Sep 232015
 
 September 23, 2015  Posted by at 8:54 am Finance Tagged with: , , , , , , , , , ,  6 Responses »


Arthur Rothstein President Roosevelt tours drought area near Bismarck, ND 1936

Signs Point To Deepening China Distress (FT)
Shadow Finance Expansion by Chinese Banks Deepens Credit Mystery (Bloomberg)
China Flash PMI Falls To Lowest Since May 2009 (CNBC)
China’s Workers Stumble as Factories Stall (WSJ)
Xi Jinping Defends China Stock Market Interventions On First US Visit (Guardian)
China Has A Message Markets Don’t Understand (CNBC)
VW Scandal Caused Nearly 1 Million Tonnes Of Extra Pollution (Guardian)
California Tests To Include Larger Diesel Engines From Audi, Porsche (Reuters)
VW Emissions Fallout Spreads To Asia (FT)
VW Emissions Investigations To Widen to Entire Auto Industry (WSJ)
VW Emissions Cheating Affects 11 Million Cars Worldwide (WaPo)
Europe Stumbles Towards A Migrant Plan (BBC)
EU’s East-West Rift Exposed In Refugee-Sharing Plan (Reuters)
Hungary Mobilizes Troops, Prisoners, Jobless To Fence Out Refugees (Reuters)
Hollande Wrongfooted on Refugee Surge, Fearing Le Pen’s Rise (Bloomberg)
The Fed Just Made A Gigantic Mess (CNBC)
Economic Policy Often Seems To Have Little To Do With Economists. Why? (Ind.)
English Farmland Prices Double In Five Years (Guardian)
Alaska Fossil Find Points To New ‘Lost World Of Dinosaurs’ (Guardian)

“Suddenly, the debate in China has shifted from a perception of too much money sloshing round and too many reserves earning meagre returns, to a concern about the adequacy of reserves given the extent of debt — much of it hidden.”

Signs Point To Deepening China Distress

China’s foreign exchange reserves fell alarmingly in August, anywhere from $94bn to as much as $150bn according to various calculations. That was just another in a series of dramatic data points that are leading to an increasing sense both within the Middle Kingdom and without that all is not well. For a long time now many hedge funds have been short Macau, once the main beneficiary of both the Chinese propensity to gamble and the rise of China as a market for luxury goods. Then the anti-corruption campaign put a big chill on the junkets to the former Portuguese enclave, as it did on sales of everything from Rolex watches to shark fin soup and abalone in top restaurants. But now there is another strand to the story.

Macau has long been one of the more porous parts of the wall meant to keep capital flows in and out of China under strict control. For example, those who wanted to get significant amounts of money out of China would purchase a dozen watches, using their renminbi credit cards, only to return the time pieces instantly and receive cash refunds, with a discount for the jeweller’s trouble. The currency would then be converted and go straight into bank accounts and investments abroad. Today, the thesis of hedge fund managers putting on the Macau trade is that regulators will tighten up on such practices, causing further damage to Macau’s wounded economy. Suddenly, the debate in China has shifted from a perception of too much money sloshing round and too many reserves earning meagre returns, to a concern about the adequacy of reserves given the extent of debt — much of it hidden.

After all, the downdraft in the stock market was all about the use of borrowed money, invisible to regulators and almost everyone else. Meanwhile, the capital flows out of China continue. It is difficult to calculate what is prudent diversification and what is capital flight. At the same time, more alarmingly, the signs of distress in the real economy are deepening, with ripple effects far beyond the mainland. Greek shipyards, for example, report that the yards in China are desperately discounting the containers they construct. The Chinese shipbuilders have to discount to compensate for the fact they are competing against builders whose currencies have fallen dramatically against the renminbi.

Read more …

Assessing China without including the shadows is of no use at all.

Shadow Finance Expansion by Chinese Banks Deepens Credit Mystery (Bloomberg)

China’s riskier banks are investing more customer funds in financing that is kept off their loan books, making it harder for rating companies to gauge their asset quality. There has been a surge in a balance-sheet item known as receivables, which often includes shadow funding such as trusts and wealth products, said Moody’s Investors Service. Fitch Ratings said it is hard to analyze this escalation in activity. Listed banks excluding the Big Four saw short-term investments and other assets – which include receivables – jump 25% in the first half, compared with total asset growth of 12%, data compiled by Bloomberg show. Slower growth in the world’s second-largest economy coupled with “still significant” credit expansion prompted Standard & Poor’s to cut its view of the banking industry’s economic risk to negative from stable this week.

Shadow-finance assets, estimated at 41 trillion yuan ($6.4 trillion) by Moody’s at the end of 2014, have become more attractive as five interest-rate cuts by the central bank since November curbed profits from lending. “Our concern with some of these investment positions is banks are using them as a way to bypass lending restrictions,” said Grace Wu at Fitch in Hong Kong. “Unlike bank loans, they don’t get reported into loan provisions, so it’s more difficult for us to ascertain the asset quality.” The opacity of Chinese banks’ credit exposure helps explain why they are priced as if investors are expecting a nonperforming loan ratio of 10 to 12% next year, which would mark a “sizeable credit crisis” in other countries, according to Wei Hou at Sanford C. Bernstein.

The reported ratio is 1.5%, according to the China Banking Regulatory Commission. The nation’s shadow-banking industry emerged as a way for creditors to circumvent lending restrictions and for savers to attain yields higher than the legally capped deposit rate. It includes trusts, asset-management plans and wealth-management products, which package loans into products for buyers.

Read more …

As long as Xi is in the US, the homefront will keep things smooth and quiet. But this number points to contraction, even as Xi just reiterated growth is at 7%.

China Flash PMI Falls To Lowest Since May 2009 (CNBC)

The preliminary Caixin China manufacturing purchasing managers’ index (PMI) fell to a six-and-a-half-year low of 47.0 in September, below the 47.5 forecast in a Reuters poll. This compares with a final reading of 47.3 in August, the lowest since March 2009. A print above 50 indicates an expansion in activity while one below points to a contraction. The closely-watched gauge of nationwide manufacturing activity focuses on smaller and medium-sized companies, filling a niche that isn’t covered by the official data. The decline in the flash PMI was mainly led by the new orders and new export orders sub-indexes, suggesting weak domestic and external demand. The new orders sub-index fell 0.6 percentage points to 46.0 in September, while the new export orders sub-index slipped 0.8percentage points to 45.8.

Wednesday’s data weighed on investor sentiment in Asia, with stock indices in Sydney and Seoul widening losses to more than 1% each in the morning trading session. China stocks, however, trimmed losses to 0.9%, from an over 1% decline at the open. “The principle reason for the weakening of manufacturing is tied to previous changes in factors related to external demand and prices,” said He Fan at Caixin Insight Group. “Fiscal expenditures surged in August, pointing to stronger government efforts on the fiscal policy front. Patience may be needed for policies designed to promote stabilization to demonstrate their effectiveness,” he added. A recent run of disappointing data has raised concerns around the health of China’s economy, leading several banks and international institutions to pare growth forecasts for the country.

Read more …

“..roughly 55% of China’s 1.37 billion people now live in cities, compared with just under 18% in 1978…”

China’s Workers Stumble as Factories Stall (WSJ)

For decades, an army of migrant workers drove China’s boom times, flocking to its cities to sew T-shirts, assemble iPhones, or build apartment blocks and Olympic stadiums. The arrangement helped millions of poor, rural Chinese join a new consumer class, though many also paid a heavy price. Now, many migrant workers struggle to find their footing in a downshifting economy. As factories run out of money and construction projects turn idle across China, there has been a rise in the last thing Beijing wants to see: unrest. In Xiguozhuang, a village among cornfields some 155 miles south of Beijing, it had been rare to see working-age men for much of the year. This year, however, many of the men are at home, sidelined by a fading property boom.

“Times are tough now,” said Wang Hongxing, a 39-year-old father of three who has worked at building sites across China’s northeast since his teens, but who has spent the past two months tending his farmland plot. “There are too many workers and wages are dropping.” But for other migrants, especially those of a younger generation who took jobs in factories along China’s coast, a return to farming isn’t an option. Nor do they necessarily want to join the service sector China sees as a cornerstone in its shift to a new economic model. Wang Chao dropped out of school when he was 15 and left his home in Anhui province. After a series of jobs up and down China’s east coast, he felt he had struck gold with a job in a textile factory near his hometown.

The factory closed in July. Mr. Wang, now 19, and other workers gathered recently outside the factory premises to demand back wages. He says he is owed two months’ pay, or about 2,000 yuan, or $320. The owner of the factory, which produces cheap trousers, told workers he is in deep debt and can’t afford to pay them. He couldn’t be reached to comment. Mr. Wang hopes he can find another factory job. In Shanghai, he worked in a restaurant but doesn’t want to do that again. “Factory work is so much more comfortable in comparison, and better paid,” he said. As a result of a rural-to-urban flow that many scholars say is likely the largest in history, roughly 55% of China’s 1.37 billion people now live in cities, compared with just under 18% in 1978.

The migrant workforce now numbers some 274 million but the pace of its expansion has slowed, and many economists believe China now faces a shortage of unskilled labor in urban areas. A mismatch of workers’ skills and aspirations with actual labor demand has exacerbated the problem. “There’s a broad structural imbalance in China’s labor market—a shortage of low-end labor and surfeit of high-end workers,” said Peng Xizhe, professor of population and development at Fudan University in Shanghai. “In China’s job market today, we see university graduates struggling to find work, while employers are finding it hard to fill traditional blue-collar positions.”

Read more …

“Xi peppered his speech with US cultural references from Sleepless in Seattle and House of Cards to Henry David Thoreau, Walt Whitman, Ernest Hemingway..”

Xi Jinping Defends China Stock Market Interventions On First US Visit (Guardian)

China’s president, Xi Jinping, has sought to reassure global concern about the world’s second-largest economy, defending his government’s actions in the stock market and saying growth will be maintained. “China’s economy will stay on a steady course with fairly fast growth. It’s still operating in a proper range with a growth rate of 7% … Our economy is under pressure but that is part of the path on the way toward growth,” the Chinese president said in a speech in Seattle on Tuesday, the first day of his state visit to the US. The president defended his government’s intervention into the country’s stock market saying the “recent abnormal ups and downs” in the market had now reached “a phase of self-recovery”.

Xi also reiterated there was no basis for continuing depreciation of the renminbi, saying Beijing was opposed to currency wars and would not devalue yuan to boost exports. World markets experienced more than a month of volatility after China devalued its currency, fuelling concerns about the state of the world’s No 2 economy. Intervention from authorities into the country’s bourses also added to worries Beijing had lost control over the economy. But just minutes after the speech, fresh data showed renewed signs of weakness in the Chinese economy with the Caixin China manufacturing flash PMI coming in at 47, the lowest since March 2009. [..]

Xi peppered his speech with US cultural references from Sleepless in Seattle and House of Cards to Henry David Thoreau, Walt Whitman, Ernest Hemingway – saying he once ordered a Mojito at El Floridita in Havana to better understand Hemingway and Cuba. Dismissing speculation that his sweeping anti-corruption campaign was about factional infighting, Xi said “We have punished tigers and flies. It has nothing to do with power struggles. In this case there is no House of Cards.”

Read more …

Or they understand it all too well.

China Has A Message Markets Don’t Understand (CNBC)

China may be compounding its own problems by the way its leaders talk about them. With the country’s growth a concern for global markets, investors are trying to fathom the depth of China’s economic issues and understand what authorities are doing. Analysts say it is difficult to discern what’s really going on there and that the economy has always been difficult to measure. Ahead of his U.S. visit that kicked off Tuesday, Chinese President Xi Jinping said in an interview with The Wall Street Journal that recent intervention in capital markets was necessary or normal and that China is still on track to transform its economy. “I think they are mostly nothing new and simply a repeat of what other officials have said,” Ilya Feygin, managing director at WallachBeth Capital, said of Xi’s comments.

Sticking to policy lines casts doubt for many on whether Chinese leaders have a grip on maneuvering the country’s economic transition in a way that doesn’t shock global markets more than it already has. “I think it’s a combination of missteps that add up to a lot of worries, capacity of the Chinese government to manage its economy through a very challenging environment and not making it worse,” said Scott Kennedy of the Center for Strategic and International Studies. “It begins with their intervention to push up their stock market last year.” Rapid-fire policy changes in the last few months have befuddled outsiders on Chinese leaders’ intentions, which raise real concern on whether the world’s second-largest economy can make a timely transition from a manufacturing hub to a consumer-oriented system.

“The point is to recognize there’s a structural transition going on,” said Arthur Kroeber, head of research at Gavekal Dragonomics. “And the problem we have is the data we have on the bad part of the economy is actually pretty developed. The data on services (is) much better but fuzzier.” Most of the economic reports still focus on manufacturing-related aspects of the economy, such as electricity use and the producer price index. Data such as the Caixin nonmanufacturing PMI provide some light on services, which continued to hold above the 50 expansion/contraction line in August. Manufacturing PMI fell below that line.

Growth in the services sector has outpaced that of the manufacturing sector in the last year and a half, according to the latest National Bureau of Statistics of China data compiled by Wind information. Amid the transition, questions also surround the accuracy of China’s reports on headline GDP growth. The official figure is 7%, the slowest in more than two decades In a report Tuesday, the Asian Development Bank lowered its forecast for Chinese growth in 2015 to 6.8% from 7.2% previously. Other analyst estimates range from 2 to 4 percentage points lower.

Read more …

“..roughly the same as the UK’s combined emissions for all power stations, vehicles, industry and agriculture..”

VW Scandal Caused Nearly 1 Million Tonnes Of Extra Pollution (Guardian)

Volkswagen’s rigging of emissions tests for 11m cars means they may be responsible for nearly 1m tonnes of air pollution every year, roughly the same as the UK’s combined emissions for all power stations, vehicles, industry and agriculture, a Guardian analysis suggests. The potential scale of the scandal puts further pressure on Volkswagen’s board and its chief executive, Martin Winterkorn. The company’s executive committee plans to meet on Wednesday to discuss the affair and to agree the agenda of a full board meeting scheduled for Friday, amid reports that Winterkorn could be replaced. The carmaker has recalled 482,000 VW and Audi brand cars in the US after the Environmental Protection Agency (EPA) found models with Type EA 189 engines had been fitted with a device designed to reduce emissions of nitrous oxides (NOx) under testing conditions.

A Guardian analysis found those US vehicles would have spewed between 10,392 and 41,571 tonnes of toxic gas into the air each year, if they had covered the average annual US mileage. If they had complied with EPA standards, they would have emitted just 1,039 tonnes of NOx each year in total. The company admitted the device may have been fitted to 11m of its vehicles worldwide. If that proves correct, VW’s defective vehicles could be responsible for between 237,161 and 948,691 tonnes of NOx emissions each year, 10 to 40 times the pollution standard for new models in the US. Western Europe’s biggest power station, Drax in the UK, emits 39,000 tonnes of NOx each year. [..] For years, UK air pollution measurements have failed to show improvements in air quality, even as standards have tightened.

“Since 2003 scientists have been saying things are not right. It’s not just the VW story, this is part of something much bigger,” said Dr Gary Fuller of King’s College. “It has a serious public health impact.” Last week, a report from NGO Transport & Environment found that Europe’s testing regime was allowing nine out of every 10 new diesel vehicles to breach EU limits. Testing regimes in the EU are known to fail to pick up “real world” emissions because cars are not driven in the same way in the laboratory as on the road. Some studies suggest the discrepancy may be up to seven times the legal limit. Williams said being able to mask their NOx emissions would also enable carmakers to pass carbon emissions tests more easily as there was a trade-off between NOx and CO2 in diesel engines.

Read more …

Bets are open on this one.

California Tests To Include Larger Diesel Engines From Audi, Porsche (Reuters)

The California Air Resources Board will broaden its testing of Volkswagen cars with diesel engines to include those with 3.0-liter V6 engines sold by two subsidiaries, a spokesman for the state regulator said on Tuesday. The latest models to be examined are the Porsche Cayenne and the Audi A6, Stanley Young, communications director for the Air Resources Board, told Reuters. Volkswagen said on Tuesday that engine software connected with a scandal over falsified U.S. vehicle emission tests could affect 11 million of its cars worldwide as investigations of its diesel models multiplied. The California Air Resources Board’s testing uncovered software in several Volkswagen models that allowed the company to cheat state and federal emissions requirements by switching performance levels between testing and real-world conditions.

“That investigation looked at two-liter four-cylinder engines,” said Young. “Now we’re going to start looking at six-cylinder, three-liter diesel engines.” Young said VW engineers acknowledged the use of a so-called defeat device – in fact, a software algorithm – to circumvent state and federal emissions standards during a Sept. 3 meeting in the board’s El Monte, California testing headquarters, attended by senior engineering executives of the regulator and the car company. It was the 10th meeting between the two sides, called by CARB to resolve the discrepancy between pollution levels measured on the road and those obtained under controlled testing conditions. “They literally ran out of excuses,” Young said, describing the meeting in which the car manufacturer “admitted there was a defeat device.”

Read more …

It’ll have to be worldwide. Wouldn’t it be funny if test results vary greatly?

VW Emissions Fallout Spreads To Asia (FT)

South Korea’s environment ministry said it would investigate the emissions compliance of Volkswagen’s diesel cars, as the fallout for the German carmaker after its admission that it rigged US emissions tests spread to Asia. The announcement on Tuesday came a day after Germany called for a probe into the matter, confirming fears Volkswagen’s trouble was unlikely to be confined to the US and that breaches could have occurred in other regions. The US Environmental Protection Agency on Friday ordered the world’s second-biggest carmaker to recall nearly 500,000 cars in the US after it admitted that it had fitted “defeat devices” to bypass environmental standards.

In the first public appearance by a senior executive since the scandal emerged, Michael Horn, VW’s US chief executive, said at an event in New York on Monday that the carmaker had “screwed up”, vowing to fix the vehicles involved and ensure no repetition. Seoul’s environment ministry said it would conduct emissions tests on 4,000-5,000 of VW’s Jetta and Golf models and the Audi A3 sedan that were imported into South Korea since 2014. “We will review if the three car models sold here show the same problems as those in the US, although the carmaker says its cars here have no such problems,” said Park Pan-kyu, the ministry’s deputy director. “We plan to complete the investigation within two months and will come up with punitive measures if any problems are found.

“If South Korean authorities find problems in VW diesel cars, the probe could be expanded to all German diesel cars,” he said. If the cars are found to have breached air pollution standards, the ministry could issue a recall order for vehicles already sold in the country, or order the German carmaker to stop domestic sales of problematic models. It could also impose a maximum Won1bn ($850,000) fine on each model. The ministry said any punitive measures would be levied in consultation with the German government, in keeping with the Korea-EU trade agreement.Volkswagen is one of the best-selling foreign brands in South Korea. VW and Audi accounted for nearly 30% of all foreign cars sold in the country in the first eight months of this year, and more than 90% of the roughly 25,000 vehicles VW sold were diesel models.

Shares in South Korean carmakers Hyundai Motor and affiliate Kia Motors rose more than 3% on Tuesday, on the view that Asian competitors could benefit at VW’s expense. “Volkswagen’s brand value is expected be hit by this issue as its strong diesel engine technology has been the backbone of its brand recognition,” said Yim Eun-young, analyst at Samsung Securities. “This could lead to gains for Hyundai and Kia, which are competing with Volkswagen in the sedan segment.”

Read more …

As I said yesterday, if VW couldn’t even come close to required emissions, what are the odds others could?

VW Emissions Investigations To Widen to Entire Auto Industry (WSJ)

Investigations into Volkswagen’s alleged manipulation of U.S. emissions tests should widen to include the entire auto industry, German and French officials said Tuesday, as regulators begin to ponder whether such deception is widespread. Calls for a broader probe came as Italy opened an investigation into the issue and a spokesman for the European Union said its regulators would soon meet with national authorities to discuss how to address the Volkswagen crisis. Concerns that the scandal could lead to broader damage for the industry hit the shares of car companies across Europe on Tuesday and those losses accelerated after Volkswagen warned that 11 million vehicles could be affected.

Shares in Volkswagen dived as much as 23% while those of Daimler AG dropped 5.5% and BMW AG slumped 5.4%. In France, Renault SA dropped 6.3% and PSA Peugeot Citroën was down 8.6%. The state of Lower Saxony, a major Volkswagen shareholder with 20% of the car maker’s voting stock, said the emissions allegations raised doubts about tailpipe data published by all car makers. The French government also called for a broader probe, suggesting a European-wide examination of the auto industry. “We need to do it at the European level,” French Finance Minister Michel Sapin said Tuesday.

In Germany, Olaf Lies, Lower Saxony’s economy minister and a member of the Volkswagen’s supervisory board, called for a wider probe and said investigations into the scandal would have consequences for any executives found guilty of deliberate manipulation. “I am convince that everyone is going to become intensely interested in knowing whether the emissions values that have been measured are the real emissions levels,” he said. “This question will not only affect Volkswagen, but the entire public debate and will certainly play a role at other companies.”

Read more …

“The only way to change auto company behavior is to put the responsible executives in jail..”

VW Emissions Cheating Affects 11 Million Cars Worldwide (WaPo)

The deception perpetrated by Volkswagen in the United States reaches around the globe, with about 11 million cars worldwide equipped with software designed to cheat emissions tests, the company said Tuesday. The automaker said it will set aside $7.3 billion to cover fixes and other efforts to win back the trust of our customers. That amount is likely to fall many times short of the actual costs, including car repairs, lawsuits and government penalties around the world. Exactly what alterations are necessary on all of those cars is unknown, and independent engineers said it could be extremely difficult to repair the emissions systems without harming engine efficiency and performance. None could offer what they deemed a reliable estimate of the cost of a potential repair.

“In my German words, we have totally screwed up”, Volkswagen s U.S. chief, Michael Horn, said at an event in Brooklyn late Monday night. The broad scale of the deception suggests that knowledge of the emissions cheating was widespread, and Justice Department investigators are focusing on the actions of executives, according to two people familiar with the inquiry. German news outlets reported Tuesday that the firing of chief executive Martin Winterkorn is imminent, citing unidentified members of the company s board. Also Tuesday, new details of the cat-and-mouse interactions between suspicious regulators and the German car giant showed how far the company was willing to go to assure the government that, contrary to the best evidence, nothing was amiss in its diesel cars.

Last year, Volkswagen informed regulators that it was initiating a 500,000-car recall in the US that would fix the problem. The recall was either a technical failure or, as some U.S. officials said, a ruse. Whether those involved in the emissions cheating software will face more severe penalties is unknown, but anger among customers, who are stuck with cars that violate pollution standards, and dealers, who are left with unsold inventory, has become increasingly evident. Their appeals have been heard in Washington. “It is an outrage that VW would take advantage of its consumers by purposely deceiving them on their mileage on diesel vehicles …There ought to be some prosecutions, and corporate executives that knew this and have done it ought to be going to jail”, Sen. Bill Nelson (D-Fla.) said in a speech on the Senate floor Tuesday, citing the repeated failures of automakers.

“And I lay this not only on the corporate culture, I lay it at the feet of the U.S. regulatory agencies who ought to be doing their job, ought to be doing it in a forceful way”. Noting that Volkswagen had been accused of similar tactics in the United States in the early 1970s, when the company paid fines of $120,000, Clarence Ditlow, director of the Center for Auto Safety, argued that financial penalties are not enough to keep the company honest. “The only way to change auto company behavior is to put the responsible executives in jail,” he said.

Read more …

In firm denial.

Europe Stumbles Towards A Migrant Plan (BBC)

There was a sense of grim determination about the crowd of cold and tired refugees and other migrants we met crossing the border one damp and windy night this week from Hungary into Austria. No euphoria. No desperation, such as we’ve seen at so many European borders over the last months, but more a sense of quiet purpose. The young men and families we spoke to were passing through what has become a relatively efficient people’s pipeline established on the ground from southern, into central and onto northern Europe. EU leaders may be in disarray over what to do next but in the meantime – for now – chaos on the ground has given way to an orderly means of transporting migrants from country to country.

One 19-year-old told us it had taken him five days to get from Turkey to Austria, passing through Greece, Macedonia, Serbia, Croatia and Hungary along the way. He still hoped to reach Germany, to join the Syrian community there, which is growing larger by the day. But this is no long-term solution to Europe’s migration conundrum. Europe’s prime ministers and heads of state will discuss that at their emergency meeting in Brussels on Wednesday. A quick or easy fix will be impossible to find and the meeting is likely to be fiery but leaders know they have to stumble towards some sort of plan or risk the unravelling of the EU itself. Look at the anger of Slovakia, Hungary, Romania and the Czech Republic forced on Tuesday at a meeting of European interior ministers to accept their share of 120,000 asylum seekers who will be re-located across the continent. [..]

EU leaders will discuss how to tighten the control of European borders. They’ll also debate a workable EU asylum policy, the more efficient deportation of economic migrants, defining who is a refugee, an asylum seeker or economic migrant, the better integration of refugees and their families already here and sending significant aid abroad to improve living conditions closer to people’s home countries so they shouldn’t be tempted to come to Europe in the first place. Decisions and debates tomorrow and in the months to come will affect all of our lives. Endre Sik is the director of the Centre for Refugee and Migration Studies in Budapest. He told me in 10 years’ time, we will look back and see this as a moment that changed Europe – its general landscape, its politics and its economics. There’s no turning back now from mass migration Europe, he says. This is an unprecedented social phenomenon.

Read more …

“We would have preferred a consensus but we could not reach that, and it is not for want of trying..”

EU’s East-West Rift Exposed In Refugee-Sharing Plan (Reuters)

The European Union approved a plan on Tuesday to share out 120,000 refugees across its 28 states, overriding vehement opposition from four ex-communist eastern nations. The European Commission, the EU executive, had proposed the scheme with the backing of Germany and other big powers in order to tackle the continent’s worst refugee crisis since World War Two. But the rift it has caused between older and newer members was glaringly evident as the interior ministers of the Czech Republic, Slovakia, Romania and Hungary voted against the plan at a meeting in Brussels, with Finland abstaining. “We would have preferred a consensus but we could not reach that, and it is not for want of trying,” Luxembourg Interior Minister Jean Asselborn, whose country holds the rotating presidency of the EU, told a news conference.

Slovak Prime Minister Robert Fico said pushing through the quota system had “nonsensically” caused a deep rift over a highly sensitive issue and that, “as long as I am prime minister”, Slovakia would not implement a quota. And Czech Interior Minister Milan Chovanec tweeted: “We will soon realize that the emperor has no clothes. Common sense lost today.” This year’s influx of nearly half a million people fleeing war and poverty in the Middle East, Asia and Africa has already sparked unseemly disputes over border controls as well as bitter recriminations over how to share out responsibility. Refugees and migrants arriving in Greece and Italy have been streaming north to reach more affluent nations such as Germany, prompting countries in central and eastern Europe alternately to try to block the flow or shunt it on to their neighbors.

Read more …

How is this Europe? How can Germany and France continue in a Union with Hungary?

Hungary Mobilizes Troops, Prisoners, Jobless To Fence Out Refugees (Reuters)

Built in a matter of weeks by soldiers, prison laborers and cadres of the unemployed, a vast new wall along Balkan frontiers is a monument to the ruthless efficiency with which Prime Minister Viktor Orban has mobilized Hungary against migrants. Orban describes the arrival of hundreds of thousands of refugees and other migrants in Europe this year from Asia, Africa and the Middle East as an attack on the continent’s Christian welfare model. Until last week, most trekked through Hungary, the main overland entry route into the EU’s border-free Schengen zone from the Balkan peninsula, which they cross after arriving by dinghy in Greece.

While Europe dithered over a collective response, Hungary took matters into its own hands, shutting off the route with a new fence along its entire 175 km (110 mile) border with Serbia, topped with razor wire and guarded by helmeted riot police. It was erected at a cost of 22 billion forints (about $80 million), a rare example of efficiency in a country which built its last underground metro line ten years behind schedule at triple the projected cost. The government says it put the military in charge of the construction so that it could act more quickly. By swiftly mobilizing state resources, the authorities also managed to turn the fence into a national project, immensely popular at home even as it is denounced by European partners.

“It took a while but the government’s campaign to rouse public opinion against the refugees is bearing fruit, and having brought much of the media under control is paying dividends,” said Richard Szentpeteri Nagy, an analysts at Centre for Fair Political Analysis. “By properly filtering the message through public television, what viewers at home see is that this is a mob, throwing stones and attacking police.” In just days since it shut the Serbian frontier, Hungary has already moved even faster to shut the border with Croatia, which is inside the European Union but outside the Schengen zone. A 41-kilometre temporary fence was thrown up within four days. Work is already underway on a permanent barrier, with machines clearing the land, fence posts driven into the ground and razor wire rolled out.

Read more …

Hollande’s a dunce and a coward. Full stop.

Hollande Wrongfooted on Refugee Surge, Fearing Le Pen’s Rise (Bloomberg)

As Europe searches for a solution to the migrant crisis, French President Francois Hollande is in his customary position: stuck in the middle and pleasing few. The Socialist leader finds himself playing second fiddle to German Chancellor Angela Merkel in the unfolding drama as European Union leaders meet Wednesday to seek a way out of their impasse on how to cope with thousands of migrants knocking on the region’s gates. France’s acceptance of migrants has been overshadowed by greater generosity shown next door by Germany. “The government is fearful of doing anything that would benefit the anti-immigration right,” said Francois Gemenne , researcher at Sciences Po University.

“At the same time, they have intellectuals in the press and much of their base saying that France, the nation of human rights, looks ridiculous next to Germany. The government doesn’t know what foot to dance on. They’ve ended up with a policy that satisfies no one.” That mirrors much of what Hollande has done in his three years in office. On the economy, his socialist base feels he has sold out by recent moves to liberalize labor markers and ease rules for business, while conservative parties pillory him for raising taxes. Hollande’s approval rating fell one point to 24% in September, according to the most recent Ifop poll. Hollande and Merkel on Sept. 4 jointly urged the EU to agree on a redistribution plan for refugees and to speed up processing in countries where they arrive.

Under a formula proposed by the European Commission, France and Germany agreed to take 30,000 and 44,000 refugees respectively, out of the 160,000 who had made their way to Italy, Greece and Hungary. Those pledges have been overtaken by events as thousands of Syrians a day cross to Greek islands from Turkey, and then try to reach northern Europe. The Organisation for Economic Cooperation and Development said Tuesday that 700,000 refugees have sought asylum in Europe so far this year and that it’ll be 1 million by year end, a record. That has led Hollande’s opponents to say he’s doing too much or too little.

Marine Le Pen, leader of the anti-immigration National Front and by some measures the most popular presidential candidate in France, has compared the influx of refugees to the barbarian invasions that destroyed the Roman empire. Former President Nicolas Sarkozy said France should reinstall border controls, has blamed Hollande’s handling of the Syrian crisis for the influx, and has called into question automatic citizenship for children born in France. “There are differences of tone between Le Pen and Sarkozy on this issue, but they are basically on the same page,” said Smain Laacher, a sociology professor at the University of Strasbourg.

Read more …

Damned if you do, doomed if you don’t.

The Fed Just Made A Gigantic Mess (CNBC)

The Federal Reserve is creating a negative-feedback loop with its mixed messages on interest rates — and it’s messing with the markets. In explaining why the Fed opted to hold rates steady, Fed Chair Janet Yellen said that policy makers remain concerned about slowing economic growth — especially in China — and the impact on global markets and inflation. But then, she added that the Fed could still raise rates in before the year was out — as early as October. What? If slowing global growth and market turbulence was a reason to pause, how likely was it, then, that all of that would be resolved by October? Since Chair Yellen spoke, a number of Fed officials have spoken, reiterating that a rate hike in 2015 remains likely. This is cognitive dissonance at its worst. Investors are now simultaneously worried about incompatible outcomes.

If growth is weak, and inflation continues to fall, the Fed should NOT, and would NOT, raise rates. If this global problem is truly transitory (a word most Fed officials need to look up in the dictionary), then a rate hike should have already occurred. This is a problem of the Fed’s own making. By insisting that interest rate normalization is imminent, the Fed is creating the very problem it is combatting by delaying that very same process. From my vantage point, the Fed more clearly needs to define what it takes to meet its dual mandate — inflation and employment. Clearly, the Fed has reached many of its goals on the employment front, although wage inflation is not accelerating to the point where a rate hike would be justified to cool an overheating economy.

Low inflation, while “transitory,” has persisted for nearly six years and is being pushed even lower by the huge drop in oil prices; the crash in other commodities; slowing growth in China and Japan and Asian emerging markets; recessions in Russia and Brazil and uneven growth in Europe. If the world is not normal, why normalize policy at all? The world affects the U.S. As we have seen in innumerable instances in the past, global instability has altered the course of domestic monetary policy for decades. Factoring that in, does not mean that the Fed has a “third mandate” as some Fed bashers claim. It simply means that the Fed has an obligation to consider how all variables affect its mandate. With an economy only “half-normal,” the normalization of interest rates can wait. But if the Fed continues to convey confusing messages about the timing of normalization, in an abnormal world, it will only serve to exacerbate the very trends it is hoping will abate.

Read more …

Economics is just politics in disguise.

Economic Policy Often Seems To Have Little To Do With Economists. Why? (Ind.)

With Jeremy Corbyn as leader of the Labour Party we will hear a great deal from his opponents that his economic policies are not “credible”. At the moment we do not have a clear idea of what these policies will be, but it is worth asking beforehand what exactly a credible economic policy is. A natural way to define a credible economic policy is one that accords with what most economists think. If this was true, you might expect it would be difficult to win an election based on a macroeconomic policy that most economists regard as mistaken. Unfortunately, the last General Election provides a clear counter-example. In that election George Osborne proposed eliminating the overall budget deficit within five years. That contradicted what most economists believe is a sensible fiscal policy, for at least two reasons.

First, it precluded any significant increase in public investment, on things like building schools and flood defences. Every economist I know agrees that now is an excellent time to increase infrastructure investment, because labour is cheap and interest rates are low. Second, another round of austerity is very risky when interest rates are so low. Osborne says we must reduce government borrowing quickly to prepare for the next crisis. That makes little economic or business sense. Firms that cut back on investment when borrowing is cheap and the economy is expanding generally fail. The more significant risk is that the world economy takes a turn for the worse in the next year or two because of events in China or elsewhere. If interest rates are already low because they are having to offset the impact of austerity, the Bank of England has little room to counter these global shocks.

So the prudent policy while interest rates are low is to avoid austerity. The fiscal policy platform on which the Conservatives won was not credible to most academic macroeconomists. The problem is that most people in politics and the media do not get their notion of credibility from this source. So where does their idea of economic credibility come from? Discussion of economic policy in the media is dominated by political rather than economic journalists. They routinely provide comment after major economic policy announcements and interview politicians. They spend most of their time talking to politicians, so the Westminster bubble defines what the media sees as a credible economic policy.

Read more …

How to turn farmers into serfs.

English Farmland Prices Double In Five Years (Guardian)

The price of good quality English farmland has doubled over the past five years, making it the most expensive in the world and offering a better return than prime London property, the FTSE 100 or gold. According to agents Knight Frank demand from wealthy private individuals as well as pension funds, has driven up the average price for an acre of “investment grade” English farmland (large plots with economies of scale) to £12,500, up 100% since 2010. In comparison, the price of luxury London homes has risen 42% over the same period, the FTSE 100 has increased 33%, while gold has dropped 10%. Many recent buyers of prime farmland arelifestyle buyers, often London financiers, for whom farming can be more of a hobby than about making the land pay its way.

Even what Knight Frank describes as some of the best land in the world – the pampa west of Buenos Aires in Argentina – sells for just a third of the average price investors are paying for farmland in England. An acre of investment grade land in Argentina sells for £4,510, while in France it fetches about £4,490. On the vast wheat-producing prairies of Canada, quality land fetches just £800 an acre, only 7% of the price achieved in England. Australian farmland values, blighted by drought, have largely flatlined in recent years.

The inflation in English land values is taking place despite a crisis among farmers struggling with falling global prices, particularly for wheat. After peaking at about £214 a tonne in December 2012, feed wheat values have since fallen by more than 50%. Global demand for wheat was 679m tonnes in 2012/13, but only 657m tonnes was produced, pushing prices up sharply. But the situation has now reversed, with global production forecast to hit about 725m tonnes this year but consumption at about 715m tonnes, sending prices spiralling down on commodity markets. UK farm gate milk prices are down by a third since 2013, prompting a wave of closures among English dairy farmers.

Read more …

And now dinosaurs are literally cool.

Alaska Fossil Find Points To New ‘Lost World Of Dinosaurs’ (Guardian)

Fossils from a unique plant eating dinosaur found in the high Arctic of Alaska may change how scientists view dinosaur physiology, Alaska and Florida university researchers have said. A paper published on Tuesday concluded that fossilized bones found along Alaska’s Colville river were from a distinct species of hadrosaur, a duck-billed dinosaur not connected to hadrosaurs previously identified in Canada and the Lower 48 states. It’s the fourth species unique to northern Alaska. It supports a theory of Arctic-adapted dinosaurs that lived 69m years ago in temperatures far cooler than the tropical or equatorial temperatures most people associate with dinosaurs, said Gregory Erickson, professor of biological science at Florida State university. “Basically a lost world of dinosaurs that we didn’t realise existed,” he said.

The northern hadrosaurs would have endured months of winter darkness and probably snow. “It was certainly not like the Arctic today up there – probably in the 40s (five to nine degrees ) was the mean annual temperature,” Erickson said. “Probably a good analogy is thinking about British Columbia.” The next step in the research program will be to try to figure out how they survived, he said. Mark Norell, curator of paleontology at the American Museum of Natural History in New York, said by email that it was plausible the animals lived in the high Arctic year-round, just like musk oxen and caribou do now. It’s hard to imagine, he said, that the small, juvenile dinosaurs were physically capable of long-distance seasonal migration. “Furthermore, the climate was much less harsh in the Late Cretaceous than it is today, making sustainability easier,” he said.

Read more …

Aug 192015
 
 August 19, 2015  Posted by at 8:43 am Finance Tagged with: , , , , , , , , , ,  7 Responses »


Lewis Wickes Hine Newsies in St. Louis 1910

Asian Shares Plunge To Two-Year Lows As China Stocks Continue To Fall (Guardian)
Do Markets Determine The Value Of The Renminbi? (Michael Pettis)
China’s Devaluation May Be Bad News For FX Industry (Reuters)
China Shadow Banks Appeal For Government Bailout (FT)
China’s Richest Traders Are Fleeing Stocks as the Masses Pile In (Bloomberg)
US Lacks Ammo for Next Economic Crisis (WSJ)
Abe Aide Says Japan Needs $28 Billion Economic Package (Bloomberg)
Europe, Listen to the IMF and Restructure the Greek Debt (NY Times Ed.)
The Hot Thing for Wall Street Banks: Capital-Relief Trades (WSJ)
Oil Goes Down, Bankruptcies Go Up – The 5 Frackers Next To Fall (Forbes)
Brace For More Dividend Cuts As Canada’s Oil Patch Runs Out Of Cash (Bloomberg)
Brazil’s Political Crisis Puts the Entire Economy on Hold (Bloomberg)
Immigration – Issue of the Century (Patrick J. Buchanan)
Hungary Deploys ‘Border Hunters’ to Keep Illegal Immigrants Out (WSJ)
Europe Struggles To Respond As Migrants Numbers Rise Threefold (Reuters)
Germany May Receive Up To 750,000 Asylum Seekers This Year (Reuters)

Note: Shanghai plunge protection came in in late trading. It ended up 1.23%.

Asian Shares Plunge To Two-Year Lows As China Stocks Continue To Fall (Guardian)

Asian shares on Wednesday struggled at two-year lows after Chinese stocks extended their fall, stoking fears about the stability of China’s economy. The Shanghai Composite Index retreated 3.9% a day after worries that the central bank could be in no hurry to ease policy further pushed it down 6.1%. The plunge dented hopes of Chinese share markets stabilising after Beijing effectively pulled out all the stops to stem the rout. Japan’s Nikkei fell 0.5% and South Korea’s Kospi lost 1.3%. “Investors care about these two things: China’s economy and the timing of a US rate hike. These two concerns dominate their minds now,” said Masaru Hamasaki, head of market and investment information department at Amundi Japan.

MSCI’s broadest index of Asia-Pacific shares outside Japan slid to a two-year low and was last down 0.1%. Australian stocks bucked the trend and climbed 1.2%. Shares of importers and firms with high US dollar-denominated debt have been under pressure following last week’s yuan devaluation. The spectre of a slowdown in China’s economic growth and a US interest rate hike has hit asset markets in emerging economies hardest. MSCI’s emerging market index fell to its lowest level since October 2011. It has dropped more than 20% from the year’s peak it hit in April. Wall Street shares also retreated overnight, with the S&P 500 sliding 0.26%, pressured by weak earnings from retail giant Wal-Mart.

Read more …

Must read from Pettis.

Do Markets Determine The Value Of The Renminbi? (Michael Pettis)

One of the main questions being batted around is whether, under the new system, the value of the RMB is finally going to be determined by the market. If it is, it almost certainly means that the value of the RMB will decline. Why? Because the balance of payments, which is the sum of the current account surplus and the capital account deficit, is in deficit if we exclude PBoC interventions. At current prices there is more RMB selling than there is buying, and the PBoC has to sell reserves and buy RMB in order to keep the currency from depreciating. This, many people argue, proves that the RMB is overvalued. The “market”, they claim, has spoken, and it has told us that the RMB is overvalued. They are wrong. The “market” is not telling us that the RMB is overvalued.

It is telling us only that there is more supply of RMB than there is demand for RMB at the current exchange rate. Because “overvaluation” and “undervaluation” usually refer to the fundamental value of a currency, this excess of supply over demand would only imply an overvaluation of the RMB if supply and demand were driven primarily by economic fundamentals. Excluding central bank intervention, which is mainly a residual contributed automatically by the PBoC to balance supply and demand for foreign currency, all purchases or sales of foreign currency in China can be divided into current account activity, which mostly consists of the trade account, along with other transactions including tourism, royalty payments, interest payments, etc., and capital account activity, which consists of direct investment, portfolio investment, and official flows.

Imbalances in both the current account and the capital account can be driven by economic fundamentals, in which case it might make sense to say that the RMB’s “correct” exchange rate is broadly equal to the clearing price at which supply is equal to demand. In this case if the central bank were to purchase RMB, reserves would decline and it would be reasonable to assume that PBoC intervention would cause the RMB to become overvalued, while PBoC sales of RMB would cause reserves to increase and the RMB to become undervalued. But neither the current account nor the capital account is necessarily driven only by economic fundamentals. As an aside, most people, including unfortunately most economists, typically assume that the current account is independent and the capital account, if they think of it at all, simply adjusts to maintain the balance, but this is an extremely confused way to think about the balance of payments.

Read more …

“Her credit markets are fragile and they are unwinding what has been the world’s biggest ever credit boom, and capital outflows are meaningful..”

China’s Devaluation May Be Bad News For FX Industry (Reuters)

China’s currency devaluation should give a shot in the arm to global foreign exchange volumes as traders take advantage of and protect themselves against the surprise surge in volatility, but its longer-term impact on market activity may not be so benign. Investors with longer-term horizons than a day’s trading profit, from pension funds seeking stable returns to companies considering expanding overseas, will be alarmed by the prospect of wild swings in exchange rates triggered by another round of “currency wars”. Former Brazilian finance minister Guido Mantega coined the term “currency wars” in 2010. It refers to countries trying to make their exports more competitive – and ultimately boost their growth – at the expense of rivals, by weakening their exchange rates.

Policymakers fear Beijing’s move could accelerate this race to the bottom, particularly as most countries, including those in the developed and industrialized world, have few growth-boosting policy tools left open to them. It’s a worry for a troubled foreign exchange industry. After years of rapid growth, which made it the world’s largest financial market and a money-spinner for big banks, trading volumes are slowly shrinking and jobs are being lost. Tighter regulation, increased automation, greater competition, and a global market-rigging scandal all suggest its glory days are over. The depressive impact on investment of a lengthy currency war would do little to restore its fortunes. “Any prolonged uncertainty in the market resulting from this, and real-money players such as pension and mutual funds will be less inclined to invest,” said Neil Mellor at Bank of New York Mellon.

As analysts at Morgan Stanley point out, China accounts for 21% of the trade-weighted dollar index used by the Federal Reserve. It is the biggest single component of the equivalent euro trade-weighted index at around 23%. So what happens to the yuan has a growing influence on dollar and euro flows. Analysts at Cross Border Capital say China’s credit markets have grown 12-fold since 2000 and are now worth around $25 trillion – roughly the same size as U.S. credit markets. “Her credit markets are fragile and they are unwinding what has been the world’s biggest ever credit boom, and capital outflows are meaningful,” they wrote in a report last month. “China remains the key risk and reward for global investors.” In that, the foreign exchange industry is no exception.

Read more …

The 800 pound blind spot in Beijing’s financial Ponzi politics comes back to haunt it.

China Shadow Banks Appeal For Government Bailout (FT)

The collapse of a state-owned credit guarantee company in China’s rust belt has shone a new spotlight on risk from bad debt and moral hazard in the country’s shadow banking system. As China’s economy slows, concerns are mounting over rising defaults, especially on loans from non-bank lenders, which provide credit to risky borrowers at high interest rates. Eleven shadow banks have written an open letter to the top Communist party official in northern China’s Hebei province asking for a bailout that would enable the bankrupt credit guarantee company to continue to backstop loans to borrowers. If the guarantor cannot pay, it could spark defaults on at least 24 high-yielding wealth management products (WMPs).

Analysts worry that a series of bailouts in recent years has encouraged irresponsible lending by fuelling the perception the government will not tolerate default. The latest appeal for a bailout will again force officials to choose between ensuring short-term financial stability or imposing market discipline on investors, which should improve lending practices in the long term. Hebei Financing Investment has guaranteed Rmb50bn ($7.8bn) in loans from nearly 50 financial institutions, according to Caixin, a respected financial magazine. More than half of this total is from non-bank lenders, mainly trust companies, who lent to property developers and factories in overcapacity industries. The letter appeals directly to the government’s concern about social stability and the fear of retail investors protesting the loss of “blood and sweat money”.

The 11 companies sold 24 separate WMPs worth Rmb5.5bn. “The domino effect from the successive and intersecting defaults of these trust products involves a multitude of financial institutions, an immense amount of money, and wide-ranging public interests,” 10 trust companies and a fund manager wrote to Zhao Kezhi, Hebei party secretary. “In order to prevent this incident from inciting panic among common people and creating an unnecessary social influence, we represent more than a thousand investors, more than a thousand families, in asking for a resolution.” Most trust products are distributed through state-owned banks, leaving unsophisticated investors with the impression that the bank and ultimately the government stands behind them, even when the fine print says otherwise.

There has been a series of technical defaults on bonds and high-yield trust products in recent years, but bailouts have shielded retail investors from losses in most if not all cases, often following public protests by angry investors at bank branches. Trust lending has exploded since 2010 amid a pullback by traditional banks. Trusts sell WMPs to investors, marketing the products as a higher-yielding alternative to traditional savings deposits. They use the proceeds for loans to property developers, coal miners and manufacturers in overcapacity sectors to which banks are reluctant to lend. Trust loans outstanding rose from Rmb1.7tn in 2011 to Rmb6.9tn at the end of June. Hebei Financing stopped paying out on all loan guarantees in January, when its chairman was replaced and another state-owned group was appointed as custodian.

Read more …

Much of it is fleeing abroad.

China’s Richest Traders Are Fleeing Stocks as the Masses Pile In (Bloomberg)

The wealthiest investors in China’s equity market are heading for the exits. The number of traders with more than 10 million yuan ($1.6 million) of shares in their accounts shrank by 28% in July, even as those with less than 100,000 yuan rose by 8%, according to the nation’s clearing agency. While some of the drop is explained by falling market values, CLSA Ltd. says China’s rich have taken advantage of state buying to cash out after the nation’s record-long bull market peaked in June. Investors with the most at stake are finding fewer reasons to own Chinese shares amid weak corporate earnings and some of the world’s highest valuations.

With this month’s devaluation of the yuan adding to outflow pressures, bulls have started to question whether there’s enough buying power to prop up prices once the government pares back its unprecedented rescue effort – a concern that contributed to the Shanghai Composite Index’s 6% plunge on Tuesday. “The high net worth clients are the ones who moved the market,” Francis Cheung, the head of China and Hong Kong strategy at CLSA, wrote in an e-mail. “They tend to be more savvy.” The median stock on mainland bourses traded at 72 times reported earnings on Monday, more expensive than any of the world’s 10 largest markets. The ratio was 68 at the peak of China’s equity bubble in 2007, according to data compiled by Bloomberg.

More than 62% of companies in the Shanghai Composite trailed analysts’ 2014 earnings estimates as the economy expanded at its weakest pace since 1990. Profits at Chinese industrial firms declined by 0.3% in June, versus a 0.6% gain in the previous month. “There is not a lot of fundamental support for the A-share market,” Cheung said. “Earnings are weak.” “This lack of a clear trend in the market causes overreactions by investors” The ranks of investors with at least 10 million yuan in stocks dropped to about 55,000 in July from 76,000 in June. Those with between 1 million yuan and 10 million yuan declined by 22%, according to data compiled by China Securities Depository and Clearing Corp. “Wealthy investors, who have been through bear markets, are better at exiting,” said Hu Xingdou, an economics professor at the Beijing Institute of Technology.

Read more …

From Fed mounthpiece Hilsenrath.

US Lacks Ammo for Next Economic Crisis (WSJ)

The U.S. over the past quarter century regularly turned to the Fed to provide stimulus when the economy stumbled. In the most recent recession, short-term interest rates were pushed to near zero, then the central bank embarked on massive—and controversial—bond-buying programs to drive down long-term interest rates. The Fed also promised to keep short-term interest rates low for an extended period. The tactics were meant to make it easier for households to pay off debts, encourage new borrowing and promote risk-taking; officials hoped that would push investment and consumer spending higher.

The next downturn could further expand Fed bondholdings, but with the central bank’s balance sheet already exceeding $4 trillion, there are limits to how much more the Fed can buy. Mr. Bernanke said he was struck by how central banks in Europe recently pushed short-term interest rates into negative territory, essentially charging banks for depositing cash rather than lending it to businesses and households. The Swiss National Bank, for example, charges commercial banks 0.75% interest for money they park, an incentive to lend it elsewhere. Economic theory suggests negative rates prompt businesses and households to hoard cash—essentially, stuff it in a mattress. “It does look like rates can go more negative than conventional wisdom has held,” Mr. Bernanke said.

Others, including Sen. Bob Corker (R.,Tenn.), see only the Fed’s limits. “They have, like, zero juice left,” he said. Many economists believe relief from the next downturn will have to come from fiscal policy makers not the Fed, a daunting prospect given the philosophical divide between the two parties. Republicans doubt federal spending expands the economy, and they seek to shrink rather than grow government. Democrats, meanwhile, say government austerity hobbles the economy, especially in a downturn. At issue is how much the U.S. can afford to borrow and spend to goose the economy out of the next recession. The experience of the past recession has set off sharp disagreement among economists.

Federal debt has grown to 74% of national output, from 39% in 2008. To restrain short-term budget deficits, Congress and the White House agreed earlier this decade on a mix of spending cuts and tax increases. In all, total state, local and federal government spending, adjusted for inflation, shrank 3.3% since the recovery began in 2009, compared with an average increase of 23.5% over comparable periods in past postwar expansions.

Read more …

Sure, throw some more oil on the fire.

Abe Aide Says Japan Needs $28 Billion Economic Package (Bloomberg)

Japan needs an economic injection of as much as 3.5 trillion yen ($28 billion) to shore up consumption and stave off a further economic contraction, said Etsuro Honda, an economic adviser to Prime Minister Shinzo Abe. “Households feel their income has been reduced,” Honda, 60, said in an interview Tuesday at the Prime Minister’s Office in Tokyo. “The negative legacy of the previous tax hike is waning, but increases in wages are lower than expected and prices of food and daily commodities are rising.” The world’s third-biggest economy shrank an annualized 1.6% in the three months through June as households and businesses cut spending and exports tumbled.

While the tailwind from the weaker yen and the Bank of Japan’s unprecedented monetary stimulus have helped propel stocks to an eight-year high, consumer confidence has slumped. Honda said a package of 3-3.5 trillion yen is needed to help lower-income households and pensioners. He suggested it should be delivered as subsidies such as child-care support or coupons, rather than spending on public works. Additional spending can be funded from higher-than-expected tax revenues, rather than issuing new government bonds, he said. Economy Minister Akira Amari said Monday he doesn’t expect to add fiscal stimulus, and Bank of Japan Governor Haruhiko Kuroda is counting on growth returning this quarter as he pursues a distant 2% inflation target with unprecedented monetary stimulus.

Honda said fiscal stimulus would be more effective than further central bank easing right now because it kicks in quicker. He said additional central bank easing wasn’t needed now, but didn’t rule it out later should inflationary expectations fall. “We should be on alert. There should be some possibility, of course, for the BOJ to pursue its next round” of easing, he said. Honda, a former Ministry of Finance official, has known Abe since they met at a wedding reception around 30 years ago. They played golf together at the weekend.

Read more …

Everyone knows what should happen, but that doesn’t mean it will.

Europe, Listen to the IMF and Restructure the Greek Debt (NY Times Ed.)

The IMF is doing the right thing by not participating in a deeply flawed loan agreement that European leaders have negotiated with Greece. Years of misguided economic policies sought by Germany and other creditors have helped to push Greece into a depression, left more than a quarter of its workers unemployed and saddled it with a debt it cannot repay. The latest European attempt to bail out Greece will make the situation even worse by requiring the country’s government to cut spending and raise taxes while increasing the country’s debt to 200% of its GDP, from about 170% now. The IMF, which joined European countries in their first two loan programs for Greece, says it cannot lend more money because Greece’s debt has become unsustainable.

In a statement on Friday, the fund’s managing director, Christine Lagarde, said Greece’s creditors had to provide “significant debt relief” to the country. Last month, the fund said creditors needed to either reduce the amount of money Greece owes or extend the maturity of that debt by up to 30 years. This is a much tougher position than the IMF has taken before. In 2010, it did not insist that Greek debt be restructured. That was a big mistake because it left Greece with more debt than it had before the crisis and reduced the government’s ability to stimulate the economy. What Ms. Lagarde, a former French finance minister, says matters because European leaders like Chancellor Angela Merkel of Germany want the fund to be a part of the loan program since it has extensive expertise in dealing with financial crises.

European officials have said only vaguely that they might be willing to consider debt relief. Many lawmakers and voters in other European nations oppose providing more help because they think the Greek government has failed to carry out the economic and fiscal reforms that would make the country more productive. There is no question that Prime Minister Alexis Tsipras of Greece needs to do more to raise economic growth. But even if he does everything European leaders are asking him to do — a list that includes cutting pensions, simplifying regulations, privatizing state-owned businesses — the country will still not be able to pay back the €300 billion it owes. Rather than go through a messy default in a few years, it is in Europe’s interest to heed the IMF’s advice and restructure Greece’s debt now.

Read more …

There are still plenty instruments available to hide risks and losses.

The Hot Thing for Wall Street Banks: Capital-Relief Trades (WSJ)

Faced with new global regulations requiring them to strengthen their capital, big lenders in the U.S. and Europe have turned to a trading tactic that flatters their positions without actually raising extra funds. Banks that have done such “capital-relief trades” include some of the largest in the world: Citigroup, Bank of America, Deutsche Bank and Standard Chartered. But the Office of Financial Research, a U.S. Treasury office created to identify financial-market risks, is suggesting the trades run the risk of “obscuring” whether a bank has adequate capital and pose other “financial stability concerns.” The Securities and Exchange Commission and the Federal Reserve also have also voiced concerns about the trades.

Capital-relief trades are opaque, little-disclosed transactions that make a bank look stronger by reducing its ” risk-weighted” assets. That boosts key ratios that measure the bank’s capital as a%age of those assets, even as capital itself stays at the same level. In a capital-relief trade, a bank can keep a risky asset on the balance sheet, using credit derivatives or securitizations to transfer some of the risk to a hedge fund or other investor. The investor potentially gets extra yield and the credit risk of smaller borrowers in a way it would be hard for them to get otherwise, while the bank gets to remove part of the asset’s value from its closely watched “risk-weighted asset” count. Banks say the trades help them manage their risk, even if they don’t go as far as a bona fide asset sale, and are just one tool among many they are using to meet new capital requirements.

Some say the Office of Financial Research is mischaracterizing the transactions, or that the trades didn’t significantly affect their capital ratios. Bank of America, for example, disclosed $11.6 billion in purchased capital protection in 2014 regulatory filings, but said the impact of the trades on its capital ratios was less than 0.01 %age point. Critics fear the trades can spread risk to unregulated parts of the financial system–just as similar trades did before the financial crisis. “It just seems like another repackaging of risk to mask who’s holding the bag,” said Arthur Wilmarth, a George Washington University law professor and banking expert.

Read more …

Pretty funny: “KKR and its partners might at least feel cold comfort that some of their cash is going to a good cause.”

Oil Goes Down, Bankruptcies Go Up – The 5 Frackers Next To Fall (Forbes)

With West Texas Intermediate crude now below $42 a barrel, the edifice of America’s oil and gas boom is finally crumbling. The number of companies in bankruptcy or restructuring has increased, and the clouds will only grow darker in the months ahead. Declining revenues, evaporating earnings and shrinking values of oil and gas reserves will put the crunch on oil companies’ ability to refinance loans, let alone borrow new cash or sell shares. Last week two companies showed that having a heroic name is no defense. Hercules Offshore, a Gulf of Mexico drilling contractor, announced it had reached a prepackaged bankruptcy with creditors to convert $1.2 billion in debt into equity and raise $450 million in new capital.

While Samson Resources on Friday said it is negotiating a restructuring that will see second lien holders inject another $450 million into the company in return for all the equity in the reorganized company. Samson is the biggest bankruptcy of the oil bust so far, and a huge black eye to private equity giant KKR, which in 2011 led a $7.2 billion leveraged buyout of the company. The deal was a classic LBO: about $3 billion in equity backed by more than $4 billion in debt. It seemed like a good idea at the time. Tulsa, Oklahoma-based Samson, founded in the 1970s by Charles Schusterman, had grown to be one of the biggest privately owned oil companies in the nation. It held vast swaths of acreage in North Dakota, Texas and Louisiana seemingly ripe for redevelopment.

The sophisticated KKR team assumed it could squeeze a lot of value out of Samson, which since Schusterman’s death in 2001 had been run by his daughter Stacy. Charles would be proud of her for inking the deal of a lifetime, selling the family jewels at what turned out to be the top of the market for shale-y acreage. It didn’t take long for KKR and its equity partners to realize they had overpaid tremendously. The pain has been spread around. Japan’s Itochu Corp. put up $1 billion in the LBO for a 25% equity stake. Two months ago it sold back its shares to Samson for $1. KKR and its partners might at least feel cold comfort that some of their cash is going to a good cause. The Schusterman family, led by matriarch Lynn, contributed $2.3 billion of their windfall to the Charles & Lynn Schusterman Foundation, which is devoted to Jewish charities and education projects in Tulsa.

Read more …

Dying breaths?!

Brace For More Dividend Cuts As Canada’s Oil Patch Runs Out Of Cash (Bloomberg)

Dividend cuts among Canadian energy producers are poised to accelerate as cost reductions fail to boost shrinking cash flow. Companies from Canadian Oil Sands to Baytex Energy are in line for deeper payout decreases, according to analysts, after Crescent Point Energy Corp. slashed its dividend for the first time last week as crude sank to a six-year low. Just 38% of the 63 energy companies in Canada’s Standard & Poor’s/TSX Energy index had positive free cash flow, defined as operating cash flow minus capital expenditures, as of Aug. 17. That’s down from 43% in 2013, data compiled by Bloomberg show. The dwindling cash flow comes even after Canadian companies joined some US$180 billion in global cutbacks this year, the most since the oil crash of 1986, according to Rystad Energy.

“There’s so much cash being spent on dividends,” said Greg Taylor at Aurion Capital Management in Toronto. “You can get increased cash flow by cutting costs but that’s not a sustainable model. The idea dividends are a sacred cow, that’s being put on the backburner.” Companies most likely to cut their dividends include Canadian Oil Sands, Baytex and Pengrowth Energy, said Sam La Bell at Veritas Investment in a telephone interview in Toronto. All three have already cut their dividends, though Baytex and Pengrowth will become more vulnerable if oil prices remain low as their hedges begin to roll off as soon as the second half of this year, La Bell said.

Canadian Oil Sands, which chopped its payout by 86% in January, may be better off canceling the dividend altogether as it struggles to generate cash, he said. “We know the dividend is important to our investors, but even more so is protecting the long-term value of their investment,” said Siren Fisekci, a spokeswoman at Canadian Oil Sands, in an e-mailed response. “We will continue to consider dividends in the context of crude oil prices and Syncrude operating performance.”

Read more …

Wile E.

Brazil’s Political Crisis Puts the Entire Economy on Hold (Bloomberg)

In Brazil, General Motors has been halting factories and laying off thousands. Latam Airlines, the region’s biggest, is cutting flights. And the world’s third-largest planemaker, Embraer, is delaying its biggest new aircraft. In the midst of its deepest economic and political crisis in a generation, Brazil is contending with a business climate so punishing that major projects across numerous sectors are being frozen or shrunk, while small businesses slash prices and shift focus. “Political instability is enormous, and it’s paralyzing Brazil,” said Eduardo Fischer, co-CEO at homebuilder MRV Engenharia, in an Aug. 5 interview. In Brasilia, the nation’s capital, “decisions and actions that need to be taken are being delayed, questioned or defeated, and nothing happens.” Even luncheonettes are hurting.

Carambola’s, a juice and sandwich shop in Sao Paulo’s financial district, saw a 30% drop during lunch starting a couple of months ago. The corner store fired two employees, and closes earlier as customers stop coming in after-hours. “People are bringing lunch from home,” Rafael Bruno da Silva, the afternoon manager, said on a recent day as a lone customer sipped coffee. “We’ve lowered the prices of juice, but it doesn’t seem to be making much of a difference.” Opposition lawmakers and many in the public are calling for the resignation of President Dilma Rousseff, whose popularity has sunk to a record low. The senate and lower house presidents are being investigated in an alleged kickback scheme that funneled money from state-run Petrobras, the world’s most indebted oil company, to political parties in the biggest corruption scandal in history.

On top of that, inflation is above the central bank’s target and unemployment is at a five-year high. Moody’s Investors Service said in a report Monday the economy will contract about 2% in 2015. Brazil’s real is the worst-performing major currency in the world this year. The crisis is reminiscent of the 1990s, when clerks were hired to re-sticker prices at grocery stores throughout the day because of hyperinflation. For others, it is a new and frightening experience. “Younger generations haven’t lived through any volatility,” said Fernando Perlatto, a professor of sociology at the federal university of Juiz de Fora. “That contributes to uncertainty. People are cutting costs, not getting married, and such. At the university, we’re not booking any conferences, trips or academic events.”

Read more …

A view from the right.

Immigration – Issue of the Century (Patrick J. Buchanan)

“Trump’s immigration proposals are as dangerous as they are stunning,” railed amnesty activist Frank Sharry. “Trump … promises to rescind protections for Dreamers and deport them. He wants to redefine the constitutional definition of U.S. citizenship as codified by the 14th Amendment. He plans to impose a moratorium on legal immigration.” While Sharry is a bit hysterical, he is not entirely wrong. For the six-page policy paper, to secure America’s border and send back aliens here illegally, released by Trump last weekend, is the toughest, most comprehensive, stunning immigration proposal of the election cycle. The Trump folks were aided by people around Sen. Jeff Sessions who says Trump’s plan “reestablishes the principle that America’s immigration laws should serve the interests of its own citizens.”

The issue is joined, the battle lines are drawn, and the GOP will debate and may decide which way America shall go. And the basic issues — how to secure our borders, whether to repatriate the millions here illegally, whether to declare a moratorium on immigration into the USA — are part of a greater question. Will the West endure, or disappear by the century’s end as another lost civilization? Mass immigration, if it continues, will be more decisive in deciding the fate of the West than Islamist terrorism. For the world is invading the West. A wild exaggeration? Consider. Monday’s Washington Post had a front-page story on an “escalating rash of violent attacks against refugees,” in Germany, including arson attacks on refugee centers and physical assaults.

Burled in the story was an astonishing statistic. Germany, which took in 174,000 asylum seekers last year, is on schedule to take in 500,000 this year. Yet Germany is smaller than Montana. How long can a geographically limited and crowded German nation, already experiencing ugly racial conflict, take in half a million Third World people every year without tearing itself apart, and changing the character of the nation forever? Do we think the riots and racial wars will stop if more come? And these refugees, asylum seekers and illegal immigrants are not going to stop coming to Europe. For they are being driven across the Med by wars in Libya, Syria, Iraq, Afghanistan and Yemen, by the horrific conditions in Eritrea, Ethiopia, Somalia and Sudan, by the Islamist terrorism of the Mideast and the abject poverty of the sub-Sahara.

According to the U.N., Africa had 1.1 billion people by 2013, will double that to 2.4 billion by 2050, and double that to 4.2 billion by 2100. How many of these billions dream of coming to Europe? When and why will they stop coming? How many can Europe absorb without going bankrupt and changing the continent forever? Does Europe have the toughness to seal its borders and send back the intruders? Or is Europe so morally paralyzed it has become what Jean Raspail mocked in “The Camp of the Saints”? The blazing issue in Britain and France is the thousands of Arab and African asylum seekers clustered about Calais to traverse the Eurotunnel to Dover. The Brits are on fire. Millions want out of the EU. They want to remain who they are.

Read more …

The ugly side of the response.

Hungary Deploys ‘Border Hunters’ to Keep Illegal Immigrants Out (WSJ)

Hungary’s government said Tuesday it will deploy police units of “border hunters” at its frontier with Serbia to keep illegal immigrants out of the country amid a flood of refugees from the Middle East and North Africa. The head of the prime minister’s office said several thousand police will be placed along Hungary’s 175-kilometer border with non-European Union member Serbia, where most of the migrants enter the country. Hungary “is under siege from human traffickers,” Janos Lazar told a press briefing, adding that the police “will defend this stretch of our borders with force.” The government will also tighten punishments for illegal border crossing and human trafficking, steps aimed at “defending the country,” he said.

“[Migrants’] demands to be let in to then take advantage of the EU’s asylum system are on the rise, aggressiveness is increasing. Police have seen that on several occasions,” Mr. Lazar added. The majority of the migrants, whom the government labels as illegal immigrants, are refugees from war-torn Afghanistan, Syria and Iraq, according to human-rights groups. Hungary has registered some 120,000 asylum requests so far this year, an increase of almost 200% from last year. This year’s total could reach 300,000, the country said last week. “Hungary is joining Italy and Greece as the member states most exposed, on the front line” of migration, Dimitris Avramopoulos, EU commissioner in charge of migration, said Friday.

Last week, Hungary requested €8 million from the European Commission in emergency assistance to expand its capacities to house migrants. Brussels will treat the request without delay, Mr. Avramopoulos said. With an estimated 4,500 migrants housed in its overflowing immigration camps, Hungary is a transit country for the vast majority of the migrants. Once in Hungary—and thus within the EU’s Schengen zone where internal borders aren’t guarded—the migrants typically travel on to countries such as Germany and Sweden. Hungary is now building a double fence on its border with Serbia to reduce the number of migrants crossing the border through woods and meadows.

Read more …

Europe is in desperate need of leadership on the issue, but there ain’t none.

Europe Struggles To Respond As Migrants Numbers Rise Threefold (Reuters)

More than three times as many migrants were tracked entering the European Union by irregular means last month than a year ago, official data showed on Tuesday, many of them landing on Greek islands after fleeing conflict in Syria. While the increase recorded by the European Union’s border control agency Frontex may be partly due to better monitoring, it highlighted the scale of a crisis that has led to more than 2,000 deaths this year as desperate migrants take to rickety boats. Italian police said they had arrested eight suspected human traffickers that they said had reportedly forced migrants to stay in the hold of a fishing boat in the Mediterranean as 49 of them suffocated on engine fumes.

Some of those traffickers were accused of kicking the heads of the migrants when they tried to climb out of the hold as the air became unbreathable, prosecutor Michelangelo Patane told a news conference in Catania, Sicily. The dead migrants were discovered last weekend, packed into a fishing boat also carrying 312 others trying to cross the Mediterranean to Italy from North Africa. It was the third mass fatality in the Mediterranean this month: last week, up to 50 migrants were unaccounted for when their rubber dinghy sank, a few days after some 200 were presumed dead when their boat capsized off Libya.

Greece appealed to its European Union partners to come up with a comprehensive strategy to deal with what new data showed were 21,000 refugees landed on Greek shores last week alone. A spokesman for the United Nations refugee agency UNHCR in Geneva said the European Union should help Greece but that Athens, which is struggling with a debt crisis, also needed to show ‘much more leadership’ on the issue. Greek officials said they needed better coordination within the European Union. “This problem cannot be solved by imposing stringent legal processes in Greece, and, certainly, not by overturning the boats,” said government spokeswoman Olga Gerovassili. Nor could it be addressed by building fences, she said.

Read more …

Merkel’s inaction now leads to her being completely overwhelmed. That’s her fault, her failure.

Germany May Receive Up To 750,000 Asylum Seekers This Year (Reuters)

Germany expects up to 750,000 people to seek asylum this year, a business daily cited government sources as saying, up from a previous estimate of 450,000, as some cities say they already cannot cope and hostility towards migrants surges in some areas. The influx has driven the issue of asylum seekers high up Germany’s political agenda. Chancellor Angela Merkel has tried to address fears among some voters that migrants will eat up taxpayers’ money and take their jobs. The number of attacks on refugee shelters has soared this year. The interior ministry declined to comment on the figures reported in the Handelsblatt but is set to issue its latest predictions this week. Its previous estimate for asylum applications in 2015 was already double those recorded in 2014.

Germany is the biggest recipient of asylum seekers in the European Union, which has been overwhelmed by refugees fleeing war and poverty in countries such as Syria, Iraq and Eritrea. There is also a flood of asylum seekers from Balkan countries. Almost half of the refugees who came to Germany in the first half of the year came from southeast Europe. Along with a shortage of refugee lodgings in cities including Berlin, Munich and Hamburg, Germany also struggles to process applications, which can take over a year. Merkel has long said this must be accelerated.

On Tuesday, the finance ministry seconded 50 customs officials to the National Office for Migration and Refugees for six months to get through the backlog. After Germany, Sweden is the next most generous recipient of asylum seekers in Europe. In 2014, it recorded 81,200 application and anti-immigration sentiment is on the rise.

Read more …

Apr 012015
 


NPC Pennsylvania Avenue storefront view, Washington DC 1921

Americans Just Aren’t Spending (CNN)
The Glory Days of Private Equity Are Over (WSJ)
Japan’s Newest Export: Deflation (Pesek)
The Oil Price Slump Is Fuelling Financial Instability Globally (Satyajit Das)
‘A Lot More Easing’ Coming From China Central Bank (CNBC)
Iceland Looks At Ending Boom And Bust With Radical Money Plan (AFP)
Tsipras Vows To Stop Greek ‘Bleeding’ As Creditors Frustrate Athens (Telegraph)
Merkel Faces Rebellion As Senior Official Resigns Over Greek Bail-Out (DT)
Greek Prime Minister Vows No Capitulation To Creditors (Independent)
Greece Fails To Reach Initial Deal On Reforms With Lenders (Reuters)
Japanese Hoarding $300 Billion Under Mattresses (CNBC)
‘Wealth Creators’ Are Robbing Our Most Productive People (Monbiot)
Is It Time For ‘Shadow Bank’ Stress Tests? (CNBC)
The Way Out (Jim Kunstler)
Ukraine Interior Ministry ‘Uncooperative And Obstructive’ In Maidan Probe (RT)
License to Kill (Dmitry Orlov)

Deflation.

Americans Just Aren’t Spending (CNN)

Consumer spending is often called an engine of the United States economy. That engine may be about to blow a gasket. Consumers are sitting on their wallets. The government reported Monday that personal consumption expenditures – aka consumer spending – rose just 0.1% in February. That follows two months of declines of 0.2%. It comes at a time when people actually do have a little bit more money to spend. In the same report, the government said disposable personal incomes rose 0.4% in February, after rising 0.5% in January and 0.3% in December. So what are consumers doing? Despite some headlines to the contrary, it appears that Americans are showing signs of fiscal responsibility. They are saving more. Mind you, they still may not be saving enough for things like retirement, a new house, or their kids’ college education.

But the savings rate rose to 5.8% in February – the highest level since late 2012. This is a bit of a surprise. Many economists were predicting that consumers would spend all that money they were saving from cheaper gas prices as if it were a tax refund check courtesy of OPEC. But oil prices may have now stabilized. As such, economists at Barclays wrote Monday that “the boost from energy prices is fading.” They suggested that the awful winter weather could be one reason for soft consumer spending in February. And Barclays is predicting that spending will rebound in the second quarter and the savings rate will fall. Still, sluggish consumer spending could mean that the economy will report very little in the way of growth for the first quarter — despite the continued strength of the labor market.

The economy has been adding jobs at an impressive clip for the past year. And the unemployment rate has fallen. But even though personal incomes are rising, wages have not risen that much to make consumers feel as if they are rolling in the dough. That’s because the personal income figure takes into account increases in other items such as interest and dividend payments on investments as well as Social Security, Medicare and other government safety net distributions. So wages have to pick up more dramatically, or consumers may not be willing to spend more. And that’s a proverbial Catch-22 for the economy. Saving more is great for the long-term. But spending is what’s needed to get the economy roaring again in the short run.

Read more …

No markets left.

The Glory Days of Private Equity Are Over (WSJ)

Private equity is done. Stick a fork in it. With Kraft singles and Heinz ketchup as toppings, there are many signs that private equity has peaked as an asset class. Sure, private equity is pervasive, which is one of its problems. According to Dow Jones LP Source, 765 funds raised $266 billion in 2014, up 11.7% over 2013. Ever since David Swensen, the investment manager of the Yale University endowment, almost 30 years ago began successfully allocating outsize portions of the portfolio to “alternate” assets, especially private equity, the so-called Swensen model has been widely duplicated. Last week the Stanford endowment named Swensen-disciple Robert Wallace as CEO. There is a lot of capital chasing similar deals.

When it comes down to it, private equity is pretty simple. You buy a company, putting up some cash and borrowing the rest, sometimes from banks but often via exotic instruments that Wall Street is happy to sell. Then you manage the company for cash flow, making sure you can make interest payments with enough left over for fees and investor dividends. With enough cash flow, you either take the company public or sell it to someone else. And how do you generate cash flow? You can expand the company, but more likely you slash costs, close divisions, cut staff, curtail marketing, eliminate research and development and more. In other words, cutting to the bone.

The Swenson model has worked for the past three decades. But it’s a bull-market investment vehicle whose time is done. Here are the main reasons private equity has peaked—the first four are reasonably obvious, but the last one is the killer. First, interest rates are going up. As they say on “Game of Thrones,” winter is coming. The Federal Reserve will no longer be “patient” on raising rates. This year? Next year? It doesn’t matter. Rising interest rates mean private equity will see higher costs of capital, wreaking havoc on Excel spreadsheets justifying future returns. Second, banks are slowing lending for leveraged deals. Since 2013, regulators have been discouraging leverage above six times earnings before interest, taxes, depreciation and amortization, or Ebitda, a measure of cash flow. Leveraged loans are the lifeblood of private equity; limits are already crimping the ability to do deals.

Read more …

What’d I say?

Japan’s Newest Export: Deflation (Pesek)

In 2006, seven years before he became Bank of Japan governor, a testy Haruhiko Kuroda told me he thought China was raising its own living standards at the expense of its Asian neighbors. “The relationship between exchange rates and poverty reduction is not so direct, but a more flexible Chinese exchange rate would benefit Asia,” Kuroda, who at the time was head of the Asian Development Bank, told me in his office overlooking the Manila skyline. “It would make a difference.” Today, those remarks demand to be read with a sense of irony. As Japan’s leading central banker for the past two years, Kuroda has relentlessly weakened the yen, which means he is now responsible for precisely the same regional dynamic he once lamented.

None of this is to suggest Kuroda is up to anything sinister. His mandate, after all, is to produce 2% inflation for Japan, and thus pull its $4.9 trillion economy out of a two-decade deflationary spiral. But it’s impossible to deny that the yen’s weak exchange rate is indirectly exporting deflation to the region. Taiwan’s export-dependent economy is feeling the strain, and Singapore might be next. But South Korea has been hit particularly hard. The country’s 4.7% plunge in industrial output in February is the latest sign that deflation is on its doorstep. The country’s consumer prices also rose by only 0.5% last month (the slowest pace since 1999), and its exports were down 3.4%.

Korean manufacturers have responded to the yen’s 20% drop in value by trying to keep the prices of their own products down. In practice, that’s meant executives with excess cash on their balance sheets have avoided making investments or giving workers a raise. The resulting wage suppression, however, is having negative consequences of its own, by hampering domestic consumption. (It doesn’t help that Korean households are sitting on record debt, equivalent to about 70% of GDP)

Read more …

“..Emerging markets have about 75% of their $2.6trn debt denominated in dollars. A similar proportion of their $3.1trn bank borrowings is dollar-denominated.”

The Oil Price Slump Is Fuelling Financial Instability Globally (Satyajit Das)

Financial markets have generally assumed lower oil prices are good for asset prices, resulting from the positive effect on growth and lower inflation which extends the period of low interest rates. In reality, the large movement in oil prices has the potential to create significant financial instability, especially in debt markets. Heavily indebted energy companies and sovereign or near-sovereign borrowers with large oil exposures face increased risk of financial distress. The boom in borrowings by energy businesses, especially shale gas and oil producers, has created a dangerous debt overhang. Energy companies now make up around 15% of the Barclays US Corporate High-Yield Bond Index, up more than 300% from 2005. Since 2010, energy producers have raised $550bn of funds.

In 2014, more than 40% of new non-investment grade syndicated loans were to the oil and gas sector. During the boom, non-investment grade bond issues and loans for the oil industry were underpinned by high oil prices and the search for yield. Now low oil prices have reduced revenues sharply, making it difficult to service debt. The industry’s weak financial structure and business model compounds the problem. A significant proportion of the industry is highly levered with borrowings that are greater than three times gross operating profits. Many firms were cash flow negative even when prices were high, usually debt-funded to maintain production. If the firms have difficulty meeting existing commitments, then the decrease in available funding and higher costs will create a toxic negative spiral.

Sovereign and near-sovereign borrowers in oil-dependent countries are similarly vulnerable. Energy companies, such as Brazil’s Petrobras, Mexico’s Pemex and Russia’s Gazprom are among the largest issuers of emerging market debt. Since 2009, they borrowed about $140bn in bond markets. Petrobras has around $170bn in debt, one of the most indebted companies in the world. Many oil-dependent economies also face additional problems from a growing currency mismatch. Many producers borrow in dollars. Falling oil revenues as a result of lower prices reduce the dollar cash flow available to service the debt. Weak oil prices also drive weakness in the value of the domestic currency of oil producers, while higher dollar interest rates compound the mismatch.

Read more …

QE Peking Duck.

‘A Lot More Easing’ Coming From China Central Bank (CNBC)

China’s most recent effort to prop up its softening real estate market is not enough, analysts say, noting that a series of interest rate cuts from the central bank is the best remedy. “I’m virtually certain we’ll see further interest rate cuts and a lot more easing, probably bank reserve requirement ratio (RRR) cuts, in the coming months,” Macquarie’s Sam Le Cornu told CNBC. “I think people are underestimating the degree of liquidity that will be put into the market and the number of interest rate cuts.” Chinese homebuyers were given a break on Monday after authorities lowered the threshold of down payments on mortgages for second homes to 40% from 60% and waived the business tax on the resale of property after two years. The measures follow Beijing’s effort to spur the economy by cutting interest rates twice since November and lowering the reserve requirements of major banks.

But that isn’t enough for many investors who continue to call for further easing. “[China still needs] further across-board monetary policy easing,” Nomura’s China economics team said in a note on Monday. It expects “more policy easing, with three more interest rate cuts and three more reserve requirement ratio cuts over the remainder of 2015.” However, Nomura believes that Mondays’ move will “see the pace of property market correction stabilizing in the second half of the year.” Monday’s move comes amid growing concerns over slowing economic growth. China set its 2015 growth target “at around 7%” in early March – it’s lowest target in 11 years – after posting its slowest annual growth rate in 24 years in 2014. The housing sector accounts for around 15% of China’s economy, and recent housing data suggests that growth continues to slow.

Read more …

No moar.

Iceland Looks At Ending Boom And Bust With Radical Money Plan (AFP)

Iceland’s government is considering a revolutionary monetary proposal – removing the power of commercial banks to create money and handing it to the central bank. The proposal, which would be a turnaround in the history of modern finance, was part of a report written by a lawmaker from the ruling centrist Progress Party, Frosti Sigurjonsson, entitled “A better monetary system for Iceland”. “The findings will be an important contribution to the upcoming discussion, here and elsewhere, on money creation and monetary policy,” Prime Minister Sigmundur David Gunnlaugsson said. The report, commissioned by the premier, is aimed at putting an end to a monetary system in place through a slew of financial crises, including the latest one in 2008.

According to a study by four central bankers, the country has had “over 20 instances of financial crises of different types” since 1875, with “six serious multiple financial crisis episodes occurring every 15 years on average”. Mr Sigurjonsson said the problem each time arose from ballooning credit during a strong economic cycle. He argued the central bank was unable to contain the credit boom, allowing inflation to rise and sparking exaggerated risk-taking and speculation, the threat of bank collapse and costly state interventions. In Iceland, as in other modern market economies, the central bank controls the creation of banknotes and coins but not the creation of all money, which occurs as soon as a commercial bank offers a line of credit. The central bank can only try to influence the money supply with its monetary policy tools.

Under the so-called Sovereign Money proposal, the country’s central bank would become the only creator of money. “Crucially, the power to create money is kept separate from the power to decide how that new money is used,” Mr Sigurjonsson wrote in the proposal. “As with the state budget, the parliament will debate the government’s proposal for allocation of new money,” he wrote. Banks would continue to manage accounts and payments, and would serve as intermediaries between savers and lenders. Mr Sigurjonsson, a businessman and economist, was one of the masterminds behind Iceland’s household debt relief programme launched in May 2014 and aimed at helping the many Icelanders whose finances were strangled by inflation-indexed mortgages signed before the 2008 financial crisis.

Read more …

My man.

Tsipras Vows To Stop Greek ‘Bleeding’ As Creditors Frustrate Athens (Telegraph)

Greece’s prime minister has vowed not capitulate to the country’s eurozone creditors, reviving controversial calls for debt relief as his government battles to unlock bail-out cash. Addressing his parliament on Monday evening, Alexis Tsipras said he would seek an “honest compromise” with Greece’s international paymasters, but warned he would not submit “unconditionally” to demands for further austerity on his stricken economy. Mr Tsipras, who spoke after a frustrating day of progress between his government and officials from the Brussels Group, insisted he would stop “the Greek people’s bleeding” as he ruled out measures such as hiking VAT. The Leftist premier also repeated his claims for Second World War reparations from Germany, and insisted on debt relief from Greece’s lenders.

Greek pleas for a bond-swap or outright haircut on its debt mountain have subsided following a February 20 agreement to extend its bail-out by four months. But Mr Tsipras said he would now pursue a claim for debt forgiveness in order to maintain the sustainability of the country’s finances. Greece is racing to get the seal of approval on a bail-out extension, before financial deadlines in April, six weeks after its Leftist government agreed an eleventh hour deal with European creditors. Despite reports Athens would submit a final comprehensive list of proposals to finance ministers on Monday, work on completing the revenue-raising measures has yet to be completed, according to European officials. Speaking in Helsinki alongside her Finnish counterpart on Monday, German Chancellor Angela Merkel cautioned any final Greek blueprint had to “add up”.

“We will await the outcome of these discussions, but in the end the broad framework has to add up,” said Ms Merkel. Circulated drafts of the reforms included cutting early retirement, raising €350m from clamping town on VAT fraud, and €250m from stamping out oil, alcohol and tobacco smuggling. But the measures are likely to fall short of creditor demands. Dissatisfied eurozone officials warned the government would still need cut pensions and wages to receive the €7.2bn it needs to stay afloat. The government’s current public sector wage and pension bill amounts to €1.2bn a month, an outlay which Athens will struggle to meet in April without a fresh injection of cash. The fledgling Greek premier also faces a domestic battle to retain the support of Syriza’s Left Platform, who oppose measures such as a property tax and the continued privatisation of the country’s ports, airports and power grids.

Read more …

You tell ’em girl.

Merkel Faces Rebellion As Senior Official Resigns Over Greek Bail-Out (DT)

Political tensions in Europe’s largest creditor nation were laid bare after a senior ally of Angela Merkel’s ruling party stepped down in protest at his government’s support for a Greek bail-out. Peter Gauweiler, deputy chairman of the Christian Social Union – the Bavarian sister party of the ruling CDU – said Greece was a “bankrupt state” and he could not serve as a member of parliament as long as his “dissenting vote against an extension of the current and completely ineffective program” was ignored. Mr Gauweiler, a fierce critic of financial support for the eurozone’s indebted countries, was appointed vice-chairman of the CSU in November 2013 in a move to appease the growing eurosceptic elements within his party.

“I have been publicly pressured to vote in the Bundestag for the exact opposite, on the grounds that I am a vice-president,” said Mr Gauweiler in a statement on his website. “This is incompatible with my interpretation of the duty of a legislator.” Leader of the CSU Horst Seehofer also came in for heavy criticism from Mr Gauweiler, who has lodged legal complaints with the German Constitutional Court against the ECB’s attempts to establish financial backstops and its purchases of government bonds. Mr Gauweiler was also one of the 28 members of Ms Merkel’s coalition to vote in opposition to Greece’s bail-out extension in February. The rapid rise of the Alternative for Germany party (AfD) who seek to force Greece out of the monetary union, has put pressure on Ms Merkel’s ruling coalition.

Her conservative Christian Democrat party suffered its worst election result since the Second World War last month, at the hands of the eurosceptics. The AfD have already made overtures towards Mr Gauweiler, extending an invitation for him to join their ranks on Tuesday. The new Greek government is currently appealing for debt relief and the unlocking of a fresh round of bail-out money as it seeks to avert bankruptcy. Speaking in Helskini on Monday, Ms Merkel warned Athens plans for reforming the economy must “add up”.

Read more …

“The European authorities want to show who is boss; This is a government they didn’t want. And they really don’t want this government to succeed.”

Greek Prime Minister Vows No Capitulation To Creditors (Independent)

Germany turned the screws on Greece again yesterday, as officials insisted Athens has still not provided a satisfactory programme of economic reforms to its single currency partners. However, in a defiant speech, the anti-austerity Greek prime minister, Alexis Tsipras, warned that his government would not “capitulate” and would keep on pushing for a “fair compromise” with its creditors. Greece’s fellow eurozone member states, including Germany, must approve the release of the remaining €7.2bn in bailout funds the country is expecting. Without the cash, Greece could run of money to pay its civil servants by the end of next month and might be unable to meet a €450m loan repayment to the International Monetary Fund which is due on 9 April.

Greece has prepared a list of proposed economic reforms, but sources in Berlin said yesterday that it was not good enough to unlock the vital funding. “We need to wait for the Greek side to present us with a comprehensive list of reform measures which is suitable for discussion with the institutions and then later in the Eurogroup,” said Martin Jaeger, a spokesman for the German finance ministry. Chancellor Angela Merkel, on a visit to Helsinki, also implied Athens was still falling short. “The question is, can and will Greece fulfil the expectations that we all have?” she asked. According to Greek sources, Athens’s plan, which is projected to raise some €3.7bn this year, includes a crackdown on tax evasion through thorough audits of offshore bank transfers.

Other proposed revenue raisers are a value-added tax on the lottery, the auction of television broadcast licences and a smuggling crackdown. But, in an indication that Mr Tsipras intends to partly reverse the previous administration’s privatisation programme, the plan also targets only €1.5bn of revenues from state asset sales, down from €2.2bn in the previous budget. And in a speech to the Athens parliament last night, Mr Tsipras insisted, once again, that Greece’s large national debt needs to be restructured – anathema to Greece’s eurozone sovereign creditors. Mark Weisbrot of the Centre for Economic and Policy Research think-tank yesterday accused Brussels and Berlin of deliberately trying to undermine the Greek economy in order to force concessions from Athens. “The European authorities want to show who is boss,” he said. “This is a government they didn’t want. And they really don’t want this government to succeed.”

Read more …

Someone up there doesn’t like you.

Greece Fails To Reach Initial Deal On Reforms With Lenders (Reuters)

Greece failed to reach an initial deal with the EU and the IMF to unlock aid after the creditors dismissed a package of reforms from Athens as ideas rather than a concrete plan, officials said on Tuesday. The lack of a deal further raises pressure on Athens, which faces the prospect of running out of money in a few weeks unless it can convince lenders to dole out more financial help. Athens put a brave face on the failure to reach an agreement with the “Brussels Group” of representatives from the EU and the IMF, saying it remained keen for a deal on the basis of its long-held demand that the measures it is asked to implement do not hurt economic growth. Lenders will intensify efforts to collect data in Athens, it said. One source close to the talks said the halt in negotiations was not a sign of a rupture but an indication of slow-moving progress in the discussions.

Mistrust and acrimony have characterized much of Greece’s talks with lenders since Prime Minister Alexis Tsipras stormed to power in January pledging to end austerity and a bailout program that has kept Greece afloat for over four years. Greece and its European partners have sought to show publicly that relations have improved in recent weeks after Tsipras held a series of talks with EU leaders, but both sides remain far apart on issues ranging from pension reform to debt relief. At issue now is a list of reforms that Greece presented to the Brussels Group representatives last week, in an effort to show lenders that it is committed to living up to pledges of financial discipline and is worthy of aid. But euro zone officials panned the list as inadequate. One EU official said the lenders had yet to receive the list they had been waiting for.

Read more …

They’re small ones too.

Japanese Hoarding $300 Billion Under Mattresses (CNBC)

The Japanese are hoarding over $300 billion under their mattresses and that cash will likely stay there unless a crisis of epic proportions sparks capital flight, analyst say. “The money has been sitting there so long, it’s difficult to pin down what will prompt people to spend the cash,” Mizuho Securities’ chief market economist Yasunori Ueno told CNBC by phone. The notion came to public attention last year when Finance Minister Taro Aso scolded the Japanese for sitting on 880 trillion yen ($7.33 trillion) in cash, which was widely reported by the local press as being ‘kept under mattresses’. “It’s ridiculous – the money should be deposited at financial institutions so the banks can fund promising industries,” said Aso, according to a Sankei newspaper report.

But that figure was based on household cash deposits at Japanese banks, rather than hidden under mattresses, Ueno said. As per his calculations in a note dated March 25, households are probably hoarding around 36 trillion yen ($301 billion) of cash. “It’s like an iceberg – it just won’t melt,” said Dai-ichi Life Research Institute (DLRI) chief economist Hideo Kumano. “It will just sit there, immobile and frozen in time.” In many countries hoarding cash at home is synonymous with the underground economy, but the reasons in Japan are more mundane. “Under deflation, cash is king,” said DLRI’s Kumano, although he added that an unknown portion of the cash is probably just being hidden from the taxman.

At any rate, putting cash in the bank doesn’t mean it will earn any interest. Deposit accounts do not pay any interest in Japan. Even a ten-year savings account will only pay interest of between 0.10% and 0.150%, or one dollar on every 10,000 dollars in the bank, according to Mizuho Bank’s website. “Why bother going to the bank to deposit your money when it earns no interest? You may as well save yourself the effort of taking the trip down to the bank,” said Kumano.

Read more …

Up vs down.

‘Wealth Creators’ Are Robbing Our Most Productive People (Monbiot)

There is an inverse relationship between utility and reward. The most lucrative, prestigious jobs tend to cause the greatest harm. The most useful workers tend to be paid least and treated worst. I was reminded of this while listening last week to a care worker describing her job. Carole’s company gives her a rota of, er, three half-hour visits an hour. It takes no account of the time required to travel between jobs, and doesn’t pay her for it either, which means she makes less than the minimum wage. During the few minutes she spends with a client, she may have to get them out of bed, help them on the toilet, wash them, dress them, make breakfast and give them their medicines. If she ever gets a break, she told the BBC radio programme You and Yours, she spends it with her clients. For some, she is the only person they see all day.

Is there more difficult or worthwhile employment? Yet she is paid in criticism and insults as well as pennies. She is shouted at by family members for being late and not spending enough time with each client, then upbraided by the company because of the complaints it receives. Her profession is assailed in the media as the problems created by the corporate model are blamed on the workers. “I love going to people; I love helping them, but the constant criticism is depressing,” she says. “It’s like always being in the wrong.” Her experience is unexceptional. A report by the Resolution Foundation reveals that two-thirds of frontline care workers receive less than the living wage. Ten%, like Carole, are illegally paid less than the minimum wage. This abuse is not confined to the UK: in the US, 27% of care workers who make home visits are paid less than the legal minimum.

Let’s imagine the lives of those who own or run the company. We have to imagine it because, for good reasons, neither the care worker’s real name nor the company she works for were revealed. The more costs and corners they cut, the more profitable their business will be. In other words, the less they care, the better they will do. The perfect chief executive, from the point of view of shareholders, is a fully fledged sociopath. Such people will soon become very rich. They will be praised by the government as wealth creators. If they donate enough money to party funds, they have a high chance of becoming peers of the realm. Gushing profiles in the press will commend their entrepreneurial chutzpah and flair.

Read more …

“..the sector is viewed as likely to be larger than the supervised banking industry..”

Is It Time For ‘Shadow Bank’ Stress Tests? (CNBC)

A leading member of Germany’s Bundesbank has backed U.S. calls for “shadow banking”, the unregulated sector that provides credit on a global scale, to be subject to stress-testing. “Stress testing, as has been suggested, may be a good idea,” Andreas Dombret, a member of the Bundesbank’s executive board responsible for banking supervision, told CNBC on Tuesday. “But if we were to go by this route, it should be directed to the link between the shadow banking sector and the banks. So it is not about introducing regulation, if there is no systemic link between this sector and the banks. That is what we really have to care about.”

Dombret was commenting after Fed Vice Chairman Stanley Fischer suggested tougher rules for shadow banking on Monday, as well as stress tests to assess the risk the sector could pose to global finance in the event of a slump. Shadow banking is huge on a global scale, handled $75 trillion in funds in 2013, up $5 trillion on the start of the year, according to the Financial Stability Board. In some countries, such as the U.S., the sector is viewed as likely to be larger than the supervised banking industry. Stress tests for conventional banking activities were adopted by the U.S. and Europe after the 2007-08 financial crisis to gauge big banks’ ability to manage risk and plan for a potential economic shock.

On Tuesday, Dombret, who has worked for major international banks like Deutsche and JPMorgan, said there might be a need to regulate shadowing banking, if it proved to be a “systemic risk” to the financial sector. “We need to monitor very closely what is happening in this sector, and the relationship between these so-called shadow banks—I would rather call them ‘non-bank’ banks—and the banking sector, and should there be a systemic risk, and should there be a close link, we may even have to go beyond monitoring and we have to go towards may be also regulation.”

Read more …

“I don’t think we’ll go there via rational political discourse..”

The Way Out (Jim Kunstler)

The truth is, when you rig a money system with price interventions, distortions, and perversions, they will eventually express themselves in ways destructive to the system. In the present case of world-wide QE and central bank monkey business, these rackets are expressing themselves, finally, in wobbling currencies. In many nations, people are deeply unsure of what their money is worth, and how much it might be worth a month from now. This includes the USA, except for the moment our money is said to be magically appreciating in value compared to everyone else’s. Aren’t we special?

Get this: nothing is more hazardous than undermining people’s trust in their money. All of this financial perfidy conceals the basic fact that the human race has reached the limits of techno-industrialism. There are too many people and not enough basic resources to grow more of them — oil, fishes, soil, ores, fertilizers — and there is no steady-state “solution” to keep that economy going. In other words, it must either grow or contract, and it can’t really grow anymore (despite the exertions of government statisticians), so the authorities are trying to provide a monetary illusion of growth, when instead we’re in contraction.

Yes, contraction. The way out is to get with the program, shed the dead-weight and go where reality wants to take you. In the USA that means do everything possible to quit supporting giant failing systems — Big Box shopping, mass motoring, GMO agribiz, TBTF banks — and get behind local Main Street integrated economies, walkable towns, regular railroads, smaller and more numerous farms, local medical clinic health care, artistry in public works, and community caretaking of the unfit. All this surely implies a reduced role for the national government, and maybe the states, too. You could call it a lower standard of living, or just a different way to live.

I don’t think we’ll go there via rational political discourse. The current instabilities around the world are so sinister that they are liable to lead to even more strenuous efforts at the top to pretend that everything’s working, and even war is one way to pretend you’re okay (and the “other guy” isn’t). Of course, war has already broken out, in the MidEast and Ukraine, and it has everything to do with the sequential failure of nations, in one way or another, to overcome the limits of techno-industrialism. America will be dragged kicking and screaming to the realization of what it needs to do. The 2016 election will be the convulsion point.

Read more …

And for good reasons too.

Ukraine Interior Ministry ‘Uncooperative And Obstructive’ In Maidan Probe (RT)

The investigation into Maidan violence during Ukraine’s coup didn’t satisfy the requirements of the European Convention on Human Rights, says a report from the European Council, adding that Ukraine’s Interior Ministry was “uncooperative and obstructive.” The report specifically concentrated on the investigation of violent acts during the three months of Maidan demonstrations: Violent dispersal of the protest by Berkut riot police on November 30, 2013, clashes on January 22, 2014, which resulted in the first deaths of protesters, and February 18-21, 2014, the deadliest days of the Kiev protests. Before the February 2014 coup, “there was no genuine attempt to pursue investigations,” said a document by the International Advisory Panel.

The panel was established by the Council of Europe to review investigations into the violent incidents during the Maidan demonstrations. “The lack of genuine investigations during the three months of the demonstrations inevitably meant that the investigations did not begin promptly and this constituted, of itself, a substantial challenge for the investigations, which took place thereafter and on which the Panel’s review has principally focused,” the report stated. The panel added that “the appointment post-Maidan of certain officials to senior positions in the MoI [Ukraine Interior Ministry] contributed to the lack of appearance of independence.” It also “served to undermine public confidence in the readiness of the MoI to investigate the crimes committed during Maidan.”

The EU experts call the number of investigations performed by the Prosecutor General’s Office (PGO) on Maidan violence “wholly inadequate.” “The Panel did not consider the allocation of investigative work between the PGO, on the one hand, and the Kyiv [Kiev] City Prosecutor’s Office and the MoI, on the other, to be coherent or efficient,” says the report. “Nor did the Panel find the PGO’s supervision of the investigative work of the Kyiv [Kiev] City Prosecutor’s Office to have been effective.” Cooperation by Ukraine’s Interior Ministry “was crucial to the effectiveness of the PGO investigations,” according to the document.

“There are strong grounds to believe that the MoI attitude to the PGO has been uncooperative and, in certain respects, obstructive,” says the report, adding that the “Prosecutor General’s Office didn’t take all the necessary steps to ensure effective co-operation” by the Interior Ministry in the investigations. They also found there were facts of “the grant of amnesties or pardons to law enforcement officers in relation to unlawful killings or acts of ill-treatment” of protesters during the Maidan protests. This “would be incompatible with Ukraine’s obligations under Articles 2 and 3 of the Convention,” said the document. “The serious investigative deficiencies identified in this Report have undermined the authorities’ ability to establish the circumstances of the Maidan-related crimes and to identify those responsible.”

Read more …

” ..non-symbolic non-gestures of a preventive nature are sure to follow..”

License to Kill (Dmitry Orlov)

With the strategy of destroying in order to create no longer viable, but with the blind ambition to still try to prevail everywhere in the world somehow still part of the political culture, all that remains is murder. The main tool of foreign policy becomes political assassination: be it Saddam Hussein, or Muammar Qaddafi, or Slobodan Milosevic, or Osama bin Laden, or any number of lesser targets, the idea is to simply kill them.

While aiming for the head of an organization is a favorite technique, the general populace gets is share of murder too. How many funerals and wedding parties have been taken out by drone strikes? I don’t know that anyone in the US really knows, but I am sure that those whose relatives were killed do remember, and will remember for the next few centuries at least. This tactic is generally not conducive to creating a durable peace, but it is a good tactic for perpetuating and escalating conflict. But that’s now an acceptable goal, because it creates the rationale for increased military spending, making it possible to breed more chaos.

Recently a retired US general went on television to declare that what’s needed to turn around the situation in the Ukraine is to simply start killing Russians. The Russians listened to that, marveled at his idiocy, and then went ahead and opened a criminal case against him. Now this general will be unable to travel to an ever-increasing number of countries around the world for fear of getting arrested and deported to Russia to stand trial.

This is largely a symbolic gesture, but non-symbolic non-gestures of a preventive nature are sure to follow. You see, my fellow space travelers, murder happens to be illegal. In most jurisdictions, inciting others to murder also happens to be illegal. Americans have granted themselves the license to kill without checking to see whether perhaps they might be exceeding their authority. We should expect, then, that as their power trickles away, their license to kill will be revoked, and they find themselves reclassified from global hegemons to mere murderers.

Read more …

Dec 042014
 
 December 4, 2014  Posted by at 11:11 am Finance Tagged with: , , , , , , ,  Comments Off on Debt Rattle December 4 2014


Arthur Rothstein Migratory fruit pickers’ camp in Yakima, Washington Jul 1936

Five Reasons Why Markets Are Heading For A Crash (Telegraph)
‘The Minsky Moment Is The Crash’ (Zero Hedge)
Global Company Bond Sales Nearing $4 Trillion Set Annual Record (Bloomberg)
Collapse Of Oil Prices Leads World Economy Into Trouble (Guardian)
Sub-$50 Oil Surfaces in North Dakota As Regional Discounts Swell (Bloomberg)
First U.S. Gas Station Drops Below $2 a Gallon (Bloomberg)
There Are 550,000 Iraqi Barrels Signaling Oil Glut Will Deepen (Bloomberg)
Crushing The “Lower Gas Price = More Spending” Fiction (Zero Hedge)
Energy Junk-Debt Deals Postponed as Falling Oil Saps Demand (Bloomberg)
Canada Gas Project Delay Highlights Oil Plunge’s Wider Risk (Bloomberg)
Norway Seeks to Temper Its Oil Addiction After OPEC Price Shock (Bloomberg)
China Shadow Bank Collapse Exposes Grey-Market Lending Risk (FT)
BlackRock China ETF’s Derivatives Strategy Faltering (Bloomberg)
What The Dollar May Be Saying About Europe (CNBC)
UK Moves To Cut Spending To 1930s Levels (Guardian)
Australia’s Dreadful GDP Figures – Six Things You Need To Know (Guardian)
Putin Accuses West Of ‘Pure Cynicism’ Over Ukraine (CNBC)
One Million Europeans Sign Petition Against EU-US TTIP Talks (BBC)
Xi’s Cultural Revolution Is Doomed to Fail (Bloomberg)
The 8th, And Final, Deadly Sin: Exploiting The Earth (Paul B. Farrell)

“The first reason to worry is the curiously juxtaposed state of asset prices, with generally buoyant equities but falling sovereign bond yields and commodity prices. They cannot both be right. High equity prices are – or at least, should be – indicative of investor confidence and optimism. Low bond yields and falling commodity prices point to the very reverse.”

Five Reasons Why Markets Are Heading For A Crash (Telegraph)

Many stock markets are close to their all-time highs, the oil price is plummeting, delivering a significant boost to Western and Asian economies, the European Central Bank is getting ready for full-scale sovereign QE – or so everyone seems to believe – the American recovery is gaining momentum, Britain is experiencing the highest rate of growth in the G7, God is in his heaven and all’s right with the world. All good, then? No, not good at all. I don’t want to put a dampener on the festive cheer, but here are five reasons to think things are not quite the unadulterated picture of harmony and advancement many stock market pundits would have you believe.

The first reason to worry is the curiously juxtaposed state of asset prices, with generally buoyant equities but falling sovereign bond yields and commodity prices. They cannot both be right. High equity prices are – or at least, should be – indicative of investor confidence and optimism. Low bond yields and falling commodity prices point to the very reverse; they are basically a sign of emerging deflationary pressures and a slowing economy. If demand was really about to roar away, both would be rising along with equities, not falling. The markets have become a kind of push-me-pull-you construct. They look both ways at the same time.

Yet this is no mere anomaly. There is a good reason for these divergent asset prices – pumped up by central bank money printing, abundant cash is desperate for fast vanishing yield, and is chasing it accordingly. Spanish sovereign debt might have looked a good buy a couple of years back, when the yield still factored in the possibility of default. But today, the yield on 10-year Spanish bonds is less than 2pc. In Germany, it’s just 0.7pc, not much more than Japan, which has had 20 years of stagnation and deflation to warp the traditional laws of investment. If it is yield you are after, sovereign debt markets are again exceptionally poor value, barely offering a real rate of return at all. Commodities were the next port of call, but that game too seems to be up.

Read more …

“We all are in a Ponzi world right now. Hoping to be bailed out by the next person.”

‘The Minsky Moment Is The Crash’ (Zero Hedge)

BCG senior partner Daniel Stetler was recently interviewed by Portugal’s Janela na web magazine, his insights are significant and worrisome… Some key excerpts: “You have to think about a huge tower of debt on shaky foundations where central banks pump concrete in the foundations in an emergency effort to avoid the building from collapsing and at the same time builders are adding additional floors on top” [..] “Today central banks give money to institutions, which are not solvent, against doubtful collateral for zero interest. This is not capitalism.” [..] “It is the explicit goal of central banks to avoid the tower of debt to crash. Therefore they do everything to make money cheap and allow more speculation and even higher asset values. It is consistent with their thinking of the past 30 years. Unfortunately the debt levels are too high now and their instruments do not work anymore as good. They might bring up financial assets but they cannot revive the real economy.” [..]

“In my view [Piketty] overlook the fact that only growing debt levels make it possible to have such a growth in measured wealth. Summing up, Piketty looks at symptoms – wealth – and not on causes – debt.” “We need to limit credit growth and make it tax-attractive to invest in the real economy not in financial speculation. This will happen automatically if we return to normal interest rates. The key point is, that we as societies should reduce consumption which includes social welfare and rather invest more in the future.” [..] “”We all are in a Ponzi world right now. Hoping to be bailed out by the next person. The problem is that demographics alone have to tell us, that there are fewer people entering the scheme then leaving. More people get out than in. Which means, by definition, that the scheme is at an end. The Minsky moment is the crash. Like all crashes it is easier to explain it afterwards than to time it before. But I think it is obvious that the endgame is near.”

Read more …

How ultra-low rates lets companies pretend they’re actually economically viable.

Global Company Bond Sales Nearing $4 Trillion Set Annual Record (Bloomberg)

Global corporate bond sales set an annual record as companies lock in borrowing costs that forecasters say are bound to rise. SoftBank, Amazon.com and Medtronic were among borrowers that helped push issuance to $3.975 trillion, past the previous peak of $3.973 trillion in 2012, according to data compiled by Bloomberg. Sales in the U.S. have already reached an unprecedented $1.5 trillion. Issuance defied predictions of a slowdown made by underwriters from Bank of America Corp. to Barclays Plc as a decline in benchmark costs that no one foresaw pushed yields to record lows. While central banks in Europe and Japan have stepped up their own stimulus efforts, the likelihood the Federal Reserve will boost interest rates has fueled company borrowings worldwide.

“We’ve seen so much issuance just because everybody’s thinking that next year’s going to be the year when rates start rising,” Nathan Barnard, a fixed-income analyst at Portland, Oregon-based Leader Capital Corp., said today in a telephone interview. “It’s cheap financing still so why not do that.” Investors are poised to earn 7.01% on an annualized basis this year on debt from the most creditworthy to the riskiest borrowers worldwide, according to the Bank of America Merrill Lynch Global Corporate and High Yield Index. Those would be the largest gains since a 12.05% return in 2012, the index data show.

Read more …

” ..because of how Saudi Arabia uses its oil well to support its entire economy, the country’s budget calls for $90 a barrel to break even, despite that the cost of production is closer to $30.”

Collapse Of Oil Prices Leads World Economy Into Trouble (Guardian)

OPEC, the largest crude-oil cartel in the world, wanted others to feel its pain as oil prices collapsed. “OPEC wanted … to cut off production … and they wanted other non-OPEC [countries], especially in the US and Canada, to feel the pinch they are feeling,” says Abhishek Deshpande, lead oil analyst at Natixis. But in its rush to influence others, OPEC ended up hurting everyone in the process – including itself. Low oil prices, pushed down further by OPEC’s meeting last week,have impacted world economies, energy stocks, and several currencies. From the fate of the Russian rouble to Venezuelan deficits to American mutual funds full of Exxon or Chevron stock, OPEC’s decision was the shot heard round the world for troubled commodities.

So how low could oil go? Standard Chartered analysts expect a “chaotic” quarter ahead, saying OPEC’s decision to keep the production target unchanged is “extremely negative for oil prices for 2015”. The bank slashed its 2015 average price forecast for Brent crude oil by $16 a barrel to $85. Other forecasts are lower. Citi Research estimated an average 2015 price of $72 for WTI and $80 for ICE Brent. Natixis’s Deshpande said their average 2015 Brent forecast is around $74, with WTI around $69. These prices have real-world effects on world economies. Everyone in the sector is smarting. Deshpande said because of how Saudi Arabia uses its oil well to support its entire economy, the country’s budget calls for $90 a barrel to break even, despite that the cost of production is closer to $30.

Other OPEC members have even higher budgetary breakevens. Saudi Arabia is sitting on a “war chest” of money it stockpiled when prices were high, Deshpande said. Citi analysts said Saudi Arabia has about $800bn in cash reserves. Venezuela, on the other hand, is a prime example of a country squandering its riches. Citi said for every $10 drop in oil prices Venezuela loses about $7.5bn in revenues. “Already weak fiscally, this should call for reducing energy subsidies. But domestic politics including the 2015 election makes this nearly impossible,” they said. OPEC countries as a whole could lose $200bn in revenue if Brent prices stay at $80, which is about $600 per capita annually, Citi said.

Read more …

“If you’re selling at the wellhead, you’re getting a very low number relative to WTI.”

Sub-$50 Oil Surfaces in North Dakota As Regional Discounts Swell (Bloomberg)

Oil market analysts are debating if oil will fall to $50. In North Dakota, prices are already there. Crude sold at the wellhead in the Bakken shale region in North Dakota fell to $49.69 a barrel on Nov. 28, according to the marketing arm of Plains All American Pipeline LP. That’s down 47% from this year’s peak in June, and 29% less than the $70.15 paid for Brent, the global benchmark. The cheaper price for North Dakota crude underscores how geographic and logistical hurdles can amplify the stress that plunging futures prices have put on drillers in new shale plays that have helped push U.S. oil production to the highest level in 31 years. Other booming areas such as the Niobrara in Colorado and the Permian in Texas have also seen large discounts to Brent and U.S. benchmark West Texas Intermediate.

“You have gathering fees, trucking, terminaling, pipeline and rail fees,” Andy Lipow, president of Lipow Oil Associates LLC in Houston, said Dec. 2. “If you’re selling at the wellhead, you’re getting a very low number relative to WTI.” Discounted prices at the wellhead have been exacerbated by a 39% drop in Brent futures since June 19 to $69.92 a barrel yesterday. Prices have fallen as global demand growth fails to keep pace with surging oil production from the U.S. and Canada. Much of that new output is coming from areas that are facing steep discounts. Bakken crude was posted at $50.44 a barrel Dec. 2. Crude from Colorado’s Niobrara shale was priced at $54.55, according to Plains. Eagle Ford crude cost $63.25, and oil from the Oklahoma panhandle was $58.25.

Read more …

Look for more of this too.

First U.S. Gas Station Drops Below $2 a Gallon (Bloomberg)

$2 gasoline is back in the U.S. An Oncue Express station in Oklahoma City was selling the motor fuel for $1.99 a gallon today, becoming the first one to drop below $2 in the U.S. since July 30, 2010, Patrick DeHaan, a senior petroleum analyst at GasBuddy Organization Inc., said by e-mail from Chicago. “We knew when we saw crude oil prices drop last week that we’d break the $2 threshold pretty soon, but we didn’t know if it would happen in South Carolina, Texas, Missouri or Oklahoma,” said DeHaan, senior petroleum analyst for GasBuddy. “Today’s national average, $2.74, now makes the current price we pay a whopping 51 cents per gallon less than what we paid a year ago.”

Gasoline is sliding after OPEC decided last week not to cut production amid a global glut of oil that has already dragged international oil prices down by 37% in the past five months. Pump prices have fallen by almost a dollar since reaching this year’s high on April 26. 15% of the nation’s gas stations are selling fuel below $2.50 a gallon, “and it may not be long before others join OnCue Express in that exclusive club that’s below $2,” said Gregg Laskoski, another senior petroleum analyst with GasBuddy. Retail gasoline averaged $2.746 a gallon in the U.S. yesterday, data compiled by Florida-based motoring club AAA show. Stations will cut prices by another 15 to 20 cents a gallon as they catch up to the plunge in oil, Michael Green, a Washington-based spokesman for AAA, said by e-mail today.

Read more …

“In a global market that neighboring Kuwait estimates is facing a daily oversupply of 1.8 million barrels, the accord stands to deepen crude’s 38% plunge since late June .. ”

There Are 550,000 Iraqi Barrels Signaling Oil Glut Will Deepen (Bloomberg)

Not only is OPEC refraining from cutting oil output to stem the five-month plunge in prices, it’s adding to the supply glut. Just five days after OPEC decided to maintain production levels, Iraq, the group’s second-biggest member, inked an export deal with the Kurds that may add about 300,000 barrels a day to world supplies. In a global market that neighboring Kuwait estimates is facing a daily oversupply of 1.8 million barrels, the accord stands to deepen crude’s 38% plunge since late June. Or as Carsten Fritsch, a Frankfurt-based analyst at Commerzbank AG, put it: There’ll be “even more oil flooding the market that nobody needs.”

Benchmark Brent crude slumped immediately after the deal was signed Dec. 2 in Baghdad, dropping 2.8% to $70.54 a barrel. Prices, which slipped 0.9% yesterday to reach the lowest since 2010, were at $70.38 at 1:30 p.m. Singapore time today. Futures are down about 10% since OPEC’s Nov. 27 decision. The agreement seeks to end months of feuding between the Kurds and officials in Iraq over the right to crude proceeds, a dispute that has hindered their joint effort to push back Islamic State militants. The deal allows for as much as 550,000 barrels a day of crude to be shipped by pipeline from northern Iraq to the Mediterranean port of Ceyhan in Turkey, according to the regional government. The Kurds were already exporting about 220,000 barrels daily, according to data compiled by Bloomberg.

The Kurdish Regional Government expanded its control of Iraq’s oil resources in June when it deployed forces to defend Kirkuk, the largest field in the north of the country, from Islamic militants. The Kurds have been shipping crude through Turkey in defiance of the central government, which took legal action to block the sales, leaving some tankers loaded with Kurdish oil stranded at sea. As much as 300,000 barrels a day of Kirkuk blend will be shipped through the Turkish pipeline under the terms of the deal, according to the KRG. Another 250,000 barrels daily of oil produced in the Kurdish region will be exported through the same route, according to the government in Baghdad.

Read more …

“.. if the consumer is struggling to go out and spend on goods and services, or if Americans are simply hesitant to ramp up spending, it could be a very un-merry holiday season for retailers. ..”

Crushing The “Lower Gas Price = More Spending” Fiction (Zero Hedge)

With uncertainty lingering and patience wearing thin after five+ years of still lackluster wage growth, consumers are increasing saving for the future, hedging against a continuation of “more of the same.” Thus, for many, extra savings at the pump as a result of lower gas prices are simply being stored away to help supplement spending needs in the future, ramping up savings, not spending. As of September, consumers increased savings from 5.4% to a 5.6% pace, up from a recent low of 4.3% in November of last year. [..]

Against the backdrop of three consecutive months of aggressive energy price reprieve, retail sales have fallen short. With more than a $0.50 drop in the average cost of a gallon of gasoline, anything less than a minimal 0.5% increase in monthly retail sales highlights just how fragile the U.S. economy remains, particularly the consumer sector. While the weakness in October was dominated by a few categories, there was insufficient demand elsewhere to compensate. Consumers continue to spend, but at a modest level with no sign of further momentum in sight with income growth stubbornly limited, and consumers opting to use savings from lower gas prices to offset rising healthcare and utilities costs.

We are, after all, a consumer based economy, and if the consumer is struggling to go out and spend on goods and services, or if Americans are simply hesitant to ramp up spending, it could be a very un-merry holiday season for retailers. From the Fed’s perspective, if consumer spending continues to disappoint, headline activity is likely to significantly underperform monetary policy officials’ optimistic forecast of +2% in 2014 and circa 3% in 2015.

Read more …

Expect a lot of this.

Energy Junk-Debt Deals Postponed as Falling Oil Saps Demand (Bloomberg)

Two energy-related companies are postponing financings after a plunge in oil prices made their high-yield, high-risk debt more difficult to sell. New Atlas, a newly formed unit of oil and gas producer Atlas Energy Group, put on hold a $155 million loan it was seeking to refinance debt, according to five people with knowledge of the deal, who asked not be identified because the decision is private. EnTrans International, a manufacturer of equipment used in fracking, delayed selling a $250 million bond, according to three other people with knowledge of that transaction. Investors in bonds of junk-rated energy companies are facing losses of more than $11 billion as oil prices dropped to a five-year-low of $63.72 a barrel this week. This is deepening concern that the riskiest oil explorers won’t be able to meet their obligations, and sending their borrowing costs to the highest since 2010.

More than half of Cleveland, Tennessee-based EnTrans’s revenue comes from equipment sales to the hydraulic fracturing and the energy industry, Moody’s Investors Service said in a Nov. 17 report. The notes, which were being arranged by Credit Suisse, would have been used to refinance debt. Gary Riley, chief executive officer at EnTrans International, said yesterday in an e-mail commenting on the deal status that “the decision to defer or go forward has not been made.” Riley didn’t respond to questions seeking comment today. Deutsche Bank and Citigroup were managing New Atlas’s financing and had scheduled a meeting with lenders for this morning, according to data compiled by Bloomberg.

Read more …

Blowing LNG out of the water.

Canada Gas Project Delay Highlights Oil Plunge’s Wider Risk (Bloomberg)

Petroliam Nasional’s decision to postpone its C$36 billion ($32 billion) liquefied natural gas project in Canada highlights the risks for energy developments around the world from oil’s plunge. Woodside Petroleum’s Browse gas project in Australia and an oil project planned by Santos in Indonesia are among others seen as facing delays with oil trading at the lowest in more than four years. “Unless there is compelling reason to move ahead with approvals, we do expect significant deferrals of capex across the board,” Nik Burns, an analyst at UBS AG, said by phone from Melbourne. “Most investors are looking for greater financial discipline with commodity prices falling.” Oil’s slump threatens to hurt LNG contracts tied to crude prices for suppliers already coping with rising costs and competition from Russian gas commitments to China.

Costs at the Canadian project need to be cut before a decision is made, the Malaysian state-owned company known as Petronas said yesterday. Petronas announced the delay less than a week after Chief Executive Officer Shamsul Azhar Abbas told reporters there were a few “loose ends” to sort out before a final investment decision would be made. Oil fell almost 8% in the days between Shamsul’s comments in Kuala Lumpur and yesterday’s announcement. With BG Group saying in November that it would slow its proposed $16 billion LNG project in Prince Rupert, British Columbia, on concern about competing sources of supply from proposed projects in the U.S., the prospects for the 18 LNG developments on the drawing board in Canada are dimming.

Read more …

Lower prices are killing jobs in producer nations. Next up: US.

Norway Seeks to Temper Its Oil Addiction After OPEC Price Shock (Bloomberg)

After the biggest slump in oil prices since the start of the global financial crisis, the prime minister of Norway says western Europe’s largest crude producer must become less reliant on its fossil fuels. “We need new industries, a new tax system and a better climate for investment in Norway,” Prime Minister Erna Solberg said yesterday in an interview in Oslo. The comments follow threats from SAFE, one of Norway’s three main oil unions, which warned this week it will respond with industrial action unless the government acts to stem job losses. Solberg said that far from triggering government support, plunging oil prices should be used by the industry as an opportunity to improve competitiveness.

A 39% slump in oil prices since June is killing jobs in Norway, which relies on fossil fuels to generate more than one-fifth of its gross domestic product. In the past few months, Norway has lost about 7,000 oil jobs and SAFE said this week it was up to the government to reverse that trend. Solberg says protecting oil jobs will ultimately make it harder for the economy to wean itself off its commodities reliance. “We need to lower our cost of production in the development of new fields,” she said. “Oil production is not going to rise, it will slowly fall in Norway.”

Read more …

I don’t think people understand the size of the China shadow banks, nor the scale of the risk linked to them, or the prominent position they have in the country.

China Shadow Bank Collapse Exposes Grey-Market Lending Risk (FT)

A sign in parchment above the locked door of Shanxi Platinum Assemblage Investment, written in calligraphy, reads “Honesty is fundamental”. Until recently a police notice below it directed investors to report to the local station to submit evidence against the company. In Taiyuan, capital of the central Chinese province of Shanxi, investors have rushed to branches of Platinum Assemblage in recent days as word spread that the company was unable to meet payouts on maturing investment products that had offered annual interest rates of 14-18%. Meanwhile, rumors swirled that executives had fled and branches in some cities had shut their doors. The incident highlights financial risks lurking in the outer margins of China’s shadow banking system, where high-yielding wealth management products blur into grey-market lending. A financial system in which the government refuses to tolerate defaults has also encouraged moral hazard among investors by creating an expectation that even risky credit carries an implicit guarantee.

“I have no idea where they put the money. I’m not really clear on the guarantee businesses. But they had a business licence on the wall,” said an elderly man surnamed Wang wearing a mechanic’s jacket and knit cap outside the company’s locked doors. State media estimates that more than Rmb100 million ($16 million) may be at risk in the collapse of Platinum Assemblage, a relatively tiny sum. But a series of similar incidents this year suggests China’s slowing economy has created fertile ground for hucksters, as companies become increasingly desperate for funds amid a pullback in lending from banks as well as more mainstream non-bank lenders such as trust companies. In March, depositors in Yancheng city, Jiangsu province, rushed to withdraw funds from rural co-operatives and were told that the institutions — which operate like banks but whose legal status exempt them from liquidity regulations – had lent out all the money. Analysts said many co-ops, which were created to lend to farmers, had in fact been investing in real estate.

It is not known how Platinum Assemblage invested clients’ funds, but a large share of shadow banking funding flows into real estate, one of the few industries that, until recently at least, could deliver rates of return high enough to service loans at interest rates often exceeding 20%. Local media reported that wealth management clients of another guarantee company, Henan Swiftly Soaring Investment, blocked a road in Xinxiang city, Henan province, on Sunday to protest against the lack of payout on similarly structured wealth management products. China Business News, a national newspaper, reported that much of that money was also used for property purchases. Late last year eight government agencies including the banking regulator, the central bank and the commerce ministry released a notice warning of rampant irregularities among non-financial guarantee companies.

Read more …

More funds that don’t deliver.

BlackRock China ETF’s Derivatives Strategy Faltering (Bloomberg)

BlackRock’s pioneering China exchange-traded fund is at risk of losing its market-leading status as returns trail its benchmark index and competitors take advantage of reduced government curbs on foreign investors. The $10.1 billion iShares FTSE A50 China Index ETF, the first to track mainland shares when they were inaccessible to most foreigners in 2004, has underperformed its target by 4.6 percentage points this year. The Hong Kong-listed fund is lagging behind as its decade-long strategy of using derivatives proves more expensive for investors than buying shares directly. The fund’s diminished appeal reflects how China’s efforts to remove barriers on its $4.6 trillion stock market are changing the way international investors gain exposure to the world’s second-largest economy. Derivative products are getting replaced by funds that access the Chinese market through the nation’s quota system for foreign institutions and the Shanghai-Hong Kong exchange link that started last month.

“The playing field is changing,” Brendan Ahern, managing director at Krane Fund Advisors in New York, which oversees four Chinese ETFs, said by phone. “The market is gravitating to direct products. Managers have to think about how to adapt to the changes.” Investors are weighing the most efficient ways to access China’s stock market as it rallies from the cheapest levels on record versus global peers. The Shanghai Composite Index has advanced 31% in 2014 and reached a three-year high yesterday amid speculation the nation’s central bank will increase monetary stimulus. The BlackRock fund’s net asset value has climbed 26% this year, versus a 30% gain in the gauge it’s designed to mimic. Shareholder returns have been just 18%, reflecting both the cost of using derivatives and investors’ unwillingness to keep valuing the ETF at a premium to its underlying securities.

Read more …

Draghi won’t move.

What The Dollar May Be Saying About Europe (CNBC)

The dollar has been riding high and is looking for another boost Thursday from a dovish European Central Bank. The greenback made new multiyear highs against the yen and euro Wednesday, ahead of the ECB meeting. The dollar has been rising as U.S. monetary policy diverges from that of Japan and the eurozone. The U.S. economy is also stronger, and that is expected to show up in another 200,000 plus jobs report Friday. While the ECB is not expected to take any new steps at its rate meeting Thursday, traders have been anticipating a dovish ECB President Mario Draghi, who holds a briefing after the meeting. “The gist of it is I think Draghi will leave the door wide open for sovereign QE in the first quarter,” said Alan Ruskin, head of G-10 foreign exchange strategy at Deutsche Bank. “I think you’ve heard a number of comments from ECB officials suggesting December is too early, and they want to let some of their past decisions work their way through.”

The ECB has embarked on asset purchases as the Fed ended its quantitative easing bond buying, or QE, in October. The ECB is now expected to expand its asset buying with a program to buy sovereign debt. The dollar index, at 89.005 was at the highest level since March, 2009 and the dollar was at a seven-year high against the yen. “There’s this kind of fear that the dollar’s traded very, very well going into this meeting, and that maybe there’s some expectation he will deliver more than he actually will,” said Ruskin. He said even though Draghi is expected to be dovish, if nothing more is announced there’s a chance the dollar could selloff.

Read more …

” .. could require cuts in non-protected departments such as police, local government and justice ..”

UK Moves To Cut Spending To 1930s Levels (Guardian)

The chancellor, George Osborne, set out dramatic plans to move Britain from the red into the black that will see public spending as a percentage of GDP fall to its lowest level since the 1930s and could require cuts in non-protected departments such as police, local government and justice amounting to a further £60bn by 2019-20. The plans, according to the Treasury spending watchdog, the Office for Budget Responsibility, also presume the loss of a further one million public sector jobs by 2020, a renewed public sector pay squeeze and a further freeze on tax credits. The scale of the implied spending cuts required to drive the country into a surplus of £23bn by 2019-20 in part prompted the Liberal Democrat business secretary, Vince Cable, to write two weeks ago to ask the OBR to distinguish in its forecasts between the spending plans agreed by the coalition up to 2015-16 and any spending projections after that date which could only be an assumption about tax and spending policy.

Cable described the Osborne plans to bring public spending down to 35 % of GDP as “wholly unrealistic”. Among the measures in a politically-dominated autumn statement was a surprise shakeup of stamp duty, with an increase in rates levied on the most expensive properties designed to trump Labour’s plans for a mansion tax six months before the general election. Osborne claimed 98% of home-buyers would pay less stamp duty as a result of the changes, which, from midnight on Wednesday night, axed the big jumps in tax currently triggered when the cost of a home moves into a higher band. Under the new system, based on income tax bands, home buyers will pay no stamp duty on the first £125,000 of a purchase, then 2% up to £250,000, 5% up to £925,000, 10% up to £1.5m and 12% on everything above £1.5m. Anyone buying an “averagely priced” home worth £275,000 would pay £4,500 less in tax.

Read more …

“Real growth is weak; nominal growth is pathetic .. ”

Australia’s Dreadful GDP Figures – Six Things You Need To Know (Guardian)

Well, what a dreadful set of numbers. The September quarter GDP figures released on Wednesday unfortunately confirmed other economic data that shows Australia’s economy is growing at barely walking pace. Let’s break down the figures and to see if there is any sunshine amid the gloom.

1. Real growth is weak; nominal growth is pathetic – In seasonally adjusted terms, the economy grew by just 0.3% in the September quarter, and by 2.7% in the past year. Given average annual growth is around 3.1%, the 0.3% growth is particularly dreadful given that it would annualise to just 1.2%. As you would expect, the news was even more depressing for GDP per capita growth. In trend terms, it didn’t grow at all in the September quarter and, in seasonally adjusted terms, it actually fell 0.13%. Thus any growth we achieved this last quarter came about through population increase. For the budget numbers, the focus always goes onto nominal growth. Measured in current dollars, it gives a better link to taxation revenue than real GDP.

The May budget forecast nominal GDP in 2014-15 to grow by 3%. In the past 12 months it has grown by 2.7%, but most of that growth came in the December 2013 quarter and thus will not be counted from the next quarter onwards. Nominal GDP in the past quarter grew by just 0.2% in trend terms and actually fell by 0.1% in seasonally adjusted terms. All in all this suggests a fairly big hit to the budget bottom line. So yeah, all gloom.

Read more …

I’d say that’s putting it mildly.

Putin Accuses West Of ‘Pure Cynicism’ Over Ukraine (CNBC)

Russian President Vladimir Putin accused Western powers of “pure cynicism” over the situation in Ukraine, in a key speech to his country as its economic prospects worsens. The ruble looked set for another record low against the dollar as his speech unfolded on Thursday. With a plummeting ruble and oil price, spiraling inflation, and the prospect of more stringent sanctions from Western powers, Russia’s short-term economic prospects are falling faster than the temperature during a Siberian winter. Putin previously served as Russia’s Prime Minister, and this term coincided with relative economic prosperity for the country, as rising oil and gas prices helped boost Russia’s biggest exports. In 2015, however, the average Russian household’s disposable income will shrink by 2.8%, according to official Russian figures – the first fall since Putin came to power.

As President, his recent focus on defence and nationalism seems to have boosted his approval ratings, but it’s far from clear that this can continue if all Russians – from street-cleaners to oligarchs – feel worse off. “The market will be looking for the new ideas which are going to pull Russia out of the economic stagnation and looming decline which was already evident prior to the crisis in Ukraine and the more recent drop in oil prices,” Timothy Ash, head of emerging markets research at Standard Bank, wrote in a research note. “The pressure is now on Putin to offer a rival vision for a successful economic model for Russia.”

Read more …

But who’s going to listen? Think these fold care about a million signatures? Once signed, we won’t get rid of these Frankensteins anymore.

One Million Europeans Sign Petition Against EU-US TTIP Talks (BBC)

A campaign group website says over a million people in the European Union have signed a petition against trade negotiations with the United States. The petition calls on the EU and its member states to stop the talks on the Transatlantic Trade and Investment Partnership or TTIP. It also says they should not ratify a similar deal that has already been done between the EU and Canada. It says some aspects pose a threat to democracy and the rule of law. One of the concerns mentioned in the petition is the idea of tribunals that foreign investors would be able to use in some circumstances to sue governments.

There is a great deal of controversy over exactly what this system, known as Investor State Dispute Settlement, would enable companies to do, but campaigners see it as an opportunity for international business to get compensation for government policy changes that adversely affect them. This kind of provision exists in many bilateral trade and investment agreements. Friends of the Earth have published new research on the impact they have had on EU countries. Information about these cases is not always made public, but the group says that going back to 1994, foreign investors have sought compensation of almost €30bn (£24bn) from 20 states. Where the results are known (a small minority of the total), the tribunals have awarded total compensation of €3.5bn (about £2.8bn).

In Britain, the possible implications of this provision for the National Health Service have been especially controversial. Campaigners believe that the investor tribunals would make it harder to reverse any decisions to contract services out to international healthcare firms. John Hilary of War on Want said: TTIP “will make it impossible for any future government to repeal the Health & Social Care Act and bring the NHS back into public hands”. The petition lists a number of other areas where its signatories believes European standards would suffer if the TTIP negotiations are completed and the Canada deal is ratified: employment, social, environmental, privacy and consumer protection.

Read more …

Feels like Mao never left.

Xi’s Cultural Revolution Is Doomed to Fail (Bloomberg)

As Japan and South Korea have shown, the best way for governments to encourage pop culture with global appeal is probably to stay out of the way. China’s President Xi Jinping disagrees. Take Monday’s announcement by China’s top media watchdog. Effective immediately, the government has reserved the right to send film and television actors, directors, writers and producers on all-expenses-paid, involuntary, 30-day sabbaticals to rural mining sites, border areas, and other remote locations. The purpose, according to the directive, is to help Chinese artists “form a correct view of art and create more masterpieces.” The measure is extreme – reminiscent of “sending down” students to the countryside for reeducation during China’s mad Cultural Revolution. But it’s by no means an isolated case. Over the last few months, Xi’s government has issued several directives designed to control the country’s entertainment industries.

They include new restrictions on the streaming of foreign programs, bans on specific types of plots (adulterous affairs, for example, can no longer be portrayed in dramas), shutdowns of independent sites that subtitle foreign programs for Chinese viewers, and even a prohibition on punning. These directives sit awkwardly with Xi’s very public ambition to expand China’s “soft power” – a term that embodies everything from movies to bugle-playing – beyond its borders. The Chinese president is a child of Communist royalty; his formative years were during the Cultural Revolution, when entertainment was viewed as an ideological pursuit whose role was to propagandize. In Xi’s worldview, artists who don’t produce “correct” movies are doing a disservice to the nation and need to be reminded of their duty — say, by spending more time with the hardworking peasants they’re supposed to be championing in their works.

Read more …

Farrell again looks beyond the narrow world of investors.

The 8th, And Final, Deadly Sin: Exploiting The Earth (Paul B. Farrell)

“When I look at America,” said Pope Francis during a recent address at a university in Southern Italy, also looking at his “own homeland in South America, so many forests, all cut, have become land … can no longer give life.” “This is our sin, exploiting the Earth and not allowing her to her give us what she has within her. This is one of the greatest challenges of our time: to convert ourselves to a type of development that knows how to respect creation,” the pope told an audience of “students, struggling farmers and laid-off workers.” Challenge? Much worse. The relentless “destruction of nature is a modern sin.” says Pope Francis. Destruction of the planet’s great rain forests is the new sin of today’s humans.

Capitalism has already converted half the world’s original rain forests and natural habitats into urban developments. Another quarter will be rapidly converted by 2050. But for Pope Francis, the real sin is consumerism. In a recent ThinkProgress summary of Pope Francis’s annual letter to the G-20 leaders meeting in Australia, Katie Valentine put it this way: “Pope Francis to World Leaders: Consumerism Represents a ‘Constant Assault’ on the Environment.” The pope relied on several studies, including a Worldwatch report commented on in National Geographic by Gary Gardner: “Most of the environmental issues we see today can be linked to consumption,” warning us that for “humanity to thrive long into the future we’ll need to transform our cultures intentionally and proactively away from consumerism towards sustainability.”

Failure to do so means that “unbridled consumerism will have serious consequences for the world economy.” Pope Francis has called consumerism a “poison.” Earlier this year he warned that “Christians should safeguard Creation,” for if humanity destroys the planet, humans themselves will ultimately be destroyed. He added” ‘Creation is not a property, which we can rule over at will; or, even less, is the property of only a few” capitalists. “Creation is a gift, a wonderful gift that God has given us, so that we care for it and we use it for the benefit of all, with great respect and gratitude.” For exploiting the Earth by destroying forests, especially Amazonian rain forests, is a sin.”

Read more …