easing and the nation’s pension fund prepared to unveil new asset allocations. The Nikkei 225 jumped 4.8% to 16,413.76 at the close in Tokyo, the highest since Nov. 2, 2007. The Topix index surged 4.3% to 1,333.64, bringing its gain for the week to 7.4%, the most since April 2013. The measure erased its losses for the year and is now up 2.4%. Volume on both gauges was more than 75% higher than their 30-day averages. The yen tumbled 1.5% to 110.83 per dollar.

Shares rose in the morning session after a Nikkei newspaper report that the $1.2 trillion Government Pension Investment Fund would announce new portfolio targets today, more than doubling its goal for domestic shares to 25% of assets. They surged in the afternoon after BOJ policy makers voted 5-4 to target an 80 trillion yen ($726 billion) annual expansion in the central bank’s monetary base. “Today you’re getting a double boost with talk of the GPIF increasing its shares allocation and the BOJ pumping more cash in at a faster rate,” Shane Oliver, head of investment strategy at AMP Capital Investors, which manages about $125 billion, said by phone. “It had become increasingly apparent that what the BOJ was doing wasn’t enough and they needed to do more, and it’s always been a question of when they would do that. It’s an excellent outcome.”

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” … the “Euroglut”, the largest surplus in the history of financial markets.”

• US And China Tighten In Unison, And Damn The Torpedoes (AEP)

Mind the monetary gap as the world’s two superpowers turn off the liquidity spigot at the same time. The US Federal Reserve and the People’s Bank of China have both withdrawn from the global bond markets, each for their own entirely different reasons. The combined effect is a shock of sorts for the international financial system. The Fed’s message on Wednesday night was hawkish. It did not invoke the excuse of a stronger dollar or global market jitters to extened bond purchases. It no longer sees “significant” constraints to the labour market. Instead it spoke of “solid job gains” and a “gradual diminishing” of under-employment. This a tightening shift, and seen as such by the markets. The euro dropped 1.5 cents against a resurgent dollar within minutes of the release, falling back below $1.26. Rate rises are on track for mid-2015 after all. The Fed is no longer printing any more money to buy Treasuries, and therefore is not injecting further dollars into an interlinked global system that has racked up $7 trillion of cross-border bank debt in dollars and a further $2 trillion in emerging market bonds.

The stock of QE remains the same. The flow has changed. Flow matters. The Fed has ended QE3 more gently than QE1 or QE2. This helps but it may also have given people a false sense of security. The hard fact is that the Fed has tapered net stimulus from $85bn a month to zero since the start of the year. The FOMC tried to soften the blow in its statement with pledges to keep interest rates low for a very long time. This assurance has value only if you think QE works by holding down interest rates, as the Yellen Fed professes to believe. It cuts no ice if you are a classical monetarist and think that QE works its magic through the quantity of money effect, most potently by boosting broad M3/M4 money through purchases of assets outside the banking system. Pessimists argue that the world economy is so weak that it needs a minimum of $85bn a month of Fed money creation (not to be confused with zero interest rates) just to avoid stalling again.

Or put another way, there is nagging worry that tapering itself may amount to an entire tightening cycle, equivalent to a series of rate rises in the old days. If they are right, rates may never in fact rise above zero in the US or the G10 states before the global economy slides into the next downturn. It is no great mystery why the world is caught in this “liquidity trap”, or “secular stagnation” if you prefer. Fixed capital investment in China is still running at $5 trillion a year, and still overloading the world with excess capacity in everything from solar panels to steel and ships, even after Xi Jinping’s Third Plenum reforms. Europe has been starving the world of demand by tightening fiscal policy into a depression, running a $400bn current account surplus that is now big enough to distort the global system as a whole. George Saravelos, at Deutsche Bank, dubs it the “Euroglut”, the largest surplus in the history of financial markets.

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Scary situation.

• Shadow Banking Grows to $75 Trillion Industry (Bloomberg)

The shadow banking industry grew by $5 trillion to about $75 trillion worldwide last year, driven by lenders seeking to skirt regulations and investors searching for yield amid record low interest rates. The size of the shadow banking system, which includes hedge funds, real estate investment trusts and off-balance sheet investment vehicles, is about 120% of global gross domestic product, or a quarter of total financial assets, according to a report published by the Financial Stability Board today. Shadow banking “tends to take off when strict banking regulations are in place, when real interest rates and yield spreads are low and investors search for higher returns, and when there is a large institutional demand for assets,” according to the report. “The current environment in advanced economies seems conducive to further growth of shadow banking.”

While watchdogs have reined in excessive risk-taking by banks in the wake of the collapse of Lehman Brothers Holdings Inc. in 2008, they are concerned that lenders might use shadow banking to evade the clampdown and cause risks to build up out of sight of regulators. The FSB published guidelines for supervisors last year to keep track of the industry. “Risks can migrate outside of the core and as a result, the FSB’s shadow banking monitoring exercise is of the utmost importance,” Agustin Carstens, who heads up the FSB’s risk assessment committee, said in the statement. The FSB, a global financial policy group comprised of regulators and central bankers, found that shadow banking increased most rapidly in Argentina, which saw a 50% jump, and China, where growth was more than 30%. The global share of activity based in the U.S. declined to 33% last year from 41% in 2007, according to the report, while the proportion of shadow banking based in China rose to 4% from 1%.

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Same, with graphs.

• The $75 Trillion Shadow Hanging Over The World (Telegraph)

Global shadow banking assets rose to a record $75 trillion (£46.5 trillion) last year, new analysis shows. The value of risky investment products, mortgage-backed securities and other non-bank entities increased by $5 trillion to $75 trillion in 2013, according to the Financial Stability Board (FSB). Shadow banking, which is not constrained by bank regulation, now represents about 25pc of total financial assets – or roughly half of the global banking system. It is also equivalent to 120pc of global gross domestic product (GDP). The FSB, which monitors and makes recommendations on financial stability issues, said that while non-bank lending complemented traditional channels by expanding access to credit, data inconsistencies together with the size of the system meant closer monitoring was warranted.

“Intermediating credit through non-bank channels can have important advantages and contributes to the financing of the real economy; but such channels can also become a source of systemic risk, especially when they are structured to perform bank-like functions and when their interconnectedness with the regular banking system is strong,” the FSB said in its annual shadow banking report. While regulators have highlighted that the size of the shadow banking system does not pose a systemic risk on its own, many non-bank lenders obtain short-term funds to invest in longer-term assets, which can trigger fire sales if nervous investors decide to withdraw their money at once.

During the financial crisis, the rapid sell-off reduced asset values and spread the stress to traditional banks, some of which controlled shadow lenders. “The system-wide monitoring of shadow banking is a core element of the FSB’s work to strengthen the oversight and regulation of shadow banking in order to transform it into a transparent, resilient, sustainable source of market-based financing for real economies,” said Mark Carney, chairman of the FSB and Governor of the Bank of England.

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Yes, it’s Ambrose.

• QE Central Bankers Deserve A Medal For Saving Society (AEP)

The final word on quantitative easing will have to wait for historians. As the US Federal Reserve winds down QE3 we can at least conclude that the experiment was a huge success for those countries that acted quickly and with decisive force. Yet that is not the ultimate test. The sophisticated critique – to be distinguished from hyperinflation warnings and “hard money” bluster – is that QE contaminated the rest of the world in complicated ways and may have stored up a greater crisis for the future. What we can conclude is that extreme QE enabled the US to weather the most drastic fiscal tightening since demobilisation after the Korean War, without falling back into recession. Much the same was true for Britain. The Fed’s $3.7 trillion of bond purchases did not drive up debt ratios, as often claimed. It reduced them.

Flow of Funds data show that total non-financial debt has dropped from a peak near 260pc of GDP in 2009 and since stabilised at 237pc of GDP. Public debt did jump, matched by falls in household and corporate debt ratios. On cue, federal debt is now falling as well. The deficit is down to 2.8pc of GDP, low enough to erode the debt ratio in a growing economy through the magic of the denominator effect. This is not a “pure” economic experiment, of course. There are other variables: the shale boom and the manufacturing renaissance in chemicals and plastics that it has spawned; quick action by the US authorities to clean up the banking system. Yet it is indicative. By contrast, the eurozone carried out its fiscal austerity without monetary stimulus to cushion the shock, lurching from crisis to crisis as a result. The region has yet to reclaim it former levels of output, a worse outcome than during the Great Depression by a wide margin. Not even the 1840s were this bad. You have to go back to the Thirty Years War in the 17th century to trump the economic devastation of EMU.

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“Beijing-based ICBC reported its biggest jump in soured credit since at least 2006 in the third quarter. Smaller rival Bank of China more than doubled its provisions for bad loans”.

• Falling Bank Deposits Add to China Economy Warning Sign (Bloomberg)

Chinese bank deposits dropped following a crackdown on lenders manipulating their numbers and “illicit” means of attracting money, threatening to weigh on credit growth and hinder efforts to reignite the economy. Four of the five biggest banks, led by Industrial & Commercial Bank of China, posted a drop in deposits as they reported third-quarter earnings this week. Central bank data showed it was the first quarterly decline for the nation’s banking industry since at least 1999. The lower deposit levels are likely to curtail credit as banks are prohibited from lending more than 75% of their quarter-end holdings, while a sustained drop could hamper government efforts to rejuvenate an economy forecast to expand this year at the weakest pace since 1990. The lenders may also come under pressure to tap more expensive financing.

“With banks now less able to window-dress their deposit figures, some will be forced to scale back lending to meet loan-to-deposit requirements,” Julian Evans-Pritchard, China economist for Capital Economics said. “Regulatory controls are getting harder for banks and that’s weighing on credit growth.” ICBC, the world’s largest lender by assets, posted the biggest decline in funds during the third quarter, with its deposits dropping by 388 billion yuan ($63 billion) from June to 15.3 trillion yuan. Bank of China, Agricultural Bank of China and Bank of Communications also reported declines. Only China Construction Bank, the nation’s second-largest, had an increase. As a housing-market slump drags on the nation’s growth, bad loans are piling up. Beijing-based ICBC reported its biggest jump in soured credit since at least 2006 in the third quarter. Smaller rival Bank of China more than doubled its provisions for bad loans, while the combined profit growth of the five biggest banks slowed to 6% from 10% a year earlier.

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Reminds me of the IRS, for some reason. Australia in joint operation with China …

• China Snares 180 Fugitives Abroad in Global Anti-Graft Sweep (Bloomberg)

China said it has now captured 180 economic fugitives from 40 countries as part of a campaign started in July to recover billions of dollars of illicit gains. The suspects were apprehended under Operation Fox Hunt 2014, the official Xinhua News Agency reported yesterday. Authorities arrested 104 suspects and the rest turned themselves in, Xinhua said. The number of those apprehended is up from 128 announced earlier this month. The Communist Party under President Xi Jinping has mounted a crackdown on corruption that has netted thousands of cadres in the country and is targeting Chinese abroad. Between 2002 and 2011, $1.08 trillion of illicit funds were spirited out of China, estimates Washington-based Global Financial Integrity.

China has sent 20 teams of investigators to Thailand, the Philippines, Malaysia, Cambodia and other neighboring countries, Xinhua reported. The government estimates the number of corrupt officials who have moved abroad at anywhere from 4,000 to 18,000 people, according to China’s chief prosecutor Cao Jianming. The two top destinations for economic fugitives are the U.S. and Canada, in part because China doesn’t have extradition treaties with them, the official China Daily reported last month. The Australian Federal Police will take part in a joint operation with Chinese counterparts to seize assets of fugitive officials, the Sydney Morning Herald reported Oct. 20.

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Right. That time goes back decades.

• Time To Take A Zero-Tolerance Approach To The Banks (Guardian)

It’s been a wretched week for Britain’s banks. On Tuesday, Lloyds Banking Group announced it was setting aside an additional £900m for the mis-selling of payment protection insurance. On Thursday, Barclays made a £500m provision for the fine it can expect for rigging the foreign exchange market. The banking list of shame will no doubt be added to when Royal Bank of Scotland reports on Friday. Patience with the banks is wearing thin. As Minouche Shafik, the deputy governor of the Bank of England, said in a speech earlier this week, it is no longer credible to put the wrongdoing down to a few bad apples. The language used by Shafik was instructive. She talked of “appalling cases of misconduct”, and of a long tail of “outrageous conduct cases”. Unless banks have a tin ear, they must surely have got the message: Threadneedle Street has had enough.

What was a bit strange about Shafik’s speech was her comment that she found some of the behaviour in the City “truly shocking”. There is no longer anything remotely shocking in the unearthing of financial malfeasance. It is only shocking in the way that the gambling going on in Rick’s night club in Casablanca was shocking to Captain Renault. There are many explanations for why the rigging of markets and the rooking of customers happened. In the end, though, the simplest explanation is the best. It happened because the banks thought they could get away with it. The culture was one in which self-enrichment was seen as serving the greater good; regulation was so light-touch as to be non-existent; and the chances of being punished were slim. It’s not just the banks, of course. Why did newspapers hack phones? Because they could get away with it. Why do multinational companies pay so little tax on their UK activities? Because they can. Public trust in business generally, not just the banks, has rarely been lower and it’s not hard to see why.

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PIMCO owns dangerously large amounts of certain companies’ bonds.

• New Junk Bond Risk: It Matters Who Owns What (CNBC)

Add a new concern to the stable of high-yield bond risks: ownership of some companies’ issuance has become concentrated in the hands of just a few fund managers. “A reduced number of asset managers hold a significant amount of the debt of large corporate issuers across advanced and emerging market economies,” the IMF said in a report issued earlier this month, noting the top-five fund families hold at least 50% of reported bond ownership filings by many large non-resource companies in the JPMorgan Corporate Emerging Markets Bond Index. Some managers hold large chunks of a company’s debt, with the report highlighting that Pimco holds more than 20% of Ally Financial’s total bonds outstanding and around 15% of Navient’s, while in emerging markets, the top-five hold around 30% of Digicel’s bond issuance and more than 20% of Melco’s.

Pimco didn’t immediately return an emailed request for comment But while the IMF is concerned about how dependence on just a few funds may affect issuers’ access to markets in “times of stress,” others believe the risk may be to the fund manager. “If you own 20% of a company’s debt – and that’s something we would never do, because we don’t think that’s prudent – you’re almost duty bound to support the company in its next financing,” said Tim Jagger, portfolio manager at Aviva Investors, which has around $371 billion under management. “It’s going be very difficult if you’re not involved, to think other investors will get involved.” Jagger also noted that the concentration of ownership highlights what may be one of the biggest risks in the fixed income market generally: liquidity may suffer as changes in regulations since the Global Financial Crisis mean banks can’t warehouse an inventory of bonds like they used to.

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Must read.

• Putin To Western Elites: Play-Time Is Over (Dmitry Orlov)

Most people in the English-speaking parts of the world missed Putin’s speech at the Valdai conference in Sochi a few days ago, and, chances are, those of you who have heard of the speech didn’t get a chance to read it, and missed its importance. (For your convenience, I am pasting in the full transcript of his speech below.) Western media did their best to ignore it or to twist its meaning. Regardless of what you think or don’t think of Putin (like the sun and the moon, he does not exist for you to cultivate an opinion) this is probably the most important political speech since Churchill’s “Iron Curtain” speech of March 5, 1946.

In this speech, Putin abruptly changed the rules of the game. Previously, the game of international politics was played as follows: politicians made public pronouncements, for the sake of maintaining a pleasant fiction of national sovereignty, but they were strictly for show and had nothing to do with the substance of international politics; in the meantime, they engaged in secret back-room negotiations, in which the actual deals were hammered out. Previously, Putin tried to play this game, expecting only that Russia be treated as an equal. But these hopes have been dashed, and at this conference he declared the game to be over, explicitly violating Western taboo by speaking directly to the people over the heads of elite clans and political leaders. The Russian blogger chipstone summarized the most salient points from Putin speech as follows:

1. Russia will no longer play games and engage in back-room negotiations over trifles. But Russia is prepared for serious conversations and agreements, if these are conducive to collective security, are based on fairness and take into account the interests of each side.

2. All systems of global collective security now lie in ruins. There are no longer any international security guarantees at all. And the entity that destroyed them has a name: The United States of America.

3. The builders of the New World Order have failed, having built a sand castle. Whether or not a new world order of any sort is to be built is not just Russia’s decision, but it is a decision that will not be made without Russia.

4. Russia favors a conservative approach to introducing innovations into the social order, but is not opposed to investigating and discussing such innovations, to see if introducing any of them might be justified.

5. Russia has no intention of going fishing in the murky waters created by America’s ever-expanding “empire of chaos,” and has no interest in building a new empire of her own (this is unnecessary; Russia’s challenges lie in developing her already vast territory). Neither is Russia willing to act as a savior of the world, as she had in the past.

6. Russia will not attempt to reformat the world in her own image, but neither will she allow anyone to reformat her in their image. Russia will not close herself off from the world, but anyone who tries to close her off from the world will be sure to reap a whirlwind.

7. Russia does not wish for the chaos to spread, does not want war, and has no intention of starting one. However, today Russia sees the outbreak of global war as almost inevitable, is prepared for it, and is continuing to prepare for it. Russia does not war—nor does she fear it.

8. Russia does not intend to take an active role in thwarting those who are still attempting to construct their New World Order—until their efforts start to impinge on Russia’s key interests. Russia would prefer to stand by and watch them give themselves as many lumps as their poor heads can take. But those who manage to drag Russia into this process, through disregard for her interests, will be taught the true meaning of pain.

9. In her external, and, even more so, internal politics, Russia’s power will rely not on the elites and their back-room dealing, but on the will of the people.

To these nine points I would like to add a tenth:

10. There is still a chance to construct a new world order that will avoid a world war. This new world order must of necessity include the United States—but can only do so on the same terms as everyone else: subject to international law and international agreements; refraining from all unilateral action; in full respect of the sovereignty of other nations.

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On off on off.

• Russia Agrees to Terms With Ukraine Over Gas Supply (Bloomberg)

Russia agreed to terms for restoring natural-gas exports to Ukraine, laying the groundwork to prevent residents going without heat as temperatures drop. The gas negotiations, brokered by the European Union, came as pro-Russian rebels stepped up attacks on Kiev government forces. They violated the wobbly truce 45 times in the past 24 hours, the Defense Ministry said on Facebook today. One civilian was killed by shelling, the Donetsk city council said on its website. European leaders said they hoped the agreement would help mend ties between the two countries. “This breakthrough will not only make sure that Ukraine will have sufficient heating in the dead of the winter,” European Energy Commissioner Guenther Oettinger told a news conference in Brussels last night. “It is also a contribution to the de-escalation between Russia and Ukraine.”

The 28-nation EU sought to avoid a repeat of 2006 and 2009, when disputes between the former Soviet republics over gas debts and prices led to fuel transit disruptions and shortages across Europe amid freezing temperatures. Tensions remained even as the sides made progress on fuel supplies. The EU yesterday rebuked Russia for an announcement by Foreign Minister Sergei Lavrov that the country would recognize separatist elections planned for Nov. 2 in Ukraine’s rebel-held territories. The conflict in east Ukraine has killed at least 3,700 people, the United Nations estimates. [..] Under yesterday’s agreement, Russia said it would resume sending natural-gas to Ukraine – halted since June – after receiving the first tranche of debt repayment and upfront payments for future deliveries. Ukraine agreed to pay $3.1 billion to Russia by the end of this year to partially cover what Russia estimates is $5.3 billion owed by Naftogaz Ukrainy to Gazprom. The first tranche, $1.45 billion, will be paid “in the coming days,” Russian Energy Minister Alexander Novak said.

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Large scale (would-be) LNG exporters, US, Australia, Qatar, risk a lot.

• Oil Rout Seen Diluting Price Appeal of US LNG Exports (Bloomberg)

Oil’s collapse is eroding the appeal of potential U.S. LNG exports to Asia as it cuts the cost of competing supplies linked to the price of crude. Brent’s 22% drop this year outpaced the 8.9% decline in natural gas at Henry Hub, the benchmark for U.S. liquefied natural gas shipments that are scheduled to begin in 2015. When the cost of processing and shipping American supplies to Asia is taken into account, the price advantage over oil-linked cargoes from producers such as Qatar has more than halved, according to data compiled by Bloomberg. While the U.S. shale boom prompts the world’s biggest natural gas producer to plan exports of the fuel, it’s also boosting the country’s crude output to the most in 30 years, helping drive down global oil prices.

“The U.S. will not sell cheap gas,” Umar Jehangir, the deputy secretary of development and joint ventures at Pakistan’s Petroleum and Natural Resources Ministry, said in Singapore on Oct. 29, adding that the opinion was his own. “U.S. LNG will be exactly the same price as gas coming out of Qatar to Asia.” Cheniere Energy Inc., which is set to become the first natural gas exporter from the U.S. shale boom when its Sabine Pass terminal in Cameron Parish, Louisiana, starts next year, says the economics still make sense. Even after crude’s slump, there’s a 15% gap between Henry Hub-indexed prices and oil-linked supplies, Jean Abiteboul, the president of Cheniere Supply & Marketing, said in London on Oct. 29.

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” … a victim of its own success”?!

• Oil Price Declines Have Small-Cap Shale Investors Scrambling (Reuters)

Plummeting oil prices are pushing some of the small-cap companies which flourished as part of the U.S. shale energy boom close to their breaking point, while also prompting some well-known fund managers to aggressively buy energy stocks. Concerns about slowing growth in Europe and a stronger dollar have helped push the price of light crude oil down about 25% since June to about $82 a barrel, creeping closer to the average marginal cost of crude production of about $73 a barrel for U.S. onshore work, according to a research note from Baird Equity Research. Those declines have sent the SIG Oil Exploration and Production index down 21.2% over the last three months. “The market is selling all of these companies, even if it’s clear that $75 a barrel oil is not going to affect every company the same,” said Mike Breard, an analyst who works on the Hodges Small-Cap fund, part of Hodges Capital.

It’s a sudden turnabout for an industry that appears to be a victim of its own success. The high price of oil over the last decade was largely behind the push to mine shale oil through fracking, a controversial technique that uses high pressure to capture gas and oil trapped in deep rock. Fracking has helped the U.S. become among the world’s largest oil producers and led to concern that there is now an oversupply of crude. Production in the U.S. is on pace to add a record 1.1 million barrels a day in 2014, and another 963,000 in 2015, according to the U.S. Energy Information Administration. Already, the share price of small-cap shale oil companies such as Forest Oil has fallen below $1 as a result of high debt levels. Analysts now say that with the price of oil now close to the point where it’s no longer profitable to drill, small-cap energy stocks laden with high costs and little cash on their balance sheets could prove vulnerable to further price declines and may become acquisition targets if oil stays below $75 a barrel for six months or more.

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“If Iran walks away from the negotiation table over the proliferation of nuclear weapons technology in the country, markets could easily be spooked over the region’s stability”.

• Iran A ‘Time Bomb’ For Oil Prices (CNBC)

Markets should look for “a significant additional political risk premium on the price of Brent” if nuclear arms talks between Iran and major world powers break down, Nomura has warned. If Iran walks away from the negotiation table over the proliferation of nuclear weapons technology in the country, markets could easily be spooked over the region’s stability and that could affect the price of Brent, which has tumbled since June, Nomura’s senior political analyst Alastair Newton said in a note Thursday. “Iran could bring politics very much to the fore again in determining the price of Brent crude before year-end,” Newton warned.

Brent crude for December delivery fell below $86 a barrel on Friday to $85.41 as a stronger dollar and over-supply combined to put pressure on the benchmark. The price has slipped more than 9% so far in October, its biggest monthly drop since May 2012, and a quarter since June. The deadline for the completion of negotiations between Tehran and the so-called P5+1 group which comprises the five permanent members of the UN Security Council (China, Russia, France, the U.K. and the U.S.) plus Germany is on November 24. “In the event of no agreement by the 24th, I think that the U.S. Congress would impose fresh sanctions anyway,” Newton said. He added there were grounds for caution that the likelihood of agreement was less than 50%.

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Curious. Mysterious.

• Drones Spotted Over Seven French Nuclear Sites (AFP)

France’s state-run power firm Électricité de France (EDF) on Wednesday said unidentified drones had flown over seven nuclear plants this month, leading it to file a complaint with the police. The unmanned aircraft did not harm “the safety or the operation” of the power plants, EDF said, adding that the first drone was spotted on 5 October above a plant in deconstruction in eastern Creys-Malville. More drone activity followed at other nuclear power sites across the country between 13 October and 20 October, usually at night or early in the morning, EDF said, adding that it had notified the police each time. Greenpeace, whose activists have in the past staged protests at nuclear plants in France, denied any involvement in the mysterious pilotless flight activity.

But the environmental group expressed concern at the apparent evidence of “a large-scale operation”, noting that drone activity was detected at four sites on the same day in 19 October – at Bugey in the east, Gravelines and Chooz in the north and Nogent-sur-Seine in north-central France. Neither EDF nor the security forces had given any explanation about the overflights, the group said, urging the authorities to investigate. “We are very worried about the occurrence and the repetition of these suspicious overflights,” said Yannick Rousselet, head of Greenpeace’s anti-nuclear campaign, in a statement.

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“These are people who want to live in a dream world.”

• US Fracking Advocates Urged to Win Ugly by Discrediting Foes (Bloomberg)

As he took the floor at the tony Broadmoor resort in Colorado Springs, the veteran Washington public relations guru had an uncompromising message for oil and gas drillers facing an anti-fracking backlash. “You can either win ugly or lose pretty. You figure out where you want to be,” Rick Berman told the Western Energy Alliance, according to a recording. “Hardball is something that I’m a big fan of, applied appropriately.” Berman has gained prominence, including a “60 Minutes” profile, for playing hardball with animal activists, labor unions and even Mothers Against Drunk Driving. In Colorado, he was offering to take on environmentalists pushing restrictions on hydraulic fracturing, or fracking. The fight over fracking in the state has been viewed as a bellwether for similar debates brewing from New York to Sacramento. Energy companies are lobbying against a slew of regulations, including ones setting safety rules for fracking on public lands and another capping carbon emissions from power plants.

That partly explains why energy and resources companies, including Koch Industries, Exxon Mobil and Murray Energy are spending lavishly on political campaigns this year. The Center for Responsive Politics data shows the industry will contribute an amount second only to its record $143 million leading up to the 2012 election. So far they have given $95.5 million to candidates and political committees. Industry supporters say they have no choice. They face a well-funded environmental campaign from groups such as the Sierra Club that threaten to endanger the boom in production and domestic manufacturing that followed the shale revolution. “There is an anti-fossil fuel movement, and a very well-funded lobbying campaign is behind it,” said Michael Krancer, Pennsylvania’s former top natural-gas regulator and an energy attorney at Blank Rome LLP in Philadelphia. “These are people who want to live in a dream world.”

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Perverse Incentives, China And You

Jan 082014
 
 January 8, 2014  Posted by at 4:39 pm Finance Tagged with: , , ,  4 Responses »


Detroit Publishing Co. “Loop the Loop at Coney Island, New York” 1903

Since I wrote “The Taper And The China Credit Power Struggle Squeeze” on Dec 29, I have of course kept on reading up on China, and thinking about what I read. And I got to say, it keeps getting murkier and scarier at the same time. What I suggested in that article is that, although nobody I’ve seen talks about it, I’m convinced there’s a political struggle afoot in China that may shake the country to its foundations. And I don’t see how the western world would not be affected by that, possibly quite severely.

That is to say, while everyone still holds on to the notion that the Communist Party and the – central – People’s Bank of China (PBOC) have near absolute power over the Chinese economy, I think power over the shadow banking system has been relinquished. The size of that shadow banking system was estimated by JPMorgan at $5.86 trillion, or 69% of GDP, in May 2013, and that’s an in your face indication of what powers the “official” leadership still has.

There’s a lot of talk of Beijing and the PBOC curbing lending through the shadow banks, but if you count for over 2/3 of the economy, it’s an obvious choice to just stare them down. In the same vein, Beijing wants local governments to show responsibility for their debt, but that will only drive local officials even deeper into the shadow system. These officials first of all get judged on their accomplishments, such as the infrastructure they get built and the jobs that are created in their region, and they’re probably covering one hole with another already, so there’s no way back.

Which, incidentally, is one of the main reasons why a annual growth rate of 7% or more is so crucial for China: it allows for cover-ups of everything that’s gone awry. Local officials would rather pay loan shark interest rates than fess up to the mess they’ve made. All they’re looking for is opportunities to keep rolling over the debt. They’re not interested in paying it off, they’d rather use the cash to build another bridge or highrise, because that’s good politically.

Reuters reported on Monday that Beijing issued a whole new set of rules:

China issues fresh curbs on shadow banking

China’s cabinet has issued new rules to strengthen regulation of the shadow-bank lending that has helped fuel an explosion in debt levels since 2008, in the latest effort to address growing financial risks, sources told Reuters on Monday.

Another way to read this: a very, capital V, substantial part of China’s growth since 2008 has been financed by an explosion in debt levels. And that’s helped push up growth a lot. Which in 2013 at an estimated 7.6% was already the lowest since 1999.

The wide-ranging new rules issued by the State Council, China’s cabinet, say that shadow banking is a “beneficial” and “inevitable” consequence of financial development and provide an official definition of the term, according to a copy obtained by Reuters.

It’s interesting to note that Beijing finds it necessary to acknowledge shadow banking’s role in its economy by providing an “official definition”. And we all understand that if any boss you’re working for ever labels you “beneficial” and “inevitable”, and puts it on paper, you know you’re good, and you’re not about to be made redundant.

The regulations contain new restrictions on banks’ cooperation with trust companies, securities brokerages and other intermediaries with whom banks have cooperated in order to carry out off-balance sheet business.

Authorities also attempt to address the problem of banks’ exploiting regulatory loopholes by clarifying the responsibilities of various regulators, the People’s Bank of China, the China Banking Regulatory Commission, and the China Securities Regulatory Commission. The rules also address internet finance, micro-lending, and informal lending by friends and family members.

The Chinese government would love to get a clear picture of what goes on underground in its own economy, but it must have understood by now that it can no longer simply demand to be given the numbers. To get that picture, it’s at the mercy of the very people it seeks to regulate more strongly. And then it becomes a straightforward negotiation: if I give you this, what will you give me?

The government did try, though, with an official audit. Or was it just going through the motions? You have to wonder about all the numbers the audit reported, since there’s no telling what was left out. This is how Bloomberg put it over the weekend:

Shadow Banking Risks Exposed by Local Debt Audit

China’s audit of local governments exposed an increased reliance on shadow banking, swelling the risk of default on 17.9 trillion yuan ($3 trillion) of debt.

Bank lending dropped to 57% of direct and contingent liabilities as of June 30 from 79% at the end of 2010, while bonds rose to 10% from 7%, National Audit Office data show. Trust financing surged to 8% from zero, while other channels that sidestep loan curbs accounted for the remaining 25%. The yield on five-year AA notes, the most common rating for local government financing vehicles, jumped by a record 158 basis points last year to 7.6%. That exceeds the 5% on emerging-market corporate notes, Bank of America Merrill Lynch indexes show.

“As banks tightened their purse strings, local governments had no choice but to resort to shadow banking and incur more expensive borrowing costs,” said Tang Jianwei, a Shanghai-based economist at Bank of Communications Co., the nation’s fifth-largest lender. “That will further constrain their repayment ability and eventually overwhelm some lower-level entities which have borrowed way beyond their means. I won’t rule out some defaults in 2014.”

Premier Li Keqiang is cracking down on less-regulated shadow banking activities, estimated by JPMorgan Chase & Co. at $6 trillion in May last year, while the central bank engineered a cash crunch in June 2013 to push deleveraging in the world’s second-largest economy. China’s borrowing spree since 2008 has evoked comparisons to debt surges that tipped Asian nations into crisis in the late 1990s and preceded Japan’s lost decades. [..]

Local government debt overdue at the end of June was 1.15 trillion yuan, or 10.56% of borrowings, the audit report showed. That compares with the 1.3% overdue ratio in the banking system, reflecting the practice of rolling over regional debt instead of classing it as delinquent, according to Barclays Plc.

“Rapidly rising local-government debt poses the biggest medium-term fiscal risks,” Chang Jian, a Hong Kong-based economist at Barclays, wrote in a Dec. 31 note. “Intertwined with the under-regulated and poorly managed shadow banking business, slowing economic growth and more liberalized markets, systemic financial risks are increasing.”

The China Banking Regulatory Commission estimated in 2010 that about half of the bank loans to LGFVs were being serviced by secondary sources including guarantors because the ventures couldn’t generate sufficient revenue, according to a person with knowledge of data collected by the nation’s regulator. In 2012, the agency suggested banks cap loans to such vehicles to levels reached at the end of 2011. CBRC Chairman Shang Fulin reiterated the limit last month.

As a result, growth in bank loans to local governments slowed to 19% to 10.1 trillion yuan from the end of 2010 to June 30, 2013, compared with a 67% jump in total debt, audit data showed. Trust financing to LGFVs surged to 1.4 trillion yuan from zero and bond issuance more than doubled to 1.8 trillion yuan.

To summarize: in just 2.5 years, total debt went up 67%, and since official banks lent less, almost all of that rise came from the shadow system. Bond issuance doubled, and the “invention” of WMPs, or Wealth Management Products, put trust financing on the map for the first time. Question: where would China’s GDP growth level have been without shadow banking? Dare we even ask?

China’s local governments are responsible for 80% of spending while getting about 40% of tax revenue, the legacy of a 1994 tax-sharing system, according to the World Bank. Local governments have set up more than 10,000 financing vehicles to fund projects such as subways and airports because regulations limit their ability to borrow money directly. [..]

Trusts typically get people to invest at least 1 million yuan in alternatives to bank accounts linked to the PBOC’s 3% benchmark deposit rate. They had 10.1 trillion yuan of assets under management as of Sept. 30, an increase of 60% from a year earlier, according to the China Trustee Association. About 26% of their proceeds were invested in infrastructure projects.

The National Development and Reform Commission will work to prevent default, fiscal and financial risks in LGFVs as 100 billion yuan of debt is estimated to come due this year, according to a statement posted on the agency’s website on Dec. 31. The special vehicles will be allowed to sell bonds at lower costs to refinance higher-cost borrowings, and the NDRC can approve new debt to finish projects short of funding, according to the statement.

The yield on China’s 10-year sovereign bond surged about 100 basis points, or 1 percentage point, last year to 4.6%. The seven-day repurchase rate jumped to an unprecedented 10.77% on June 20, pushing the average rate in 2013 to 4.09%, up from 3.50% in 2012. The one-year interest-rate swap, the fixed payment needed to receive the repo rate, reached an all-time high of 5.38% on Jan. 2, 2014.

In order to maintain their hold on power, Communist Party big wigs need high growth numbers. The more they come down on the risk-laden shadow banking system, the more they need that system to finance that growth. And the system knows it. That’s a rock and a hard place in Chinese: attempt to take back power from the shadows, and see your economy dwindle, a politically very risky move because defaults are a certainty, or let the shadows finance ever more of the economy, let them grab ever more political power away from the Party, and forget a stable economy. More numbers from Bloomberg yesterday:

China Crisis Risk Flagged by Haitong as Debt Snowballs

China’s second-biggest brokerage said record debt threatens to trigger a financial crisis as borrowing costs jump to unprecedented highs despite a cooling economy.

Liabilities at non-financial companies may rise to more than 150% of gross domestic product in 2014, raising default risks, according to Haitong Securities Co. The ratio of 139% at the end of 2012 was already the highest among the world’s 10 biggest economies, according to the most recent data. That compares with 108% in France, 103% in Japan and 78% in the U.S., figures from the Bank for International Settlements and the World Bank show.

“We are concerned that the debt snowball may get bigger and bigger and turn into a crisis,” Li Ning, a Shanghai-based bond analyst at Haitong Securities, said in an interview on Jan. 3. “Default probabilities from next year may rise because more and more Chinese companies depend on new borrowings to repay old debt.”

Premier Li Keqiang has driven up money market rates to help deleverage the economy, as Moody’s Investors Service warned this week that credit expansion could spark a financial crisis. Companies must repay a record 2.6 trillion yuan ($430 billion) of borrowings this year even after bond yields surged and economic growth slowed to the weakest in more than a decade. [..]

China’s aggregate financing, the broadest measure of new credit, climbed 14% to 16.1 trillion yuan in the first 11 months of last year from the same period in 2012, central bank data showed. Total debt of publicly traded companies in China and Hong Kong has surged to the equivalent of $1.92 trillion from $607 billion at the end of 2007, according to data compiled by Bloomberg.

China’s shadow banking system is opaque, built on risk, and extremely leveraged. China holds $1.3 trillion in US Treasuries, and that’s just the official number. So I wonder things like: what have these Treasuries been purchased with? Leverage? What if they dump them to pay off liabilities? Another question: how deeply are Goldman Sachs, Blackrock, JPMorgen involved in that shadow system? It seems easy enough: they have the cash, there’s little or no control, and if you thought US subprime was the ultimate stage for bigtime gamblers, you stand corrected.

And so yes, perhaps the real prize is control over the Forbidden City after all. But a growth rate of over 7% cannot be sustained by leverage levels of 100:1. Moreover, a battle for power at that scale never ends well for the people, neither in China nor in the west. Too big to fail banks can risk all they want, they’re not on the hook for the losses. That’s what you call a perverse incentive. Which exist in the US, in Europe, and, as we now know, also in China.

China’s economy is somewhere in the middle of a roller coaster ride, and the cars need to keep going at high speed, because if they slow down, they will derail. And we will all go down with them. Or do you think, or hope, that the world’s second largest economy, and its biggest supplier of gadgets and trinkets, will implode without you noticing?

Nicole will be teaching, along with Albert Bates, Marisha Auerbach and Christopher Nesbitt, on a Permaculture Design Certificate course in Belize in 2014. The course will be the 9th annual event held at Maya Mountain Research Farm between Feb 10-22nd. Click here for details and registration.

This article addresses just one of the many issues discussed in Nicole Foss’ new video presentation, Facing the Future, co-presented with Laurence Boomert and available from the Automatic Earth Store. Get your copy now, be much better prepared for 2014, and support The Automatic Earth in the process!


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